Grain markets this morning are mostly in the green alongside equity markets after yesterday’s major sell-off in global markets.
“I think we are intrinsically prone to being irrational and superstitious. A lot of it comes from our fear of the unknown and the fear of a lack of control over our fate.” – Venkatraman Ramakrishnan (Indian biologist and the winner of a Nobel Prize in Chemistry)
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Grain Markets, Equities Rout, and if its Irrational
Grain markets this morning are mostly in the green alongside equity markets as they rebound after yesterday’s major sell-off in global markets. The situation in both grain markets and global markets is quite fluid and so here’s a quick Coles Notes of the last 36 hours or so:
- S. suspends travel between them and Europe for next 30 days. 
- Federal Reserve injects $1.5 Trillion (yes, with a “T”) into funding markets to prevent “unusual disruptions” in markets. 
- Despite the increased liquidity, investors ran to the sidelines yesterday as the Dow Jones lost nearly 10% in Thursday’s trading, the 5th largest drop in its history and the largest since 1987.  A quick reminder though that U.S. stock markets are up about 5% this morning.
- Canadian Prime Minister Trudeau’s wife, Sophie, tested positive for coronavirus and so she and he will remain in self-isolation for at least the next 2 weeks. 
- Pretty much every single sports and entertainment in the world has been suspended for the next 2 months. 
- The Italian healthcare system is having to enact wartime-esqe decision making. 
With this last point, it marks a stark warning that, unless you enact strict protocols to prevent the spread of the coronavirus, hospitals and the healthcare system in general will be overwhelmed (mainly because they already are; my fiancé is a nurse and so I hear about it regularly!).  Here at FarmLead, we’ve initiated a remote work policy as a means to reduce unnecessary travel. We’ve done this to assuage anyone who might feel unsafe, but also doing our part to be good citizens of our communities by limiting the transferability of the coronavirus to others, especially those more susceptible to serious illness.
NOTE: I’d be happy share our remote work protocols with any of you who are thinking about implementing similar policies in your offices/place of business.
Specific to grain markets, it’s likely that we’ll close this week lower than we did a week ago, but as a reminder, this is the time of year when grain markets find seasonal lows. The different being that the rout in broader markets are causing additional volatility in grain markets and so the move lower is a bit more pronounced.
Perhaps there’s some sunny days on the horizon though in the form of returning to normal. The Baltic Dry Index is now sitting at its highest level since late January as inventories in exporting nations is starting to build and product competes to get moved, such as steel in China.  However, at least 80% of the freight industry says that their operations are being negatively impacted by the coronavirus, according to a recent Morgan Stanley survey. 
Soybean Exports and that Other Virus
In China, while they’re still working on containing the coronavirus, they still are dealing with lagging effects of African Swine Fever. Live hog prices in China are nearly triple what they were a year ago and retail pork prices are up 135% year-over-year as the slowdown in economic production has resulted in a slower-than-expected rebuild of pig inventories. 
Rabobank is expecting pig production to fall 15% – 20% in China this year, which would be on top of the 20% reduction in 2019. The bottom line is that while the world focuses on one virus, there’s another one still lurking out there that continues to have major disruptions in the pork market. It’s worth noting that the USDA released its own action plan to combat the African Swine Fever should it make landfall in the U.S., including a 72-hour national standstill of pork production and transports 
As the Chinese hog markets battles to rebuild their herd, the obvious question that grain markets are asking is when might demand for feedstuffs start to improve. One of the hard datapoints we know is that soybean exports sales to China continue remain depressed with recent sales sitting.  More generally though, actual U.S. soybean exports shipments have been slowing, tracking only 10% ahead of where we a year ago with 30.2 MMT sailed through Week 27 (or 1.11 Billion bushels if converting metric tonnes into bushels). Compare this to a few weeks ago when soybean exports were roughly 25% higher than the pace seen in 2018/19.
Worth also noting is that CONAB raised their estimated of the Brazilian soybean harvest to 124.2 MMT. This echoes the USDA’s higher forecast in this week’s March WASDE report to 126 MMT. As a reminder, based on what the USDA said in Tuesday’s WASDE, Brazil and Argentina will grow 53% of the world’s soybeans this year.  The two South American nations are also quite large corn producers but the highlight in corn markets yesterday was the 1.6 MMT in U.S. corn exports sales. For this specific week in the crop year, it’s the second-largest weekly sale of all time. However, from an actual shipments perspective, U.S. corn exports are tacking 42% behind last year with just 15.2 MMT sailed (or
In a similar vein, it’s been one year since China revoked licenses of Canadian canola exporters.  That said, canola exports have started to improve a bit recently with shipments tracking only 4.3% behind a year ago now through Week 31, with 5.55 MMT sailed. Further, domestic use (read: Canola crush) continues to be strong with 6.22 MMT used up so far, good for a 13% jump from the same week a year ago.
Will Grain Markets See Panic Too?
While the sell-off seen in equity markets is significant, the question many farmers and grain buyers are asking me is whether a similar rout can happen in commodity markets. Further, is the sell-off in broader markets complete? The best lens to look at all this through is with behavioural economics, or the psychology of how people are acting. As Dan Hubeber puts it, “have we reached the irrational, ‘I want out at any price’ stage yet?”  He also notes that, despite the fear in broader equities, grain markets are still trading in the same range that we’ve seen for the last 5.5 years!
The fear of contagion has pushed people to increase their preparedness levels, including buying up more food, which will obviously drive up food prices (there’s more demand but the same supply). Nowhere is this more evident than in China where food prices jumped 22% in February compared to the same month in 2019. This is even higher than the 20.6% food price increase seen in January.  The clear take-away here is the that people still have to eat, food will continue to be transported, which, in turn, grain markets will still be active with companies have to buy grain!
Given the major drops recently, one could argue that, yes, we can see the light at the end of the tunnel but I’ll float another theory: normalcy won’t show up until at least April. This means that volatility will continue in equity and grain markets and what we used to consider “normal” daily life will be sidelined for a few more weeks. Ironically, numerous studies have concluded that “fear and stress weaken our immune system, leaving us more vulnerable to infection,” something Barry Glasner reminded us this week in an LA Times op-ed (and he’s an expert in this field, as an sociologist and author of the book, The Culture of Fear). 
Whether or not irrationality will spill over into grain markets is yet to be seen. The point is, you, yourself cannot control any of this, especially where grain markets go! Instead, during this time of near-hysteria, focus on what you can control. This might be getting a head start on your Plant 2020 preparations. Maybe it’s a review of what your cost of production will look like this year. Another big one is having a deep discussion with your banker about refinancing as there’s plenty of better options that have opened up recently.  Lastly, work on building up your connections of trusted trading partners on Combyne. This is a much more rational and effective use of your time versus scanning your phone and getting caught up in the anxious headlines that the media is pushing.
Have a great weekend!
Due to some technical challenges, futures grain markets data is not in today’s Breakfast Brief but you can review them here.
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.