Soybeans face long road End to tariffs wouldn t help 2018 exports much By Bryce Knorr, senior grain market analyst

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1 Soybeans face long road End to tariffs wouldn t help 2018 exports much By Bryce Knorr, senior grain market analyst Forecasting grain prices is relatively easy in normal times. Most models assume the future will be like the past. When it isn t, weather usually is the blame. Bad weather cuts production, increasing prices. More recently, benign conditions six years in a row caused inevitable building of supplies, crushing prices lower. But predictions are hard, if not nearly impossible when assumptions about the future turn out to be anybody s guess. That s the dilemma for soybean growers. Yes, there s hope that talks at the end of the month between President Trump and President Xi of China will yield a breakthrough. But resolution of the dispute that includes China s punishing 25% tariffs on U.S. soybean imports isn t likely. Even if it happens, the soybean market may not be able to recover quickly. That s the good, bad and ugly of the market growers face headed into If Trump s trade agreements so far were a guide, the U.S. and China could just agree to disagree and move on. But deals with South Korea, Mexico and Canada were agreements made between neighbors and allies. China? Hardly. There s always a chance Trump and Xi could say they ve reached an agreement that boils down to some vague promises that permit the status quo to continue, allowing the countries to lift mutual tariffs. That s the good outcome from this dispute, and even it might not be that great initially. By the time the tariffs vanish, Brazil would be harvesting what appears to be a very large if not record crop. On average, 40% of the U.S. selling season s potential would be lost, limiting any rebound in sales as Brazil takes over control of shipments to China. Even if China buys U.S. soybeans, record world supplies would weigh on prices. Bad outcomes seem more likely. The U.S. and China are more than economic rivals. Like many conflicts in the past, the trade war is a proxy, in this case a U.S. attempt to block China s military, economic and foreign policy ambitions. Trump s strategic vision make it more likely he ll demand real change that Chinese leaders are less likely to give. USDA was slow to acknowledge the impact of the tariffs. The agency cut its original estimate of 2018 exports from 2.29 billion in May to 2.04 billion in July when the tariffs took hold. On Nov. 8 the agency took its forecast all the way down to 1.9 billion bushels. That could prove a little too bearish, but not by much. Even in a perfect world without tariffs, U.S. exports likely would have shown minimal growth due to rising production around the world and slowing Chinese economic growth. This is a warning to those who think sharply lower U.S. soybean acreage in 2019 is a panacea. It might produce good selling rallies. But historically the U.S. share of world exports depends on its share of world exportable supplies production plus leftover

2 inventories not used domestically. Smaller crops bring less export potential unless the competition suffers too. Fortunately, many growers forward priced beans on the spring rally. Big carries in futures, Market Facilitation Program payments and sales already on the books could mean a profit for many producers. Growers who followed our recommendations to price 60% of production at an average July futures price of $10.36 could make $10 to $20 dollars an acre if yields hold up. The market didn t get much of a rally on USDA s forecast for lower yields, and futures face a turning point in November. Ability to take out October highs could set the market on a bullish path. But conditions are favorable in South America so far. Without a threat or a surge in Chinese demand, the market historically has moved lower into February, and neither factor looks likely this year. Prices could rebound during the spring or summer on acreage or weather concerns. But growers holding soybeans unpriced should recognize the risks if the market never mounts much of a rally.

3 Soybean Supply & Demand Area Average No Tariff 2019 Planted 90,142 89,557 89,557 89,557 82,538 Harvested 89,522 88,348 88,348 88,348 81,643 Yield Beginning stocks Production 4,411 4,600 4,600 4,600 4,117 Imports Supplies, total 4,734 5,063 5,066 5,064 5,079 Crushings 2,055 2,080 2,061 2,061 2,002 Exports 2,129 1,900 1,937 2,156 2,073 Seed Residual Use, total 4,296 4,115 4,126 4,347 4,203 Ending stocks Ave. cash price $9.33 $8.60 $8.64 $8.96 $8.74 Ave. nearby fut. $9.24 $9.59 $9.35 (To-Date) $9.70 Stocks to use 10.2% 23.0% 22.8% 16.6% 20.9% Top Third of Price Range USDA $10.04 to $10.83 Bryce $10.40 to $11.22 $10.15 to $10.95

4 $1.20 $1.00 What's in an average? Difference between USDA and actual average cash soybean prices $1.07 $0.80 $0.60 $0.40 $0.32 $0.37 $0.20 $- $(0.20) $(0.01) * Source: USDA, MGEX *Sept-Nov estimate

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12 MONTHLY BRAZIL SOYBEAN EXPORTS MILLION BUSHELS Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec CHINA SHARE OF BRAZIL SOYBEAN EXPORTS 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% * *Through Nov. 2

13 LEADING SOYBEAN EXPORT COMMITMENTS YEAR TO DATE NOVEMBER 1, THER, 24% PAKISTAN, 4% UNKNOWN, 28% CHINA, 4% EUROPEAN UNION, 11% MEXICO, 15% Weekly Export Inspections in million bushels For week of 11/01/18 Average Trade Guess This Week Last Year Rate Needed to Meet USDA Forecast Year-to- Date Total This Year Year-to- Date Total Last Year This Week Last Week WHEAT CORN SOYBEANS Source: USDA, Reuters

14 Weekly Soybean Export Inspections Thousand Bushels 100,000 90,000 80,000 70,000 60,000 50,000 40,000 30,000 20,000 10,000 0 S O N D J F M A M J J A Yr. Avg. Thailand, 5.8 SOYBEAN EXPORT INSPECTIONS WEEK ENDING NOV. 1, 2018 Million bushels Other, 19.1 Netherlands, 5.2 Argentina, 4.9 Mexico, 4.3 [CATEGORY NAME], [CATEGORY NAME], [VALUE] [VALUE]

15 1,000 MT Soymeal Export Commitments Year Average Weekly Export Sales (million bushels) AS OF WEEK ENDING 11/1/18 Wheat Corn Soybeans Old Crop Sales New Crop Sales Total Sales Prior Week Trade Estimates Rate to reach USDA Forecast (Old Crop) Export Shipments Rate to reach USDA Forecast Commitments % of USDA estimate (Old Crop) 63% 36% 38% 5-year average for this week 60% 37% 70% Shipments % of USDA est. 43% 17% 15% 5-year average for this week 42% 12% 22% Source: USDA, Reuters, Farm Futures

16 Total Soybean Shipments (Year To Date) 30.0% 25.0% Million bushels % 15.0% 10.0% 5.0% 0.0% Total Shipments % of USDA Forecast Million Bushels Total Soybean Sales & Shipments (Year to Date) 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Total Commitments % of USDA Forecast

17 Unshipped Soybean Sales Million Bushels New crop sales Next Year's Soybean Sales (Year to Date) Final Exports New crop sales Final exports 2,500 2,000 1,500 1, SOURCE: USDA.

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19 $2.50 CBOT Crush Margin $2.00 $1.50 $1.00 $0.50 $- 1/3/2014 1/3/2015 1/3/2016 1/3/2017 1/3/2018 mil bu USDA soybean crush 9/1 1/1 5/1 9/1 1 Jan 1 May 1 Sep 1 Jan 5/1/218 1 Sep Source: USDA

20 Percentage Of Crush Margin From Soybean Oil 40% 35% 30% 25% 20% 1/1/16 4/1/16 7/1/16 10/1/16 1/1/17 4/1/17 7/1/17 10/1/17 1/1/18 4/1/18 7/1/18 10/1/18

21 35% World soybean stocks to use 30% 25% stocks to use 20% 15% 10% 5% 0% 30% U.S. Soybeans Stocks/Use 25% 20% stocks/use 15% 10% 5% 0%

22 1,100 1,050 1, July Soybean Futures Seasonal Trends /30 8/30 9/30 10/31 11/30 12/31 1/31 2/29 3/31 4/30 5/31 6/30 Bull market year July 2019 Normal year July Soybean Futures Seasonal Trends Start Date +1 Week +2 Weeks +3 Weeks +4 Weeks +5 Weeks +6 Weeks 11/12 11/19 11/26 12/3 12/10 12/17 12/24 Ave. Gain/Loss (0.4) % Up 58% 60% 49% 53% 53% 58% % Down 38% 40% 49% 47% 47% 42% Ave. Gain - Up year Ave Loss - Down Year (23.8) (23.6) (22.5) (31.5) (29.3) (29.8) Biggest Gain Biggest Loss (97.8) (95.3) (90.0) (152.0) (113.5) (127.5) This table shows the typical seasonal pattern at weekly intervals from the start date, based on average daily futures prices from Gains and losses are based on the difference between the closing price on the start date and the closing price on the weekly date shown.

23 Commitment of Traders - Soybeans $12.00 $11.50 net position in contracts /15 4/15 7/15 10/15 1/16 4/16 7/16 10/16 1/17 4/17 7/17 10/17 1/18 4/18 7/18 10/18 Source: CFTC Index funds Hedge funds Futures $11.00 $10.50 $10.00 $9.50 $9.00 $8.50 $8.00 nearby futures Commitment of Traders - Soybean oil net position in contracts nearby futures /15 4/15 7/15 10/15 1/16 4/16 7/16 10/16 1/17 4/17 7/17 10/17 1/18 4/18 7/18 10/18 20 Source: CFTC Index funds Hedge funds Futures

24 Commitment of Traders - Soybean meal $ $400 net position in contracts $350 $300 $250 nearby futures /15 4/15 7/15 10/15 1/16 4/16 7/16 10/16 1/17 4/17 7/17 10/17 1/18 4/18 7/18 10/18 $200 Source: CFTC Index funds Hedge funds Futures

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