Commentary

Rural Voice Februay 12, 2020

The optimism that was once felt in many commodity markets seems to have faded away.  For a long time, many commodity prices seemed to trade at levels that were below the hopes of the producer, with market chatter indicating that this would change when the US and China came together with a trade deal.  Well finally these two nations did come together to form the Phase 1 trade deal.  From this, the markets were somewhat positive, and the outlook seemed brighter that US ag trade would resume to the big Chinese marketplace.  Then as soon as the optimism seemed to be gaining speed, and commodities began to appreciate in value, the markets turned lower and the outlook soured.  The change in sentiment came from the Corona virus outbreak, that originated in Wuhan China.  What the final outcome of this spreading virus will be is uncertain.  What will be its duration and how widespread will it become around the world and what will be the mortality of the virus?  These are questions that no one can answer with certainty today.  Uncertainty is the scourge of markets and in times of doubt many market prices fall as speculators pull their money from “risk assets” until there is a feeling that the risk has dissipated. 

There are many who speculate that the virus will have minimal impact on human health, and the situation will clear up much like SARS did years ago. There seems to be a general thought that many markets have been under pressure due to worries of epidemic hysteria and a herd mentality that will prove to be unfounded.  Whether this will be the case or not is yet to be shown.  What is apparent though, is that even if the virus does go away quickly, the impact to many markets – especially ag markets, will likely remain and keep prices subdued for some time to come. 

The Chinese economy will be negatively affected as a result of the attempted containment of the virus.  Many Chinese cities are under lockdown conditions and travel is impeded for millions of people.  Global traffic has halted to the region as the World Health Organization declared a public health emergency of international concern.  China has become a major economy within the world sphere – representing 15% of the global economy.  With this emerging situation energy markets are under pressure and this weakness spills over into weakness in the ag markets likewise.  China is hindering shipments of many commodities to its shores and has declared force majeure on some liquid natural gas shipments; this is indicative of falling commodity demand in the nation.  While energy demand will most likely resume its regular pace as business turns back to normal, US ag markets will not be so lucky.   

The top US White House economic advisor, Larry Kudlow, has already indicated that the virus outbreak would delay the US export surge promised by the completion of the Phase 1 trade deal.  Agriculture was to account for 16% of the increases in US trade to China, and much of this is now on hold.  It is not only grain and oilseeds that will be affected, but also meat consumption.  This outbreak has coincided with the Lunar New Year celebrations which is typically a time of high meat consumption.  As these celebrations and public gatherings are limited, so is celebratory consumption of food items, including large volumes of meat. 

US Soybeans into China will likely be the most challenged, as large South American crops are expected to hit the market soon.  The Brazilian bean harvest is thought to reach record high volumes this year at 124.5million metric tonnes – with supplies of about 75 million tonnes for export.  This puts further skepticism over large purchases of US beans as China emphasizes that the Phase 1 agreement still allows China to buy ag commodities as market conditions dictate.  In other words China will only buy US beans when they are cheaper than Brazilian and that will not be the case when Brazilian harvest hits full swing.  Brazilian farmers are reported to be heavy sellers of soys.  Brazilian farmers are feeling fear in regards to world demand for their beans from Corona virus, the reduced Chinese hog herd and uncertainty as to China’s intentions for US purchases.  Couple that with a record harvest and a weak Brazilian currency and Brazilian farmers are ready sellers. 

The opposite position is seen currently in Argentina.  Producers there are becoming more vocal in opposition to the grain export taxes that have been increased by the recently elected government.  It is reported that farmers are demanding soybean export taxes to be dropped to 24.5% from the current 30% export tax.  A rural association called Carbap, which represents 32,000 famers has said that they will withhold sales if the government didn’t propose tax changes.  From the government’s perspective, they are desperate to hold tax rates high.  The government has debt obligations in US dollars and is counting on soy revenues to pay the bills and support the local economy.