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Practical Risk Management

Coronavirus and commodities

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The good news is that grain markets will trade their own market fundamentals of supply and demand.

Markets hate uncertainty. A pandemic such as the coronavirus – aka COVID-19 – brings too much uncertainty to financial markets. If that wasn’t enough, Saudi Arabia and Russia chose this moment to duke it out on oil prices. Sharp drops in stock markets and oil prices have spilled over into grain markets. As a grain producer, you are what is known as collateral damage. Can anybody make sense of this mess?

In the short term, the spillover effect on grain prices is regrettable. Eventually, however, I expect grain markets to go their own way. We may stop travel and we may avoid sporting events and concerts, but does anyone plan to stop eating? The stock market and grain prices have little in common. The correlation between the two markets, if there is one, is likely to be a negative.

The good news is that grain markets will trade their own market fundamentals of supply and demand. And the bad news? As we enter the 2020 planting season, grain fundamentals are not positive.

In recent weeks, I have read widely and consulted different sources trying to make sense of Phase One of the U.S. and China trade agreement. Am I the only person who struggles with a trade deal that speaks in terms of sales dollars, and not quantities? Commodity-types like you and me tend to think in terms of bushels and pounds. $12 billion in soybean sales can be one billion bushels at $12/bushel, or it can be 1.5 billion bushels at $8/bushel. It makes my head hurt.

Going back to mid-January, my initial assessment of Phase One put low odds of reaching the ambitious sales targets for 2020 and 2021. Then came Covid-19. I place the current odds somewhere between “when pigs fly” and “a cold day in hell.” The coronavirus does create a convenient out in the agreement. See chapter 7, page 4 -- “In the event that a natural disaster or other unforeseeable event [], the Parties shall consult with each other.” This is not good news.

News about African swine fever (ASF) is another collateral victim of coronavirus. It’s hard to find fresh news on ASF, but a mid-March report from Reuters found industry sources who estimated a decline in Chinese pig numbers of “at least 60%.” This is much higher than the 40% reported earlier. The ASF virus is still killing pigs, with a second wave of attacks in some areas. This is also not good news.

If not for the coronavirus, locust swarms in Kenya, Ethiopia and Somalia would be front-page news every day. They are decimating small grain crops and putting millions of people at risk of starvation in parts of Africa and Asia. This is not good news, but relief efforts could provide a near-term boost to grain demand.

The coronavirus outbreak led to an interesting debate in the office. Will the increased demand for ethanol used in hand sanitizers offset the potential loss of demand for ethanol as fuel? The debate did not last long. Everyone left early in search of a store with toilet paper in stock.

Basis remains firm but we need a spring rally in futures prices. Get your sell orders in place and keep your fingers crossed.

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