Fallout from the coronavirus pandemic flattened hopes for a grain market rebound in the first half of March. Misery loves company, and farmers weren’t the only ones steamrolled. Markets finally bounced on Friday, but not before Wall Street officially entered bear market territory and new crop futures for corn and soybeans slumped to new contract lows.
The classic “shoot first, ask questions later” panic illustrates how quickly the mood can change. Stocks, as measured by the S&P 500 Index, made new all-time highs less than a month ago. As selling intensified, aversion to risk drove investors and traders to sell anything and everything to raise cash, meet margin calls and stop the bleeding.
Not all markets suffered. Safe havens in times of trouble gained, including U.S. Treasuries, gold and the dollar. But even these bunker assets fell victim to the chaos at times. Gold rallied initially, then plummeted as those owning the precious metal dumped it to cover other losses. Rock-solid U.S. 10-Year Notes even wobbled a bit, catching their own infection from investors nervous about potential defaults on bonds from corporations hit by lower earnings. The dollar also wavered as investors braced for more interest rate cuts by the Federal Reserve.
All together now
Of course, this wasn’t the first time markets moved in tandem. Trade war headlines in 2019 caused a similar affect. But overall in 2019, corn and soybeans moved independently of outside markets last year due to historic flooding.
The two tables below show the how this changed during the first two-and-a-half months of 2020. The first table looks at correlations between different markets during all of 2019. The second covers 2020 trade through March 13. Positive correlations between two assets are in black; negative correlations are in red. By definition the numbers range from -1 to +1.
A positive correlation means the two assets tend to go up and down at the same time. In 2019 corn and soybeans showed the strongest correlation with wheat, not to each other or stocks. Gold, the dollar, crude oil and 10-Year Notes all showed a positive correlation with stocks, reflecting either gloom over the trade war or enthusiasm for a strong economy.
These relationships changed in 2020. Corn, soybeans and wheat all followed the stock market, as did hogs and cotton. But gold and 10-Year Notes moved the opposite of stocks due to the risk-on, risk-off trade.
How long will it last?
This interdependence between markets could last until Wall Streeters finally crawl out from under their rocks. History offers some clues about the length and timing of bear markets in stocks, but no definitive answers.
Since “Black Monday” in 1929, stocks slumped 23 times into bear market territory, defined as a drop of more than 20% from previous highs. On average it took 132 days before the market finally made its low. The longest downturn came in the middle of the Great Depression from 1931-1932, lasting 399 days. But it’s not unprecedented for stocks to slip into bear market territory and bottom out on the same time.
There’s no strict definition on what constitutes a bull market. But a rally 20% above the low generally moves the bar. On average it took 100 days for this turnaround, though it happened only a week after the 1929 crash. Of course, the Depression was so severe that there were nine bull market rebounds in the overall long-term bear market that lasted through the start of World War II.
Not all bear markets are tied to recessions, however. No bear market preceded the 1980 recession. And the recession of 1990-1991 came three years after the stock market crash of 1987.
Events, not just market signals, cut both ways in this debate. The “Arab Oil Embargo” of 1973-1974 triggered a bear market and a recession, and shortages of gasoline, not toilet paper. But the 1990-1991 downturn came with no 20% correction on Wall Street.
And while markets appear tied globally today, that wasn’t always the case. A financial crisis that began in Asia in 1997 eventually spread to Latin America and Russia. But the U.S. stock market and economy didn’t slip into a bear market and recession until the dot-com bubble burst in March 2001, followed by the 9/11 attacks.
What would recession bring?
Hopes for a brighter outcome for farmers in 2020 could depend on whether the U.S. slips into recession. Every recession since 1929 except one was also accompanied by a downturn in net farm income, so Main Street is not independent of Wall Street.
Economic cycles are harder to pin down than stock market boom and bust. The rule of thumb definition for recession used to be two consecutive quarters of negative growth in inflation-adjusted gross domestic product -- data that’s always several months out-of-date at best.
But the official dates for recession and recovery come from National Bureau of Economic Research, which makes its designation when the actual events are even further in the rear-view mirror based on a variety of factors.
Shutting down or slowing economic activity could trigger a downturn. The table below shows the contribution of different segments to GDP for 2019. Transportation, recreation, food services and accommodations account for more than 10% of the economy, and all will be affected for a time. Declines in private investment should be offset by increased government spending and health care. While it will take time for the dust to settle, the best growers can hope for is lower volatility if government actions help ease market perceptions.
Fertilizer price uptick
One ag market already bucked the madness seen elsewhere: fertilizer.
Part of the economic stimulus offered by the Chinese government is encouraging fertilizer manufacturers there to sell their product domestically, rather than export it abroad. This, along with seasonal demand from farmers in the northern hemisphere helped wholesale urea prices jump $50 a ton at the Gulf after trading at a deep discount to other international locations. Higher nitrogen costs also pulled phosphate product prices higher after a slump to their lowest level since 2006, though potash continues to leak mostly a little lower.
Nutrient market dynamics are just one part of a complex puzzle farmers must solve as they focus on final planting plans for 2020.