Grain markets are mostly green as eyes turn towards Plant 2020 expectations from the USDA and potential impacts of a recession thanks to COVID-19.
“Our goals can only be reached through a vehicle of a plan, in which we must fervently believe, and upon which we must vigorously act. There is no other route to success. – Pablo Picasso (Spanish artist)
How Much Will Plant 2020 Plans Change with COVID-19?
Grain markets are mostly green as eyes turn towards Plant 2020 expectations from the USDA and potential impacts of a recession thanks to COVID-19. Even U.S. Federal Reserve Chairman, Jerome Powell, has admitted that America “may well” already be in a recession but that it’s not a normal one.  Technically, a recession is defined by economists as two consecutive quarters of negative GDP growth. Some are pinpointing a recovery at the end of 2Q2020 but with President Trump extending the social distancing guidelines until the end of April. 
Permabear and NYU economics professor Nouriel Roubini says that if the spread of COVID-19 doesn’t slow in the U.S., the recession could mirror that of the Great Depression.  To keep things in perspective though, Roubini has gained the nickname “Dr. Doom” because of his persistent doom and gloom outlook on all things economics. That said, we saw a record for the number of new people who filed jobless claims last week at 3.3M.  For context, the previous record for a single-week jump was just under 700,000 new people who applied for EI, and that was back in 1982. More of the impact of this structural change in employment in a bit!
Plant 2020 / Prospective Plantings Expectations
With a large portion of the developed world in lockdown, oil markets continue to be at multi-decade lows. For oil prices, IHS Markit is suggesting that the world only has about 1.6 billion barrels of storage left but, because of the drop in demand, inventories are expected to climb 1.8 billion barrels by the end of June.  This basically means that after July, there’ll be nowhere to put new supplies coming to market.
All of this will likely have a direct impact on grain markets and more specifically corn. Tomorrow, we’re supposed to get the UDSA’s Prospective Plantings estimates but market participants are already starting to discount any corn acreage number that USDA puts forward. With gasoline demand in the U.S. down 70% – 80% in just the past week, this means that there intuitively will be less ethanol needed.
In laymen’s terms, with corn-for-ethanol demand dropping significantly as anywhere from 2 to 5 billion gallons of ethanol production is expected to go offline, it’s certainly possible that less corn gets planted.  Of course, there’s the Conservation Reserve Program (CRP) that will allow farmers to let their land sit idle and still get paid for it but the cap is 24.5M acres this year, up 2.5M acres year-over-year.  It’s worth remembering though that, in the past, American farmers have tended to almost always plant a crop, even when demand – and thus prices – were poor. This could hold true for Plant 2020 as rental payments in key growing areas have to still be paid and CRP assistance won’t cover it! 
Currently, pre-report estimates for tomorrow’s Prospective Plantings report suggest that the USDA will show American farmers plan to plant 94.1M acres of corn, 85M acres of soybeans, and 45M acres of all types of wheat. For perspective, these pre-report estimates almost exactly match what the USDA said in their February outlook forum and would be up 5% for corn and 12% for soybeans. While Plant 2020 is still a few weeks away from starting, wetness concerns remain a status, albeit it probably won’t be as bad as last year. 
The bottom line is that, unless gasoline demand returns very quickly, there’s potentially a lot of corn that’s going to be hitting the U.S. market with a demand structure about 20% – 30% less than what it was a year ago. At worst, corn prices could drop below $3 again, which we’ve haven’t seen since the American ethanol / biodiesel program was first introduced back in 2007.
In Western Canada, the story may be a little different where a bump in demand for food products made from cereals and pulses is helping cash prices. Obviously, the spike in demand caused by panic-buying could be short-lived. However, sustained demand for food staples may be more likely when considering the 2-3 months that governments are softly suggesting this COVID-19 lock down could last. 
If that’s the case, we might see a few more acres of oilseeds switch over into cereals or pulses for Plant 2020, however, for agronomy reasons, this might not be the best play. Further (and a bit ironically), canola exports switched from pacing behind last year to now getting in front of it, thanks to 335,400 MT sailed this week, the 2nd-largest one-week shipment in 2019/20. Now, through Week 33, 6.1 MMT of Canadian canola has been exported, up 1.3% year-over-year. Coming back to Plant 2020, more snow is expected for Western Canada this coming week, with Alberta’s Peace region likely to get the most, according to Drew Lerner of World Weather, Inc. 
Agriculture Industry Structural Changes
In Friday’s Breakfast Brief, I looked at supply chain implications of the COVID-19, namely how some current decision making is lacking the expertise to execute. So, before we start jumping into “this is the best possible plan” strategizing, it might be important to look at what other countries have done to ensure access to food supply chains remains robust amidst the COVID-19 challenges. For example, in South Korea, the USDA’s office there is reporting a smooth customs process has helped stabilize food prices, despite the surge in demand for meat and other home-cooking supplies. 
Conversely, in Italy, foodstamps worth €400M are being distributed to low-income households as the country’s leaders are becoming increasingly concerned about social unrest due to rising poverty.  After all, with many out of work due to the lockdown, the ability to affordably put food on the table becomes extremely tough. I’m also watching developments in India closely where social distancing is practically impossible, especially amongst the lower classes.  Part of problem for the 3-week lockdown in India is that seasonal workers who showed up for the winter rabi harvest have since headed back to their hometown villages, leaving the crop exposed to forecasted rains.  As mentioned last week and above, pulses might be dealing with a perfect storm of weaker supplies and higher demand, both because of COVID-19.
On Friday last week, President Trump officially signed off on a $2 Trillion USD spending bill in attempt to get businesses to keep their employees on payroll and minimize economic disruption. However, the $350 Billion allocated to the Small Business Administration is unlikely to help the agricultural industry (as that’s, historically, been the case).  Basically, the loans are actually just grants, as the loans will be forgiven over time as long as employers continue to keep their employees on the payroll. Relative to the U.S. agriculture industry’s contribution to GDP, U.S. agriculture could potentially access $20 – $25 Billion, but like most COVID-19 government assistance programs, there’s very little details available in terms of who’s eligible and requirements to apply.
In terms of the food supply chain, there’s obviously a large shift of supply heading for wholesale/grocery stores instead of to retail/restaurants. The team of ag economics experts from the University of Illinois’ farmdoc program says that meat, dairy, egg, and produce supply chains are the most important.  That said, last week, U.S. egg prices hit record levels on “panic-demic” buying.  As eggs are simple staple for locked down households – about 93% of families in fact – suppliers are “seeing four, five, six times the level of demand” pre-COVID-19. From a different lens, those who are growing more niche, specialized products might start to “feel the pinch” according to a new study by the International Food Policy Research institute. 
Beyond agriculture, there’s plenty of theories going around about how COVID-19 will change the world going forward, upending the way we’ve worked, socialized, and studied.  This includes politics, as the U.S. and China are trading barbs over the spread of COVID-19, which, will ultimately just slow the economic recovery if that continues.  It’s not all bad blood though as millions of medical gloves, masks, and gowns and other supplies are making their way from China to countries where COVID-19 have left short on supplies.  Quite simply, with Asian factories coming back online and a few months off is probably a good thing. The question for grain markets is now whether these countries – especially China – will look to buy more foodstuffs from the major producers.
Let’s make it a great week!
At 7:10 AM CST in the North American futures markets (*not cash prices*):
(all prices in dollars per bushel unless otherwise indicated)
$1 USD = $1.4133 CAD, $1 CAD = $0.7076 USD)
May Corn: -0.8¢ (-0.2%) at $3.453 USD or $4.88 CAD
May Soybeans: +7¢ (+0.8%) to $8.885 USD or $12.557 CAD
May Soybean Meal (per short ton): +$4 (+1.25%) to $327.10 USD or $462.30 CAD
May Soybean Oil (cents per lbs): +0.31¢ (+1.15%) to 27.16¢ USD or 38.39¢ CAD
May Oats: +1.8¢ (+0.65%) to $2.673 USD or $3.777 CAD
May Wheat (Chicago): +4.3¢ (+0.75%) to $5.755 USD or $8.134 CAD
May Wheat (Kansas City): +4.5¢ (+0.9%) at $4.913 USD or $6.943 CAD
May Wheat (Minneapolis): +3.3¢ (+0.6%) to $5.403 USD or $7.636 CAD
May Canola: +8.8¢ (+1.55%) to $10.587/bu / $466.80/MT CAD or $7.491/bu / $330.28/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.