OPEC+ surprised the market with a one-million-barrel per day cut in production on April 3, 2023. Crude oil prices responded with a 5% one-day rally, but they weren’t alone. Gasoline and Ultra-Low Sulphur Diesel (formerly known as heating oil) prices jumped 3%, while corn, wheat, soybean and soybean oil prices all advanced by 1%-2%.

It’s been clear for many years that crop prices are closely connected to the price of crude oil. This is visually apparent when comparing prices for crops and WTI side-by-side (Figures 1-4). 

Figures 1-4: Crop prices have generally tracked WTI prices so far this century.

As strong as that connection appears to be, a gap has opened up between crude oil and crop prices, especially the prices of corn and soybeans, and to a lesser extent soybean oil. Crude oil prices fell steadily between late June 2022 and the end of March 2023. By contrast, corn, soybean and soybean oil prices have not declined as much.

It’s difficult to attribute this gap entirely to the Russo-Ukrainian war, which has its largest impact on the wheat market, where the Black Sea region exports the equivalent of 7.5% of global wheat production, roughly 3x as much as the U.S., which is the next biggest exporter. The Black Sea region exports about 3% of global corn production, which is relatively small compared to corn exports from the U.S. and South America (Brazil + Argentina) – each account for 6% of global production. Meanwhile, Russia and Ukraine export almost no soybean at all, although they dominate sunflower oil exports, which likely impacts the price of soybean oil indirectly.

The crop-WTI price gap is better explained by what is happening to gasoline and diesel fuel prices. Prices for these two products have jumped relative to crude oil amid bottlenecks at refineries. Arguably, some of the bottlenecks are war related: Russia can export crude somewhat easily and at a discount to global benchmarks, but it struggles to export refined products in similar quantities. While crude oil has been generously supplied, leaving the market with unseasonably high levels of inventories (at least before the OPEC+ cut), inventories for gasoline and diesel have been unseasonably low (Figures 5-7). In turn, this has resulted in crack spreads that are much wider than historical norms between crude oil and crude oil products (Figures 8-11). 

Figure 5: Crude oil inventories are unseasonably high

Figures 6 and 7: Gasoline and Diesel inventories are unseasonably low

Figures 8-11: Gasoline and ULSD prices are exceptionally high compared to crude oil.

Perhaps not surprisingly, crop prices are much more closely connected to oil product prices than they are to crude oil. There are likely two major reasons for a tighter connection between crop and product prices:

  1. Agriculture is an energy-intensive business and farmers plant their fields, harvest and ship their crops with machines powered by gasoline and diesel, not by crude oil.
  2. Ethanol from corn and biodiesel from soybeans gets mixed into final blends for gasoline and diesel.

As such, corn, soybean and soybean oil prices appear to be much more closely connected to gasoline and ULSD prices than they are to crude oil itself (Figures 12-19). Wheat also correlates strongly to product prices. Moreover, the recent gap between product prices and crude oil prices may explain why crop prices haven’t fallen in line with crude oil over the past three quarters. 

Figures 12-19: Corn, soybean and wheat prices track gasoline and ULSD more closely.

Agriculture data

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All examples in this report are hypothetical interpretations of situations and are used for explanation purposes only. The views in this report reflect solely those of the author and not necessarily those of CME Group or its affiliated institutions. This report and the information herein should not be considered investment advice or the results of actual market experience.

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