The new coronavirus continues to spread throughout China and around the world. In China alone there are now 28,000 cases reported with over 560 deaths as of Thursday last week. Cases in the U.S. now total at least 11. More airlines have announced travel bans to China in an effort to limit its spread, along with travelers from China being held in quarantine. The Chinese government has announced it will be injecting $174 billion into the country’s economy to help offset financial losses from the outbreak.
Initial estimates on the economic losses from Coronavirus show the costs could approach $120 to $1250 billion dollar globally. By comparison, the SARS virus in 2002 cost the global market $54 billion. The difference between now and then is how much more of a factor China is in the global market at the present time.
China has also reached out to the United States to ask for an adjustment to the Phase 1 agreement, mainly the volume of imports that were stated. At this point it is highly unlikely we will see China import the volume of commodities it would take to reach the dollar value that was reported. The real deciding factor will be how long it takes to contain the outbreak, with some predictions that the worst is yet to come.
One of the bigger fundamental stories right now is the start of the South American harvest season. Soybean harvest is underway in Brazil and yields are coming in much better than expected to start. Just as much interest is on harvest pace though, as progress is behind normal, which could limit the window for the planting of the Safrinha crop. Trade is also monitoring soil moisture in Brazil, with Mato Grasso only seeing 57% of normal precipitation recently. This state produces 42% of Brazil’s Safrinha crop so any decrease in plantings will have a major impact on total production.
As the Brazilian harvest ramps up, so will the pressure on the global soybean market. Asian buyers are reportedly covered on needs for the next several weeks and will wait to see how far futures set back before extending coverage. Brazilian farmers and exporters have been active sellers to capture as much Asian business as they can prior to U.S. and China enacting Phase 1 purchases which has further pressured futures. To see this pressure on the complex last for another month or two would not be surprising.
While the U.S. may not see exports of whole soybeans in the near future, it could easily see elevated demand for soy meal. Many Argentine crushers are facing economic issues and are struggling to satisfy demand as production has been slowed or idled altogether. As a result, buyers have started to surface for U.S. meal and surprisingly pushed our sales above Argentina in recent weeks. Even with higher values we have seen buyers surface for U.S. meal as the higher protein content compared to Argentina’s can negate the price differential. Typically, Argentina is the world’s leading soy meal provider.
There have been changes in the outside markets that have been favorable for commodity values. The main one of these has been a decline in the value of the U.S. dollar. A weaker U.S. dollar tends to bring the U.S. more export business as a buyer can book more product for a lower value. This is especially the case on wheat and is a primary reason behind the rally we have seen in wheat over recent weeks.
We are also seeing a shift in the entire market that needs to be monitored. For several months we have seen strength in the financial markets with both the DOW and NASDAQ hitting record highs. There are now some indications a reversal could be coming as investors start looking elsewhere for potential gains. One of these has been gold, where values have rallied to 14-week highs. If the financial markets would correct, it would likely bring buyers to other commodities as well, especially those that are currently undervalued.
We are seeing a division in the global corn market that could end up being beneficial to the United States. In the latest USDA data, the world corn carryout projection was lowered to 297.8 million metric tons. While this was not a huge decrease from month to month, it continues a trend of global corn production falling short of corn demand. For the year world corn demand is expected to outpace production by 23 million metric tons this year. This could end up making the United States one of the main suppliers to the world market on corn.
We are seeing a reaction to the Phase 1 agreement in Brazil as well as the United States and China. Brazilian farmers have started selling large volumes of soybeans, both for this year’s crop and next year’s expected production. Farmers and traders in the country believe soybean futures will fall as China sources more product from the United States and want to take advantage of the current market.
This commentary is the sole opinion of Karl Setzer, market adviser for AgriVisor. This is intended for informational purposes only and not to be used for specific trading recommendations. The information used to generate this commentary is gathered from a variety of sources believed to be accurate. If you have any questions or would like additional market information, feel free to contact Karl at firstname.lastname@example.org. You can also follow Karl on Twitter via @ksetzergrains.