The recent spread of the novel coronavirus, whose resulting disease has become known as COVID-19, has directly impacted people in all corners of the world since it surfaced in the Wuhan province of China and began spreading earlier this year. The ramifications have been seen in global equity and commodity markets as investors have responded to economic developments and sought safe assets. In this piece, we will take a fact-based approach to highlight many of the impacts on markets around the world along with a discussion of potential implications for U.S. soybean supplies.
In previous articles, contributors to USSOY.org have highlighted the special status of an essential industry that the U.S. government has placed on the food supply chain while also discussing the advantages of the U.S. supply chain that have limited the impact that the virus, and the steps taken to prevent its spread. These steps include new actions to maintain social distancing, shutting off access to visitors and new cleaning procedures at grain handling and processing facilities. In the transportation sector, quarantine protocols at ports are in place should any member of a vessel crew test positive for the disease. Those specific articles highlighting measures in the U.S. soybean supply chain can be found here while precautions in the transportation sector can be accessed here.
In late March, increased measures to curb the spread of COVID-19 throughout South America resulted in some disruptions in the local soybean supply chains. According to World-Grain.com, local authorities in both Brazil and Argentina imposed strict measures to isolate the public to curb the spread of the disease. In Brazil, where most soybeans are brought to port via trucks, drivers reportedly had experienced issues getting necessary goods such as food and tires along their routes while delivering soybeans due to local stay-at-home orders. By the end of the month, it was reported that issues were relaxed allowing for better movement of soybeans to export terminals.
In Argentina, similar isolation measures limited the movement of soybeans to both crush and export facilities. While safety concerns still linger in Argentina, Thompson Reuters reported that the government had issued a resolution in late March stating that workers of jobs related to foreign trade were exempt from the country-wide stay-at-home orders. This has reportedly alleviated the transportation bottleneck and brought about improved movement of soybeans early in April although some laborers are lobbying for additional restrictions.
According to Roberto Azevêdo, the Director-General (DG) of the World Trade Organization (WTO), global commerce is expected to surpass the slump experienced in the 2008-09 global financial recession to decline by 13 to 32% in 2020. According to DG Azevêdo, the greatest impact is expected to be felt in the electronics and automotive product markets. The accompanying chart published by the WTO Secretariat outlines potential scenarios for world merchandise trade and highlights scenarios for a “V-shaped” recovery to occur in 2021 in both the agency’s Optimist and Pessimistic scenarios. Foreign demand for agricultural products such as soybeans has been shown to have felt a limited impact from measures to thwart the spread of COVID-19. In contrast, buyers have instead rushed to the marketplace in some instances to ensure food security. This is highlighted by reports of consumers in the U.S. and state-buyers in Southeastern Asia and the Middle East stepping up purchases of rice and wheat. According to Thompson Reuters, curbed exports of rice by Thailand and increased purchases of grains by Iraq and Egypt have resulted from food security concerns. This same article underscores ample global supplies in the U.S. and other sources thanks to larger plantings and improved yields. One such example of this occurred when Chinese buyers secured cargoes of U.S. soybeans as a result of shipping delays in South America.
The spread of COVID-19 also has sparked fears that the ongoing global economic slowdowns have pushed economies into recessionary territory. This is likely to have lasting negative impacts on affected economies around the world. According to the International Monetary Fund (IMF), a recession is a sustained period when economic output falls and unemployment rises. The IMF’s Managing Director Kristalina Georgieva told G20 Finance Ministers and Central Bank Governors that “(t)he human costs of the Coronavirus pandemic are already immeasurable” and that the negative economic outlook for 2020 calls for “a recession at least as bad as during the (2008-09) global financial crisis or worse.” It remains to be seen just how long current containment measures will remain in place and the duration of these will likely define the extent of damage to global economies. In Georgieva’s statement, recovery is expected to occur in 2021.
The impact that COVID-19 fears have had on equity and commodity markets has been decidedly negative as demand destruction from shelter-in-place orders around the world have reduced demand at restaurants shifting more demand to retail sectors for eating at home. The chart above shows the relative price performance of key markets indexed against January 14, 2020 when the outbreak was first confirmed by China. The two markets that have shown the worst performance over the period have been West Texas Intermediate (WTI) crude petroleum futures, whose losses reached as high as 65%, and Lean Hog futures, whose losses totaled 49%. While these two commodities have struggled with other bearish fundamental hurdles on the supply side of the market over the studied period, demand destruction has helped to accelerate losses. Representing two key global equity markets are the U.S. Dow Jones Industrial Average (DJI) and the London Financial Times Exchange 100 (FTSE) which have experienced largest losses of 36% and 34%, respectively, in data through April 3rd. U.S. soybean futures, measured against the nearby May contract traded on the CME, have fared relatively better over the course of the pandemic with greatest losses of 14% based on the January 14 settlement. Relative support to the soybean market over the period has been attributed to the short-term supply disruptions in South America highlighted in the proceeding section.
U.S. farmers and ranchers were polled by Farm Journal in March as to the expected impact that COVID-19 might have on their operations. Data collected through the end of March indicated that about one-third of the grower responses indicated that they were not worried about getting sick with the coronavirus, while about 38% responded that they were not worried yet that could change any day. Impacts to farm labor have been limited, with some respondents indicating that they have been quarantined. Most U.S. farmers live in rural areas, providing them with an inherent higher level of social distancing than people living in more densely populated urban areas. The impact of the social distancing measures imposed to thwart the spread of the virus has proven to be a positive for some E-commerce applications that sell agricultural inputs. According to AgWeb.com, one retailer of inputs including seed, fertilizer and crop insurance reported a year-over-year increase in farmer buying requests of 225% in the first two weeks of March.
The Federal Reserve, the Central Bank of the United States, slashed its overnight lending rate to near zero percent following an emergency meeting on March 15th to help cushion the economic impact of the pandemic on the U.S. financial system. According to the Fed, its “role is guided by its mandate from Congress to promote maximum employment and stable prices, along with its responsibilities to promote the stability of the financial system.” This was the first U.S. institution to respond to the crisis and has since been followed by Congress who passed the Corona Aid, Relief, and Economic Security (CARES) Act on March 27 which established $2.2 trillion in aid to help keep the U.S. economy afloat during the pandemic. Key aspects of the Act included $250 billion in unemployment insurance coverage, $349 billion in loans to small businesses and $500 billion in loans, loan guarantees or other aid to businesses and local governments. According to Mark Giddings, the chief executive officer of an accounting firm in North Dakota, U.S. farmers should be qualified for the loans under the Small Business Administration. These loans would help farmers meet their cash needs while maintaining existing labor at a period in the growing cycle when demand for seed, fuel, and chemicals necessary to grow summer crops are elevated.
According to USDA’s latest planting estimates for the 2020 U.S. summer crops released at the end of March, soybean plantings totaling 33.796 million hectares are seen rising nearly 3 million from historically challenged efforts in 2019. These larger plantings, combined with ongoing efforts for the U.S. to maintain safe, reliable food supplies, are expected to result in ample new-crop supplies for the U.S. soy industry to deliver to end-users both domestically and abroad.