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Paragon Commentary

Futures File: Biofuels, Petroleum & Currencies

Mar 03, 2017

Bio-Fueled Grain Rally

Corn and soybean prices exploded on Tuesday on rumors of a new deal to change regulations surrounding biofuels.

The plan was submitted to the White House by the Renewable Fuels Association and Carl Icahn, a billionaire investor and Trump adviser. The deal would curb foreign imports and boost demand for domestically-produced biofuels like soy-based biodiesel and corn-based ethanol.

At the Chicago Board of Trade, the biggest gainer was soybean oil, which is used to produce biodiesel; that market gained nearly 6% on the news, trading near 34.5 cents per pound.

The early rumors were that the plan was going to be implemented soon, but a White House denial of immediate action cut the legs out from the rally; by Friday, the markets had given up almost half of their gain, with May corn and soybean worth $3.80 and $10.32 per bushel, respectively.

 

Petroleum Plummets

Oil and gasoline prices dropped this week, led lower by concerns of oversupply. Crude oil inventories in the U.S. are at a record-high 520 million barrels, a factor of strong imports and more aggressive domestic drilling.

Meanwhile, domestic demand for gasoline has dropped 6% over the last year, and could drop further if the recent renewable fuels plan is enacted. Under the deal, fuel at the pump would be 15% ethanol, up from the current level of 10%, a move that would significantly reduce gasoline consumption.

As a result, April gasoline futures hit the lowest level since last November, trading for $1.65 per gallon, a price that excludes taxes, transportation, or other expenses.

However, even if U.S. consumption of gasoline stays lower, prices could still rise, as refiners are exporting a record amount of the fuel, especially to Mexico.

 

U.S. Dollar Leads the Pack

The U.S. dollar gained on further prospects of interest rate hikes, while most of our major trading partners’ currencies fell.

Commodity exporters like Australia and Canada were hurt by weak commodity prices this week, while a deteriorating political climate throughout Europe hurt the eurocurrency and British pound.

The Chicago Mercantile Exchange also offers trading in the Russian ruble and Mexican peso, broadening the menu of investments available to those who keep an eye on politics as well as economic news.

Exchange rates are important to businesses, as a strong U.S. dollar makes foreign goods cheaper while making it harder for us to export to our trading partners.

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