Crop market traders and industry analysts watch the weather forecasts and crop condition ratings very closely during July and August.
These months are critical time periods for determining U.S. corn and soybean yield potential, and this year is no exception. However, the COVID-19 pandemic also is creating high levels of uncertainty in the grain and livestock markets.
The combination of these two factors leads to considerable price volatility, which increases risk exposure but also can create marketing opportunities. Developing a crop marketing plan in this environment just got harder.
Most people I visit with about crop marketing understand how changes in supply can impact prices. The price response to changes in planted and harvested acreage, crop yields and current grain inventories are well understood. However, the price impacts from changes to demand for crops is more complicated, especially when trying to anticipate the impacts from the COVID-19 virus.
Agricultural products primarily are used for food, fuel and fiber. However, the major crops, such as corn, soybeans and wheat, are processed and used as ingredients for multiple final products bought by consumers. This means that changes in consumer purchasing patterns do not directly impact crop prices; the impacts are indirect. The supply chain that connects farmers to consumers can have many links, depending upon the product.
The COVID-19 pandemic is forcing political and economic systems to balance public health concerns with economic activity. Instituting stay-at-home/work-from-home orders, closing schools and selected business, and limiting travel have helped slow the spread of the virus but have created significant economic challenges, which is changing consumer demand.
In economics, the term “effective demand” has a specific meaning. Effective demand is defined as a consumer want or need that is supported by an ability to pay. This means that individuals must prioritize what and when they buy products and services against a limited budget. Everyone has a different set of priorities about wants and needs, as well as different budget limits. Overgeneralizing about how consumers may respond to changes is a common mistake.
What have we learned so far about changing demand for crops, domestic and international, due to COVID-19? The agricultural supply chains with the fewest links between farmer and end consumer have been impacted the most. The demand for gasoline and ethanol dropped rapidly when the stay-at-home/work-from-home orders were implemented. Lower demand for ethanol caused corn prices to fall.
States are beginning to relax the stay-at-home orders and motor fuel demand is recovering. However, many forecasters don’t expect motor fuel demand to fully recover for another 12 to 18 months. Corn demand from the ethanol industry is expected to increase slightly from today’s levels.
Overall consumer demand for meat has remained strong, but the most popular type of meat products and packaging sizes have changed. Restaurants purchase meat in bulk while individuals purchase small packages in the grocery store to be prepared at home. High-value meat cuts such as steak and ribs are most often sold to restaurants, while hamburger, chicken and pork chops are more often sold in grocery stores.
Restaurant closures have reduced the demand for high-value meats in bulk packaging while demand for small consumer-packaged hamburger, chicken and pork has increased. Thus, the farm-level prices for beef, chicken and pork have decreased faster than feed prices.
Profit margins for the livestock producers, including dairy, have fallen dramatically. Lower livestock prices and profit margins reduce the demand for feed, such as corn and soybean meal, because of tighter budget constraints. Even though total livestock numbers are forecast to increase slightly during the next year, increased use of forages in beef and dairy rations could limit the amount of extra feed needed.
Demand for vegetable oil, such as soybean, canola and sunflower oil, is expected to remain relatively stable. Vegetable oils are most often used for cooking and frying and have a comparatively long supply chain from producer to consumer. Vegetable oils also make up a somewhat small portion of the total cost for food products, so a change in the price of the oil will have a small impact on the amount used.
Demand for bread, pasta, cake, cookies and cracker products, requiring wheat and durum, also has been stable. Bread, pasta and other wheat products typically make up a small portion of the total cost for a meal. They are easy to include in meals prepared at home, ready-to-eat products or meals eaten at restaurants. Macaroni and cheese and pizza have become more popular during the pandemic.
Changes to international demand for crops is by far the most complex and difficult to forecast. Effective demand can be very different in each country and often varies by region within a country.
For example, consumers in Mexico likely will adjust differently to the coronavirus pandemic than consumers in Japan. Mexico and Japan are major buyers of U.S. agricultural products. In addition, concerns about possible supply chain disruptions can impact the volumes of U.S. products imported by each country. Fortunately, the export sales for U.S. corn, soybeans and wheat are near normal levels and are not expected to change dramatically due to COVID-19.
U.S. consumers have changed the way they buy food but have made relatively small changes in the type of foods they buy. The amount of food purchased from grocery stores has increased and purchases from restaurants have decreased.
More people are ordering their groceries online and requesting home delivery rather than going to the grocery store. We’ve also seen an increase in the number of meal kits or boxed meals bought by people with basic cooking skills or who have little time to prepare a meal from scratch.
Companies at all stages in food supply chains are struggling to understand the rapidly changing consumer preferences and how many of these changes will be permanent versus temporary. In other words, will they see structural shifts in their respective industry and how will these impact their company’s role in the supply chain?
Structural shifts typically don’t impact short-term crop prices, but they can influence longer-term price trends. No one can accurately predict all the impacts COVID-19 will have on crop prices, but everyone involved in agriculture will need to be watching for any shifts and adjust as quickly as possible.