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Ag, energy experts take a look at COVID-19 & ND economy

Concerns about the impact of COVID-19 caused the 2020 crash, with the three worst stock market point drops happening this month.

The crash began on Monday, March 9, followed by two more record-setting drops on Thursday, March 12, and Monday, March 16.

“For the most part 25 percent of the stock markets high has been wiped away. It’s about 60 or so percent of where it was just a few short weeks ago,” said Bryon Parman during a NDSU Extension agricultural economics webinar held March 23. Parman is an NDSU Extension agricultural finance specialist

The webinar, with various NDSU Extension experts, was held for agricultural producers, agribusinesses and those in the energy industry to understand more about how COVID-19 will affect North Dakota’s economy.

“It’s kind of showing what the market and, I won’t say pandemic, but concern rippling through everything and how it’s going to affect many industries including the restaurant business, hospitality and hotels and then furloughing and laying people off, especially in these states like California and New York,” Parman said during the March 23 presentation.

Parman said one company is rating industries based on how tightly the U.S. is tied to China and the risk of bankruptcy or financial strain. He said industries at the top risk or extremely vulnerable include food, restaurants and travel agencies. Agriculture and oil are at the bottom of the table with medium and high risk of problems down the road for these specific industries, Parman said.

Parman said ag banks also were listed. “If we have problems – people losing their jobs or lowering prices going forward – how’s that going to affect the banking system, for instance just taking into account if somebody loses their job and they worked at a restaurant, are they going to be able to make their credit card payments, are they going to be able to pay rent, are they going to be able to make their car payment? Any of these lending institutions that have lent money to those individuals could be in big trouble down the road,” he said.

David Ripplinger, NDSU Extension bioproducts/bioenergy economist, said key factors going on now include:

– Energy market started downturn

– Saudi overproduction

– Significant reduction in domestic transportation fuel use

“It’s really important to note the energy market already started a downturn before the recent activity in the United States in the last week or two,” Ripplinger said, referring to the COVID-19 concerns.

He said obviously, China was hit early on with COVID-19. In response to that, he said Saudi Arabia, OPEC and Russia had discussions on how they were going to address this oversupply and typically, it can go one or two ways – to reduce supply to help prices rise and equal things out with demand.

“They couldn’t reach an agreement so that was about two and a half weeks ago. Essentially, what has happened is Saudi Arabia, the Gulf states and Russia have all decided that they’re going to produce as much oil as they can with the intent of lowering prices – damaging everyone else at the table including themselves,” Ripplinger said.

“Now what we’re seeing here in the United States is COVID-19 is starting to materialize. The next vacation of significant production is in fuel use – both gasoline which is primarily passenger fuel as well as diesel,” he said. He said one has to go back 20 years or so to find when prices are as low as they are now for a variety of energy products.

“There’s a lot of uncertainly what actual fuel use will be,” he added.

Ripplinger said both oil and ethanol have had a significant impact but oil is taking the biggest hit.

What is going to happen in the near term or the second quarter of 2020?

“There’s going to be a significant and immediate reduction in fuel use and exports. We have refineries up and they’re producing. We don’t want to necessarily shut down so I don’t know if we’re going to ratchet back fast enough and it’s going to result in a significant oversupply/prices.

He said another important point is how severe and how long this situation might last and what it could lead to, noting the corn ethanol industry specifically but also how it reverberates through the rest of agriculture.

He said, for example, if what we have right now (as of March 23) lasts for four months and there’s about a 20 percent decline in gasoline and consequently a 20 percent decline in U.S. corn ethanol consumption, that equates to about 2 million acres lost for the year.

If this is going to last for all of 2020 and a 25 percent reduction, he said it would be a loss of about a fourth of the corn acres used for ethanol, which is about 7 1/2 million acres.

“A lot of this just depends on how the market reacts, how the economy reacts. We’re going to see unemployment numbers, we’re going to see some immediate significant changes. While I’m confident we’re going to catch our feet and begin to grow as early as the third quarter, it’s going to probably take years to get back to the same level of GDP (gross domestic product) and consequently, the same amount of fuel use,” he said.

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