Unforeseen Events Shape 2020 US Agriculture

BY JOHN MILLER

While every year seems to bring unexpected economic, political, or adverse weather events that surprise the marketplace, 2020 seems to have found a level of frequency not seen in a while.

As if wasn’t enough, commodity markets began the year mostly focused on the ongoing US-China trade dispute and the prospects for solutions beyond the prior-year Phase One agreement that was negotiated largely with agriculture in mind. Since the beginning of the year, US agriculture has experienced a strong uptick in Chinese purchases of our agricultural products, mostly in the form of soy beans and corn with modest improvements in a considerable number of other products. It is true that China has barely approached half of the original goal for this year, but a recent surge in purchases of US soybeans and corn have been of critical importance to buoying commodity futures prices in recent months.

As we moved into mid-January of this year, it was well understood that US famers would attempt to plant more than enough corn and soybean acres to satisfy demand and then some. Commodity traders were already preparing for the prospects of lower prices in anticipation of formal planting surveys that start coming out in March. Little did anyone know that those early reports of something called Covid19 would turn into a Black Swan event that would keep mar kets on the defensive for the balance of the year. One of the best illustrations of the impact of Covid19 on the economy must be Figure 1 which shows the rapid decline in weekly ethanol production start ing in late January of this year (blue line). In just three months, this industry went from producing a record 1.1 million gallons per week to just under 500 million gallons per week, or just less than half of prior Covid19 levels.

Since virtually all ethanol is used as an additive to gasoline, this directly reflects the slowdown in economic activity as the American family and work life started to grind to a halt. Figure 2 shows the corn futures market over this same time, and how it did not take long for these prices to react since roughly forty percent of the US corn crop has been going towards ethanol production since 2013. The expectation of a large US corn and soybean crop coupled with un foreseen impacts of Covid19 on the economy suggested at the time that commodity prices could very well decline further to extremely unprofitable levels. 26

As the Rio Grande Valley harvested corn and sorghum during June, the commodity markets remained on the defensive as the crops across the US Midwest continued to impress, and the economic effects of Covid19, while abating to some degree, still added uncertainty to the marketplace. After harvesting a modest, but somebut sometimes surprisingly good corn and sorghum crop given the dry spring, Valley farmers were eager to get out there and pick one of the best cotton crops seen in a while. Early expectations ranged anywhere from just under 2 bales per acre to over 3 bales per acre

to over 3 bales per acre on non-irrigated land. Another words, an outstanding crop. Keeping in line with the luck of 2020, Hurricane Hanna which had been meandering across the Gulf, starting drifting southward and ultimately made landfall on about the 25th of July. This storm packed an amazing punch with winds accelerating last minute to make the storm hurricane force as it moved across the Valley. As Figure 3 shows, Hanna was not kind to a mostly mature cotton crop that had just begun to be harvested. It is estimated that up to 300,000 bales of cotton were lost to the storm. The fact that this is the earliest cotton to be harvested and available to the mills helped cotton futures rally several cents per pound in late July as illustrated in Figure 4. This unforeseen event could well have a ripple effect into year end as the Valley losses are fully understood and added to almost historic drought related losses of cotton being experienced across West Texas. In early August, the drought situation that had been hurting West Texas crops began to creep into the Western Plains and points fur ther east such as Central Iowa. The growing area of dry conditions began to get the attention of the marketplace as estimates for the Iowa corn crop began to marginally decline. Then starting on August 10th, a startling unforeseen and rare weather event hit Central Iowa in and around the Ames area. As the corn in Figure 5 illustrates, a strong straight-line wind of up to 100 miles per hour nicknamed ‘Derecho’ for the Spanish meaning literally flattened the crop across a 700-mile wide swath of Central Iowa.

Referring to Figure 2, the severity of this storm and the still unknown measure of corn loss helped rally corn futures almost 40 cents per bushel in the weeks following. And if that was not enough, we barely had time to digest what had happened in Iowa when we started following dueling tropical storms across the Gulf. As the two systems merged into what become Hurricane Laura, the marketplace began to contemplate possible damage to cotton and grain crops in the Delta contrasted with potential help from the rain Laura might bring to the Midwest. Hurricane Laura ended up being devastating to property right along the coast, but crop damage was ultimately minor as the photo of a twisted soybean crop in Figure 6 illustrates. But Laura swiftly moved east and failed to generate moisture in the dry

areas of the Midwest.

Given the uncertainties farmers and all Americans have been dealt this year, one has to wonder what lies ahead this fall and winter. We are told that a vaccine for Covid19 is around the corner, but that it is still too early to know the effectiveness of these early efforts. Per haps the most important unforeseen aspect of Covid19 will continue to be the medical and political recommendations and/or policies that might further limit economic recovery. Weather will continue, as always, to play a role in commodity price uncertainty. Hurricane season has some time left, but it is likely that the marketplace will be looking for chances of crop damaging flooding or freezes as farm ers across the Midwest start to harvest their crops. We will also be following updates of the overall US crop balance sheet as more is understood about the full measure of effects of the Derecho storm across Iowa, drought losses across the Western Plains, and events like Hanna and Laura. It is only September and it seems like we have seen enough calamity for one year. The various droughts and storms have primed the pump for speculation on whether the US will end up with adequate supplies of the major commodities. The un certainties related to Covid19 and US-Chinese trade relations makes one wonder if the ultimate demand for commodities will be strong enough to hint at shortages, or wane to the degree that prices fall back again. As you drive around the Valley and notice the plowed up cotton fields, and the absence of those bagged round bales of cotton setting at the fields edge or at the cotton gin, it will be a local re minder of the need to consider the potential influence of unforeseen events on our daily lives.