The market concerns continue to be focused on the coronavirus and how fast it is spreading across the world The virus has raised havoc with public events and attractions as more announcements of closings and cancellations hit the market hard.
Just a few of the closures include the NBA postponing the rest of the session, the NCAA canceling March Madness, Disneyland closing, and numerous colleges calling off in-person classes and looking to do only online classes through the first week of April. The Chicago Mercantile Exchange will close floor trading until further notice. The U.S. has suspended travel from the European Union for the next 30 days. Italy has shut down the country completely. New York has declared a state of emergency but has not closed schools as of yet. New York companies are telling employees to work from home if possible. Some companies are breaking employees into groups and not allowing groups to interact with each other.
The World Health Organization stepped up the classification of the coronavirus last week, now calling it a pandemic. Not sure what that all means, except that the markets did not like the change in status as not only did the grains drop another leg lower, the U.S. stock market melted down and entered bear market territory. A bear market classification in the stock market happens when the market drops over 20% from its 52-week high. Both the Dow Jones and S&P 500 have accomplished this task.
The spreading virus is resulting in a massive disruption in the supply chain, and at this point most are projecting the disruption to continue through end of June. The global economy is shrinking as factories, schools and cities go into lockdown.
The Federal Reserve surprised everyone last week by cutting interest rates 0.5% ahead of their regularly scheduled meeting. The market is expecting the Fed to once again be forced to make another 0.5% interest rate cut in their March 17-18 meeting, bringing rates down to 0.5% to 0.75%. Most are also looking for the Fed to make a quarter point cut in the April meeting if the virus continues to be an issue.
Traders are starting to head to the sidelines as the markets are not making sense. The grains are too cheap and in an oversold market condition, but if the virus keeps spreading, demand will slow down. It’s a catch 22. Spring is when the U.S. uncertainty is at its greatest, and markets are normally trending the other direction. The selloff has been steep enough at this point that most are expecting a dead cat bounce — a small, brief recovery in the price of a declining stock — but if the virus continues to cause havoc, a recovery will be delayed. It is likely that the situation will not get better until the number of infections in the U.S. starts to retreat.
The U.S. is also looking at a massive stimulus package to help the U.S. economy. The White House has come up with a plan, but the lack of enthusiasm for the plan caused the markets to retreat. The biggest aspect of the stimulus is to offer payroll tax forgiveness to the end of the year. Congress was not excited about that package and went to the drawing board to try and come up with a plan of their own.
On the energy front, OPEC+ held an emergency meeting toward the end of the first week of March. The meeting was a disaster with no decision being made. Russia proceeded to call for production cuts to end by April 1, freeing up all countries to produce as much oil as they want. Saudi Arabia was in the camp to cut production to come more in line with consumption. But Russia is not a fan of fracking and wants to get the price of oil cheap enough to slow down that method of oil drilling. In response, Saudi Arabia went into a bidding war, slashing oil prices to the bone in an attempt to undercut Russia and make it hurt. Their intention is to increase production by 2.6 million gallons by the start of April if Russia is not willing to talk about production cuts. Russia responded by saying they are going to jump production by 200,000 to 300,000 barrels quickly and likely jump to 500,000 barrels.
As for the U.S. winter wheat crop, the major production states started to release weekly crop progress reports the first of March. The March 9 report had the three major winter wheat states (Kansas, Oklahoma and Texas) reporting the following conditions: Kansas: 47% good to excellent, +4%; Oklahoma: 58% good to excellent, +1%; and Texas: 26% good to excellent, -10%. Oklahoma’s crop was 1% jointed versus 5% last year. Texas's crop is 25% headed versus 24% last week, 6% last year, and 1% for the five-year average. The estimates were negative as they showed another solid improvement in the crop.
The U.S. Department of Agriculture's March Crop Production and Supply and Demand reports gave the market nothing. Other than a small tweaking of the supply and demand numbers, USDA made no major changes. One interesting item to note is that USDA lowered both corn’s and soybean’s national average prices 5 cents, putting both one step closer to their Price Loss Coverage reference price.
The interesting aspect in the grains is the intermarket spreads. Minneapolis wheat has a decent carry from the front month to deferred contracts, but the winter wheat contracts are inverted or no carry. Corn is in the same boat, inverted. And soybeans offer a small carry. The lack of a carry in the market is a signal of low supplies and the need to try and pry product out of producers’ hands. Of course, with the market prices sitting at recent lows, farmer selling remains light. But the market is signaling that they are in need of product, especially Chicago wheat and corn as both of those markets are inverted. This is also a sign that the production for those two markets might be much less than estimated. To top off the inverted market, basis levels remain strong as well.
This is hard to say, but now is not the time to panic or make snap decisions. There is no doubt the markets are not where we expected them to be, but the recent knee-jerk reaction to sell aggressively in all markets is extremely overdone. The market is trying to guess what the potential economic impact the virus is going to cause, but again, that is an extremely hard number to come up with. China’s slowdown in cases has helped its economy to recover to pre-coronavirus levels. That will also be the case in the U.S. We just need to be patient and be ready to act once the number of cases starts to slow.
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