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Straits Financial Q3 Ag Update

Aug 17, 2020

Straits Financial Q3 Ag Update
All markets, whether bonds used to finance debt or grains used to feed the world, have been affected by the ongoing global COVID-19 pandemic. As the globe tries to move on from the virus, some markets may return to a sense of “normalcy” while others may continue to see heightened volatility and struggle to regain pre-crisis levels.

The livestock and agricultural markets are no exception. These markets have seen significant movement based on COVID-19 fears, with their expected supply and demand numbers being significantly impacted as well. In addition to the ongoing pandemic, many markets, including livestock and grains, are also being affected by U.S./China relations and the potential or lack thereof for a viable long-term trade agreement.

Livestock

Meats have seen a significant impact from the virus as well as the ongoing trade negotiations between the U.S. and China. Some of the markets have already recovered a large portion of their virus-based declines. It remains unclear, however, if the meats will regain previous price levels or even beyond.

The livestock market saw a significant decline that began to materialize last February, as the virus began to spread all over the globe. The drop took live cattle futures from around the 120 level all the way down to the 85 level before finding a bottom. Since hitting 85, however, the market has been trending higher, with prices approaching the 100 region on the chart in recent trade. The ability of live cattle to reach back towards the 120 region may be dependent on virus containment. Many states have already attempted to reopen and have been forced to implement closure measures again. The closure of restaurants could weigh on cattle prices as demand suffers.

Feeders have also had an interesting few months since COVID-19 began to spread. Feeders fell from a high in January in the mid-150s down to a swing low of less than 112 by the time the selling subsided. The market has since attempted to recover its virus-based declines and has been trending higher since the first week of April. Like live cattle, feeders have thus far been unable to recoup all their previous declines. Prices are currently sitting in the mid-140s and could be gearing up for another leg higher if there are no major developments on the spread of the virus. Feeders, like live cattle, are also vulnerable to any significant changes in the U.S./China trade relationship.

As was the case with beef products, pork has also had a challenging year as the virus took hold. Lean hogs took a dive from their January highs in the 75 region, falling all the way down to almost 46 before the selling pressure abated. Unlike the beef contracts, however, pork has not staged any significant rebound yet and currently sits in the mid 50 region.

Pork has been hit hard by the previous shelter-in-place orders and any fresh closures could have a significant impact on pork prices. Not only is pork having to contend with COVID-19 and U.S./China trade relations, but is may also have to deal with a slowdown in processing as labor shortages cause a significant slow in processing rates. Without a fresh, bullish catalyst to boost the price of hogs, the market could remain under pressure and could even test levels not seen since the late 90s/early 2000s.

Grains

Until recently, the grain markets have also been hit hard by the virus, with November soybean prices declining from over 981 to less than 832 within a matter of weeks. The bean bulls have put up a decent fight however as export expectations climb and recent storm damage is still being assessed. Early June saw a run in soybean prices with the market pushing towards the 900 level which we have decisively broken through in the last week as it eyes 920. Like livestock, the soybean market has several major issues to contend with currently that includes the pandemic, U.S./China trade relations and the weather.

The wheat market was not spared the volatility and selling brought on by the spread of COVID-19, as the market tumbled from nearly 600 per bushel down to almost 450 per bushel in a short period of time. The 150 or so decline since the low was reached in June was quickly retraced, with a combination of bulls and short covering likely behind a quick pulse higher to the 550 level. That bullishness did not hold, however, and wheat has again declined towards the 500 region. The market, like soybeans, is also highly vulnerable to any changes in the COVID-19 situation as well as U.S. and Chinese relations and weather.

The corn market may at this point be the most fragile, as prices have been unable to stage any rebound from their virus-based lows. After declining from just over 400 per bushel in January, corn is now on the recent lows, trading in the 320 region. A test of the market’s five-year low around 300 per bushel could even set the stage for a fresh leg lower in corn prices that could see a test of 200 per bushel. The ongoing U.S./China trade uncertainty as well as worries about the pandemic have hit corn hard, while massive oversupplies have kept the bulls from maintaining any upside.

All these markets have been beat up bad, and some have recovered stronger than others. The next several months will likely determine the direction of trade going forward, as producers are looking for China to purchase large amounts of U.S. grain to make a long-term agreement on global trade.

The ongoing pandemic is another factor entirely. Another large global shutdown could send prices in both sectors sharply lower, while the introduction of a marketable and effective vaccine could set the stage for a sharp rally higher.

DISCLAIMER: This document is issued for informational purposes only. This document is not intended, and should not under any circumstances be construed as an offer or solicitation to buy or sell, nor as financial advice or a recommendation in relation to any capital market product. All the information contained herein is based on publicly available information and has been obtained from sources that Straits Financial believes to be reliable and correct at the time of publishing this document. Straits Financial will not be liable for any loss or damage of any kind (whether direct, indirect or consequential losses or other economic loss of any kind) suffered due to any omission, error, inaccuracy, incompleteness, or otherwise, any reliance on such information. Trading commodity futures and options products presents a high degree of risk, and may not be suitable for all investors. Past performance or historical record of futures contracts, derivatives contracts, and commodities is not indicative of the future performance. The information in this document is subject to change without notice.  The impact on market prices due to seasonal or market cycles and current news events may already be reflected in market prices.