Tough 2020 for grain markets continue
Since the first of the year, the grains seem to have been on a one-way ticket to the basement. December 2019 was a good month for the grains with most rallying enough to make a significant recovery for the year, but since 2020 has started, the grains have sold off to the low of that range and stayed in the basement.
The coronavirus has a lot to do with the selloff in the grains and the rally in the U.S. dollar, which in turn has affected U.S. exports. Since the start of the year, the U.S. dollar has rallied 2.7% mainly due to money flowing into the US. The U.S. economy is still the best performing economy in the world, which in turn has other countries investing into the U.S. Add to that the Federal Reserve’s resistance to change interest rates and you have a good investment for other countries. In addition, the DOW, Nasdaq, and S&P 500 are all trading at record highs.
A strong dollar does not bode well for commodity prices through. The Bloomberg Commodity Index has dropped 7% since the start of the New Year. The index hit a new four-year low in February and has since bounced off that level.
Now different markets within the index have done different things. Gold has been the rock (excuse the pun) of the index, holding values up. Gold has been and will always be a safe haven market. That means when times are tough, you buy items that have value or are tradeable, like gold. Gold will always have value. Gold has also seen a jump in price due to China buying as they try to stimulate their economy.
Copper, on the other hand, has seen a sharp drop, down 7%. Copper is a market that helps determine the state of the economy, as copper is used a lot in construction. A declining copper market is a signal of slowing economies and the tightening of money.
Crude is another market that has taken a hit since the first of the year, mainly due to coronavirus in China. China’s demand for crude oil is reportedly down 20% since the start of the New Year due to China’s quarantine of people and economic slowdown. The drastic drop in demand has resulted in OPEC deciding to cut production further. In all, crude oil prices have retreated 14% and are sitting near the psychological $50 per barrel level.
The grains have not been hit as hard as people need to eat no matter the state of the economy. It’s just what they eat that affects the grains and meats. The grains have slipped 3.5% since the start of the year while livestock is down 11%. In times of tight money, people revert to lower protein sources like wheat and rice and switch from beef to pork or poultry.
The end result is that the coronavirus has brought a lot of uncertainty into the grains, mainly to the demand picture, which has many traders concerned. Especially with the potential for Brazil to see a record soybean production this spring, and the U.S. to follow up with higher planted acreage as last year’s prevented planting acres return to production.
This is not to say we will not see opportunity this spring. It is very likely the grains will rally higher this spring as adverse planting conditions continue to make guessing 2020 acreage a moving target.
Kansas City wheat is going to have to rally to get producers to hang onto wheat acres as many will look to switch winter wheat to cotton. That will force spring wheat to rally to buy acreage, which is what it will have to do because of last year’s issues anyway. And no one can predict what will happen with all of last fall’s corn ground and cornfields that are yet to be harvested. The standing corn fields and sunflower fields just might be prevented planting in 2020. Spring will bring a lot of unanswered questions that the market will have to get their answer for from crop price, giving the producer the incentive to plant the one crop over another.
The U.S. Department of Agriculture's Ag Outlook Forum was held at the end of last week. The event took place Feb. 20-21 and gave traders the second look (a preview of baseline projections was released last fall) of what economists feel ag producers will do as far as planted acreage for the next 10 years. Of course, this is just an economist view of what should happen, based only on economics. The report will also include USDA’s projections for demand over the same 10-year period. As of press time, the only numbers the Outlook forum made public were the acreage estimates for 2020 and the potential national average price for those markets.
Early estimates were:
All wheat acreage came in at 45 million acres versus expectations of 45.2 million but in line with October’s early baseline projection of 45 million and versus 45.2 million last year.
All wheat stocks are estimated at 845 million bushels versus 950 million bushels in October and 940 million bushels for last year. The national average price for wheat is estimated at $4.90 versus $4.55 in 2019.
Corn acreage was estimated at 94 million versus expectations of 93.6 million and versus 94.5 million in Oct and 89.7 million last year. Corn stocks are estimated at 2.496 billion bushels versus 2.754 billion bushels in October and 1.896 billion bushels last year. The national average price for corn is estimated at $3.60 versus $3.85 in 2019.
Soybean acreage was estimated at 85 million, in line with expectations of 85 million acres and versus 84 million in October and versus 76.1 million acres last year. Soybean ending stocks at 533 million bushels versus 518 million bushels on October and versus 425 million bushels this year. The national average price for soybeans is estimated at $8.80 versus $8.75 in 2019.
Again, this is an economist view on what producers should intend to plant in 2020. This spring will make the final decision as to what can get planted, but at this point, with current weather forecasts, it seems unlikely that those wheat and corn projections could be realized.
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