The News & What it Means – Good and Bad News for Farmers in Oil’s Rise

By John DePutter & Dave Milne – May 8, 2018

 

The news:

“The price of the North American oil benchmark hit $70 a barrel for the first time in more than three years on Monday.”

– CBC, May 7, 2018

 

What it means:

For Canadian farmers, there’s some good news and bad news that go along with rising oil prices.

 

First the bad news. The most obvious impact of higher oil prices is that it trickles down to push both gasoline and diesel costs higher as well. And so, with springtime here and farmers getting out on the land to seed the 2018 crop, it’s going to cost more to keep those tractors and other equipment fueled and running.

 

In discussing what it expects will be the top economic trends of this year, Farm Credit Canada earlier this year suggested that producer fuel costs will be higher than in 2017, estimating that Alberta farmers will pay about 10% more for diesel and roughly 7.5% more for gasoline. Actual increases were not forecast for the remaining provinces, but the general price direction for all is expected to be higher.

 

June crude oil future, showing Tuesday’s reversal:

 

Higher input costs to pressure profitability

Of course, higher input costs mean farm profitability could be pressured in 2018. Farm Credit Canada recently projected total 2018 operating expenses up about 2% from a year earlier, although that forecast was based on an average annual oil price of around US$60/barrel. We’re certainly higher than that now, so the expense side of the ledger could end up looking less pretty than expected.

 

However, it’s worth noting that oil prices have been volatile. In mid-2014, US oil prices reached a peak of around $110/barrel. From there, the market plummeted all the way down to $28 by the beginning of 2015. Prices later rallied to around $50, where the market has generally traded until the latest step higher.

 

Gains in oil help support corn

So, what’s the good news?

 

It’s no surprise that plenty of crop markets are influenced by factors outside agriculture, including oil. Indeed, ever since the US government hitched its wagon to the ethanol bandwagon, corn and oil have become even more closely entwined.

 

As the price of oil and gasoline starts to rise, that means the price of ethanol – which is made from corn – starts to rise as well. The correlation isn’t high but even so, the two markets are related. At an estimated 5.575 billion bu, US corn for ethanol use in 2017-18 is projected to eat up slightly more than 38% of last year’s entire American corn crop.

 

Meanwhile, they don’t call it king corn for nothing. As the most widely planted crop in the US for years (soybean planted area may have a chance of matching corn in 2018), the price movement in corn has often been the leading indicator for other, smaller crops. In essence, as corn goes, so too does any number of other crops.

 

In the end, it boils down to this: corn and oil are commodity market giants, who both carry massive heft that can impact farmers both positively and negatively.

 

Heads up, oil reversed today!

Crude oil futures started higher in overnight trading before slamming lower Tuesday morning. The chart pattern tells us it’s not a done deal that the rally will continue.

 

The DePutter team will be monitoring the indicators closely, given the importance of crude’s direction to the ag markets.

 

Want updates on how crude oil’s action fits into your profit picture and the prices you get for crops? Our Ag-Alert or DePutter Market Advisory Service can help keep you informed.

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