SHAKEN AND NOT STIRRED

POSSIBILILITIES AND POTENTIALS

Presentation for Iowa Soybean Research Conference

February 6, 2018

Introduction: As we rolled the year over to 2018, there seemed to be negativity in most markets, and especially in agriculture. The supply fundamentals seem so stacked bearish but, we have to remind ourselves, we go from abundant supplies and low prices to tighter supplies and higher prices. There are three events that can change trends. They are weather, politics, and war.

Slide 2: Taking care of Kim Jung Un may not be as difficult of a task as we think. Will we really need the big red button?

Slide 3: Commitment of Traders data implies that the smart money is buying soybeans. We view the smart money as commercials that are aware of expected business and supplies. In this graph, the center line implies smart money buying strongly via contracts when the center line is high and prices are low or at a low. The opposite is true when the center line is low and the smart money is selling with prices high. The CFTC releases this data on Friday of every week.

Slide 4: The US Dollar struck a 15-year cycle high in January 2017 and has since declined over 15%. Still, we note that the Dollar has a wave four count at 87.645 area.

Slide 5: The Goldman Sachs Dow Jones Ratio versus commodities valuations implies the ratio of assets to commodities is extremely over done to the downside and money

managers are becoming acutely aware of this and movement of money is already starting to occur. (moving from assets to commodities) World equity markets have been vibrant, setting new all-time highs while users and importers of food products are starting to look at the markets a bit differently.

Slide 6: Ag trade organizations and the ag sector, in general, has been on edge as President Trump tries to rework trade agreements as part of his plan to lower trade deficits. Making the playing field more fair along with lowering the Dollar to make the US exports more attractive is all part of his plan.

In NAFTA, Mexico has a greater market share of US imports than Canada so Canada has less to lose. Our trade deficit with Mexico is $63 billion and with Canada, the deficit stands near $12.1 billion. While, no agreements have been made, a bit of progress was seen in the last round of talks. The next round of talks will take place in Mexico in late February to early March. The next and perceive last round of talks will be in the US in late April and early May.

Slide 7: I believe immigration has not received the full respect that it should have when it comes to its effect of ag commodities along with supply and demand fundamentals. Immigration into Europe increased by 1.3 million people in 2015 which was a sharp increase from previous years. The European Union Commission tried to put limits on the number of individuals that could immigrate in 2016 to 600,000 people. However, due to Germany and Italy allowing immigrants into their countries without enforcing the European Commission’s asylum-seeking regulations, more immigration was made possible and reached 1.2 million people in 2016. There are estimates that the number of smuggled immigrants into Europe each year may be around 400,000 people. Regardless, more small wars and increasing urbanization of the world’s population will keep asylum numbers high.

While, there will be no return to the open-door policy of the 1960’s or even the 19th century, the European Union economy will require an increase in selective primary immigration due to its native populations, do not retain birth rates sufficient to overcome death rates. The US has the same issue. Countries like Sweden, Austria, and

Norway are all nations in which the foreign born make up 15% or more of the population in 2016. That said, Sweden had the greatest increase in foreign born in 2016 which stood at 18.3% of the population and Austria is estimated at 18.5% of the population was foreign born. The immigrant’s share of the US population has increased by only 1% in over a decade and from 2005 to 2015 was estimated at 14%.

Immigrants into Europe who are fleeing famine, political instability, and/or war in Africa or the Middle East, can at the very least, be assured of the provision of their meals due to the existence of welfare programs. (the US also has such programs)

There is a noted relationship with immigration that when people migrate, food diets change and improve. South Asian immigrants into Canada reported a variety of positive dietary practices of which consumption of convenience foods, sugar-sweetened beverages, dining out, and “red meat” were reported.

The top five countries for the amount of beef consumption per person in 2014 were Argentina, Brazil, Uruguay, Australia, and the US. However, between 2014 and 2024, the countries predicted to have the highest percentage of increases per capita consumption are Vietnam, Mozambique, Tanzania, Turkey, and Indonesia. (Note, Indonesia has already become the world’s second largest wheat importer, using most of it as feed.)

Poultry will remain the dominant form of livestock on the planet as consumption is forecast to rise in China and India. By 2024, we can add Vietnam and Ukraine to that list. A growth in India in demand for poultry is forecast to increase 850% from 2000 to 2030 and along with the rise in demand for poultry meat is also the rising demand for egg consumption with India up 280% alone. (We should note, India is in the process of expanding their electrical grid into every village in the country.)

Lastly, we note that those who tend to leave and migrate tend to be better educated and have skills that make them employable and are adaptable to new Western style environments. Beef consumption is seeing the most notable increase in China. Bottom line, as migrants move and become employed in new countries with Western styles, the

life style moves up and the eating patterns improve causing food prices to rise along with greater demand.

Slides 8 and 9: The Continuous Commodity Index is weighted by agriculture and is starting to break out of the major downtrend since 2011. “A global AG bubble seems to be starting.”

Slide 10: Volatility is extremely low and well below the 20-year average. This is offering a great opportunity to buy call options with volatility record low or new record low levels, not seen since the late 1990’s. As volatility ramps up, premiums should increase in value. This seems like an opportunity before we enter our planting season.

Slide 11: The Global Grains Price Index shows it is starting to break out.

Slide 12: The US Drought Monitor is self-explanatory and will leave that for Dr. Elwynn Taylor.

Slide13: Chinese stocks are breaking out the upside along with the Chinese Renminbi. I wonder if China is pulling money out of our stock market and taking it home to invest in their own stocks and economy.

Slide 14: China’s domestic usage continues to set new records every year. The government is trying to entice farmers to plant more soybeans but China buys 60% of US soybeans and 73% of the world’s soybean supply.

Chinese biofuel shift is a major event and in the case of corn, stocks quality and quantity are highly suspect. Global fuel-demand is ramping up in China, India, Brazil, and Japan. The US Dollar’s weakness favors US exports and hurts Canada and Australian exports.

Slides 15 and 16: World soybean ending stocks and stocks as a percentage of usage shows that the world continues to produce greater supplies but demand continues to draw on supplies faster than production. The same is true for South American production versus usage.

Slide 17: Global soybean ending stocks shows Argentina is holding the largest inventory compared to its neighbor Brazil and China along with the US. Argentina is the world’s largest exporter of soymeal and farmers are taxed heavily on exports of whole soybeans. This explains why the focus on Argentine weather is so strong.

Slide 18: Foreign Soybean Production Deficit: This graph has the US pulled out of the picture and is meant to show the rest of the world never produces enough soybeans and needs to import. Note, this graph keeps the record production of South America included and still there is a record need for soybeans globally. This is meant to show how much the world needs the US supplies. (bars going down implies need and up would imply no need and would be very bearish)

Slide 19: This graph of weekly soybean is continuous so, when March expires the chart will pick up May and so on. The soybean market is breaking out of the down trending line from the highs of 2012 which should imply a friendly tone. Last year was an inside range year with the low made in 2016. We anticipate a higher high than last year’s 1080 high.

Slide 20: One of the concerns for the soybean market is due to the competition from Argentina and Brazil along with their soybeans thought to be of better quality for this crop year. We should add that there is concern over the sheer size of the carryout in the US which is forecast at 470 million bushels in the face of a potentially larger South American crop coming for 2018/19. Since 1964, there have only been 4 other years that the carryout exceeded 400 million bushels. Under that scenario, those four years tended to make highs in April, June, or November. However, we should take note that in all 4 years, a low was made in August of which 3 years low in August was a secondary or higher low. Keep in mind, the past two years, the harvest low has come in August.

Slide 21: Years of an “8” show soybean prices tend to mark the yearly high in May to June more times than not.

Soybeans have demons to deal with on the carryout of 470 million bushels that may still push higher on competition of higher exports being sourced out of Brazil and Argentina. SA farmers have been slow to make cash sales.

Slide 22: World corn stocks versus stocks as a percentage of usage implies that global supplies will decline again in 2018/19. The global stocks could decline by as much as 20 MMT.

Slide 23: Chinese corn ending stocks are declining quickly and doing so on demand outpacing production and acres enticed into other crops. If the crop is of poorer quality as we have been told to believe, stocks of Chinese corn could decline quicker than normally.

Slide 24: We apologize for the quality of this graph as it was taken from a Chinese newspaper. In 2011, the USDA forecast a 25% growth in corn demand for ethanol production over the next 5 years into 2016. The USDA in the latest reports forecast 2017/18 ethanol production would use 36 million more bushels of corn than in 2016/17. So, if China is serious about expansion into ethanol (we believe they are) US corn demand growth could spiral 40% or greater over the next 5 years. By 2020, Chinese use of E-10 in automotive fuel is to be nationwide and there are 11 provinces already using E-10. The plan is to scale up cellulosic ethanol production by 2025. The plan basically entails quintupling ethanol production in 3 years!

Slide 25: Taking Chinese stocks out of the picture, we note that the US owns 65% of all global corn stocks. As exports ramp up, the Dollar slips, and the Yuan improves adding to China’s buying power for nearly 1 billion bushels by 2020, US exports will solve the issue of cheap prices.

Slides 26 and 27: Foreign production deficit takes the US out of the picture and leaves the large producers of South America in. Still, the rest of the world has a record need for corn imports that should stabilize US values. Again, bars going down are bullish and imply need by the foreign buyer. We note, foreign coarse grains production deficit with the US pulled out is second greatest need.

Slide 28: I normally do not show graphs in my outlooks. However, I felt producers need to be aware of the gap that a daily continuous “July” corn chart has unfilled. This gap is huge and encompasses 549.75 to 700.50. The September and December contracts also have similar gaps and we suspect the gaps will not be fully filled until 2019 but the start of the movement is upon us.

Slide 29: The Weekly Continuous Corn chart has March on it and when March expires it will include May and so on. Note, the major channel support from the lows of 2008 and how the market is starting to break out over the down trending line from 2016. The next level will be to break through the down trending line from 2012. (NOTE, WE HAVE DONE SO THIS WEEK)

Slide 30: Years of an “8” show a tendency over the past 10 times of a year ending in an “8” , the high for the year tend to come in May-June-July. We think this year will be late May to June.

Slide 31: Self-explanatory but, Corn trades simply and moves like a freight train. It takes off slowly working up to full steam ahead. Then it catches momentum, but the runaway does not happen until everyone becomes believers. The train is just leaving the station. Note, basis the March contract, a wave 5 which is rare, was 345. The low was close to that. Again, options are offering opportunity and we recommend retaining ownership via options when making cash sales.

Slide 32: Disclaimer

Market Insight by Sue Martin

Ag & Investment Services

1-800-527-0051

www.futurescashinfo.com

Weekly Commodity Index Continuous

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Take Away For 2018 Economies are improving – increasing immigration leads to

increasing food prices.

Commodities versus assets are undervalued – the US Dollar peaked in January 2017 – wave 4 is major support at 87.645.

Open interest in many ag markets are setting record highs versus declining sideways action. This indicates ag futures are overly short – whose left to sell?

China buys 73% of the world’s soybeans – SA quality?

Best time for cash sales – May – June – July in years of an “8” both corn and soybeans.

Years of soybean carryout over 400 million bushels tend to break into August with highs in May – June.

AG & Investment Services, Inc. 1-800-527-0051www.futurescashinfo.com

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