Crashing Oil Markets and Coronavirus: Can Agricultural Markets Withstand?

Article   16 March 2020

Crude oil prices and Bloomberg agricultural index monthly averages

The novel coronavirus and Saudi oil price war have resulted in collapsing oil prices. The implications of falling oil markets are widespread, with corn, soy and wheat prices, in particular, all showing a strong co-movement with oil prices for both direct and indirect reasons.

As the relationship between agricultural markets and crude prices has continued to grow stronger, a knock-on effect of oil prices could pressure agricultural markets. Crude oil values are directly linked to those agricultural commodities used to produce biofuel; the demand for corn, soybeans, sugar and others used as a feedstock for biofuel is directly related to the price of the main substitute product crude oil.

 

Crude Oil and Corn Price Monthly Average*

Crude oil and corn index price monthly average

 

Lower oil prices lead to decreased input prices for farmers, but coronavirus is impacting potential demand and trade

 

There are minimum levels of biofuel use in some nations, but as production capacity is generally higher than the mandates, biofuel prices can fluctuate (and at times drop below production costs). For other agricultural markets, lower oil prices can help with margins as input costs can fall, thereby reducing the cost of production for farmers.

When it comes to livestock markets, a falling oil market means grain and oilseed prices will drop, thereby reducing the feed costs. Lower crude oil prices therefore could be a beneficial factor currently were it not for coronavirus, which is impacting the potential demand and trade for products.

 

Crude Oil and Beef Price Monthly Average*

Crude oil and beef price monthly average

 

COVID-19 shocks and crude oil price war already beginning to negatively impact agricultural markets

 

It is difficult to quantify at this time what the impact on demand and price the COVID-19 disease will have for the agricultural markets as we still do not know the scale and scope of the infection, but given the apparent shutdown much of the world will have to endure, consumption will likely take a profound hit. Such an outlook will prompt speculators in agriculture markets to sell products, putting further pressure on prices.

The livestock prices have already reversed course after strong gains this year. In the end, the crude oil price war and coronavirus shocks are going to have a negative impact on agricultural markets, and we are already seeing the beginning.

 

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