Prepare for the Worst, Pray for the Best
Posted on April 17, 2020
Despite overwhelming evidence from literally every corner of the world, a farmer friend recently related to me that three—not one, not two, but three—rural acquaintances had assured him that “this whole virus thing is just a big hoax to bring down Trump.”
If so, worldwide there’s more than 25,000 graves, over a half million hospital patients, and trillions of dollars of lost equity to prove them wrong. Dead wrong, in fact.
The Covid-19 virus is not a hoax. Billions more people have months more of restricted movement and, as that occurs, local, national, and international markets will become more restricted, too.
When will these almost frozen markets—hotels, restaurants, airlines, ports, cities, and nations—thaw? No one truly knows but plan on the worst and pray for the best and you’ll be prepared for everything in between.
What’s already baked into this growing calamity is skyrocketing unemployment and plunging U.S. Gross Domestic Product (GDP). If we’re lucky, economists predict the number of unemployed Americans will hit 10 million in the coming weeks and 20 million in the coming months. If we’re unlucky, well, the sky’s the limit on both.
Likewise, the lucky version of GDP suggests a 25 percent decline in the
April-through-June quarter. Unlucky means 40 percent down.
American farmers and ranchers already know what unlucky looks and feels like. The week most “shelter in place” orders were issued by big states like California, Illinois, and New York, futures prices on nearby contracts of corn, soybeans, wheat, hogs, and cattle got pummeled.
In just days, however, the biggest market driver, panic food buying, receded and markets rebounded to near or above pre-Covid-19 levels. Part of the rise was tied to market speculators who believe China, a key U.S. ag customer slammed by the disease in January and February, was re-entering U.S. grain and meat markets.
Regardless, 2020 farm income prospects remain dismal. Should the U.S. economy take the lesser predicted hit, private forecasters see U.S. corn and soybeans returns clipped $50 to $90 per acre, or a staggering $9 billion to $16 billion reduction in gross income for just those two crops.
And, foresee Brent Gloy and David Widmar, whose firm Agricultural Economic Insights issued that forecast March 23, U.S. meat markets could have an even tougher time.
First, meat purchases are highly dependent on consumer income. During 2008’s Great Recession, “…per capita consumption of all meat… turned lower,” they note and, worse, “…beef consumption took nearly 10 years to recover pre-recession levels.”
Moreover, since more than half of every food dollar is spent on meals outside the home, closed restaurants and limited food pick-up sites likely point to weakening livestock and poultry prices.
Ethanol producers aren’t spared either. The oil price war between Saudi Arabia and Russia drove crude oil prices so low in mid-March that you could buy a barrel of crude oil for nearly the same price as two, choice rib-eye steaks.
That’s right, 42 gallons of crude oil—from which refiners can “crack” 16 gallons of gasoline and other products—cost $24 while two lovely, ready-to-grill rib-eyes cost just $22.
Crude’s crash, and Covid-19’s deep bite into nationwide fuel sales, caused the Renewable Fuels Association, ethanol’s powerful lobbying arm, to announce March 23 that its members would soon cut two billion gallons of “annualized output” from its forecasted 15-billion-gallon 2020 production.
That 13 percent drop in U.S. ethanol production means about 700 million bushels of corn used to make it now returns to the already overwhelmed market as free stocks. Free, indeed.
Ethanol could be ag’s canary. While not a perfect example, it is a sign of how quickly and badly markets sicken if some outliers choose to follow their own “It’s-a-hoax” rules and not the rules of civil society.
And that’s just ethanol; it’s only bushels and jobs. It isn’t lives. Not yet, anyway.
And it certainly isn’t a hoax. None of this is.
© 2020 ag comm