Bloomberg Commodity Outlook – October 2019 Edition Bloomberg Commodity Index (BCOM)

The Trend Should Continue‒ Batten Down the Hatches, Commodity Storm Set to Worsen in 4Q

‒ Crude Oil Headwind: U.S. Energy Independence Set for Halloween

‒ Commodities Increasingly About Higher Gold vs. Everything Else

‒ Copper Has an Oil-Price Problem

‒ Soybeans May Be the Savior for Moribund Agriculture Sector

CONTENTS

02 Broad Market Outlook

03 Energy

07 Metals

11 Agriculture

DATA 14 Performance

18 Curve Analysis

21 Market Flows

24 Performance

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Bloomberg Commodity Outlook – October 2019 Edition Bloomberg Commodity Index (BCOM)

Data and outlook as of September 30

Mike McGlone – BI Senior Commodity Strategist

BI COMD (the commodity dashboard)

Note ‐ Click on graphics to get to the Bloomberg terminal

From Copper to Crude Oil, Broad Commodity Headwinds Accelerating Performance: Sept.. +1.2%, 2019 +3.1%, Spot +4.6%. (Returns are total return (TR) unless noted)

(Bloomberg Intelligence) -- Macro, micro, technical, fundamental, take your pick, our indicators point to further commodity price declines in 4Q, with the notable exception of precious metals. Risks of resuming last year's plunge are elevated on the back of increasing stock-market volatility. A similar swoon would be more enduring this time, especially in energy. Unfavorable demand vs. supply conditions in both crude oil and natural gas are strong price headwinds amid the paradigm shift in U.S. energy independence in 4Q. Price trends in key macroeconomic-related commodities -- copper and crude oil -- pointed down last year. Weakening Chinese economic growth and the strengthening dollar need to reverse for a recovery in broad commodities. A definitive U.S.-China trade agreement is only a first potential ingredient for recovery. Strong Macro Headwinds Batten Down the Hatches, Commodity Storm Set to Worsen in 4Q. Our outlook for broad commodity prices in 4Q remains unfavorable. A potential light at the end of the tunnel for recovering prices should come when the dollar peaks and Chinese economic growth rebounds, yet both are unlikely in the near term. Gold and precious metals will keep shining, in our view. Macroeconomic Price Pressure Predominant. Broad commodity prices will remain under siege for the foreseeable future, in our view. Predominant macroeconomic factors -- the strengthening greenback and weakening Chinese economic growth -- need to reverse for sustained commodity appreciation, if history is a guide. Our graphic depicts the trade-weighted broad dollar extending all-time highs and China GDP slowing to the lowest in over two decades. The potential for mean reversion in these commodity price companions is substantial, which represents hope for price recovery, but we see little to reverse the trends in the near term.

Commodity Headwinds - Strong Dollar, Weak China

Macro Performance Favors Gold vs. Oil, Copper. We expect a top performer on this year's dashboard, crude oil, to continue giving back gains, particularly vs. the S&P 500. Risks of resuming the 4Q18 simultaneous swoon are elevated, but crude faces a more clearly defined demand vs. supply balance that is unfavorable. The trend-is-your-friend rule supports continued appreciation of bond and gold prices. Plunging bond yields are boosting gold despite the strengthening dollar. The lofty greenback and mean-reverting crude prices are primary forces to keep broad commodities under pressure in 4Q.

Consolidating copper, at the bottom of the dashboard, is in the process of alleviating an oversold condition with risks tilted toward further price declines. Crude Oil at Risk of Heading Towards Copper

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Bloomberg Commodity Outlook – October 2019 Edition Bloomberg Commodity Index (BCOM)

Sector Performance Shines on Gold, Metals. Gold will remain at the top of the precious metals leaderboard, and its performance accelerate into year-end, in our view. A definitive reversal in weakening global economic conditions should be needed to reverse this trend, yet further woes in 4Q appear the greater risk. Energy is the most vulnerable. Having given back over half of 1H gains in 3Q, risk in 4Q is tilted toward losing the rest. Our view remains that the earlier energy-price recovery was a dead-cat bounce, notably due to ending last year near 2018 lows.

4Q Vulnerables -- Energy, Industrial Metals

Industrial metals are similarly vulnerable. Oversupplied agriculture, led by U.S. grains, also has limited upside absent a peak dollar and definitive U.S.-China trade accord.

Energy (Index weight: 29% of BCOM) Performance: Sept.. +1.1%, 2019 +5.6%, Spot +4.7% *Note index weights are the 2018 average.

Paradigm Shift and Lower Prices That Hissing Sound? It's the Diminishing Energy Risk Premium. Energy is in the midst of a paradigm shift, with October marking a watershed month that keeps the pressure on crude oil and natural gas prices, in our view. U.S. energy independence -- a dream since the Carter administration -- will become reality, based on Energy Department estimates. The failed spike after the attack on Saudi oil assets showed crude's inability to sustain higher prices with unfavorable global demand vs. supply conditions. Iran's increasing isolation should diminish the geopolitical price premium. If the country is identified as the source of a future attack, the response may be decisive.

U.S. supply is coming on strong. Liquid-fuel net exports are estimated to reach 1.5 million barrels a day by the year-end 2020 vs. imports of 5 million just five years ago.

Deflating Risk Premium Crude Oil Headwind: U.S. Energy Independence Set for Halloween. Risks are tilted toward declining crude oil prices, in our view. The geopolitical premium should diminish with the increasing isolation of Iran and predominant U.S. supply. The price spike after attacks on Saudi oil assets aggravated unfavorable demand vs. supply conditions and proved the resilience of responsive sellers. U.S. Fuel Paradigm Shift Set for October. Crude oil prices have been heading lower and we don't foresee a force powerful enough to reverse it. Based on the latest Energy Department estimates, the dream for U.S. energy independence since the Carter administration will occur in October. Our graphic depicts imports of liquid fuels shifting to exports by Halloween. Price spikes on the back of geopolitical events should only accelerate this trend. Crude Oil Greater Risk Is Revisiting 2016 Low

In 2018, net imports averaged a bit less than 1 million barrels a day. The estimate for this year is about 500,000 barrels of exports, and triple that in 2020. Absent some form of sustained supply disruption, notably from the Middle East, crude oil is entering a near-perfect storm for lower prices as incremental demand is also in decline. WTI Line-In-the Sand at $55 WTI Crude Oil Line-in-the-Sand Support Moves to $55 a Barrel. About $55 a barrel in West Texas Intermediate crude oil is now the key support. Similar to $60 last year, we expect there are plenty of sell stops below $55. The attack on Saudi oil assets reduced supply and added a risk premium, but we expect it just aggravated the downtrend in prices and uptrend in volatility. Crude Oil Deja Vu Decline Risks Are Elevated. About $55 a barrel in WTI crude oil will act as a similar price pivot as $60 did a year ago, we expect. It was the breach of this support level that accelerated sell-stops to the 2018 low of $42.36. Geopolitical risks are supporting prices, but have also aggravated the clear trend in demand -- downward revisions.

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Bloomberg Commodity Outlook – October 2019 Edition Bloomberg Commodity Index (BCOM)

Our graphic depicts the WTI 52-week average turning down last year and the market appearing vulnerable. A paradigm shift in U.S. liquid-fuel production exceeding consumption is only a few months away, according to Department of Energy estimates. This should remain the overwhelming theme pressuring prices. The Crude Oil Price Trend Turned Down Last Year

We expect that further supply disruptions will be needed to sustain higher prices. The price spike from the attack on Saudi oil assets may have just flushed the short base, leaving the downside more vulnerable. Volatility on the Rise and Lower Crude Oil Prices. The petroleum premium should be short-lived, in our view, and prices will continue to decline with rising volatility. Increasing demand is typically required to sustain higher commodity prices, particularly in a market facing a once-in-a-generation paradigm shift of U.S. supply exceeding demand. Our graphic depicts the strong negative correlation in declining petroleum prices and rising volatility. Substantial forces should be required to reverse these unfavorable price trends that resumed last year. Prices Have Turned Back Down, Volatility Up

Geopolitical risks can support prices, but we view the current bid as fleeting. Iran is seen as a primary source disrupting global oil flows. If identified as such, swift and decisive action

should be expected to substantially reduce the country's capabilities to support crude oil prices via offensive strikes. Unfriendly Price Trends for WTI Crude Oil, Houston, Permian. The bottom-line price outlook for new crude oil futures contracts -- WTI Houston and Permian -- is riding a receding tide, in our view. Department of Energy estimates of U.S. liquid fuel production exceeding consumption for the first time in a lifetime by about the end of this year should remain an overwhelming headwind for prices. Added challenges come from the wobbly stock market, trade tension and the upcoming U.S. presidential election. Our graphic depicts West Texas Intermediate futures appearing vulnerable, on the back of the recent price spurt due to the attack on Saudi production. U.S. Supply Exceeding Demand Pressuring Prices

Trend-is-your-friend rules point to lower crude oil prices. The WTI crude 12-month average turned down last year. Greater risks point to acceleration of these enduring trends. Whack-a-Mole Risks Elevated in Crude Oil. Having been swiftly and violently cleansed of a good amount of speculative shorts, crude oil may follow similar recent commodity price-pop examples and embark on a more enduring decline. The natural-gas spout last year is the prime example in the energy sector: It recently traded at a three-year low following the four-year high in 4Q18. West Texas Intermediate and natural gas are key measures of shifts in U.S. production that should keep prices under pressure. Whack-a-mole risks get elevated when prices rally sharply and reduce the more speculative short base.

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Bloomberg Commodity Outlook – October 2019 Edition Bloomberg Commodity Index (BCOM)

Crude-Oil Bounce Is Minor vs. Natural Gas

Producers typically take advantage of higher prices and hedge production, which we expect will be the case for crude oil. The WTI 200-day average turned down last year. We fear the recent price blip will rejoin the receding tide. Crude Oil and Unfavorable Demand vs. Supply. Crude-oil prices appear too high relative to unfavorable demand vs. supply. Our graphic depicting the 12-month average of global demand vs. supply from the Energy Intelligence Group shows Brent crude should be closer to $47 a barrel vs. about $54 on Aug. 30. Auto scaling helps emphasize the strong relationship in our average of demand vs. supply over the past 15 years. Incremental demand has much lower volatility and is declining with an ebbing economic tide, leaving a sharp cut in supply or lower prices as the primary rebalancing factors.

Demand vs. Supply Balance Is Negative for Prices

Some combination of both are likely, in our view, led by supply cuts from Saudi Arabia. Needing reductions from the world's largest exporter to stabilize prices doesn't reflect a bull market, notably as higher prices will encourage production from other sources.

Unprecedented Gas Supply Bulls Have Little Hope vs. Parabolic U.S. Natural Gas Production. "Good luck with that one" is our outlook for natural gas bulls looking for a repeat of last year's price spurt. Short covering is supporting the market in the near term, but unprecedented U.S. supply and the hangover from the 2018 spike will continue to pressure prices, potentially to new lows, if history is a guide.

Unprecedented Supply Limits Natural Gas Upside. Parabolically increasing U.S. natural gas production is the overwhelming force that will keep prices under pressure, in our view. Record supply is known, but it's the rate of increase that's striking. Our graphic depicts the 24-month rate of change in Department of Energy natural gas production at over 24% -- the greatest in the database since 1973. Coming on the back of last year's short-covering price spike puts the market in a similar bearish condition as the aftermath of the price pop five years ago.

Natural Gas Bounce Should be Short Lived

That hangover led to a 17-year low about two years later. A big difference from the 2014-15 bear market is that supply wasn't nearly as strong. The 2016 low close of $1.64 per million BTUs is at risk of breach, based on history. Elevated hedge fund shorts are supporting prices in the near term, but that shouldn't endure. $3 Good Gas Resistance; $2 Risk of Breach. The tide has shifted to the downside for natural gas prices, in our view. Resistance toward $3 should be a formidable obstacle. We expect the resumed downtrend will pressure the market back below $2 support. Elevated net-short managed-money positions are a tailwind, but have boosted prices closer to the downward-sloping 52-week average. The same mean on positions elevates our conviction that the hangover from last year's overly optimistic price spike should endure. Appearing to be in the early days of backing away from last year's record high, mean reversion risks in the 52-week average of net positions are tilted to the downside.

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Bloomberg Commodity Outlook – October 2019 Edition Bloomberg Commodity Index (BCOM)

Elevated Shorts, Only Near-Term Support

The market setup appears similar to the early days of the 2015 bear market. U.S. excess supply is the predominant force, overwhelming exports, LNG and domestic demand. Divergent Weakness vs. the Futures Curve. The relatively flat natural gas futures curve is a positive indication for prices, but record levels of commercial hedging are limiting typical contango. Our graphic depicts the 52-week average of CME natural gas commercial shorts at its highest ever, on the back of rapidly increasing production. Since the previous peak in producer shorts was surpassed in 2017, the one-year futures curve has remained in a relatively flat contango, yet prices have declined. Last year's spike appears to be an aberration.

Record Producer Hedging is Limiting Contango

Contango is normal for natural gas, with a 10-year average about 12% in the one-year curve vs. 4% on Sept. 30. The bygone commodities condition of "normal backwardation" due to producer hedging that's dominating the future curve is creeping back into natural gas.

PERFORMANCE DRIVERS

More Fading of Green on Energy Screen. Strong energy-index performance will continue to erode, in our view. Still the top performer, unleaded gasoline has given back more than half of its gains from the 1H peak. Substantially increasing U.S. liquid-fuel supply and diminishing domestic and global demand are pricing headwinds. Additional risk comes from increasing stock-market volatility. These conditions remain decidedly unfavorable for energy prices. Demand vs. supply reversals tend to be slow, leaving a potential recovery in equities as a key support factor for crude oil. Giving Back 1H Gains, The Primary 2H Trend

Front Energy Futures to September 30

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Bloomberg Commodity Outlook – October 2019 Edition Bloomberg Commodity Index (BCOM)

Metals All (Index weight: 35% of BCOM) Performance: Sept.. -2.0%, 2019 +9.9%

Industrial (Index weight: 19.0% of BCOM. Performance: Sept.. +0.5%, 2019 7.2%, Spot +6.1%)

Precious (Index weight: 16.1% of BCOM. Performance: Sept.. -4.4%, 2019 +12.8%, Spot +13.6%)

Receding Tide Favors Gold Paused and Refreshed, Gold Is Poised to Stay Ahead of Copper. This year's primary theme of gold outperforming most other commodities should prevail into year-end, in our view. Prices for copper, the primary industrial metal, should decline as global macroeconomic conditions falter. Markets have stabilized along with the plunging yuan and global bond yields, but we see little to reverse overall trends, leaving a pause-and-refresh the more likely scenario. Dollar-denominated gold should continue to follow the lead of palladium toward record highs, pulling silver and platinum along.

The rabbit, nickel, is at high risk of going the way of overhyped cobalt and lithium, which have been giving back gains since last year. On a sector basis, metals are poised to accelerate outperformance vs. broad commodities in spot and total returns.

Melting Macro Favors Gold

Gold and Precious Metals Should Maintain the Upper Hand. More back-and-fill favors the predominant trend of precious metals outperforming industrials. Copper has alleviated some of the oversold condition from August and gold has done the opposite, but we expect global economic malaise will prevail, providing support for precious metals.

Predominant Theme: Gold Outpacing Copper. The dual trends of declining copper prices and increasing gold should continue, we believe. Our graphic depicts what appear as two, increasingly entrenched directional patterns fueled by rising stock-market volatility: the declining copper-to-gold ratio and bond yields. The CBOE S&P 500 Volatility Index (VIX) 100-week average has had a strong inverse relationship with the ratio of CME copper to gold futures, which often trades almost tick-for-tick with the yield on the U.S. Treasury 30-year bond.

The Tide Is Likely to Keep Receding

Absent a definitive U.S.-China trade accord, we see little to reverse these slowing indicators. The trend-is-your-friend mantra tilts risk vs. reward toward resumption of gold outperforming copper following some back-and-fill from the end of August. Commodities Increasingly All About Metals. Metals have outperformed broad commodities, and we expect the trend to accelerate. Unlike most commodities, notably an energy sector facing increasing price headwinds from rapidly advancing technology, metals should experience more demand without similar support for supply and substitution. Until global economic slumps reverse, precious metals should top industrials, but our graphic depicts the benefits of the overall metals sector vs. broad commodities. Spot and total returns favor metals. Metals Typically Outperform Broad Commodities

Much less subject to roll-yield volatility, the ratio of the Bloomberg All Metals Index vs. broad Bloomberg Commodity Total Return Index has increased to 2.6 from 1-to-1 at the end of 1999. Over the same period, the broad commodity total return is up only about 20%, about a 10th that of the spot change.

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Bloomberg Commodity Outlook – October 2019 Edition Bloomberg Commodity Index (BCOM)

Crude Oil Downgrades Copper Gold and Precious Metals Should Maintain the Upper Hand. More back-and-fill favors the predominant trend of precious metals outperforming industrials. Copper has alleviated some of the oversold condition from August and gold has done the opposite, but we expect global economic malaise will prevail, providing support for precious metals. Copper Has an Oil-Price Problem. Copper prices are at elevated risk of declining further if the metals' history of divergent weakness vs. crude oil is a guide. Our graphic depicts the only two occasions in the past 10 years when crude oil rallied 10% or more on a monthly basis and the red metal declined, like it did on Sept. 16-17. Last year's June peak marked the most recent occasion when copper dropped despite advancing crude. It has remained the metal's high water mark since.

Copper May Be Entering Lose-Lose vs. Crude Oil

Persistent crude-oil appreciation due to geopolitical issues and supply constraints should keep the pressure on copper, yet both may resume the downward moves begun last year as global economies slowed. The two-day decline of about 3% in the Bloomberg Industrial Metals Total Return Index since the attack on Saudi oil assets represents the primary commodity-sector loser.

Extreme Shorts Supporting Copper for Now. Copper short covering should hold the market in check, though we think the price bounce will have limited duration. Some recovery from the recent record 28% of CME copper managed-money net shorts vs. open interest should be sufficient to get prices back toward the downward-sloping 52-week mean. Doctor Copper provided its negative macroeconomic diagnosis when it plunged 20%-plus to its August 2018 trough. Indicating little recovery potential, it extended that low this September.

Shorts Buoy Copper, But Tide Has Turned

Elevated levels of net shorts increase the bid underlying the market. Some cleansing and covering is typically required for the price to keep sliding. Our graphic depicts the hangover status for the long holders, which reached database highs about two years ago. This, in our view, is the more durable trend, indicating pressure for copper prices.

Rabbit Nickel Risks Reversion

Nickel Risks Joining Growing List of Failed Commodity Rabbits. This latest commodity rabbit, nickel, is at elevated risk of following cobalt and lithium down the path of giving back much of its sharp gain. The old adage "price is a primary driver of supply and demand" is playing out with increasing efficiency in commodities. Unleaded gas and corn are this year's notable additions, so far. Nickel Just Catching Up to Metals Brethren. Nickel's price spurt is entering a period of elevated speculation risk, if recent history is a guide. Up about 62% this year to Sept. 30, and 100% since the beginning of 2016, nickel has caught its metal cousins, as measured by the Bloomberg Industrial Metals Spot Subindex since the end of 1999. The trend in most metals (other than precious) is clear: Absent a resurgence in Chinese economic growth and a peak greenback, rallies should be tame. Similar to cobalt and lithium, anticipated demand for batteries and electric vehicles is supporting nickel's price appreciation.

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Bloomberg Commodity Outlook – October 2019 Edition Bloomberg Commodity Index (BCOM)

Nickel Price Running Into Brethren Resistance

We've seen this setup before, along with the subsequent price dumps. For example, cobalt is unchanged from 2010 despite a spike of about 150% to last year's peak. Our analysis shows potential EV demand and supply constraints as similarly optimistic for nickel. A Tiring Rabbit, Nickel to Pressure Base Metals. Industrial metals are particularly vulnerable if this year's rabbit, nickel, has peaked, as we fear it has. The lustrous white metal appears to have reached the end of its glamour run at five-year highs. Our graphic depicts nickel's potential overbought disparity vs. the downward sloping Bloomberg Industrial Metals Spot Subindex. The index is particularly vulnerable to an economic slowdown, notably in China, as depicted by the plunging yuan in our graphic.

Nickel's Greater Risk Appears to Be Mean Reversion

We fear the bullish nickel story -- increasing battery demand and decreasing Indonesia supply -- is about played out. Similar rallies for cobalt and lithium, fueled by electric-vehicle demand, have been mean reverting lower for about a year. EV demand is unlikely to command a substantial portion of global nickel supply, and Indonesia is a small portion of production.

EV Nickel Fate Risks Similar to Cobalt, Lithium. Nickel prices are similar to cobalt and lithium in terms of the risk of mean reversion downward. Both metals have had enduring price corrections since peaking last year. Akin to nickel more recently, much of the previous cobalt and lithium price appreciation came amid anticipated electric-vehicle (EV) usage. Demand is increasing for battery and EV metals, but so is supply on the back of rising prices, suggesting for nickel a pattern similar to cobalt and lithium price peaks in 2018 that were followed by declines of 70% and 40%, respectively. Nickel May Have Peaked, Like Cobalt & Lithium

Rabbit Nickel Risks Reversion

It's Gold vs. Everything Else Commodities Increasingly About Higher Gold vs. Everything Else. The commodity market trend displaying the most endurance in this Fed easing cycle is rising gold and precious metals prices, in our view. Copper turned down over a year ago and has declined since the first rate cut. Despite increasing geopolitical risks, crude oil is also showing potential failure, similar to natural gas last year.

Gold Maintaining Upper Hand With Fed Easing. Up about 3% since the first rate cut of this Fed easing cycle, we expect gold to maintain the upper hand vs. most other commodities. The graphic depicts copper down about 4% since July 30 and most notably, Brent crude oil losing almost 6%. It's quite a negative price signal from the global seaborne crude-oil benchmark to be unable to maintain a bid, despite the significant elevation in geopolitical risks. If crude oil can't rally, the broad commodity market will remain under pressure.

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Bloomberg Commodity Outlook – October 2019 Edition Bloomberg Commodity Index (BCOM)

Gold Up, Copper & Crude Down in This Easing Cycle

It's an added negative crude oil and broad commodity indication that Brent is underperforming West Texas Intermediate, which is oversupplied and more landlocked. WTI is about unchanged, along with the S&P 500 over the period. A primary gold price support factor is the increasing CBOE S&P 500 Volatility Index. Gold Foundation Firming vs. Most Commodities. Appreciating gold prices on the back of increasing stock market volatility will remain the predominant 2H trend in commodities, in our view. Back-and-fill is the mode in the quasi-currency since the initial move at the beginning of August to $1,500 an ounce. Unless the mean-reverting higher CBOE S&P 500 Volatility Index (VIX) can abruptly change course, gold and precious metals should continue to outperform most other commodities. Our graphic depicts the 50-week average on the Bloomberg Commodity Spot Index, which turned down last year almost simultaneously with the recovery of the 100-week average on the VIX and gold prices. Gold is Riding Stock Market Volatility Wave

Gold Poised to Take Bullish Baton as S&P 500 Again Targets 3,000. The price of gold is on a more sustainable upward trajectory, notably if the S&P 500 keeps backing down from 3,000 resistance. Our graphic depicts the potential third month in a row for the equity index to trade

above 3,000 -- and at risk of falling short. This level is proving to be an inflection point for higher gold. Since the S&P 500 first closed above 3,000 on July 12, gold has gained about 5%, essentially leaping a handle to $1,500 an ounce from $1,400. Divergent strength in the metal may indicate a dimmer future for stocks. S&P 500's Third Month-End Drive to Top 3,000

When the history of 2019 is written, higher gold may make more sense, along with plunging bond yields and equities retreating from resistance. As shown in our graphic, gold's price has remained stuck at about half the S&P 500 level, emphasizing the recent close relationship between the two.

PERFORMANCE DRIVERS

Performance: Precious Tailwinds, Base Headwinds. The disparity between strong precious metals and relatively weak industrials will continue to widen, in our view. Copper, down about 3% in 2019 on a spot basis, reflects weakening economic conditions and has strong companions in plunging bond yields. Similar forces should keep gold on pace to continue reversing the 2013 decline, which began at about $1,700 an ounce vs. $1,475 on Sept. 30. A primary concern as we head toward year end is nickel going the way of other battery- and EV-related metals cobalt and lithium and giving back overhyped gains. Gold Momentum Should Continue, Nickel at Risk

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Bloomberg Commodity Outlook – October 2019 Edition Bloomberg Commodity Index (BCOM)

Agriculture (Index weight: 30% of BCOM) Performance: Sept.. +4.2%, 2019 -5.0%, Spot +1.9%)

Grains (Index Weight: 24% of BCOM) Performance: Sept.. +5.2%, 2019 -4.5%, Spot +3.3%)

Softs (Weight: 6% of BCOM) Performance: Sept.. +4.2%, 2019 -8.5, Spot -1.2%)

More Pain Before Gains Soybeans May Be the Savior for Moribund Agriculture Sector. There's little potential light at the end of the tunnel for broad agriculture-sector price recovery, with the notable exception of soybeans. Elevated grains stocks-to-use, the strengthening dollar, declining U.S. exports and trade tensions will keep ag prices generally under pressure, but soybeans are about as beaten up as they get, in our view. The oilseeds' price discount, on the back of its status at the epicenter of U.S.-China trade tension, appears to be sufficient. U.S. production is plunging and exports to China near zero have only upside potential.

Multiyear lows in soybean prices this spring are supporting a rapid rebalancing of the market, reducing bloated inventories as U.S. exports-to-production are set to recovery to near the 2017 all-time peak about 50%. Not Much Worse for Soybeans Soybeans Gaining Upper Hand vs. Stock Market With Trade Tensions. Soybean prices are showing divergent strength and should be a stalwart for the moribund agriculture sector, in our view. Beans are about as beaten up as they get. Prices reached an 11-year low a few months ago, U.S. exports to China have dropped toward zero and production is plunging. Hard to Fall From the Floor, Supporting Soybeans. U.S soybean exports to China dropping toward zero tilt risk vs. reward for prices to the upside. Our graphic depicts the annual average of accumulated soybean exports near 4% of production -- the lowest since 2000. This compares with peaks near 25% in 2014-17. While exports to China are unlikely to revisit the previous highs soon, poor Corn Belt growing conditions and low prices are pressuring production to the most significant annual decline (about 21%) since 1984, based on the latest USDA estimates.

Limited Downside - Soybean Exports to China

Market rebalancing is advancing rapidly, whittling away at the overhang of supply. Although total exports are expected about the same as last year -- about 50 million metric tons -- the percentage of production will approach the 2017 peak about 50%.

Soybeans Appear Sold Out vs. Trade Tensions. Indicating divergent strength, the commodity at the epicenter of U.S.-China trade tension, soybeans, are outperforming the stock market. Our graphic depicts the front soybean future up about 9% since the May 5 announcement from President Donald Trump about the breakdown in China trade talks and imposition of tariffs. Over the same time period, the S&P 500 has gained about 1 percent. Our primary takeaway is soybeans face lesser downside price risk from increasing trade tensions than the stock market.

Soybeans Outperforming Equities With Trade Tension

The worlds' primary oilseed/grain and high-protein source is exhibiting sold-out price behavior. In May, soybean futures dipped to an 11-year low and exports to China dropping toward zero can only improve. Down about the same 7% as the S&P 500 last year, soybeans and equities aren't typically highly correlated.

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Bloomberg Commodity Outlook – October 2019 Edition Bloomberg Commodity Index (BCOM)

Soybean Prices Appear Low vs. Production Plunge. The big drop in U.S. soybean production will reduce inventories and support prices, in our view. USDA estimates for this year's soybean crop are for a significant decline and contrary to upward revisions for corn, the trend in the oilseeds' production estimates has been downward since September 2018. Our graphic depicts the steepest decline in soybean production below its five-year average in 30 years. The 1988 drought boosted prices to a peak close to $11 a bushel. U.S. Soybean Production Decline Is Historic

Prices on Sept. 30 of about $9.06 a bushel appear too cold vs. the substantial drop in production.

Not Much Worse for Soybeans Price Pressure to Persist as Grains, Agriculture Cage Tightens. Agricultural commodities need three primary suppressants to reverse for a sustained price recovery, in our view. U.S. grain stocks and the greenback remain too high, and exports are too low. A potential peak in global grain stocks-to-use from a two-decade high indicates there's light at the end of the tunnel. Trends That Need to Reverse for Ag Recovery. Agriculture prices should remain under pressure with declining U.S. grain exports and the strengthening dollar, in our view. These predominant trends need to reverse for a sustained price recovery, if history is a guide. The graphic depicts our measure of the dollar value of grain exports based on USDA estimates. This measure's plunge to $28 billion from almost $35 billion at the beginning of 2018 on an annual basis coincides with a downturn in the 12-month average on the Bloomberg Grains Spot Subindex. The dollar value of exports is a top companion with agriculture prices, and the greenback leads negatively correlated factors.

Strong Dollar, Declining Exports Pressuring Prices

In the past 20 years, the Bloomberg Agriculture Subindex is about 0.92 correlated to our measure of U.S. grain exports and has a negative 0.55 correlation to the trade-weighted broad dollar. Grain Stocks-to-Use May Finally Be Peaking. Agriculture prices may get a boost if the grains' stocks-to-use figure has peaked. The graphic depicts our global combined measure of corn, soybean and wheat stockpile estimates from the USDA backing away from last year's two-decade high. This is an initial indication for a bottoming market, as sustained low prices are a primary factor suppressing supply and supporting demand. Led by the grains, agriculture prices should remain subdued until elevated stockpiles continue to decline. 2018 Was the Highest Stocks-to Use Since 1986

It usually takes one notable year for prices to bottom. The drought of 1988 -- three years after stocks-to-use peaked -- is a good example. We initially expected this year's record Corn Belt floods to spark the peak in stocks and a bottom in prices, but overestimating the productivity of the American grain-supply machine is more appropriate.

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Bloomberg Commodity Outlook – October 2019 Edition Bloomberg Commodity Index (BCOM)

PERFORMANCE DRIVERS

Soybeans Increasingly the Stalwart Ag Commodity. Divergent soybean strength is gaining endurance. Down the least among Bloomberg Agriculture Subindex constituents on a total return basis, and up in spot terms, beaten-up soybeans stand out as a crop with limited further downside. The overhang of U.S. supply will limit rallies, but exports to China dropping toward zero can only improve, which should keep soybeans as a strength leader. Soybean Showing Divergent Strength

Grain accounts for about 82% of the Bloomberg Commodity Agriculture Subindex on a 2019 target-weight basis.

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Bloomberg Commodity Outlook – October 2019 Edition Bloomberg Commodity Index (BCOM)

DATA on BI COMD Performance - Overview Key Metrics

Historical Performance may vary from above due to delayed end date

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Bloomberg Commodity Outlook – October 2019 Edition Bloomberg Commodity Index (BCOM)

Performance – Commodity Total Returns Key Metrics

Historical

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Bloomberg Commodity Outlook – October 2019 Edition Bloomberg Commodity Index (BCOM)

Performance – Prices Key Metrics

Historical

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Bloomberg Commodity Outlook – October 2019 Edition Bloomberg Commodity Index (BCOM)

Performance - Volatility Key Metrics

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Bloomberg Commodity Outlook – October 2019 Edition Bloomberg Commodity Index (BCOM)

Curve Analysis – Contango (-) | Backwardation (+) Key Metrics

Measured via the one-year futures spread as a percent of the first contract price. Negative means the one-year out future is higher (contango). Positive means the one-year out future is lower (backwardation.

Historical

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Bloomberg Commodity Outlook – October 2019 Edition Bloomberg Commodity Index (BCOM)

Curve Analysis – Gross Roll Yield Key Metrics

Historical

19

Bloomberg Commodity Outlook – October 2019 Edition Bloomberg Commodity Index (BCOM)

Curve Analysis – Forwards / Forecasts Spread %

Data Set

20

Bloomberg Commodity Outlook – October 2019 Edition Bloomberg Commodity Index (BCOM)

Market Flows – Open Interest Key Metrics

Historical

21

Bloomberg Commodity Outlook – October 2019 Edition Bloomberg Commodity Index (BCOM)

Market Flows – Commitment of Traders Key Metrics

Historical

22

Bloomberg Commodity Outlook – October 2019 Edition Bloomberg Commodity Index (BCOM)

Market Flows – ETF Flows (annual)

23

Composite Indices * Click hyperlinks to open in Bloomberg

Sep YTD 1-Year 3-Year 5-Year 10-Year 20-Year 30-Year 40-Year 50-YearBloomberg Commodity ER BCOM 1.01% 1.39% -8.71% -8.86% -34.47% -39.08% -15.85% -13.42% -34.58% 395.02%Bloomberg Commodity TR BCOMTR 1.17% 3.13% -6.57% -4.43% -31.09% -35.69% 18.75% 102.08% 282.66% 5355.25%

Bloomberg Commodity Spot BCOMSP 1.31% 4.56% -5.40% 6.21% -10.40% 5.40% 207.30% 254.47% 258.26% 1870.95%Bloomberg Roll Select BCOMRST 0.98% 1.44% -8.04% -4.44% -27.69% -25.08% 149.41%

1 Month Forward BCOMF1T 1.26% 3.00% -6.44% -3.00% -27.87% -27.59% 106.23% 2 Month Forward BCOMF2T 1.14% 2.68% -4.29% 0.89% -24.76% -25.69% 149.20% 3 Month Forward BCOMF3T 1.22% 2.81% -5.79% -0.33% -24.21% -23.25% 160.72% 4 Month Forward BCOMF4T 0.93% 2.55% -6.11% 1.16% -21.18% -17.22% 5 Month Forward BCOMF5T 1.08% 3.26% -5.46% 2.40% -19.68% -16.27% 6 Month Forward BCOMF6T 0.81% 2.71% -5.48% 2.69% -18.84% -14.97%

Energy BCOMENTR 1.11% 5.63% -21.61% -2.43% -60.22% -71.82% -52.61% 13.43%Petroleum BCOMPETR 1.32% 18.00% -23.24% 13.24% -54.38% -48.16% 61.86%Agriculture BCOMAGTR 4.19% -5.04% -4.89% -26.22% -31.43% -30.69% -30.41% -20.78% 9.48% 1413.37%

Grains BCOMGRTR 5.24% -4.51% -3.79% -18.82% -29.19% -31.52% -40.29% -44.59% -36.36% 421.80%Industrial Metals BCOMINTR 0.51% 7.24% -2.07% 18.56% -8.14% -18.32% 111.46%Precious Metals BCOMPRTR -4.40% 12.83% 20.52% 2.67% 11.32% 25.79% 296.37% 274.35% 162.97%

Softs BCOMSOTR 4.25% -8.49% -7.82% -46.19% -45.57% -47.10% -53.58% -38.19% 16.05% 2427.76%Livestock BCOMLITR 7.49% -6.13% -5.48% 18.59% -28.84% -13.48% -49.20% -21.53%Ex-Energy BCOMXETR 1.18% 2.14% 1.62% -5.79% -15.64% -12.29% 40.32%

Ex-Petroleum BCOMXPET 1.12% -0.70% -0.83% -9.75% -26.30% -35.60%Ex-Natural Gas BCOMXNGT 1.23% 5.68% -5.51% -0.92% -24.22% -18.70%Ex-Agriculture BCOMXAGT 0.02% 6.71% -7.43% 6.13% -32.09% -39.92%

Ex-Grains BCOMXGRT 0.46% 4.73% -7.33% -1.14% -31.56% -38.16%Ex-Industrial Metals BCOMXIMT 1.32% 2.19% -7.57% -9.23% -35.57% -39.99%Ex-Precious Metals BCOMXPMT 2.47% 1.25% -10.96% -6.02% -37.63% -43.78%

Ex-Softs BCOMXSOT 0.96% 4.00% -6.48% -0.35% -30.37% -35.52%Ex-Livestock BCOMXLIT 0.81% 3.73% -6.73% -5.49% -31.38% -37.08%

Ex-Agriculture & Livestock BCOMXALT -0.60% 7.95% -7.80% 5.34% -32.77% -42.31%Bloomberg Dollar Spot BBDXY 0.18% 1.92% 3.01% 3.05% 13.81% 23.54%

Bloomberg 500 Total Return B500T 1.66% 20.81% 4.48% 46.22% 67.14%US Aggregate LBUSTRUU -0.53% 8.52% 10.30% 9.03% 18.07% 44.48% 166.06% 479.94% 1648.68%US Treasury LUATTRUU -0.85% 7.71% 10.48% 6.88% 15.44% 35.41% 147.39% 430.04% 1502.95%

US Corporate LUACTRUU -0.65% 13.20% 13.00% 14.12% 25.95% 71.81% 220.69% 627.69% 2128.86%US High Yield LF98TRUU 0.36% 11.41% 6.36% 19.33% 29.91% 114.71% 293.57% 945.95%

Single Commodity Indices

Sep YTD 1-Year 3-Year 5-Year 10-Year 20-Year 30-Year 40-Year 50-YearNatural Gas BCOMNGTR 0.43% -24.17% -24.18% -43.64% -78.44% -95.41% -99.40%

Low Sulfer Gas Oil BCOMGOT 5.00% 15.32% -17.48% 35.02% -40.83% -19.75% 241.02%WTI Crude BCOMCLTR -1.33% 18.09% -26.19% 5.78% -65.09% -65.50% -3.16% 166.49%

Brent Crude BCOMCOT 1.40% 16.67% -23.68% 22.00% -53.70% -33.25% 233.16%ULS Diesel BCOMHOTR 3.30% 14.11% -17.77% 20.55% -41.09% -28.03% 142.29% 300.24%

Unleaded Gasoline BCOMRBTR 4.41% 27.43% -20.22% 5.80% -46.32% -8.42% 222.82% 681.09%Corn BCOMCNTR 5.11% -3.32% -0.67% -17.23% -29.23% -34.73% -77.41% -83.13% -80.67% -31.13%

Soybeans BCOMSYTR 4.43% -3.12% 0.14% -18.72% -14.92% 25.93% 211.40% 238.21% 244.15% 3580.45%Wheat BCOMWHTR 7.37% -2.50% -4.93% -14.01% -36.43% -65.57% -86.85% -91.16% -89.01% -23.92%

Soybean Oil BCOMBOTR 1.10% 1.53% -3.49% -22.07% -26.12% -44.68% -18.95% -24.48% -24.00% 2512.76%Soybean Meal BCOMSMT 2.10% -6.12% -6.56% -11.16% 0.54% 106.61% 921.09%HRW Wheat BCOMKWT 4.64% -21.65% -27.88% -37.53% -63.62% -71.09% -78.22%

Copper BCOMHGTR 1.23% -1.14% -7.27% 13.62% -17.98% -19.66% 239.67% 590.15%Alumnium BCOMALTR -1.51% -8.36% -18.34% 0.87% -20.94% -40.33% -29.80%

Zinc BCOMZSTR 9.37% 3.04% -0.88% 13.13% 12.81% 5.66% 50.52%Nickel BCOMNITR -4.49% 60.95% 36.57% 59.49% 0.21% -14.36% 304.32%Gold BCOMGCTR -3.53% 14.21% 22.47% 9.29% 17.42% 36.88% 339.63% 282.83% 235.85%Silver BCOMSITR -7.17% 8.49% 14.31% -14.68% -6.50% -8.63% 157.00% 166.20% -25.85%Sugar BCOMSBTR 3.88% -4.32% 3.40% -55.18% -45.46% -65.52% -15.22% 1.91% -57.55% 110.94%Coffee BCOMKCTR 4.61% -10.13% -12.96% -50.86% -68.45% -67.66% -89.48% -83.91% -79.27%Cotton BCOMCTTR 3.57% -15.67% -21.52% -9.40% 0.55% 32.74% -68.66% -50.01% 157.39% 993.11%

Live Cattle BCOMLCTR 5.68% -7.41% -5.60% 19.01% -18.42% 2.25% -4.16% 78.76% 607.56% 3489.83%Lean Hogs BCOMLHTR 10.81% -4.97% -7.22% 13.42% -46.31% -36.53% -82.24% -83.51%

Index Name Ticker

Index Name Ticker

PERFORMANCE: Bloomberg Commodity Indices

2019

2019

24

Composite Roll Select Indices * Click hyperlinks to open in Bloomberg

Sep YTD 1-Year 3-Year 5-Year 10-Year 20-Year 30-Year 40-Year 50-YearBCOM Roll Select BCOMRST 0.98% 1.44% -8.04% -4.44% -27.69% -25.08% 149.41%

Roll Select Agriculture BCOMRAGT 3.67% -5.68% -5.65% -23.29% -29.20% -21.42% 28.21%Roll Select Ex-Ags & Livestock BBURXALT -0.58% 5.62% -9.65% 5.00% -27.81% -31.14%

Roll Select Grains BCOMRGRT 4.39% -5.24% -5.03% -15.73% -25.92% -22.78% 15.52%Roll Select Softs BCOMRSOT 3.77% -9.72% -8.76% -46.45% -47.27% -39.23% -16.28%

Roll Select Livestock BCOMRLIT 5.64% -7.01% -7.86% -0.35% -38.02% -9.29% 43.88%Roll Select Energy BCOMRENT 1.29% 1.40% -24.25% -2.31% -52.51% -59.25% 86.15%

Roll Select Ex-Energy BCOMRXET 0.83% 1.55% 0.76% -5.83% -15.44% -5.69% 135.05%Roll Select Petroleum BCOMRPET 1.26% 13.16% -24.07% 13.92% -46.17% -29.75% 345.66%

Roll Select Industrial Metals BCOMRINT 0.21% 6.33% -3.27% 17.23% -8.68% -14.51% 208.67%Roll Select Precious Metals BCOMRPRT -4.33% 12.83% 20.52% 2.71% 11.85% 26.98% 313.05%

Single Commodity Roll Select Indices

Sep YTD 1-Year 3-Year 5-Year 10-Year 20-Year 30-Year 40-Year 50-YearNatural Gas RS BCOMRNGT 1.42% -26.57% -27.94% -40.90% -71.47% -90.78% -90.09%

Low Sulfer Gas Oil RS BCOMRGOT 4.15% 12.22% -19.70% 28.53% -41.46% -20.10% 267.15%WTI Crude RS BCOMRCLT -0.83% 14.15% -24.04% 9.93% -51.51% -39.51% 320.35%

Brent Crude RS BCOMRCOT 1.40% 11.74% -25.79% 20.68% -47.09% -25.46% 422.01%ULS Diesel RS BCOMRHOT 1.55% 11.16% -20.36% 12.48% -43.36% -31.42% 290.84%

Unleaded Gasoline RS BCOMRRBT 4.41% 17.75% -22.82% 11.36% -35.61% 5.86% 402.72%Corn RS BCOMRCNT 3.51% -4.18% -1.44% -14.33% -25.11% -28.17% -57.33%

Soybeans RS BCOMRSYT 3.85% -2.09% 0.89% -8.06% -3.46% 56.35% 374.62%Wheat RS BCOMRWHT 7.37% -6.02% -10.31% -21.58% -43.33% -64.23% -57.73%

Soybean Oil RS BCOMRBOT 1.26% 1.39% -3.68% -22.10% -25.51% -39.08% 17.04%Soybean Meal RS BCOMRSMT 2.28% -5.39% -4.31% 0.98% 9.08% 136.49% 1325.15%HRW Wheat RS BCOMRKWT 3.74% -23.76% -29.74% -37.25% -62.01% -68.26% -48.79%

Copper RS BCOMRHGT 1.26% -1.21% -8.18% 14.25% -18.34% -16.26% 376.85%Alumnium RS BCOMRALT -2.07% -9.49% -19.14% -2.64% -21.43% -37.11% 1.65%

Zinc RS BCOMRZST 8.19% 0.78% -3.31% 10.15% 9.93% 9.18% 129.47%Nickel RS BCOMRNIT -4.49% 59.84% 35.54% 59.16% 0.76% -9.66% 552.38%Gold RS BCOMRGCT -3.47% 14.25% 22.51% 9.34% 18.04% 37.76% 345.72%Silver RS BCOMRSIT -7.08% 8.40% 14.20% -14.67% -6.08% -6.77% 189.42%Sugar RS BCOMRSBT 3.16% -6.49% 0.92% -57.36% -50.72% -61.64% 82.70%Coffee RS BCOMRKCT 4.46% -10.51% -12.22% -50.37% -67.49% -63.62% -82.54%Cotton RS BCOMRCTT 3.72% -16.06% -21.99% -7.31% 3.25% 58.77% -47.62%

Live Cattle RS BCOMRLCT 2.96% -9.90% -9.29% 9.28% -23.89% 5.54% 58.39%Lean Hogs RS BCOMRLHT 10.81% -0.69% -4.37% -15.00% -56.71% -31.68% 1.92%

PERFORMANCE: Bloomberg Commodity Roll Select Indices

Index Name Ticker

Index Name Ticker

2019

2019

25

BLOOMBERG INTELLIGENCE: COMMODITY DASHBOARDS BI <GO> * Click hyperlinks to open in Bloomberg

Crude Oil Production: BI OILS <GO> Natural Gas Production: BI NGAS <GO>

Precious Metal Mining: BI PMET <GO> Agricultural Chemicals: BI AGCH <GO>

Copper: BI COPP <GO> Aluminum: BI ALUM <GO>

BI provides analysis on several key drivers of BCOM performance; industrial and precious metals mining, oil and natural gas production, and agricultural chemicals. The dashboards include key macro data libraries and interactive charting and commentary from analysts with an average of seventeen years of experience.

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COMMODITY CHEAT SHEET FOR THE BLOOMBERG PROFESSIONAL® SERVICE

* Click hyperlinks to open in Bloomberg

Broad Commodities EnergyTop commodity news CTOP Top energy news ETOPGlobal commodity prices GLCO Top oil news OTOP Commodity playbook CPLY Crude Oil Production Dashboard BI OILSCommitments of traders report COT First Word oil NI BFWOIL Calendar of commodity events ECO17 News on oil inventories TNI OIL INV Commodity arbitrage calculator CARC Oil Buyer's Guide newsletter NI OBGBRIEFCommodity fundamental data explorer FDM Pipes & Wires newsletter NI PAWSBRIEFCommodity futures overview CMBQ Oil market analysis BOILSecurity finder SECF Nat gas spot prices BGASCommodity data contributors & broker CDAT Forward European utility markets EUMContract table menu CTM News on oil markets NI OILMARKET Seasonality chart SEAG News on OPEC NI OPEC Commodity curve analysis CCRV OPEC production and prices OPECCommodity fair values CFVL Oil markets menu OIL Commodity price forecasts CPFC Crude stored in tankers NOONCommitments of Traders Report COT Refinery outages REFOCommodity maps BMAP Oil’s decline EXT5 Commodity options monitor OMON Oil versus inflation expectations SWIFCommodities charts COSYCommodity Investors menu CMNV MetalsUS exchange traded product fund flows ETF Top metal news METT

Precious metal dashboard BI PMETGBase metals dashboard BI BMET

Commodity Indices Metals prices and data MINE Index description BCOM Index DES Precious metals prices and rates MTL Index constituent weights BCOM Index MEMB Metals Bulletin MB Listed index futures BCOM Index CT COMEX inventories COMX Option volatility surface BCOM Index OVDV LME monitor LME Seasonality chart BCOMNG Index SEAG LME implied volatilities LMIV Commodity index futures movers FMV LME warehouse inventories LMEI Commodity index ranked returns CRR

AgricultureWeather Top agriculture news YTOP Global weather database WETR Agriculture calendar AGRI US snow monitor SNOW Agriculture spot prices AGGPEU weather & utility models EUMM Agriculture supply & demand AGSD

Crop calendar CCAL

BCOM QUICK FACTS Index Methodology

Weighting Bias 2/3 market liquidity and 1/3 world production No. of Commodities 20 Re-balancing Frequency Annual Roll Schedule Monthly (5 day roll) Caps/Limits Single commodity: max 15%

Single commodity and its derivatives: max 25%Related commodity groups: max 33%

First Value Date 30 December 1990

The data provided in this report can be easily accessed on the Bloomberg Professional® service along with numerous news and analytical tools to help you stay on top of the commodity markets.

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