Virus panic in the markets

Are commodity markets showing resiliency to the virus?

The coronavirus COVID-19 infection has the grain markets and stock markets in a frenzy recently. 

As of Tuesday, the Chinese virus has infected 80,289 people globally and killed 2,704. 

It is the market story, causing more than a 1,000-point drop in the DOW (3.56%), and commodities following with about half that percentage loss. However, note that infections are slowing, with 772 new infections Monday vs. over 2,000 per day, in early February.

READ MORE: Ag markets still have no life Wednesday

Also, note that since this virus runs its course in about 15 days that 7% also recover each day. So, about 4,000 people should also have recovered Monday, as well.

The panic doesn’t seem to be in the impacts of the infected/dead now, but the economic impacts due to the steps taken to stop the spread of the virus. China (77,660 infections, or 97%) has basically shut down a lot of economic activity in the worst affected region in order to contain the disease, and it is causing much more economic disruption than originally expected.  

While China has taken some criticism for its dramatic and sometimes draconian steps, now attention has moved to South Korea (977 infections), Italy (270 infections), and Iran (61 infections), as they seem to also be having some trouble containing the problem. 

The headlines have made many would-be travelers cautious about, for example, taking a cruise ship into Asia or international travel into infected zones (mostly China and South Korea). The economic impact of the tragic news stories might be 10 times, 100 times, or even greater than the infections themselves!

Actually, in the face of two or three times the impact in stocks than commodities, perhaps that’s a sign that commodities are stronger? Hard to say that a 5¢ loss in corn and 16¢ loss in soybeans is positive, but percentagewise, corn lost 1.3% and soybeans lost 1.8% yesterday, while stocks were mostly 3.5% to 4.5% lower. Once the supply chain gears back up and shipping resumes, it might be easier to resume exports of commodities than the supply chain disruption of the global product network.  

SAM weather continues to call for little to no rain in Argentina, with above-normal temps the next 14 days. This is going to adversely affect Argentina’s production of soybeans and corn this year. But, so far, no one is paying much attention to the current drought developing there. Look for reductions in production estimates in the next few months, unless weather takes a dramatic change. Brazil weather is better, with normal rainfall and cooler-than-normal temps forecast the next two weeks that would be mostly beneficial if accurate.  

USDA’s Annual Ag Outlook ended last Friday, with USDA forecasting a 163-million-bushel cut in wheat endings stocks (ES) to 777 mb, corn ending stocks up 745 mb to 2637 mb, and soybean ES down 105 mb to 320 mb.  Soybean exports were up more than 10% (225 mb) to 2050 mb – apparently in a nod to the Phase One China trade agreement, but still below the 2017/2018 exports of 2134 mb. While soybean carryout is cut 25%, price projections are only up 5¢ to $8.80.

READ MORE: China taking action to begin implementing trade deal, says Perdue and Lighthizer

Based on these numbers, there would be no soybean PLC payment in 2020 ($8.40 support price), but a 60¢ wheat payment ($4.90 projected price vs. $5.50 support) and a 10¢ corn payment ($3.60 vs. $3.70 support). We’ll have to subtract out the extra PP acres from their acreage totals as PP is likely to be higher than normal in 2020 due to the flooded conditions in the entire U.S. (USDA assumes normal PP of about 3 million acres.)  

SAM weather is still relatively adverse for Argentina, with virtually no rain forecast the next week, which will strain yield potential, and it continues in the eight- to 14-day forecast, which is also suggesting below-normal rainfall. The almost zero rainfall in Argentina the next two weeks is accompanied by an above-normal-temps forecast, so this is going to stress crops. Perhaps SAM yields won’t be as good as previously advertised (again, as happens so often in February)?

This week’s panic on the Chinese coronavirus will be interesting to watch. Is it, in fact, a buying opportunity in both stocks and commodities? Or is the end-of-the-world, sky-is-falling mentality correct?

Ray Grabanski can be reached at raygrabanski@progressiveag.com.  
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Ray Grabanski is president of Progressive Ag Marketing, Inc., a top-ranked marketing firm in the country.

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