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Black Swans Everywhere  

Wednesday, March 25, 2020
filed under: Marketing/Risk Management

The markets seemed to be starting to pick up a little bullish momentum a few months ago. The biggest reason was the signing of the Phase One trade deal with China after one and one-half years (or so) of stop-and-go negotiations, tariffs, threats, etc. 

Other reasons included declining wheat ending supplies among the major wheat exporting countries and in the U.S.  The initial U.S. winter wheat acreage estimate came in slightly below expectations. The USDA appeared to be running out of bearish supply and demand reports.

Then the parade of Black Swans started.  The first Black Swan came with the Coronavirus (Covid-19) eruption in China that has clearly put most aspects of the Phase One deal on hold as China’s economy has ground to a near halt.  Travel in and out of China is on hold, and there will be some supply chain disruptions until the virus is controlled. 

As a result, the expected surge in soybean export sales to China still hasn’t happened.  And, it’s also meant the hoped-for corn and wheat export sales to China haven’t happened, either.  All this has cast another shadow over world demand.  The good news is that China is going back to work as of this mid-March writing.

The next Black Swan event happened the second week of March when a crude oil price war exploded between Russia and Saudi Arabia.  That drove crude oil prices down nearly 30% in one day.  The collapse in crude oil, coupled with the expanding spread of the Coronavirus across the Northern Hemisphere, created enough uncertainty for U.S. equity markets to crash nearly 8% the same day that oil collapsed. 
There has been nothing fundamentally bullish happening around grain and oilseed markets. World winter wheat crops are mostly still dormant, and there is no indication of any major problems today.  The most important part of the winter wheat growing season is still ahead of us.  Soybean and corn production in Brazil and Argentina is again on a path to be at record, or near record, levels, although late-season dryness has caused Argentina to reduce its corn and soybean numbers slightly.

The USDA/RMA released the initial (and minimum) prices for the 2020 crop revenue insurance products.  (The numbers below show the history of these initial prices since 2014.)  These prices were the daily average new-crop futures during the month of February for wheat, corn and soybeans, and the average new-crop cash price for sunflower.  Note the stability of sunflower prices relative to spring wheat, corn and soybeans. 

The USDA will release important reports on March 31 that will have an impact on the markets.  These include the planting intentions and the quarterly stocks estimates.  The planting intentions report will be very important.  Most analysts are forecasting as much as a 10-million-acre increase in corn plantings and a five-million-acre increase in soybean plantings. 

USDA will also update the winter wheat acres estimate.  They additionally will estimate spring wheat acres (and all other spring-planted crops like barley, oats, sunflower, etc.).  We expect spring wheat acres will be lower than last year if corn and soybean acres show big increases in acreage.  These acreage estimates will be the starting point for supply and demand estimates for the 2020/21 marketing year. Analysts will use these acreage numbers and undoubtedly use big yield guesses to project production. 

The trade will also take a close look at the quarterly stocks report.  They will be used to try to measure the accuracy of the final 2019 production estimates, especially for corn and soybeans.  Smaller quarterly stocks than expected would mean either 2019 production was smaller or demand has been greater than anticipated.              
USDA/RMA Crop Insurance Prices
Spring Wheat ($/bu)
2014     $ 6.51
2015        5.85
2016        5.13
2017        5.65         
2018        6.31
2019        5.77
2020        5.56
Corn ($/bu)
2014     $ 4.62         
2015        4.15
2016        3.86
2017        3.96
2018        3.96
2019        4.00
2020        3.88
Soybeans ($/bu)
2014   $ 11.36
2015        9.73
2016        8.85
2017      10.19
2018      10.16
2019        9.54
2020        9.17
Oil Sunflower ($/cwt)
2014   $ 20.90
2015      16.90
2016      16.90
2017      18.20
2018      17.50
2019      16.70
2020      16.90
Confection Sunflower ($/cwt)
2014   $ 27.40
2015      26.50
2016      26.70
2017      27.20
2018      23.70
2019      22.50
2020      22.60                                                                                                                         
Mike Krueger founded The Money Farm, and is now a senior analyst with World Perspectives, a Washington, D.C.-based consulting company.  While the information in this article is believed to be reliable, marketing involves risk, and the author and The Sunflower assume no responsibility for its use.
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