Commodities Watch: Crude Oil Sends Prices Tumbling (CORN, JJG, MOO, DBA)

This morning’s announcement by the International Energy Agency that it would release 60 million barrels of crude from member nations’ stocks has dealt a crushing blow to commodity prices. Only the US dollar is getting a boost, and that’s what’s sending all commodity prices down.

Nearly all commodities are priced in dollars, so when the greenback rises commodity prices fall. Crude oil, also priced in dollars, follows the same pattern, no matter whether oil prices fall first or the dollar rises first. Today, the near 5% drop in  crude prices led the parade.

Aside from the usual volatility associated with big announcements, it’s useful to look for some previously concealed news in the price moves. Let’s look at corn and wheat for a good example.

Corn and wheat futures are both off about -2% at around mid-day. Wheat, at $6.26/bushel, has fallen lower than corn, at about $6.63/bushel. The fall in wheat prices began following last week’s rain in Europe. This raised expectations of a larger crop which would require lower imports. That’s not good news for US wheat farmers.

Worse still is the likelihood that Russia is about to dump its existing wheat supplies onto the export market in anticipation of the coming harvest. Export prices for Russian wheat are expected to be very low because that is traditionally how the Russians deal on all commodities. The US just won an Egyptian order for 240,000 metric tons of wheat at $38/metric ton lower than an Egyptian order made just a week earlier.

Wheat almost never trades lower than corn. Since 1984, that’s only happened twice. When it does, however, low wheat prices drag on corn, regardless of the supply situation and forecast for corn. The main reason for the related price drops is that cattle feeders will switch from corn to wheat. It appears that many traders believe that is already happening. The US Department of Agriculture’s most recent estimate lowers the amount of corn going to livestock feed by nearly -3% in 2011.

A further impact on corn is the demand from ethanol producers. In the US, about 40% of the corn crop is used to make ethanol to meet government-mandated production quotas for blending with gasoline.

One other reason is that tomorrow is options expiration day for existing contracts, and rather than lose any more sleep over corn and wheat prices, many traders will simply dump their contracts. This also tends to drive down the price.

So, yes, corn and wheat prices are reacting to today’s news on crude oil, but behind that reaction are some real events in the real world. Imagine that.

The Teucrium Corn Fund (NYSE: CORN) fell -4% earlier today before coming back to down about 1.5%, at $43.16, in a 52-week range of $23.79-$48.77.

The iPath DJ-UBS Grains Total Return Sub-Index ETN (NYSE: JJG), which is weighted with 25% wheat and 37% corn, also fell -4% early, but has recovered somewhat to be off by about 1.9%, at $48.84, in a 52-week range of $32.49-$58.25.

The Market Vectors Agribusiness Fund (NYSE: MOO) is down about -2%, at $50.64, in a 52-week range of $35.62-$57.93 and the PowerShares DB Agriculture Fund (NYSE: DBA) is down about -1.3%, at $31.82, in a 52-week range of $23.53-$35.58.

Paul Ausick