Market analyst: Bearish corn, bullish wheat?

Ray Grabanski
Special to the Farm Forum

04/28/20 — Commodity markets have been dominated the past few months by COVID-19. Finally, spring planting is beginning while the coronavirus seems to be fading as the flu season comes to an end. That’s great news for the wheat market, which has had some good news the past few weeks. But for corn, that isn’t necessarily good news due to the impact of the ethanol market on corn farmers.

The coronavirus now has at least 3.05 million infections worldwide (up 72,393), with 211,522 died (+4,719). U.S. infections are nearing 1 million, but the 24 hour addition (22,536) is the second smallest since April 1 — indicating a continued slowing for this flu season. It’s likely it will continue to moderate into summer, buying the world a reprieve where they will get to examine what worked, what didn’t and why and evaluate the decisions that were made. The best performers worldwide include Japan, with only 385 deaths and 13,614 infections (2.8% death rate) which indicates the actual infections are probably only three times those reported. This is a very low infection rate for populated Japan! Worst performers would have to be Italy (26,977 dead and 199,414 infected for a 13.5% reported death rate) as they likely have 14 times or more actual infections, meaning over 1 million people. Close following is Spain (10.3% death rate on 229,422 infections), and Sweden (12% death rate on 18,926 infections).

Yet, countries that did not shut down their economies are probably better off in spite of worse health statistics on COVID-19, and their suicide rate is probably much lower, too. So a great deal of evaluation will need to go into what worked and what didn’t and why. Pro Ag thinks social distancing will continue (especially during flu season) until a vaccine is developed — which could be two to six years — but closing a country is unlikely to occur again in 2021 or 2022. Some industries which rely on crowds will be devastated (concerts, Disneyland, Vegas, pro sports) while others will come back (restaurants but maybe not bars).

Attention now turns to starting up the world economy, with the energy industry devastated by three months of extremely low and unimaginable demand. The glut has caused the lowest crude oil price ever, which in real inflation adjusted terms means it’s almost free. Energy demand won’t get back to old levels anytime soon, but it will improve greatly once we get the country opened again in May. If energy demand dropped 60% the past few months, we might gain half or more of that back the next three to six months. But that still leaves a tremendous surplus (imagine the impact of these demand changes in any market).

Most impacted in grains is corn, which is 30-40% energy today in the form of ethanol. But acreage shifts from corn to soybeans/HRS wheat will also hurt those markets.

We note a few things in the crop progress numbers: 1. Corn 27% planted (7% ahead of normal), 2. Soys 8% planted (4% ahead of normal). Early planting usually means big crops, so that’s bearish corn/soybeans today as if the early planting continues, we’ll have to start plugging in above trend yields for 2020.

But HRS wheat was only 14% planted (15% behind normal) this week and winter wheat conditions were down 3% to 54% G/E. The Pro Ag winter wheat yield model dropped over 1 bu/acre the past 2 weeks after the cold weather (freeze) in HRW wheat. These are quite bullish developments in wheat as it indicates a loss in HRS wheat acreage is likely due to prevented planting or late planting, and we lost 0.4 bu/acre yield potential in winter wheat this week and 0.6 bu/acre last week. That probably is a 50 mb loss in wheat production potential or more in 2 weeks, and that is very bullish wheat prices. If it weren’t for COVID-19 and the horrible energy market, wheat would be in a bull market.

It’s amazing what the Corn Belt can plant in one week (37% of Iowa, 29% Illinois, 39% Minnesota, and 18% Nebraska) and 20% of the U.S. acreage in one early week in April. That’s an outstanding planting week for these states. Can it continue?

At least finally we can focus on agriculture and not medicine, as the virus thing is getting old for everyone. But there are impacts, such as the pork industry where they are contemplating euthanizing market ready hogs as they do not have the capacity to butcher them with so many plants idled with workers who have the virus. These are things you never thought were possible anywhere but Venezuela, but here we are in the U.S. with some crazy short term impacts from the coronavirus. Let’s hope the worst is behind us.