Demand is plunging — outlook for agriculture
Do you know what our biggest problem is? Let me tell you. Low prices cure low prices. At least that is how the market is supposed to work.
Our problem however, is that Covid-19 short-circuits market signals disconnecting critical market forces so that despite low prices, consumers cannot access markets to take advantage of low prices offered them. Instead of demand increasing as prices fall, demand for things like beef, pork, chicken, milk and cheese, is continuing to contract because of the shutdown in the economy. Urban areas are now being slammed with the virus and it is going to get a lot worse before it gets better.
The global pandemic has much further to go. India, Africa and South America will soon join the collective misery. The global economy is going to contract to a degree that rivals the Great Depression. The commodity markets are not working because the market is not working. These extraordinary circumstances inhibit the market’s ability to heal itself. It doesn’t matter how low the price of pork goes, for example, if there is not freedom of commerce. More than ever we need a fully functional market place and when we recover to that level is everyone’s guess. This may be the scariest thing that I have ever seen in ag markets.
Milk futures collapsed and cheese and butter trade had locked up in a stall. Our office manager had to go to two stores to get her family’s normal weekly 4 gallons of milk because of store limits. Some people will drink less milk. Frozen products such as ice cream are not as easy to do with home delivery. It will melt on the steps. The questions would seem to be how much milk does this industry have to dump, how many cows do they need to kill if kill plants are operating, and how big that the rescue aid check from DJT (Donald J Trump) is going to be? This industry was coming back from a massive structural shakeout and just when it was getting back on its feet it is getting punched in the jaw again.
The price of choice beef initially soared as consumers cleaned out meat cases and retailers came back at packers with big orders to replenish stocks and build an inventory in case that processing plants closed. Retailers went through the Tyson plant fire last year and know how that market responded. We saw cash cattle prices plunge while beef prices soared when it was just one packing plant in Garden City last year. They compensated at other plants to maintain the kill and the plant was repaired making the loss of kill capacity temporary. The potential disruption to the kill if packer workforces are compromised by Covid-19 is much larger than that seen by a single plant. There will be less flexibility to compensate by adding kill to other plants. Workers are going to get more and more concerned about their safety as the epidemic worsens and harder to keep on the job even with bonuses.
This will be the same story, different verse, for the poultry and pork industries. Different than for beef, which is less dependent on exports, wholesale pork prices have been crushed under the weight of supply, despite Chinese exports. We have 34 cent cash bellies and light trade volume. Slicers must not know what to do with all of them. While exports to China are good, other exports, particularly to Mexico, are suspect. There will be temporary massive unemployment. I think that U.S. consumers will need more than one $1200 check to get through this and maintain consumption. With food service and airline revenue down 90% and the restaurant trade relying on take-out, market access to consumers has been severely restricted. Grocery sales will shift more and more to home delivery as consumers avoid supermarkets. I see demand for cold products requiring refrigeration deteriorating. The poultry industry has been on a treadmill adding 3% to chick sets each week. They are not going to be able sell enough chicken through the KFC drive-up window. The poultry industry can be the quickest to respond to a market disaster. All that they have to do is set fewer eggs and chicks and within a few weeks there is less chicken. They need to scramble some eggs.
Livestock industries are going to have to pull back the reigns on production. Their expansion has slammed into a wall and exports are not going to bail us out. Livestock industries are going to have to figure out ways to re-connect with consumers ASAP. Their survival hinges on it. $9.5 bln in government checks is not enough to fix this.
As a corn producer, I took 85% coverage at 3.88 from crop revenue insurance and 3.70 is the target price for the PLC farm program elective. Farmers also know that they will get another payment from Trump. By hedging the crop too, you will have four different pools of revenue that will combine together that frankly should cover costs and even produce a profit. Not only are lower prices no longer a threat but they become your friend until 2021 when we will need a set-aside because of the gargantuan carryover.
As to ethanol. . .again same story, different verse. The way to grow demand is to offer a better price to buyers. Unfortunately, we are doing the opposite. The price of ethanol has fallen but the price of competitive unleaded gas (RBOB) has fallen much more as Russia/the Saudis try to injure our shale oil and biofuel industries with a price war. Their attack is working. We are getting murdered. The rig count is plunging and ethanol plants are closing down wholesale. With retail ethanol prices 20-30 cents gallon above gasoline, few consumers other than me are going to buy ethanol.
Demand for ethanol is plunging from the loss of mileage resulting from the general shut-down of the country. With ethanol production falling sharply it will be a task to see ethanol prices fall which is what they need to do to compete with unleaded gas to grow ethanol demand. Here is that disconnect again where the market cannot heal the damage being done. Until consumers drive again this is unfixable.
Here is the other kick to the gonads…instead of messing around with SREs, EPA is going to just stop compliance enforcement of the RFS altogether from refineries. Personally, I think that the very survival of the ethanol industry is currently in question. The RFS has been effectively dismantled by the EPA during the Trump term in office.
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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