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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
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