Walter Kunisch Jr.

With new-crop Dec 2020 corn setting a new life of contract low this week at $3.70, there was seemingly little news to support a quick turnaround. The global coronavirus pandemic, an oil market that is imploding—and, on top of that, an expectation that 2020 U.S. corn supplies will be growing—all seem to point to a challenging year for farmers and pricing corn. Increasing corn supplies are probably the biggest threat to corn prices over the next year. In February, USDA’s Ag Outlook Forum provided a grim view of how ugly the 2020 U.S. corn balance sheet could get. Based on USDA economist estimates of a 4 million acre increase and a return to normal yields, which they peg at 178.5 bushels per acre, that translates into a record-large production of 15.5 billion bushels, up 1.7 billion bushels from this year’s drought-impacted crop. But the worst thing is that USDA has stocks soaring to 2.6 billion bushels from this year’s number of 1.9 billion. That represents an 18 percent stocks relative to total use ratio in the coming year versus only 13.4 percent this year. If that is what is in store for the coming crop year, what does that suggest about the likely price trajectory for the coming growing season? Is there a decent chance of a “summer weather rally” and how does the upside versus downside risk potential look? To explore these issues, we examined data on Dec corn futures for the growing season from March prior to planting up until harvest in October. We looked at daily closing prices during this period covering the crop years 1990-2019, giving us 30 years of data. In addition to futures prices, we want to understand how early season reports on new-crop stocks and how those metrics compare to the old-crop situation. Throughout this article, we will refer to the stocks difference between new-crop (NC) as of the first report in May and the same reading on the old-crop (OC) balance sheet in May relative to total use.  Although we are not yet in May, we do have data from USDA’s Ag Outlook Forum in 2020, which points to an estimate of 18% for stocks to use and the last OC balance sheet estimate sits at 13.4%. So, we will use that difference of +4.6 percent increase in stocks in that analysis that follows. Is there more upside potential or downside risk this growing season?  Using our 30 years of data, we examined how this reading of stocks to use difference has impacted the potential for upside prices as well as downside risk. We did this look at 30-day intervals with the starting point at March 1 and concluding in September. The chart below illustrates the reading of NC stocks less OC stocks on the x-axis and the y-axis illustrates the percent up moves (in green) and percent down moves (in red) relative to March 1. The vertical line on each grid illustrates what the expectation is for stock changes this year, which is a 4.6 percent increase.   The important point of this chart is first and foremost that when we have a big jump in stocks (positive x axis value), we see that the trend is for downside risk to heavily outweigh upside potential as the season progresses. For example, upside potential by May is 3.4 percent but downside risk is more pervasive at 5.3 percent, and that only amplifies as we get to harvest around September when upside potential is 10.6 percent but downside risk is larger at 16.4 percent. An important point to note is that this upside vs downside skew can flip in a year when stocks are actually falling in a marketing year. For example, if stocks-to-use were falling 5 percent instead of expected to increase 4.6% like this year, then the September upside/downside would flip to 20 percent/7 perecent, making upside potential a much better play. Can we expect a summer rally with growing stocks?  We take the same data we discussed above, but now want to gain a better understanding of seasonality. To better illuminate possible trends based on stock differences between NC and OC, we partition the data into three buckets:  (1) Years when stocks are declining. These years are averaged together in the left pane of the below chart. Not surprising, in years when we see NC supplies expected to fall, the new-crop corn prices build a weather premium into summer. (2) Years when stocks are increasing. This is what we are expecting this year, and the historical norms are illustrated in the right-hand pane in red. Here we see little to no rally potential. Indeed, on average in these years of building stocks, the long-run average seldom exceeds the early season price in March. Adding to the woes, the downside risk only gets worse as we get into harvest in October and November with prices discounted 10% on average relative to early spring prices. (3) Years with no significant change. This is illustrated in the middle pane. This also exhibits similar seasonality as years when stocks are increasing. Roadmap for marketing Without a major change in acreage expectations or yield potential, it seems likely we are entering a year of grain stock building. With that as the hand we are dealt, holding out for a big summer rally or waiting for big moves to the upside seem like losing propositions. In years when stocks are expected to grow, there is significant downside risk in substantially lower harvest prices expected relative to spring. While we are not suggesting going out and selling now, as the market falls sharply on fears of coronavirus and oil prices, we do think it means being disciplined to sell as the market bounces up. Further, it means the bounces we should sell on will likely be smaller than rallies in past years. Want access to more insights like this? This article is excerpted from our Market Intelligence newsletter, delivered weekly to FBN Market Advisory  members. With FBN Market Advisory, you'll receive truly personalized tools and reports to support your grain marketing efforts. Get access to market news, straightforward marketing recommendations, basis trend insights and weather reports—all relevant to your operation and geographic location. Copyright © 2020 FBN BR LLC. All rights Reserved. FBN Market Intelligence is distributed by FBN BR LLC. Contact 877-472-4607 for more information. For the purposes of quality assurance and compliance, phone calls to and from FBN BR LLC may be recorded. We do not guarantee customers will receive specific benefits or value from participating in FBN BR LLC; results will vary. The data in this article is being supplied as a courtesy by FBN BR LLC. The risk of trading futures and options can be substantial and may not be suitable for all investors. All information, publications, and reports, including this specific material, used and distributed by FBN BR LLC shall be construed as a solicitation. FBN BR LLC does not distribute research reports, employ research analysts, or maintain a research department as defined in CFTC Regulation 1.71. This article contains information obtained from sources believed to be reliable, but its accuracy is not guaranteed by FBN BR LLC. Past performance is not necessarily indicative of future results. Disclaimer: Futures and Option trading involves substantial risk, and may not be suitable for everyone. Trading should only be done with true risk capital. Past performance, either actual or hypothetical, is not necessarily indicative of future results.

The U.S. pork export program has always been a viable demand source for the U.S. hog complex. Mexico, Japan, Korea, Hong Kong and Canada have been consistently reliable import/export markets for U.S. pork. From 2015 until mid-2019, mainland China was importing a steady volume of U.S. pork. Since the summer of 2019, China has been aggressively importing pork from the U.S. to help offset high mortality rates resulting from African swine fever (ASF). Background China has the world’s largest hog herd, and pork is a staple component of the Chinese diet, making it a critical commodity to the Chinese economy. The price of pork represents 3% of China’s consumer price inflation (CPI) index. Meaning that the price of pork in China is so influential to the Chinese economy that price rises or decreases can influence broader monetary policy decisions by the Chinese central bank.        Prior to 2015, mainland China was an important export market for the U.S. pork industry. The country’s hog business was fragmented and lacked a level of biosecurity that made the herd prone to disease. These various diseases had a history of spreading rapidly throughout the country and resulted in supply shocks, which caused the prices of pork to spike. One incident occurred prior to the 2008 Summer Olympic Games in Beijing and another was in 2011when Porcine Reproductive and Respiratory Syndrome (PRRS) inflicted major mortality rates on the domestic hog herd. From 2005 to 2015, mainland China averaged 7% of the total annual U.S. pork export business. From 2011-2012, China averaged 13% of the monthly U.S. exports, with volume spiking to 23%.         In 2015, the Chinese Central government’s five-year plan contained a directive to create a modern, westernized and biosecure domestic hog supply chain. The objective was to help the country become increasingly self- sufficient with regard to its pork demand. To help achieve this goal, the Chinese implemented a ban on pork imports containing traces of the feed additive and finishing enhancer ractopamine, also known as Paylean. Ractopamine was a popular hog-finishing agent in the U.S., and the Chinese ban was considered controversial because it was viewed as a politically driven protectionist policy rather than science based. Since other countries with more stringent food safety standards such as Japan and Korea allowed pork imports containing ractopamine, the U.S. tried fighting the Chinese ban. During this time, U.S. pork exports to mainland China settled into an annual trend of 7 percent of total U.S. export volume.     ASF revives U.S. trade In 2018, the Chinese domestic hog became afflicted with African swine fever (ASF). With no vaccine and a near 100 percent mortality rate, domestic Chinese hog supplies have plummeted. Some estimates have domestic hog supplies at 30-35 percent below the peak supply level of 2017 and back at 1996 levels. One consequence of ASF is that domestic pork prices have spiked, causing the country to aggressively import pork.   In 2018, China implemented a 25 percent import tariff on U.S. pork and began buying pork from countries such as Brazil and the EU. In 2019, the Chinese government opportunistically relaxed the 25 percent import tariff on U.S. pork to help ensure supplies and to combat soaring domestic pork prices. This was particularly evident as the country aggressively increased pork imports ahead of the Lunar New Year celebration that lasts for two weeks in mid-January. Since the Phase 1 Trade Agreement was signed on Jan. 15, China has been the largest buyer of U.S. pork. The recent sales pace has slowed as the coronavirus has slowed export logistics at China’s ports and forced the delay of containers.  During this time, U.S. exports to China regained momentum and helped deliver price support to the U.S. pork and hog markets. From June 2019-December 2020, U.S. pork exports to China averaged 20 percent of the monthly export total. This figure spiked to 33% in December, which is the largest single monthly export total and percentage of sales on record. We believe that the USDA’s figures underestimate the actual export business to China because the numbers represent pork primals, which does not account for the volume of whole hog carcasses.    What this means for the U.S. farmer The intractable presence of ASF in China has created domestic supply shocks and price spikes which have created opportunities for the U.S. pork export program. China’s desperate need to ensure stable pork supplies to help influence domestic price stability and slow inflation has forced the country to aggressively import record volumes of U.S. pork. As the U.S. hog herd continues to expand at a linear rate, we believe the Chinese export business can create enhanced hog demand. With increased domestic packer and export demand for hogs and hog carcasses, we have little reason to believe that a negative catalyst exists that would suggest the expansion pace of the domestic hog herd will slow.  We view this scenario as being a positive variable for domestic corn and soybean meal demand, which can help support both regional and local basis.  Want access to more insights like this? This article is excerpted from our Market Intelligence newsletter, delivered weekly to FBN Market Advisory  members. With FBN Market Advisory, you'll receive truly personalized tools and reports to support your grain marketing efforts. Get access to market news, straightforward marketing recommendations, basis trend insights and weather reports—all relevant to your operation and geographic location. Copyright © 2020 FBN BR LLC. All rights Reserved. FBN Market Intelligence is distributed by FBN BR LLC. Contact 877-472-4607 for more information. For the purposes of quality assurance and compliance, phone calls to and from FBN BR LLC may be recorded. We do not guarantee customers will receive specific benefits or value from participating in FBN BR LLC; results will vary. The data in this article is being supplied as a courtesy by FBN BR LLC. The risk of trading futures and options can be substantial and may not be suitable for all investors. All information, publications, and reports, including this specific material, used and distributed by FBN BR LLC shall be construed as a solicitation. FBN BR LLC does not distribute research reports, employ research analysts, or maintain a research department as defined in CFTC Regulation 1.71. This article contains information obtained from sources believed to be reliable, but its accuracy is not guaranteed by FBN BR LLC. Past performance is not necessarily indicative of future results. Disclaimer: Futures and Option trading involves substantial risk, and may not be suitable for everyone. Trading should only be done with true risk capital. Past performance, either actual or hypothetical, is not necessarily indicative of future results.

A combination of ideal growing conditions and expanded planted acres have helped propel Brazilian soybean harvest projections to near record levels. And Brazilian corn is expected to match the record crop set last year. Brazil’s position as the largest soybean exporter and second largest corn exporter represents a structural threat to the U.S. export programs.  Brazilian Soybean Overview This year, Brazil will become the world’s largest soybean producer. The USDA estimates that Brazilian soybean production is at 4.6 billion bushels. The U.S. produced 3.5 billion bushels of soybeans this year.   This is the first year that Brazil will be the largest soybean producer.   Brazil is the largest exporter of soybeans and China is the primary destination.   This year, the USDA estimates that Brazil will export 2.8 billion bushels of soybeans, while it estimates that the U.S. will export 1.775 BBU of soybeans.    Unlike the U.S., Brazil is not a major exporter of soybean meal and oil. Most of the soybean derivatives are consumed domestically.   Brazilian president Jair Bolsonaro’s agricultural policies have encouraged the country’s farmers to expand land for agricultural use, which comes from deforestation of the Amazon region.      Brazil’s planted soybean acres and exports have grown alongside China’s import needs.   China has been a major investor in Brazil’s agricultural transport infrastructure. Starting in 2010, China has been a significant investor in Brazil. Some of these projects have included modernizing key Brazilian ports, rail and highway projects.   This year, the major highway BR-163 will be fully paved and will offer reliable trucking from key soybean growing regions to Brazil’s river terminals.        Brazil is adding a rail line along highway BR-130 to enhance corn and soybean volume at the river terminals. Brazilian Corn Overview After the U.S., Brazil is the world’s second largest producer and exporter of corn.  Brazil produces about twice the amount of corn as Argentina, the world’s third largest producer, and 2.5 times more corn than Ukraine.   This year, the USDA estimates that Brazil will produce a record-tying 4 billion bushels of corn. This year, the U.S produced 13.69 BBU of corn.   Brazil produces two corn crops. The second crop, known as the safrinha crop, is the larger of the two and the key export crop. Ironically safrinha is Portugese for “little crop.”  The first corn crop is the smaller of the two and is primarily used for domestic feed needs. Brazil has a vibrant livestock business sector and is a key global exporter of beef, pork and chicken.   The safrinha corn crop represents approximately 70% of Brazil’s crop production and a majority of the country’s corn exports.     Brazil’s second corn crop is planted after the soybean crop has been harvested.   Production of Brazil’s second corn crop is the result of seed R&D that has produced enhanced seed varieties.    This year, Brazilian agricultural statistics agency CONAB estimates that Brazilian planted corn acres will rise to a record 17.991 million hectares (MH). Second corn acres are expected to rise to a record 18 MH. The USDA is estimating that Brazilian corn exports will fall this year to 1.4 BBU from 1.6 BBU last year. What this means for the U.S. farmer We believe that Brazil’s record-breaking soybean production figure has the ability to suppress U.S. soybean exports this year. We also believe that increasing soybean and corn acres, along with a modernized infrastructure that is designed to create a more efficient supply chain, has the ability to pressure U.S. agricultural commodity prices. Add to the mixture a strong U.S. dollar, and we foresee structural headwinds for the U.S. soybean and corn export programs.                       Want access to more insights like this? This article is excerpted from our Market Intelligence newsletter, delivered weekly to FBN Market Advisory  members. With FBN Market Advisory, you'll receive truly personalized tools and reports that go the extra mile. Get access to market news, straightforward marketing recommendations, basis trend insights and weather reports—all relevant to your operation and geographic location. Copyright © 2020 FBN BR LLC. All rights Reserved. FBN Market Intelligence is distributed by FBN BR LLC. Contact 877-472-4607 for more information. For the purposes of quality assurance and compliance, phone calls to and from FBN BR LLC may be recorded. We do not guarantee customers will receive specific benefits or value from participating in FBN BR LLC; results will vary. The data in this article is being supplied as a courtesy by FBN BR LLC. The risk of trading futures and options can be substantial and may not be suitable for all investors. All information, publications, and reports, including this specific material, used and distributed by FBN BR LLC shall be construed as a solicitation. FBN BR LLC does not distribute research reports, employ research analysts, or maintain a research department as defined in CFTC Regulation 1.71. This article contains information obtained from sources believed to be reliable, but its accuracy is not guaranteed by FBN BR LLC. Past performance is not necessarily indicative of future results. Disclaimer: Futures and Option trading involves substantial risk, and may not be suitable for everyone. Trading should only be done with true risk capital. Past performance, either actual or hypothetical, is not necessarily indicative of future results.

For most of the 2019/20 marketing year, U.S. corn and soybean export values have been uncompetitive in the global export market. A strong dollar combined with bumper corn crops in Argentina, Brazil and Ukraine have worked against and slowed U.S. exports for most of the current marketing year. Over the last three weeks, the U.S. export sales pace has risen from the dead and is showing signs of life.    The 2019/20 U.S. corn export program has faced a series of structural headwinds that has resulted in one of the slowest and underperforming export sales paces in recent years. This lack of sales volumes has forced the USDA to lower their corn export estimate for the marketing year by 75 million bushels (MBU) in the January WASDE and left the broad market questioning the current estimate of 1.775 billion bushels (BBU).   Part of the reason for the lack of competitiveness can be attributed to the shock from lack of a global feed grain supply, bumper corn crops in Argentina, Brazil and Ukraine, and a strong U.S. dollar. For almost the entire five months of the 2019/20 marketing year, the U.S. dollar has been historically strong against the local currencies of other major corn exporting countries such as Argentina, Brazil and Ukraine. Because global corn exports are transacted and settled in U.S. dollars, there is a financial and economic incentive for exporters to aggressively sell corn and convert into local currency.  We believe these variables have directed global corn export flows away from the U.S., making U.S. corn the residual supplier to the world—or the supplier of last resort. Recently, U.S. corn has become increasingly competitive against corn in the global export market. While the strength of the U.S. dollar against the Argentine peso, Brazilian real or the Ukraine hryvnia has not subsided, we believe the torrid export pace from Brazil and Argentina has drawn down stocks and forced spot export values higher. At the same time, we believe that the compression of the March corn futures price, which has declined by $0.14 from the January 2020 high of $3.94, has been a contributing variable that has helped make U.S. corn competitive. Over the last three weeks, U.S. export sales pace has accelerated to the largest volumes of the marketing year. We believe that part of the surge in marketings is seasonal and can be attributed to the low stock levels in Argentina and Brazil. Another variable that we believe is helping to make U.S. corn competitive is the 12% export tariff on Argentine corn exports that was levied by the country’s new president in December.  What this means for the U.S. farmer We believe that now is the time for U.S. Yellow #2 corn to shine in the global export market. Lower futures prices have been a contributing variable that has helped U.S. corn find a clearing price in the export markets. The recent sales pace of U.S. corn is an encouraging signal for a much beleaguered complex, but the data illustrates that the momentum needs to persist during Argentina’s and Brazil’s intercrop period. Want access to more insights like this? This article is excerpted from our Market Intelligence newsletter, delivered weekly to FBN Market Advisory  members. With FBN Market Advisory, you'll receive truly personalized tools and reports that go the extra mile. Get access to market news, straightforward marketing recommendations, basis trend insights and weather reports—all relevant to your operation and geographic location. Copyright © 2020 FBN BR LLC. All rights Reserved. FBN Market Intelligence is distributed by FBN BR LLC. Contact 877-472-4607 for more information. For the purposes of quality assurance and compliance, phone calls to and from FBN BR LLC may be recorded. We do not guarantee customers will receive specific benefits or value from participating in FBN BR LLC; results will vary. The data in this article is being supplied as a courtesy by FBN BR LLC. The risk of trading futures and options can be substantial and may not be suitable for all investors. All information, publications, and reports, including this specific material, used and distributed by FBN BR LLC shall be construed as a solicitation. FBN BR LLC does not distribute research reports, employ research analysts, or maintain a research department as defined in CFTC Regulation 1.71. This article contains information obtained from sources believed to be reliable, but its accuracy is not guaranteed by FBN BR LLC. Past performance is not necessarily indicative of future results. Disclaimer: Futures and Option trading involves substantial risk, and may not be suitable for everyone. Trading should only be done with true risk capital. Past performance, either actual or hypothetical, is not necessarily indicative of future results.

The USDA’s January Crop Production report represents the government’s final yield, harvested acres and production figures for corn and soybeans. Given the delayed corn harvest this year, the USDA stated in the January Crop Production report that they will be “recontacting” corn producers in North and South Dakota, Wisconsin, Minnesota and Michigan to help develop a more comprehensive final assessment of 2019/20 corn production. After talking with the head corn analyst at USDA-NASS, FBN has a working understanding of how the government will proceed with their resurvey along with an idea about when the data will enter the market—and how this can impact the U.S. farmer. Here are 10 things to know about the USDA "resurvey": 1. Why is the USDA recontacting corn producers? During the first two weeks of December, USDA’s National Agricultural Statistics Service (NASS) conducts their annual December Agricultural Survey (DAS). This survey uses a sample size of approximately 79,000 farm operators across the U.S. During the time that the DAS was being conducted, a material amount of corn acres was unharvested in North and South Dakota, Wisconsin, Minnesota and Michigan. To help derive final yield, harvested acres and production figures for the 2019/20 crop year, NASS determined that recontacting farmers whose crop was unharvested is necessary.       2. Who will the USDA contact? The USDA will be contacting corn producers who indicated that harvest was incomplete when responding to the DAS survey. Because the harvest pace in North Dakota was historically slow, the government alluded to the notion that a majority of its resources will be focused there.     3. When will the USDA be contacting corn producers? NASS will recontact producers starting in mid-March.     4. How far behind was the 2019 corn harvest? Using data from the USDA’s final weekly Crop Progress report on December 9, the U.S. had harvested 92 percent of the national corn crop, which was the fourth slowest harvest on record. At just 43 percent complete, the corn harvest pace  in North Dakota was the slowest on record. The harvest pace in Michigan (74 percent complete) was third slowest on record, while the harvest pace in South Dakota and Wisconsin were the seventh slowest on record. At 94 percent complete, the pace in Minnesota was the fourth slowest on record.   5. How important are these states to the nation’s corn production? For the 2019/20 crop year, North Dakota and Wisconsin are estimated to produce 3% of the total U.S. corn crop; Michigan, 2%; and South Dakota, 4%. Meanwhile Minnesota produces approximately 9% of the national total.    6. How much corn is left to harvest? Because NASS collected harvest data beyond the final Dec. 9 Crop Progress report, it’s difficult to ascertain how many unharvested acres remain and what the yield may be. When comparing the change in the USDA’s harvested acres figure in the November Crop Production report to the January report we estimated that unharvested acres in North and South Dakota, Minnesota, Michigan and Wisconsin totals approximately 430,000 acres, or less than 0.5% of the USDA’s estimated  81.5 million harvested acres. 7. If state-level data is incomplete, what numbers are contained in the January report? In an attempt to present the public with the best possible data, NASS asked producers in the DAS to estimate yields and acres for unharvested areas that were intended for harvest. Therefore, the data in the January Crop Production report for the states mentioned above is regarded as the government’s best estimate based on the survey responses. FBN considers this data to be a temporary placeholder.         8. Will NASS collaborate with FSA to help assess the production total? No. NASS is the statistical arm of the USDA; they have their own survey methods and use their own statistical methods to produce estimates that are unique to the USDA. The FSA uses their own sampling and survey techniques. The USDA does not collaborate with FSA for final harvested acres and yield data.   9. When will these revisions appear? The government is aiming to publish any revisions in the May 2020 Crop Production report. 10. FBN believes that the delayed harvest is more of a cash market than a futures market event. While the USDA attempts to deliver final production information for the 2019/20 corn crop, the local and regional cash markets have responded accordingly. Using the above chart, we believe that the cash market appreciation in Michigan and Wisconsin is a result of tighter supplies amid an enhanced demand structure. We believe that the soft basis in North Dakota and north central areas in South Dakota is attributed to a slow Asian export program, which may be negatively influenced in part by lower quality corn with high test weights.           FBN believes that because the volume of unharvested corn resides outside of the key producing states, any changes to yield and final production figures may not possess enough statistical power to “move the needle” on the aggregate U.S. balance sheet. If the USDA’s results do not possess the ability to materially lower the existing 1.892 billion bushel ending stocks, then we believe that the potential impact on futures prices can be minimal. Want access to more insights like this? This article is excerpted from our Market Intelligence newsletter, delivered weekly to FBN Market Advisory  members. With FBN Market Advisory, you'll receive truly personalized tools and reports that go the extra mile. Get access to market news, straightforward marketing recommendations, basis trend insights and weather reports—all relevant to your operation and geographic location. Copyright © 2020 FBN BR LLC. All rights Reserved. FBN Market Intelligence is distributed by FBN BR LLC. Contact 877-472-4607 for more information. For the purposes of quality assurance and compliance, phone calls to and from FBN BR LLC may be recorded. We do not guarantee customers will receive specific benefits or value from participating in FBN BR LLC; results will vary. The data in this article is being supplied as a courtesy by FBN BR LLC. The risk of trading futures and options can be substantial and may not be suitable for all investors. All information, publications, and reports, including this specific material, used and distributed by FBN BR LLC shall be construed as a solicitation. FBN BR LLC does not distribute research reports, employ research analysts, or maintain a research department as defined in CFTC Regulation 1.71. This article contains information obtained from sources believed to be reliable, but its accuracy is not guaranteed by FBN BR LLC. Past performance is not necessarily indicative of future results. Disclaimer: Futures and Option trading involves substantial risk, and may not be suitable for everyone. Trading should only be done with true risk capital. Past performance, either actual or hypothetical, is not necessarily indicative of future results.

On Wednesday, January 15, President Trump and Chinese Vice Premier Liu met in Washington, D.C., to sign the first component of a multi-stage trade agreement between the two nations. More commonly known as the Phase 1 Trade Agreement, the deal seeks to address some of the major issues that have caused a two-year political and economic spat between the two countries. The Phase 1 Trade Agreement sought to increase the sales of U.S. goods and services to China, further open Chinese markets to foreign firms — particularly in financial services — and provide strong new protections for trade secrets and intellectual property. Key takeaways from the Phase 1 Trade Agreement Below are takeaways from the Phase 1 Trade Agreement that we at Farmers Business Network℠ ( FBN ) think are the most pertinent and relevant for the U.S. farmer: 1. From an agricultural perspective, the language of the deal does not list details of U.S. agricultural commodities, committed volumes and/or a committed time frame for future commodity purchases. We view this as a letdown for the U.S. agricultural community. 2. The Chinese publicly stated that the country is committed to purchasing agricultural commodities in accordance with domestic demand and global market conditions . The Chinese made this comment in December and Vice Premier Liu reiterated the position at the signing ceremony in Washington, D.C. At FBN , we are particularly concerned about this stipulation as it has the ability to  deprioritize potential export volumes of key U.S. row crops such as corn, soybeans, sorghum and wheat, which might direct the purchase dollars to other commodities. Remember, Brazil is the world’s largest exporter of soybeans and China is the largest buyer of Brazilian soybeans. If Brazil produces a bumper soybean crop this year, which forces Brazilian export prices lower, the lack of Chinese commitments to purchasing specific quantities of U.S. soybeans could become problematic. 3. China agrees to a $32 billion increase in purchases that uses the total dollar amount of U.S. agricultural commodity purchases from 2017 as a baseline figure for future trade activity. China agrees to purchase $12.5 billion more in ag goods from the U.S. in year one and $19.5 billion in year two. There are no details for future years. 4. Overall, agriculture purchases have smaller financial goals for increased trade under the deal than energy — specifically natural gas, manufacturing and services, including financial services. 5. The agreement provides language to create an administrative framework to help enhance cooperation between the two countries and increase the traceability and phytosanitary safety of U.S. processed foods, protein combos/primals, animal feeds and agricultural row crops. 6. The list of agricultural commodities that are mentioned and are subject to Chinese purchases is comprehensive but essentially represents those impacted by the retaliatory tariffs that the Chinese imposed starting in 2018.  This list includes common agricultural items such as soybeans, cotton, fruits and nuts, to even the uncommon commodities like human hair (presumably for wigs), wool grease and vegetable wax. 7. Ethanol is not mentioned in the Phase 1 Trade Agreement, but the language defines administrative reforms that China will take to help facilitate exports of DDGS. 8. The deal includes monitoring and enforcement mechanisms to help ensure that Chinese imports of U.S. agricultural commodities are in compliance with the trade terms. 9. The agreement acknowledges that China will work to amend or “fix” the existing tariff rate quota (TRQs) for corn, wheat and rice to address compliance issues with the World Trade Organization (WTO). What this means for the U.S. farmer At FBN , we believe that the Phase 1 Trade Agreement is anticlimactic for the U.S. farmer. Marketed as a type of economic panacea for the U.S. farmer, the trade deal leaves us at FBN wanting more. Because the language does not contain firm commitments on commodities, volumes or time frames, we view this as short-run bearish and long-run neutral. We believe that traders had hoped for transparency to support the recent price strength and without it, the market will go back to gauging competitiveness and looking for tangible signs of transactions to bring more upside. Want access to more insights like this? This article is excerpted from our Market Intelligence newsletter, delivered weekly to FBN Market Advisory  members. With FBN Market Advisory, you'll receive truly personalized tools and reports that go the extra mile. Get access to market news, straightforward marketing recommendations, basis trend insights and weather reports—all relevant to your operation and geographic location. Copyright © 2019 FBN BR LLC. All rights Reserved. FBN Market Intelligence is distributed by FBN BR LLC. Contact 877-472-4607 for more information. For the purposes of quality assurance and compliance, phone calls to and from FBN BR LLC may be recorded. We do not guarantee customers will receive specific benefits or value from participating in FBN BR LLC; results will vary. The data in this article is being supplied as a courtesy by FBN BR LLC. The risk of trading futures and options can be substantial and may not be suitable for all investors. All information, publications, and reports, including this specific material, used and distributed by FBN BR LLC shall be construed as a solicitation. FBN BR LLC does not distribute research reports, employ research analysts, or maintain a research department as defined in CFTC Regulation 1.71. This article contains information obtained from sources believed to be reliable, but its accuracy is not guaranteed by FBN BR LLC. Past performance is not necessarily indicative of future results. Disclaimer: Futures and Option trading involves substantial risk, and may not be suitable for everyone. Trading should only be done with true risk capital. Past performance, either actual or hypothetical, is not necessarily indicative of future results.

At Farmers Business Network℠ , we believe that the January 10 WASDE report was neutral to slightly bearish for corn and soybeans as the pre-report estimates were looking for larger reductions in the production and ending stocks figures than the USDA reported. We believe that the USDA’s all-wheat and by-class ending stocks figures were neutral and in line with the pre-report estimates. Corn Highlights We believe that the USDA’s reported corn supply and demand figures relative to the pre-report expectations presents a bearish/neutral outlook for corn. The USDA reported the 2019/20 corn production of 13.692 billion bushels (BBU) compared to the pre-report estimate of 13.513 BBU and the government’s 13.661 BBU estimate in December. The changes in production along with the adjustments increase of 230 MBU of domestic demand takes the USDA’s 19/20 carryout to 1.892 BBU or -18 MBU from the December WASDE. The ending stocks figure of 1.892 BBU compares to the pre-report estimate of 1.757 BBU. Corn Supply: Yields and Production The USDA reported their national corn yield at 168.0 BPA and harvested acres at 81.5 million acres (MA). This compares to the pre-report estimates of 166.2 BPA and 81.350 MA. The USDA reported yields at 167.0 BPA and harvested acres of 81.815 MA in the November WASDE report. Note: The USDA did not conduct or publish an updated corn yield or acres survey for the December WASDE, so the January figures are compared against the USDA’s data from the November Crop production report. Normally, the USDA’s corn yield and harvested acres figures in this report are considered to be the government’s final production numbers of the marketing year. To accommodate the slow harvest pace in Michigan, Minnesota, North/South Dakota and Wisconsin, the USDA announced that the government will “re-contact” individuals that had not harvested corn in December in the “early spring” for harvest updates. The USDA further stated that if new data warrants any production changes, the government will adjust the related variables at a future date. The government reduced the national yield from the November Crop Production report for Nebraska, North Dakota, South Dakota and Mississippi. Yields in Kansas and Nebraska were left unchanged from the November report. Corn yields were raised in Iowa, Illinois, Indiana, Minnesota, Ohio and Wisconsin. The USDA generally raised the final corn yields in most secondary and tertiary corn producing states, which we believe was instrumental in helping push the final yield figure higher from the November report. Corn Demand The USDA lowered export demand by 75 MBU from December as lackluster export sales for most of the marketing year have been a source of concern. The USDA lowered FSI demand by 20 MBU and left the corn for ethanol use figure unchanged from December. Feed and residual demand was raised by 250 MBU. The USDA’s December Cattle on Feed and the Quarterly Hogs and Pigs reports, combined with weekly broiler egg sets and chick placements were all at or close to record levels. U.S. Ending Corn Stocks With the 2019/20 ending stocks number declining by 18 MBU from December to 1.892 BBU, the USDA’s ending stocks were 135 MBU higher than the pre-report estimate of 1.757 BBU. We believe that the 1.892 BBU ending stocks number is not tight and is the sixth largest carryout since 2000. The 1.892 BBU carryout is psychologically important as the figure is below the 2 BBU level for the first time in three years. Foreign Corn Comments: Argentina, Brazil, China and Ukraine Pre-report estimates for CONAB, Brazil’s national statistics agency and private forecasters, are estimating Brazil’s corn production at 96-99 MMT. The USDA’s production estimate is unchanged from December and tied with the 101 MMT bumper crop from last year. Argentina’s production is left unchanged at 50 MMT and is 1 MMT below the 51 MMT bumper crop last year. Last year, Argentina and Brazil combined produced a record 151 MMT corn crop. The January report made no changes from December to China but raised Ukraine’s export estimate by 500,000 MT to a record 30.5 MMT. What this means for the U.S. farmer At FBN , we view the report as neutral to slightly bearish prices because the current ending stocks for U.S. corn is neither tight nor loose. We believe that USDA’s cutting export demand while adding to the feed and residual demand is correct and aligns with the data. With the supply side of the 19/20 corn crop “in the books,“ the market will now shift focus to the demand side of the balance sheet along with developments in Brazilian and Argentine corn production and exports. Soybean Highlights We believe that the USDA’s reported soybean supply and demand figures relative to the pre-report expectations present a neutral to slightly bearish outlook for soybeans. The USDA’s reported 19/20 soybean production figure of 3.558 billion bushels (BBU) compared to the pre-report estimate of 3.512 BBU was bearish. The changes in production along with no adjustments in the demand side of the equation leaves the USDA’s carryout steady at 475 MBU. This compares to the pre-report estimate of 424 MBU and unchanged from the 475 MBU reported in the December WASDE. Yields and Production The USDA reported their national soybean yield at 47.4 BPA and harvested acres at 75.0 MA. This compares to the pre-report estimates of 46.6 BPA and 75.462 million acres (MA). The USDA reported yields at 46.9 BPA and harvested area of 75.462 MA in the November WASDE report. Normally, the USDA’s soybean yield and harvested acres figures in this report are considered to be the government’s final production numbers of the marketing year. To accommodate the slow harvest pace in Michigan, North Dakota and Wisconsin, the USDA announced that the government will “re-contact” individuals that had not harvested soybeans in December in the “early spring” for harvest updates. The USDA further stated that if new data warrants any production changes, the government will adjust the related variables at a future date. Overall, the USDA’s final soybean yield figures in Illinois, Iowa, Nebraska, Ohio, Indiana and Wisconsin were raised from December, while yields in Michigan, Minnesota, and North/South Dakota were lowered and Missouri was unchanged. Across the Delta, yields were mixed. Soybean Demand The USDA made no changes to their crush or export demand figures in the January report. The government left soybean meal and soybean oil demand static from the December report as well. U.S. Ending Soybean Stocks Despite the incremental 8 MBU increase in production from December, the 475 MBU carryout is realized by a slight increase in beginning stocks for the 19/20 marketing year and a decline of 5 MBU in imports. The 475 MBU carryout is the fourth largest stocks on record but 438 MBU below last year’s 913 MBU figure. Foreign Soybean Comments: Argentina and Brazil Pre-report figures showed that CONAB estimated Brazil’s soybean bean production from 121.7-124.3 MMT. Last year, Brazil produced a 117 MMT crop, which was the second largest production on record. At 121 MMT, the 2017/18 crop is the largest on record. Pre-report estimates pegged Argentina’s soybean crop at 49.59 MT, which is a hair below the 50 MMT from last year. The USDA left Argentine and Brazilian soybean supply and demand estimates intact from December at 53 MMT and 123 MMT, respectively. The government also left Chinese imports unchanged. What this means for the U.S. farmer We believe that the USDA’s treatment of the supply and demand side of the balance sheet presents a fundamentally neutral/slightly bearish report. At 475 MBU, ending stocks are 438 MBU lower than the 2018/19 marketing year, but the number is still accommodating. With the supply side of the 19/20 year “in the books,” we shift our attention to the demand side of the balance sheet and the upcoming Jan. 15 signing of the Phase 1 trade agreement between the U.S. and China. Wheat Highlights The pre-report analyst estimates were looking for a slight 5 MBU decline in the all-wheat carryout to 969 MBU. Given the incremental changes to the ending stocks, we believe the report was largely neutral for U.S. wheats. The USDA estimates a 965 MBU all-wheat carryout as the all-wheat feed and residual figure was raised by 10 MBU to 150 MBU. The government made incremental changes to the by class ending stocks figures from December. The USDA also lowered HRW exports from December by 5 MBU, which is offset by a 5 MBU increase in durum exports. HRS domestic use rose by 5 MBU while SRW domestic use was cut by the same amount. Foreign Wheat Comments: Australia, Argentina, Canada, EU, Russia and Ukraine Overall, we believe at FBN that the changes to the USDA’s foreign balance sheets were incremental, and at the moment do not represent material impacts for the U.S. The USDA cut Russian exports by 1 MMT but offset some of this loss by raising Ukraine exports by 500,000 MT. EU exports were raised by 2 MMT, but no changes were made to Argentine or Canadian exports. The government lowered Australian wheat production by 500,000 MT and reduced the export figure by 200,000 MT. What this means for the U.S. farmer As expected, we believe that the USDA’s reported WASDE was a neutral event for the U.S. wheats. With all eyes focused on the government's 2020/21 winter wheat seedings report, we believe that the estimated HRW and SRW ending stocks have become a focus for the trade. We still remain focused on the export pace from Russia and the Black Sea and are interested to see how the newly implemented export tariffs on Argentine wheat exports can shape and influence U.S. wheat exports and the HRW balance sheet in upcoming months. Lost export volume from Australia along with the possibility of the Phase 1 trade agreement between the U.S. and China, which will provide export opportunities for the U.S., are also a focus for FBN . Want access to more insights like this? This article is excerpted from our Market Intelligence newsletter, delivered weekly to FBN Market Advisory  members. With FBN Market Advisory, you'll receive truly personalized tools and reports that go the extra mile. Get access to market news, straightforward marketing recommendations, basis trend insights and weather reports—all relevant to your operation and geographic location. Copyright © 2019 FBN BR LLC. All rights Reserved. FBN Market Intelligence is distributed by FBN BR LLC. Contact 877-472-4607 for more information. For the purposes of quality assurance and compliance, phone calls to and from FBN BR LLC may be recorded. We do not guarantee customers will receive specific benefits or value from participating in FBN BR LLC; results will vary. The data in this article is being supplied as a courtesy by FBN BR LLC. The risk of trading futures and options can be substantial and may not be suitable for all investors. All information, publications, and reports, including this specific material, used and distributed by FBN BR LLC shall be construed as a solicitation. FBN BR LLC does not distribute research reports, employ research analysts, or maintain a research department as defined in CFTC Regulation 1.71. This article contains information obtained from sources believed to be reliable, but its accuracy is not guaranteed by FBN BR LLC. Past performance is not necessarily indicative of future results. Disclaimer: Futures and Option trading involves substantial risk, and may not be suitable for everyone. Trading should only be done with true risk capital. Past performance, either actual or hypothetical, is not necessarily indicative of future results.

The soybean oil futures curve has appreciated since the beginning of December and has been led by the January contract, which has risen by 13 percent to its highest level in a year. The contraction of vegetable oil supplies in Indonesia, Malaysia, the EU and Australia have helped provide some support to U.S. soybean oil futures.  We believe that congressional reinstatement of the biodiesel blending tax credit was an important catalyst for some of the price action and has the ability to provide future support. Last week, Congress amended a government spending bill that contained language to renew and extend the $1 per gallon blending tax credit for the biodiesel industry through 2022. The tax credit is also retroactively applied to the last two years. Since the credit was revoked in 2018, 10 plants in the U.S. have closed.  The biodiesel credit was created in 2005 as part of the Renewable Fuel Standard (RFS), which was designed to help farmers and increase U.S. energy independence by promoting support of biofuels. The blending tax credit costs close to $2 billion per year and according to the Department of Energy (DOE) is one of the most costly U.S. energy subsidy programs. The tax credit provides a subsidy to biodiesel refineries that use feedstocks such as soybean oil along with animal fats and industrial greases to produce the fuel. The latest production data from the DOE showed that during September, the 95 U.S. biodiesel plants produced 142 million gallons of biodiesel. While this figure is down from 164 million gallons in 2018, the nine-month year-to-date total of soybean oil used in biodiesel in 2019 is 6% higher than the same time during 2018. Domestic biodiesel demand continues to be strong, as the monthly ending stocks level has been close to zero since February. What this means for the U.S. farmer We believe the tax credit is a positive for the U.S. soy producer. Despite strong demand, the estimated biodiesel producer gross margins have been soft to negative for most of 2019. We believe the tax credit provides a financial incentive to increase production, which can be positive for soybean oil demand. We also believe that the positive downstream demand structure for soybean oil can help draw down domestic soybean oil stocks while creating an enhanced demand structure at the crush level. And we believe greater demand for soybean derivatives, meal and oil can support crush margins, which has the ability to be supportive local soybean basis. Want access to more insights like this? Our FBN Market Intelligence subscription delivers expert analysis, straightforward recommendations and local basis trend insights to better inform your approach to grain marketing. Sign up for a free 30-day trial today. Copyright © 2019 FBN BR LLC. All rights Reserved. FBN Market Intelligence is distributed by FBN BR LLC. Contact 877-472-4607 for more information. For the purposes of quality assurance and compliance, phone calls to and from FBN BR LLC may be recorded. We do not guarantee customers will receive specific benefits or value from participating in FBN BR LLC; results will vary. The data in this article is being supplied as a courtesy by FBN BR LLC. The risk of trading futures and options can be substantial and may not be suitable for all investors. All information, publications, and reports, including this specific material, used and distributed by FBN BR LLC shall be construed as a solicitation. FBN BR LLC does not distribute research reports, employ research analysts, or maintain a research department as defined in CFTC Regulation 1.71. This article contains information obtained from sources believed to be reliable, but its accuracy is not guaranteed by FBN BR LLC. Past performance is not necessarily indicative of future results. Disclaimer: Futures and Option trading involves substantial risk, and may not be suitable for everyone. Trading should only be done with true risk capital. Past performance, either actual or hypothetical, is not necessarily indicative of future results.

Argentina has a long history of taxing agricultural exports to generate revenue. When former Argentine president Mauricio Macri was elected to office in late 2015 under centric reformist agenda, export taxes for Argentine agricultural commodities declined. The result was a sharp increase in harvested corn acres, a decline in soybean acres and a resurgence of Argentina as a global corn exporter. In November, a leftist populist government led by Alberto Fernandez ousted Macri. Last week, Fernandez introduced a series of steep tax increases on Argentine agricultural exports. We believe that these tax hikes can be beneficial for U.S. corn as well as soybean meal and soybean oil. Background on Argentine Agricultural Export Tariff Policy Since 2003, Argentina has been governed by a left-leaning populist political party known as the Peronists. Under the Peronist regime, the government vilified the Argentine farmer and used export taxes on agricultural goods to generate revenue for the perpetually broke government. During this time, export taxes for corn were at 20%; wheat, 23%; soybeans, 35%; soybean oil, 32%; and soybean meal, 32%. In 2015, a centrist reformist government led by Macri was elected. During his presidency, Macri reduced export tariffs on Argentine agricultural goods, making them more competitive in the global export markets. When Macri was voted out of office in early November, he was replaced with Fernandez, who represents the same populist-leftist Peronist government that raised the export taxes on Argentina’s agricultural commodities before Macri. When Fernandez took office in early December, he raised the export taxes on soybeans, oil and meal to 30% while the taxes on corn and wheat were increased to 12%. Given the growing global demand structures for coarse grains and feedstock use for biofuels, we believe that a rise in Argentine export tariffs comes at a critical period. At FBN , we believe the new tariff structure has the ability to progressively shift the global supply structure back to the U.S., which can be a positive for corn, soybean meal, soybean oil and wheat. Corn At FBN , we believe that the newly imposed 12% export tariff on Argentine corn can be beneficial to the U.S. farmer if planted corn acres in Argentina contract. Interviews with Argentine farmers conducted by Thomson Reuters seem to anecdotally indicate that the new tariff structure will act as a disincentive for planting corn acres in 2020. To illustrate how the export tariff structure served as a negative for domestic corn production, during the 12-year reign of the leftist Peronist party (2003-2015), harvested corn acres averaged 3.19 million hectares (MH). During the Macri presidency, harvested corn acres averaged 5.75 MH, or an increase of 80%. Harvested corn acres in 2018 and 2019 were 6.1 MH and the largest on record. From 2003-2015, Argentina corn exports averaged 15.3 million metric tonnes (MMT). During the same time, Argentina’s corn exports as a percentage of global corn exports averaged 9.1%. During the liberalized trade policies of Macri, both of these figures skyrocketed. From 2016-2019, Argentina’s corn exports averaged 29.5 MMT while the country’s percentage of global corn exports rose to an average of 15.9% and peaked at historical highs of 18%. As Argentina’s corn exports rose, U.S. exports declined. What this means for the U.S. farmer If the new export tariffs serve as a disincentive for the Argentine farmers to plant corn and export volume contracts to the pre-Macri range, we believe that approximately 6.8% of the world’s corn exports could be up for grabs. While producer margins play a big role in Argentine corn-producing decisions, if the government increases the import tariff on crop inputs, which has been discussed, we believe that both margins and yields could compress, which could be a negative. Ultimately, we believe that if Argentine corn exports decline that this volume would be assumed by Brazil, Ukraine and the U.S., which would be a positive for the U.S farmer. Soybeans Argentina is the third-largest producer of soybeans but the largest exporter of soybean meal and soybean oil. After Brazil, the U.S. is the third-largest exporter of soybean meal and soybean oil. Under Fernandez, Argentina’s export tax on soybeans will rise to 33% from 30% but is still below the 35% rate before Macri. The new export tax rates for soybean meal and soybean oil rise from 18% to 30%, matching the same level as soybeans. Historically harvested soybean acres in Argentina averaged 17.37 MH during the Peronist period from 2003-2015 but sharply increased in 2013-2015 to an average of 19.42 MH when the country raised corn export taxes. This number declined from 2016-2019 to 16.53 MH as the corn export tariffs were lowered. From 2003-2015, Argentina’s annual soybean meal and oil exports as a percentage of production were approximately 94% and 76% of total production. These figures declined during the Macri presidency to 92% for soybean meal and 64% for soybean oil. Historically, the Argentine soy producer has relied on ground storage for soybeans, but we believe that timing is too premature to tell how the producer will respond. What this means for the U.S. farmer At FBN , we believe Argentina’s taxes on soybean meal and soybean oil can represent a material opportunity for the U.S. export programs. Given the rising global demand for soybean meal and feedstock for biodiesel, we believe that any contraction in Argentine exports can be a benefit to the Brazilian and U.S. export programs. Increased demand for soybean meal and oil can be positive for crusher demand, which we believe can support both soybean basis and futures. Wheat When wheat exports were taxed at a 23% rate, this limited shipments. When Macri removed the export taxes in December 2015, Argentina’s exports shot higher for the 2015/16 crop year and the coming years. Production also increased and reached a record in 2018/19, as producers increased planted area on the lack of taxes, taking advantage of the export potential. Currently, USDA sees Argentina’s 2019/20 exports at 13 million tonnes. USDA’s December WASDE was released ahead of the boost in taxes. Argentina is in the midst of its wheat harvest. While the updated policy may have disgruntled some producers and could cut back export potential for 2019/20, more pronounced effects are likely to come for 2020/21. Producers may be less willing to plant as much wheat given the nearly doubled increase on taxes. This could result in lower production totals and thus lower export totals. Argentine producers are known for being willing to store commodities, especially soybeans, but it is difficult to maintain quality of wheat when in storage for several years. This year, Argentina’s wheat exports may not be significantly reduced since the crop is already made. But, producers will be hesitant on betting that a reduction in the taxes is forthcoming given the new government is just settling in and, hence, may not be willing to risk the decline in quality over the chance of a tax change in the next year or two. What this means for the U.S. farmer Argentina’s updated tax regime is a net benefit to the U.S. wheat producer. Argentina likely will continue to be Brazil’s primary supplier but may cut back on exports to other nations, notably in Africa. This will translate to opportunities for the U.S. producer but those opportunities may not be fully realized until this time next year when the Argentine farmer reacts to the changes in taxes and alters plantings and production. Want access to more insights like this? Our FBN Market Intelligence subscription delivers expert analysis, straightforward recommendations and local basis trend insights to better inform your approach to grain marketing. Sign up for a free 30-day trial today. Copyright © 2019 FBN BR LLC. All rights Reserved. FBN Market Intelligence is distributed by FBN BR LLC. Contact 877-472-4607 for more information. For the purposes of quality assurance and compliance, phone calls to and from FBN BR LLC may be recorded. We do not guarantee customers will receive specific benefits or value from participating in FBN BR LLC; results will vary. The data in this article is being supplied as a courtesy by FBN BR LLC. The risk of trading futures and options can be substantial and may not be suitable for all investors. All information, publications, and reports, including this specific material, used and distributed by FBN BR LLC shall be construed as a solicitation. FBN BR LLC does not distribute research reports, employ research analysts, or maintain a research department as defined in CFTC Regulation 1.71. This article contains information obtained from sources believed to be reliable, but its accuracy is not guaranteed by FBN BR LLC. Past performance is not necessarily indicative of future results. Disclaimer: Futures and Option trading involves substantial risk, and may not be suitable for everyone. Trading should only be done with true risk capital. Past performance, either actual or hypothetical, is not necessarily indicative of future results.

Unrelenting large weekly production runs, record-level stocks, compressed industry-wide margins and meddlesome politics in Washington, D.C. contributed to largely negative effects on U.S. ethanol for most of the 2018/19 marketing year. By late summer, the industry started to take necessary steps toward recovery. Faced with the threat of tightening corn supplies and a strengthening basis in many of key ethanol producing states. While production cuts and stocks draws have helped estimated gross ethanol producer margins return to a positive level, the downside has been lower overall corn use. We believe that lower corn use for ethanol can be a negative for disappearance. Weekly production cuts and stock draws have been key For almost the entire 2018/19 marketing year, the domestic ethanol industry was plagued with record large stocks. Part of the stocks build in early 2019 can be attributed to robust export business to Brazil, Canada and India, and part was to satisfy seasonal driving demand. The demand side of the equation had worsened for U.S. ethanol by the second half of 2019: Export pace had declined, there was still no trade deal with China and the spread between reformulated gasoline and ethanol was narrowing, making ethanol less competitively priced. Add to this lackluster sales of the much-heralded e-15 and the summer stocks continued to achieve record-high levels.  By August 2019, weekly YoY U.S. ethanol production levels started to decline. Part of the production decline can be attributed to the compressing and negative estimated gross margin structure, and part can be attributed to maintenance and plants being idled. In 2019, 15 ethanol refineries across the U.S. closed, including in Iowa, South Dakota and Michigan, resulting in reduced production capacity. Weekly production also fell as downstream gasoline refiners were facing negative margins and exercised the small refiners production waivers (SRW) that were guaranteed by the federal government. According to the Renewable Fuels Association, the Trump Administration has granted waivers to 85 oil refineries since 2016, deterring an estimated 1.4 billion bushels of corn from being used to make ethanol. From August to late November, weekly ethanol production declined by an average of 4 percent. Using the most recent data from the U.S. Department of Energy’s Energy Information Agency (EIA) and the USDA, decline in corn use correlated with the decline in weekly ethanol production. Assuming a 2.85 gallon-to-bushel ethanol yield and that 2 percent of the weekly domestic ethanol production is from sorghum, weekly corn for ethanol use declined sharply during the first three months of the 19/20 marketing year. Using production data from the first 12 weeks of the marketing year is averaging 101.537 million bushels (MBU) a week suggesting corn for ethanol use is roughly 5.279 billion bushels—well below the USDA’s estimate of 5.375BBU. FBN is estimating corn for ethanol use during the marketing year to be at 5.300 BBU. Current demand for U.S. ethanol has illustrated some recent improvement, but FBN believes that ethanol remains vulnerable . Monthly reported ethanol exports of U.S. ethanol for September were +8 percent from 2018, but exports as a percentage of domestic production has shrunk during the second half of 2019. Also serving as a negative for ethanol disappearance is the decline in weekly exports of gasoline. Since September, weekly U.S. gasoline exports have declined by an average of 8 percent YoY.  Conclusion Since the start of the 2019/20 marketing year in September, the production pace of U.S. ethanol has declined from 2018 rates. The recent 10-week run of weekly higher ethanol production is a positive for corn demand, but the total corn for ethanol use suggests approximately 5.275 billion bushels—roughly 100MBU below the USDA’s estimate of 5.375BBU. We believe that if margins exist for the ethanol refiner, then there is an incentive to produce. An incentive to produce is positive for corn disappearance. Add to this the lowest stocks level since 2017 and we believe that the recent production trend could persist, which would be a positive for corn demand. But at FBN we remain cautiously optimistic: Small refinery waivers combined with a loss of production capacity can keep production below levels observed during the 2018/19 marketing year. Want access to more insights like this? Our FBN Market Intelligence subscription delivers expert analysis, straightforward recommendations and local basis trend insights to better inform your approach to grain marketing. Sign up for a free 30-day trial today. Copyright © 2019 FBN BR LLC. All rights Reserved. FBN Market Intelligence is distributed by FBN BR LLC. Contact 877-472-4607 for more information. For the purposes of quality assurance and compliance, phone calls to and from FBN BR LLC may be recorded. We do not guarantee customers will receive specific benefits or value from participating in FBN BR LLC; results will vary. The data in this article is being supplied as a courtesy by FBN BR LLC. The risk of trading futures and options can be substantial and may not be suitable for all investors. All information, publications, and reports, including this specific material, used and distributed by FBN BR LLC shall be construed as a solicitation. FBN BR LLC does not distribute research reports, employ research analysts, or maintain a research department as defined in CFTC Regulation 1.71. This article contains information obtained from sources believed to be reliable, but its accuracy is not guaranteed by FBN BR LLC. Past performance is not necessarily indicative of future results. Disclaimer: Futures and Option trading involves substantial risk, and may not be suitable for everyone. Trading should only be done with true risk capital. Past performance, either actual or hypothetical, is not necessarily indicative of future results.