The markets were off to another messy start on Monday. Everything from the stock market to commodity markets felt the concerns of warning signs the U.S. will fall into a recession the first half of the year.
The Monday freefall marked the second consecutive rocky start to the week. Last week, the tipping point was a double whammy: COVID-19 and an oil war.
“This all comes from an oil production war, which Saudi Arabia had wanted Russia to join in,” explained Davis Michaelsen, with Pro Farmer’s Inputs Monitor. “The said, ‘look, we've been on curtail production for three years. Now, we're done with that.”
“The Saudis said, ‘you know what, we're going to go the other way, and we're going to increase production, we're going to lower our price targets,’” added Joe Vaclavik of Standard Grain. “That was something that was totally unexpected.”
The oil war could result in the marketing being flooded with oil in the short-term. As a result, it’s taking a direct cut out of commodity prices. Vaclavik says the reason is how powerful oil prices can be. He says crude oil is the king of the commodity markets, and so the price drop started to drag other commodity markets with it.
“When oil makes these big moves, and it loses 25 to 30% in a day, you're going see these other markets be impacted,” he says. “Is that something that you're going to have to see play out? If crude stays cheap for three or four months? No, I think ultimately you'd see the corn market, soybean market and the wheat market separate itself from that, but I just think the knee jerk reaction was ‘we've got to sell everything.’ That's what we saw last Monday.”
It wasn’t just crude oil that initially gashed the markets. COVID-19 continues to infect the markets across the board, with fear and panic selling grasping prices.
“This is very dynamic its fairly unprecedented,” says Samuel Taylor, vice president, farm input analyst for Rabo AgriFinance, when explaining COVID-19.
The unprecedented times sparked a historic selloff last week, with the free fall continuing into this week.
“I think the corona virus was a catalyst for the big correction in the stock market, which a lot of people would argue was overdue to begin with,” says Vaclavik. “There's always a catalyst for a sell off or for a correction.”
The catalyst for a major correction in the stock markets, in the midst of not just growing uncertainty around how much the virus will spread, but also how fast.
“What I know for sure is that the coronavirus has been without a doubt the catalyst, at least for this correction in in the stock market, which has been in a 10-plus-year bull market,” adds Vaclavik. “We were due for something substantial here, and now we have got it.”
The cut to commodity markets was ad news or for farmers hoping for higher prices, but good news for buyers looking for cheaper inputs.
“We have relief in progress, and I do expect us to head lower from here,” says Michaelsen.
As heating oil futures fall, it’s creating cheaper retail diesel prices for buyers. However, Michaelsen reminds producers it takes time for the futures prices to trickle down to the retail level.
“There's a lag there,” says Michaelsen. “When you see a big move in heating oil futures, about anywhere from a week to three weeks out, you'll begin to see that impact the farm diesel market.”
Prices are starting to fall, but the bottom of retail diesel prices may be yet to come.
“I think there's room to the downside in that on farm retail diesel price,” says Michaelsen. “I think now is not the correct time to book, because the lag that I've noticed in my analysis between the heating oil futures and the retail price is anywhere from seven to 22 days.”
It’s not just diesel that could be less expensive for producers, but other farm inputs could see softer prices due to the impact of COVID-19.
“My survey shows anhydrous ammonia is off $100 from the same week last year,” says Michaelsen.
It’s possible prices on inputs like anhydrous ammonia could continue the trend to the downside.
“China is a large importer of ammonia for industrial purposes,” says Taylor. “If they have an economic slowdown, this is going to be deleterious to industrial products and deleterious to demand.”
“China uses a tremendous amount of ammonia for manufacturing purposes, not just for fertilizers if they're refusing those deliveries,” adds Michelsen. “Now, we have a system flush with ammonia that's going to drive down your anhydrous price. My subscribers are 50% booked for their spring and summer needs. I'm very comfortable there.”
While nitrogen prices may see some relief, not all inputs could flood the market. Some industry leaders fear a potential shortage could be brewing on certain inputs.
“A lot of the compounds in the chemicals that farmers use on their farms, they're maybe put together in this country, but the small molecules - the ingredients - a lot of those come from China,” says Jon Doggett, CEO of National Corn Growers Association (NCGA). “We know there's starting to be a bit of a disruption in some of that that supply chain, and so if you can't get the ingredients to put together to make your chemical, we're going to have a problem.”
An input at the top of the potential shortage list is phosphates.
“That's a concern because so much of the phosphate that's out on the export market is made and manufactured in China,” adds Taylor.
He says one hiccup in supply could cause a major ripple effect in agriculture.
“If you look at a single province, that accounts for about 14.7 million metric tons of finished phosphate production,” says Taylor. “If 60% of their plants are out of production at the moment, and the rest of the 40% plus are running in a various state of up to full capacity or down to full capacity, you have a significant impact on that supply.”
The potential supply issue is something Michaelsen is also closely watching.
“As they may have difficulties not only manufacturing enough product to keep up with demand, but also getting it shipped out, we're going to see a price response there.”