Wheat, soybean, canola, and corn prices are all lower morning as U.S.-China trade relations continue to worsen on who is taking the blame for COVID-19.
“The planning fallacy is that you make a plan, which is usually a best-case scenario. Then you assume that the outcome will follow your plan, even when you should know better.” – Daniel Kahneman (American-Israeli psychologist and economist and author of one of my favourite books, “Thinking Fast and Slow”)
Corn Prices: Best & Worst COVID-19 Scenarios
Wheat, soybean, canola, and corn prices are all lower morning as U.S.-China trade relations continue to worsen on who is taking the blame for COVID-19. The trade tensions add more bearishness to a grain markets complex that has already been battered by a loss in demand of many areas (and as reflected by last week’s performance of grain markets). As a reminder, the next WASDE report will be released on Tuesday, May 12th, and in it, we will get the first estimates for the 2020/21 crop year from the USDA.
One positive is soybean crush continues to be robust as the USDA’s report for March showed 192.2M bushels were used (or 5.23 MMT if converting bushels into metric tonnes). This beat pre-report estimates, was more than 7% above March 2019’s crush volume, and is a new monthly record, beating the previous mark set just this past January. As a reminder, the USDA crush report is of the entire industry, not just NOPA soybean crush volumes, which comes out a few weeks earlier.
In today’s USDA crop progress report, grain markets are expecting to see as much as 48% of U.S. corn planted, which would be well above the 27% planted last week, 21% in the ground for this week in 2019, and the 5-year average of 39%. Similarly, soybean acres successfully planted are expected to come in as high as 18% (10% average, 5% a year ago, and 8% a week ago). Planted hard red spring wheat acres, however, continue to lag with the market expecting to see 25% completed (five-year average is 54%).
Given the constant stream of meat plants opening and closing, and raging debates about how lockdowns will end, grain markets, in the big picture, are trading off weather and demand fundamentals. Yes, there is a factor of money managers and their algos providing liquidity (and possibly volatility!) to grain markets, but I keep getting asked, “Brennan, where will we be in 6 months? A year from now?” With that in mind, this week’s Breakfast Brief posts will be looking at the tail effects of COVID-19 on grain markets. Just a heads up that the reading will be a few minutes longer as we must talk about a few hypothetical scenarios
Today we’re going to focus on corn prices, namely the worst and best possible scenarios within the COVID-19 framework. Quite literally, there are some major paradigm shifts in demand, which has some seriously implications for grain markets, with corn prices likely the most at risk.  Given that the current situation in grain markets is fluid, I reserve the right to update my guesstimates, but the purpose behind why I’m sharing this is to get you to think a bit more deeply about the long-term and not just day-to-day. Further, it might prompt you to ask your grain marketing consultant, broker, merchandisers, etc. some questions and get their perspective (in addition to mine!).
Finally, just because you don’t grow or buy corn, doesn’t mean that the ripple effects of the below scenarios can’t impact your soybean or canola prices (which I’ll cover on Wednesday) or cereals (which I’ll cover on Friday). If you’re looking for what’s going in pulses or specialty crops, see what I had to say of pea and lentil prices and others from last Friday’s Breakfast Brief.
COVID-19 Headlines Worth Watching
Over the weekend, U.S Secretary of State Mike Pompeo doubled-down on China’s malfeasance in containing COVID-19 and said that there’s “enormous evidence” that the virus originated at the Wuhan Institute of Virology (and not a wet market).  Further, also over the weekend, President Trump said that China made a “horrible mistake” trying to cover up the COVID-19 outbreak. 
On that note, regardless if you think COVID-19 came from a bat in a market, was an accident from the lab, or is a bioweapon, the fact remains that the Communist Party of China covered up and suppressed vital and copious amounts of information from not only its own citizens, but also the rest of the world. If there’s one piece of additional reading you should do today, it’s this Wired article from inside China…really shocking.
While there continues to be much debate about how to end COVID-19 lockdowns in North America, societies in Europe are starting to open backup. In Germany, churches, museums, zoos, playgrounds, and hair salons open back up today, in addition to many students heading back to school. In Italy, manufacturing and construction projects are restarting. And in Spain, on four of its islands, the retail industry is allowed to open their doors again (think restaurants, hotels, bars, and stores). Key point here is that it’s not the Spanish mainland that’s open.
Ultimately, the restrictions won’t ease up until we have more antibody testing and/or a vaccine. On that front, Swiss giant Roche got fast-tracked approval from the FDA for its COVID-19 antibody test and should be able to produce over 100M by the end of this year.  While more testing is a necessity, there’s a lot of debate on the timeline of when a COVID-19 vaccine will actually be found, let alone, production ramping up to meet astronomical global demand.
The key point here is that until said vaccine is found, or herd immunity is built up, an economic return to pre-COVID-19 levels is highly, highly unlikely. For example, yes construction work is starting to resume, but there isn’t much demand to build new things, at least if indications in the U.S. are an indicator.  Further, with jobs and wages lost, discretionary spending is a bit volatile, but it doesn’t seem many want to buy new cars, as indicated by the growing amount of cars stuck on boats at sea! 
Corn Prices: The Worst COVID-19 Scenario
On that note, with way less cars on the road, it’s no secret that gasoline demand has dropped like a baby giraffe out of the womb; production is down 46% year-over-year and capacity (AKA the number of operational plants) sits at half of what it was in May 2019.  Dan Basse of Ag Resource Company says that we’ve got about 8 weeks worth of ethanol in storage. But with production halved, that’s about 250M bushels of corn every month that doesn’t have a home in the ethanol line item anymore. That is why Mr. Basse thinks that, by the end of 3Q2020, there’ll be anywhere between 1.1 – 1.3 Billion bushels of corn that don’t go into ethanol. And that’s just by Fall 2020.
Obviously, if we added another 6 months to this, that basically doubles the 1.3 billion bushels that the ethanol market does not need to 2.6 billion bushels. At the global level, the International Grains Council cut its forecast for global corn demand by 6 MMT to 1.145 Billion tonnes, mainly because of weaker ethanol demand. I think that 6 MMT number is on the low side, and by a wide margin. Corn prices in April clearly reflected this demand shift.
As a reminder, this assumption is based on another assumption: that we are still in some sort of lockdown mode and antibody testing has been limited and/or a vaccine has not yet been found. With lockdowns starting to ease, it’s human nature for people to go to the movies or their favourite restaurants again, but government restrictions could seriously impede this retail demand. I’m thinking that you could see some laws where something like 25% – 50% of capacity would be tolerated, in order to maintain social distancing. This will likely kill off a few of these businesses.
Before business shut their doors for good though, recognize though that, because of reduced capacity requirements, there will be less cars driving to these social gathering institutions. Further, (and obviously), this means continued reduced demand for food from the commercial food services/hospitality industries. This would likely mean that we still have too many animals in the pipeline. While you could argue that nice summer weather could mean more backyard BBQs, I said in last Wednesday’s Breakfast Brief that I don’t see meat plants getting back to full capacity, but somewhere closer to 60% – 80%.
With cash corn prices already sub-$3 in the Corn Belt (the supposed demand epicentre), any good weather will continue to push corn prices lower. Is sub $2/bushel on the corn market a possibility? Absolutely and I think it’s going to happen if Mother Nature plays nicer (at least compared to last year’s wet conditions). While some corn that is supposed to go into ethanol will make its way into corn exports or the domestic feed market (because it’s cheap), we’re not talking about billions of bushels.
All of this corn that’s not taken by ethanol, feed, or corn exports from both 2019/20 AND 2020/21 balance sheets means more carryout. Mr. Basse thinks that U.S. corn ending stocks could easily top 4 billion bushels for the new crop year.  In an absolute worst-case scenario, I think Mr. Basse is low by probably 1.5 billion bushels. Yes, I think that, in a worst-case scenario, U.S. corn carryout could top 5 billion bushels and be within spitting distance of 6 billion bushels. While corn prices – both futures and cash – would be reduced significantly, $2.20 is a U.S. government-guaranteed level that every American corn farmer would receive (even if cash corn prices are below that level, which, in this scenario, they would be).
Corn Prices: The Best COVID-19 Scenario
In a best-case scenario for corn prices, it’s pretty simple: you need a bullish shock of some sort, be it from the supply or the demand side. While we’ve had a decent start to the 2020 growing season, there’s some talk that warmer weather and limited rain could see 2012 and $8 corn prices repeat itself.  Given the amount of supply in the global pipe, I don’t think $8 corn prices in Chicago is possible, but $6 corn prices are likely only if we see a dry May, June, and possibly July. If dry conditions do show up, you’ll know when to sell if CNBC, Fox Business, and other mainstream media start to talk about corn prices.
On the demand side, I agree with Jerry Gulke of the Gulke Group, who thinks that countries who are net importers of food, may use this COVID-19 pandemic as a catalyst to build some strategic reserves, let alone their food supply chain infrastructure.  As a reminder, 2019/20 U.S corn exports are tracking nearly 1/3 behind last year’s pace with 22.7 MMT sailed through Week 34.
The question I’m wondering is if the world’s net food importers (namely poor countries with no sustainable agricultural industry) can afford to (1) build up their infrastructure, and (2) buy more foodstuffs. This may be an opportunity for the Western world to collectively support these countries instead of said nations falling for the well-documented, fundamentally negative nature of China’s Belt and Road initiative. 
The other demand shock could be that countries like Ukraine and others in Black Sea put more quotas on their exports. This would limit the amount of globally available supplies, and thus, likely push corn prices higher (or the prices for any commodity whose trade is limited). The extreme opposite of this would be if every food exporter in the world were to tax any agricultural exports going to China, but no one else. Obviously, this would require unprecedented alignment and a profoundly serious consequence could be some sort of war, be it military or cyber-based. Some sort of business tax would require a delicate process of diplomacy but could potentially do the job of holding China accountable for misleading its allies and trade partners of how just how lethal/concerning COVID-19 was/is.
Ultimately, it’s easy to say that corn prices in 2020/21 will fall somewhere in the spectrum of below $2 and above $6, and while that’s obviously a huge range, these are goalposts for a crop that has many moving demand functions.
Happy Star Wars Day! May the fourth be with you.
At 8:35 AM CST in the North American futures markets (*not cash prices*):
(all prices in dollars per bushel unless otherwise indicated)
$1 USD = $1.4092 CAD, $1 CAD = $0.7096 USD)
July Corn: -3.8¢ (-1.2%) at $3.148 USD or $4.436 CAD
July Soybeans: -12.5¢ (-1.45%) to $8.37 USD or $11.795 CAD
July Soybean Meal (per short ton): -$2.10 (-0.7%) to $290.40 USD or $409.25 CAD
July Soybean Oil (cents per lbs): -0.58¢ (-2.2%) to 25.92¢ USD or 36.53¢ CAD
July Oats: +1.8¢ (+0.6%) to $2.88 USD or $4.059 CAD
July Wheat (Chicago): -6¢ (-1.15%) to $5.105 USD or $7.194 CAD
July Wheat (Kansas City): -4¢ (-0.85%) at $4.79 USD or $6.75 CAD
July Wheat (Minneapolis): -3.3¢ (-0.65%) to $5.035 USD or $7.096 CAD
July Canola: -4.3¢ (-0.4%) to $10.53/bu / $464.30/MT CAD or $7.472/bu / $329.47/MT USD
COMMODITY TRADING INVOLVES RISK AND MAY NOT BE SUITABLE FOR ALL RECIPIENTS OF THIS POST. Neither the information presented, nor any opinions expressed, constitutes a solicitation for the purchase or sale of any commodities. The thoughts expressed in this email and basic data from which they are derived are believed to be reliable, but cannot be guaranteed due to uncertainty about future events and complexities surrounding commodity markets. Those acting on the information are responsible for their own actions.