Corn growers have plenty of reason for anxiety right now due to the effects of weather. Energy markets would also seem rife for stress after a month that’s seen tanker attacks and hurricanes threatening supplies. Global energy demand is just as much a question mark. Doom and gloom on financial markets one day gives way to record stock prices the next.
Despite these factors, prices in the options market for crude oil would seem to suggest traders aren’t worried in the short-term about risk. The relative cost of options, as measured by implied volatility, normally shows short-term puts and calls trading at premium to deferreds. That’s not the case right now, however. Implied volatility for options expiring in 30 days is less than those with a year to run.
This is the conundrum facing farmers still needing to book energy supplies for fall. Though U.S. crude oil production fell last week, that may have mostly been due to closure of rigs in the Gulf as Barry churned through extremely warm water. Otherwise, production continues to move higher and higher, even as inventories of gasoline and diesel are building.
Midwest diesel stocks rose by 1.7 million barrels as refineries in the region operate trouble free and close to capacity. Basis, in this case the difference between Midwest cash prices and ULSD futures settled in New York Harbor, is also weakening as farmers finally park machinery for the season.
I recommending finishing booking fall needs when the market spiked lower in June. With the market back on its heels there’s potential to revisit those lows around 15 to 20 cents below today’s settlements. But waiting incurs headline risk from one of the many trouble spots around the world, as well as firming basis as agricultural demand picks up ahead of harvest. So be sure you can take the risk. Besides bullets, those include disruptions to refineries, which can encounter “unplanned maintenance” or transportation problems at just the worst time.
Producers needing propane to dry what could be a wet corn crop face a similar situation. Record propane production last week is keeping prices weak at a time when they typically are beginning their rise into fall. Propane is also vulnerable to moves in crude oil that could come at any time. Swaps into fall show the market anticipating rising prices, and it’s unlikely prices will get cheaper enough now to justify the risk of holding off on purchases.
The anxiety in the energy market isn’t good news for ethanol, which has not gotten a bump from E15. Production rose last week but stocks were up 2.2%, sending futures down 4.7 cents Wednesday. Margins in the industry remain poor but plants must maintain production, forcing them to push corn basis to attract the feedstocks they need. The latest production numbers continue to suggest USDA is too high in its forecast for corn usage to make the fuel, though the agency made no adjustment in its July 11 report.
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Senior Editor Bryce Knorr first joined Farm Futures Magazine in 1987. In addition to analyzing and writing about the commodity markets, he is a former futures introducing broker and is a registered Commodity Trading Adviser. He conducts Farm Futures exclusive surveys on acreage, production and management issues and is one of the analysts regularly contracted by business wire services before major USDA crop reports. Besides the Morning Call on www.FarmFutures.com he writes weekly reviews for corn, soybeans, and wheat that include selling price targets, charts and seasonal trends. His other weekly reviews on basis, energy, fertilizer and financial markets and feature price forecasts for key crop inputs. A journalist with 38 years of experience, he received the Master Writers Award from the American Agricultural Editors Association.