Commodities in the U.S. are taking a beating and hurting Kansas farmers and ranchers.
The culprit is the fear of coronavirus.
The market is looking toward the future, and traders think the future might be bleak. Therefore, prices are declining for beef and a little less for grains.
It is all about economics for commodities right now, not about the number of fatalities, said Jeffrey McReynolds, of McReynolds Marketing and Investments, a full-service commodity brokerage firm in Hays.
"The markets have gone down because the method used to fight the outbreaks brings economic activity to a near standstill, which hurts demand," McReynolds said. "This is not about the body count."
McReynolds said it is about the fear of quarantines, closed restaurants and factories.
Dan O’Brien, an agricultural economics professor located in Colby, said the futures market has declined in the last several weeks.
"People have become more cautious," O’Brien said. "This tends to reduce the price of commodities."
Because the virus appears to have a higher mortality rate and because of quarantines in China and Italy, the commodities market is reflecting these concerns.
"The markets this week were forced to consider what would happen to the U.S. economy, and to domestic demand, if the disease gets a solid foothold here," McReynolds said.
According to Johns Hopkins School of Medicine, there are many different kinds of coronaviruses. A newly identified type, COVID-19, has caused a recent outbreak of respiratory illness that began in China. According to Johns Hopkins, gene sequencing determined the new coronavirus, 2019-nCPoV, a betacoronavirus, is related to both MERS-CoV (Middle Eastern Respiratory Syndrome virus) and SARS-CoV (Severe Acute Respiratory Syndrome virus). Researchers at major universities, including Kansas State University, are looking into ways to combat this virus.
"Although the price of futures have declined for grains," O’Brien said, "the local price relationships are holding up. We still have local cash markets displaying some strength."
Although wheat might remain strong, corn might falter because of its use in ethanol production.
"The cheaper that gasoline gets, the harder it is for ethanol to compete," McReynolds said. "If gasoline is cheap, ethanol blending drops."
Farmers can store grains, but animals are a living, breathing commodity.
McReynolds and O’Brien said the drop in commodities affects cattle the most. Speculatively, if restaurant demand goes down, then beef demand declines. In addition, the U.S. relies heavily on beef exports.
"It’s going to really hurt incomes," said Clay Simons, executive Extension agricultural economist at the South Central K-State Extension Office located in Hutchinson. "If you’ve got cattle that are ready to go, it’s just going to be tough."
"The trajectory of the rate seems to be moderating as of the news we have today," O’Brien said. "We’re in a different situation than in mainland China."
McReynolds recommends that farmers and ranchers buy some put options – an agreement to sell options at a certain price on or before a certain date. He said this would "put a floor" on their losses. They would essentially be buying insurance that they would only need to use if prices continue to drop.
"The market will stop going down when the news gets better, or when the market has adequately priced in the risk of quarantine," McReynolds said. "This is about fear."
O’Brien suggested farmers remain calm.
"We still have to grow the 2020 crop," he said. "Right now, there’s increased uncertainty, temporary caution and lower prices."
To view market trends, visit K-State’s website at www.agmanager.info.