Our economy cannot afford another shutdown (Grain Marketing)
(Editor’s note: John Hall is a professional commodities analyst.)
Everyone seems relieved now that businesses and restaurants are opening back up after the COVID-19 shutdown.
The problem is, the threat still exists.
Last week Arizona, Florida, Oklahoma, Oregon and Texas all reported record increases in new cases after recording all-time highs earlier this month, and Nevada reported its highest single-day tally of new cases last week.
It is very difficult to separate the facts from the politics.
A scary fact is that China lowered Beijing’s emergency response level back to Phase II from Phase III last week as outbreaks there saw an increase, and we know we probably did not get all the information.
COVID-19 caused the world to shut down. The economic engine in several countries were stalled.
The virus required us to wear masks. If you are like me, I felt masks were a pain and a waste of time.
A recent Facebook graphic, though, caught my attention and changed my mind.
Masks greatly reduce the spread of the virus. The graph showed that a COVID-19 carrier has a 70-percent probability of spreading the virus to another person when not wearing a mask.
That same infected person cuts the probability of spreading the virus to 5 percent when they wear a mask.
The probability of spreading the virus drops to 1.5 percent when both people are wearing masks.
This is huge! I have come to grips with the fact that I would much rather put up with the inconvenience of wearing a mask than having the country shut down again.
Our economy cannot afford another shutdown.
Nationwide, our crops look good.
The national weather maps suggest active rains for almost all areas over the next 10 days along with average- to below-average temperatures for most areas.
There are some dry spots around the country, however.
In the USDA Crop Progress Report released on June 15, corn ratings dropped 4 percent in the good-to-excellent rating from 75 to 71 which is a huge weekly drop for this report — but fear not, the crop is now right at the five-year average.
This latest drop in corn ratings was driven by deteriorating crop conditions in western states such as Nebraska, Kansas, Colorado and the Dakotas, as weather there has been unusually hot and dry.
We need to monitor these areas as we move into July. If these conditions worsen, we may get a rally.
In soybeans, crop conditions were unchanged at 72-percent good to excellent with 93 percent of the crop planted.
Current prices reflect our sluggish economy. Fundamentally, we have too much inventory.
The USDA Supply and Demand Report released June 11 had ending stocks increasing in all categories. These huge inventories have depressed prices.
On June 17, July corn closed at $3.26 while the December future closed at $3.41.
Historically there has always been a rally in the summer.
With current stocks, I fear it will take significant dryness to cause a rally to reach the $4 level.
Hopefully you know your cost of production and can break-even at today’s prices.
It looks like profits will be hard to capture under current conditions.
Question: “Do you know your break-even cost?”
This year’s wheat crop provides an excellent example of pre-harvest marketing. July wheat closed at $4.91 on June 17 down from the $5.80 you could have captured back in January.
If we subtract a normal 80 under basis, $5 wheat is much easier to live with than $4.10.
On June 17, November soybeans closed at $8.71 up from the $8.40’s seen in early May.
Two articles caught my attention this past week that are worth mentioning.
First, is an article entitled “Cause for Concern? Government Programs Increasingly Important Part of Farm Income” released June 14 by Keith Good, Illinois, and found in farmdoc.
In this article, Good referenced a Wall Street Journal article written by Kirk Maltais on June 11.
Maltais wrote: “A strong planting season for U.S. corn is expected to lead to a record-high supply, as demand for the crop remains muted thanks to the fallout from the coronavirus pandemic.”
He goes on to write: “Ending stocks of corn — unsold corn left over after the marketing year is done — are expected to total 3.32 billion bushels in 2020-21, the USDA said in its monthly supply and demand estimate June 11.
That figure is 58-percent higher than last year’s ending stocks, according to USDA data.”
The article presented the graph that is shown above.
The second article covered lowering rental rates and simple states that rents must be lowered at current price levels.
Volume does not assure profitability. Selling prices over cost of production assures profitability.
Maltais goes on and writes: “The uses of corn and soybeans must grow in the future if corn and soybean returns are to reach higher levels. If uses do not increase, a combination of two items will need to occur: 1) financial aid and intervention from the Federal government will need to continue, or 2) farmers will need to make financial adjustments as well as lower cash rents.
“These factors are illustrated by evaluating time trends of corn and soybean returns and then associating return periods with corn and soybean use.”
Agriculture, like several industries across the country are facing some very difficult times. If you are feeling the pinch, put together a team of financial people to evaluate your business.
Financial pressure will seldom solve itself in a beneficial way.
(Note: I research material from Allendale, DTN, USDA, University Land Grants and other credible sources in compiling this article. It is not merely my opinion, but rather a consensus of experts in the trade. Looking for a marketing coach or someone to discuss strategies with? Contact me at email@example.com, or call 410-708-8781.)
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