Current Events & Global Perspectives / March 10, 2020

The Effects of Coronavirus on Agriculture

 

After consistently surpassing record highs over the last year, many warned that a 10%-15% dip was on the horizon, and that markets would shift into correction mode in the very near future.

They didn’t have to wait long to be proven right. Stoked by fears of the effects of Coronavirus, investors turned jittery last week, causing indices like the Dow and the S&P 500 to tumble by 10.4% and 14%, respectively. Today was also catastrophic for markets, as the Dow had shed just over 2,000 points by 3:00 this afternoon (EST).

This volatility was compounded today when crude oil prices plunged after Saudi Arabia cut its oil prices amidst plans to boost production. Not wanting to cede market share to US shale oil companies, Russia declined the Saudis’ proposal to increase supply cuts. This led to an all-out price war that caused oil prices to drop by as much as 20%.

The shock to oil prices, combined with widespread concerns over the Coronavirus, caused markets to tumble again today, triggering a “circuit breaker” pause in trading as the Dow dropped 7% shortly after opening.

How will this impact the agricultural trade? Generally, agriculture is not highly correlated to publicly traded markets. This is mainly due to the stability of demand for its products. When the economy swings downwards, people might not have the money to buy a house or take a vacation – but they still have to eat.

The low price of oil will also have an impact on the industry, despite being a drain on the global economy at large. Logistical savings will be passed on to players in the industry, and lower operations costs as a result of cheaper oil could mean more profits for growers.

“Prices of agricultural commodities are affected by energy prices through two channels: directly through fuel (and other energy) costs, and indirectly through chemicals and fertilizers (some fertilizers are made directly from natural gas),” notes a report from the World Bank. Cheaper energy could be good for farmers, the report notes.

However, this depends heavily on target markets. As the Fed hurries to cut interest rates again, a weakening dollar could spell trouble for US exporters, especially since the US is now the world’s top oil producer. Soybeans, wheat, and corn are all taking much longer to reach markets due to the virus, and the cattle industry is likely to take a hit as well.

In vulnerable areas, the effects of Coronavirus will be more severe. Food security is under stress in many regions, and although the food supply has been stable even in heavily effected areas like Wuhan, where the Coronavirus originated, processed foods and stable crops could be negatively affected, as occurred during other outbreaks like SARS. Smallholder farms in emerging markets will also suffer, as health concerns will limit market access.

As a region much less dependent on oil production, European markets are not as highly affected by an oil glut, and will enjoy many of the benefits without suffering as many of the consequences. Prices for agricultural commodities are not likely to suffer serious repercussions.

“There will be no real demand destruction in agriculture from the coronavirus,” said Sal Gilbertie, president and chief investment officer at Teucrium Trading, in an interview with Market Watch. “People still need to eat, which means agriculture demand will not abate.”

Specific sectors, such as coconuts, green vegetables such as kale, and citrus, may see additional surges as many people flock to these products for their health benefits. Whether purchased for their legitimate immune-boosting effects or as part of dubious home remedies, there is likely to be an increase in demand for some agricultural products.

Agriculture is a highly varied space, and macroeconomic phenomena may benefit some sectors while harming others. As markets continue to reel from the effects of Coronavirus and oil price panic, there is no clear consensus on the future of the markets, in agriculture or more generally. But, as with the virus itself, panic is decidedly not the answer.

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