Coronavirus and commodities

The coronavirus and its effect on the world will clearly live in infamy. We are living in historic times with no corner of the earth spared from this pandemic despair. Global economic markets have crashed in response to the uncertainty of what it means for thriving economies to come to a screaming halt. Traditional market fundamentals have been brushed aside for the short term as computeralgorithmic trading takes over.

As of late March, the market seems to have come to a pause, and the initial dust has settled. Going forward, commodity traders will look for any new signs of supply and demand to dictate the next price direction.  Let me be clear, these potential new signs of supply and demand critically hinge on how long “shelter at home” orders remain in place not only in the United States, but around the world. 

Due to the “shelter at home” and strict social restrictions in an effort to limit the spread of the virus, the U.S. economy is drastically slowing. An unprecedented jump in U.S. jobless claims (3.3 million) on March 26 accentuated the coronavirus’s impact on the economy, weakening the value of the U.S. dollar. Some economists predict an unemployment rate of 13% by May. (During the Great Recession, which ended in 2009, the jobless rate never got above 10%.) If the economy continues to stay closed, that unemployment number may move higher than 13%. If the dollar continues its current trajectory lower, ultimately that will bode well for U.S. commodity exports.  Remember, when the value of our dollar is lower, it makes it more appealing for other nations to import our commodities due to the currency exchange rate.

Let’s take a look at a few important farm commodities to try to understand potential scenarios for prices in the coming months. At this moment, there is plenty of uncertainty as to demand, and even supply.  Do expect volatile price activity in the months ahead.

Corn

Corn futures are sitting on an ever so critical up-trending support line when looking at monthly charts.  The $3.40 price area on nearby May futures is of the utmost importance for prices.  Should that price support area fail, the potential downside target then points to (gulp!) $3 in May 2020 futures price. The reality is that energy prices have been under price attack due to the lack of driving demand as American citizens stay at home because of the virus.  Supplies of crude oil and gasoline are building. Add to that the continue overproduction of crude oil in the world as Russia and Saudi Arabia dig their heels in, and keep the over production in full force in a very dangerous game of Russian roulette to see who will be the last country to stand.

Ethanol plants have lowered production or all together stopped production in response to lower energy prices.  The lower ethanol production means less corn used for ethanol.  The result is that unfortunately your local basis has widened and your local cash price has weakened.  The U.S. Department of Agriculture released two important reports on March 31; Quarterly Stocks and Planted Acreage. Depending on results of these two reports, corn futures prices will potentially either quickly fall to $3or hold firm on this very critical long term trend-line support, and find optimism to trade sideways to slower higher.

Wheat

The recent wheat rally was in response to the coronavirus panic buying at stores, which depleted shelves of bread and pasta. The food industry has responded wonderfully to get those shelves restocked and wheat futures have also rallied in response to demand uptick. Wheat futures have now rallied up to major technical resistance levels on Chicago Wheat and Kansas City Wheat charts. According to the considerably large wheat carryout around the world (287.1 million metric tons), one would think that the wheat rally will come to a screaming halt. And it just might. But that ending stock number is large in part due to a decade long trend of decreased wheat demand for food (here in the U.S. anyway).

Here is something to drastically consider, if the U.S. economy doesn’t get back on track in the coming weeks, unemployment numbers will continue to grow and Americans will be in dire need of “cheap food.”  The food that will then be in demand will be bread and pasta. This food is cheap, easy to make and fills the bellies of hungry children. This would potentially be new, increased demand for wheat products when you compare it to recent history.

Now think about that increased demand for bread and remember that the majority of wheat planted in this country is Hard Red Winter Wheat (Kansas Wheat Futures) or Soft Red Winter Wheat (Chicago Wheat futures) both which were planted back in late fall to be harvested this summer. The amount of wheat that was planted was historically small, because wheat demand overall in the U.S. has been reduced in the past decade due to the “I don’t eat carbs” trend. Therefore, if this new demand does actually occur, we are not able to plant more winter wheat for seven months. I currently sit in the camp of “we have plenty of wheat” and point to those jaw dropping large global carryout levels.  But I am very aware of this potential new food demand here in the U.S. (again, only if the economy is shut down longer than expected).

Cattle

Holy volatility!  Here is a market that had an initial dramatic sell off due to the virus and assumptions that Americans would not dine out (and eat beef) for weeks or months due to shelter at home rules.  That assumption went out the window quick as images emerged on social media of grocery store shelves emptied of beef. The market then rallied on short-term demand to refill retail beef shelves. So while restaurant demand will likely be slow for another month, the consumer has clearly shown an appetite for beef while stuck at home.

My opinion is that ground beef demand will be extremely strong for the upcoming months as parents with children at home will make tacos, spaghetti and hamburgers for quick and relatively inexpensive meals. If the economy continues to slow and unemployment creeps higher, then you’ll likely see less demand for expensive cuts of steak.

On the supply side, cattle weights are high. The average dressed steer weights for the week ending March 14 came in at 901 pounds, this is up from 865 pounds a year ago. Eight hundred and seventy-six pounds is the five-year average weekly weight for that week in history.  Cattle numbers are high, too.  And overall animal protein is ample when compared to poultry and hog production.

With all the twists and turns of this historic time, there will likely be marketing opportunities along the way. Traders will focus on headlines for the coming weeks as we focus to find a new normal. Keep in mind also that low prices will cure low prices.  With commodities still relatively inexpensive, and if the value of the dollar continues to drop, we may see an uptick in export demand. And along the way there will likely be some sort of weather issue, which will make for a dramatic price reaction. The virus will pass eventually. People will still need to eat in the meantime.

Editor’s note: Naomi Blohm is a marketing advisor with Total Farm Marketing by Stewart-Marketing and she is a regular contributor to the Iowa PBS series “Market to Market.” She can be reached at [email protected].