# A BULLISH CASE FOR CORN AND SOYBEANS IN 2016

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1 A BULLISH CASE FOR CORN AND SOYBEANS IN 2016 Probabilities for higher prices, and the factors that could spur price rallies. Commodity markets tend to move on three variables: perception, momentum and attitude. As we head into 2016, the general perception is that the U.S. has ample inventory and supply of corn and soybeans. This fuels belief that grain prices aren t likely to rally, putting a lid on momentum and preventing a move toward higher prices. Consequently, attitude remains bearish. These three variables feed off each other until one of them changes. This paper will address factors that could disrupt the status quo and suggest how to prepare for potential selling opportunities.

2 2 Mathematical probabilities point to higher prices in Probability measures the likelihood that something will occur. By applying math-based probability to commodity price scenarios, you can determine the least and most likely price outcomes in the unpredictable commodity markets. This, in turn, enables you to better focus and take action on your marketing strategies with the confidence of better understanding both the risks and the opportunities. Our analysis suggests that there will be opportunity in To establish the probabilities, we researched annual corn and soybean futures contracts and following-year prices over the past 25 years. Looking at year-to-year price changes, we determined likelihoods for reaching certain price levels this year for corn (Fig. 1) and soybeans (Fig. 2). As a business owner, you apply probability to your business decisions every day. You plant when you have the probability of the greatest yields, although you also know weather can be unpredictable. You make purchase decisions when the probability of expenditures on repairs outweighs the expected return, even though there s a chance you may get more productivity out of your machine. Probability analysis is one of the many tools we use at Stewart-Peterson to help assess the market strategically. We look at the market analytically in order to avoid the trap of emotionally predicting what the market will do. We focus on preparing you for wherever the market may go, regardless of how optimistic or pessimistic forecasters may be. Chances of Corn Reaching These Prices in 2016 Chances of Soybeans Reaching These Prices in 2016 Price March July Price March July \$4.00 \$4.50 \$5.00 \$5.50 \$6.00 \$6.50 \$ % 48% 32% 12% 8% 4% 100% 76% 52% 24% \$9.50 \$10.00 \$10.50 \$11.00 \$11.50 \$12.00 \$ % 72% 52% 40% 24% 100% 92% 76% 60% 56% 48% 32% Fig. 1 This chart depicts price probabilities for March and July futures in The December corn futures contracts and following year March and July contracts over the past 25 years were used for this analysis. Probabilities are based on price movements from 1990 to 2015, indexed to December 2015 prices. Source: Stewart-Peterson Inc. Fig. 2 This chart depicts price probabilities for March and July soybean futures in The November soybean futures contracts and following year March and July contracts over the past 25 years were used for this analysis. Probabilities are based on price movements from 1990 to 2015, indexed to December 2015 prices. Source: Stewart-Peterson Inc.

3 3 Be ready to take action on short-lived price rallies. While downward price pressure has been the predominant scenario among analysts for 2016, our analysis suggests that there may be opportunity to take advantage of short-lived price rallies. That s why it s important to be prepared to take action. The following factors and trends support the case for price rallies. 1. Supply is less flush than some believe. Current ending corn stocks of 1.8 billion bushels in 2015 imply that there is ample supply on hand. However, ending stocks do not give a complete supply picture. For that, we look at the stocks-to-usage ratio, which measures the relationship between supply and demand. Since 1995, the stocks-to-usage ratio has spanned just under 5 percent to about 20 percent. At 13.6 percent, the 2015 stocks-to-usage ratio for the U.S. corn supply puts us only in the middle of the range. In other words, corn stocks are not as abundant as is generally perceived (Fig. 3). U.S. Ending Stocks and Stocks-to-Usage Ratio 2,500 25% Planted Acres Planted Acres ,120 1,250 1,366 1,496 1, ,014 1,175 1,307 1,439 1,556 1,688 1, Carryout (in mil bu) ,025 1,189 1,352 1,486 1,620 1,739 1,873 2, ,040 1,206 1,372 1,537 1,673 1,809 1,929 2,065 2,201 1,042 1,210 1,378 1,547 1,715 1,852 1,990 2,112 2,249 2, ,249 1,420 1,590 1,761 1,932 2,072 2,211 2,336 2,475 2,615 Stocks-to-Usage (in percentage) ,448 1,621 1,794 1,968 2,141 2,283 2,425 2,551 2,693 2, ,654 1,830 2,006 2,183 2,359 2,503 2,647 2,775 2,919 3, ,000 20% Ending Stocks 1,500 1, % 10% 5% Stocks/Use Ratio Fig. 4 These tables demonstrate the potential sensitivity of carryout (top table) and stocks-to-usage (bottom table) assuming a constant demand over all planted acre and yield scenarios. Assuming farmers plant 88 million acres of corn in 2016 at an average yield of 167 bushels per acre, carryout could be projected at billion bushels of corn and a stocks-to-usage ratio of 12.6%. Source: Stewart-Peterson Inc. and USDA 0 0% Ending Stocks Stocks/Use Ratio Fig. 3 Current U.S. stocks-to-usage ratio for the U.S. corn supply Source: Stewart-Peterson Inc. and USDA Looking into 2016, our sensitivity modeling (Fig. 4) suggests that the stocks-to-usage ratio will also settle close to 2015 s ratio of 13 percent. We consider a stocks-to-usage ratio above 15 percent as bearish for price; below 10 percent as bullish.

4 4 2. The dollar offers upside potential. Even in the event of increases in the already high value of the U.S. Dollar Index, we do not anticipate significant decreases in corn exports or the price of corn. That s because there is a consistent baseline demand for corn exports regardless of the value of the dollar. More specifically, the dollar has been close to its monthend January 2016 price of approximately 99 since March of 2015, and export demands have generally held strong at 1.5 to 1.85 billion bushels. Even if the dollar reached a historical high of 120, we anticipate export demand and thus price would be minimally impacted (Fig. 5). On the flip side, a decrease in the dollar would likely be beneficial. Under this scenario, U.S. grain farmers would become more competitive, resulting in increased demand for U.S. grain, a decrease in U.S. stocks-to-usage ratios, and, ultimately, a gain in price. 3. Odds for a 4th year of record corn yields are low. One of the biggest stories of 2016 has been the prediction of a shift from an El Niño to La Niña weather pattern. La Niña tends to usher in dry weather to the Grain Belt along with varied, often lower grain yields. While the potential of La Niña supports the case for lower yields in 2016, probability analysis of yield trends makes an even more compelling case. Examining corn yields since 1970, an impressive 52 percent of the time corn yield for any year has been within 95 percent or higher of the previous high. Thus, for any given year, U.S. farmers have a 52 percent chance of a near-record or record crop. The odds of achieving this two years in a row fall to 20 percent, not unlike the odds of flipping one vs. two heads in a row on a coin toss. In 2013, 2014 and 2015, U.S. corn farmers experienced something even more difficult to achieve: near-record or record yields three years in a row. This has occurred only 3 times in the last 35 years, or 6.5 percent of the time. Dollar Index Fig. 5 This table demonstrates the relationship between the price of the U.S. dollar and corn exports. Source: ProphetX and USDA Jan Jan-92 Dollar Index vs Yearly Corn Exports Jan-94 Jan-96 Jan-98 Jan-00 Jan-02 Corn Exports 3,000 2,500 2,000 1,500 1,000 Fig. 6 U.S. corn near record or record yields. The red data points indicate years in which yield was within 95% or better of the most recent, maximum yield. Source: ProphetX and USDA The odds of four years in a row are unsurprisingly lower at only 2 percent. Will we achieve this in 2016? Yields would need to be at least bushels per acre (Fig. 6). Jan-04 Jan-06 Jan-08 Jan-10 Dollar Index Jan-12 Jan-14 U.S. Corn Record or Near-Record Yields 95% of Max Yield for 2016 is % of Max Yield Jan Corn Exports (Million Bushels)

5 5 4. Managed money is positioned to turn. When hedge funds avoid purchasing commodities, prices tend to stay low (Fig. 7). However, hedge funds historically do not remain bearish for long and the situation can turn bullish quickly. When they start investing again, it usually signals a change in sentiment. As you manage your price opportunities this year, keep an eye on managed money positions versus the corn price. As shown in Fig. 7, the market seems wellpositioned to rally soon. From an opportunity perspective, it s important to set strategy before the market moves. Corn: Managed Money Position vs Corn Price 500,000 \$ ,000 \$ ,000 \$ ,000 \$ ,000 \$ ,000 \$ ,000 \$ ,000 \$ Net Position Corn Price Fig. 7 Managed money positions correlate with the price of corn. When hedge funds are bullish on corn, higher prices are likely around the corner. The date for each year indicated in this chart is December 13. Source: CFTC and ProphetX 5. Soybean meal rallies after a record crop. When we ve experienced a record soybean yield, the following year we ve seen soybean meal rally 75 percent on average. This trend dates back to Most price increases have ranged from 25 to 80 percent (Fig. 8). If you exclude large rallies from the 1970s, soybean meal rallies following a record crop have still averaged about 35 percent. Front Month Continuous Soybean Meal Price Year (T) Record Yields th Qtr (T) Low Price High Price the Next Year (T+1) ? Average Price Change Median Price Change % Chg 153% 332% 88% 51% 64% 27% 13% 37% 54% 63% 25% 37% 27%? 75% 51% Fig. 8 Source: Stewart-Peterson Inc. and ProphetX

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