Bull recovery expected from COVID-19

The history of pandemics shows the downturn in economic activity is swift and brutal, but it is quickly followed by a period of recovery with robust export activity, said Export Development Canada chief economist Peter Hall during a coronavirus webinar. | Screencap via EDC.ca

Canadian exporters reeling from the impact of COVID-19 need to know this is likely a short-term setback, says Export Development Canada.

The history of pandemics shows the downturn in economic activity is swift and brutal, but it is quickly followed by a period of recovery with robust export activity.

“We do believe that the second half of the year will be that rebound part,” EDC chief economist Peter Hall said during a coronavirus webinar.

Part of the reason for his optimism is that the world economy seemed poised for a bull-run prior to the discovery of COVID-19.

The tumultuous trade environment that has plagued markets for the last couple of years finally appeared to be calming down.

In one “magical week” in December 2019, Canada, the United States and Mexico signed a new trade pact, the U.S. and China announced they had agreed to phase one of a trade deal and the United Kingdom finally voted to leave the European Union.

Those three developments set the stage for a promising year ahead in 2020 and then China discovered coronavirus and the world economy was turned upside down.

The tourism industry has been particularly hard hit with airlines, cruise ships and restaurants experiencing a sales revenue free-fall. But commodity markets are also hurting.

Hall said it is “almost offensive” to talk about the economic impact of a disease that has killed thousands of people but history shows the world economy is more resilient than humanity itself when it comes to pandemics.

“The key message here is that there is a limit to the duress and there is a limit to the duration,” he said.

There are already positive signs of a turnaround. The rate of infection in China and South Korea is starting to slow and people are returning to work.

China will be the first economy to recover. It will take longer for the developed world to rebound as infection rates were still on the rise in key markets like the U.S. late last week.

Hall said the good news is that there is considerable pent-up demand for all kinds of products in markets like the U.S. and Western Europe.

The other bit of good news for Canadian agricultural exporters is that the Canadian dollar is losing ground to the U.S. dollar due to slumping crude oil prices and other factors. He is forecasting the dollar will bounce around in the 70 to 75 cents U.S. range for the foreseeable future.

Arlan Suderman, chief commodities economist with INTL FCStone, initially struggled to figure out why the COVID-19 pandemic was driving down prices of various agricultural commodities.

It didn’t make sense. Billions of people around the world are still eating food.

He asked his team in China to do some research on the subject. One of the team members found some answers in the 2017 China Health and Nutrition Survey.

The study showed that urban residents in China consume 17 percent more red meat and 28 percent more poultry when they dine out compared to eating at home.

The differences are even more stark for rural residents who consumed 64 percent more red meat and 84 percent more poultry when eating out.

“There is more of a shift towards protein when eating out,” Suderman said during a recent webinar.

But Chinese people are eating out less frequently due to various coronavirus-related restrictions.

Suderman said it is reasonable to assume there is a similar shift in eating habits in other affected markets such as South Korea, Japan and Italy.

Put it all together and that can have a profound impact on meat and feed grain demand.

But it doesn’t fully explain the magnitude of the drop in agricultural commodity prices. He thinks there is a more sinister factor at work.

“When fear is the driver, it doesn’t matter where the chart support is or what fundamental support is,” said Suderman.

He said the fear is being fueled by a constant barrage of media reports overplaying the danger of coronavirus.

“The media does this. Name the cause, they hype it. That’s how they get viewers,” said Suderman.

“We may not like it but we have to recognize the risk that it has to commodity prices.”

Grain markets need something to jolt them out of their current bearish mindset and he sees a couple of possibilities on the horizon.

The first factor is that it is wet in the U.S. Midwest … very wet.

In fact, the rain totals over the last 12 months are the most on record in the corn belt since 1895. The same goes for the two-year, three-year, four-year and five-year precipitation accumulations.

A weather forecaster that he trusts is predicting more wet weather in the Midwest come spring. That could result in delayed seeding and a poor start to the 2020-21 U.S. corn and soybean crops.

The other red flag is that there have been some preliminary signs that the El Nino-southern oscillation may be shifting to a La Nina phase.

If a full-fledged La Nina is in place by mid-summer it could result in a hot and dry August in the U.S. Midwest, which could reduce yields.

Contact sean.pratt@producer.com

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