Despite rallies in wheat, soybeans and meal, corn futures effectively followed the path of crude oil and equities markets, all sinking in unison last week. Growing fears of a novel coronavirus induced recession and a simultaneous crude oil trade war between Saudi Arabia and Russia sent crude oil, equities markets and ethanol, along with gasoline and corn futures, plummeting to sharp losses. While the initial euphoria of China's largest U.S. corn purchase in seven years sent May corn 12 cents higher early Friday, the market ended up lower, as crude oil and equities continued the nosedive that began a few weeks ago. The realization set in that with ethanol futures having fallen to the lowest level recorded, and gasoline prices down 56% in less than a month, the China purchase would hardly be enough to offset the implied huge loss in corn usage for ethanol. As plant margins fell deeper in the red, ethanol plants cut back and even shuttered operations altogether. City, state and country lockdowns to control the spread of COVID-19 halted air travel and auto consumption, and estimates of last week's corn usage for ethanol losses for the year approached 100 million bushels. Some analysts have already scaled back corn for ethanol for 2019-20 by as much as 170 million bushels. May corn on Thursday fell to a long-term support level of $3.32, and that is likely to be the benchmark support in coming weeks. Only a concerted effort by China to buy more corn or ethanol, or a weather issue in South America, can save this market from falling further, with export sales still down 31% from a year ago, a large South American crop ahead, and an expected surge in U.S. corn acres.
Corn has been moving in tandem with crude oil, so a sudden reversal in that market is likely to underpin corn as well. The hope is that Friday's China purchases were only the tip of the iceberg, and that U.S. efforts to hunker down and increase medical supplies can halt this virus soon.
APRIL CRUDE OIL:
To realize the unrelenting bearish influence the fast-spreading COVID-19 virus and the Russia-Saudi trade war have had on crude oil prices, one has only to look at the more than $9.00 fall last week, the $30 fall in the past four weeks, and the $45 per barrel drop just since the first of the year. Crude oil futures fell to the lowest level since 2016, but the break under $20 per barrel was last matched over 18 years ago. Estimates of the crude oil demand decline approached 10% or more by analysts, as airlines halted business, including international flights, and cities and states locked down, requiring work-from-home directives. That has effectively crippled crude oil, gasoline and ethanol demand. When coupled with a growing division between Russia and Saudi Arabia along with a price cut, values plunged. Even the Trump administration decision to buy 77 million barrels of oil to place in the Strategic Petroleum Reserve (SPR) was not enough to stem the tide of global recession fears. It is likely that Friday's plunge to just under $20 per barrel would be the benchmark, with the $15 to $20 range likely to provide good historical support. However, we are in uncharted territory, and few can estimate with confidence what might occur. This unusual pandemic, once under control, will likely be looked back upon as the greatest buying opportunity for energy that we have ever seen.
DOW JONES INDUSTRIAL AVERAGE:
As the fears of a global recession grew more real by the day, and COVID-19 infections and deaths rose dramatically in the world and the U.S., the Dow Jones average, along with other indices, plunged to levels that few could have envisioned even a month ago. COVID-19 infections as of March 21 are now 299,061 worldwide, with 12,762 deaths, according to Johns Hopkins University. The U.S. total is rising dramatically as testing accelerates, with March 21 numbers totaling 24,148 Americans infected and 285 deaths. The Dow Jones average, along with the S & P index are two barometers of the health of the U.S. economy. The virus is continuing to spread, and the world and the U.S. are expanding travel restrictions and business closures, but that has pushed buyers to the sidelines and brought panic selling into the equation. Despite the Federal Reserve's efforts, slashing interest rates to near zero, and injecting liquidity into the markets, the Dow fell unabated.
Since the mid-February high, the Dow Jones has fallen near 35%, and after a brief recovery, the plunge since just March 4 has been 29% from the high that day. Following last week's break to just under 19,000, the next level of support on the Dow would be what should be a major level of support dating back to 2015, at 18,000 to 18,500. Few feel that the ultimate pain has yet to be felt; but as in crude oil, one would have to think that we could look back a few years from now, and see what an opportunity this may have been, once the virus is deemed to be under control. In the meantime, it is fear and panic, fueled by nonstop media coverage, driving this bell-weather market to levels that few could have imagined in an economy that was considered booming just a few months ago.
Comments above are for educational purposes and are not meant to be specific trade recommendations. The buying and selling of commodities or commodity futures involves substantial risk and are not suitable for everyone.
Dana Mantini can be reached at Dana.Mantini@dtn.com
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