In calling for the recent meeting of the Agricultural Advisory Committee (AAC) on an expedited basis, Chairman Heath Tarbert stated that “Agriculture, like so many sectors of the U.S. economy, is facing an unprecedented challenge at the hand of the coronavirus." In the meeting, which was held telephonically on April 22, 2020, the AAC focused on the COVID-19 pandemic and its impact on agricultural commodity markets.
The meeting featured remarks from U.S. Secretary of Agriculture Sonny Perdue, as well as presentations by the CME Group’s Derek Sammann, Global Head of Commodities & Options Products, and the Chief Operating Officer of ICE Futures US David Farrell. The 15-day notice period required by the Federal Advisory Committee Act was waived due to the exceptional circumstances associated with the COVID–19 pandemic.
Secretary of Agriculture Perdue notes resiliency but expresses caution. In his remarks, Secretary Perdue acknowledged the intertwined roles and fortunes of the U.S. Department of Agriculture (USDA) and the CFTC given the COVID-19 pandemic and the challenges it presents. Perdue praised the admirable performance of the U.S. food supply chain during the crisis which he described as “the most efficient in the world.” However, Perdue noted that he had significant concerns about the processing industry and the fact that livestock prices are at multi-year lows.
Perdue also indicated that the USDA was working to assist producers that have been devasted by the pandemic. Perdue noted the USDA was also working to amend various regulations to provide relief for market participants but noted those changes will take some work and will need to be fair, transparent and effective.
Chairman Tarbert announces new Commission undertakings to address pandemic impacts. Chairman Tarbert, who also serves as the sponsor of the AAC, noted two significant Commission undertakings in light of the pandemic. First, in recent weeks, the CFTC established a livestock markets task force that is monitoring in real time contracts such as Live Cattle, Feeder Cattle, and Lean Hogs. That task force’s focus includes whether prices are moving in an uneconomic manner relative to an underlying commodity’s cash prices.
Additionally, Tarbert announced that the Commission will soon appoint a CFTC Liaison to the USDA in the first time of its 45-year existence. He noted that the CEA requires that the USDA appoint a liaison officer for purposes of maintaining a connection between the USDA and the CFTC. Tarbert indicated that reciprocating with its own liaison will ensure robust dialogue and continued coordination regarding matters of mutual interest between the agency and the USDA. Commissioners Brian Quintenz and Dan Berkovitz also provided their statements regarding the various issues at hand.
A view from the exchanges. The CME’s Derek Sammann took particular note of the cattle and dairy markets given shifts in demand from institutional players and restaurants to retail consumers. Moreover, he noted that the markets have seen the front live cattle contract drop from $22 to 36 cents in the span of a week. Nonetheless, Sammann indicated there has been orderly convergence between the futures and cash prices and that futures contracts have continued to be effective hedge and risk management tools in these chaotic markets.
David Farrell of ICE Futures US observed double-digit increases in volume and volatility in their contracts in March. More recently, and after some of the initial uncertainty has diminished, Farrell noted that volumes have decreased. He also indicated the ICE is continuing to review its contingency and mitigation plans and is taking steps to assure that its markets remain open for fair trading.
Ag products unlikely to show negative prices. During the Q and A portion of the meeting, a question was asked whether Ag contracts could display negative prices similar to the recent activity in the WTI crude oil futures. Derek Sammann responded that he thought it was very unlikely for agricultural products to go negative. He noted that crude oil went negative due to oversupply, reduced demand, and the lack of storage capacity. In contrast to crude oil, he noted that grains and oilseeds are much easier to store. Additionally, slaughter-ready cattle can be put back out to pasture, and hogs can be put back to their pens. He conceded butter could be more vulnerable to negative pricing, but even that had options to be stored in a temperature-controlled environment.
Living in historic times. Division of Market Oversight (DMO) economist David Amato was asked whether the markets are reacting as expected in these turbulent times. Amato answered “yes,” noting the price action being seen reflects supply and demand factors. However, he also indicated that packing plants have emerged as hotspots for the COVID-19 contagion, with 8 percent of those facilities currently offline and the remainder operating at 60 percent of normal operating capacity. He also noted 8 percent of milk is being dumped and chickens are being killed in the fields. He concluded, “We are living in historic times.”
Ag products unlikely to show negative prices. During the Q and A portion of the meeting, a question was asked whether Ag contracts could display negative prices similar to the recent activity in the WTI crude oil futures. Derek Sammann responded that he thought it was very unlikely for agricultural products to go negative. He noted that crude oil went negative due to oversupply, reduced demand, and the lack of storage capacity. In contrast to crude oil, he noted that grains and oilseeds are much easier to store. Additionally, slaughter-ready cattle can be put back out to pasture, and hogs can be put back to their pens. He conceded butter could be more vulnerable to negative pricing, but even that had options to be stored in a temperature-controlled environment.
Living in historic times. Division of Market Oversight (DMO) economist David Amato was asked whether the markets are reacting as expected in these turbulent times. Amato answered “yes,” noting the price action being seen reflects supply and demand factors. However, he also indicated that packing plants have emerged as hotspots for the COVID-19 contagion, with 8 percent of those facilities currently offline and the remainder operating at 60 percent of normal operating capacity. He also noted 8 percent of milk is being dumped and chickens are being killed in the fields. He concluded, “We are living in historic times.”