Guide To Navigating Market Volatility In Missouri & Iowa

The Coronavirus pandemic has created great economic uncertainty for all of us, from the early days when White House press conferences could result in massive stock market drops to the ongoing toll of small-business closures on communities. Locally, an explosion of cases spreading through meat-packing plants has left community members to deal with both economic and health consequences, with many deciding to remain largely at home. And while the stock market has gained much of what was lost, it will be some time before things are back to normal.

The good news is that the economic impact of COVID-19 is quite different from the most recent housing crisis, and economists like Paul Krugman predict that “the economy will recover a lot faster than it did from the 2008 crisis.” However, the timeline for recovery, according to Krugman, will depend on exactly how the pandemic evolves or comes under control, which at the time is almost impossible to assess.

Even if our national economy largely recovers in the next year, in the meantime members of our community, especially our small farmers who play a large role in our local economy, can face real and lasting hardship. So, what can you do to ride out the market volatility created by COVID-19? In this post we’ll dive into what we know about the financial impact of the pandemic on agricultural markets, and how to best protect your farm and your assets while we await a return to normalcy.

How will Agricultural Markets be affected?

From empty bread-shelves to milk-dumping, our food distribution system has already run the gamut of responses to COVID-19. Early days of shortages caused by hoarding have given way to long-term supply chain issues as people eat more meals at home and less at restaurants and schools. According to restaurant industry magazine QSR, 67% of all meals were eaten away from home before COVID. Today that number is more like 45%.

Farmers are just the first leg of a long process of food distribution, but disruptions further down the line have already trickled up in many niches, including dairy, eggs, potatoes, and beef–all heavily reliant on markets outside the grocery store. However, with students expected to make at least a partial return to school in the fall, and more people venturing out to eat again, demand is expected to return to near pre-COVID levels as long as a large second-wave doesn’t require another sustained lock down.

For rural communities like ours in Missouri and Iowa, where agriculture and food production provide a foundation for local economies, the unpredictable nature of the pandemic can leave residents and small farmers reeling. In an article about grain market uncertainty in Agrilife Today, Luis Ribera, Ph.D., an economist and director of the Center for North American Studies at Texas A&M University, College Station, explains, “With COVID-19, there is a lot of uncertainty and commodity prices are all over the place. There are a lot more questions than answers right now.” But there are a few things that we do know about how COVID has affected and will continue to affect agricultural markets.

Hardest Hit: Corn and Dairy

Corn and dairy prices will likely be hit the hardest for very different reasons. In the case of #2 field corn, 40% is grown for ethanol and the demand for fuel is down, so corn prices have already dropped 10 to 15%. It is likely that demand for fuel will remain low for the time being, despite economies opening up. Even if prices only dip by single digits, farmers who already experience low profit margins in good years could find those numbers devastating.

The Farm Bureau has called for farmers to reduce corn plantings this year, though that call may have come too late for many farmers who have already purchased seed or planted. Farmdoc Daily from the University of Illinois predicts losses because of increased production in a time of decreased need: an average loss of $107 per acre of corn, though high yield acres would only lose an average of $57 per acre. However, there is a chance that increased opportunities for exports due to global effects of COVID might be able to salvage the year for US corn farmers. It’s too early to know with any degree of certainty.

On the other hand, dairy was already experiencing a downward trend in consumption, kept afloat by institutional contracts like those with school districts. When kids stay home, they drink less milk, purchased through a completely different distribution system, resulting in a surplus of milk and significantly impacted milk prices. However, the dairy industry is showing signs of a burgeoning recovery, with milk production in June 2020 up fractionally from June 2019.

Hanging in There: Soy

According to a recent study by Purdue University, “The impact of COVID-19 on demand for bio-diesel, soy bio-diesel, and soybeans would likely be smaller than its impact on gasoline, ethanol, and corn.” Similarly, while Farmdoc Daily also shows a potential loss for soy ($40 per acre), high-yield acres would fetch on average $10 profit per acre. Potential for export could also improve these prices. Predictions for organic soy are more optimistic with expectations of a strong year. As the Specialty Soy and Grains Alliance writes in their 2020 outlook, “a collapse in imports from China and a reduction from Canada and the Black Sea Region point to supply constraints and higher prices.”

Fairing the Best: Wheat

With positive outlooks for exports to Russia and increased demand for flour, wheat prices seem to be fairing the best at the moment, despite the fact that food service sector sales have decreased. Although wheat acreage decreased nationally since last year, in Missouri winter wheat increased by almost a million bushels–a smart move by local wheat farmers. Currently, the July 2020 USDA Wheat Outlook shows the wheat crop shrank on reduced outlook for winter and other spring wheat.

What further complicates the picture is the fact that much of the formula for calculating prices depends on demand overseas. And this year that depends not only on the usual weather and economic conditions, but also with how each country responds and is affected by the pandemic. On one hand, countries entering a recession might import fewer crops from the US. On the other hand, countries like Brazil producing fewer crops means less export competition, leading to increased prices. And of course this will vary crop by crop. Ultimately only time will tell. The USDA does note that: “Despite this month’s reduction, global wheat production remains record-large and supports the outlook for record-high exports.”

Strategies For Farmers Navigating Market Volatility

The impact of COVID on US agricultural markets is not only out of the wheelhouse of many experienced in commodity crop economics, but is also dependent on factors, like the development of a vaccine, that no one can presently know. But people need to eat, the threat of COVID will pass, and, even for agricultural markets that have been hit the hardest, it is likely that prices will rebound in the following year.

However, the impact of a year of lost income can have lasting consequences for farmers, many of whom were already experiencing economic hardship before COVID-19. If you are concerned about the vulnerability of your own farm, it’s important to consider how to make it as resilient as it can be this time, so that it can not only survive the pandemic financially, despite economic hits, but be prepared to rebound when markets settle down again. Here are five things you can do to prepare for the ongoing impact of COVID-19 on your farm business:

1. Use a Conservative Approach

When making decisions, now is not the time to take big risks, make large purchases or expenditures, sign long-term leases, or take on significant new debt. Instead, make do with what you have and keep your debt-load manageable. As AgriLife Today recommends, “get break-even prices as low as possible–for this season and beyond.”

2. Take Active Steps to Reduce Overhead

There will be some costs that are outside of your control, but there are many things that you can do to reduce your overhead costs. One of the most useful steps you can take is to reach out to your local lender for ways to consolidate your current debt and reduce monthly payments with a lower-interest agricultural loan or farm real estate loan (Especially since mortgage rates have hit at historic lows!). Farmers who cannot afford current loan payments may also qualify for temporary forbearance due to COVID-19.

Additionally, take a look at every line-item of your budget, and look for ways that you can reduce costs. Consider reaching out to your county extension office for suggestions on ways to reduce spending. Our area is served by numerous extension office locations of the University of Missouri.

3. Prepare for Disruptions

Because it’s difficult to know what exactly will happen, create plans for several different scenarios for both commodity pricing and distribution, and as well as what will happen if there is a second wave of COVID-19 this fall, or if you or any of your staff falls ill. Consider the following questions when creating contingency plans:

Will my usual market be available to me when I harvest/am prepared to sell? If not, are there any other potential markets I can explore?
Will my farm be financially solvent if I am unable to break-even this year? If not, can I seek funding to get me through this tough time?
How will I be able to redistribute work if a key-player on my farm gets ill? Who will take over my farm operations if I fall ill, and how will they manage?
What safety and hygiene measures can I put in place to protect myself and my employees from Coronavirus to prevent illness?

4. Wait to Finalize Plans for 2021

Although it’s wise to create a contingency plan for next year, too, it’s advisable to wait until we know more about the impacts of COVID before finalizing plans for future seasons. Keep an eye on agricultural futures (linked below), but take them with a grain of salt until we know more about how COVID-19 will affect us this fall.

5. Stay Informed and Reach out for Help

In order to make the best decisions in a rapidly-changing pandemic, it’s important to stay up-to-date on financial developments, as well as opportunities for relief. Below is a collection of resources to help guide you through your decision-making and show you what assistance is available to your farm to help it through the pandemic.

COVID-19 Farmer Resources

The most trusted farm-related organizations have put together significant collections of resources for farmers facing the effects of the pandemic. Here is a list of links to a number of organization’s COVID resource pages:

Commodity Pricing and Market Outlooks

Stay on top of market pricing and outlooks, even with the acknowledgement that things could change quickly. As the summer season progresses and more is known about COVID-19, these outlooks will have more and more certainty and be increasingly useful in your plans for both this year and the next. Here are a few market futures to consider:

Opportunities for Relief

Lastly, do not forget that relief packages for farmers and small businesses affected by COVID are available. Some funds are limited, so early application is beneficial. Here are a list of links to some of the opportunities available to farmers–but don’t hesitate to speak to your local lender or county extension office for help in locating the right assistance for you:

BTC Bank is here to help local farmers!

If you are concerned about your finances and aren’t sure where to start, a good place to get advice, pandemic or no pandemic, is your local financial institution. Your community bank can not only help you navigate mortgage forbearance or refinancing home loans, but can provide you guidance on savings and retirement planning and other major financial decisions. Contact us at BTC Bank or stop by one of our branch locations to learn more about how we can assist you as you navigate life during the pandemic.