Kub's Den

Coronavirus Concerns: More Than Just Market Risk

Elaine Kub
By  Elaine Kub , Contributing Analyst
The process of getting ag commodities produced and into the hands of end users is a complex supply chain, with each link vulnerable to interruption. (Graphic by Elaine Kub)

This week -- while I puttered around my garden shed, starting tomato seedlings seven weeks before the average last frost date -- I felt pretty insulated from the coronavirus concerns currently causing anxiety for nurses in New York City and out-of-work restaurant staff all across the country. Maybe I was even feeling a little smug -- I mean, if nothing else, now I know I'll have tomatoes to eat. If ever in a real pinch, I guess I could even go slaughter a calf.

I suspect I'm not alone in my complacency. We in the agriculture industry justifiably feel like our jobs are pretty secure, even during a pandemic or any other human disaster. Yes, we need grocery store clerks and truck drivers to keep getting food distributed to the population, and I think everyone will agree we also need America's farmers to keep planning ahead and keep growing the commodities that underpin the nation's food supply.

Given that driving in a tractor cab is, by its nature, a self-isolating task, no farmer is going to be asked not to show up at work this spring. Life "out here" will proceed pretty much as normal, as long as our loved ones don't get sick. Then, assuming you have a reasonable supply of toilet paper, canned food, pre-emergence herbicide, seed, inoculant, fertilizer, fuel, bolts, belts and alternators ready and on-hand (200 rolls of toilet paper is not a reasonable supply!), you're all set.

But do we have all these supplies ready and in place, free from any and all threats to shipping disruptions or, worst-case scenario, transportation checkpoints at the state line or the county line? No, we probably do not. It turns out that we in the agriculture industry are not as totally immune to coronavirus concerns as we might like to think.

We face all the usual risks as much as ever, and in some cases, more than ever.

MARKET RISK

Ag commodity prices haven't fallen as dramatically as other assets. During the past four weeks since COVID-19 started spreading in Europe, airline stocks have lost more than half their value. Through that same timeframe, corn futures have dropped only 8%, soybeans are currently down only 1% and wheat prices are actually 1% higher. This makes economic sense: people are flying much less during the pandemic, but judging from the grocery store shelves stripped of beef, cooking oil, cereal, milk and soda pop, people are eating as much as ever of the end products of corn, soybeans and wheat.

However, do take note that corn's losses haven't been zero. This market is far from immune to coronavirus concerns. From a fundamental supply-and-demand stance, some short-term demand destruction is likely occurring for all ag commodities and some long-term demand destruction will certainly occur if the pandemic results in a large number of deaths. For ethanol and corn, very serious demand destruction is occurring every day that people don't get in their cars to drive to work, to a restaurant or to a track meet four towns over. We may reasonably judge that ag commodity futures were oversold during the past four weeks of market panic, but in my opinion, we should not expect all of them to fully recover to their pre-pandemic levels.

COUNTERPARTY RISK

I don't want be a fearmonger -- I don't know of any agricultural customers who are currently in danger of bankruptcy and certainly not any who aren't covered by surety bonds. Farmers shouldn't, in my opinion, put their grain marketing plans on hold for fear of writing a contract with a counterparty who may not be in business and therefore unable to pay for grain later in 2020. However, it is always prudent to be mindful of counterparty risk, especially when our customers' profitability is threatened. As DTN's Todd Neeley reported (https://www.dtnpf.com/…) this week, several U.S. ethanol plants have scaled back their corn-buying operations while the economics of the fuel markets are so grim. Again, this is not a reason to panic, and it's not to suggest that they can't pay for grain, but just a reminder that counterparty risk is one form of risk we tend to only think about during times of economic crisis, but it's actually a risk that's with us always.

SUPPLY CHAIN RISK

Truckers have been among the heroes of the COVID-19 situation; railroads are famous for preparing their dispatch operations to be secure under all scenarios and barge traffic should be able to proceed unimpeded by any pandemic. But that's not to say there's zero risk of any shipping troubles anywhere in the world. If there is any product that your operation (or your supplier, your co-op or your seed salesman) needs to have shipped in during the next couple of months, it may be prudent to start asking about those shipments or thinking of accelerating those shipments ahead of potential freight disruptions, or having a Plan B for if those shipments can't get through.

LABOR AVAILIBILITY RISK

Foreign workers are not just for strawberry farms in California and orange groves in Florida -- custom harvesters and conventional grain and livestock producers throughout the Midwest have come to rely on agricultural workers with short-term visas. Air travel may be challenging or impossible to bring those workers in before spring planting season, so the producers who rely on that labor will be scrambling to make a Plan B. In a worst-case scenario, we might all be scrambling to find workers or to get our own work done, if debilitating sickness spreads widely in our own communities.

WEATHER RISK

The ground is still extremely wet across the Corn Belt, and future temperatures and precipitation amounts are never perfectly predictable during spring planting season. Therefore, that's one thing the COVID-19 pandemic can't change -- we still can't control the weather.

It's not pleasant to catastrophize or to play the part of Chicken Little, but if a few moments of thinking through potential risks and worst-case scenarios gives a farming operation a better chance of being resilient during the next few weeks of disruption (economic disruption, health disruption, peace-of-mind disruption), then those few moments were well spent.

Elaine Kub is the author of "Mastering the Grain Markets: How Profits Are Really Made" and can be reached at masteringthegrainmarkets@gmail.com or on Twitter @elainekub.

(BE/SK)

Elaine Kub