Weekly Market Update – January 31, 2020

After making new highs last week, the markets have been in all out panic. Fundamentally nothing has changed drastically from last week until now. Corn and wheat have held on relatively well compared to beans and cotton. As more cases of the coronavirus in more countries were reported, the fear of a global pandemic grew, bringing selling to all markets and all asset classes. As fears of a global pandemic recede, there are still fears that the controls China is going to have to institute to stop the spread of the virus will also push the economy into a recession. Hints of slowing global growth this week have added to those fears. China has made it clear they will support their economic growth, but even a slowdown on growth there will have global impacts. Markets always overreact and this case is no different. The hope is that the overreaction has already occurred. There is no need for us to panic here, but everyone should take this wakeup call to review their plan and make sure the objectives they have set still make sense. If you are one that is so moved, calls on cotton or beans may be a good investment.

Corn was on the way to making new highs before the virus hit. Support in wheat and funds being short has helped it fair better than beans in the panic. We are only trading 12 cents off the high put in last Thursday. Exports were good this week and South America is very hot. Excessive rains in soybeans areas are delaying harvest and therefore delaying corn planting. Southern areas are dry and the heat is taking its toll. US demand is good. Ethanol plants are not shutting down anymore. Corn looks positive fundamentally, we just need to get the fear to subside before we get too close to March delivery.

Last week, it looked like we had $3.99 in the sights, now we are getting closer to March delivery (end of Feb) and need to be getting sales done. We need to be making sales above $3.90 on old crop. We can still be a little more patient on new crop, but any moves above $4 should be sold.

Since the funds are long beans, the panic has led to selling which is why beans have been hit harder than corn and wheat. Beans have also been hit harder because the virus started in China. There is a clause in the trade deal that: “In the event that a natural disaster or other unforeseeable event outside the control of the Parties delays a Party from timely complying with its obligations under this Agreement, the Parties shall consult with each other.” In my view however, if anything, crisis will increase their need for imports. The CEO of ADM was quoted as saying he did not believe this crisis would cause the Chinese to back out of the deal. I shudder to think about where the market would be right now with the virus if we had not gotten Phase 1 deal done beforehand.

Do not sell beans here. If you have old or new hedges, I would be more likely to consider lifting them rather than selling more. Monday may be interesting as the Chinese markets finally open back up after being closed a week for their New Year, but the fundamentals should support beans from here.

Wheat still has the production concerns around the world it did before the virus. It is hard to see how this virus will have much impact on wheat even if it spreads more. Wheat paid more attention to the strong exports. Australia’s export pace has exceeded estimates and their domestic supplies continue to drop to and are forecasted to reach very low levels midyear. Still targeting $6 on new crop wheat. No need to change objectives right now on wheat.

Cotton held on better than beans until today. The risk for cotton right now is significant downside risk in the Chinese currency. If they devalue their currency to try to support their economic growth, cotton will have a hard time holding on. The weakness today in cotton was in anticipation of that and also the US stocks trading down so hard. Cotton is more sensitive to equities than the other grains. Exports this week significantly exceeded expectations and a lot of that business was to China. Exports are good, that is what the market wanted to see! Now it is not paying attention! Sit tight on cotton.