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ANALYSIS: Oil's volatility will impact agriculture


International crude oil prices fell by 25% on Monday.


They dropped to their lowest level since February 2016, the biggest one-day percentage fall since 17 January 1991, at the start of the first Gulf War.


The price of Brent crude, one of the main benchmarks, has recovered by some 4% today to around $35.80 per barrel, but the recovery feels tentative.


What are the implications for agri-futures?


There is a strong historical correlation between crude oil prices and those of agri-commodities - they tend to move in tandem.


Corn and sugar left guessing


Farmers everywhere will be giving three cheers, as oil accounts for as much as 60% of their input costs. But joy is premature, not least for farmers who produce corn and sugar for ethanol.


As the price of oil drops, so does the incentive for producing ethanol, used as an additive to petrol.


If the low oil price endures into the US planting season, corn farmers may plant more alternatives such as soybeans on the prospect that demand for corn-for-ethanol will be lower.


In Brazil, where the important Centre South cane crop harvest has been delayed this season after a dry spell in December and January, crushers may opt to produce much more sugar than ethanol if fuel prices remain depressed.


Right now, US corn farmers and Brazilian sugarcane crushers will be pondering what to do.


Food and oil are joined at the hip


A lasting drop in the oil price will however make shipping costs cheaper, thus benefiting not just trade prices but also in ways that are not obvious - bulk shipping of fertilisers for instance should be cheaper


Food prices should ease, depending on how long-lived the price collapse persists.


So while the drop in the crude price might appear to be overall a useful stimulus to increased agri-products’ demand, we are right now only at the start of what might be a protracted period of crude oil price volatility.


Not all agri-goods will benefit in the same away - or perhaps at all.

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