The short and mid-term Covid-19 impact on agriculture: agriculture markets

Going from “a packed sardine can” to “a ghost town.” That’s how Mike Pearson describes the area around the CME Group building (usually the center of the U.S. crop and livestock market universe)

The usual hustle and bustle have been replaced by a new quiet that characterizes many cities where protective orders have been put in place. Only the sedation of Chicago, especially where Pearson, vice president of market engagement for ag commodity brokerage firm the Zaner Ag Hedge Group, works, is influencing the agriculture markets as much as it is the usually frenetic city streets. The effect is just as profound, but instead of a slowdown, it’s fueling a more volatile marketplace characterized by whipsawing prices in the crop and livestock sectors alike.

 

Rising demand for marketing plans

“Every day, I ride the bus through the heart of downtown to get to work. Before this whole thing, my bus at rush hour was standing room only. Since COVID-19, on most days, I’m the only one on the bus. It’s like I have a personal driver,” Pearson said. “Since we work with agriculture, we’re considered essential, and most of our guys are working from home. We’re staying plenty busy; all this volatility in the agriculture markets has probably made more than a few guys consider adopting a marketing plan.”

The volatility and customers’ consideration of more established marketing plans are the primary short-term outcomes of the pandemic at the farmer and broker levels. Around the country where his farmer customers and others live and work, the short-term market implications can be tied directly to the steps society has taken to limit COVID-19’s spread.

 

Beef prices and demand

Restaurants closing down and other consumer-facing food service options shuttering, as well as kneejerk self-preservation reactions to the pandemic, have caused a slowdown in meat demand after an initial spike. But, as virus case numbers grow in processing plants and operations pause or shut down altogether, marketplace speculation is turning to whether the supply chain can continue to meet demand. Given these dynamics and increasing packer margins — the price spread between live cattle and boxed beef prices — the net effect will be an overall slowdown in the entire industry, likely lowering production as demand continues to slow.

“Now the industry is trying to gain a grasp of what the demand will be from this point forward. Domestic demand is expected to be down, but nobody knows by how much. It takes many months to slow down the meat production cycle,” according to INTL FCStone Financial Inc. Chief Commodities Economist Arlan Suderman, who characterized the meat industry as “riding a roller coaster.” “Labor problems add to the problem with high employee absenteeism. Many employees either had coronavirus or feared getting it, leading them to stay home. Some plants had temporary closures, while others slowed chain speed. This tends to back up the supply, increasing it as animal weights increase.”

 

Grain and ethanol pressures

As it relates to the grain markets, the COVID-19 pandemic has most profoundly affected the ethanol sector. Beyond the last two decades, the biofuel has comprised a considerable demand factor for the corn market, directly contributing to per-bushel corn prices. Today, as much as 40% of the U.S. corn crop goes toward ethanol production…or such was the case before COVID-19 came along.

A combination of sharply lower crude oil prices and a widespread decline in consumer fuel demand has gutted ethanol demand to the point at which many ethanol refiners have paused operations while gasoline and diesel refiners are producing just enough to meet consumer and supply chain logistical fuel demands. Suderman said informal survey work conducted by INTL FCStone shows overall fuel consumption was less than half of normal for April, with use increasing incrementally until July, when it’s expected to level off at around 95% of normal.

“The range of estimates varied widely, reflecting the many unknowns still before us. Ethanol exports are also slowing as similar patterns evolve overseas among our customers. The crude oil price war between Russia and Saudi Arabia adds to the pressure, but the bottom line is that we need to get people driving again,” Suderman said. “We’re seeing gas move on the cash market in volumes as low as $0.08 per gallon. Refineries are trying to keep operating to produce enough diesel fuel to meet truck demand and agriculture’s spring planting demand, but they are running out of places to store gasoline.”

Suderman added he expects corn usage for ethanol to fall by almost 700 million bushels for the 2020 marketing year.

 

Global markets and price stability

Though there has been a lot of angst surrounding the long-term viability of the food and feed supply chain as the COVID-19 lockdown continues, assurances stemming from different sectors give light to potential agriculture market restructuring that could offer long-term opportunity for U.S. producers. Row crops, small grains and even vegetables could see new demand abroad as global trade partners change the pace at which they make major purchases, especially when it’s possible that clusters of COVID-19 could pause port operations around the world.

“The world had become very comfortable with just-in-time supplies, knowing they could always get more from major suppliers rather quickly if necessary. Exporting countries are rethinking how low they are willing to see their stocks go in light of COVID-19,” Suderman said. “Importing countries are starting to rethink their just-in-time mentality and are looking at increasing inventories over the coming year. That’s expected to increase global trade of rice and wheat in the next year.”

And as the COVID-19 situation continues to force protective measures like stay-at-home orders around the country, operations at major ports in countries like Argentina — a competitor of the U.S. on the global grain export market — could become interrupted and inconsistent. This means grain export inspections will be a key variable to watch for grain market direction through the pandemic and beyond as global buyers look to the U.S. for more consistent supplies of things like soybean meal.

“Global meal buyers are worried that they may not receive their purchases, sending more business to U.S. shores. Furthermore, shuttering U.S. ethanol plants reduces the supply of distillers’ grains available for livestock,” Suderman said. “That’s increasing domestic demand for soymeal as well. It isn’t offsetting lost export demand at this time, but it helps to stabilize prices.”

 

Editor’s Note: This is part two in our series of the effects of the COVID-19 pandemic on the agriculture sector. See more here.

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