Top 10 Ag Stories of 2020 - 4 (A) - A Year Without Comparison, Part A

Oddly, 2020 started with a hint of optimism as rumors swirled that China had agreed to buy large amounts of U.S. ag products in 2020 and 2021. After the phase-one trade agreement was signed and made public on Jan. 15, the optimism quickly dissipated and soybean prices plungedw. Chapter 6 in the agreement explained China was allowed to make purchases based on "commercial considerations," a clause that meant China wasn't obligated to buy anything.

Meanwhile, the World Health Organization (WHO) was talking about a suspicious cluster of pneumonia cases reported in Wuhan, China. According to its own timeline, WHO first declared COVID-19 a public health emergency of international concern on Jan. 30.

Early on, it was hoped the virus could be isolated and was considered an Asian problem. However, by late February it was clear the virus had spread to other countries and was becoming impossible to contain. On Feb. 24, the Dow Jones Industrials dropped more than 1,000 points, starting a 30-day landslide that would erase 38% from the index's February high.

In the grain sector, corn and soybeans were already under bearish pressure after the uncertainty of the phase-one trade agreement with China. Selling picked up after Saudi Arabia announced it was hiking oil production on March 7.

The Saudi Arabia announcement, plus growing concerns of drastic cuts in oil demand due to the pandemic, were especially difficult for ethanol prices: they fell to a new record low below 83 cents a gallon in late March. U.S. ethanol plants responded in March by shutting down production. By late April, both U.S. gasoline production and ethanol production levels were cut nearly in half.

For U.S. ag, the bearish hits kept coming. On April 12, Smithfield Foods announced it was closing its 20,000-head-per-day pork processing plant in Sioux Falls, South Dakota, after many employees tested positive for coronavirus.

A pork plant of similar size owned by JBS in Worthington, Minnesota, closed the following week; soon many livestock plants were closing, leaving producers scrambling to find a market. For those who could get bids, formula hog prices fell to $43 per hundredweight in April, the lowest in two years. Negotiated hog prices eventually plunged below $30 in June, the lowest in more than a decade.

Producers found themselves holding long lines of hog production in various stages with nowhere to go. Euthanization became an unwelcome choice of last resort for many. Even now, after many months, it is not certain how many hogs were destroyed.

Negotiated cash cattle prices also hit tough times, reaching lows in July near $154 per hundredweight dressed and $96 live. Many producers were unable to even get a price for a time. Far below breakeven prices, cattle were held back and put on weight. In late December, USDA shows cattle slaughter weights up 15 pounds from a year ago as production continues to try to work out from under the spring disruption.

Fortunately, political efforts were made to keep workers safe and get processing plants running again. Slaughter rates eventually returned to year-ago levels, but in the case of cattle, prices have been slow to heal with coronavirus concerns keeping packers cautious about buying.

As bearish as all the above scenarios were, April 20, 2020, will likely stand as the most bearish event in market history when May crude oil prices fell to a low of minus $40.32 a barrel. Falling oil demand in the face of a pandemic, the threat of higher oil production from Saudi Arabia, a lack of available storage capacity in the U.S. and narrowly defined regulations on how and where one could take delivery of oil all conspired to bring about the unthinkable: an oil price that plummeted deeply into negative territory.

The negative oil price did not last long as subsequent contract months stayed in positive territory, but few can deny the April 20 shockwaves felt throughout many markets as traders began to wonder what other commodities might be susceptible to negative prices. We were left scratching our heads and had to wonder just how bad are these markets going to get?

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