Slippage in the markets
There’s that old saying, "May you live in interesting times." There is no doubt that we do. The agricultural markets have been buffeted by a string of announcements and events within the first month of the year. We have seen positive news on the trade front, with the signings of the USMCA and US-China Phase 1 agreements. The announcement of the outbreak and spread of the coronavirus has significantly negatively impacted a number of markets, including agricultural ones. But while the general trend in crop pricing for the first month of 2020 has been lower, the markets are still providing signs that 2020 could be a better year for crop prices than the previous several years have been.
Figure 1 outlines the movement of corn and soybean price projections for the 2020 crops over the past month. For these projections, I use the corn and soybean futures contracts for the period between September 2020 and September 2021, as the 2020 marketing year covers the period September 1, 2020 to August 31, 2021. Given the daily futures prices and the five-year average basis levels, we can construct national season-average price estimates. These daily estimates are what are graphed in Figure 1.
As the graphic shows, crop prices have worked their way down since the start of the year. Corn has given up 10-15 cents per bushel, while soybean has lost roughly 50 cents. Some of these losses are profit-taking following the trade agreement announcements, a "buy the rumor, sell the fact" story. Crop prices had risen by roughly the same amounts in December, boosted by the progress in the US-China trade talks (which led to the Phase 1 deal) and the legislative action on USMCA. Thus, when both deals were signed by President Donald Trump last month, they were positive news stories for agricultural demand, but prices reacted negatively. You can especially see that market reaction with the pricing moves in the middle of January, in the days just after the signing of the Phase 1 deal. Soybean prices declined by 15 cents, while corn lost 10 cents. While corn was able to recapture some of that loss in the week after the initial reaction, soybean prices continued to slide.
The latter part of January was dominated by the discussion surrounding the coronavirus and the possible impacts of the outbreak on both the Chinese and global economies. With the Chinese government implementing a quarantine around Wuhan and limiting travel within the country, it is expected that China’s economic output will decline. As various countries and industries move to reduce possible transmission pathways (see, for example, British Airways cancelation of flights to and from China), global economic output is likely to decline as well. Those concerns manifested themselves in a slew of markets, from energy and agriculture to stocks and bonds. The coronavirus outbreak has also been added to the list of reasons for skepticism on the Phase 1 trade deal. Combined with the African Swine Fever (ASF) outbreak, China is dealing with significant health challenges for its human and livestock populations. While the ultimate impact of the coronavirus on Chinese agricultural demand is unknown, the impact of African Swine Fever is much easier to predict. The loss of hogs in China is dramatic and has and will continue to curtail the need for soybean. While China has re-emerged as our top soybean export market, soybean sales are still below pre-trade war levels. ASF has diminished China’s need for soybean as livestock feed, but has increased China’s need for meat, especially pork, and other protein sources to offset the swine losses.
Traders in the futures markets have also pointed to the lack of significant export sales to China since the signing of the Phase 1 deal. The 2020 target for agricultural sales to China is roughly $32 billion under the deal. That is $7 billion higher than the record amount of agricultural sales to China, set in 2012. Soybean represented a substantial portion of that record total. With the AFS effect on soybean demand, China will have to expand purchases dramatically in other commodities to make up the difference and meet the trade agreement target.
As we entered 2020, the futures markets pointed to 2020 season-average prices around $3.95 per bushel for corn and $9.50 per bushel for soybean. By the end of January, those price estimates had fallen to $3.83 for corn and $8.92 for soybean. But these price estimates are still above USDA’s initial projections for the 2020 crops. In late October of last year, USDA provided an early outlook for 2020. That outlook had crop price estimates of $3.40 per bushel for corn and $8.85 per bushel for soybean. The USDA outlook was based on some crucial assumptions: the continuation of current government policies at the time and a reversion to more "normal" planting conditions this spring. Since USDA released that outlook, government policies have shifted greatly with not only the signings of the Phase 1 deal and USMCA, but also the trade deal with Japan. While overall export sales have been lackluster over the first half of the 2019 marketing year, the three trade deals offer reason for optimism and are reflected in the futures market prices. And with time, we will see if crop planting progress returns to normal, but current conditions and National Weather Service forecasts do not look promising. Wet soil conditions created problems in 2019 and the potential for similar conditions this spring looms large.
Putting these two pieces of information together implies that USDA’s initial projections are likely too heavy on supplies and too light on demand. A recipe for higher prices, and that’s what the futures markets are showing. Does that guarantee 2020 will be better than 2019 price-wise? No, as futures prices in early 2019 were roughly at the same levels (actually, a bit higher). But it does provide another example that even in challenging times, the markets will provide windows of opportunity.
Chad E. Hart, extension economist, 515-294-9911, firstname.lastname@example.org