Market Matters Blog

Crude oil prices have plummeted more than 20% since June, hitting four year lows, and for those of us in the Midwest, that means gasoline prices now (or will soon) sport a $2 per gallon price tag. At least the price of one of farmers' input costs is going down.

Surging U.S. oil production and declining global demand has shifted the supply and demand situation, but the role of the Organization of Petroleum Exporting Countries (OPEC) is perhaps more interesting. Several articles, like this one from Bloomberg (http://bloom.bg/…), explain that OPEC wants to pressure U.S. shale producers into curtailing production by driving prices below breakeven levels -- even though major oil exporting countries aren't sure of how low they'll have to push prices.

As a result, every major financial news service ran a version of the "winners vs. losers" article this week. The losers are energy producers, their countries and governments, while the winners are consumers, according to an article in the Financial Times. "The decline in prices would generate a $1.8bn daily windfall, about $660bn annualized," the article stated. "Tracking this into gasoline prices, in the U.S., where last year some $2,900 per household was spent on gasoline, the windfall would amount to a tax rebate of just under $600 per household." (You can find the whole article here: http://on.ft.com/…)

Farms run on diesel fuel and gasoline, and the current market provides farmers a chance to lock-in some of their needs at good prices. DTN senior analyst Darin Newsom said farmers may want to consider contracting with a local provider to cover 2015 needs. Harvest is a busy time for farmers, but Newsom said that "unless some drastic change occurs, which it shouldn't, opportunities will be hard to miss."

But he cautions: "Looking for a buying opportunity in a market where the S&D is so out of balance is similar to hedging into the cattle market. It might make sense on paper, but hedges/contracts have not turned out well."

Michigan farmer Barry Mumby has been following energy prices for several weeks, but feels the future is murky.

"With a general slowdown in the economy and the uncertain situation with all that has happened with Ebola this week including the abrupt unexplained rally in the Dow Jones at about 2 p.m. Wednesday, a solid market projection is iffy at best," he said to DTN in an email. "I have been interested in hedging my fuel needs in the July '15 heating oil contract, which is at a five year low as I write this. There is no carry from now to July, so the big players must view the growing U.S. supply of crude will hold prices at or below the current price.

"My gut tells me it is time to cover up, but market signals really aren't on my side," he said.

Newsom said the fundamentals of the crude market are difficult to read as the market structure appears to be in a transition. The strengthening inverse is usually bullish, but now it's actually a bearish sign. I highly suggest reading his Newsom on the Market column on Friday for a better understanding of the changes underway in the crude oil market and what it means for you and your farming operation.

That said, has anyone taken advantage of this price move? How?

(CZ/SK)

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