Crude and Grains

Crude and Grains

Crude and Grains

This blog is was first written on November 16, 2010 on AgBasis.com

Today's movements in the market look very familiar to the movements a few months ago. It really feels like deja vu! European Debt Crisis; but this time it's Ireland. Back in April we saw crude trade from the $86 a barrel range all the way down to the $68 dollar range based on the idea the the European union will fold. Ironically it didn't and once the fears were cooled we have seen crude make a strong climb over the past few months to break the $88 a barrel level.

What does this mean for the average farmer trying to make since of projected future fuel cost for their farm equipment? Or rather, what does this mean for the grain elevator trying to figure drying cost for stored grain and maintain a steady stream of business? The daunting task of figuring fixed cost to variable cost of a farming business is tough because of these constant market flucuations. One of these constant flucuations is the cost of fuel.

So what does crude have to do with the grain markets? Crudes movement has some weight to the movement and demand for grain products. Last week crude traded above the $88.40 a barrel mark. At the same time we saw the corn market break the $6 a bushel mark. This can be contributed to the fact that with the EIA report showing a growth in demand for fuel would lead to a demand growth for ethonal and inturn corn. The same can be said for the soybean market as we saw the front month trade above $13 a bushel at he same time.

Since then we have seen all three of these markets trade off their respective highs because of China's interest rate hike and the European second debt crisis. When looking at market projections and entry points to hedging you have to keep in mind the "other fundamentals". Yes supply and demand should be the driver of the commodity markets but large institutions usually drive these markets based on fear and speculation.

At this moment fear is driving the energy market (crude) down on fear of default and rising interest rates that will slow economic growth. In my perspective the fear of a slow down in the middle of the recovery will only create more cheap money and flood the markets with dollars and inturn drive the energy and grain markets again as large institutions buy on optimisim and sell the dollar.

Keep in mind when you consider selling to your local or reginal grain elevator what the overall market is looking for. Fundementals are the base but understanding the market psychology can also help increase profit margins for both farmers and grain elevators.

GRAIN ELEVATORS

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