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Is the end in sight?
“It can’t get much worse, can it?” This is the No. 1 question asked by many farmers in these trying weeks. After being mentally and emotionally battered by horrific weather events of 2019, farmers now face a new ambush in 2020: lower prices due to COVID-19 panic selling.
A Food Shortage on the Shelves?
As many of you very well know, due to recent national social distancing orders, demand for many commodities has slowed or come to a screaming halt. Americans love to eat out. Now we are forced to be home, or in some instances drive and pick up carryout food orders. America has had the food supply. There is not a food shortage. The problem is that the food has already been packaged for restaurant use, and is in frozen storage still packaged for restaurant use. The consumer and retail sector is now facing short-term demand of “we need more food for consumers to purchase at the grocery store,” and so you saw the depleted store shelves on the news just weeks ago. The industry responded quickly, as did prices with a short-term spike to get the pipelines filled again.
Low Gas Prices Are Not a Good Thing
Prices in the past week have run out of friendly sentiment. With the nation asked to stay home for the entire month of April (if not longer), demand for energy use is substantially lower. Overproduction of crude oil was continuing around the world keeping prices suppressed and pushing ethanol plants to close. While the rumors of potential production are coming out of Saudi Arabia and the president’s tweets, let me be clear that this production cut is out of necessity. There is NO MORE ROOM TO STORE THE EXCESS CRUDE OIL.
This is not going to help ethanol demand. Americans haven’t been driving like normal for the past two weeks, and now they will not be driving for the entire month of April! This will forever lose demand for those six weeks. Once Americans get back to work, and driving, it is not like they are going to drive EXTRA to make up for the driving they didn’t do in late March and April. To make up for that, you’d need nearly every American to drive to the Pacific Coast on a week-long road trip to make up for that lost demand. That’s not going to happen. Especially with many Americans out of work (unemployment claims near 10 million in just two weeks)!
Add to it that it is now the start of a new quarter. Funds are relentlessly selling commodity futures. Last year in the corn market they got short just over 300,000 contracts of corn by mid-May. Currently we estimate they are short just over 150,000 contracts. Historically speaking, there is still room for them to sell additional contracts. Seasonally, grain futures have a tendency to trade sideways to lower during the month of April, with the market finally finding some sort of bottom in May. The bottom will come.
It Will Get Better
Remember, low prices cure low prices. And, commodities are getting CHEAP. Expect a couple more weeks of negative news, but the dust will settle. Funds will need to exit/buy back the short positions. Global end users will show up to buy mass quantities of cheap commodities to store in their countries. There will likely be some sort of weather scare. Prices will respond higher. The world still needs to eat. The world still needs the American farmer. Cling to your faith. Cling to your families. Remember your love of country. And, at the first sign of a bottoming signal, I will sound the alarm!
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