The first quarter of 2020 brought a collection of unique challenges to the global financial system. An unprecedented viral outbreak, an energy price war, and aggressive monetary policy shook the commodities markets to their core. Despite the chaos, the livelihood of North American farmers still hinged on the all-important planting season.
Although the continuation of the USD as a safe haven and potential coronavirus (COVID-19) fallout both pose major concerns to the ag sector, traditional fundamentals will still affect commodity pricing. In this article, we’ll take a look at the expectations for 2020’s grain and oilseed planting season.
USDA Projects a Spike in Corn and Soybean Plantings
The March 31, 2020 USDA Planting Intentions Report brought a few surprises to ag producers and traders alike. Here are the key takeaways from the USDA brief:
- Planted corn acreage for 2020 is estimated to come in at 97.0 million acres. This figure is up from 2019’s final estimate of 89.7 million.
- Soybeans are projected to be a favored crop, with an estimated planting of 84.8 million acres. This figure is well above 2019’s final estimate of 76.1 million acres.
- USDA estimates suggest a drop in spring wheat acres, with 2020’s plantings coming in at 12.6 million. The March 31 projection for spring wheat is well below consensus estimates of 13.0 million acres.
The scrubbed planting season of 2019 played largely into the perceived scarcity of grains and oilseeds in the latter half of the marketing year. In addition, the introduction of fresh Chinese tariffs on ag exports posed a collection of unique demand-side questions.
Although the planting season of 2020 is projected to be robust, the U.S.-China trade standoff persists. However, there is reason for optimism. Phase One of a comprehensive U.S.-China trade deal was signed in January 2020. The agreement provides for large-scale Chinese purchases of U.S. ag products and should bolster demand for the 2020-21 marketing year.
In the case of corn, extraordinary bearish pressure is likely to stem from a collapse in energy prices. The late-April plunge of crude oil into negative territory brought the future of ethanol as a fuel source into question. The refinement of ethanol accounts for one-third of all corn demand in the U.S. ― if low gasoline prices become the new norm, corn values will be positioned to plunge.
Unfortunately for grain/oilseed producers and traders, concerns regarding the COVID-19 pandemic are now front and center. Greatly reduced global economic activity will impact consumption and ag sectoral demand significantly. Ultimately, grain and oilseed futures are likely to remain conflicted in the wake of a challenging, energy and virus-impacted economic cycle.
Will El Niño Plague 2020’s Planting Season?
Those who pay attention to the ag commodity market will remember that 2019 was no picnic for farmers and traders. A strong El Niño cycle contributed to the widespread flooding to midwestern farming communities, delaying a significant portion of corn, spring wheat, and soybean plantings. Fortunately for grain producers, the fall plantings of Winter wheat in the U.S. was largely unaffected by 2019’s floods. Is 2020 destined to replicate the devastating floods of 2019?
According to the World Meteorological Organization (WMO), the chances of an El Niño system hampering the 2020 planting season are minimal. In fact, here are a few of the WMO’s findings published in its February 2020 report:
- Since July 2019, tropical surface sea waters in the Pacific have remained in a largely neutral range. Slight warming trends were measured in late 2019 and early 2020 but are not expected to last.
- Models suggest that there is a 60 percent chance of neutral conditions prevailing during the planting season of March-May 2020. The aggregate probability of an El Niño cycle developing during this time is 35 percent.
- For June-August 2020, the WMO projections assign a 20-25 percent chance of an El Niño cycle impacting North America.
For the 2019 ag marketing season, extensive flooding was a key driver of volatility in corn, wheat, and soybean pricing. The dramatic moisture count came as little surprise because a strong El Niño system was expected to blast the U.S. through the first nine months of the year. Weather projections are much kinder for 2020, and we should be in for a fundamentally sound grain and oilseed production season.
Building Your Own Ag Market Plan
If early 2020 has taught us anything, it is that it pays to be prepared for the unexpected. For guidance during turbulent times, check out Daniels Trading’s comprehensive hedging suite. Featuring actionable trade ideas, objective input, and the Daniels Ag Mobile App, it is a great place to begin building your customized ag marketing plan.
* Updated – May 20, 2020 at 1:15 PM CT.