Agriculture: a year in review
Trade, coronavirus, derecho and drought — those events will definitely bring the year 2020 into the history books.
“When we look back, we will all remember the year 2020, but it is one of the few years that farmers will be able to say, ‘hey you know what? We actually had a better year than most that year,'” said Chad Hart, Iowa State University agricultural economist.
Agricultural markets are for the most part, in better shape as we say goodbye to 2020, than they were at the beginning of the year.
Hart describes the year 2020 has an “upside down year.”
“If you look at traditional, seasonal patterns in the crop markets, if you flip those upside down, that is what we had this year,” he said. “We had prices falling throughout the springtime, hitting their lows when typically we would be talking about the highest prices of the year. Then we saw prices rising all the way throughout harvest time, instead of normally going down to those seasonal lows.”
Hart said it is fascinating for all of the problems we experienced this year: the pandemic, the drought, the derecho, shut downs of businesses and travel restrictions that the agricultural market is coming out on the backend of this with $4 in front of a corn price and soybean prices in the double digits.
“It is an amazing move as we have recovered here the past two to three months,” he said.
Hart said there are a lot of factors contributing to this turnaround.
“Typically, you need a really big movement in either supply or demand. And what we got in 2020 was a little bit of both. The bigger demand move than a supply move, but they both moved in the right direction to create higher prices,” he said.
Although there were some production issues brought forth by the drought and a derecho, Hart believes what is really driving the marketplace right now is global demand for our products.
Part of the story of 2020 is not just one virus, it is actually still two.
“It’s the story of the coronavirus when we think about the human population, but it is still a story of African swine fever when it comes to our agricultural markets as well,” said Hart. “That is what really set the table here for what is happening with China in 2020. When that hit in 2018, 2019 — it really just decimated their hog industry. That put China in a position where they knew they were going to be buying a lot of agricultural products in 2020 and 2021.”
Hart feels China worked with the U.S. to reach a Phase 1 trade deal to capture some credit for some purchases they already knew they were going to make.
“You have seen them return to being that powerhouse in the soybean market. They are by far the top spot when it comes to the pork market. We have seen them become the top spot for us in the corn market – a market they don’t traditionally play with us in. They are also number five or six on the beef side. That is another market you don’t normally think of China. You are seeing them making moves across the board.”
China is definitely a part of the price recovery, but Hart said there are other countries beyond China as we look at some of these different markets. Currently, his favorite one to look at is the corn market.
“When I look at our top six markets within the corn market, all six of those markets are up and up by least 10% and in a lot of cases they’re up by 100% or more,” he said. “That tells you there is a broad-based economic demand worldwide for corn.”
There are similar stories in other commodities as well.
“That has sort of weathered the test of time in the coronavirus here as we look at export sales, almost across the board, we are seeing incredibly strong sales — the corn market, the soybean market, pork market, beef market, broiler market, wheat market — you name it, we are seeing those agricultural markets, the products moving off the shelves really quickly,” said Hart.
What should producers be doing with their 2020 and 2021 year’s crops?
“For those that have not sold their 2020 crop yet, they are in the catbird seat right now,” said Hart. “They have seen a good price rally occur. They can make a move right now if they want, but I look at it as a great time to put in some price protection, no matter what you do. If you are looking to hold out for spring time for better prices, I believe you have a great opportunity to do that. But I don’t want to do it completely unprotected.”
As far as new crop sales, Hart doesn’t believe we are in a hurry. But also advises in putting in some price floors for new crop sales as well.
“Time is still on our side. My own sense is we are going to trade sideways here at least for a little while, while we make sure global demand is sticking with us,” he said. “We pushed prices to fairly high levels now. We are much better off at this time now than we were at this time last year.”
One issue not being discussed much, Hart said is the fact the drought is still here.
“Will we have problems in 2021 production-wise because of that? One of the reasons that 2020 crop was as good as it was, is because we came into the crop year with really good soil moisture and it helped us hold off some of the potential damage that the drought could have done to his year’s crop. We’re not going to have that same savings account as we look at next year’s crop,” he said. “That does add to a little bit of supply uncertainty as we look forward into next year. Typically that supply uncertainty leads to some additional price pressure once we get out there in springtime. I want farmers to be able to take advantage of that, if they see it.”
Hart said 2020 is going to be the year where we realized the ethanol market has really hit its maturity point and it most likely will not be the growth sector that it has been over the past couple of decades.
Coronavirus was a part of that mix. Gasoline consumption in the U.S. fell to the lowest level since the late 1960s.
“People really did quit driving at least for a little bit, but as soon as we started to loosen back up again, we saw a lot of that driving come back – not all of it though,” he said.
Going back to Jan., Feb and March – the ethanol industry, Hart said was purring right along as normal. Then there was the dramatic cut in April.
“We watched the industry cut itself in half in roughly four weeks,” he said. “As soon as we hit rock bottom, we did start working our way back up again.”
Late June, into early July, liquid fuel consumption and ethanol consumption was back up to where the industry was roughly running at about 80% capacity. And since then has grown to about 90% capacity.
“We are not going back to full capacity, and that, I think is the last piece. We know that as we look at 2021, and the prospects of getting a vaccine out and sort of trying to get back to normal, the issue is going to be that normal has shifted a bit,” he said. “We are not just going to go back to exactly what we did pre-pandemic. That some of the adjustments we have made in our lives will be permanent, and that probably does mean a little less reliance on travel.”
The market is driven enough to fill the E10 blends as well as the E15 market where it currently stands, Hart said.
“The plants that we have online now and running can fulfill those needs,” he said.