The precipitous decline in crude oil prices is worrisome on a number of fronts.
Analysts are trying to decipher where oil will go from here as well as the ramifications, but there’s little agreement.
The graph of oil prices over the last six months looks like a downhill ski slope.
Oil has declined to $60 a barrel from more than $110 in July, which is reminiscent of what happened in 2008, when oil peaked at $145 in July and fell below $40 by the end of the year. Prices then gradually recovered through 2009 and 2010.
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Corn, wheat, soybeans and canola followed much the same path. In fact, over the last eight years, there has been an amazing correlation be-tween all of these commodities. Our best grain prices have been when oil is high.
On top of that, the value of the Canadian dollar has also fluctuated in sync with oil prices: high oil prices, high grain prices, high Canadian dollar. And the opposite has also been true.
However, corn prices have actually divorced themselves somewhat from declining crude oil values recently. Corn futures have gained about 70 cents after bottoming out at around $3.30 a bushel in October.
It might seem logical to conclude that low oil prices would mean less demand and less profitability for corn-based ethanol, but the equation isn’t that simple. Low corn prices mean ethanol can be produced at less cost, and ethanol demand remains strong.
The growth in American ethanol production is over, but production is likely to remain relatively stable for the foreseeable future.
As for currencies, the widening disparity between the loonie and the American greenback has more to do with the strength of the U.S. currency than weakness in Canada. The U.S. dollar index, which is a measurement against other key currencies, has increased dramatically in the last half of this year.
Some analysts predict that the newfound strength in the American economy will spark a hike in interest rates south of the border.
The Canadian dollar has proportionately declined as the American dollar has strengthened. Our economy is no longer the shining star of developed nations. Interest rate increases are less likely here.
Of course, continuing low crude oil prices will have a big impact on the provincial economies of Alberta and Saskatchewan as well as the entire nation. Much of the oil price decline is attributed to the Organization of Petroleum Exporting Countries refusing to cut production. There is also a new dynamic with the United States starting to gain self-sufficiency in oil, something that seemed impossible just a few years ago.
The same thing happened with natural gas, which is now relatively cheap in North America.
At one time, analysts pointed to a relationship between natural gas prices and the retail value of nitrogen fertilizer. In recent years, that relationship has broken down with nitrogen more closely following the price of corn.
The relationship between high corn prices, high demand for nitrogen and high nitrogen prices certainly isn’t perfect, considering that nitrogen refuses to match the 2014 drop in corn prices. However, with corn recently turning somewhat higher, there is some evidence of strengthening nitrogen values.
The dramatic drop in oil prices is touching all facets of the economy: locally, nationally and internationally. History would say dropping oil doesn’t bode well for the grain industry, but cause and effect relationships can change over time.
