Weekly Market Update – February 28, 2020

This week has been like a bad dream that will not end as complete and utter panic has continued in all markets. Everything continues to be hit, energies, grains, equities, everything. The spark that brought on this latest panic is an increase of cases elsewhere in the world over the weekend. Some of these cases cannot be easily traced back to a source in China which is concerning for those trying to contain it. China for their part seems to be doing a decent job at containment as the number of new cases there is dropping. Two weeks ago it seemed like a global pandemic had been avoided, now we have flipped to full blown panic. The virus itself is not so bad as far as mortality rates, but what the market is worried about is if we disrupt enough economic activity to drag the economy off a cliff. Fear breeds fear and right now people are afraid. A recession is not necessarily the end of the world for grains and oilseeds as people still have to eat and the monetary policy that governments use to stimulate the economy are long term friendly for grains and oilseeds. However, energies and cotton do not fall into that category. We know better than to take China government announcements at their word, but based on verifiable indicators, it does look like the Chinese economy is getting back up to speed. The question is how much damage was done and can it get going fast enough to keep from losing all the growth. The question the world is now trying to answer is if the spread can be slowed down before it does the same thing to the world economy.

Enough with the negative, let’s find some positive things from this week: At the outlook conference USDA officials and federal government officials remain very confident that China would honor their commitments despite the effects of the virus. USDA was unable to put much of a change on their balance sheets since it has not been publicly released how much of which commodities they agreed to buy. The source of confidence by the government officials is in the enforcement. It was widely known and reported enforcement would be the key to a successful deal. We could pave a road with the number of commitments China has made and then broken but this time the punitive tariffs remained in place with only temporary waivers granted. Noone has priced in the possibility of them actually honoring the commitments, the market wants to see action before doing so. I remain skeptical how the targets will be achieved because of how difficult it is to make the math work, but I am hopeful we will see big improvements. Only time will tell whether the skepticism or optimism is warranted but it is something really big that still has the potential to drastically help our balance sheets. If realized, it will be a multi-year help not just a blip.

We are in a quiet time of year for news. We are approaching the end of the growing season in South America and the begining in the US but not quite to either yet. We will get USDA updated S&D on March 10th but there typically are not many changes. The next big date to be watching for is March 31 when we will get prospective plantings and stocks.

Corn has put the low in a couple contracts on first notice day and we hope this will be another example. One positive on corn is how strong the basis remains. Fertilizer is the one input that has actually come down this year and with energies continuing to fall, this trend should continue. This will help push new crop acres of corn up. Last year at this time, we were facing the prospect of lots of corn acres adding to an already huge carryout. This year, we are facing the prospect of lots of corn acres but we do not have the buffer of such burdensome old crop stocks. The spread tightened up making it easier to roll basis contracts to the May for the first time in a while. We are not even close to the range that we wanted, but we need to be pricing old crop on any bounces we get in both old and new crop. We have a whole planting and growing season ahead of us, but we need to manage risk, not bet everything on a weather disaster. Everyone needs to be selling on a bounce!

Soybeans actually got some positive news this week. Argentina made populist moves to significantly increase export taxes on ag commodities. This will make our commodities more competitive even during the time of year when we are usually significantly more expensive. This will make our beans more attractive to all importers. Soybeans were able to shake off trading down 13 and closed higher on the news. Even if Argentina’s crop continues to grow in size, this will help equalize. Beans have a better outlook for the rest of the season as a lot of the acres going to corn are going to come out of soybeans. Even with a big South American crop, we have good potential with small changes in demand. May beans are within striking distance of $9. If you need cashflow soon, sell beans at that level. Basis continues to strengthen. Be patient on new crop beans. Early beans should have good basis premiums for the first time in several years.

Weakness in the dollar should be supportive to wheat but it has been as much of a victim of the selling as anything. Despite low acres, the benign winter weather has been good for wheat production in most of the country. A warm up in early March in the Midwest could set wheat up for a cold snap threat. Be patient on new crop wheat until we have a better idea of our crop. Basis will be weaker at harvest but should run back to triple digits quickly into the fall.

Cotton has taken it the worst of any commodity since it is the most sensitive to economic slowdowns. During recessions, all participants in the supply chain hold significantly less inventory. People always have to eat, but they do not need to buy as many new clothes. The drop in energy prices making synthetic fibers cheaper also weigh on cotton. If cotton was going to lose a lot of acres before last week, now it is going to lose more. If you want to make a bet on the economy, plant cotton.