If it’s not one thing, it’s another for farm markets
The current novel coronavirus epidemic causing a massive sell-off in Monday’s equity and crude oil markets, and to a much lesser extent the agricultural commodities, is just the latest black swan event keeping a lid on potential price rallies.
Farmers hoped for a selling opportunity after the African swine fever outbreak settled down last year. However, the U.S.-China trade tariff war struck and started the second black swan market event.
Once the U.S.-China trade tariff dispute was settled in early 2020, U.S. farmers hoped for a post-trade war rally.
Not so fast. A crude oil price war between Saudi Arabia and Russia, and China’s coronavirus (now a global crisis), are slowing the economy’s pace to a 30-year low, a present problem for the farm markets.
As of Monday, 105,586 people in the world (423 in U.S.) were infected (26 U.S. deaths) with the coronavirus, according to the Center for Disease Control data.
While there have been 3,900 deaths, over half of the people who contracted the virus have recovered, according to the Associated Press Monday. Still, the deadly virus has spread to over 100 countries and is straining the U.S. health care system.
On Monday, the New York Stock Exchange fell under so much pressure. A 7% fall triggered circuit breakers and shut down trade for 15 minutes. Both the S&P 500 and the Dow Jones Industrials were on pace for their largest one-day declines since 2008.
This fall was triggered by continued reported coronavirus cases and the oil price war between Russia and Saudi Arabia.
After OPEC nations couldn’t decide recently on cutting crude oil production, due to the latest surplus of world supplies, Saudi Arabia dropped its crude oil prices by 20%. Russia followed with its own deep cut in prices.
To start the week, the crude oil market dropped 31% at $31.20 per barrel, the lowest since the 1991 Gulf War.
Goldman Sachs, a large trading firm, sees crude oil dropping to $20 per barrel.
Between February 20 and February 28, the S&P 500 Index fell 12.4% as coronavirus transitioned from a largely Asian issue to a global problem. The energy sector took the biggest hit at 16.4%, more than financials and health care, during that time frame last month.
Why The Farm Markets?
It’s clear why coronavirus is impacting global economies, but why is it hurting the farm markets? And how long will farmers have to wait for a post-coronavirus rally?
Keep in mind, on an annual basis, the markets offer farmers a selling opportunity in the spring. With that season days away, the question becomes will the coronavirus block that opportunity?
A longtime Chicago commodities trader, choosing anonymity, says the reason coronavirus impacts U.S. farm markets is mostly due to China being such a huge customer.
“When you talk about China, you’re talking about soybean demand and food demand, in general. It is a food-deficit country,” the Chicago trader says. So, the ripple effect of a coronavirus outbreak pressures ag markets.
For Iran, Italy, and all of Europe, the impact from a pandemic like the coronavirus is felt in the equity markets vs. commodities.
“China buys two out of every three soybean cargoes sold on the world market,” the trader says.
China Is A Big U.S. Customer
The U.S. shipped $1.49 billion worth of agriculture and ag-related products to China in January, up 52% from January 2019, yet still an 11-year low, according to the U.S. Census Bureau.
In January, the U.S. soybean exports totaled 5.32 million metric tons (195 million bushels), up 10% year over year. And 40% of the soybean exports went to China.
For corn, January exports totaled 2.49 mmt (98 million bushels) with 40% going to Mexico. Sales were 47% below a year ago.
Pete Meyer, SPGlobal analyst, says most, if not all, of the sell-off in the ag markets has been sympathy-based with equities.
“Investors and traders have an inherent fear of the unknown, so they do not want to step in and catch the proverbial falling knife. That’s not to say that global demand for commodities generally will not slow down given lockdowns and restricted movement, but it’s more psychological at this point,” Meyer says.
Meyer added, “We certainly understand the sell-off in energy prices given the aforementioned lack in movement, and with ags. With corn specifically linked much more to energy than soy, the sell-off there makes sense.”
Soybean Market Holds Up
“When you look at the past month, soybean prices have held up pretty well as compared with corn due to the correlation with energy. Looking at the March contracts, which are in delivery, corn is down 20¢ a bushel, but soybeans are actually 15¢ higher than at the end of January. On livestock, hogs are flat for the month while cattle have taken a beating,” Meyer says.
The beef market drop may be correlated to a possible economic slowdown, but probably more based in market fundamentals, which were bearish already, Meyer says.
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The farm markets haven’t needed any help going lower. Even before the ASF outbreak, the trade tariff war, and the coronavirus, farmers had been facing sideways trading markets for five years.
“We were trying to reestablish a bid post-ASF,” the Chicago trader says. “Once it looked like China was getting its ASF epidemic behind it, expanding forward purchases into China. In November 2018, China increased its hog population.”
With a big gap to fill in China, world hog and poultry producers were anticipating big opportunities with the Asian buyer.
So, a post-trade and post-ASF buying frenzy was expected to boost ag markets, specifically for the soybean complex.
The U.S. lost about 9 million tons of soymeal into China, due to ASF. The U.S. went from 94 million tons of soy meal imports to China in 2018 to an 82-million-ton import total in 2019, mostly because of ASF and partly due to the trade war disruption between the two countries.
A rally wasn’t to be due to China’s outbreak of the deadly coronavirus.
That market impact started around January 24, 2020.
“To avoid a spread of the virus, China slaps quarantines on people moving around the country. That started to impact China’s ability to offload products at its ports. As a result, whether it was hogs, chicken parts, or soybeans, a backlog of products piled up at the ports,” the Chicago trader says.
Plus, China’s government gave its importers the right to back out of trade deals and to renegotiate.
Another factor impacting the U.S. soy oil market involves China’s increased demand for palm oil. As its domestic crush plummeted due to sharp losses of hog herds, China began to buy palm oil and other oils from countries around the world, the Chicago trader noted.
With consumers frightened of contracting the coronavirus, China’s restaurant’s have been reporting a 90% drop in business. This scenario has played out for six to eight weeks, spoiling demand for edible oils, according to the trader.
“As a result, soybean oil prices get hurt, and that pressure bleeds over into the entire soybean complex,” the trader says.
The trader added, “This sparked a gunning of optimism in the hog market that somehow the U.S. producers were going to take part in filling the post-ASF gaps in China, until their hog herd numbers return.”
But now, the coronavirus outbreak has delayed buying, caught people long the market, and has triggered liquidation.
“For the investor who hasn’t realized the anticipated gains from post-trade war, post-ASF, margin calls have started to come in and a liquidity crunch hits and money is needed from those initial investments,” the Chicago trader says.
“It’s like somebody yelling, ‘Everybody out of the pool – the sharks are circling!’”
He added, “It’s the problem with crises. All of these markets start to unify where everything is down on the same day or everything is up on the same day.”
While China has been dealing with the coronavirus for three months, its coronavirus case count has dropped and the recovery case count for coronavirus victims is going up.
“If China is reporting an honest count, it appears the country is containing the spread,” the Chicago trader says.
On Monday, the CME Group’s soybean market dropped 21¢, soy meal fell $4.70 per short ton, corn was off 4¢, and wheat finished higher.
Net net, it appears there is widespread liquidation around derivatives.
The markets that were almost record short have been rallying, while markets that were long, like bean oil, are breaking.
Last week, the USDA Weekly Export Sales Report indicated strong soybean meal sales. Last week’s exports totaled 316,000 tons, with a sales pace needed each week to meet USDA estimates at 123,000 tons.
The soybean market has gone too far downward, while corn has broken enough, the trader says.
For soybeans, if the experts are correct and the coronavirus subsides with spring weather, the narrative of China needing to return its soymeal imports back to 94.0 million tons, and its gross domestic product returning, protein consumption returns to trend growth, the Chicago trader says.
“Over time, this could be really bullish for the soybean market. Even if the U.S. adds 8 to 9 million acres of soybeans this spring, stocks won’t build,” the trader says.
In 2019, the U.S. soybean ending stocks totaled 900 million bushels, following a projection of 1 billion bushels. Due to smaller acreage last year, this year’s soybean ending stocks are halved to roughly 500 million bushels.
“The end result? I think there is a lot of potential for this soybean market to rally, if we get the coronavirus out of the way,” the trader choosing anonymity says.
This black swan event will delay farmers’ opportunity to sell, and they’ll have to sit on unsold crop too long, the Chicago trader says.
Elevators offer farmers a delayed pricing (DP) contract. It allows farmers to sell their basis and determine their future’s market flat price at a later date.
“If farmers wait until after corn pollination stage to sell, that DP contract expires, and they are forced to sell the market,” the trader says.
In four of the last five years, the corn low hit August 31-September 1. Ironically, that is the height of when DP contracts come due.
“So, that’s the risk farmers run by waiting for a post-coronavirus rally,” the trader says.
In the short-run, farmers have held crops tight, encouraged to do so by the Market Facilitation Program (MFP) payments and Agriculture Risk Coverage (ARC) county payments received this year.
Yet, farmers and investors are looking for that post-ASF, post-trade war, post-coronavirus bid in the market.
“The strategy to hold crop will be proven right or wrong this spring, if the U.S. planting season is delayed or the growing weather is hot and dry. What farmers need to understand is that Brazil has a big soybean crop that it will market this summer. And Brazil’s second corn crop will be harvested in August, front-running the U.S. corn crop on the world market,” the Chicago trader says.