The U.S. economy is expected to see more bad news as first quarter earnings are starting to be released. Most companies are expected to fall short of their goals because of the coronavirus.
Some sectors of the economy are going to be hurt more than others. So far energy is off 50%, industry off 31%, consumer discretionary spending down 29%, financials down 17%, and materials down 14%. There are areas showing growth such as communication services up 7%, information technology up 3%, utilities up 2%, healthcare up 1%, real estate up 1%, and consumer staples up 1%.
Congress has made no progress on expanding the Paycheck Protection Program as they continue to debate the two plans that are being offered. Republican senators have been trying to add $250 billion to the program in a clean bill by consent vote but the Democrats want a more encompassing bill that will not only add $250 billion to the program but also give money to hospitals and state and local governments and expand SNAP, the Supplemental Nutrition Assistance Program. So far, the Democrat bill has not gained traction and has been voted down. Talk is negotiations will resume this week, which means the program will not see any new disbursements until more funding gets approved. This is at a time when the Paycheck Protection Protection program has just been expanded to include self-employed and farmers.
In addition, the U.S. Department of Agriculture is putting together a $15.5 billion stimulus package to help support the nation’s food supply chain. This will be in the form of direct payments to farmers and ranchers. More details are expected later in the week.
The crude oil market continues to grab a lot of attention as well. OPEC+ held its meeting last week and made the decision to cut production by 9.6 million barrels per day, a far cry from the almost 30 million barrels per day demand that has been lost. There has been a reduction in other non-OPEC countries, like the U.S., Canada, Brazil and Norway, but the production cuts in those countries have been because of shut-down wells that will likely resume production once prices recover. Crude rallied on the expectation that cuts would be significant but has since lost all of its gains as the May contract is now trading at or near 18-year lows.
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The other issue with the production cuts is that they are not expected to start until May. That means that production will continue to be unchanged for the remainder of April. All storage facilities are expected to be full by June, which means prices could really drop by then as there will be no storage available.
The U.S. dollar continues to hit the U.S. grains. One would expect the dollar to be declining as the virus issues remain high, but the dollar is rallying back to what appears to be an attempt to test its recent high. The dollar traded to three-year highs around mid-March then retreated to hit two-week lows during the second week of April. The strength in the U.S. dollar is slowing U.S. exports. That was evident in April’s Crop Production report, which showed a reduction in wheat and soybean export pace. The strength of the U.S. dollar coupled with the weakness in the Brazilian real has made it all but impossible to sell U.S. soybeans to China.
As the calendar has flipped to April, traders’ focus will also be flipping from the events in South America to the activity in North America. One report that helps keep up to date on the weekly planting progress and crop development of the U.S. crop is USDA’s Weekly Crop Progress report. The report is released each Monday afternoon and gives an update on crop progress.
The April 12 Crop Progress report came in close to expectations. Spring wheat planting was estimated at 5% versus 9% average, corn planting was estimated at 3% completed versus 4% average, and winter wheat conditions were unchanged at 62% good or excellent. Winter wheat conditions are expected to start to decline over the next few weeks due to the freezing temps currently gripping the Plains states. Severe damage is not expected at this point, but the winter wheat crop is far enough along that there will be some damage done to the wheat in Kansas and Oklahoma. Corn harvest is slowly advancing in North Dakota. As of April 12, North Dakota's corn harvest progress at 83% complete versus 81% the previous week. U.S. planting progress was estimated at 3% complete versus 0% the previous week and 4% average. Illinois is 1% planted while Iowa, South Dakota, Minnesota and North Dakota are at 0% planted.
Wheat struggled this past week with most of the selling pulling wheat to the middle of its recent trading range. Pressure was tied to the stronger U.S. dollar (which makes U.S. wheat unattractive to foreign buyers). But wheat has some fundamentally positive news that seems to be overlooked. The U.S. Southern Plains (Kansas, Oklahoma, Colorado primarily) experienced freezing temperatures last weekend and into the start of last week. Temperatures in the northern part of Kansas were reported in the teens while parts of Oklahoma, Colorado, and southwest Kansas saw temps in the upper 20s. All were cold enough to cause damage due to the stage of the crop. Weather forecasts are calling for adverse weather to continue for much of the Plains over the next 15 days. The north will continue to see cold conditions which will continue to delay planting progress while wet conditions will continue to hamper the crop in the south.
Drought concerns in parts of Russia are also concerning, but rain is in the extended forecast for Russia. The strength in the dollar and slowdown in demand is causing wheat to lose a lot of its premium.
Corn seems to be wanting to find a bottom, but that being said, corn did trade to new contract lows and levels not seen since August 2016. The picture does not look bright for corn (large ethanol cuts and expectations for high acreage). Exports are improving as U.S. corn remains the cheapest in the world, which should help give corn some support. The past three ethanol production reports have shown huge declines in production. With planting uncertainty still an issue (slow planting progress due to wet conditions) corn might try to refrain from trading below the $3 level. If weather improves and planters start to roll, corn will likely test the $3 level.
The biggest question facing corn in the short term is how many acres will get planted. At this point, it sounds like producers are looking at switching a portion of their corn acreage into wheat or soybeans. Prevented planting in the northern tier states will be an easy option, especially on any acreage not harvested until this spring.
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Soybeans remain weak because of poor demand and expectations of increased acreage in 2020 on weather concerns and the expectation of some corn acres switching over to soybeans. Weak export demand continues to pressure soybeans as the Brazilian real continues to lose ground to the U.S. dollar, making Brazil the easy choice to import. The bright spot in the soybean complex is once again coming from soybean meal. Meal demand should be seeing an increase due to the slowdown in ethanol production (less dried distillers grain). But meal demand was expected to level off as livestock producers try and slow down weight gain in an attempt to delay marketing product now at a time of low prices and plant closures. Soybean export demand is expected to pick up, but not until South America has exhausted their supplies, which is expected to occur around mid-summer.
As hard as it is, producers should continue to be patient on selling grain. If you need to move old crop product, look for re-ownership. There are a lot of May hedge to arrive contracts that are coming due in the next week to 10 days, which might be keeping prices depressed, but look for an opportunity to lock futures later not sooner. Contracts might need to be rolled again but look at option prices before making that decision. It might be cheaper to re-own with calls than roll.
Volatility continues to be the main attraction in the cattle market. April live cattle continues to trade at a steep discount to cash, and that is attempting to support the live cattle market. Technical buying is adding to the push as both live and feeder cattle contracts are oversold and in need of a correction. Traders are concerned about plant closures and its effect on movement of slaughter-ready animals. A slowdown in slaughter numbers will back up runs and result in increased slaughter weights, eventually dumping more meat for the system to absorb.
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