COVID-19 gripped the commodity markets again this week. As the virus spreads, and containment efforts ramp up, the worst may be yet to come with commodity prices.
“The fact of the matter is we have a virus in the United States and around the world that is expanding, and it’s new to the world,” says Jim McCormick of AgMarkets.Net. “The market is a little bit of panic right now.”
McCormick thinks as the virus spreads, and the potential impacts multiply, the long-term impacts are also a major unknown.
“China took around 25 to 30 days to max out before it kind of started leveling out,” he says. “We're in the beginning stages here in the United States. I fear it's going to get worse in the next couple weeks.”
Whether the market moves this week are overdone or justified, some analysts think there’s more room for prices to drop.
“I don't I don't think we've seen the bottom quite yet,” says Brian Roach of Roach Ag. “The equities and financial markets are kind of one thing, but typically the crop markets trend lower anyway into April and May, and so I think we're accelerating that.”
No matter how fast COVID-19 spreads, consumer will still eat. However, everything from disruptions to restaurants and the number of people eating out to hiccups in the movement of products to eat, could also cause disruptions for agricultural markets.
“The problem with the commodity markets has got right now is logistics,” explains McCormick. “What are you going to do with products. Consumption is going to drop near-term.”
He says in terms of the beef market, logistics concerns come in when moving product from point A to point B.
“How do you get that beef from the packer to the grocery store and will that trucker be willing to take that?” asks McCormick. “That is why the markets are very concerned about that demand at the moment. That demand is inelastic. In the long-run it will come back, but for right now the fear is of the unknown.”
Roach thinks the beef sector could see the biggest disruption short-term, but he says moving grain could also become a concern.
“Port could close without port workers and you without river cargoes being loaded, I think there'll be disruptions, but not certainly a halt to all of it,” adds Roach. “I think we're probably 20 to 30 days from seeing the peak, and so between now and then, there's a huge unknown.”
As markets continue to fall, the commodity markets are expose to any concern. That fear could continue to impact commodity markets in the short-term.
“The fact of the matter is you have to be realistic right now,” says McCormick. “Unfortunately, it's probably going to get worse. When the market is in freefall and no one knows what to do, it tends to be sell first and ask questions later. The reality is we are dealing with an inelastic product.”
Worldwide, the virus is continuing to impact financial markets. Roach says that means traders are liquidating assets and the stock market has margin calls. Roach adds no market is considered safe at this point. He says it’s a rush to liquidity to cover some of these exposures in the financial market.
“I think that the Fed will pump a lot of they will be injecting a lot of liquidity into the market. And at some point when the financial markets not so economic but financial markets see a green light will see a sharp response. I don't think that's a ‘V bottom.’ It's probably a ‘U’ that feels like an ‘L’. But the reality is the financial markets will respond to it when the green light comes on. I just don't know exactly when that will happen.”