Risks posed by the crude oil price decline: threats to Ukrainian corn
31 March, 2020 at 15:03
● Bullish factors are available for the wheat market and oilseed complex.
● Corn market is under pressure from bearish factors.
The extremely negative factor is high dependence of corn futures on prices of crude oil and its derivatives, i.e. gasoline and ethanol-containing gasoline. 5.4-5.5 Bl bushels of corn (some 137 MMT) is annually used in the U.S. for ethanol production.
The rapid fall in gasoline price results from the decline in world crude oil prices. In addition, a tight quarantine in the U.S. along with movement restrictions provoked a slump in consumer demand for all fuels.
The April futures price of gasoline is the lowest since November 2001, at USD 0.54 per gallon (March 26). The price has lost 21% since March 23 and as much as 65% since March 1.
The ethanol decline was not that dramatic: April futures price has fallen by 24% since March 1, to USD 0.97 per gallon. However, for the first time in the entire history, ethanol price is below USD 1 per gallon. Consequently, ethanol production margin sharply decreased that caused closure of a number of distilleries.
In March, the U.S. experiences a drop in corn demand and decreased ethanol production. Corn surplus will sharply increase closing stocks in the country. Now the USDA forecasts the stocks to be down 8.3 MMT y/y, but this figure looks questionable. The bearish pressure on prices is aggravated by the fact that the current pace of U.S. corn exports is 42% behind last year. The USDA predicts this season’s exports to drop by 17%.
The nearby corn futures price has already fallen by 7% since March 1. Brazil is absent from the world corn market, while Argentina is just beginning corn harvest. Supply from South America increases the risk of a corn price decline in 6-8 weeks.
The market can only be supported by active demand from China.
Possible further price falls will intensify competition between the U.S. and Ukraine for the Chinese market. American prices will be under pressure from old-crop stocks, UkrAgroConsult reports.
