Election Countdown: Are Commodity Markets on the Verge of a Tipping Point?

Commodity markets faced some pressure this week as confirmed COVID-19 cases continued to trend higher. The concerns captured headlines, acting as a short-term anchor for corn, soybean and hog prices, while cattle prices found a way to climb.

The reversal in certain markets set a cautious tone this week, after a harvest rally caught many off guard. So, what was driving commodity prices higher the past couple months? Economists say several factors favored prices, including a surprise adjustment in the last USDA report.

“The first thing was that last USDA stocks report came in and tightened up supplies,” says Seth Meyer, associate director of University of Missouri’s Food and Agricultural Policy Research Institute (FAPRI). “The market had been wondering about that and came in and tightened up supplies a little bit, and so carry out stocks looked a little bit tighter.”

While Meyer says USDA’s stocks adjustment revealed tighter supplies, the biggest piece of the positive commodity market puzzle is demand. 

“At the same time the Chinese kept buying,” he says. “The Chinese have been buying pretty regularly; that’s started to slow a little bit, but that's after a huge run in prices, and that demand looks pretty real. There's still a lot of outstanding sales. We need to turn those into shipments, but that has been driving us higher.”

Scott Brown, an Extension economist with the University of Missouri, says explosive exports are not just helping drive prices higher, the shift in consumption is helping these price moves last. He says as long as exports continue, there may be more room for prices to climb.

“I think a lot of that has to do with what happens on the demand front from this point forward, if you want to have higher prices,” he says. “Exports could get stronger yet again. I still look at just overall domestic demand and the strength we've seen in a number of these commodities of late, despite some of the COVID-19 concerns. If we can keep that demand growing, maybe there is that possibility prices move higher. However, I always say right now, there's probably more downside risk in those prices from where we sit today than upside potential.”

As COVID-19 cases rise, Brown says the biggest risk may be to livestock prices, especially cattle. For row crops, Meyer says the export story seems to be overshadowing the bleak ethanol demand situation.

“We've seen that folks haven't returned to driving,” says Meyer. “If COVID continues to outbreak here and around the world, we'll see some soft demand, but it'll be focused, I think, on specific commodities. But even those commodities have had a run because of some export demand.”

Meyer says there are still many unanswered questions about ethanol consumption in the U.S. He says that’s not just surrounding how many people are buying less gasoline, it’s also about renewable fuels policy.

“We have policy statements by EPA that are way overdue, and we just see driving down about 10%,” says Meyer. “As a result, it's going to be real tough for them to come back in and even hold with level mandates going into the next year. We're at a really sensitive point in terms of costs. That's why you've seen some of these things, like rising RIN prices, because folks understand it'll be hard to shove through that ethanol through the system in the coming year.”

Brown says while agriculture waits for some of that policy to unfold, the demand story continues to be exceptional, with retail demand from grocery stores making up for the lack of demand from restaurants.

“If we would have said six months ago, ‘we're going to be talking about stronger prices going forward,’ not many would have believed you,” says Brown. “You take pork, for example, we've seen much higher hog prices here over the past 60 days or so that, you know, we're slaughtering 2.7 million hogs a week. Normally, that kind of supply would have driven prices lower.”

Watch the complete discussion from the 2020 U.S. Farm Report College roadshow.