When Traders Panic
It seems longer, but coronavirus has been mentioned as a market factor for ag prices for over a month now. Back on Jan. 21, DTN's closing market comments talked about the concern of 318 confirmed cases of this infectious and deadly disease in China, just as millions were ready to travel across the country to celebrate the Chinese New Year.
As of Thursday, confirmed infections jumped above 80,000, and according to the New York Times, the disease has spread to over 47 countries, including the U.S.
The stock market's response to the disease has had its roller coaster moments. Dow Jones Industrials saw a brief sell-off in late-January, followed by a new high in mid-February as investors seemed to regain their composure. Fears returned this past week after new cases were found in Italy and Iran, setting off alarm bells about how quickly the disease had spread.
As an analyst trying to help grain and livestock producers understand markets, it's not pleasant to see hopes for profitable prices growing more distant as the markets' anxiety level increases. Oddly, it is quite possible actual food demand will barely notice the impact of coronavirus.
Yes, the transportation of goods will be restricted and world economic growth will be strained by the disruption. Even U.S. GDP could take a hit as people adjust to the news of infections closer to home. I don't mean to sound insensitive or be naive, but people will keep eating.
The roughly 3,000 coronavirus deaths counted to date are so small in relation to the world's population, we can still confidently say there are 7.77 billion people in this world who do not have coronavirus, and world population will still increase by at least 80 million people in 2020 (https://www.worldometers.info/…).
So, how's a U.S. grain producer supposed to cope with so much anxiety in the market? There's nothing easy about this, that's for sure.
I can't guarantee prices will pop back next month and erase all the bearish news -- that seems unlikely at this point. But I can say it is difficult for markets to perpetuate this high of an anxiety level for a long time. It takes a lot of energy to stay panicked.
Fear is a powerful driver and at its root is an inherent tendency to project current trends into the future -- a tendency that often gets us in trouble. At some point, this heightened state of concern will lose momentum. More information will come in, people will change how they live and, perhaps, even a treatment for the virus will be found. It is the inability to say when that keeps the stress level high.
This is another good example of why I say markets are people, and people are emotional -- not nearly as rational as older economists assumed. That emotion can work both ways for U.S. ag prices and this round is clearly bearish.
In Monday's (2/24/2020) trading, fear in the market was so great, and the desire to raise cash so strong, nearly every commodity other than gold and silver was lower on the day. A similar pattern was seen early Thursday.
On Wednesday, May corn fell to a new contract low of $3.74 1/2. The daily volume of 306,457 contracts was over twice the level of the previous day, a possible sign noncommercial longs were starting to throw in the towel.
May soybeans fell to a new nine-month low of $8.82 1/2 Monday and managed futures funds probably added to net-short positions that CFTC said already totaled 95,975 as of Feb. 18.
For those who believe markets are rational and efficient, this may have been the week to give up hope for higher corn and soybean prices or maybe even go short, but that's not how I see it.
In the case of corn, it is a difficult call as we do have the bearish possibility of increased corn plantings this spring. However, there is also a lot of uncertainty ahead, including the challenge of planting in a wet Corn Belt.
Coronavirus fears aside, the case for higher soybean prices in 2020 is more promising. Even if 85.0 million acres of soybeans do get planted this spring, as USDA estimates, there is a good chance of having demand for that much production. The supportive outlook for soybean prices is enhanced by chances weather problems could again become a concern.
The smart money in the market, commercials, are slightly net long soybeans with prices near nine-month lows. The less skilled poker players, the futures funds, are heavily net short and obviously profiting from the latest sell-off. Even so, the funds have a knack for making their biggest bets at the wrong time.
As coronavirus infections continue to spread, part of the torture of the uncertainty is that none of us can guarantee the situation can't become more bearish for U.S. ag prices. There is no limit on emotional markets.
We can look at a bigger picture and see that even as coronavirus remains uncontained, the odds of the death toll having a significant impact on world population remain remote. The way markets sometimes behave, one might think this coronavirus is the end of the world, but I strongly doubt it.
Todd Hultman can be reached at email@example.com
Follow him on Twitter @ToddHultman
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