The best quote I have seen that describes the situation the markets are facing came from The Hightower Report: “The fundamentals are of almost no concern to direction of price, trade has no sense of how bad or how long demand destruction will be seen and trade also has little in the way of fundamental justification to suggest a bottom in prices.” The market continues to trade on pure emotion and news of the moment. Until traders can start to see a light at the end of the tunnel (fewer infections) the current volatile trading pattern will likely remain.
In looking back on the past three months, the rearview mirror says we should have been aggressive sellers. The markets have taken a severe beating so imagine just how far ahead of the game we would have been if we had sold. Some did sell, most did not. There were many reasons not to have sold product in January, with the main reasons being the signing of the phase one trade deal with China along with expectation of increased demand due to the fact that the U.S. was the only game in town for soybeans and the cheapest exporter in corn.
But outside forces prevented the U.S. from being the favorite destination for corn exports. Quality was the most cited reason for the U.S. being left out of the corn export market. China’s ability to slow down purchases long enough to wait for Brazil’s soybeans to become available hurt U.S. soybean exports.
Now the U.S. is dealing with the coronavirus. The virus has resulted in a massive loss in major sectors of the economy. Since the start of the new year, the Dow Jones has dropped 9,000 points or roughly 32%. The S&P 500 is down 28% and the Nasdaq is off 19%. The sell off in the equity markets has been enough to change their classification to a bear market, which refers to markets that have dropped 20% or more from their 52-week high.
Energies is another sector that has been hammered. West Texas Intermediate crude has dropped $35.42 or 59%. Heating oil is off 96 cents or 48% while gasoline has retreated $1.20 or 64%. Ethanol has not been immune to the selling pressure, dropping 29% since the start of the new year. This creates another issue. Ethanol plants are starting to feel the impact of lower energy prices with most plants slowing production while some have just decided to shutter (two plants in Iowa closed this week). The slow down in ethanol production has caused issues in the protein market, pushing soybean meal higher on the expectation of increase meal demand due to potential decreasing supplies of dried distillers grains.
As we can see from the above numbers, the virus is causing more issues than just medically. On a positive note, the rate of new infections in China was zero on March 19. So, after 3 months of aggressive isolation China is emerging from the grips of the virus. That would mean the U.S. is about halfway home. But it is likely the U.S. exposure will last longer as the U.S. can not detain citizens as aggressively as China.
As for the markets, all eyes are on Washington, D.C. The second virus relief package (free testing, two weeks paid sick leave, enhanced job benefits) passed the Senate with a wide margin. It now sits on the president’s desk waiting for his signature. Congress is currently working on the massive third virus relief package. This stimulus package has swollen to $1.3 trillion. It is expected to include direct payments to Americans, small business loans, and aid to the most severely impacted sectors of the economy (airlines, energies).
The grains have also seen historic swings. In just four sessions, the dollar has rallied to three-year highs posting a 7% gain. In the 60 days between Jan. 17 and March 17, cattle are off 24%, trading at 10-year lows; corn is off 12%; soybeans off 12%; soymeal off 2%; soy oil off 24%, Chicago wheat off 13%; hogs down 14%; and gold off 2%. The Dow peaked at 29,506 on Feb. 12. The recent low is at 18,766. In just a little over 34 days, the Dow has lost 10,740 points or 36% of its value.
As tired as everyone is hearing about it, we are tired talking about it, but with statistics like these, you can see how the coronavirus has sucked all of the oxygen out of the room and is the only item driving the markets at this point. Fundamentals will have to enter into the equation at some point, but as of now, they are not influencing market activity.
Weather is starting to return as the main fundamental as we are about to gear up for the 2020 planting season. At this point though, there is little incentive to plant any one crop over another. This could lead to producers planting the easy crops in an attempt to reset for 2021. There are a lot of roughed up fields out there because of last fall’s difficult harvest period. The right crop rotation will help to give producers a chance to get those fields back in shape.
As for the grains, besides being extremely oversold and in need of a correction, wheat is seeing support from weather forecasts that are hinting of a cold air blast that could affect the Southern Plains.
Corn has been under pressure from poor ethanol demand. With the recent decline in crude and decline in demand, ethanol stocks are increasing, and plants are shutting down. Wheat and corn have also been the benefactors of China’s buying. Rumors have two to eight cargoes of U.S. products recently sold to China.
Soybeans are seeing support from meal as traders are expecting to see demand increase because of a slowdown in dried distillers grains. Weather concerns in South American are adding to the support for corn and soybeans, as the recent hot dry conditions were expected to trim production estimates slightly.
The cattle markets are once again in the situation where boxed beef prices are rallying sharply while live cattle futures decline. Concerns that beef demand will see a massive decline because of coronavirus related cancellations of events has traders expecting beef demand to decline and stocks to increase.
So far, though, the restaurant slowdown has been offset by a massive increase in grocery store demand. Of course, the rate of demand in grocery stores will slow down much faster than restaurant demand will increase. But in the short-term, supplies are not increasing, which should help cattle recover from the recent debacle. Cattle trading at 10-year lows seems a little overdone, especially when boxed beef prices are at year highs.
“The risk of loss in trading futures and/or options is substantial and each investor and/or trader must consider whether this is a suitable investment. Past performance, whether actual or indicated by simulated historical tests of strategies, is not indicative of future results.”