Weekly Market Update – April 17, 2020

Anyone that does not feel like they just got run over by a truck, has not been watching the markets and I am glad for them. For everyone else, these last few weeks have been brutal and without precedent. We should all feel fortunate to not be trapped in a shoebox sized apartment in a city, but that does not make the pain we are all feeling any less. Staying in a tractor can be a welcome respite from the storm. Many people have old crop left to price and new crop is going in the ground. Everyone feels frozen by this market. We are quickly approaching first notice day for the May contracts and first notice day has not been kind to us this year. Our best chance for any kind of bounce comes after first notice day (May 1st) when the hard decisions on basis contracts have been forced.

The best way to start getting our head wrapped around this is to think small. I doubt we are going to hit a price in the next few weeks that will make you excited to sell every last bushel of unpriced grain and cotton. We need to set our goals lower. We need to sell in small increments. Small increments will be easier to swallow. Our objective is to manage risk. We have been thrown a curve ball but we have to continue to manage risk in the environment we are in, not the one we want to be in or were in. We have significant challenges to overcome for the crop in the ground, we need to be getting the old crop behind us. Anything on basis vs May, we need to be scaling in sales now. At very least, sell small but sell often.

The USDA has had over $16 billion appropriated for aid. But right now that is for all sectors and will not be nearly enough. Congress continues to debate more packages but have not been able to pass anything as quickly as the first bill. The positive here is aid will be at minimum $16 billion, hopefully more. The details on how it will be distributed will also take some time to determine.

Cheap money will be friendly to commodities. Money is looking for returns. We are seeing the widest divergence in history between the Goldman Sachs commodity index and stocks. That will correct but it will take time. We have to get some confidence in the economy reopening and see stability in the food system.

China has had to sell beans out of their state reserves to keep domestic crushers supplied as they rebuild their domestic pig herds and get their economy back going. We lost the top end of the crop in South America, but the crop is still large just not as big as it could have been. With all the ethanol plant closures, soybean meal is being increased in rations in the US upping already strong US demand. China bought a few cargoes of US beans last week but have slowed down this week. Exports were nothing special this week as they are buying most of their beans from South America. Any export hiccups in South America would quickly force China to switch to more US beans and see a quick rally on the board. Basis remains very strong in our markets. Beans should not see as much pressure as corn as we approach first notice day but we still need to scale in sales on any higher moves in old crop beans. We can be patient on new crop.

Corn is trading as just an energy right now without as much influence as a feed. It is estimated that half of the ethanol plants are currently shut down. Dividing out our yearly usage by day, if half the ethanol industry stays down for 100 days we will have lost 680 million bushels of usage. Approximately one third of that will go back to feed usage so we will lose around 500 million bushels of corn usage if this continues. Right now in energies it is not even a question of price. People are not driving even if gas was free. The market’s job is to find a price that supply equals demand and demand is currently stopped by government not by price. The only solution is to get the economy going as soon as it is safe to do so. As we approach first notice day at the end of this month, a lot of hard decisions are going to have to be made. I worry corn may have some additional downside as those decisions are made. I think we have a good chance of seeing a bump higher when we get into May but question where we start that bump from. Sell corn small and sell often to clean up basis contracts.

Wheat still has decent fundamentals but is trading a weather market and weather markets are volatile. The US has had very cold weather threatening the wheat crop, but Russia has rain forecast in the two week window which is very much needed. The rain forecast for Russia along with the strength in the dollar offset the US weather threat. The funds are very long in the wheat market which adds another element of volatility. Kansas City wheat will probably see more delivery pressure than Chicago which may keep pressure on the market. Be a seller above $5.50 july Chicago up to $6.00.

Cotton had about as much bad news this week as it could have with huge export cancellations and very negative GDP data from China after USDA’s big bearish adjustment last week. Economic data is all backward looking so cotton’s ability to hold on and not trade lower after this week shows hope for the future. Direction of the cotton trade gives us an indicator of what the market thinks the economy is going to do, right now everyone is hopeful of an economic startup coming soon.