Markets starting to reveal new demand paradigms — this week in the grain markets



Grain markets ended the Easter-shortened trading week with some heavy data and policy dumps, notably from the USDA and OPEC. On Thursday, April 9th, we got the USDA’s monthly WASDE report, although these estimates were largely discounted even going into the report given the ongoing COVID-19 related demand fluctuations. For the most part though, grain prices on the futures board were able to find positive gains relative to last Friday’s close.

Conversely, the meeting between OPEC and Russia was watched with bated breath by the world to see if they were going to cut production or not. In it, OPEC and Russia agreed to cut their oil production in May and June by about 10% or roughly 10M barrels of oil per day. However, investors were hoping to see a bigger cut and thus, oil prices dropped nearly 8% in Thursday’s trading alone.

Much of this drop was associated with the fact that estimated global oil demand in April would be down about 25% or 25M barrels per day in April, but the aforementioned production cuts don’t happen until May. In the U.S. alone, it’s been estimated that if COVID-19 lockdown conditions persist, gasoline demand will drop by about 55% from pre-pandemic levels.

Bottom line is we already know that there’s drastically less oil demand out there, which means that there’s drastically less ethanol demand, which means that there’s drastically less demand for corn. For example, this past week, POET announced it is idling 4 plants (including one new one), which, combined, account for roughly 110M bushels of annual corn demand (or 2.8 MMT if converting bushels into metric tonnes). Should that gasoline demand decline persist for a full year, this would equate to about 2.7 billion bushels of corn demand being lost (or about 68.6 MMT!) from the entire U.S. ethanol industry.

The by-product of less biofuel production is less by-products, namely less DDGs and soymeal. This intuitively has had an impact on the feedstuffs market. For example, this past week on our Combyne cash grain marketplace, we saw feed barley and feed wheat prices that traded anywhere from $10 – $20 CAD/MT higher than the previous week! As we eventually push to a new supply/demand equilibrium in our COVID-19 food supply chain, I’m cautious of significant further upside for feed grain prices, especially with protein demand dropping dramatically without restaurants/retail buying. The only bullish factor at this point is that fertilizer deliveries will start to make freight more expensive. The downside factor glaring us in the face is the amount of corn that is might be going directly into the feed column (instead of ethanol).

That said, the USDA lowered their estimate of how much corn is going into the ethanol column in their April WASDE report by 375M bushels to 5.05 billion bushels. While leaving corn exports the same, they also raised corn going into the feed market by 150M bushels, a number I think is low. Ultimately, U.S. corn ending stocks were raised by 200M bushels to climb back above 2 billion bushels. For soybeans, exports and residual use were lowered to raise ending stocks by 55M bushels, well above pre-report expectations.

Many grain market participants were more interested though in what’s happening down in South America, given the dryness in southern Brazil and parts of Argentina. The USDA did recognize some of the hotter weather, dropping both Brazilian and Argentine soybean estimates, but they kept corn production numbers the same as the March WASDE. Something to keep in mind here is that the USDA’s estimates are based on the final collection of data submitted weeks before the actual publishing of the WASDE report. And, in current COVID-19 situation, a ton of factors can change in just 2 weeks.

Looking at the bigger picture, the IMF is now saying that the world will suffer its worst recession since the Great Depression! They’re not expecting a partial economic recovery in 2021 if the COVID-19 pandemic fades and we see an easing of current lockdown/containment measures. From a quotable standpoint, the CEO of private equity monster Blackstone sees the financial impact of COVID-19 on the U.S. economy erasing roughly $5 Trillion, or nearly 25% of the country’s total annual $22 Trillion GDP. A good indicator of this has been the 16.3M people in the U.S. who have filed for unemployment benefits in just the last 3 weeks. This is literally unprecedented as the chart from The Block shows below. Also, one-third of all renters in the U.S. have not paid their April rent yet!

In Canada, more than 4M people have filed for unemployment benefits and that at least 15% of the country’s workforce would likely be laid off in March or will be in April. For perspective, currently, the official unemployment rate in Canada is 7.8%, which would be the worst since April 1997. Specifically, in Alberta, Premier Jason Kenney predicts that unemployment in the province to climb above 25%. With the food supply chain looking for more workers, there are definitely jobs available, but it’s likely a matter of people deciding if they’re willing to do some “tougher” work today versus absolutely needing to do it a few weeks from now when EI doesn’t cover the bills.

To wrap things up, Prime Minister Trudeau announced on Thursday that normalcy in Canada won’t return until a vaccine is available and that “we will have to remain vigilant for at least a year.” This despite the uncertainty of how close the country is to seeing its COVID-19 cases peaking. That said, some incredible journalism by Globe and Mail reporters Kathy Tomlinson and Grant Robertson have made it now clear that the Canadian government had the information to make better proactive decisions, and it didn’t. Quoting them, “It appears warnings were either played down, forgotten, or ignored by government, putting front-line medical workers at heightened risk and health authorities marshalling every available resource just to catch up.” The only thing they forgot is they also upended the economy.

Of note, British Prime Minister, Boris Johnson, spent a few days and nights in the ICU this week due to his own COVID-19 complications. If a world leader passes because of COVID-19, the WHO and China are going to have work on saving face very quickly with everyone else. That said, should our political leaders also have to answer for their inaction? Just some thoughts for us to ponder, amidst all the other reflections that happen with the annual Easter long weekend.

P.S. take it easy on the chocolate!

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