By John DePutter & Dave Milne – April 22, 2020
The News:
“US oil benchmark crashes below $0/barrel to mark historic plunge.”
–Market Watch, April 20, 2020
What it means:
A bad situation for the oil industry no doubt, but the covid-19 pandemic has unleashed a series of cascading events at warp speed, with far-reaching implications.
Think of oil as just one domino in a chain of many that are falling.
As we all know, the self-isolation and social distancing measures associated with the pandemic have absolutely gutted oil demand – to the point that, on Monday, the market deemed crude for nearby delivery not only worthless, but actually demanded producers pay to have their so-called ‘black gold’ taken off their hands.
Now, it is interestinging to note that oil really wasn’t doing all that great even before the pandemic hit, with US futures mostly chopping around between US$50 and $60/barrel for most of 2019 – a far cry from the dizzying heights of summer 2008, when prices streaked to over $140. In other words, the oil industry was already struggling and in a weakened position when the biggest hit to demand in history suddenly made things much, much worse.
The losses in oil, meanwhile, have spilled over to ethanol and, in turn, to corn. Of course, lower corn prices negatively impact all manner of other crops, including barley and oats directly and soybeans indirectly.
At the same time, the shutdown of restaurants across North America has taken a major bite out of demand for soybean oil – a key food-ingredient – and put pressure on the soybean market. It’s also not helping that less biofuel is being used, further reducing demand for soybean oil. You can also bring canola into the picture of the declining veg oil demand.
On the livestock side, covid-19 outbreaks in packing plants on both sides of the border have reduced slaughter capacity, which means that cattle and hog supplies are backing up on the farm. Producer prices are getting hammered, while the wholesale market climbs.
Consequences, adjustments and more consequences to the adjustments
The obvious implication is that primary producers – whether energy or agricultural – will have to adjust accordingly.
Already, there are rumblings that US producers, in the wake of the ethanol-related demand destruction, won’t plant the 97 million acres of corn they had planned on earlier in the spring. Indeed, an analysis conducted by the American Farm Bureau suggested farmers might have to shave as many as 6.6 million acres off their original intentions. If a cutback of that size comes to fruition, it would surely mark one of the largest last-minute adjustments we’ve ever seen.
Typically, any drop in corn acres would result in an increase in soybean acres. This would mean that the current poor demand situation and low prices for corn create excess soybean production – and lower prices for beans.
Livestock inventories to be pared
Lots of red ink means that livestock producers will be forced into cutbacks. American hog producers, who had been ramping up production for years in response to strong export demand, may be forced to sell off a portion of their breeding herd. There could be some herd cuts in Canada as well.
As for cattle, the latest USDA inventory report released earlier this year confirmed that cyclical herd expansion was over, with the number of head as of Jan. 1, 2020 down 0.4% from a year earlier. But while the numbers implied that inventories had stopped growing, there was no major liquidation underway. The pandemic will change that. A recent study suggested that US producers could be looking at losses totaling $13.6 billion.
One spinoff effect of lower livestock numbers down the road would be fewer animals eating corn. This would deal another blow to the demand side of the already low corn market.
Actions and reactions; changes coming quickly
Of course, when you have extremely low prices, you have the right condition for a move in the opposite direction. The pandemic won’t last forever. Nor will the low prices it has brought.
Some markets could soon react to the deep declines with sudden swings in the opposite direction, which, in turn, would set off yet another series of reactions!
Changes being forced more quickly
Much remains uncertain amid the pandemic, including how long self-isolation and social distancing measures will remain in place. What farmers can be sure of is the fact that they are facing the prospect of major price changes much more quickly than might otherwise have been the case.
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