A Crude Connection Between Grains and Geopolitics

Energy & Fertilizer Markets

There are some clear and certain ways the war in Ukraine is affecting grain prices, like the cutoff of wheat and corn shipments from Black Sea ports, the uncertainty about spring planting in that region or fertilizer availability in coming months, and the volatile activity in futures prices when traders holding short positions get squeezed or forced out by margin calls.

Then there are some less certain ways the situation is adding to the wild bullishness, like the rumor that the European Union might consider importing GMO corn from the U.S. and South America, or whatever else might be the rumor of the day.

And, finally, there are some indirect, circuitous paths for the crisis to affect grain prices for producers in the United States. There are European natural gas prices to consider and the loss of Russian fertilizer exports to the global market; in addition — more subtly — the shipping companies that now refuse to take bookings to or from Russia, relieving some of the pressure on the global supply chain and ocean freight prices. But the big one, of course, is oil.

President Joe Biden announced Tuesday the United States will ban imports of oil or natural gas from Russia. As DTN Senior Market Analyst Troy Vincent points out, Russian oil amounted to 7.9% of total U.S. oil imports last year, and “while U.S. refiners and blenders can get by sourcing this oil from elsewhere, it will come at a higher cost. The lack of Russian crude on the global market will likely mean lower refinery utilization in Europe, which portends lower availability of refined fuels for importing to the U.S. East and West coasts.”

So, it’s not necessarily that this country (or much of the rest of the world) will have to cut back on total fuel usage; consumers will just have pay more for all types of fuel — fuel oil, diesel fuel, gasoline, and, yes, ethanol, our climate-friendly, domestically produced alternative that now gets to demand higher prices alongside everything else.
Corn and crude oil prices are linked together for a number of reasons. Both markets are denominated in U.S. dollars and both are bought and sold together as part of the overall “commodity” sector to diversify investors’ portfolios or hedge against inflation. But most of all, they are linked because they are effectively substitutes. No, you can’t eat oil, but yes, you can use corn to make your car go. When one market spikes, the other also spikes, and when one lags, the other tends to lag, too. Sometimes corn can have a unique market movement without affecting the price of fuel much or the price of crude oil at all — for instance, think of the 2012 drought, during which oil prices stayed flat — but never the other way around. Any time fuel prices rise, corn ethanol prices and corn prices themselves participate in a similar rally.

Nearby WTI crude oil futures have already traded above $130 per barrel this week. But what if there’s more of a price spike yet to come? The all-time highest price tag ever traded for the front-month crude oil futures contract was $147.27 back in the summer of 2008. In today’s dollars, that would be equivalent to $180 per barrel. Similarly, the April 1980 spike in nominal crude oil prices to $39.50 per barrel would be equivalent to $137.10 in 2022 inflation-adjusted dollars. So, U.S. consumers have already experienced what it’s like to pay for fuel when energy values are this high.

Notably, those past spikes kicked off eras of demand destruction when people balked at the prices and drastically scaled back their consumption; but those were also troubling economic times for other reasons. During the financial crisis, consumers who lost their homes probably would have scaled back on energy consumption no matter what commodity prices did. Today is different. Right now, our economy is growing and the financial sector isn’t in the middle of a crisis. The Russian oil ban and higher energy prices are a somewhat isolated variable, setting up a natural experiment that has never been tried before. Don’t shoot the messenger, but this time, consumers may be perfectly able to keep paying for fuel at never-before-seen prices for a more extended period of time. History may not be a very reliable guide.

These same questions must be asked for corn, while its chart spikes higher alongside oil: What prices are consumers able to bear? And at what price level will demand be destroyed? History has offered a few demonstrations of corn prices above $9 per bushel in 2022-equivalent, inflation-adjusted terms: the mid-2008 spike, plus a series of peaks from 2011 through 2013 — none of which boded well for the profitability of corn end users, like livestock feeders and international food and energy customers.

In some sense, it feels like the die has been cast and the energy charts, including the chart for corn, are virtually destined to keep exploring these high price levels. Then the remaining question will be, given all the upcoming challenges of drought or input availability or wider war or whatever else is coming next, when will they come back down?

Elaine Kub, CFA, is the author of “Mastering the Grain Markets: How Profits Are Really Made” and can be reached at masteringthegrainmarkets@gmail.com or on Twitter @elainekub.

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