Big AG Issues Bow To Weather Markets For Now

BIG AG ISSUES BOW TO WEATHER MARKETS FOR NOW

BY JOHN MILLER

It is difficult to look back and try to understand the across the US each day. Barely measurable until early March, this full impact of recently felt outside forces on agri- disease has been begun to accelerate after what seemed to be a culture markets in the short time since we entered ‘bending’ of the curve in early June. The CDC suggest that this data 2020. It is true that the wide-ranging trade dispute shows a continued acceleration of the first wave of the pandemic, between the US and China has been ongoing for and not a second wave, although increased testing probably plays some time. However, China’s overall progress on a role. This information is critical to agriculture since government ag purchases agreed to under a ‘Phase One’ portion of a broader policies limiting travel and commerce has a swift and direct impact trade deal has become hotly debated since the start of this year. on agricultural businesses with employees, transportation of agricul And it was about that same time that we began to hear about a tural products and services, and over demand from consumers that previously unknown and highly contagious virus that become knows themselves are limited in their ability to maintain travel and other as Covid19. There is no question that these two issues, and the purchases. Apart from our opinion of the need for broad restric broader implications, greatly overshadowed the supply, demand and tions, it is the political uncertainty of future government action that macroeconomic factors that largely affect agricultural markets on a will keep agricultural markets on edge. day-to-day basis. As you can see from the December corn futures chart, by late April, the price had dropped to multi-year lows for this For Valley farmers, corn and grain sorghum are vital crops. The time of year. The December cotton futures chart shows a similar Valley has a long history of using corn and grain sorghum as a path, trading down to a lowly 55 cents per pound at about that same key annual rotation with cotton. In addition, a lot of commerce has time. The US-China trade dispute, and our ability to overcome developed around the handling and export of these commodities to Covid19 remain the key issues of 2020. But has these two charts feeding operations throughout Mexico. It would be hard to calcushow, the months of June and July are the most volatile time for late the size and scope of cross-border business created by this commodity futures. A lowered acreage adjustment for corn (down trade. There are a lot of jobs associated with production support 5 million to 92 million acres) and cotton (down 1 million to 12 million services, handling, transportation and brokering Valley farm acres) coupled with a hot and dry US weather forecast reminds us products into Mexico. To sell at profitable prices, Valley farmers that the traditional worries over weather and ultimate production can need help from the futures market which builds in information from still rule commodity markets during the summer. around the world to determine daily values. To better understand the impact of Covid19 on agriculture, one only needs to look at the US Fuel Ethanal Production chart. This shows where the annualized production of ethanal across the US dropped by half from almost 17 billion gallons to 8.5 billion gallons over this past spring as Covid19 related travel and work restrictions took effect. This was the direct result from a decline in gasoline demand over that same period. Fortunately, you see where ethanal demand has clawed its way back to 13.5 billion gallons annualized as some restrictions on work and travel have been lifted. We now have to wonder if the acceleration in Covid19 cases will see a There is no question that Covid19 carries with it the greatest point return to more restriction and again foster reduced ethanol demand of uncertainty for agricultural markets, and commerce in general, for which would likely be bearish corn prices. The corn export chart 2020 and perhaps well into 2021. Until a vaccine is found, it seems shows a similar affect. You can see from the US Corn Export Sales almost impossible to understand the nature and duration of policies Progress chart that a combination of Covid19 affects worldwide being implemented to try and reduce exposures. The CDC daily coupled with a challenging agricultural trade environment has kept caseload chart shows that we are seeing up to 50,000 new cases US corn exports far behind year-ago levels, and below the seasonal

Fortunately for Valley farmers, grain sorghum exports have been on the uptick lately. You can see from the Chinese Sorghum Imports chart that China all but left this commodity by 2019. Tariffs associ ated with the US-China trade dispute had all but stopped all US to China grain sorghum trade. You can see from this same chart that China has returned to purchasing grain sorghum from the US and this has had a direct positive impact on Valley prices since Gulf port locations like Houston and Corpus Christi have found more value for now. Looking at the overall US Milo Export Sales Progress chart, you can see that sales began to increase rapidly after the first of year as trade restrictions into China and associated tariffs began to be relaxed. Notice the abrupt increase over year-ago levels, and greatly improved prospects of catching up to prior USDA projec tions. This is very good news for the Valley farmer, and this has already helped them to achieve better prices than anticipated just a few months ago. The increased values for grain sorghum have also helped corn prices as these two crops compliment each other to local buyers and shippers.

Now that we have reviewed two major outside forces that are affect ing farmers in a way not seen before, let’s talk old school market movers. As mentioned above, the USDA has recently lowered its estimates for acres of corn and cotton which instigated a sharp in crease in futures prices as you saw in the price charts above. This move by the USDA was very much welcomed by farmers since the until that time, the negative effects of Covid19 and the China trade dispute were ruling the day. Suddenly, the pump was primed for a classic July weather market that often sees futures prices peak for the season. As if on cue, the early NOAA long term weather fore cast for July indicated well above normal temperatures across the US, and no more that normal to below normal rainfall for the major US corn growing areas. The NOAA forecast maps shown here are heavily followed by speculators and hedgers throughout the sum mer and have suddenly grabbed everyone’s attention.

The NOAA, like all other weather services, provides a forecast. And in Texas we understand that forecast often don’t materialize. If good rains materialize soon, and Covid19 and China trade talks worsen, we could be back to springtime lows. But it is almost as important to have the perception of hot and dry as it is to have those condi tions materialize. The beauty of the futures market is that farmers can capitalize on the uncertainty associated with unknowns such as weather regardless if the worried over event occurs. For now, speculation about weather, and the ultimate yields outcomes for corn and cotton are the talking points. The US Corn Yield History and Trend chart tells a huge story of the end game. Will US corn farmers achieve the 175.1 trendline prediction? If adverse weather takes this yield down even 5 bushels per acre nationwide, futures price prospects improve dramatically and may even help us find profitable opportunities for the 2021 crop. Even with cotton, the story is similar. While Valley cotton looks tremendous, the crop across the Texas Panhandle is suffering under extreme hot and dry conditions that has led to the loss of considerable acres. With corn and cotton, we need to see consistent improvements in demand, but good old-fashioned weather forecast has at least temporarily helped keep lower prices at bay, and perhaps set us up for better pricing down the road.