The link between grain and crude oil prices appears to have weakened this year.
In 2008 and 2009, prices of corn and crude moved almost in lock step, linked by the ability to turn grain into biofuel, but since the start of this year they have diverged.
The May crude oil futures contract on the first trading day of the year closed at $83.15 per barrel, fell to $70.28 on Feb. 5, but has since rallied, closing April 9 at $84.92.
From the start of the year to April 9, it rose about two percent.
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From the February low, it rallied 21 percent.
May corn started the year at about $4.29 per bushel, nosedived Jan. 12 after the USDA report and drifted lower since, closing April 9 at $3.44.
From the start of the year to April 9, it is down 20 percent.
Traders’ perceptions of the two markets are quite different now.
Grain markets are seen as well supplied. South America is harvesting record soybean and corn crops and there are no major production threats in major growing regions. Only modest demand increases are seen this year.
There is no shortage of crude oil either, but in the last couple of months, oil was like a barometer, measuring rising optimism about the recovering world economy and stock markets.
There were fundamental drivers too, like rising demand in China, but at the same time, the market disregarded slow U.S. demand.
Last week, the weak American demand finally registered and traders pulled back on crude, but many observers believe oil will climb modestly but steadily later this year.
Demand from developed countries can’t be ignored, but many, like the International Energy Agency, believe oil demand has peaked forever in the U.S. and Europe, due to rising efficiency, conservation and alternative fuels.
The driver for price gains will be demand from China, India and the Middle East. Year over year, China’s oil demand is up a whopping 28 percent and for the first time, it buys more Saudi oil than does the United States.
Future oil price gains will support grain prices, but won’t quickly change the depressed tenor of the market. That will require a major crop failure somewhere in the world. Otherwise we can expect a slow recovery as demand gradually catches up with supply.
