Coronavirus Unleashes A Black Swan BY JOHN MILLER
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ou only need to look at almost any commodity chart starting on or near January 23rd of this year to see that something abruptly affected the entire marketplace in an adverse way. This was the day that Chinese officials publicly recognized the problems surrounding a Coronavirus outbreak in humans; but still suggested that it was premature to declare an emergency. The chart below show the Dow Jones Industrial Average (DJIH20 in black), March Cotton (ETH20 in pink), March corn futures (ECH20 in blue), and crude oil (ECLJ20 in purple) since January 1st. You can see the DJIA tumbled from just short of the fables 30,000 level to just above 25,000, a record decline in that short of a timeframe. For our valley farmers, it was hard not to notice cotton prices falling from approximately 70 cents per pound to 62 cents, the difference between a tight profit and a clear loss. Corn behaved similarly, falling from $3.90 to $3.60 per bushel. Even the energy providers took a big hit as crude oil dropped from $65 to $45 per barrel. This has been a falloff of commodity prices rarely seen in one’s career. With China now exceeding 80,000 cases and roughly 2,800 deaths, the government there can no longer pretend this is anything less than a public health disaster for their country. With more than 89,000 cases and 3,100 deaths worldwide, according to John Hopkins and as illustrated by the heat map below, governments around the globe are taking serious action to ward off a larger public impact.
As if the recent African Swine Fever (ASF) outbreak causing massive extermination of China’s hogs was not enough, the market disruptions associated with the Coro-
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navirus has only added to the headwinds being faced by the freshly signed US-China Phase One trade agreement. The unforeseen arrival and spread of the Coronavirus worldwide, and subsequent uncertainty this news created in markets, almost immediately began to have this phenomenon labeled a Black Swan event. Made famous in the book The Black Swan: The Impact of the Highly Improbable by Nassim Nicholas Talib written in 2007, this term has become synonymous with key unforeseen events that result in major market disruption. Some might argue that the Coronavirus outbreak does not rise to the level of a Black Swan event, but those of us in agriculture that are depending on more fair and open access to world markets check that box. Taleb, a former options trader and risk analyst specializing in probability and randomness became concerned that generally accepted and widely used economic models had an inherent weakness when it came to the occurrence of low probability events such as we are facing with Coronavirus. The Black Swan concept can actually be traced back to the middle ages when it was thought that no Black Swan (the actual bird) existed. This term, then, became to be used when thinking of an event that was impossible. When in the late 1600’s in Australia, an actual Black Swan (the bird) was observed, this term began to be associated with an event that shattered the notion that it could never occur. From Taleb’s book, he emphasizes that Black Swan events are ones that are unpredictable and have far-reaching implications. Perhaps the most interesting commonality is that when these events happen, there seems to be a strong feeling in the marketplace that in hindsight it seems almost obvious it would occur. Some
