Game Changers. Fundamental shifts Long term Impact

Game Changers Fundamental shifts Long term Impact

Over The Past Three Years The U.S. co-op system has been cut by more than 50%. The world s largest seed genetics and chemical firms have merged, cutting the number of players by roughly 50%. The fertilizer industry has consolidated just as aggressively. 25% to 30% of farm equipment dealers are gone.

Over The Past Three Years Though numbers are not available, we estimate a minimum of 10% of U.S. row crop producers have either retired or had career changes. The final wash out is occurring now. China is cleaning up its act. Gasoline will be going to a 10% ethanol blend by 2020. Emission controls from factories is moving rapidly ahead Inefficient chemical plants located in cities will be closed and re-built in more rural areas, and will have tighter emission controls.

What We Are Left With: A new set of players in agribusiness firms, ag lenders and younger farmers. A new generation is moving in more techie and will all have a new set of ideas on how things should be done.

What We Are Left With: Larger and more sophisticated farm operations. As the old saying goes Bad times do not cause business failures. They expose them. That group is gone. The sorting out is almost over. Remaining farmers have solid balance sheets, are more sophisticated and most are more professional. All of the above changes the way producers, lenders and agribusiness suppliers work together. More targeted. Retail covering wider geographic areas.

Confirmation Bias Confirmation bias is the tendency to search for, interpret, favor, and recall information in a way that confirms one's preexisting beliefs or hypotheses, while giving disproportionately less consideration to alternative possibilities. Anything that does not support your beliefs is UNDERVALUED What the facts say Anything that confirms your beliefs is OVERVALUED Anything else that confirms your beliefs Unsupported by facts

Examples of confirmation bias: Confirmation bias exists in politics, finance, science, medicine, history, law, religion in all facets of the human experience: Politics: Hillary Clinton, Donald Trump Food/nutrition: Organic food GMO Meat, fat, and salt consumption Science, energy, farming Global warming Ethanol Fracking Poultry in cages Hogs in pens Antibiotics

Crude oil $/barrel 180 160 140 120 Brent Crude vs. Corn 9.00 Corn $/bushel 8.00 7.00 6.00 100 80 60 40 20 0 Corn Crude 5.00 4.00 3.00 2.00 1.00 0.00 Corn (right scale) Brent Crude (left scale)

Source: EIA 2017 2018 2013-2017 average U.S. Crude Oil Inventory As of February 23, crude oil inventory was: 18.6% below last year, 2.0% above 5-year average 2013-2017 range Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec million barrels 600 575 550 525 500 475 450 425 400 375 350 325 300 275 250

Crude Oil monthly

April 2018 Crude Oil

Farm Economy

Emotions 7 Stages of Agricultural Economic Cycle 7 Stages of Ag Economic Confidence Skepticism Caution 2012 Euphoria Cycles Hope Concern Despair Time Now 1985 2012 2017 Copyright by Richard Brock and Associates, Inc.

Farm crisis? Or opportunity?

From cash burn that started in 2013 To equity burn the last two years

Observations

Cropland Value per Acre $9,000 $8,000 $7,000 $6,000 $5,000 $4,000 Iowa $8,100 -+1.3% Illinois $7,350-1.3% Indiana $6,700-4.3% Ohio $5,780-0.3% Nebraska $4,550-6.2% U.S. $4,090 unchanged $3,000 $2,000 $1,000 $0 1980 1985 1990 1995 2000 2005 2010 2015 2017 Source: USDA Land Values, August 2017 Summary

4,500 4,000 3,500 3,000 2,500 2,000 1,500 1,000 500 - U.S. Gross Farm Income Correlation to Cropland Value Based upon USDA projected 2018 gross farm income as of February 2018, land values should be closer to $3,288 vs. $4,090 per USDA survey in August. Cropland is 24% "overvalued" by historical valuation measures. Actual Land Value Land value per regression formula 200% 190% $4,090 in 2017 180% 170% 160% 150% 140% 130% $3,288 120% 110% 100% 90% 80% 70% 60% 50% % overvalued 40% 30% 20% 10% 0% -10% % undervalued -20% -30% -40%

Corn Prices and Nitrogen Prices are Highly Correlated Nitrogen price index 400 Corn price $8.00 350 300 National Corn Price (marketing year) USDA Nitrigen Price Index (1982 = 100) Nitrogen price index $7.00 $6.00 250 $5.00 200 $4.00 150 100 50 0 Corn price $3.00 $2.00 $1.00 $- Source: USDA NASS through December, 2017

$/ton 950 900 850 800 750 700 650 600 550 500 450 400 350 300 Retail Anhydrous Ammonia, DAP and Potash, llinois 250 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Source: USDA AMS through March 1, 2018 Price and change vs. 1-year ago Anhydrous $511-2% DAP $477 +12% Potash $350 +8%

$/ac $700 Returns to Land for Midwest Corn Production assuming non-land costs of $417/acre (Iowa State for 2018 ) $600 $500 $400 $4.50 $4.00 $3.50 $300 $200 $3.00 $2.50 $100 $0 190 bu/ac @ $3.50/bu = $248/ac return to land -$100 145 160 175 190 205 220 235 Yield/ac

$/ac $450 $400 $350 $300 Returns to Land for Midwest Soybean Production assuming non-land costs of $254/acre (Iowa State for 2018) 55 bu/ac @ $9.50/bu = $269/ac return to land $10.50 $10.00 $9.50 $9.00 $8.00 $250 $200 $150 $100 $50 40 45 50 55 60 65 Yield/ac

2,250,000 1,750,000 Minnesota Net Farm Income by Farm Size, 2012 1,978,368 Top 20% of farms 1,250,000 750,000 250,000 483,412 250,129 266,258 129,277 60,912 129,274 55,481 8,509-16,440 6,078 34,532 85,886 852,748 450,116 158,543 821,525 All farms 258,534-250,000 <100 101-250 251-500 501-1000 1001-2000 >2,000 Farm size (ac) Source: FINBIN database, Minnesota Farm Business Management Education, SW Minnesota Farm Business Management Association, University of Minnesota Bottom 20% of farms

700,000 600,000 500,000 400,000 300,000 200,000 100,000 0-100,000 35,731 74,627 Minnesota Net Farm Income by Farm Size, 2016 133,734 204,052 362,836 258 29,301 44,532 72,330 74,640-30,967-32,138-46,679-58,948 566,468 All farms 109,568-200,000-156,345 Bottom -300,000 20% of -316,329 farms -400,000 <100 101-250 251-500 501-1000 1001-2000 >2,000 Farm size (ac) Source: FINBIN database, Minnesota Farm Business Management Education, SW Minnesota Farm Business Management Association, University of Minnesota Top 20% of farms

million acres 100 90 80 U.S. Planted U.S. Planted Area Acreage (million acres) Corn 91.0, +0.6 90.0 +0.5 Soybeans 70 60 50 40 Source: USDA 09/10 10/11 11/12 12/13 13/14 14/15 15/16 16/17 17/18 18/19 Source: USDA, Brock Associates Wheat 46.0 unch.

million metric tons 300 Production 250 Consumption Ending Stocks 200 Imports 150 China Corn Fundamentals Record consumption 202 240 Production 100 111 Ending Stocks 50 - Source: USDA, February 2018 Imports 80 Ending stocks/use ratio projected to be 33% at end of 17/18 from 51% at the end of 15/16.

U.S. Corn Supply & Demand

$10.00 $/bu $9.00 $8.00 Central Illinois Cash Corn Cycles 1917 1948 1948 1974 1974 1996 1996 2012 31 Years +29% 26 Years +40% 22 Years +32% 16 yrs +63% 2024-2025? 2008 12-13 yrs? $12? $8.54 $7.00 $6.00 $5.00 $4.00 $3.00 $2.00 $1.00 $0.00 $2.21 15 Years $2.84 14 Years $3.97 $5.25 13 Years 9 Years 2018 $2.79 low Oct 1, 2014 Updated February 26, 2018

U.S. CORN SUPPLY AND DEMAND USDA Brock Marketing year begins Sept 1 15/16 16/17 Est. 17/18 Proj. 17/18 Proj. 18/19 Proj. ACREAGE (million) Planted Area 88.0 94.0 90.2 90.2 90.5 Harvested Area 80.8 86.7 82.7 82.7 82.9 Yield 168.4 174.6 176.6 176.6 174.0 SUPPLY (mil bu) Beg. Stocks 1,731 1,737 2,293 2,293 2,352 Production 13,602 15,148 14,604 14,604 14,424 Imports 67 57 50 50 50 Total Supply 15,401 16,942 16,947 16,947 16,826 USAGE (mil bu) Feed & Residual 5,120 5,467 5,550 5,550 5,600 Food/Seed/Ind 6,646 6,889 6,995 6,995 7,025 Ethanol & By-Products 5,224 5,439 5,525 5,525 5,550 Domestic Use 11,766 12,356 12,545 12,545 12,625 Exports 1,898 2,293 2,050 2,050 2,100 Total Use 13,664 14,649 14,595 14,595 14,725 Ending Stocks (Aug 31) 1,737 2,293 2,352 2,352 2,101 Stocks/Use 12.7% 15.7% 16.1% 16.1% 14.3% Farm Price ($/bu) $3.61 $3.36 $3.05-3.55 $3.00-3.40 $3.25-3.75

Average Farm Price ($ / Bushel) 8.00 7.50 7.00 6.50 6.00 5.50 5.00 12 11 U.S. Corn Ending Stocks/Use Ratio vs. Average Price (1997/98-2018/19) 10 4.50 13 07 08 2017/18 17.2% stocks/use; $2.80-3.40/bu 4.00 14 2018/19 17.5% stocks/use; $2.75-3.50/bu 3.50 15 16 09 3.00 06 post-2007 03 2.50 02 97 05 98 04 2.00 pre-2007 1.50 01 99 00 Source; USDA, Brock Associates 1.00 5% 10% 15% 20% 25% Corn Ending Free Stocks to Use Ratio "10" indicates 2010/11 marketing year

Corn Yield & Production Yield (bu/ac) Production (mil bu) State 2015 2016 2017 Change 2015 2016 2017 Change Iowa 192 203 202-1 2,506 2,741 2,606-135 Illinois 175 197 201 4 2,013 2,256 2,201-55 Nebraska 185 178 181 3 1,693 1,700 1,683-17 Minnesota 188 193 194 1 1,429 1,544 1,480-64 Indiana 150 173 180 7 822 946 934-12 South Dakota 159 161 145-16 800 826 737-89 Kansas 148 142 132-10 580 699 686-12 Wisconsin 164 178 174-4 492 573 510-63 Missouri 142 163 170 7 437 571 553-18 Ohio 153 159 177 18 499 525 554 29 North Dakota 128 158 139-19 328 517 449-68 Texas 135 127 140 13 266 324 314-10 Top 12 Total 11,863 13,220 12,706-513 United States 168.4 174.6 176.6 2 13,602 15,148 14,604-544

Panama 2% Guatemala 2% Canada 1% Costa Rica 2% S. Korea 4% Peru 9% U.S. Corn Export Shipments Taiwan 1% Spain 4% Colombia 13% R.O.W. 5% Japan 20% Mexico 37% Spain 2% Taiwan 2% Panama 1% Guatemala 2% Canada 0.6% Costa Rica 1% U.S. Corn Export Commitments R.O.W. 27% S. Korea 5% Peru 6% Colombia 7% Mexico 29% Japan 17% USDA FAS as of February 8, 2018 Shipments vs. last year: Japan: -18%, S. Korea -72%, Taiwan -80% Mexico: +9%,Colombia: +27%, Peru: +3%, All destinations: -29%

World Corn Ending Stocks and Stocks/Use mil. metric tons 250 Ending stocks/use 60% '17/18 revised 3.5 mmt lower 200 50% 150 40% 100 30% 50 20% - 75/76 80/81 85/86 90/91 95/96 00/01 05/06 10/11 10% Ending Stocks (left scale) Ending Stocks/Use (right scale) Source: USDA FAS, February 2018

2018 Final Crop Revenue Insurance Base Prices 2018 base 2017 base 2018 base price vs. price price 2017 crop insuance Corn Dec. 2018 futures 3.96 3.96 0.0% Soybeans Nov. 2018 futures 10.16 10.19 0.3% Mpls. Wheat Sep. 2018 futures 6.31 5.65-11.7% Nov. Soybean/Dec. corn price ratio 2.57 2.57

Ethanol

billion gallons 20 U.S. Ethanol Production & Domestic Consumption vs. RFS Mandate RFS Statutory Mandate Total fuel ethanol production Domestic consumption 15 10 5 - Source: EIA, EPA, February 2018

Ethanol Costs, Revenues, and Profitability/gallon $/gallon 4.00 3.50 3.00 2.50 2.00 1.50 1.00 0.50 - (0.50) Profitability Costs Revenues Feb. est: breakeven 2011 2012 2013 2014 2015 2016 2017 2018 Source: Iowa State University through November 2017, Brock estimates for Dec and Jan

million gallons 200 175 150 125 100 75 50 25 0-25 -50-75 -100-125 -150 Ethanol Exports Surge to Record High Net Exports up 33% for the Year Exports Imports Net exports Record monthly net exports Source: USDA FAS (through December 2017; January data to be released in March) 2011 2012 2013 2014 2015 2016 2017 165

million gallons 500 450 400 350 300 250 200 150 100 50 0 +60% +5% +89% +15% U.S. Gross Ethanol Exports 2017 exports up 17% vs. last year +77% 2016 2017 +256% -87% +67% Source: EIA. (percent of U.S. 2017 gross exports next to country name)

Total U.S. DDGS Exports Down 2% in 2017 Exports to China down 84% from last year 1000 metric tons 1,000 800 200 8 200 9 201 0 201 1 201 2 201 3 201 4 Exports to rest of world up 19% from last year 201 5 201 6 600 400 200-201 7 1000 metric tons 1,100 1,000 900 800 700 600 500 400 300 200 Source: USDA FAS through December 2017; January data to be released in March

Continuous Monthly Corn Futures

July 2018 Corn Support

December 2018 Corn Support

Soybean Supply & Demand

Marketing year begins Sep 1 15/16 16/17 Est. 17/18 Proj. 17/18 Proj. 18/19 Proj. ACREAGE (million) Planted Acres 82.7 83.4 90.1 90.1 90.5 Harvested Acres 81.7 82.7 89.5 89.5 89.5 Yield 48.0 52.0 49.1 49.1 50.0 SUPPLY (mil bu) Beg. Stocks 191 197 302 302 530 Production 3,926 4,296 4,392 4,392 4,475 Imports 24 22 25 25 25 Total Supply 4,140 4,515 4,718 4,719 5,030 USAGE (mil bu) U.S. SOYBEAN SUPPLY AND DEMAND USDA Brock Crush 1,886 1,899 1,950 1,950 1,980 Exports 1,936 2,174 2,100 2,100 2,200 Seed 97 105 106 106 105 Residual 25 36 33 33 35 Total Use 3,944 4,213 4,188 4,189 4,320 Ending Stocks (Aug 31) 197 302 530 530 710 Stocks/Use 5.0% 7.2% 12.7% 12.6% 16.4% Farm Price ($/Bu) $8.95 $9.47 $8.90-9.70 8.80-9.70 7.75-9.00

Soybean Yield & Production Yield (bu/ac) Production (mil bu) State 2015 2016 2017 Change 2015 2016 2017 Change Illinois 56.0 59.0 58.0-1.0 544 593 612 19 Iowa 56.5 60.0 56.5-3.5 554 566 562-5 Minnesota 50.0 52.0 47.0-5.0 378 389 380-9 Indiana 50.0 57.5 54.0-3.5 275 324 321-3 Nebraska 58.0 61.0 57.5-3.5 306 314 326 12 Missouri 40.5 49.0 49.0 0.0 181 271 290 18 Ohio 50.0 54.5 49.5-5.0 246 264 252-12 South Dakota 46.0 49.5 43.0-6.5 230 256 241-15 North Dakota 32.5 41.5 34.0-7.5 186 249 240-9 Kansas 38.5 48.0 37.0-11.0 149 192 189-3 Arkansas 49.0 47.0 51.0 4.0 155 146 179 33 Wisconsin 49.5 55.0 47.0-8.0 93 107 101-7 Top 12 Total 3,296 3,672 3,691 19 United States 48.0 52.0 49.1-2.9 3,926 4,296 4,392 95

U.S. Soybean Export Shipments U.S. Soybean Export Commitments Netherlands 3% Indonesia 3% Thailand 3% Pakistan 2% Taiwan 2% Japan 3% Mexico 5% E.U. 7% Spain 2% Germany 2% R.O.W. 1% China 67% Pakistan 2% Taiwan 2% Netherlands 2% Thailand 3% Indonesia 3% Vietnam 1% Spain 1% Japan 3% Germany 2% Mexico 6% Unknown 7% R.O.W. 3% China 59% E.U. 6% USDA FAS as of February 8, 2018 Shipments vs. last year: China: -21%, E.U -5%, Mexico: +5%,Japan: +7%, Peru: +14%, All destinations: -13%

Soybean Production (million bu) United States 4,392 2017/18 proj. world production: 12,747 4,115 Brazil 5,000 4,500 4,000 3,500 3,000 2,500 1,984 Argentina 2,000 1,500 Source: USDA FAS, February 2018 China 522 1,000 500 0

World Soybean Ending Stocks and Stocks/Use mil. metric tons 100 90 80 70 60 50 40 30 20 10 Ending stocks/use 40% '17/18 revised 0.4 mmt lower 35% 30% 25% 20% 15% 10% 5% - 75/76 80/81 85/86 90/91 95/96 00/01 05/06 10/11 Ending stocks (left scale) Ending stocks/use (right scale) Source: USDA FAS, February 2018 0%

9/83 Continuous Monthly Soybean Futures Approximate time from peak to peak 5 yrs 5 yrs 4 yrs 2.5 yrs 4 yrs -51% 6/88-53% 7/93 5/97-56% 4/00 5/04 4 yrs 4 yrs -53% 7/08-53% 9/12 Broken Support 11/15-42% 20 $/bu 18 16 14 12 10 8 6 6/91 2/05 9/86 4 7/99 3 yrs 3 yrs 2 yrs 2 Approximate time from peak to trough 0 1980 1985 1990 1995 2000 2005 2010 2015 2018

July 2018 Soybeans Broken resistance Bull flag Objective $10.49 Support

November 2018 Soybeans Bull flag Objective $10.38 Broken resistance Support

Wheat

70 65 60 55 50 U.S. Winter Wheat Seedings (mil acres) Forecast seeded area for 18/19 crop 32.608 million ac, down fractionally from 2017/18 45 40 35 30 25 20 1980 1985 1990 1995 2000 2005 2010 2015 Source: USDA 2018 crop

U.S. WHEAT SUPPLY AND DEMAND USDA Brock Marketing year begins June 1 16/17 Est. 17/18 Proj. 17/18 Proj. 18/19Proj. ACREAGE (million) Planted Area 50.1 46.0 46.0 46.0 Harvested Area 43.9 37.6 37.6 38.9 Yield 52.7 46.3 46.3 48.0 SUPPLY (mil bu) Beg. Stocks 976 1,181 1,181 1,005 Production 2,309 1,741 1,741 1,867 Imports 118 155 145 130 Total Supply 3,402 3,076 3,067 3,002 USAGE (mil bu) Food/Seed 1,010 1,017 1,012 1,026 Feed & Residual 156 100 100 130 Domestic Use 1,167 1,117 1,112 1,156 Exports 1,055 950 950 1,000 Total Use 2,222 2,067 2,062 2,156 Ending Stocks (May 31) 1,181 1,009 1,005 846 Stocks/Use 53.2% 48.8% 48.7% 39.2% Farm Price ($/Bu) $3.89 $4.55-4.65 $4.50-5.00 $4.75-5.30

Wheat, Monthly Continuous Broken resistance Support

July 2018 Chicago Wheat Futures Support

U.S. COTTON SUPPLY AND DEMAND Marketing year begins Aug 1 15/16 16/17 Est. 17/18 Proj. 17/18 Proj. 18/19 Proj. ACREAGE (million acres) Planted Area 8.58 10.07 12.61 12.62 13.00 Harvested Area 8.07 9.51 11.35 11.51 11.24 Yield 766 867 899 890 900 SUPPLY (million 480-lb. bales) Beginning Stocks (August 1) 3.65 3.80 2.75 2.75 5.75 Production 12.89 17.17 21.26 21.34 21.08 Imports 0.03 0.01 0.01 0.01 0.00 Total Supply 16.57 20.98 24.02 24.10 26.83 USAGE (million 480-lb. bales) USDA Brock Mill Use 3.45 3.25 3.35 3.40 3.50 Exports 9.15 14.92 14.50 14.70 16.75 Total Use 12.60 18.17 17.85 18.10 20.25 Unaccounted 0.17 0.06 0.17 0.25 0.00 STOCKS (million 480-lb. bales) Ending Stocks (July 31) 3.80 2.75 6.00 5.75 6.58 Farm Price ( /lb) 61.20 68.00 67-71 66-72 58-70

44% Cotton's Share of Fiber Consumption, U.S. 42% 40% 38% 36% 34% 32% 30% Source: USDA ERS, Cotton and Wool Yearbook, November 2017 (updated annually in November) 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

May 2018 Cotton Futures Support

December 2018 Cotton Futures Support

Livestock

billion lbs. 55 50 45 40 35 30 25 20 U.S. Meat Production and Forecast (and percent change 2017 vs. 2016, 2018 vs. 2017) +2.0% All red meat and poultry combined: +2.6%, +3.8% Beef +3.8% +2.0% Poultry +5.9% +5.1% +2.6% Pork 15 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 proj. 2017 Source: USDA ERS, February 2018 proj. 2018

Estimated Returns for Finishing Medium #1 Steer Calves, 560 lbs to 1,300 lbs, to Choice Slaughter grade, Iowa - Southern Minnesota Source: Iowa State University, through January, 2018 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 $/head 600 500 400 300 200 100 - (100) (200) (300) (400) (500) (600)

million head 12.00 11.75 2018: 11.630 million; +7.9% vs. 2017 Cattle on Feed 11.50 11.25 11.00 10.75 10.50 10.25 10.00 2017 5-year average 9.75 Source: USD NASS 9.50 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

June 2018 Live Cattle Resistance Support

May 2018 Feeder Cattle Resistance Support

December 1 Hog Inventory (million head) 80 75 70 65 60 55 Total inventory 73.23 +2.4% 67.05 +2.5% Market inventory 50 6.3 6.2 6.1 6.0 5.9 5.8 5.7 Source: USDA NASS Kept for Breeding 6.179 +1.1%

U.S. Pork Exports and Exports as a % of Production Exports (1000 mt) 3,000 2,500 U.S. Exports 2,000 Exports as a % of Production 1,500 1,000 500 0 50 +4.8% +7.5% 45 proj. 40 35 (%) 30 25 20 15 10 5 0 Exports (% of production) Source: USDA, February 2018

2017 U.S. Pork Export Destinations Australia 4% China + Hong Kong 9% South Korea 9% Rest of world 14% Canada 10% Japan 22% Mexico 32% Calendar year 2017 vs. 2016 Mexico +12% Japan +1% China -18% Canada -1% S. Korea +29% Australia +11% World total +7.5% Source: USDA, February, 2018

Farrow to Finish Production Costs, Returns, and Profitability Cost vs. Selling Price per cwt (carcass) 300 250 200 150 100 50 Selling price per cwt (carcass) Costs per cwt (carcass) P/L per head (right scale) - 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 $3.56 $0.71 $-5.58 $15.07 $8.14 $2.75 $0.90 * History based upon ISU Estimated Costs & Returns Brock hedging profits (loss) per head Brock proj.* 400 375 350 325 300 275 250 225 200 175 150 125 100 75 P/L 50 25 0-25 -50

June 2018 Lean Hogs Resistance

Take Away Points The majority of grain producers should have a profitable year much better than USDA forecast Survivors will become better managers Marketing will still be the key separating winners from losers controlling costs also high on list Pork and poultry producers could have a challenging year. Demand growth needs to continue at a phenomenal pace to support current prices.

For More Information on the Brock Report, write, email or call BROCK ASSOCIATES 2050 W. Good Hope Rd. Milwaukee, WI 53209 (800) 558-3431 www.brockreport.com rabrock@brockreport.com