Ag markets functioning as expected

CFTC Agricultural Advisory hearing focuses on lessons learned from pandemic and update on ag economic outlook.

The Agricultural Advisory Committee of the Commodity Futures Trading Commission (CFTC) met Sept. 24 and offered insight into how the agricultural commodity markets have functioned in recent months, especially in the wake of the COVID-19 pandemic.

“The events of 2020 demonstrate just how important it is for all of us to work together as partners so that our ag markets continue to serve their role in price discovery and risk management,” CFTC chairman Heath Tabert said.

David Amato, supervisory market analyst in the division of market oversight, gave an update on behalf of the Livestock Task Force, which was created after the many issues that presented themselves in the livestock industry in March and April.

“As 2020 began, many of the agricultural markets were seeing relatively low prices affected by weather the previous year and trade conflicts. Starting in the first quarter, COVID-19 brought significant market impacts on both the supply and demand side,” Amato said.

“Overall, markets are working as we expect,” Amato said, noting that, despite concerns about convergence in the April cash and futures market, the market showed good liquidity and good convergence at the end of the contract, given a somewhat nonexistent cash market because feedyards were unable to deliver when packing plants closed.

From April 17 to May 8, boxed beef prices more than doubled their value, reaching a record $475/cwt. Since then, the Choice boxed beef cutout has fallen to $220/cwt. At the same time, livestock cash and future prices fell sharply, leading to a large spread between the value of a processing facility’s input and outputs.

Boxed beef prices are now near historical averages, “but as we know, this could rapidly change, depending on [COVID-19] outbreaks at any of the packing plants,” Amato said.

During the height of the pandemic, Amato estimated that pork and beef processing capacity fell 35-40% due to plant closures and absenteeism. The latest numbers for cattle slaughter show that slaughter numbers are up significantly, almost 45%.

After the COVID-19 pandemic started, lean hog prices fell as much as 40%. Additionally, live cattle hit a 10-year low, down more than 35% at one point. Other agricultural producers were affected similarly, with individual commodities climbing between 10% and 40% in March. Today, most are approximately 10-20% lower than compared to the January numbers, with the exception of grains and oilseeds that were boosted recently by strong exports to China.

“Livestock markets, though, are still dealing with animal backlogs and relatively weak demand,” Amato said. “Livestock prices in general remain relatively soft, and with restaurant and institutional demands continuing to be frail, this will be the case until the opening up of the full economy occurs.”

Nate Kauffman, vice president and Omaha, Neb., branch executive for the Federal Reserve Bank of Kansas City, noted that the agriculture sector started off 2020 in what he characterized as a “prolonged downturn, even before this year’s pandemic.” He added, “As the weeks and months unfolded with the pandemic, especially in April, conditions deteriorated quite rapidly.”

Kauffman said the economic conditions in agriculture have improved slightly, but that is due in significant part to government payments. “The environment surrounding agricultural credit conditions -- I would still describe those conditions as relatively weak,” he said, although farm real estate markets have provided some support in this area.

Coming into 2020, working capital was expected to decline about 15%, even before the onset of the pandemic, Kauffman noted.

“When the pandemic hit, especially in April and May, the combination of the temporary closures of meat packing plants, in addition to the shift in how consumers were buying food, led to some significant disruptions in the supply chain and ultimately lowered prices on the farm,” Kauffman stated. Dramatically lower energy use also greatly affected ethanol demand, which caused another major disruption for agricultural markets.

At the beginning of the year, profit margins had already been relatively low versus what had been the case from 2010 to 2013. By April, cattle prices, for example, had dropped 30% relatively to January, but other major commodities like hogs, ethanol, corn and dairy products had fallen even further. “Many of these prices rebounded somewhat since those lows in April, but most prices still remain lower than what they were at the beginning of the year, with the exemption, of course, of soybeans due to recent export strength,” he said.

Direct government payments will be on the order of about 40% this year, which is quite high in historical context and also doesn’t include the latest announcement of additional aid through the second installment of the Coronavirus Food Assistance Program of $14 billion.

Kauffman noted that the agricultural credit sector has seen delinquency rates on farm loans trend higher, but it is worth noting that the increases have been quite modest so far. Farmland as an asset accounts for more than 80% of the value of the farm sector's balance sheet. Despite some sharp declines in agricultural commodity prices and farm income, the industry has only seen modest declines in farm real estate values since the peak levels of 2013 and 2014.

“Agricultural lenders that have been recognizing additional stress in their portfolios and have been concerned about the level of liquidity or working capital among their farm borrowers [have] had opportunities in each of the past few years to restructure debt and take maybe additional accounts in the form of collateral as farm real estate to shore up some of that working capital,” Kauffman said, attributing it to limiting additional financial stress that might have been expected alongside some of the cash flow shortages.

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