Getting ahead of the market: Global Crop Outlook Summer 2018

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1 Getting ahead of the market: Global Crop Outlook Summer 2018 Thomson Reuters Agriculture Research (Lanworth ) analysts capture the essentials of the global trade outlook for corn, wheat, rapeseed and soy. Using our proprietary data, insights and access to a network of on-the-ground resources, the Lanworth team provides the most authoritative analysis on market trends, price forecasts and supply/demand in the global agriculture markets.

2 Global Crop Outlook Summer 2018 The Black Sea 2 REUTERS/Ilya Naymushin THE BLACK SEA Will the Black Sea surprise the wheat market again in 2018/19? For the past couple of years, Russia and Ukraine have been breaking one grain production record after another. What has been the cause behind this tremendous rise in grain production? Do we foresee further increases? Starting in the late 1990s, yields in both countries began a steadily upward trend. Today, Russia and Ukraine are among the world s largest wheat producers. In 2017/18, Russia produced 85 million tons; Ukraine produced 27 million tons. Russia now holds the title of the world s largest exporter. The major drivers are higher investments in agriculture, land privatization, creation of so-called agroholdings, all of which resulted in better inputs and technology. Ukrainian and Russian farmers are using better-quality seeds, along with more efficient crop protection, fertilizers and irrigation. In addition, for the past few seasons they were lucky to get the right weather at the right time.

3 Global Crop Outlook Summer 2018 The Black Sea 3 Black Sea Wheat Yields Russia Ukraine 2018/19 = Yield, ton/ha /19 = Ukrainian Agriculture Source: USDA FAS and TR Agriculture Research (2018 data) The Ukrainian economy and agricultural sector have stabilized post-2014, which brought more financial inputs into crop cultivation. Now agriculture is growing to become the leading sector in the Ukrainian economy, especially with regards to exports. With higher collaboration levels with the European Union following the signing of the Association Agreement, and moving forward to a more effective agricultural legislation, Ukrainian agriculture is becoming more attractive for foreign and local private investments. At the same time though, the agricultural sector s development is limited by a lack of funding and governmental support. Additionally, agriculture in Ukraine suffers from a lack of long-term investments and a clear management structure. One of the reasons is the continuously postponed abolishment of the moratorium for free land trade. Since Ukraine obtained independence in 1991, agricultural land cannot be traded on the market. The land can only be leased for a limited time period. Despite these challenges, improvement of agricultural technologies, better inputs (such as seeds and fertilizers), a generally mild winter and cold early spring to date, sufficient weather during planting and in the long-term outlook set Ukraine national-level yields at 4.05 tons per hectare for 2018/19. For now, and assuming normal springtime/summer weather, it seems Ukraine could surprise the market once again. Russian Wheat Last year s record wheat crop in Russia, increased export potential, better agriculture technologies and a relatively stable exchange rate between foreign currencies and the Russian ruble all imply high gross revenue for wheat. Considering cultivation trends, gross revenues, autumn conditions, mild winter and assuming adequate weather in spring and summer, especially during wheat heading stage, production may rival last year s record and reach 84.3 million tons. National-level yields in Russia are set at 2.7 tons per hectare (including 3.87 tons per hectare for winter wheat), which may go to up to 3.2 tons per hectare assuming ideal weather moving forward. Such a yield would be another record. The Black Sea vs. the EU Finally, let s compare current record yield in the Black Sea with yield trends in the European Union. In France and Germany, farmers can harvest over 7.5 tons per hectare in a good year, while in Russia and Ukraine, farmers can barely get 4.0 tons per hectare yields. Assuming continuation of improving economies in both countries, continued investment in the agriculture sector, and land intensification, we cannot exclude the possibility of yields in the Black Sea nearly doubling within the next decade and approaching levels in Western Europe. So Russia also has the potential to surprise once again and in years to come.

4 Global Crop Outlook Summer 2018 The European Union 4 REUTERS/Johannes Eisele THE EUROPEAN UNION Are there weather risks for wheat and rapeseed this season in the EU? The past two seasons were not ideal for production in the European Union, as crops were stricken with excessive precipitation or dryness accompanied by heat waves. This season, with minor to no winterkill and sufficient precipitation in spring and early summer, wheat and rapeseed production is to set to be approximately 156 and 22.7 million tons, respectively. Production, however, can drop to 138 and 19.6 million tons with late-season spring frosts during rapeseed blooming and drought in spring and summer. On the other hand, with adequate weather during the season, especially during wheat heading and rapeseed blooming stages, production may reach 162 and 24 million tons. Higher prices and increased demand for rapeseed will likely lead to farmers sowing more winter rapeseed this year. However, unfavorable weather conditions locally across Europe (Germany and Poland, in particular) have prevented farmers from completing intended plantings, which partially offsets the potential for increased rapeseed area increase at this point. Low barley prices will continue to decrease its planted area, as farmers switch to more profitable crops.

5 Global Crop Outlook Summer 2018 The European Union 5 Soft Wheat Yields in the EU Yield, ton/ha / / / France Germany EU-28 Crops in France Source: USDA FAS and TR Agriculture Research (2018 data) In France Europe s biggest wheat and rapeseed producer farmers have completed planting of the winter crops at an average pace this autumn. Generally dry conditions were beneficial for uniform planting pace and initial crop emergence and early development. NDVI, a measure of healthy vegetation as evidenced by satellite imagery, indicated healthy wheat development prior to dormancy in the major wheat producing areas, which supported good cold resistance during dormancy and resulted in low winterkill. German Wheat and Rapeseed In Germany Europe s second largest wheat and rapeseed producer abundant rainfall in northern regions increased soil moisture to a five-year high, preventing farmers from planting intended areas with winter crops this autumn. Winter rapeseed is impacted to a bigger extent relative to the rest of the European Union, considering the majority of rapeseed is grown in either in Germany or France. NDVI is mostly above normal, but considering record-high soil moisture in northern areas, crops here could be more exposed to pests and disease impact. Output in Eastern Europe In contrast to Germany and Poland, Southern Europe experienced a severe precipitation deficit following a summer drought lingering from last season. In those areas, additional rainfall will be especially advantageous for crops. Yields in Eastern Europe are continuing to increase due to improvement of agricultural technologies and inputs. For the past decade, yields have increased by 15-25% across these countries. The most notable example is Romania with yields increasing by over 5% annually. For 2018/19, trend wheat yield here is set at 4.14 tons per hectare, but could go even higher with sufficient weather. In Poland, Hungary, Czech Republic and Bulgaria, trend yields are set between 4.75 and 6.35 tons per hectare. In the rest of Europe, yields remain relatively stable, but with a gradual upward trend. National-level EU-28 wheat yield is set at 5.89 tons per hectare, including 6.15 tons per hectare for soft wheat and 3.63 tons per hectare for durum. Rapeseed yield is set at 3.38 tons per hectare. Considering long-term weather outlooks, we see a potential for hot and dry weather this spring in Southern Europe, which could also impact crop regions in southern France. Bearing in mind very low soil moisture in those areas since late summer last year, crop production can be somewhat affected unless more rainfall arrives.

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7 Global Crop Outlook Summer 2018 The United States 7 REUTERS/Jim Young THE UNITED STATES Will we see another mammoth corn and soy crop from the U.S. in 2018/19? U.S. corn and soy production has given us back-to-back record seasons, and so far, the panorama is for things to stay strong, especially for soybeans, as they continue to gain acreage on corn and other crops. Stable economic and weather conditions to date have our current U.S. corn and soy production outlooks at 14.3 [ ] and 4.31 [ ] billion bushels. We expect corn and soy plantings to hover around 90.4 and 90.1 million acres, 2.7% and 1% above the current estimate of 88.0 and 89.9 million acres for both crops released in the U.S. Department of Agriculture (USDA) s March Prospective Plantings Report (29 March 2018). As last year, rebounding soy prices and lower production costs make soy a more profitable crop for farmers, which is pushing for another year where King Corn is brought down another notch. In fact, it is quite possible that soy plantings will surpass corn for the first time since 1983, as suggested by the USDA in Prospective Plantings, which is exceptional.

8 Global Crop Outlook Summer 2018 The United States 8 Plantings Corn Soybeans Acres, in millions U.S. Acreage Estimates Source: USDA-NASS and TR Agriculture Research (2018 data) Many in the market had expected a higher number for soy (and lower for corn), than the position we currently hold, with a recent Reuter s Poll of Analysts (23 March) suggesting the average trade estimate at 89.4 and million acres, respectively. However, the current USDA acreage estimate often changes by millions of acres by the time the final sowing numbers are released in the January Crop Production Annual Summary Report, and we expect that crop rotation requirements, as well as steady pressure from competing crops in the Plains and South, will keep acreage for crops nearer to last season s crops. Things could well change into the coming months, as weather will be the ultimate deciding factor if intended corn acres could be planted in favorable windows during April and May. Weather Risks Are there any weather risks to U.S. corn and soy crops to be looking out for this season? The biggest concern at this point centers around the unusually cold April weather experienced throughout the Midwest and Plains. While optimal sowing windows for corn extend into mid-may in the core production areas, low soil temperatures likely delayed April sowings. Typically, if summer weather cooperates, corn sown in the last half of April has the highest odds of reaching full yield potential in most of the Midwest. However, farmers throughout the U.S. are increasingly able to leverage their expertise with new technologies to sow the crop quickly as favorable weather windows emerge, reducing the potential for delays. However, if we get an unusually wet start to May, farmers may opt to plant more soy than corn to reduce yield loss risks, since optimal planting windows for soy extend into late May in core production areas of the Midwest and Plains. Fortunately, beyond sowing delays, there are no major red flags at this point that would threaten crop growth through the summer. Drought conditions in the Southern Plains, especially in Kansas, Oklahoma and north Texas will surely affect corn and soy plantings and early development, but only smaller areas in the core soy and corn belts are currently experiencing moderate drought. Moreover, Thomson Reuters Weather Research Analysts are expecting April to finish above average in precipitation in most secondary areas that are currently dry, and there appear to be no major temperature constraints into May. While we are still several months away, the current El Nino Southern Oscillation outlook for the June-August period points to favorable temperature regimes, but widespread average to slightly below-average precipitation over the three-month period for the corn and soy belts. The Thomson Reuters Weather team will be publishing frequent updates throughout the season, and we will work closely with them to incorporate their expertise and latest short- to long-term outlooks into our own machine learning acreage and yield models for both crops, which have allowed us to get ahead of the monster corn and soy crops in the U.S. and South America last season.

9 Getting Ahead of the Market: Global Crop Outlook Summer REUTERS/Darrin Zammit Lupi Changing agriculture markets create new opportunities. Are you going to see and seize them first? Thomson Reuters Eikon is the world s most innovative desktop and mobile application, delivering news, analytics and financial data across asset classes globally along with intuitively designed tools that enable deeper discovery and collaboration across the financial community. As global information flows increase in number and complexity, we provide focused, timely, relevant news that moves markets plus insightful commentary that makes sense of the issues. As the task of predicting future price movements grows more complex, we ve included Lanworth analysts at Thomson Reuters adding forward-looking insights and historic insights to our extensive fundamentals coverage. As online interaction becomes increasingly influential, we connect you to key market participants via our Global Agriculture Forum. As you need access wherever you are, we enable you to work on your BlackBerry, Android, iphone or ipad using the lists and news searches you set up on your desktop. It is a combination that gives you unique market insight more relevant information in more usable forms, more quickly delivered via the industry s most intuitive and flexible user interface. So you can grasp exactly where the market is and where it is likely to go and act with confidence.

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