How Will Coronavirus Impact Soybean Meal Prices?
Calendar Spreads Key As Ample Supply Buffers Broad Food Price Inflation
The 2020 outbreak of Coronavirus has had, and continues to have, significant impact on economies and markets. In the case of agriculture markets and the price of basic food commodities, the impact of Coronavirus remains difficult to assess – the virus’ spread has occurred in a well-supplied global market, which reduces if not removes the threat of broad and rapid food inflation and lessens concerns for food security.
However, while inherent demand reductions implied by lower economic growth reduce the likelihood of broader price spikes, Coronavirus highlights a relatively fragile global supply chain where price impact occurs along the forward curve – the difference in prices in the same commodity delivered at different times in the future.
This post analyzes the impact of Coronavirus on soybean meal prices.
Coronavirus presents an unprecedented challenge for individuals, governments, and businesses around the world. No one is left untouched and certainly not agriculture research analysts, traders, or policy-makers addressing this critical concern.
First, Coronavirus is an epidemiological and economic challenge in its regard – its rapid spread has surprised analysts in many fields, managing its spread has revealed fractured responses from governments, and discussion of addressing its economic fallout has only begun. In short, the broader economic ramifications – a function of policy, management, and coordination – remain unclear.
Second, beyond the food industry’s position inside the broader economic framework, Coronavirus poses specific norm-busting conundrums to the agriculture trade. In comparison to the energy industry – where the wholesale grounding of the airline industry and worldwide travel restrictions generally are not supportive of prices – the full ramifications of this worldwide pandemic on agriculture prices are less clear.
Agriculture traders, analysts, and policy-makers – anyone looking to understand or forecast food prices moving forward in the Coronavirus environment the world is facing – must balance three competing factors: abundant global supplies, macro-economic induced demand reductions, and broader market correlations, and supply chain disruptions.
The relative impact of these agriculture price drivers – especially the timing of each component’s impact – will likely lead to a price path going forward that surprises analysts, traders, and policy-makers.
Mixed Messages Along the Supply Chain
Of these three primary price drivers – underlying fundamental conditions, macroeconomic impact, and supply chain management – likely the most challenging to model or understand is emerging supply chain disruptions.
For example, the UN Food and Agriculture Organization (FAO) recently released a study forecasting food price inflation*. Nonetheless – the organization’s March 2020 food inflation index fell sharply, hit by a Covid-19 induced demand drop and a plunge in global oil prices. The UN FAO food price index, which measures monthly changes for a basket of cereals, oilseeds, dairy products, meat and sugar, averaged 172.2 points in March, down 4.3% on February.
Similarly, just as forecasters struggle to discern when and how food prices will be impacted, governments are also applying divergent strategies in response to food security concerns. Exporting countries such as Russia and Ukraine have moved to restrict food exports, if not just symbolically while importing countries such as Saudi Arabia have shown indications of possible anticipatory buying.
*Source FAO. View: here
Russia, the world’s largest wheat exporter and a critical supplier to the Middle East, North Africa, and the Maghreb regions, announced plans to limit wheat exports to 7 million metric tons between April and June, as well as plans to release grains from its state reserves. While the move to restrict exports is concerning at face value, it is essential to note that Russia was widely expected to export 7 million metric tons during the period in any case.
Ukraine has similarly moved towards food commodity export restrictions. The country’s biggest grain traders agreed in late March to an economy ministry proposal to limit wheat exports to 20.2 million tons in the 2019/20 crop year.
Meanwhile – the real impact of Covid-19’s fall out on Ukrainian exports is far from clear. In the last week of March, into the first week of April, Ukrainian wheat exports from seaports almost halved to 138,000 metric tons, down from 277,000 metric tons a week earlier. However, overall grain exports in the period rose to 1.021 million tons from 845,000 tons thanks to higher corn shipments, and, on 8 April, the Ukrainian Ministry for Development of Economy, Trade, and Agriculture announced grain exports for the year so far in 2019/2020, which began in July, had reached 47 million metric tons so far, a record.
In the United States – China’s soybean imports from the United States rose sixfold in January and February compared to the same period of 2019, according to Chinese customs data, as cargoes booked during a trade truce between the countries arrived and overshadowed anticipated demand reductions expected as the nation faced peak pandemic conditions.
Nonetheless – The US exported just 2.76 million tons of soybeans in February – the fewest for the month since 2004 – while Brazil exported 6.84 million tons of soybeans – slightly more than the average February.
At the same time – Smithfield Foods, the world’s largest pork processor, said on 10 April that it would shut at least one US plant indefinitely due to a sharp outbreak of coronavirus cases among employees, noting that the country was moving “perilously close to the edge” in supplies for grocers as several shutdowns are disrupting the US food supply.
Even as Smithfield Foods is warning of meat shortages in the US, shipments of beef from Argentina’s cattle ranches to the European Union have plunged to be nearly non-existent, and sales to China are roughly 30% of what they were a year ago, according to anecdotal evidence provided by commodity brokers in the AgFlow network.
Meanwhile, French soft wheat shipments to destinations outside the EU reached their highest tally for March in at least 10 years, AgFlow data showed. Soft wheat exports to destinations outside the EU totaled 1.63 million tons, the highest March volume in figures going back to the 2009/10 season.
In short – agriculture policy-makers in exporting and importing countries, traders and analysts, and multinational companies involved in the sector are witnessing a slew of mixed data and messages. A sharp fall in exports from Ukraine is the next week, mirrored by a rapid increase in buying in Saudi Arabia, for example. Warnings of meat price spikes in the United States are countered by sharply lower beef export data in Argentina. Positive soybean trade flows from the US to China stand next to weak overall US soybean exports.
Given that the world’s generally ample supply situation, Covid-19 has not, until now, created widespread price increases.
Instead, the pandemic is creating supply chain disruptions, delayed demand signals, and pockets of price support among an overall low price environment.
Two Types of Price Movement
Commodities, in several regards, are vastly different than other asset classes. Commodities markets exist as supply chains for physical goods. These markets are among the most liquid and most high profile in the modern economy – but at their core, commodities markets are a function of the real economy and serve to move goods from surplus producers to deficit, consuming nations.
Commodities traders, and commodities businesses, more broadly, are supply chain managers. In many regards, the commodities industry is less high finance and more supply chain optimization where the cost function, or the performance metric, is measured as a profit and loss statement.
As such – in addition to absolute price movements or changes in the level of prices, commodities markets also feature changes in price for delivery of goods by period. There is no single price for any commodity, but rather a price chain – the price of corn for March delivery is different than that for April or May, and the price difference between these values is shaped by myriad factors but is acutely linked to longer-term supply conditions, immediate demand dynamics, and supply chain factors, such as delays at port terminals.
In this sense, commodities markets function similarly to fixed income markets and the shape of the curve – the difference between prices for delivery – is a paramount and embodies significant information content.
In fixed income markets, for example, a yield curve inversion between 3-month and 10-year US Treasury bonds, is popularly cited as a barometer of broader economic health and a prediction of recession. When 3-month Treasury yields are lower than 10-year Treasury yields – or, in other words, when short term risk-free financing is less costly than longer-term financing, an inverted yield curve – financial markets generally speaking are indicating significant distress.
An inverted yield curve has preceded all US recessions since 1950. In February of 2020, US Treasuries entered this territory as the global economy began to strain under Covid-19.
Similarly, the shape of the agriculture product price curve reflects underlying market conditions, more so in many ways than the absolute price.
By observing both absolute prices and the spread between prices in different delivery windows – for example, the difference between delivery for corn April and May – traders, analysts, and policy-makers can gain a significantly more in-depth understanding of actual commodity market conditions.
Impact Of Coronavirus On Soybean Meal
Soybean meal is a prime example of the nuanced and specific impact Covid-19 has had, and likely will continue to have, on agriculture markets, as well as the importance of following, trading, or managing risk along the calendar spread for delivery of food inputs and products.
In 2017 the price of soybeans and soybean meal experienced significant price volatility – the causes and rationale were many – but regardless of the specific price drivers, the soybean complex experienced sharp movements higher and correspondingly sharp movements lower.
Source: CME via AgFlow
It is critical, however, to consider that even as prices rose sharply in 2017, and fell sharply, the calendar spread – the price difference between delivery immediately and delivery in three months – did not change in a meaningful fashion.
This sharp price rise in soybean meal in 2017 had logic and rationale – mostly a reflection of strong general demand from Chinese buyers – but the fact that the shape of the physical calendar spreads remained in line with historical norms indicated to traders that the underlying supply of soybean meal was not especially stressed.
Price increases, or price falls, that are not reflected in changes in price along the forward curve have distinct and essential differences in cause and duration. Changes in the price level that are not matched by changes in the shape of the forward curve often reflect
Source: AgFlow
Soybean Meal Calendar Spreads First Quarter of 2020
In late February and the first half of March 2020, China, after having been at the front of the worldwide struggle against Covid-19, began reducing its “lockdown” policy, allowing citizens to return to work in various capacities.
Throughout February, prices for delivery of Brazilian soymeal – and Brazil and Argentina are in the middle of peak export season – slowly rose higher, especially for nearby contracts, namely March and April delivery. In early February, traders reported that Brazilian soymeal for March delivery – FOB, or free on board from Brazilian seaports – was exchanged for approximately 315 USD, considering currency exchange rates, while the delivery of the same product in April was priced around 310 USD.
Source: AgFlow
This spread in prices, with a premium for immediate delivery – this inverse, as industry parlance goes – was already unusually sharp as prices for physical agriculture goods are generally, in many market conditions, lower for nearby delivery than for later delivery to account for the cost of storing the goods.
Throughout February, this inverse continued to highlight stress on the supply chain as the monthly average spread widened sharply along with prices as Chinese quickly looked to secure supply after a weeks shut down that prohibited domestic meal production and news reports of spreading infections in South America highlighted concerns
By mid-February, AgFlow data shows cargos of Brazilian soymeal for March delivery trading as high as 340 USD, while prices for soymeal delivered in April peaked at just under 320 USD.
Across the full month of February – the average price of soymeal delivered FOB at Brazilian ports for March delivery reached USD 324, while the average price for April delivery reached USD 313.
Throughout February, however, soybean meal futures, as traded on the US’s CME and the Dalian Commodity Exchange in China, showed no sign of the stress that was being exhibited along the supply chain.
Source: Dalian Commodities Exchange via AgFlow
Source: CME via AgFlow
In mid-March, just as China fully returned to work, the widespread soymeal supply chain stress – as clearly exhibited for in premium for nearby delivery – became widely apparent to a broader audience of futures market participants and prices. In just over a week, it rose just over 10% as media reports noted that coronavirus outbreaks in South America fuelled further supply concerns amid already tight quantities.
As of early April, soybean meal futures prices have returned to February 2020 levels – but the premium for nearby May delivery over June delivery of Brazilian meal remains historically elevated and unstable.
It is helpful to observe that agriculture markets in a Covid-19 climate are not immune from sharp price appreciation, even if short-lived, and that this movement will likely first emerge along the forward curve for physical delivery. While futures markets will often follow macroeconomic news, a keen eye on the forward curve for physical delivery allows traders and analysts a better understanding of supply chain stress that can often quickly and sharply bleed into futures markets.
Moving Forward in a Coronavirus Economy
Moving into April and into May, one significant question – aside from the general spread of the pandemic – is how Covid-19 will impact exporting countries in comparison to importing countries.
A seismic change is emerging as the Covid-19 pandemic unfolds. China, the most important food-importing nation, has passed the first wave of Covid-19 while the western hemisphere – namely the United States, Brazil, and Argentina in the case of significant food exporting nations – is entering what models suggest is likely the peak of the initial impact of this pandemic.
If the spread of Covid-19 unfolds in a manner similar to how it has spread thus far in nations such as Italy, or cities like New York City, or more generally Europe and the United States – then it is possible that export supply chains in Brazil and Argentina will be stressed and slowed as Chinese demand for commodities returns.
Any such export slowdowns – or rapid buying – will likely first and foremost emerge as price spikes for immediate delivery of agriculture commodities, just as soybean meal prices experienced in March and April of 2020.
Fortunately, the world is buffered by ample agriculture supplies. According to the US Department of Agriculture, US farmers plan to plant their most significant corn acreage in eight years in the spring of 2020, as highlighted in the department’s 31 March annual prospective plantings report, which surveys approximately 80,000 farmers taken during the first two weeks of March.
Unlike 2008, or 2011, or even 2013, when droughts or production challenges, export restrictions, or other difficulties created tangible food shortages and dramatic price shocks, the world of 2020 is one of the surplus supplies.
Covid-19, as a result, will not likely play out in the headlines as a full-scale food commodity problem.
Instead, Covid-19 will likely continue to impact calendar spreads and traders, risk managers, journalists, and policy-makers are best suited to analyze the impact of this crisis as it plays out along the forward curve.
This article does not constitute financial advice.
