Uncertainty caused by the global COVID-19 pandemic is reflected in financial markets crashing; the impact on ag markets is less dramatic
By Jackie Clark
The COVID-19 pandemic has changed daily life around the world and has had a dramatic effect on financial markets. The fact that food is a basic necessity and people will always need to eat keeps some agricultural commodities relatively more stable, however, there have still been some notable changes in the demand and market logistics for pork products, as well as other livestock and grain commodities.
Stock markets and crude oil
Throughout March, as the full scale of the coronavirus pandemic became more apparent, “the markets reacted steeply,” said Abhinesh Gopal, head of commodity research at Farms.com Risk Management. The drop in the stock market was much faster and steeper than previous crashes, such as the 2007-08 recession.
“I think the market factored in the worst, and that’s probably why the fall was so steep. Very quickly I think the market factored in the possible spread” of COVID-19, Gopal said. “Once the market got wind of what was happening globally … the market (dropped) lower and hit the current low,” around March 23.
“Concurrently you had all the other markets falling as well,” Gopal explained. “The crude oil market also has been crashing along with the coronavirus pandemic, mostly because the demand for oil” has decreased.
Because of this rapid initial reaction, markets likely hit the bottom faster than in previous crashes, and the markets are now “trying to get back to stable conditions from here on,” he added.
“That is not to say that the market won’t go lower. For now it seems the stock market is trying to consolidate,” Gopal said. He wouldn’t be so bold as to say markets are recovering, but the current situation could signal the beginning of a turnaround. There is still a lot of uncertainty.
“This understanding that the world would always have to be fed has been supporting grain prices,” Gopal said. “There’s this short-term, huge demand for food.”
Corn prices were already low, and have taken an additional hit.
“Corn prices have been affected by the lower crude oil prices, because there’s that direct link with ethanol. If you’re not going to demand a lot of gasoline, you don’t need to blend a lot of it,” he explained.
“On the other hand, wheat prices have been climbing like crazy” which is likely linked to stocking up on shelf-stable wheat products like flour and pasta.
In addition to domestic demand, China seems to be recovering from coronavirus and starting to rebuild.
China’s “been importing heavily over the last couple of weeks … Generally China just needs food and the feed for their livestock as well,” Gopal said. “That’s been helping” grain prices.
China is recovering not only from coronavirus, but also may be rebuilding their herd after African swine fever, which would increase their need for feed. COVID-19 is still devastating many parts of the European Union and disrupting trade, so China may be looking to import more from North America.
Pork and other meat prices
“The livestock prices have been very choppy, very volatile,” Gopal said.
“There’s always going to be demand for food, and hence there will be demand for hogs at the slaughterhouse. The catch there is, with all the lockdowns, shutdowns and travel bans, will the packing houses have enough manpower to go through with their inspections and their slaughter activities? … A simple situation, like an employee at a packing house getting infected” could cause a plant shutdown as employees will need to isolate, Gopal said.
The uncertainty has lead to whipsawing livestock prices – people are reacting to news that is changing at a rapid rate. “Pork prices have been more volatile … because they are meats and (those prices) react quicker. A person’s income dictates how much he or she is going to buy meat.”
“On one hand you have demand, which is driving up prices, and then you have the situation with all the lockdowns which is affecting against it,” Gopal said.
There are also some practical challenges in the meat supply chain.
“These packing houses, they traditionally have been catering to a set number of clients,” and it’s likely that they’ve lost some from the restaurant sector, as the establishments have shut down. “You have that aspect of demand getting lowered at the food service end and demand increasing at the retail end,” Gopal said, which causes some logistical reorganization.
“Distributors for the retail end are running extra shifts to keep the supermarkets and other stores stocked,” Gopal added.
In addition to domestic demand, export demand for pork has been strong recently, with both Mexico and China buying pork products.
Demand “has been good on both fronts so far,” Gopal said. “The pork market will be supported … The fact that China is coming to buy is something we’ve been waiting on for over a year now.”
Meat prices are typically more unpredictable than other commodities, and are likely to remain so. However, in several weeks, as consumers adjust to a new normal, we may see pork markets return to a more average level of volatility.
“I feel that there’ll be some more of this knee-jerk choppiness in the livestock markets, at least for another couple of weeks, but the demand aspect of things does seem strong,” Gopal said.