Todd's Take

A Bearish Week in January

Todd Hultman
By  Todd Hultman , DTN Lead Analyst
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DTN's national index of cash soybean prices fell to $8.22 a bushel on Thursday, Jan.30, 2020, pressured in part by increasing concerns of how coronavirus might impact U.S. soybean demand in 2020. (DTN ProphetX chart)

I am not kidding when I say I was just talking to a friend last week and made the comment, "what keeps me up at night is another year like 2008 where we do all this work trying to figure out supply and demand factors, argue about how big the corn crop is and then some unexpected outside event comes along and hits the markets like a tidal wave."

People get touchy about the precise definition of a black swan so I'll leave that bird alone, but the recent rise of coronavirus into the daily headlines certainly got the market's attention this week. One China-sensitive example is March soybeans, which fell over 33 cents a bushel from last Thursday to this Thursday, Jan. 30. The contract finished at $8.76 1/4, its lowest close in eight months.

A 33-cent drop in soybeans is not a tidal wave, but it is difficult to ignore how quickly the market changed from bullish expectations for the phase-one trade agreement with China to now wondering if China's soybean demand will take a hit in 2020.

Of course, everyone wants to know just how serious the outbreak will become, but that is something none of us know at this point. As of early Friday, the New York Times reported 200 deaths and 9,800 confirmed infections -- two numbers that will probably be much higher a week from now.

The current number of coronavirus infections has already passed the SARS total of 2003. According to the U.S. Centers of Disease Control and Prevention (CDC), SARS took the lives of 774 people over a nine-month period before outbreaks stopped in July 2003 ( https://www.cdc.gov/…).

At the risk of sounding like a callous analyst, even if the current death toll reached the SARS level, it would not be enough to make a speck of difference to U.S. grain demand. According to the University of Oxford's website, Ourworldindata.org, world births are expected to exceed deaths by 80.46 million in 2020. Unfortunately, that was not one of this week's headlines, but those numbers have a bigger impact on grain demand than any flu virus.

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There is, of course, a slight risk that I'm wrong, and this could be the start of a devastating catastrophe, in both human terms and economic impact. How are grain producers supposed to manage risk in that type of situation?

As DTN's Lead Analyst, my answer is the same as it was before we knew about coronavirus. We assess markets in a disciplined way with DTN's Six Factors Market Strategies. Looking for ways to help producers protect themselves from lower prices is what we do and it does not matter that the virus was unexpected -- bad news often is.

For the 2019 soybean crop, part of the plan to protect producers from lower prices was to make forward cash sales early in the year for 50% of anticipated production. The recommendations were made as November 2019 futures prices averaged $9.45 a bushel, higher than Thursday's March soybean price of $8.81 1/2.

The other 50% of 2019 production is theoretically being stored, waiting for a better price opportunity and admittedly took a hit in the recent sell-off. There is still time, however, before the typical seasonal peak is reached at the end of June.

For 2020 soybean production, I recommended buying November 2020 $8.00 soybean puts for 100% of production back on Nov. 20, 2019, when the puts were going for less than 4 cents. I realize many producers don't like the thought of buying put options that have a good chance of expiring worthless, but for me the advantages were clear.

Granted, no producer wants November soybeans to go to $8.00, but none of us want our house to get hit by a tornado either. Inexpensive put options are a cheap form of price insurance that took away 84% of the contract's downside risk. The act of buying the puts changed the span of price possibilities to a more favorable set of outcomes in 2020.

Notice that back in November when the recommendation was made, none of us knew about the coronavirus or whether or not a trade deal would be struck with China or what the deal might say. And there are probably more surprises waiting in the year ahead.

Markets are emotional, the future does not give up its secrets easily, and we humans are not good at predicting things we have no way of knowing about. I suspect fears about the coronavirus are overblown where it concerns U.S. soybean demand, but I'm also glad to have recommended an inexpensive form of disaster insurance, just in case.

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

Follow him on Twitter @ToddHultman

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Todd Hultman