FOCUS

GlobalEnergy,Chemicals&Agriculture

ChinaE-10:CornBoost,RoundTwo?

AlthoughcurrentinvestorAgfocusissquarelyonthechallengingshort-termweather-disruptedUSdynamics,thisreportdivesintoanunderappreciatedopportunity:thepotentialcorn-demandboostfromChinaE10biofueladoption.Notonlycouldthisbesignificant,itistopicalwiththeongoingtrade/tariffdiscussions,

whichcouldincludeaprovisionforacceleratedChineseE10implementation(tothebenefitofUScornplayers).Inthisreportweprovideanoverviewandpotential

INDUSTRYUPDATE

U.S.Chemicals

POSITIVE

Unchanged

U.S.ChemicalsDuffyFischer

+12125263212

EquityResearch

29July2019

implications,alongwithanillustrativescenarioanalysesforseed,fertilizer,energy,oxygenates,machineryandenzymecompanies.Relevantcompanies:BAYN,CTVA,DE,CF,NTR,MOS,DD,NZYM(notcovered),BASF.

Chinaalreadyhasastatedpolicytomandatea10%ethanolblendinitsgasolinepoolby2020,reflectingthepositiveoctaneenhancement,chancetoreducedependenceonenergyimportsandpotentialtoutilizecornstockpiles.Ifrealized,globalAgandEnergymarketimpactscouldbesignificant.Thesimplemathforoverallsizingpurposes(notincremental):China’s2018gasolinedemandwas~46bngallons;a10%ethanolblendwouldrequire~4.6bngallonsofethanol.Onecornbushelproduces~3gallonsofethanol,whichimplies~1.6bncornbushelsneededtofulfillChina’sentire2018need.Thisisequivalentto>9mU.S.cornacres.Welayoutourbull/base/bearscenarioslaterinthisreport.Therewilllikelybeaportfolioapproachtoprocuringthisethanol:a)ChineseethanolfromChinesecrops,b)Chineseethanolfromcoal,c)UScornethanol,andd)Braziliansugarcaneethanol.WhileChinaiscurrentlylessthanafifthofthewaytobuildingtherequisiteethanolproductioncapacity,itdoeshaveseveralnewplantsunderconstruction;sousingsupplementaryUS/Braziliansupplywouldbealogicalbridge.Ourbasecasewouldbeaninitial~5%demandincreaseforUScorn.

Anagmini-cycle?:After5+yearsofagenerallynegativeagoutlook,wecannowseethepotentialforaminiagupcycle.a)weatherdrivingcornstocks-to-usedown+b)cornpriceshigherdrivingmorecornacresin2020+c)ASFpushingChinatomorepoultry+cattleproteinwhichconsumesmorewesterncorn+d)newdemandfromChinesecornethanol=bestcorn(ag)outlooksincedroughtof2012.

Whowins:a)Cornseedcompanies-With>30%UScornmarketshareeach,BAYN(Papadakis,OWPT€85)andCTVA(Fischer,EWPT$32)shouldseepriceandvolumegainsfromademandboost(cornseedrevenueperacreis2xsoy),b)Fertilizercompanies–Cornuses~$70/acremorefertilizerthansoy.CF(nitrogen)hasmorecornleveragethanNTRorMOS.c)AgMachinerycompaniesd)Ethanolproducerse)EnzymecompaniesshouldseeanuptickinenzymedemandthoughSyngenta’sEnogentechnologyiscausingsomeobsolescenceintraditionalenzymeproducts;Wholoses:a)MTBE/Methanolproducers–theirproductisdisplaced,b)Proteinproducers–fueldemanddriveshigherpricesfortheiranimalfeed.

.

BarclaysCapitalInc.and/oroneofitsaffiliatesdoesandseekstodobusinesswith

companiescoveredinitsresearchreports.Asaresult,investorsshouldbeawarethatthefirmmayhaveaconflictofinterestthatcouldaffecttheobjectivityofthisreport.Investorsshouldconsiderthisreportasonlyasinglefactorinmakingtheirinvestmentdecision.

ThisresearchreporthasbeenpreparedinwholeorinpartbyequityresearchanalystsbasedoutsidetheUSwhoarenotregistered/qualifiedasresearchanalystswithFINRA.

PLEASESEEANALYSTCERTIFICATION(S)ANDIMPORTANTDISCLOSURESBEGINNINGONPAGE27.

duffy.fischer@

BCI,US

EuropeanPharmaceuticalsEmmanuelPapadakis,PhDCFA

+44(0)2031341246

emmanuel.papadakis@

Barclays,UK

U.S.Machinery&ConstructionAdamSeiden,CFA

+12125262212

adam.seiden@

BCI,US

AmericasAgribusinessBenjaminM.Theurer

+525552413322

benjamin.theurer@

BBMX,Mexico

EuropeanChemicalsSebastianSatz,CFA

+44(0)2031347201

sebastian.satz@

Barclays,UK

AlexStewart,CFA

+44(0)2035554957

alex.stewart@

Barclays,UK

EuropeanIntegratedOil&RefiningLydiaRainforth,CFA

+44(0)2031346669

lydia.rainforth@

Barclays,UK

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CONTENTS

TOC\o"1-1"\h\z\u

Cornmattersmost,ofplantedcrops,toaginfluencedstocks 3

China:TriangulatingapotentialpolicymoveonE-10 5

Howethanolandcorncanimpactmultipleindustries 8

PotentialBull,Base,BearCaseScenariosforCorn 15

Bayer(OWPT€85):cornscenarioanalysisandkeytakes 17

Ethanol:AQuickBackground 20

UnitedStates:ALookattheMakingofanEthanolGiant 22

Cornmattersmost,ofplantedcrops,toaginfluencedstocks

OfthetwolargeacrecropsintheAmericas--cornandsoybeans--cornconsumes>75%moreinputdollarsandthosedollarsgenerallycarryhighermarginsforthesellers.Notonlyiscornhigherrevenuegeneratingbutweestimatethatrevenuecarriesahighergrossmargin.ThetwocompanieswiththelargestleveragetocornwouldbeCortevaandCFIndustries.Thetablebelowshowsthatseedandnitrogenseethelargestpositiveincreasefrommovingtocornacres.

FIGURE1

TypicalIAacreshowscornissignificantlyhigherinputcoststhansoybeans…

Corn(200bu/acre)

%ofTotal

Soybeans(62

bu/acre)

%ofTotal

Cornvs.SoyInputDeltaperAcre($)

Seed

$112

37%

Seed

$51

31%

Seed

$61

Nitrogen

$71

23%

Phosphate

$21

13%

Nitrogen

$71

Phosphate

$32

10%

Potash

$29

18%

Phosphate

$11

Potash

$19

6%

Lime

$6

4%

Potash

-$10

Lime

$6

2%

Herbicide

$56

34%

Lime

$0

Herbicide

$48

16%

Herbicide

-$7

Insecticide

$15

5%

Insecticide

$15

TotalInput$/acre

$302

TotalInput$/acre$162

TotalInputDelta$/acre

$140

Source:BarclaysResearch,IowaStateUniversityExtension

Cornpricesversussoypricedrivestheshiftbackandforthbetweencornandsoyastherearemanyfungibleacresofeithercrop.Theratiobetweensoypriceandcornpriceisagoodruleofthumbfordirectionandmagnitudeofshiftsinacres.WelooksetuptomovetomorecornacresoverthenextyearevenbeforeanyinfluencefromaChinaE10move.

FIGURE2

TheSoy-CornPriceRatioshoulddrivemorecornacresoverthenextyear

77.4

82.7

90.2

89.2

84.6

74.3

72.0

79.6

81.8

88.2

88.0

90.2

89.1

89.8

Acres,M200

180

160

140

120

100

80

60

40

20

0

Soy-CornPriceRatio

2000 2005 2010 2015 2017 2018 2019E

CornPlantedAcres SoyPlantedAcres Soy-CornPriceRatio

3

2.8

2.6

2.4

2.2

2

Source:BarclaysResearch,USDAestimates

Priceforeachcropisdictatedbythesupply-demandbalance,ofwhichthebestindicatoristhestocks-to-useratio,whichhasmaintainedrelativelyelevatedlevelsinrecentyearsduetoaconsistentstringofgoodharvests(thatisexpectedtobebrokenin2019).Mostindustryparticipantsexpectameaningfulfallinthebelowchartsasupdateddatafromthisyear’stoughweatherseasonrollsthroughUSDAnumbers.However,soybeansshouldcontinuetoseehigherrelativestocks-to-use,meaningthesoy-cornratioshouldcontinuetofavorcorn.

FIGURE3

U.S.CornStockstoUseRatio

STURatio

25%

20%

15%

10%

5%

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018E

2019E

0%

FIGURE4

U.S.SoyStockstoUseRatio

STURatio

30%

25%

20%

15%

10%

5%

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018E

2019E

0%

Source:USDAestimates,BarclaysResearch Source:USDAestimates,BarclaysResearch

AgintheAmericas,themoneyregionforinputproviders,isseeingaperiodofrelativelystablemarketshares,fewnewblockbusterlaunches,andpriceincreases.Webelievemarketshares,newbiotechtraits,andprice-ableothertechnologiesarelikelytobelargelystagnantforthenextcoupleyearswithoutameaningfulincreaseingrainprices.Becauseofthis,mixshiftsbetweencorn/soyandvalueopportunitiesfromhigherpricedcorn/soyarelikelythebestavenuesforincreasingagprofitsoverthenextcoupleyears.

FIGURE5

Corteva+Bayer/MonsantoN.AmericaCornMarketShare

MktShare Corteva Bayer/Monsanto45%

40%

35%

30%

25%

20%

FIGURE6

Corteva+Bayer/MonsantoN.AmericaSoyMarketShare

MktShare Corteva Bayer/Monsanto45%

40%

35%

30%

25%

20%

15%

10%

Source:BarclaysResearch,companyreports Source:BarclaysResearch,companyreports

Thebottomlineisashiftfromsoytocornshouldbequitesupportiveofagstocksoverthenextyear;firstinLatinAmericathisFalltheninNorthAmericanextSpring.Thishasthemakingsofaminiupcycle,againstthebackdropofourbiggerpictureviewofthelastfiveyearsofbearish(moregrainproducedthanconsumed)fundamentals.However,forthistolastmorethanayear(barringmorebadweather),anewcropdemandsyncneedstoappear.ThatdemandsinkcouldbeChina’sethanolpolicywhichcouldextendtheupcyclefor2-4yrs.

China:TriangulatingapotentialpolicymoveonE-10

InSeptemberof2017,theChinesegovernmentannouncedanewnationwideethanolmandatethatwouldexpandthemandatoryuseofE-10fuelfromtrialprovincestotheentirecountryby2020.Initialstudiesindicatedthatthismeasure,iftrulyenforcedandrealizedinthestatedtimeframe,wouldrequireethanolproductioninChina(thelargestmotorvehiclemarketintheworld)toatleastquadrupleorusesignificantimportedethanol.

Asoftoday,theChinesearesignificantlybehindinaddingenoughethanolcapacitytomeetthismandatewithinternalproduction.WethinkthatifE-10weretoberigorouslyimplementednationwidenoworphased-inatamoderatepace,Chineseconsumptionoffuelethanolcouldreachnearly5billiongallonsby2024underourbull+basecasescenarios(moredetailslaterinthisreport).AccordingtotheU.S.RenewableFuelAssociation,Chinawasranked4thgloballyinfuelethanolproductionin2018with~1bngallonsofproduction.Thislevelofproductionrepresentsa65%increasesince2014anda22%increasevs.2017(basedoffRFAdata).

WethinktherewereseveralreasonsthatcontributedtoChina’sannouncedexpansionofitsethanolmandatein2017:

Chinainrecentyearshasbecomeincreasinglyconcernedoveritsenvironmentalpoliciesandincreasinganoxygenateingasolinewillloweremissions.Webelievethatthemovetofurtherethanolconsumptionillustratedthecountry’scommitmenttoreducedemissionsandcleanerair.Usingethanolasablendingasolineallowsthemixturetoburncleaner,whichiswhytheUSusesethanolandEuropeandothersuseacompetingproduct(MTBE).

MuchliketheUnitedStatesanditsinteresttofurtherethanoluse,Chinamaybelookingatethanolasawaytoenhanceitsoverallenergysecuritybyreducingitsdependenceonoilimports.Whileintransition,however,Chinawouldincreaseitsdependenceonforeignethanoland/orcornimports.

TheethanolmandatewouldassistinreducinglargecorninventoriesinChinathathavebeenbuildingupforyearsduetoongoinggovernmentsubsidies.Thiswouldbeatransitorybenefit.

FIGURE7

China–CornEndingStocks(MillionsofMetricTons)

MetricTons,M

AhistoricalrevisionfurtherhighlightedtheamountofcornstockpiledinChinathatwaspreviouslyunreported.

250

200

150

100

50

0

Source:BarclaysResearch,USDAestimates

WhilewehavebeenskepticalofChina’scommitmenttoE-10sinceinitialannouncement,webelievethattheprobabilityofanenforcedE-10policyinChinahasincreasedsignificantlysince2017asevidencedbypolicysupportfromseniorofficialsandmovementonnewethanolproductioncapacity.Althoughwestillthinkthat2020istooaggressiveatimelinefordelivery,themovementinChinatobuildoutethanolcapacity,itsextensivedomesticcornstocks,anditscommitmenttoenvironmentalmeasuresthathasbeenborneoutinvariouschemical/materialchainsthepastcoupleyearsleadsustobelievethatE-10inChinaisnowmorelikelythannot.

WhatisthecurrentsituationwithrespecttoChineseethanolcapacity?

Asnoted,fuelethanolproductioninChinahasexpandedsignificantlysince2014(+65%)andwhilethereisagrowinglistofethanolplantsunderconstruction,itseemslikelythattherewillbeasubstantialinternalgapbetweensupplyanddemandinthemediumterm.Ifwesimplyused4.6bngallonsoffuelethanolconsumptionasabase-linefornationwideE-10compliance(basedon2018gasolineconsumptionof~46bngallons),Chinawouldneedtoproduceanincremental3.55bngallonsoffuelethanolover2018levels(1.05bngallons),basedonRenewableFuelsAssociation(RFA)productiondata(assumingallfuelethanolproducedinternallywasconsumed).

FIGURE8

ChinaFuelEthanolCapacityCircaOctober2017

Annualcapacity(liters,millions)

Company

Location

Sep-14

Oct-17

Notes

ShaanxiYanchangPetroleum

Yanchang,Shaanxi

-

127

Demonstrationfacilityofcoaltoethanol.Startedupin2017.

COFCOBiochemical

Bengbu,Anhui

557

634

JVbetweenAnhuiBBCAandSinopec.

COFCOBiochemicalEnergy

Zhaodong,Heilongjiang

127

127

FormerlyHeilongjiangHuarunEthanol.

COFCOGuangxiBio-Energy

BeihaiCity,GuangxiZhuang

253

253

Cassava.Startedlatein2007.Firstnon-grainbasedfuelethanolplantinChina.Statedesignedfuelethanolenterprise.

HenanTianguanFuelEthanol

Nanyang,Henan

634

634

Wheat.State-designedfuelethanolenterprise.CameonlineinApril2001.

JilinFuelEthanol

Jilin,Jilin

507

634

State-designedfuelethanolenterprise.Firstcameonlineinlate2003.

SDICGuangdongBioenergy

Zhanjiang,Guangdong

127

190

FormerlyGuangdongZhongnengEthanolCo.

ShandongFuenBiochemical

Rizhao,Shandong

-

152

Cassava.Startedupin2016.

ZonergyCompany

Sanmeng,InnerMongolia

127

127

ZTEEnergy.

HenanTianguanCelluloseEthanol

Nanyang,Henan

-

190

Straw.Demonstrationproductionlinewith150kt/year.

ShandongLongliveBiotechnology

Quindao,Shandong

101

190

Twonewstrawprojectscameonstreamin2016.

TotalFuelEthanolCapacityLiters,Millions

2,433

3,258

TotalFuelEthanolCapacityConvertedtoGallons,Millions

643

861

1liter=0.26417gallons

Source:IHSMarkit

Therearethreebuckets,or“generations”offeedstocksforfuelethanolproductioninChina.Generation1referstothegenerationofbioethanolfromthefermentationofgrains,mostpredominantlycorn,whichaccountsfor>60%oftotaloutput.Generation1.5refersprimarilytocassava,sugarcane,sweetsorghum,etc.Cassava,atuberousstarchroot,isthesecondlargestfeedstockandaccountsfor>20%oftotaloutput.Chinahasalsobeenpromotingcellulosicethanol(Generation2),thoughproductionthroughthismethodologyhasbeenlimitedtothispointbylackofefficienttechnology(samewithUSattempts).

ProjectedIncrementalCapacity

Mostprojectscurrentlyunderconstructionarefuelethanolprojects–weprovidethatlistbelow.Sevenoftheseprojects,whichwereoriginallyscheduledtobecompletedin2018,arestillunderconstruction.WethinkthishighlightstherelativelyslowpaceofChina’sinternalproductionbuildoutatpresent.

Ifweweretoassumeallthefuelethanolprojectsoutlinedbelowareupandrunningat100%operatingrates(forthoughtexperimentpurposes)by2020,Chinesefuelethanolcapacitywouldberoughly2bngallons.Thiswouldstillbe<50%oftheinternalproductionneededtofulfillitsE10mandateby2020.

FIGURE9

ChinaFuelCapacityCurrentlyUnderConstruction

(liters,millions)

Company Location PlannedCapacity ExpectedCompletion Notes

DaqingBorunBiotechnology Daqing,Heilongjiang

507

Originally2018

Corn,fuelethanol.

InnerMongoliaLiniuBiochemical Tongliao,InnerMongolia

380

Originally2018

Sorghumstalk,fuelethanol.

InnerMongoliaShiqiGroup Tongliao,InnerMongolia

380

Originally2018

Corn,fuelethanol.

JiangsuLianhaiBiotechnology Nantong,Jiangsu

380

Originally2018

Cassava,fuelethanol.

SDICBioenergy Tieling,Lianoning

380

Originally2018

Corn,fuelethanol.

SichuanHongzhan Nahe,Heilongjiang

761

Originally2018

Corn,600ktwillbefuelethanol.

ZhongjuTianhuanBioenergy Ningde,Fujian

634

Originally2018

Cassava,fuelethanol.

Sinopec Jiangxi

127

Oct-19

Casava

M&GandAnhuiGuozhen Anhui

231

TBD

Cellulosic

TianguanBioenergy Tianjin

761

TBD

Casava

TotalEthanolCapacityUnderConstruction

4,540

TotalEthanolCapacityUnderConstruction(Gallons,M)

1,199

1liter=0.26417gallons

Source:IHSMarkit,BarclaysResearch

ThebottomlineisChinahasanE10policyinitsfive-yearplanandhasbeenbuildingoutinternalproduction.WethinkE10isnotIFbutWHENforChina.TheUScouldspeedadoptionbyprovidingamixofbothethanolandcornforChina’sprogram.OurbasecaseifatradedealisfinalizedwouldbetheUSwillsupplyethanolandcornthatisequivalenttoabout5mnacresofUScorninthebeginningbutdroppingovertimeasChinabuildsoutitsowninternalcapability.

Howethanolandcorncanimpactmultipleindustries:

Energy–LydiaRainforth,CFA

E10moveslowsgrowth,butontheworldstageit’stillsupplythatmatters

Forcontext,Chineselightdistillatedemandin2018stoodat4.37mb/d,oressentially4.4%oftotalworldoildemand,ofwhichc80%isgasoline.Growthwas7.3%y/y,upc0.3mb/dandcomparestoanaveragegrowthrateof8.4%overthelast10years.PutanotherwayChineselightdistillategrowthmadeup20%oftotalworldoildemandgrowthin2018andatatimewherethereisgrowingevidenceofslowingdemandgrowth,anyincrementalchangesneedexamining.Theanalysisfromourcolleaguessuggestsanincremental2.2bngallonsofethanolblendover2018levels–theequivalentofc150kb/dofoildemandover2019/2020thatgetsdisplaced.Giventhatthisislessthan10%oftheoverallgrowthinoildemandwehaveoverthesameperiod,wedonotseeasignificantincrementalnegativeontheoverallmarket,particularlyinamarketthatisstilldominatedbyOPEC+supplycuts.

Fromacompanyperspective,Chinaremainsasmallmarket,althoughwehighlightRoyalDutchShell(TopPick,OW,3250p/shpricetarget)whichhastheleadingnetworkofretailsitesamongtheintegratedoilcompaniesinChinaandisthenumberoneIOClubricantsmanufacturerandmarketerinChina,andweexpectittobeoneofthebestpreparedfortheE10implementation.Regardlessoftheformoffuelconsumption,whatmattersmostisthevolumegrowthandmarketshareandhereweseeShellaswellpositionedwithbrandlikelytobeofhighimportancewithanychangeinspecification.ThedownstreamandtheChinesemarketwithinthatareanimportantpartofgrowingFCFoutto2025.WeremainconfidentofShell’sabilitytodeliveronitsFCFaspirationsandseethe9%+totaldividendandsharebuybackyieldasattractive.WeratethestockOverweightwitha3250p/shpricetarget.

EthanolProducers

OperatingratesofUSproducersarecurrentlywellbelowoptimumlevels.IfChinaweretosourceethanolfromtheUS(likelyinourviewifatradedealiscompleted),thenplantoperatingratesfortheindustrywouldimprovelikelyleadingtobothmarginimprovementsandalsogreatervolumessoldforethanolproducers.WhentheUSconvertedtoitsE10policyoveradecadeago,itwasahugeboonforethanolproducersinitiallybeforeoverbuildingledtoabust.WewouldnotexpecttheUStobuildnewplantstosupplyChina,butrathertorampupunderutilizedexistingproduction.

MTBE/Methanol(MEOH,CE,LYB)

MTBE/Methanolproducersprobablyhavethemosttolosefromalltheindustrieswelookedat.WhentheUSconvertedfromMTBEtoethanolitwasabignegativefortheMTBEindustryandasomewhatlesseronetomethanol,arawmaterialforMTBE.MTBEisusedasanoxygenate,blendedintogasoline,butiftheUSisthetemplateitwouldloseitsspottoethanolasthemandatedoxygenateandthereforelosesalesvolumes.China’sblendgrowthofbothMTBEanddirectmethanolintofueloverthelastdecadehasbeenstrong.ItisabigendmarketformethanolandMTBEthatwouldbeimpossibletoreplace,leadingtofallingoperatingrates.

AgricultureMachinery(DE,CNH,AGCO)–AdamSeiden,CFA

NorthAmericanagriculturalmachinerysaleshavehistoricallybeentiedwithcornprices.Unitsalesofhighhorsepowertractorsandcombineswereattheirlowestlevelswhencornwasunder$5/bushelandhavetendedtoincreasewithcornprices,roughlydoublingwhencornwaspricedover$7/bushelvs.under$3/bushel.Smallag(<100HPtractors),isuncorrelated,wheremachinerypurchasestendtobemuchmoretiedtoglobaleconomiccycles(thinkAGCOinNA).

FIGURE10

CornPricesvs.NTM100+HPTractors,4WD,Combines

FIGURE11

CornPricesvs.NTM<100HPTractors

$/Bushel

$9

$8

$7

$6

$5

$4

$3

$2

$1

Jun-02Sep-03Dec-04Mar-06Jun-07Sep-08Dec-09Mar-11Jun-12Sep-13Dec-14Mar-16Jun-17

Sep-18

$0

Units

70,000

60,000

50,000

40,000

30,000

20,000

10,000

0

$/Bushel

$9

$8

$7

$6

$5

$4

$3

$2

$1

Jun-02Sep-03Dec-04Mar-06Jun-07Sep-08Dec-09Mar-11Jun-12Sep-13Dec-14Mar-16Jun-17

Sep-18

$0

Units

300,000

250,000

200,000

150,000

100,000

50,000

0

CornPrice NTM100+HP,4WD&CombinesUnits CornPrice NTM<100HPUnits

Source:BarclaysResearch,AEM Source:BarclaysResearch,AEM

NorthAmericaAgmachinerydealersentimenttrackscloselytocornprices.AchangeinsentimentduetoE-10coulddriveinventoryflows(restocking/destocking);Mathematically,netdealersentiment(salesoptimismvs.thepriormonth)mirrorscornpriceswithanR-squaredof.8throughmid-2016.Thecorrelationhasbrokendowninrecentyearsastheneedformachineryreplacementafterseveralsteepdown-yearsoutpacedthechangeincommodityprices.

FIGURE12

N6MNetDealerSentimentvs.CornPrices

N6MDealerSentiment

CornPrice

NetDealerSentiment

30%

20%

10%

0%

-10%

-20%

-30%

Apr-11Oct-11Apr-12Oct-12Apr-13Oct-13Apr-14Oct-14Apr-15Oct-15Apr-16Oct-16Apr-17

Oct-17

-40%

CornPrice

$9.00

$8.00

$7.00

$6.00

$5.00

$4.00

$3.00

$2.00

FIGURE13

Correlation:N6MNetDealerOptimismvs.CornPrices,April’11ThroughJune‘16

CornPrice

$9.00

$8.00

$7.00

$6.00

$5.00

$4.00

$3.00

$2.00

$1.00

$0.00

-40%-30%-20%-10% 0% 10% 20% 30%

NetDealerOptimism

Source:BarclaysResearch,FarmEquipment,Bloomberg Source:BarclaysResearch,FarmEquipment,Bloomberg

EquityinvestorshavelongassociatedDE’sstockpricewiththatofcorn.Arelationshipthatwascloseforyearsbutbrokedownin’16duetoitsabilitytooutperformthefundamentalsonflow-throughandthensubsequentreplacementdemandforlargemachinery.

FIGURE14

DEStockPricevs.CornPrices

DEPrice DE Corn$/Bushel

$200

$150

$100

$50

CornPrice

$9.00

$7.00

$5.00

$3.00

$0 $1.00

Source:BarclaysResearch,Bloomberg

Anincreaseof50cto$1.00incornprices,usingthebullandbasecaseforChina-drivendemand,fromE-10usagewouldaidfarmereconomics,muchinthesamewayasit’sbeeninthepast.

Usinghistoricalequipmentpurchasesasabogey,theabsolutedollarincreasematterslessthantherangecornpricessitin.Usingunitsaleswhencornpricesareunder$3asthebase,salesare15-20%higherat$3-4cornand40-50%higherat$4-5corn.Inparticular,equipmentpurchasesincreasesubstantiallyat$4.25-4.75corn,wheretheyare60-100%highervs.35-40%higherat$4-4.25corn.Thebackdropisdifferenttoday(governmentprograms,noRFSetc.)butthepastcouldbeusedasaframeofreferenceofwhathighercommoditypricescoulddotospurdemand.

FIGURE15

CornPricesvs.TractorUnitsSold,NextTwelveMonthsSales&MonthlySales

Source:BarclaysResearch,AEM,Bloomberg

Onaverage,a$0.50stepupinpricefromcurrentpricescouldleadtoadditionalpurchasesof~14,000moreHHPtractorsand~2,000morecombinesoverthenexttwelvemonths,assuminganevenenvironment.A$0.25increasewouldn’tcontributeassubstantiallytocombinesalesgrowth,butwouldstillseesimilartractorsalesgrowth.Theincreaseinequipmentpurchasesaren’tassubstantialwhenmovingto$5-6corn(50-60%higher),butstepupsubstantiallyat$6-7corn(70-100%higher).

FIGURE16

CornPlantingCostSplit

Land&Labor38%

Other5%

Machinery18%

Prep/Maintenance39%

FIGURE17

CornPlanting:MachineryCostSplit

Handle,6%

Dry,33%

Haul,12%

PreharvestMachinery,33%

Combine,16%

Source:BarclaysResearch,IowaStateUniversity Source:BarclaysResearch,IowaStateUniversity

Alloftheaboveestimatesaremadeunderthecontextofhistoricalconditions;someofwhicharerandom(includingweather),someofwhichhavebeenstructural(moreusageoflargeagmachinerysuchastractorsandcombines),andsomeofwhicharepolitical(i.e.Trumpadministration’stradepolicy).AcombinationoflessChinadrivendemandforU.S.farmerswithstructurallylesslarge(bigger,stronger,faster)machinerythanbeforeinfavorofsmarterandleanercouldverylikelyendupwithdifferingforecasts.

FIGURE18

CornPricesvs.TotalU.S.FarmMachineryCapEx

CornPrice Corn,$/Bushel CapEx,$mn

$9.00

$8.00

$7.00

$6.00

$5.00

$4.00

$3.00

$2.00

$1.00

$0.00

Source:BarclaysResearch,USDA,Bloomberg

Capex

$35,000

$30,000

$25,000

$20,000

$15,000

$10,000

$5,000

$0

EachofourlargeAgricultureEquipmentOEMs(JohnDeere,CNHIndustrial,&AGCO)areglobalinscale–withsizeablebusinessesinSouthAmericaandEurope.SeeourAgricultureChartbook4/12/19formore.IfE-10benefitedtheU.S.lessthanotherregions,thelargeOEMswouldstillbenefitduetooutsizedshareinmostareaswithavailableacres,butintheirrespectivecountry(i.e.Brazil,Argentina,etc.).IntwosituationsapotentialChinaE-10mandatecouldimpactouragmachinerycompaniesless.1.IfChinaweretoproducemorecornlocally,itcouldactasacatalystforChinatofurtheritsChina2025planofproducingmoremachinerydomestically.StrongerChinacompaniescouldonedayleadtostrongerinternationalcompetition,ofwhichthereislittletononecomparedtoothermachineryindustries.2.IfChinapursuesaCoaltoEthanol(CTE)strategy,thentheimpacttoglobaldemandbalanceswouldbeevenmoreremotethanourbullandbearcase.

Chemicals/Enzymes–SebastianSatz,CFA&AlexStewart,CFA

BASF(EW)islikelyseesomepositiveimplicationsfromapotentialenforcementofE10inChina.However,wed