Coronavirus Unleashes A Black Swan

BY JOHN MILLER

You only need to look at almost any commodity chart starting on or near January 23rd of this year to see that something abruptly affected the entire marketplace in an adverse way. This was the day that Chinese officials publicly recognized the problems surrounding a Coronavirus outbreak in humans; but still suggested that it was premature to declare an emergency. The chart below show the Dow Jones Industrial Average (DJIH20 in black), March Cotton (ETH20 in pink), March corn futures (ECH20 in blue), and crude oil (ECLJ20 in purple) since January 1st. You can see the DJIA tumbled from just short of the fables 30,000 level to just above 25,000, a record decline in that short of a timeframe. For our valley farmers, it was hard not to notice cotton prices falling from approximately 70 cents per pound to 62 cents, the difference between a tight profit and a clear loss. Corn behaved similarly, falling from $3.90 to $3.60 per bushel. Even the energy providers took a big hit as crude oil dropped from $65 to $45 per barrel. This has been a falloff of commodity prices rarely seen in one’s career. With China now exceeding 80,000 cases and roughly 2,800 deaths, the government there can no longer pretend this is anything less than a public health disaster for their country. With more than 89,000 cases and 3,100 deaths worldwide, according to John Hopkins and as illustrated by the heat map below, governments around the globe are taking serious action to ward off a larger public impact.

As if the recent African Swine Fever (ASF) outbreak causing massive extermination of China’s hogs was not enough, the market disruptions associated with the Coro

navirus has only added to the headwinds being faced by the freshly signed US-China Phase One trade agreement. The unforeseen arrival and spread of the Coronavirus worldwide, and subsequent uncertainty this news cre ated in markets, almost immediately began to have this phenomenon labeled a Black Swan event. Made famous in the book The Black Swan: The Impact of the Highly Improbable by Nassim Nicholas Talib written in 2007, this term has become synonymous with key unforeseen events that result in major market disruption. Some might argue that the Coronavirus outbreak does not rise to the level of a Black Swan event, but those of us in agriculture that are depending on more fair and open access to world markets check that box.

Taleb, a former options trader and risk analyst specializing in probability and randomness became concerned that generally accepted and widely used economic models had an inherent weakness when it came to the occurrence of low probability events such as we are facing with Coro navirus. The Black Swan concept can actually be traced back to the middle ages when it was thought that no Black Swan (the actual bird) existed. This term, then, became to be used when thinking of an event that was impossible.

When in the late 1600’s in Australia, an actual Black Swan (the bird) was observed, this term began to be associated with an event that shattered the notion that it could never occur. From Taleb’s book, he emphasizes that Black Swan events are ones that are unpredictable and have far-reaching implications. Perhaps the most interest ing commonality is that when these events happen, there seems to be a strong feeling in the marketplace that in hindsight it seems almost obvious it would occur. Some

of us can recall the sudden collapse of the Soviet Union in 1991, and agree that this event was a Black Swan. Historians tell us that the sudden outbreak of WWI was at the time a Black Swan event. But shelves of books now suggest that these events were telegraphed to the extreme. Just in my 20 or so years working in risk man agement, I can recall several major events which I like to call ‘outliers’ that have happened and greatly affected how I proceeded with a marketing plan. For those that trade cattle, who can forget the first cases of Foot and Mouth disease that hit the UK in 2001, and the market effects of even a few cases in North American in subsequent years.

Again in 2001, the 9/11 terrorists attack on the World Trade Center in New York. Or the financial market melt down surrounding Lehman Brothers, AIG, etc, in 2008. How about the original Brexit vote back in 2016 that rattled financial markets for some time? And there are quite a few more events like this in the 2000’s.

Given that these low probability events are so difficult if not impossible to see coming, should we be spend ing large amounts of time trying to predict Black Swan events? Since these evenat are all but impossible to predict, the answer is no. But that is not to say that a farmers, or anyone in business, should not use consistent values in an effort to guard against unforeseen events during key periods of price risk for your farm or non-farm business. While we want to spend time trying protecting downside price risk in the chance of a negative event, we also should keep in mind that we want to try and be posi tioned to capitalize on market positive impacts.

It does seem that outliers, or black swan events, are more far reaching that in years past. Or is it more a reflection of the changing nature of markets with respect to the globalization of commodities? For now, this global nature of the commodity markets seems like a permanent feature, and a condition to always be mindful of. The Coronavirus will run its course. In the US, the Center for Disease Control and other medical oversight will work around the clock to insure public safety as best possible.

Over time, reassurances will work its way into the market. But this does not take away from the fact that these events are hurtful in short term. The key is to understand that these events will happen from time-to-time, and that contingency funds whether in reserve equity or cash, or in the form of insurance is important to consider every crop season.

Temple, Texas, March 2, 2020 — The USDA-Natural Resources Conservation Service (NRCS) in Texas has announced the first funding application deadline of April 3, 2020, for the Environmental Quality Incentives Program (EQIP). If additional financial assistance funds are still available, a second funding application deadline will be scheduled for May 15, 2020.

Applications are taken year around for NRCS programs, but deadlines are announced to rank and fund eligible conservation projects. Producers interested in signing up for EQIP should submit applications to their local USDA service center. If already a USDA client, a producer can submit applications online via Conservation Client Gateway.

EQIP is a voluntary program that provides financial and technical assistance to agricultural producers. Technical assistance is provided without a fee from NRCS specialists to help landowners and land managers plan and implement conservation practices to help them meet their land management goals, address natural resource concerns and improve soil, water, plant, animal, air, and related resources on agricultural land and non-industrial private forestland.

For additional information visit the NRCS Texas website at www.tx.nrcs.usda.gov. Applications for EQIP are accepted on a continuous basis. Producers interested in EQIP can contact their local USDA service center or visit our NRCS EQIP web page.

Carrizo Springs – Feb. 27, 2020 — In celebration of Women in History and National Ag Day in March, the USDA’s Natural Resources Conservation Service (NRCS) in partnership with the Texas/Mexico Border Coalition (TMBC) will host the Greater South Texas Conference for Women in Agriculture. The event will be held on March 24, 2020, at the Dimmit County Arena and Conference Center, 539 Industrial Blvd. in Carrizo Springs, Texas.

Keynote speaker for the event is Tina Yturria Buford of the H. Yturria Land and Cattle Company in Harlingen. Listen to exciting speakers from South Texas who are entre preneurs in their field discuss a wide range of topics of interest to women, including conservation, financing, marketing, animal health and personal health. See on-site demonstrations, visit booths and participate in the networking opportunity. Men are also encouraged to attend. On-site check-in will be 8 a.m. until 8:30 a.m. To pre-register, visit the TMBC website at www.tm-bc.org/. A lunch of locally raised and harvested, grassfed Native American bison will be provided. There is no charge for the event and lunch; however, those not registered by March 17th may not be able to join the catered lunch.

Persons with disabilities who require alternative means of communication for program information (e.g., Braille, large print, audiotape, American Sign Language, etc.) should contact Bertha Venegas at (830) 249-3508 ext. 103 or USDA’s TARGET Center at (202) 720-2600 (voice and TTY) or contact USDA through the Federal Relay Service at (800) 877-8339. Additionally, program information may be made available in languages other than English.

Ranch Name Group Breed RGVBIA Index * Award

Mendietta Beefmasters Calf Beefmaster 112.60 Champion Peña Farms Beefmasters Calf Beefmaster 109.78 Res. Champion La Campana Ranch Calf Santa Gertrudis 107.95 Champion Lazy JV Ranch Calf Santa Gertrudis 104.73 Res. Champion La Muñeca Cattle Co. Calf Simbrah 113.49 Champion Nieschwietz 7N Ranch Calf Simbrah 109.02 Res. Champion Peña Farms Beefmasters Junior Beefmaster 104.81 Champion La Muñeca Cattle Co. Junior Brahman 112.31 Champion SRS Land & Cattle Co. Junior Brahman 106.25 Res. Champion Lazy JV Ranch Junior Santa Gertrudis 103.29 Champion La Campana Ranch Junior Santa Gertrudis 101.43 Res. Champion La Muñeca Cattle Co. Junior Simbrah 107.20 Champion Salazar Beefmasters Intermediate Beefmaster 105.60 Champion April M. Salinas Intermediate Santa Gertrudis 101.93 Champion SRS Land & Cattle Co. Senior Brahman 103.23 Champion J Bar Braunvieh Senior Braunvieh 108.91 Champion Circle C Ranch Senior Braunvieh 101.05 Res. Champion Lazy JV Ranch Senior Santa Gertrudis 107.10 Champion

There are 22 bulls that will sell on Cattle In Motion (insert link - www.cattleinmotion.com/) from March 21-24, 2020. The breeds represented in this sale are: Santa Gertrudis, Simbrah, Simmental, Angus, Brahman and Braunvieh. The bulls selling on Cattle In Motion were the highest indexing bulls in the test. There are many other bulls for sale at private treaty. For details, contact Vidal Saenz at (956) 383-1026. *The RGVBIA Index is the ratios of the following computed within each age group: 30% Average daily gain, 20% Ribeye area/cwt., 20% Weight per day of age, 20% Marbling and 10% Scrotal circumference.