COVID-19 has had a direct impact on every country of the globe as well as the world’s financial markets. With information changing minute by minute, lenders and companies alike are scrambling to predict the future and understand the risks.
The same is true in the agricultural industry. To understand how COVID-19 is affecting the financial aspects of agriculture, Bill Moore, Chief Risk Officer for Compeer Financial, presented his webinar: Economics – What’s Happening, on March 19.
Here are a few of the key takeaways from the presentation.
Current Market Outlook Is Bleak
A quick look at prices shows the impact the disease has had on the market and the impact it will have on the world economy. Stocks have declined more than 30% from their peak and the rise in volatility is equal to what was witnessed in 2008.
The oil war between Saudi Arabia and Russia is adding further complications to the picture.
The Federal Reserve is counteracting these challenges with rate cuts. On March 3 and again March 15, the FOMC voted to cut the Fed Funds Rate by an aggregate of 150 bps, a rare but not unprecedented move. The era of zero interest rates appears to be upon us.
Since 1994 the Fed has made such emergency changes only nine times. All were tied to momentous events including the 9/11 terrorist attacks, the mortgage crisis and the burst of the dot-com bubble.
The Fed’s Action Plan
The Federal Reserve action plan can be broken down into two parts.
In stage one the Federal Reserve will provide a monetary stimulus supporting a willingness to purchase a variety of financial assets. In stage two the Fed will increase access to discount window and repo markets as well as PDCF and CPFF.
In addition to the Fed’s efforts, the treasury department has assured banks’ liquidity and the House and White House have agreed on a paid leave, food and health security bill. There is also the prospect of a $1.2 trillion spending proposal including $1,000 direct payments for adult U.S. citizens.
The Small Business Association will provide support via Economic Injury Disaster Loans to businesses impacted by the outbreak. However, businesses with credit available elsewhere may not be eligible.
Recession Likely To Be Brief And Global
Moore predicts this unprecedented pandemic will tip the world into a global recession. In the United States, he predicts a decrease of 2% to the U.S. economy in the first quarter and a 3% decrease in quarter two.
The recession places small businesses in particular in total limbo as consumer spending and energy seem poised to see big decreases.
However, Moore expects economies to rebound aggressively as the disease moves into regression.
Impact On The Grain Market
While many aspects of the U.S. economy appear poised to struggle through the recession, Moore is optimistic about U.S. grain. This is due in large part to the upcoming growing season, which he feels could be the bridge between recession and recovery.
However, he cautioned that ethanol could be a factor. If gasoline consumption falls for an extended period of time, corn used for ethanol production may lose 120 to 170 million bushels, or more. To maintain margins at least on a parity basis, corn would have to drop 87 cents per bushel.
Outlook On The Entire Agricultural Economy
The agricultural economy has historically been largely uncorrelated from the general economy and that’s a good thing in this environment. In addition, interest rates should help maintain land values.
However, this market is not without its challenges for agricultural producers. Labor availability is expected to be scarce and milk sales to schools have decreased sharply. In addition, off-farm income sources and transportation/logistics issues will further compound problems.
The China Model And Disease Life Cycle
The Hubei province, where COVID-19 began, is now the epicenter of some very positive news. After seeing new cases climb drastically through the latter stages of January, Hubei’s new cases per day dropped through February and in March the province has begun reporting days with no new cases. In addition, companies including Apple have begun opening their doors again in China and conducting business as usual.
As the epicenter of the event, China is the first to enter the recovery stage with Korea, Italy and Iran theoretically next. The United States figures to still be in the acceleration stage, making the home-bound policies enacted across the country so important. And while such living conditions are a stretch from the normal, the economy and the population as a whole will be better served on the other side.
To learn more about this topic and to see how Agri-Access can support your business, contact us today.