The spread of coronavirus has hit ag markets hard, especially livestock sectors that fear weak demand as restaurants close in response to the pandemic.
As the Dow Jones Industrial Average reels, the commodity sector also has been a casualty of the COVID-19 outbreak. The cattle futures have been the most sensitive as traders perceive a slowdown in demand for beef with the possible global recession and the cancellation of many events, such as the NCAA men's basketball tournament, which hits the restaurant and food service sector.
On Monday, March 16, live cattle, feeder cattle and lean hog futures all hit new contract lows and many contracts closed limit down under expanded limits. The livestock contracts were down in tandem with the stock market, which lost nearly 3,000 points on the day.
Minnesota on Monday ordered the closure of restaurants across the state as part of the attempt to slow the spread of the coronavirus and the COVID-19 illness that it causes. Other cities and states have limited hours of operation for restaurants or mandated take-out-only restrictions.
However, the other fear is that COVID-19 will result in the slowdown or shutdown of meat processing at packing plants, which would cause a backup of this perishable product. The weekly pork export report on March 12 provided evidence of a slowdown in United States sales as it showed a cancellation of 45,200 metric tons of pork by China, which resulted in a weekly record low for export sales of -23,500 metric tons. For the week ending March 13, April live cattle were down $10.18, March feeder cattle dropped $17.70 and April hogs were off $9.55. Compared to the high on Jan. 23, the April live cattle contract as of March 16 had dropped $35.05 to close at $91.85.
Cash cattle prices also responded to the break in the futures trading at mostly $110 live for the week ending March 13, which is $14 below the $124 paid through much of January. At the same time there are exceptions, as prices for choice boxed beef, which refers to cuts of meat for the wholesale market that are packaged and ready to ship, were up $16.22 on March 16, closing at $224.36. It’s the largest one-day price increase in history and is tied to a surge in demand as consumers stocked up.
While sales of beef in the restaurant and food service sector have been compromised, demand has skyrocketed at grocery stores, resulting in empty shelves at many outlets.
Market analysts tried to calm the fears of grain and livestock producers. However, markets do not like uncertainty, so panic selling resulted from this unprecedented event in the markets.
“Even the (bovine spongiform encephalopathy, or mad cow disease) case in December of 2003 did not result as violent reaction or selloff in the cattle market as this black swan event. We really have nothing to compare it to," says Brad Kooima of Kooima Kooima Varilek Trading in Sioux Center, Iowa.
Grain futures held up somewhat better than the livestock sector but were not immune to the outside markets and demand fears and suffered from speculative selling pressure. The corn market fell to new contract lows as it was impacted not only by the COVID-19 fears but also by the huge drop in crude oil prices. The nearby crude oil contract traded as low as $27.34 per barrel the evening of March 8 as the OPEC price war heated up between Russia and Saudi Arabia. That also caused unleaded gas futures to fall below spot ethanol prices. That is a rare occurrence and severely stresses margins for ethanol plants. Despite that, May corn was only down 10 ¼-cents for the week ending March 13. Soybeans were under more pressure as the May contract dropped 42 ½-cents for the week. On March 16, the May soybean contract lost another 27 cents to close at $8.21 3/4 and set new contract lows.
Most market observers agree that once the panic selling subsides there will be a tremendous relief rally in all the commodity markets, in large part due to pent up demand. However, the markets have to bottom first, and the COVID-19 cases will need to start to slow down in the U.S. and globally before that will happen.