Oil’s nosedive is sending farmers a stark reminder — they also need to be energy traders.
Growers have become more vulnerable to energy swings over the past decades as nations from the U.S. to Brazil mandated the use of biofuels. About a third of America’s corn crop is used in ethanol, while Brazilian millers can use as much as 60% of their cane to make the biofuel. Asia’s palm plantations and Europe’s rapeseed crops are largely dependent on biodiesel demand.
As oil suffers its steepest plunge since the Gulf War in 1991 and the coronavirus spreads across the globe, agriculture markets are feeling the pinch.
Sugar tumbled as much as 6.5%, palm oil fell 11% and European rapeseed lost more than 3%. Shares of U.S. ethanol maker Green Plains Inc. tumbled 43%, the most since records begin in 2006. Fertilizer giant Nutrien Ltd. hit an all-time low.
“Ever since farmers embraced and promoted ethanol and biodiesel, they have increased their linkage to energy prices,” said John C. Baize, an independent consultant who advises the U.S. Soybean Export Council. “When energy prices were high, corn and soybean prices were also high. Now with the collapse of oil prices, commodity prices also are low. One cannot accept the higher prices without also accepting lower prices now.”
Oil’s rout — caused by a price war between Saudi Arabia and Russia — is the latest blow to crop markets already hurt by a decline in demand due to the spread of coronavirus that’s keeping people at home.
Markets have become more tied together over the past decades. Farmers nowadays need to watch everything from crude oil to the state of the global economy.
“The coronavirus and drop in crude will impact demand and economic activity, and this could be dangerous,” said Michael McDougall, a managing director at Paragon Global Markets in New York. “Farmers have to be cognizant of this.”
U.S. ethanol margins got crushed as cheaper crude makes the biofuel less appealing. Ethanol futures in Chicago fell 2.5%, while shares in producer Pacific Ethanol Inc. plunged as much as 28%.