Inside the Market

Understanding where grain prices are headed is never an easy task, but here in early 2020, corn and soybean prices are already off to a bearish start, and the bulk of planting hasn't even begun.

Before the year even started, grain prices were already pressured by large U.S. surpluses, a trade dispute with China and the disastrous consequences of the record wet 2019 planting season, followed by difficult harvest conditions across the northern Corn Belt.

NET FARM INCOME

Even with aid from prevented plantings in 2019 and two years of market facilitation payments, the string of bearish hits has kept net farm income down the past six years, well below the 2013 total of $123.7 billion.

Given the rough start in 2020, USDA's slightly higher net farm income estimate of $96.7 billion for 2020 is probably too high and will need to be adjusted lower.

FUEL PRESSURES

In 2020, the spread of coronavirus and Saudi Arabia's decision to increase oil production at a time when the global economy is nearly paralyzed sent oil prices sharply lower and took ethanol prices to record lows.

Without a profitable ethanol industry, corn prices are at risk of falling further. If that weren't enough, USDA estimated 2.64 billion bushels of U.S. ending corn stocks in 2020-21, an even larger surplus that points to national cash corn prices near $3 a bushel.

FEAR OF THE UNKNOWN

The quick spread of coronavirus has arrived like something out of a science fiction novel. Photos on social media show once-bustling cities now looking like ghost towns. As this article nears print, U.S. deaths from the virus are above 5,100 and are rising rapidly. The Johns Hopkins global death toll is well over 48,000. By the time you read this, those numbers will be far higher, and no one can say when the disease might abate.

It is uncertainty that feeds our fears and sends prices plummeting. The theory of supply and demand is a nice concept for beginners, but one of the flaws is that both forces have to be active to achieve equilibrium prices. When potential buyers are scared, the market's pricing mechanism collapses.

Emotional markets like those experienced in early 2020 are like tornadoes. It is difficult to sustain the energy level required, but you don't want to underestimate the damage that can be done.

For grain producers caught in the bearish storm, I can't guarantee prices won't get worse this year, but I do think it's worth noticing the relentless string of bearish misfortunes is historically rare. We don't know when normalcy will return, but when it does, prices are bound to look better than they do now.
> Read Todd's blog at about.dtnpf.com/markets.

> You may email Todd at todd.hultman@dtn.com, or call 402-255-8489.

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