Weekly Market Update – April 24, 2020

It has been another brutal week in the markets but the net change for the week is not nearly as bad as it looked on Tuesday. Let me get all the bad news out of the way first so I can end with the positives. Ethanol plants continue to shut down across the country hurting old crop demand. The market’s job is to find a price that spurs demand and in the energy sector, that is not possible because many people cannot drive at any price. Oil wells cannot be easily or cheaply capped and there is so much crude with no demand that we are out of places to store it. Oil prices briefly went negative for the first time in history meaning that to sell a barrel of crude, you would have to pay someone to take it. Milk can be dumped, corn can be stored on the ground, livestock can be culled but crude has to be stored safely and cannot be easily disposed of. We are starting to see increased disruptions in the processing sector now. These disruptions were not caused by the government mandating a shutdown, but due to spiking infection rates in workers. In preparation for this, companies have been slowing down breeding programs but it is likely there will be some animals that will have to be culled rather than slaughtered. For right now, the Southeast has not had as many issues as other areas. Feed rations are being adjusted to try to slow the rate of gain to keep animals from getting too big and buy some time. Our whole food system has been constantly adapting to gain efficiencies, get rid of redundancies and maximize economies of scale. It cannot handle shocks like this and will take time to retool and adjust. Anyone who has bet against the American Economy at any time in the last nearly 250 years has been obliterated in the long run. It may be dicey in the short run but give it a little time.

Chinese demand continues to strengthen. They are currently importing all they can from South America and are still having to release grain from their state reserves to meet the demand. They are going to have to add suppliers (Us!). They have bought a handful of cargos so far but not enough to turn the tide yet. As South America heads into flu season and many brace for a spike in Corona cases, any logistic hiccups should result in significant market reactions. Soybeans will be the biggest recipient of these, but corn should not be completely left out. There have also been news reports of China’s desire to refill state reserves of corn and soybeans. The amount rumored for corn was 20 mmt which is 800 million bushels. They have been buying most of their corn from us. It is unlikely they would buy that all at one time but it would still represent a big boost to start to offset the loss of ethanol demand.

USDA announced the breakdowns of direct assistance programs for the $16 billion. $3.9 billion will be for row crop producers and $2.1 billion for specialty crop producers. There will be a single payment which will be determined using two calculations:

> > > Price losses that occurred January 1-April 15, 2020. Producers will be compensated for 85% of price loss during that period.

> > > Second part of the payment will be expected losses from April 15 through the next two quarters, and will cover 30% of expected losses.

The specifics have not been released about how losses will be proven. We expect that to be published in early May and signups will be run through FSA offices. Any rain delay office time should be spent getting your cash grain receipts in order as there will likely be some documentation required. We will also be available to help once we have the specific requirements.

We put in good support this week printing the low at $3.01 then rallying from there but i would be slow to call a low until we get past first notice day on the May contract (April 30). There are a lot of basis contracts in the country that are going to have to be priced or rolled. Planting progress is just getting started in the Midwest and is a little bit ahead of pace in the Western Corn Belt. The Eastern corn belt remains wet but not to an alarming degree yet. Basis has weakened significantly in many markets as ethanol plants stop buying and in some cases sell corn back into the market. It has remained firm in the Southeast compared to historical levels, but not as high as earlier in the year. Any rally we see in May needs to be aggressively sold for both old crop and new.

Soybeans still have better fundamentals than corn, but you would not know that from watching the price action this week. The few cargos bought from the US by China this week is not enough to move the needle yet but any logistic issues in South America will change the picture quickly. The Brazilian currency made new lows against the dollar this week, but China is maxed out buying and shipping from down there. Basis remains very firm on beans but seems to have leveled off and is not currently getting any stronger like it has been. I do not foresee a lot of weakness coming in the bean basis. Be looking for sales after first notice day on old crop beans on a move close to $9. Be patient on new crop.

Wheat was up 30 to start the week but could not hold it with the bloodbath in corn and beans. Russia may have to limit old crop exports and it is too dry on the new crop. The US saw damaging cold last week that was reflected in the condition ratings this week. On already record low acres, wheat does not have a lot of buffer to lose much yield. The corn wheat spread makes wheat into the feed channel very unappealing this year. We need to do everything we can to get it into a flour mill or an elevator. That means get in the wheat early and get it tested to know what you have. Harvest basis has weakened but there is still triple digit bids for fall wheat. Wheat needs to get first notice day behind it to have the best chance for a bounce. Start scaling in sales above $5.50. We will also start hedging 2021 crop $5.75 to $6.

Cotton has tried to maintain a steady climb higher despite the chaos in everything else. Cotton was the first to drop so hopefully it is a good sign of a recovery. Basis has strengthened a little this week which is also a good sign. LDP payment dropped about 50 points this week but the board touched limit up a few times yesterday. Watching cotton is seeing where the traders see the recovery process. We are losing cotton acres every day the price is below $0.60.