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Have the grains divorced from the crude oil market?

Agriculture.com Staff 12/23/2008 @ 1:53pm

From $147 to under $40 per barrel. That's the swing in prices seen in 2008 in the crude oil market. And, if you've marketed corn or soybeans in the last two years, the price you've gotten has no doubt been heavily influenced by the price of black gold.

The bond between the grains and crude oil prices has been a strong one throughout the year up until recent weeks, when it's appeared at times that bond has broken. But, have the grains truly divorced themselves from the crude oil market?

The biofuels industry has been the glue holding the grains and crude oil together. That's why corn prices spiked alongside oil this past summer, and partly why the grains took a similar slide as crude began its tumble this fall. But now, that glue is starting to dry up, says Iowa State University (ISU) ag economist Chad Hart.

"The buildup of the biofuel industry has led to the formation of a fairly strong relationship among crude oil, corn and soybean prices. Since the beginning of 2007, the correlation among the three prices is well over 0.9, indicating that the prices are moving together," Hart says. "Prices in the crop markets have dropped dramatically over the past five months, in combination with declines in energy prices and stock declines.

"As corn and soybean prices rose earlier this year, we could point to strong export demand, growing biofuel demand and significant feed demand. Now all three of those demand sectors have shown signs of weakness," Hart adds.

What's developed now, he says, is a different trend in which the bond among the commodities has been weakened. As proof of this, the economist notes crude oil's price nosedive has been considerably sharper than that in the grains.

"Crude oil has experienced a much deeper price decline than either of the crops," Hart says. "Since the beginning of September, crude oil prices are down 50% while corn prices are down 39% and soybean prices have fallen by 32%. Most of this separation has occurred since mid-October."

This downward slide is clear. But, do a couple of months make a trend? It's too early to tell whether or not the grains have completely decoupled from the crude oil market, says Grainanalyst.com floor trader and market analyst Vic Lespinasse. The long-time CBOT trader says he's never had to watch the crude oil market as closely as he does today, in terms of its effects on the grains. And while corn and beans have virtually marched in lock-step with crude oil lately, recent market action indicates that's changing.

"I think we have shown some independence lately from crude prices in the grains," Lespinasse says. "Before, they were in lock-step with crude, but I don't think that's true quite as much now. Certainly for a long time, we were totally dependant on what crude was doing, but that's been lessened considerably."

This doesn't mean future movement in the crude oil market won't affect the grains, however. Lespinasse says he's skeptical to call the bond broken. Any big moves down the road, as well, could put the grains right back where they were earlier this year, at crude oil's side.

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