Disclosures & Disclaimer This report must be read with the disclosures and the analyst certifications in the Disclosure appendix, and with the Disclaimer, which forms part of it. Issuer of report: HSBC Securities (USA) Inc View HSBC Global Research at: https://www.research.hsbc.com African swine fever (ASF) and trade headwinds likely to have thrown soft commodities into a downward spiral We analyse soybean economics and the upside to corn price due to poor weather, versus our coverage universe We reduce our TP on CF to USD52 on earnings revisions (maintain Buy); NTR (USD65, Buy), Rumo (BRL22, Buy) Reports of ASF continue to spread across continents. China has become endemic while Vietnam has culled 5% of its herd supply. Global companies have started flagging risks due to ASF and some countries are banning processed foods from affected regions, hurting the supply chain. And there are a host of factors affecting the ag value chain such as trade tensions, severe weather, and armyworm in China. Brazil to feel the shiver. Soybeans were the single largest item exported out of Brazil in 2017 (c12% by value) and China accounts for c80% of Brazil’s soybean exports; ASF could significantly impact the Brazilian market. So far this year soybean exports to China are already down 13% and such unprecedented weakness could weigh on Rumo’s contract renewals and take-or-pay terms in 2020. Rumo’s 2019 EBITDA is somewhat protected by take-or-pay contracts, but lower volumes are net negative and risk to guidance cannot be ruled out. Soybeans facing the chill wind: As US corn planting is way behind the trend due to severe weather, farmers could switch to soy as they have until June end to plant without losing yields. In our analysis, US soy prices are below break-even (page 5), however, US aid (likely USD2/bu for soybeans) could improve the economics significantly, distorting the supply/demand balance (+4m soy acres could increase 2019e stocks by 27%). The additional supply, coupled with trade tensions and ASF, could prove to be a perfect storm for soybean prices. The silver lining of delayed planting is that it could significantly affect corn yields (c10-20% based on recent trends). In our analysis, just c5% lower than projected yields coupled with 2m lesser acres could reduce 2019e US stocks by 40% (page 7), and this is a huge positive for corn prices (+15% YTD, the highest in three years). Higher corn prices do not give a bail-out to fertilizer companies: Our expectation of a recovery in fertilizer prices appears to have been stymied as demand expectation takes a U-turn due to wet weather and short run oversupply, which is net negative for fertilizer companies. We reduce our 2019 NPK price forecasts by 2-16%. Estimate changes: For CF, we reduce our TP to USD52 (from USD60) on weak nitrogen prices and we revise earnings estimates for NTR, below consensus (page 12).3 June 2019 Alexandre Falcao Global Ag/EV Materials & LatAm Industrials Analyst HSBC Securities (USA) Inc. alexandre.p.falcao@us.hsbc.com +1 212 525 4449 Santhosh Seshadri*, CFA Analyst HSBC Securities and Capital Markets (India) Private Limited santhosh.seshadri@hsbc.co.in +91 80 4555 2758 Augusto Ensiki LatAm Industrials, Agri, Healthcare and Education HSBC Securities (USA) Inc. augusto.a.ensiki@us.hsbc.com +1 212 525 4915 Ronny Berger, CFA Analyst, LatAm Airlines, Healthcare, Education HSBC Securities (USA) Inc. ronny.berger@us.hsbc.com +1 212 525 6707 * Employed by a non-US affiliate of HSBC Securities (USA) Inc, and is not registered/ qualified pursuant to FINRA regulations Global Agribusiness Equities Agribusiness Global Can bad weather save commodity prices from trade war and ASF? Equities ● Agribusiness 3 June 2019 2 2019 corn planting was 49% as of 20 May; 58% vs historical average of 90% as of 26 May In only five of 40 years the 50% corn planting point has not occurred before 15 May. In each of those five years, the state-wide (IOWA) corn yield was below trend line 2019 corn planting progress is worse than in 2013 when delayed planting led to a 20% decline in corn yields and 3.6m acres of prevent planting 50% corn planting date and impact on yields Corn futures prices already at 3yr high Source: IOWA State University Source: USDA, HSBC estimates Sensitivity of 2019/20 US corn ending stocks to changes in yields and acres* Estimated yield Acreage 176.0 172.0 168.0 164.0 160.0 92.8 0% -14% -27% -41% -55% 91.8 -7% -20% -34% -47% -61% 90.8 -13% -26% -40% -53% -67% 89.8 -20% -33% -46% -59% -73% 88.8 -26% -39% -52% -66% -79% Source: HSBC estimates, USDA *Assuming 8% abandonment per USDA estimates NPK price forecast changes New forecasts 1Q 2019a 2Q 2019f 3Q 2019f 4Q 2019f 2019f 2020f Long term N Ammonia - (FOB Black Sea) USD/t 310 235 225 260 258 300 340 Urea (FOB Black Sea) USD/t 290 255 245 265 264 280 300 Ammonia - (FOB US NOLA) USD/st 304 285 268 299 289 318 363 Urea (FOB US NOLA) USD/st 248 260 255 272 259 290 308 Nitrate AN (France Spot) EUR/t 294...
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