Keeping an Eye on Commodity Markets

While the economic risks we bear as a result of COVID-19 remain uncertain, the general consensus is that the worst of the economic decline is behind us. As the ability of the U.S. general economy to rebound remains highly suspect, so does that of agriculture. In March and April, we saw grocery store sales skyrocket as food service business screeched to a near halt. The effects were felt across commodities as they were faced with impaired production and declining commodity prices.

Since that low, conditions in the agriculture industry have adjusted and prices have improved. Without knowing what the future holds, things have rebounded enough for many producers to now have the opportunity to assess and potentially reduce risk if they hadn’t prior to March.

Having a strong risk management plan in place is key, with dairy serving as a prime example. On April 22, Class III July milk contracts traded as low as $12.80, but as of July 31 trade above $24. For the remainder of 2020, the CME curve is above $17. This would mean that a Wisconsin dairy with 100% Class III could utilize DRP to provide a revenue guarantee above an average cost of production (COP) through the end of 2021.

For grain farmers, supply and demand has been a greater disrupter than COVID-19. Driving factors have been trade with China, acres planted and weather. Compared to January, September Corn is off 20%. Since mid- March, basis has improved, but many producers are in a position where corn and soybeans trade below their COP. Working capital and efficiency remain keys to success. While Compeer’s benchmarking reports indicate that average working capital per acre changed little in 2019, the averages between the highest and lowest quartiles is wide, by nearly three times. This is where low interest rates may provide some relief.
 
Since the start of the U.S. pandemic, the Federal Reserve has cut rates to as low as they can go without going negative (a scenario they claim is not in the cards). While a wide selection of U.S. banks have pulled back on ag lending in recent months,

Compeer continues to grow and serve its clients. Client borrowing costs are currently between 50 and 150 basis points lower than at the beginning of this year. Conversions and/or new opportunities to finance are at
historically low rates. Reach out to your financial officer to discuss opportunities for your operation. The consensus on U.S. interest rates suggests rates will remain low while we get through COVID-19, but will begin to modestly rise once a true recovery begins to take hold.