Crude returns: How low oil prices have broken the relationship to food prices

Until recently, the price of crude oil and food moved largely in tandem. Since 2005 the correlation coefficient between the two price series (sourced from the IMF) has been +0.84. However, since late 2014 food prices have significantly outperformed crude oil prices.

Chart: Crude oil versus food prices


Note: The IMF food price index includes cereal, vegetable oils, meat, seafood, sugar, bananas and oranges while their crude oil price index is an average of Brent, WTI and Dubai.

Energy is a vital component of a farm’s operating costs. Direct energy consumption includes the use of diesel, electricity, propane, natural gas and renewable fuels for activities on the farm. Indirect energy consumption includes the use of fuel and feedstock (especially natural gas) in the manufacturing of agricultural chemicals, such as fertilisers and pesticides.

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Cotton prices: The top 10 most important drivers

This is the fifth in a series of articles looking at the top 10 most important drivers behind some of the main commodity futures prices. Episode 5 looks at cotton prices.

1) Economic growth

A shaky economy tends to dent consumer spending on discretionary items such as cotton sheets, shirts, and jeans. It may also lead to a substitution effect towards cheaper man made polyester clothing and away from cotton.

2) Government policies

Many cotton producing countries have sought to insulate their farmers and the textile industries upon which they depend from external competition (see driver no. 4), changes in these policies (eg, subsidies) can have a disproportionate impact on other global cotton producers. For example the US government has subsidised US cotton farmers since the 1930’s, to a greater extent that farmers of other crops. However, these subsidies distort global flows of cotton.

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History points to nickel leading rebound in base metal prices

The past 35 years of price data suggests nickel prices are the closest of all base metals to bottoming out while nickel sees the greatest risk of prices rebound sharply from current levels.

Looking across the main base metal prices the extent of the current down-cycle, only copper and nickel match or exceed previous down-cycles in prices. Both metals, but nickel in particular also have the greatest risk of a significant imminent move up in prices from current depressed levels. In contrast aluminium, tin and zinc have tended to need to fall much further and remain much longer trading at depressed levels than they have so far this time around.

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