Gasoline futures contracts hit $0.67/gallon this week as crude oil got down to $23/barrel. The Saudi’s are still trying to pump the world full of oil to punish the Russian’s for not agreeing to their proposed cuts. What started as a threat to hurt the Russians, now has the whole US energy sector on the ropes. We cannot pump oil at these levels and our energy sector is highly leveraged. 40% of our corn demand is in ethanol. If we allow the ethanol industry to be destroyed, we have enough corn to last several years even if the Chinese start buying lots of corn. The administration indicated they were going to put some pressure on the Saudi’s to curb production; which is the reason for the bounce in energies on Thursday that took the foot off the throat of corn and helped everything find solid buying.
There have been no new cases in China for more than 5 days now and their economy is getting back going. We do not just take their word for things. We can measure things for ourselves like movement of people, smog as factories crank back up, and movement of goods. FedEx reported today much stronger rebound than expected. China getting back going is the best news so far related to the virus. They are several weeks ahead of us and are proving that it can be contained and when it is contained, we can get back going. Italy has had to put more stringent controls in place. We are lucky that several countries have fought this before it came here because we can see what has worked and just as importantly what has not worked. There are some old therapies that have shown promise in fighting this. That is very positive because we will not have the unknown side effects we can get from new therapies.
What has changed in the outlook for grains?
- China is buying US corn, wheat, and soybeans in larger amounts than anticipated this week! They have a long way to go to reach the targets, but this was a small step in the right direction in the actual amounts they bought this week, but a giant leap in the fact they are buying from us while South America has new crop available. This is a big deal!
- The South American growing season is finishing hot and dry (sound familiar?). They still have a large crop but estimates continue to shrink by the day. It is not as big as estimated only a short time ago.
- Argentina has made moves to tax exports and there are rumors of ports starting to shut down. This has caused a lot of issues trying to execute meal and beans out of South America. This is very beneficial to the US.
- Bread being wiped out on store shelves across the US and world is very good for wheat demand. The excess demand of meats in the grocery store is partially offset by lack of eating meals away from home. The overall meat demand picture is better, but not as much as bread and milk. But this is still a very positive effect.
- Unfortunately there are also negative effects, and corn for ethanol is a major one at risk here. We need to support the domestic energy sector. Until the market sees some firm guidance from the energy markets, upside in corn is going to be limited.
- Cotton is more sensitive to macroeconomic conditions and is also pricing in the additional risk in the other Asian countries. India has nearly as many people as China but not as much control over them. We have yet to see how the outbreak is going to play out there and the cotton market is very worried about that.
What to do?
With crude making 17 year lows, corn has more risk now than previously anticipated. We need to be selling rallies. We could easily get back in the $3.60s. I do not see much upside above that until we get some of the uncertainty behind us. China buying corn is a big deal, but they most likely will not be able to replace 40% of ethanol demand so there is still some risk. We need to have reasonable objectives.
Soybeans do not have near the downside risk that corn does. We have strong demand that is getting stronger. We could still see some big downside moves on outside market weakness and overall fear, but I currently do not see sustained downside risk in beans. If you need to sell beans for cash, be scaling in on up days. Be patient on new crop.
Wheat also has more upside from here. If you need to ship new crop at harvest, be looking for your home now. We do not have a monster crop but we do have more than last year and the flour mills will get backed up at harvest. Futures should make a run above $5.50.
Cotton showed yesterday an unwillingness to move much until we get the virus further behind us, even when we see strength in the other ag commodities. If you have old crop cotton and need to generate cash, sell it and buy calls. If you still have unsold cotton in the warehouse, you have the opportunity of a LDP payment this week of 205 points. You have until next Wednesday to decide on that. Give this market a few more days to trade to see if next week has the possibility of being more.