Market Outlook

Neil TownsendChief Market AnalystFarmLink Marketing Solutions

What do you see?

Market Analysis

Outlook for 2019

One Mantra has dominated over last few years:

LOWER for Longer• Steady demand,• Relative abundance,• Weather,• Trade tensions,• Macroeconomic,• Geopolitical.

1. Hard to see pathway towards sustained higher prices.2. Need weather events to change circumstances.

Victims of Success?

• The threat is real,• More and more and more and more,• Yield is King (The “Tail” of the Ethanol Era),• Laws of Supply/Demand,• Typical behavior: find the “high cost” producer,• Execute with extreme prejudice.

Market Analysis

• Crop markets aren’t always efficient

• Especially for smaller crops

• Farmers aren’t traders

• Look for a few opportunities per year

• Longer term trends are more reliable

• Compared to market ‘noise’ that can distort markets over days/weeks/months

For grain marketing, market analysis works!

Market Analysis vs Marketing Decisions

Markets – don’t care about your farm

Marketing Decisions – 100% about your farm

Include considerations such as:• Risk Management• Cash Flow Needs• Management Styles

They are not the same thing!

Marketing is the action of turning crops into cash (hopefully in a manner that is optimal for your business)Markets provide the signals on how best to do this (…and not do this…)

Market Divergence: Macroeconomic vs. Grains

Grains: Large supplies lead to lower volatility

• Cushion reduces threat of production ‘scares’

• Buyers can be patient in getting coverage

Range of potential outcomes:

Thinner ‘tails’ when supplies are large

Market Divergence: Macroeconomic vs. Grains

What else impacts grain prices beyond the ‘traditional fundamentals’ ?...

FX, economy, interest rates, credit, geopolitics…

Is the macroeconomic setup in a ‘fat tail’ situation?

Tic-Tac-ToeRemember the old game “Hollywood Squares”? We are going to play the game filling in the squares with a “bear” (bad news) and “bull” (good news). Let’s see if we make a tic-tac-toe winner!

• Facebook: February 2004• U.S. field oil production 161,583,000 barrels in the month (Feb/2004)• U.S. field oil production 357,646,000 barrels in the month (Oct/2018)• North Dakota income in 2004 (per capita): $40,099 (-$6,011 from the

U.S. average)• North Dakota income in 2016 (per capita): $62,837 (+$12,260 from the

U.S. average)• The United States likely surpassed Russia and Saudi Arabia to become

the world’s largest crude oil producer earlier this year, based on preliminary estimates in EIA’s Short-Term Energy Outlook (STEO). In February, U.S. crude oil production exceeded that of Saudi Arabia for the first time in more than two decades. In June and August, the United States surpassed Russia in crude oil production for the first time since February 1999.

Canadian Dollar

• World is going through a period of macroeconomic adjustment- Slowdown in growth, attempts to normalize policy

• Uncertainty and Volatility in all financial markets

• U.S. dollar ‘should’ benefit as a ‘safe haven’

• Canada’s economy relatively weaker than U.S.

168 169 170 171 172 173 174 175 176 177 178 179 180 181 182

90.0 632 714 797 880 963 1,046 1,128 1,211 1,294 1,377 1,460 1,542 1,625 1,708 1,791

90.5 709 792 875 959 1,042 1,125 1,209 1,292 1,375 1,458 1,542 1,625 1,708 1,791 1,875

91.0 786 870 954 1,037 1,121 1,205 1,289 1,372 1,456 1,540 1,623 1,707 1,791 1,875 1,958

91.5 864 948 1,032 1,116 1,200 1,284 1,369 1,453 1,537 1,621 1,705 1,790 1,874 1,958 2,042

92.0 941 1,025 1,110 1,195 1,279 1,364 1,449 1,533 1,618 1,703 1,787 1,872 1,956 2,041 2,126

92.5 1,018 1,103 1,188 1,273 1,358 1,444 1,529 1,614 1,699 1,784 1,869 1,954 2,039 2,124 2,209

93.0 1,095 1,181 1,266 1,352 1,438 1,523 1,609 1,694 1,780 1,865 1,951 2,037 2,122 2,208 2,293

93.5 1,173 1,259 1,345 1,431 1,517 1,603 1,689 1,775 1,861 1,947 2,033 2,119 2,205 2,291 2,377

94.0 1,250 1,336 1,423 1,509 1,596 1,682 1,769 1,855 1,942 2,028 2,115 2,201 2,288 2,374 2,461

2019/20 U.S. Corn Ending Stocks Matrix

U.S Corn Yield (bushels per acre)

U.S

. C

orn

Pla

nte

d A

re

a

(m

illio

n a

cre

s)

18

1,0

00

161,

000

17

1,9

00

15

3,3

00

158,

600

14

0,1

00

131,

300

106,

600 12

4,3

00

123,

500

89,8

00

107,

200

10

7,8

00

97,5

00

92,0

00

84,0

00

87,5

00

73,5

00

67

,30

0

85,0

00

77,3

00

70

,16

3

64,3

05

61,1

87

54,6

71

49

,64

2

43

,62

5

39,1

57

41

,66

6

35,5

77

39

,20

3

33,0

45

33,1

60

29,7

05

27,1

58

28,2

53

20,4

64

22,7

73

-

20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000

180,000

200,000th

ou

san

d t

on

ne

sArgentina and Brazil Soybean Production and Exports

Production Exports Source: USDA/FarmLink

World Oilseed Demand Growing Faster Than Yields:

Need More Oilseed Acres!

- Very strong growth in annual global protein meal demand (+3.6%) and global vegoildemand (+3.8%)

- Oilseed crop yields have been rising at an average annual rate of around 1.7%

- US soybeans gain 1.5-2.0%

- Implication: More oilseed acreage will continue to be needed to meet global demand

- World soybean acreage needs to rise by around 2 mm acres each year

China:• China has economic problems (FULL STOP);• Policy: more market driven, less supports;• Trade wars: retaliation for the steel tariffs;• Demographics: aging rural population;• Farm consolidation;• Mechanization, world class yields in

corn/soybeans;• Could become a net exporter for

corn/wheat.

Source: USDA/FarmLink

Source: USDA/FarmLink

Argentina8.0%

Australia 5.9%

EU12.9%

Canada13.4%

U.S.15.3%

RUK34.5%

others10.1%

World Wheat Exports: 2018/19

Canola Market:• Healthy production, hard to kill canola;• Canadian farmers like growing canola;• Trade wars: have had an impact on trade

flows (negative and positive);• Healthy ending stocks 2018/19 and more

acres 2019/20;• Lower exports to U.S. and Japan;• Higher exports to China;• Canadian cheapest origination, but need

DEMAND to pick up.

Crop Year 2013/14 2014/15 2015/16 2016/17 2017/18 2018/19 5-year avg 2019/20F % change % change

17/18 to 18/19 18/19 to 19/20

Carryin 588 3,008 2,573 2,091 1,342 2,506 2,304 2,122 86.7% -15.3%

Seeded Area 19,941 20,900 20,785 20,784 23,014 22,813 21,659 23,045 -0.9% 1.0%

Harvested Area 19,790 20,738 20,669 20,419 22,914 22,535 21,455 22,353 -1.7% -0.8%

Harvested % 99% 99% 99% 98.2% 99.6% 98.8% 99.1% 97.0% -0.8% -1.8%

Yield 40.5 34.9 39.2 42.3 41.1 39.8 39.5 40.3 -3.1% 1.3%

Production 18,503 16,406 18,377 19,600 21,334 20,341 19,211 20,441 -4.7% 0.5%

Imports 66 77 105 50 65 50 69 50 -23.1% 0.0%

Total Supply 19,157 19,491 21,055 21,741 22,741 22,897 21,585 22,613 0.7% -1.2%

Crush 6,950 7,360 8,315 9,143 9,269 9,375 8,693 9,425 1.1% 0.5%

Exports 9,100 9,163 10,295 11,107 10,815 11,000 10,476 10,905 1.7% -0.9%

SFR 99 394 354 149 151 400 289 250 165.2% -37.5%

Total Demand 16,149 16,918 18,964 20,399 20,235 20,775 19,458 20,580 2.7% -0.9%

Ending Stocks 3,008 2,573 2,091 1,342 2,506 2,122 2,127 2,033 -15.3% -4.2%

Stocks:Use 18.6% 15.2% 11.0% 6.6% 12.4% 10.2% 11.1% 9.9% -17.5% -3.3%

Canadian Canola Supply and Demand

3,281 3,714 4,361 4,326 4,798 4,409

5,819 5,449

5,9346,781 6,017 6,591

30%

32%

34%

36%

38%

40%

42%

44%

46%

48%

50%

0

2,000

4,000

6,000

8,000

10,000

12,000

2013/14 2014/15 2015/16 2016/17 2017/18 2018/19

% e

xpo

rted

1,0

00

to

nn

esCanadian Weekly canola exports (to date)

Exports To Be exported % ExportsSource: CGC

3,688 4,1563,505 4,005 4,127 4,054

3,3613,599 5,164

5,288 5,293 5,721

0%

10%

20%

30%

40%

50%

60%

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

10,000

2013/14 2014/15 2015/16 2016/17 2017/18

% C

rush

ed t

o d

ate

1,0

00

to

nn

esCanadian canola Domestic Disappearance (to date)

Usage to date Remaining % UsageSource: CGC

Crop Year 2013/14 2014/15 2015/16 2016/17 2017/18 2018/19F 5-year avg 2019/20F % change % change

17/18 to 18/19 18/19 to 19/20

Carryin 3,902 8,666 6,118 4,078 5,028 4,696 5,558 4,000 -6.6% -14.8%

Seeded Area 21,135 19,568 18,346 17,680 17,346 18,701 18,815 19,800 7.8% 5.9%

Harvested Area 20,867 18,880 17,852 16,416 17,039 18,344 18,211 19,062 7.7% 3.9%

Harvested % 99% 96% 97% 93% 98% 98% 97% 96% -0.1% -1.9%

Yield 55 47 46 54.4 53.8 51.9 51.1 52.84 -3.4% 1.7%

Production 31,025 24,226 22,205 24,374 25,022 26,015 25,370 27,492 4.0% 5.7%

Imports 55 79 95 50 50 50 66 50 0.0% 0.0%

Total Supply 34,982 32,971 28,418 28,502 30,100 30,761 30,995 31,542 2.2% 2.5%

Domestic 2,439 2,450 2,574 2,450 2,600 2,600 2,503 2,500 0.0% -3.8%

Industrial 891 870 664 800 780 780 801 800 0.0% 2.6%

Exports 17,980 18,699 17,179 15,642 17,631 18,500 17,426 18,000 4.9% -2.7%

SFR 5,006 4,834 3,923 4,583 4,393 4,881 4,548 4,900 11.1% 0.4%

Total Demand 26,316 26,853 24,340 23,474 25,404 26,761 25,277 26,200 5.3% -2.1%

Ending Stocks 8,666 6,118 4,078 5,028 4,696 4,000 5,717 5,342 -14.8% 33.5%

Stocks to Use 33% 23% 17% 21% 18% 15% 22% 20% -19% 36%

Canadian Wheat Supply and Demand

*Wheat includes spring, winter and eastern Canadian wheat. Durum is excluded.

6,926 7,292 7,6256,193 6,738

8,194

11,054 11,4079,554

9,44910,893

10,306

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

20,000

2013/14 2014/15 2015/16 2016/17 2017/18 2018/19F

% e

xpo

rted

1,0

00

to

nn

esCanadian Weekly wheat exports (to date)

Exports To Be exported % ExportsSource: CGC

Barley Market:

• Feed barley market perking up. Expected to have reasonable opportunity (weather dependent in 2018/19).

• Canadian exports to China have surged in 2017/18. Is it malt or feed? Will it continue into 2018/19?

• U.S. barley acres down 8% in 2018/19.• Australia expected to have larger crop.• Saudi Arabia main feed market (seen declining) as

time goes by.• Robust feed market globally.• Malt is a weather question, more or less.

PULSES

IndiaProduction• Record pulse production in 17/18• Disappointing kharif yields – prices under MSP rates• 2018/19 rabi pulse seeding 1M hectares below last year. • Drought conditions persist through main pulse growing regions – critical time end of

Jan/FebPolicy• Government builds buffer stocks – to ‘eliminate the price volatility and increase food

security’. • Methyl Bromide fumigation- non-tariff trade barrier (has been extended 3x, the latest

being until June 30th, 2019, but has a 5x cost penalty fee)• Pea tariff max rate that can be applied under WTO, plus quantitative restriction. 33%

lentil tariff and 60% chickpea tariff implemented• Election in April 2019 • Policy uncertainty remains

• 20% drop in pulse production expected.

Why is the Indian Government Interfering in the Market?

• Increasing farmer incomes – double by 2020 (450 million farmers, 52% of population involved in Agriculture).

• Upcoming elections• Drive towards self-sufficiency in pulses by 2022. • Government buffer-stocks are large and going out of condition

Pea Market:• Strong Chinese demand due to growth in both starch/protein

demand – 1.25 million already sold to China.• Quantitative restriction on peas + tariff remain on peas

entering India. However, small volumes still being imported though loophole – exports on pace for 350 KMT.

• US/Bangledesh showing strong demand.• Ending stocks will be below 5-year average.• Expect prices to firm through Spring.• 2019 seeded area increasing modestly.

• Rabi crop production will dictate Indian imports and policy

Expect Canada, Australia, FSU, and US to increase seeded area of pulses in 2019 as prices recover – this will limit upside.

2019 Expectations

Other Points to Consider

•Margins squeezed – what are the implications?

• Tight Prairie S&Ds – fixed (…’overfixed’…) in 2019?• Cereals correcting back into rotations

•Pulse market showing signs of life

What to Do About It…

•Old crop – active marketing into opportunities

•New crop – securing margin

•Hedging – you need to be thinking about it

Marketing & Risk Management Options

• Each crop will vary in:

• Marketing options

• Lots of active buyers vs small number of outlets

• Pricing flexibility and forward opportunities vs spot bids

• Avoid selling into a window of stagnant demand

• Risk Management options

• Buyer contracts

• Hedging opportunities

• Act of God

Why Trade Futures and Options?

Strategies allow growers to more efficiently…

▪ Manage price risk

▪ Achieve optimum crop pricing

▪ Increase Marketing flexibility

Conclusions:

• Uncertainty, uncertainty, uncertainty;

• Volatility elevated in geopolitics and macroeconomic space;

• Short-to-medium term opportunity for positive news;

• Longer term bearish risks due to both demand and supply concerns;

• Protect margin; manage risk.

Conclusions:

• Lower for longer: reality not just a catch phrase;

• Planning is important: Cost of production and revenue per acre (profit is important);

• Weather is important but world has a “buffer” against contained (local) issues;

• Trade war issues are a real threat. Heightened uncertainty and volatility.

Price Outlook (per bushel)

2018/19 2019/20

Canola $11.00 $10.75Durum $6.50 $6.75CWRS $7.50 $7.00Red Lentils $0.19/lb $0.19/lbOats $4.25 $3.25Barley – feed $5.00 $4.25Barley – malt $5.50 $5.00Yellow Peas $7.75 $7.50Green Peas $10.75 $8.75

THANK YOU