‘This will be a disaster worse than the trade war’
When U.S. Airways flight 1549 took off from LaGuardia airport in January 2009 piloted by Captain Chesley Sullenberger, “Sully”, it was a nice day and he had every reason to expect that he would reach his destination. While my life was not in danger, I felt a little bit like Sully must have felt that a.m. in the past few weeks relative to the corn market. My destination was a spring rally in the corn market. I still had 18% of my 2019 corn crop in the bin and was looking for the opportunity to unload it above $4 bushel. The basis was extraordinarily good at the local ethanol plant, 5 cents over Chicago, with no reason to expect that to fail. Feed usage was strong as all sectors of livestock/poultry were expanding production with both weights and numbers, ethanol margins had recovered from late last year and some plants that had closed then were back on line at 50% production. Yields were poor in our region so supply was not burdensome and with ethanol plants operating and strong local feed demand, export demand was not a dominant factor. Corn basis should have held up until there was confidence in the new crop being made. I did not intend to hold it that long. Seasonals said to expect normal spring strength and it was an election year where typically the high comes in April, June or July. DJT (Donald J. Trump) had negotiated 4 trade dealsone with South Korea, Japan, the USMCA and finally a Phase One deal where China had committed to large purchases of U.S. commodities including corn. Then came the geese.
One species was the coronavirus and the other was the Russian/Saudi crude oil direct attack on our shale oil and ethanol industries. They gave us the birds. One minute all engines were thrusting nicely and the next Thawunk! Thawunk! Both main engines for the corn market took hits and the recognition quickly registered that the corn market was going down and we were crying “Mayday” looking for a place to land. My first reaction was to hedge up covering both the old crop in the bin as well as new crop production. Normally we would scale into such sales. Not given the Mayday. This was an emergency. I was not ready to bail out but we deployed hedges as a parachute so that if we had to, we would survive. Actually, that was the second chute. The first was to take the maximum 85% coverage from Federal crop insurance. I could change metaphors here and say that there was smoke coming into the cockpit and the plane was on fire. We could still buy insurance which you do not often get to do when the plane is already in on fire. PLC works best as a farm program when prices are low and it was not hard to see from where I was sitting that we were losing altitude. PLC it was. That is all new crop protection however.
What was apparent to me was that we were about to see the worst hits to the corn balance sheet in a very short time that we have likely ever experienced. When the numbers get reflected by the USDA, they will be ugly. Coronavirus will tank demand for ethanol likely costing us close to a billion gallons or 280 million bushels of demand by August in just this marketing year. The Russian/Saudi attack on the global oil market by dumping supply and crashing the market collapsed the unleaded gas market. Ethanol which typically sells at a discount to gasoline was now selling 40 cents premium. E-10 was priced 20 cents gallon cheaper than E-85 at Star Energy. As that is reflected in the market place discretionary blending will collapse. Ethanol companies are convening emergency board meetings trying to decide how much to shutter plants. Ethanol stocks will surge to records, taxing storage capacity. The ethanol industry is in dire straits. It will get in line with other damaged industries for government financial aid. In context with shutting down production, ethanol plants first widened their basis and then some went out of the corn market altogether. The plant that I sell to went from bidding a nickel over to 35 cents under Chicago, taking 40 cents off their corn bid before leaving the market. I still had corn in the bin at home and I immediately started looking for a place to land. Another elevator not far from the farm has a feed mill and they were still bidding 16 cents under. That was my Hudson River and I changed course to a new destination. The corn market bounced from its initial sharp selloff and the only question that I asked was when you can pick it up. It wasn’t the landing that I expected but given circumstances you have to respond in real time or you will be featured on cable TV’s Worst Air Disasters.
When it rains it pours. One additional nail in the corn markets coffin is the U.S. dollar going to new highs. On the other end of that sharp appreciation is collapses in the Russian ruble, Brazilian real and Mexican peso. Our corn export competitiveness just took a goose in the shorts. Mexico was one of our best corn and pork export buyers and the value of its money and buying power was very abruptly and seriously diluted. The weakness of the ruble and real will offer strong competition for wheat, soybeans and corn exports. What is a record shift in fundamentals should show up accordingly with a record change in the carryover when USDA gets the numbers put together.
I mentioned new crop. We are a long way from landing that one safely yet. I am afraid we lost our engines and the corn market will be a glider controlled by gravity. I mentioned the 85% crop revenue coverage. The spring guaranteed crop insurance price for corn is $3.88. That price was set before the country shut down from coronavirus and the Russian/Saudi attack on our shale oil and ethanol industry. That will be a good price. The PLC target price for corn is $3.70. That will be a good price too. Any rally should be hedged. I think that we will get one more check from DJT because he loves us. This will be a disaster worse than the trade war. They are re-funding the CCC so there will be money again and while they may not call it an MFP payment, I would be shocked if we got nothing. The tools were there for a safety net but you are at the controls and you have to fly the plane. I am not Captain Sully but I plan to set this plane down with the least amount of damage.
David Kruse is president of CommStock Investments Inc., author and producer of The CommStock Report, an ag commentary and market analysis available daily by radio and by subscription on DTN/FarmDayta and the Internet.
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