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Futures Prices Declined Substantially In Ag Markets Since First US Case Of Covid-19
DR. AARON SMITH
KNOXVILLE, TENN.
Another chaotic week in stock markets due to the COVID-19 virus out-break. Stock markets continue to drop, then partially recover. However, the trend remains down providing a strong indication that the bottom has yet to be established. The severity of the outbreak remains largely unknown which is creating massive volatility. Until there is a better understanding of the spread and the economic ramifications of the virus markets will continue to be erratic.
For agricultural markets, futures prices have declined substantially since the first U.S. case of COVID-19 was identified on January 21. Since then, harvest contracts for corn, soybean, cotton, and wheat are down 30 cents ($4.01 ¾ to $3.71 ¾), 88 cents ($9.61 to $8.73), 8.88 cents (69.72 to 60.84 cents), and 52 ½ cents ($5.59 ¼ to $5.06 ¾). The drop in prices comes at a very inopportune time as projected crop insurance prices were set in February for spring crops and producers will soon began spring field work and planting.
From a crop insurance standpoint, making sure revenue products have the harvest price option (this is the default for revenue policies) is essential. Opting for revenue protection with harvest price exclusion (RP-HPE) policies, for minor savings in premium expense, does not make sense in the current low price environment and eliminates the capacity to benefit from improved prices when the fall crop insurance price is determined.
From a marketing standpoint, it is very challenging to find attractive opportunities (basis may be the exception, but it depends on your location). So the best alternative may be to do no additional pricing and wait for pricing opportunities later in the production year for crops. At this time, one suggestion for producers is to evaluate how much of 2020 production is currently priced and what their storage capacity is relative to anticipated production. Conducting this evaluation will provide producers with an indication of the marketing window they are realistically looking at for the 2020 crop (i.e. how much crop will need to be priced between now and harvest and how much production can be priced when the crop is in storage). During low price periods storage can be a powerful tool to extend the marketing year and capture improved prices outside the harvest window when prices are typically depressed.
Corn
Ethanol production for the week ending March 6 was 1.044 million barrels per day, down 35,000 barrels from the previous week. Ethanol stocks were 24.334 million barrels, down 0.630 million barrels compare to last week. Corn net sales reported by exporters for February 28-March 5 were up compared to last week with net sales of 57.9 million bushels for the 2019/20 marketing year and 5.0 million bushels for the 2020/21 marketing year. Exports for the same time period were down 4 percent from last week at 33.5 million bushels. Corn export sales and commitments were 64 percent of the USDA estimated total exports for the 2019/20 marketing year (September 1 to August 31) compared to the previous 5-year average of 76 percent. Across Tennessee, average corn basis (cash price-nearby futures price) strengthened at Northwest and Upper-middle Tennessee and weakened at Northwest Barge Points and Memphis. Overall, basis for the week ranged from 4 over to 30 over, with an average of 20 over the May futures at elevators and barge points. May 2020 corn futures closed at $3.65, down 11 cents since last Friday. For the week, May 2020 corn futures traded between $3.63 and $3.79. May/Jul and May/Dec future spreads were 3 and 8 cents. July 2020 corn futures closed at $3.68, down 11 cents since last Friday.
In Tennessee, new crop cash corn contracts ranged from $3.48 to $3.83. December 2020 corn futures closed at $3.73, down 8 cents since last Friday. Downside price protection could be obtained by purchasing a $3.80 December 2020 Put Option costing 30 cents establishing a $3.50 futures floor.
Soybeans
Net sales reported by exporters were down compared to last week with net sales of 11.1 million bushels for the 2019/20 marketing year and 0.05 million bushels for the 2020/21 marketing year. Exports for the same period were down 18 percent compared to last week at 20.9 million bushels. Soybean export sales and commitments were 69 percent of the USDA estimated total annual exports for the 2019/20 marketing year (September 1 to August 31), compared to the previous 5-year average of 89 percent. Average soybean basis strengthened at Memphis, Northwest Barge Points, Northwest, and Upper-middle Tennessee. Basis ranged from 16 under to 29 over the May futures contract at elevators and barge points. Average basis at the end of the week was 12 over the May futures contract. May 2020 soybean futures closed at $8.48, down 43 cents since last Friday. For the week, May 2020 soybean futures traded between $8.45 and $8.85. May/Jul and May/Nov future spreads were 8 and 16 cents. July 2020 soybean futures closed at $8.56, down 44 cents since last Friday. May soybean-to-corn price ratio was 2.32 at the end of the week.
In Tennessee, new crop soybean cash contracts ranged from $8.34 to $9.02. Nov/Dec 2020 soybean-to-corn price ratio was 2.32 at the end of the week. November 2020 soybean futures closed at $8.64, down 41 cents since last Friday. Downside price protection could be achieved by purchasing an $8.80 November 2020 Put Option which would cost 53 cents and set an $8.27 futures floor.
Cotton
Net sales reported by exporters were up compared to last week with net sales of 484,200 bales for the 2019/20 marketing year and 160,400 bales for the 2020/21 marketing year. Exports for the same time period were down 11 percent compared to last week at 424,600 bales. Upland cotton export sales were 95 percent of the USDA estimated total annual exports for the 2019/20 marketing year (August 1 to July 31), compared to the previous 5-year average of 88 percent. Delta upland cotton spot price quotes for March 12 were 55.95 cents/lb (41-4-34) and 58.20 cents/lb (31-3-35). Adjusted World Price (AWP) decreased 0.32 cents to 53.04 cents. May 2020 cotton futures closed at 60.49 cents, down 2.3 cents since last Friday. For the week, May 2020 cotton futures traded between 58.57 and 62.91 cents. May/Jul and May/Dec cotton futures spreads were 0.27 cents and 0.73 cents. July 2020 cotton futures closed at 60.76 cents, down 2.75 cents since last Friday.
December 2020 cotton futures closed at 61.22, down 2.59 cents since last Friday. Downside price protection could be obtained by purchasing a 62 cent December 2020 Put Option costing 4.9 cents establishing a 57.1 cent futures floor.
Wheat
Wheat net sales reported by exporters were down compared to last week with net sales of 16.6 million bushels for the 2019/20 marketing year and 1.0 million bushels for the 2020/21 marketing year. Exports for the same time period were down 31 percent from last week at 16.4 million bushels. Wheat export sales were 87 percent of the USDA estimated total annual exports for the 2019/20 marketing year (June 1 to May 31), compared to the previous 5-year average of 96 percent. May 2020 wheat futures closed at $5.06, down 9 cents since last Friday. May 2020 wheat futures traded between $4.97 and $5.25 this week. May wheat-to-corn price ratio was 1.39. May/Jul and May/Sep future spreads were 1 and 7 cents.
In Tennessee, June/July 2020 cash contracts ranged from $5.19 to $5.61. July 2020 wheat futures closed at $5.07, down 9 cents since last Friday. Downside price protection could be obtained by purchasing a $5.10 July 2020 Put Option costing 30 cents establishing a $4.80 futures floor. July wheat-to-corn price ratio was 1.39. September 2020 wheat futures closed at $5.13, down 11 cents since last Friday. ∆
DR. AARON SMITH: Assistant Professor, Crop Marketing Specialist, University of Tennessee
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