Oil’s Epic Crash Reminds Farmers They’re Also Energy Traders

(Bloomberg) -- 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 and farmers 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%. Archer-Daniels-Midland Co., which is trying to sell its dry ethanol mills, slumped as much as 7.1%

“Destruction of U.S. demand is heavy on everyone’s mind right now,” Jordan Fife, domestic ethanol trader at BioUrja Trading LLC in Houston, said.

Sugar futures slumped in New York as lower oil prices boost the incentive for millers in Brazil to produce more of the sweetener at the expense of ethanol. Today’s move could mean an additional 6 million metric tons of sugar produced in Brazil this year, according to top producer Raizen.

Equities were also hit, with Brazilian sugar and fuel giant Cosan SA falling as much as 15%, and ethanol producer Sao Martinho SA tumbling as much as 33%. This year’s recovery in sugar prices had already been threatened by slow demand and the sell-off in commodities due to the coronavirus.

Edible oils used in biodiesel production also took a dive.

Palm oil closed down nearly 5%. Its premium to gasoil climbed to $201 a ton, the highest in three years, and compared with an average discount of $17 over the past year, making discretionary use in biofuel prohibitive and mandatory use tougher.

In Europe, where more than 70% of rapeseed oil is used for biodiesel, Paris futures fell as much as 3.4%. In the U.S., soybean oil slid as much as 5.8%.

The sell-off comes as agricultural chemical manufacturers are hoping to see a rebound after last fall’s wet weather hampered demand. Nutrien Ltd., the world’s largest crop nutrient supplier, tumbled as much as 6.2% to a record C$48.47 in Toronto. Shares in competitors Mosaic Co. and CF Industries Holdings Inc. slid more than 10%.

It’s not all bad news for farmers. Crop prices are still holding relatively well compared to oil and lower energy costs will help U.S. growers as they power tractors to plant this year’s crop.

Chris Robinson, managing director of agriculture and commodities at TJM in Chicago, is advising clients to take advantage of crude’s plunge to lock in diesel prices. “At the end of the day, that’s the silver lining to being an energy trader/farmer,” he said.

--With assistance from Fabiana Batista, Tatiana Freitas, Megan Durisin and Marvin G. Perez.

To contact the reporters on this story: Isis Almeida in Chicago at ialmeida3@bloomberg.net;Michael Hirtzer in Chicago at mhirtzer@bloomberg.net;Jen Skerritt in Winnipeg at jskerritt1@bloomberg.net

To contact the editors responsible for this story: Lynn Doan at ldoan6@bloomberg.net, Millie Munshi

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