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Todd's Take
Monday, April 6, 2020 7:56AM CDT
By Todd Hultman
DTN Lead Analyst

For many with an interest in ag markets, this has been another unpleasant week of watching grain and livestock prices slide lower, struggling to find any interest from the demand side of the market while the coronavirus threat keeps many of us home from work, home from stores and distant from each other.

Some traders probably watch prices on a chart with a detached curiosity, but I never seem to get that luxury, knowing what all-time lows in ethanol prices and $20 declines in cattle mean to real people, and in some cases, entire communities trying to make a living. The pain is real and so is the uncertainty of what lies ahead.

With the coronavirus death count climbing higher by the hour, President Donald Trump extended social distancing guidelines to April 30 this week and warned U.S. deaths could reach somewhere between 100,000 and 240,000. News media sources have been covering the spread of coronavirus nonstop and sometimes seem to be in competition for finding the interviews and predictions that will scare us most.

To be clear, I am all for the president, public health officials and news outlets aggressively informing the public of what we need to do to be safe. And if extreme predictions and worst case scenarios help communicate the urgency we need to act, so be it.

However, as an analyst who has spent a lifetime watching expert opinions often turn out wrong, please don't be offended if I hang on to some of my deeply ingrained skepticism. In fact, if you trace down the more reputable sources of predictive modeling for this disease, you'll find many of them describe a wide range of numerical possibilities, depending on how aggressively the virus is tracked and how responsible we all are in keeping a safe distance from each other.

The wide range of possibilities is a statistical admission of uncertainty and should be a reminder to us all to be careful about forming any particular market view based on anyone's prediction in these precarious times.

As I say that, I am reminded of many who did not take advantage of last summer's high prices to sell corn because they heard predictions of even higher prices ahead. The anxious market we are currently in could be the bearish version of what corn experienced last summer. Managed futures funds are not as heavily net short as they were at this time a year ago, but they are net short.

The combination of coronavirus fears, reduced travel and OPEC's decision to increase oil production at a time when the world's major economies are drastically slowing is a bearish mix that could easily fan the bearish flames of those inclined to make exaggerated predictions or place big bets.

Don't get me wrong, the outlook for corn prices is currently bearish and the recent sell-off is understandable. But just as it became easy to exaggerate last summer's acreage losses, I'm concerned it has now become easy to exaggerate corn's bearish factors. Those who have already projected drastic ethanol production declines out a full year or more may be getting ahead of themselves.

The current situation doesn't compare well with others, but it may help to know that in the financial meltdown of 2008, annual gasoline demand was down 3% on the year. Wednesday's report from the U.S. Energy Department showed last week's U.S. gasoline demand down 30% from a year ago. Time is going to be the key that determines how much corn demand will be lost due to a lack of ethanol production in 2020, and that variable is currently very difficult to predict with any confidence.

On Thursday, President Trump tweeted an expression of hope that Saudi Arabia and Russia would be cutting oil production by 10 million barrels or more. A short time later, Dow Jones reported Saudi Arabia called for an emergency meeting of OPEC members and other oil producers. We don't know if any agreement will be reached, but it is another example of how quickly the important factors behind corn's bearish predicament could change.

Given all the variables at play in 2020, we can't confidently say where corn prices will trade this summer, but if adverse weather doesn't interfere, something below $3.00 currently looks likely.

On the other hand, we do know that the market has a strong tendency to put too much weight on the things it knows and ignore the things it doesn't. Right now, there is far too much we still don't know, including how the new U.S. crop season will go.

This year could turn out to be one of the worst years for corn prices in modern history or it could be a year that still has a few surprises. At times like this -- when the way forward is not so clear -- frustration levels are high, including my own. As always, I'll continue to report on the market's important clues as we find them and see if we can find a break in the clouds.

Todd Hultman can be reached at Todd.Hultman@dtn.com

Follow him on Twitter @ToddHultman

(BE/CZ)


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