The trickle down effect of the OPEC deal on agriculture

By now, many in the area will have noticed the sudden jump in gas prices that were hovering around the $2.00 mark for much of the fall.

Posted 12/17/2016

By Melissa Anderson

The recent agreement made by members and non-members of Organization of Petroleum Exporting Countries (OPEC) to cut oil production back beginning in January has been the catalyst for the prices of benchmark U.S. West Texas  Intermediate (WTI)  crude oil to go up from the mid $40 per barrel range to just over $54 per barrel at the opening of the stock markets on Monday, December 12.
With the members of OPEC, including Saudi Arabia, Iran, Iraq, Kuwait, UAE and other countries whose markets depend on oil exports, agreeing to cut oil production by about 4.5 percent each, the price of a barrel of oil rose, but the market was still cautiously waiting for non-OPEC member countries with large oil exports to respond to the request to cut back their production as well.
Russia led the decision for the primary non-OPEC members,  such as Mexico by agreeing to cut production back and this caused another increase in oil prices early in the week of December 12. The purpose of the agreement to cutback the production is an attempt to bring the supply and demand of crude oil back into balance and eliminate the glut that has plagued the market for the past few years in an attempt to drown out the U.S. supply.  Should the pledging countries adhere to their promised reduction, the oil market could be back in balance in as quickly as six months.
For U.S. producers of shale oil, the OPEC deal marks a turning point as those who weathered the oil glut of the market now begin to focus on getting their oil rigs pumping again and with the export ban on crude oil, U.S. suppliers are now able to trade on the global market. With so many players and variables involved, experts and analysts are having a hard time determining when it will be safe to say that the cutbacks had an impact and oil prices are firm.
Until then, agricultural dependent communities and states like that of Cavalier County and North Dakota will feel a trickle down effect in a few areas that producers will notice come spring time.
Tony Gratton, the Grain Department Manager at CHS Milton, notes that the energy market typically impacts the agricultural market in little ways that can quickly add up.
“Input costs come to mind, whether it be diesel fuel for planting/harvest or natural gas, which can impact the cost of fertilizer,” Gratton said.
Gratton also mentioned that ethanol could be impacted as well by the rising cost of oil. Gratton explained that when gas prices rise as a result of demand, the demand and cost for ethanol also rises, providing support to  the corn market.
“Sentiment across commodities also comes to mind,” Gratton stated, “For example, a push higher in crude oil or lower can impact sentiment of other agricultural commodities.”
As producers look to the spring planting when crop prices are still rising slowly, Gratton has a few tips to help reduce costs.
“As it relates to input costs, particularly for diesel, basis levels are low in winter for diesel in much of the country before they seasonally move higher into spring,” Gratton stated.
There is also a carry in the futures market. Gratton advises producers to fill their diesel tanks sometime between the December and February time frame.
“Considering the OPEC agreement, I think locking in some forward contracts now makes sense and take advantage by covering any additional needs if prices move 10-20 cents lower,” Gratton stated,”Right now forward contracts to the farm gate are under $2.00 in most areas, which remains on the low-end of recent year’s history.”
Agricultural commodities  that travel by rail freight will also see trickle down affect as the demand for transportation of goods increases. If the nations that promised to cutback production adhere to those statements, the U.S. producers will undoubtedly act upon the rising oil prices and ramp up their production.
“The demand for rail for frac sand and oil once again becomes a key component to freight costs,” Gratton said.
The few examples given by Gratton on where the volatile oil market is likely to affect agriculture gives a glimpse at what oil market analysts are trying to decipher in regards to the future of oil prices. Agricultural market analysts will have to sit along side those who specialize in the energy sector and wait out the coming months to see what the final result of the recent OPEC deal will do to their specific market.