Mar 2 – Coronavirus Blanketing Equity, Grain Markets with Fear

Grain markets and broader equity markets are mostly green as they try to rebound from last Friday’s sell-off due to ongoing coronavirus concerns

“The oldest and strongest emotion of mankind is fear, and the oldest and strongest kind of fear is fear of the unknown.” – H.P. Lovecraft (American author)

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Coronavirus Blanketing Equity, Grain Markets with Fear

Grain markets and broader equity markets are mostly green as they try to rebound from last Friday’s sell-off due to ongoing coronavirus concerns. On Friday, the Dow Jones stock market officially wrapped up its worst week since 2008, losing 12%, including Thursday’s loss of nearly 1,200 points, its largest one-day drop ever. [1] Similarly, the S&P 500 shed 11.5% as the two equity markets are coming off new record highs posted just a few weeks ago. Fear has been spreading through the market as fresh coronavirus cases, including the 2nd death in the U.S. over in Washington state and more the first case confirmed in the state of New York. [2]

From a grain markets perspective, last week didn’t turn out so great either. Keep in mind that Friday was also the end of the month and so traders may have pulled off to the sidelines amidst the sell-off seen in the equity markets. Cereals saw the biggest losses, led by oats which lost 8.5% for the week but technically was only down 3% for the month. In fact, winter wheat prices on the futures boards in Chicago and Kansas City fell more last week than they did compared to where January ended. That said, wheat prices were negatively influenced by the IGC estimating that farmers around the world will produce a new record of 769 MMT of wheat in the 2020/21 crop year. [3]

Front-month futures grain prices weekly performance through Feb 28, 2020

Front-month futures grain prices monthly performance through February 2020

Mounting Coronavirus Concerns (But Are They Legit?)

Globally, the coronavirus has now killed more than 3,000 people and there are over 88,000 infected. [4] The vast majority of these cases are in China, accounting for nearly 80,000 cases and over 2,800 deaths. After that, the countries that are becoming new breakout centres include Iran, Italy, Japan, and South Korea. Just as it seemed that there was a slowdown in the number of cases, the opposite seems to be happening and fear in the market has clearly settled in. The below charts from The Economist help give some perspective. [5]

Coronavirus economic impact in China through Chinese New Year (from The Economist)

The bottom line is that investors are probably right to pull off to the sidelines and hold cash versus playing in this sort of market. If I’m looking at the current economic conditions plagued by the coronavirus, literally one-third of the world’s manufacturing capacity was idle for nearly a month, and for some companies, they’re still idle. [6] More and more companies are trying to ship products by air instead of sea cargo. [7]

From a supply chain perspective, the ripples of this is quite extensive. For example, 30% of the U.S. construction industry’s products come from China. What happens when you don’t get those materials? Ultimately, investors aren’t trading off the impact of the coronavirus today, but rather, the future. What happens if Chinese factories stay closed for another few weeks? Months? The earliest that economists are expecting a rebound in economic activity in China is April!

As mentioned via the performance tables from last week, the fear from equity markets’ participants is clearly spilling over into grain markets, but that fear tends to exaggerate moves. [8] If indeed, we take a longer-term view, how great would it be for grain markets if we saw more headlines about China starting to buy more grain? The challenge is, however, that they need consumer demand to do that and with the economy in China fairly stagnant right now, we might have to be patient to expect a major rebound.

Thinking backwards from the slowdown in manufacturing, there are more questions being asked about available crop input supplies ahead of Plant 2020. For example, 30% – 45% of Mosiac’s phosphate, DAP, and MAP are produced in the Hubei province in China, which is the epicentre of the coronavirus. This intuitively means that fertilizer prices could climb (albeit they usually do this time of year). [9]

Other Headlines I’m Watching in Grain Markets

Speaking of supply chains, it’s been estimated by the Western Grain Elevator Association that between demurrage costs, capacity losses, and contract penalties, the railroad blockades in Canada have cost the grain industry about $9M CAD/day or $63M/week. [10] This intuitively has put pressure on cash grain prices as elevators aren’t as readily able to buy since their own storage capacity is already spoken for with less trains coming through to empty their bins. [11]

More generally, with all the buzz about coronavirus, the usual focus in grain markets for this time of year has taken a bit of a backseat. For example, the chit-chat has died down a bit for what Plant 2020 acres are going to look like since the USDA shared in its estimates a few weeks ago. What’s likely going to make things challenging is some of the warm weather coming this week and the potential early start to this year’s snowmelt, especially in the Corn Belt. [12] That said, despite a large amount of snowpack in the North Dakota this year, the expectations of flooding in Manitoba are looking similar to last year. [13]

Coming back to grain markets, corn prices in Brazil are still sitting 20% higher than they were a year ago. [14] The reason for this is mainly record exports in 2019, a weaker Brazilian currency, and stronger domestic demand, both from the livestock and ethanol industries. That said, Brazilian farmers are currently planting their second/safrinha corn crop, but it’s expected that at least 50% of the crop will be planted outside the ideal planting dates. [15]

Overall, as we turn the calendar over into March, grain markets have some opportunity to rebound. Activity has been fairly volatile and we continue to see healthy trading activity on our next-generation cash grain marketplace, Combyne with over 60% of the user base using the tool successfully in February. That said, those farmers who are getting the most interest are those who are posting their Listings publicly, but also sharing it with their current trading partners. Intuitively, a question for you today: if your expectations for your next grain deal were to change, who of your trusted trading partners would you want to automatically share this information with?

Share your Combyne cash grain marketplace Listing with your trusted trading partners

Put simply, when your grain buyers or farmer customers on your Combyne network, you get notified of each other’s Listings automatically. These are your important relationships and so you’re the important information should be share with them first. Start building your Combyne network and adding your Connections today.

To growth,

Brennan Turner
TF: 1-855-332-7653
@Combyne on Twitter

At 7:40 AM CST in the North American futures markets (*not cash prices*):
(all prices in dollars per bushel unless otherwise indicated)
$1 USD = $1.3256 CAD, $1 CAD = $0.7544 USD)

May Corn: +2.3¢ (+0.6%) at $3.705 USD or $4.955 CAD
May Soybeans: +5.3¢ (+0.6%) to $8.98 USD or $12.009 CAD
May Soybean Meal (per short ton): +$1.10 (+0.35%) to $306.70 USD or $410.16 CAD
May Soybean Oil (cents per lbs): +0.26¢ (+0.9%) to 28.94¢ USD or 38.70¢ CAD
May Oats: unchanged at $2.728 USD or $3.648 CAD
May Wheat (Chicago): -5.3¢ (-1%) to $5.198 USD or $6.951 CAD
May Wheat (Kansas City): -5.8¢ (-1.25%) at $4.475 USD or $5.985 CAD
May Wheat (Minneapolis): -3.5¢ (-0.65%) to $5.24 USD or $7.008 CAD
May Canola: +5.4¢ (+0.55%) to $10.403/bu / $458.70/MT CAD or $7.779/bu / $342.99/MT USD

COMMODITY TRADING INVOLVES RISK AND MAY NOT BE SUITABLE FOR ALL RECIPIENTS OF THIS POST. Neither th 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.

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