Apr 22 – Oil Prices Turn Negative; Will Grain Markets Do the Same?

Grain markets this morning are mixed as volatility in oil prices continue to drive negative market sentiment in agricultural commodities.

“I never looked at the consequences of missing a big shot… when you think about the consequences you always think of a negative result.” – Michael Jordan (NBA Legend)

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Oil Prices Turn Negative; Will Grain Markets Do the Same?

Grain markets this morning are mixed as volatility in oil prices continue to drive negative market sentiment in agricultural commodities. Yesterday, as WTI oil prices on the front-month June 2020 contract dropped below $8 USD/barrel, corn and soybean prices also made new contract lows, including corn prices dropping to their lowest since 2009. (More on the oil prices gongshow and in a bit). In Monday’s crop progress report, the USDA shared that 7% of America’s expected 2020 corn crop has been planted, while 2% of the soybean crop was in. [1]
Anti-lockdown protests continue to grow in the U.S., as frustration is skyrocketing over the duration and economic fallout due to the lockdown. [2] Adding to the frustrations is the food supply chains continuing to be disrupted, and as a result, we’re seeing more rationing at the grocery store to the tune of only one gallon of milk or max 2 dozen eggs can be purchased by each customer. [3]
On the flipside, U.S. COVID-19 aid for farmers means they could see up to $250,000 each ($125,000 per commodity for up to 2 commodities). [4] The only people who are ineligible are those who made more than $900,000 in adjusted gross income or make more than 25% of the income off the farm/outside the agricultural industry. Also worth mentioning is that U.S. Congress passed another new relief package worth $484 Billion yesterday, bringing the total aid package from the U.S. government to about $3 Billion (in addition to the roughly $4 Billion provided by the U.S. Federal Reserve). [5]
I’m no medical expert and that’s why I don’t try to comment or speculate on the COVID-19 medical aspect, instead deferring to the people who actually have studied for years, if not decades on the subject. Accordingly, I tune out anyone who’s not a medical expert on social media. I’m explicitly talking about all the people on Twitter and Facebook who are suddenly are virologists or infectious disease experts after reading an article on Medium from another non-practicing, self-proclaimed medical expert. There’s also a lot of new experts of all things oil prices, and more broadly, economics. Giving these people time of day is literally a waste of time and you are doing yourself no good by paying attention to them.

Negative Oil Prices: Where Do We Go Now?

That said, I try to focus my energies on the COVID-19 implications on the world of commodity trade, specifically agricultural commodities. This is what I am an expert in. I do know a few things about the energy market (I covered the space during my stint in trading/finance on Wall Street) and this oil market is making some historic moves. First off all, oil prices going negative is a function of a lot of things, but mainly the fact that May 2020 contracts were rolled and that nobody wanted to touch physical delivery of oil in May with a 10-foot pole (mainly because no one has anywhere to put it). [6] Thus, what you get is sellers willing to pay buyers to take the oil contracts (and physical) off their books.

OIl prices continue to trade lower as demand flops will supply remains large

With WTI oil prices still trading around the $10 USD/barrel mark, there’s a strong chance that we’ll see single digit oil prices for the remainder of April and likely part of May, unless there’s a significant demand or supply shock. One of these demand shocks could be the economy in China opening back up – after all, it looks like they tried to nail the down move in oil prices by doubling its storage inflows in 1Q2020 compared to 1Q2019). [7]. Another dynamic might the shutting down of oil fields as (1) there’s nowhere else to store the production, and (2) the wells are operating at a negative margin so it’s not worth keeping it going anyways.
Another shock could be that COVID-19 lockdown rules are relaxed in the Western world and people start travelling around again (read: driving their cars, meaning more gasoline demand). After all, if all it takes is continued social distancing and everyone wearing masks, it’s better than what we’re experiencing now? And this model does work as shown by Taiwan – the supposed bad actor as labeled by China, and thus, the WHO – where the containment of COVID-19 has been incredibly impressive, and their economy is operating near-normal. [8]

Grain Markets: The Dark and Bright Spots

These lower oil prices are not helping corn or soybean prices whatsoever, hence the fresh contract lows made yesterday. Darin Newsom also reminds us that new crop-corn prices are unlikely to go negative since there are insurance mechanisms in place to prevent this, in addition to the U.S. government’s loan program goal of stopping the bleeding at $2.20 USD/bushel. [9] Amazingly, back on March 30th, I said that corn prices could drop below $3 again (would be first time since 2007) as a large U.S. corn Plant 2020 campaign could produce a 2020/21 carryout of over 3 billion bushels. On the flipside, if U.S. farmers switched some of their fields from corn to soybeans, it still won’t avoid a significant increase in grain supplies. [10]
Adding fuel to the bearish fire is that, as Plant 2020 starts firing up, weather conditions are relatively benign, export activity is a bit mute, and domestic demand for anything other than wheat and oats is also weak. Put simply, with so much bad/bearishness out there, almost any bullish headline will help pop the market back up, but it’ll likely be short-lived as traders and farmers sell the rallies.
One example is the possibility of China buying more corn from the U.S. by increasing the number of tariff-free waivers it gives out to importers. [11] This would likely also help China meets its agricultural purchases commitments set out in the trade war deal struck back in January with the U.S. (remember that thing? Feels irrelevant today, eh?) Keep in mind, however, that Brazilian corn exports will likely be competitive with any U.S. port prices. [12] Another example is further export restrictions, such as the ones we’re seeing in the wheat market.
One of the main takeaway for grain markets from this whole negative oil prices fiasco is to not be caught with open hedges in the futures market a few days before the contract expires (uncles you actually will accept or deliver the physical grain). [13]  The other takeaway is that in the cash market, oil prices are not in the negative (hence why you still have to pay something that at the pump, not the other way around!). Since grain can be stored, and there is eventually demand for it – be it as food, feedstuff, or energy – it will eventually get consumed. Put another way, grain can be piled on the ground, oil can’t (well, theoretically you could, but you’d likely go to jail or get fined for breaking some sort of environmental law?).
Switching gears to the bright spots, In Monday’s Breakfast Brief, I discussed the situation in pulses, namely some higher prices being traded on our Combyne cash grain marketplace, and what’s going on in India, both in terms of the current crop and forecasts for 2020/21. Also, on the bullish side for wheat prices is some dryness in central Europe, namely Germany. Their national producer organization, DRV, says that the wheat crop there is desperate need of a rain after 2 months of practically nothing. [14] In fact, even with an El Nino, this past year in Europe was the hottest on record. [15]
On the domestic front, putting some pressure on wheat has been ultra-cheap corn. That said, we continue to see feed grain prices on our Combyne cash grain marketplace – namely feed wheat prices and feed barley prices – continue to be resilient. We usually start to see a seasonal downturn around this time of year, and I think that’s still possible but the other factor to consider here is the amount of animals that aren’t going to the processing plants that are now closed temporarily due to COVID-19. This means that more animals are going to be staying on feed but it’s more than likely that livestock producers will put their herds on low-weigh gain or maintenance rations, which basically translates to some weaker demand for feed grains in general. That said, be it old or new crop, set up a new Listing on Combyne – the tool is completely free.
Alberta feed barley prices inch higher through April 17, 2020
Alberta feed wheat prices inch higher on the Combyne cash grain marketplace through April 17, 2020
To growth,
Brennan Turner
CEO| FarmLead
TF: 1-855-332-7653
help@combyne.ag
@Combyne or @FarmLead on Twitter
At 7:50 AM CST in the North American futures markets (*not cash prices*):
(all prices in dollars per bushel unless otherwise indicated)
$1 USD = $1.4206 CAD, $1 CAD = $0.704 USD)
July Corn: +5¢ (+1.6%) at $3.223 USD or $4.578 CAD
July Soybeans: +6.8¢ (+0.8%) to $8.475 USD or $12.039 CAD
July Soybean Meal (per short ton): +$1.30 (+0.45%) to $295.80 USD or $420.20 CAD
July Soybean Oil (cents per lbs): +0.37¢ (+1.45%) to 26.13¢ USD or 37.12¢ CAD
July Oats: unchanged at $2.77 USD or $3.935 CAD
July Wheat (Chicago): -1.8¢ (-0.3%) to $5.445 USD or $7.735 CAD
July Wheat (Kansas City): -3¢ (-0.6%) at $5.01 USD or $7.117 CAD
July Wheat (Minneapolis): -1.3¢ (-0.25%) to $5.165 USD or $7.337 CAD
July Canola: +4.5¢ (+0.45%) to $10.464/bu / $461.40/MT CAD or $7.366/bu / $324.80/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.

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