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Grain, Crude Oil Prices Fall, But Relief For Consumers Likely Limited

By Debbie Carlson of Kitco News
Thursday August 14, 2014 2:00 PM

(Kitco News) - Grain and crude oil supplies are growing and weighing on futures prices, but the impact on consumers may be limited as other factors remain in the marketplace.

Grain prices fell sharply in the past few months in anticipation of a huge U.S. harvest this fall, and news from the U.S. Department of Agriculture did not disappoint. On Tuesday, USDA said their first estimate of this year’s corn harvest was 14 billion bushels, a record if realized. And the soybean harvest is forecast to be 3.82 billion bushels, also a record if realized.

Meanwhile, the U.S. Energy Department said in July the U.S. produced the most crude oil in nearly 30 years. Additionally, the International Energy Agency cut its global demand-growth forecast for 2014 to 1 million barrels a day and noted that supplies were plentiful despite ongoing geopolitical conflicts.

While headline the consumer price index may fall, the core index doesn’t count food and energy. Additionally, the impact at the grocery store may not be as noticeable, market watchers said.

“Corn prices may have come down 50% (from their highs), that doesn’t mean a box of corn flakes will fall 50% in price. Much of the price of food comes from the processing and movement of food, especially grain-based food,” said Sterling Smith, futures specialist at Citibank Institutional Client Group.

He said grain-based foods are not as price sensitive. For instance the cost of the wheat in a loaf of bread is about seven cents, whether it’s for the cheapest or most expensive loaf. It’s the manufacturing and processing of the wheat that makes for a more expensive, better quality bread.

While a giant grain harvest will help to alleviate some concerns about crop shortfalls the markets have witnessed lately, the big harvests come too late for livestock producers who had to cull herds over the past few years because of high feedstuff costs. That’s pushed meat prices to multi-year price levels. Given the time it takes to raise an animal to slaughter weight, especially for cattle, it may be some time before those prices start to fall.

Consumers are more likely to feel the commodity cost in foods like meat, where the product cost makes up more of the bottom line, Smith said. Other more price-sensitive commodities are coffee and cocoa, and because of supply problems, these foods are seeing elevated prices, too.

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Gas, Oil Prices Down

Motorists are seeing some relief at the gas pump, said Phil Flynn, futures account executive for the Price Futures Group.

“It’s good news to see gasoline prices fall. It’s an indication that we’re at an end of an era of high gas prices and that might change the way we thinking about oil…. It’s a benefit of the U.S. production,” he said.

Despite the geopolitical events in the Middle East and between Russia and Ukraine, oil prices are at their lowest prices since April and are under the major long-term moving averages. At 1 p.m., September Nymex crude oil prices are at $96.05 a barrel.

“If this was five, 10 years ago, oil prices would be at $140 a barrel or higher on the geopolitical news,” Flynn said.

The reduced demand forecast from the IEA also underscores a weaker global economy from Europe and Asia, Flynn said, which he added suggests that the crude oil “sell off is not all good news.”

Smith said while grain prices are low, there might be some limits to how much further prices will fall. He noted there are some logistical problems facing the grain industry in moving such a record crop as many rail cars are being used to transport crude oil because of the record U.S. oil production. These bottlenecks have been an issue for some time, so some farmers might opt to build on-farm storage and wait to market grain.

By Debbie Carlson of Kitco News; dcarlson@kitco.com
Follow me on Twitter @dcarlsonkitco



Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in precious metal products, commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.
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