It’s Getting Pretty Dark. We Need Some Good News

Today the Dow Jones lost the most value in one day in its history. Markets hate uncertainty and despite the fact a few weeks ago the equity markets were telling us the coronavirus didn’t matter, it isn’t the case now. A few weeks ago, commodities markets were getting beat up while equities weathered the storm. However, this coronavirus concern is the Black Swan that just keeps on giving. The road ahead looks like a dumpster fire to the pessimists and they seem to be winning the day.

The Dow Jones dropped 1191 points or 4.4% in the worst one-day point drop off ever. The S and P 500 also closed down 500 points. Coronavirus was showing up almost everywhere, with new hot spots like South Korea, Iran and Italy spooking the media. The Dow Jones is down about 12% since February 12th, NASDAQ is down 12.9% since last Thursday, the biggest drop since 2009. However, Clorox stock is soaring. The world is upside down.

Of course, with agricultural futures prices, we’re a little more used to going nowhere. In the last week, May corn has lost about 20 cents. May soybeans have lost about 15 cents, but that’s not so bad when it seems the world is crumbling around you. Needless to say, the sky isn’t falling, but you could be mistaken for thinking it might be.

Meanwhile back in Canada the trains have started moving again, with only one blockade left in Quebec. However, the situation is still tenuous and agricultural commodities are way behind in scheduling. I talked to a soybean exporter this week, who had beans stuck in transit as customers were waiting. Ditto across much of the country as issues over pipelines, aboriginal rights and the glacial speed of government meet. When the true costs are measured of this transportation bottleneck, I’ll be truly interested, because it’s been very costly. The way forward simply has to be better than this.

As it is now, December corn is sitting at $3.77 and November soybeans are at $9.13. Both of these prices are not getting anybody excited and they tell a story. Essentially, the world has got enough corn and soybeans with big crops coming out of South America and big acres predicted in North America this year. Throw the coronavirus on top of the already eroded demand picture and we get prices nobody wants to write home about.

Basis tells a significantly different story. Across the United States, the corn basis ranges from a +26 over the nearby month for old crop in Ohio to -$1.10 in North Dakota. Between those two points, there are a range of basis levels which reflects the local supply and demand. However, I’m wondering in 2020 if there might be another reason for those basis levels. Have the American MFP payments helped support basis levels for soybeans and corn with farmers having a longer time to sell? Has this translated into a marketplace, where MFP has recapitalized basis levels beyond what they normally would be?

It is hard to know. However, MFP was much higher for soybeans than corn and in my opinion will likely turn into an annuity. Like almost any other agricultural subsidy, the money gets recapitalized back into the farm, usually fixed assets. You can see this on the Canadian side of the border as the supply managed sector typically pays the most for fixed assets whether that is equipment or farmland. In the case of MFP, you’d need an empirical agricultural economy study to find out truly if MFP has raised grains basis levels. Needless to say, I think it does, changing traditional timing for some grain sales. For our American farm friends currently withstanding this global “equity” decline, the MFP has surely been valuable and is likely to offset sales. In Canada that would only be a dream.

As we move ahead, it’s the world of catching the falling knives. We are in a bad news cauldron where every new day, brings a new infection with the resultant hype around it. AS mentioned earlier, stock for Clorox, a company that markets bleach is soaring. However, that is unlikely to continue into perpetuity, just like our grain prices will likely turn around at a certain point. We might be at months long contract lows for corn and soybeans, but much of this doesn’t add up. It’s snowing outside and the North American crop is still barely a theory.

Needless to say, we’re caught in a Black Swan that keeps on giving. I left out the bearish grain fundamentals. However, we can only take so much negative. It might be a different time with the word “pandemic” in the air, but remember, it’s always darkest before the dawn. We need some fresh good news. Maybe it’s just around the corner.