7/16/2014. FOR COOPERATIVES Fertilizer Risk Management

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1 2014NSAC S S TAX & ACCOUNTING CONFERENCE FOR COOPERATIVES Fertilizer Risk Management DISCLAIMER The INTL FCStone Inc. group of companies conducts a global full service, integrated commodities, futures, investment banking, derivatives trading and risk management business. Our research department may provide research, market commentary and general or specific analyses as may be requested from time to time by our clients, which may reflect opinions that are contrary to the illustrations in this presentation. INTL FC Stone Inc. has adopted policies designed to preserve the independence of our research analysts. These policies prohibit non research personnel from influencing research personnel to issue favorable research or offer to change a research rating or price target as consideration for an inducement to obtain business or other compensation. The INTL FCStone proprietary trading desks and investing businesses may make investment decisions that are inconsistent with the materials in this document. INTL FCStone Inc. and its affiliates, officers, directors, and employees, will from time to time have long or short positions in, act as principal in, and buy or sell instruments the derivatives that are identical or economically related to the derivatives referred to in this document. This presentation is not an offer to sell or a solicitation of an offer to buy any derivative or security and is not a commitment to enter into any derivative or other transaction, and does not create a binding obligation on INTL FCStone Inc. or any of its affiliates. This presentation does not constitute investment research or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual clients or recipients of this material. You are directedtoseekprofessionalandtax advice. 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INTL FCStone Inc. and its affiliates may from time to time take proprietary positions and make a market in instruments identical or economically related to derivative transactions entered into with you, or may have an investment banking or other commercial relationship with and access to information from the issuer(s) of securities, financial instruments or other interests underlying derivative transactions entered into with you. INTL FCStone Inc. and its affiliates may choose to hedge their obligations by trading in derivatives. The costs associated with hedging activity could affect the market value of, or the price at which we would be willing to enter into a transaction. Further, we may internalize and match order flow or route it externally for execution. If we choose to match orders internally, our compensation is greater than if we execute the order externally. INTL FCStone Inc. and its affiliates make no representation, warranty or guarantee as to, and shall not be responsible for, the accuracy or completeness of the information contained in this presentation and have no obligation to update the information. Any illustrations provided are strictly hypothetical and no representation is being made that any person will, or is likely to achieve profits or losses similar to those examples. You are advised to undertake an independent review of the potential legal, tax, regulatory and accounting implications of any derivatives transaction to determine whether derivatives or any particular structure would be suitable for you, and if necessary seek professional advice. Derivatives give rise to substantial risk and are not suitable for all recipients of this presentation. This presentation has been prepared solely for private informational purposes for the pre qualified eligible contract participants to whom it was distributed. The INTL FC Stone Inc. group of companies act solely in the capacity of an arm s length counterparty and not in the capacity of your financial adviser or fiduciary. Prior to undertaking any transaction, you should discuss with your tax or other adviser how a particular transaction may affect you. Any opinions expressed are subject to change without notice and certain information is based upon information from third party sources which we have not independently verified. No part of this presentation may be (i) copied, photocopied or duplicated in any form by any means or (ii) redistributed without the prior written consent of INTL FCStone Inc. February Fertilizer Risk Management Bruce Kempf Bruce Kempf Risk Management Consultant 9 years at FCStone LLC Areas service: Commercial Grain & Fertilizer 2005 Graduate of Iowa State University Major Ag. Business & Economics 1

2 Fertilizer Risk Management INTL FCStone overview History of our Name INTERNATIONAL ASSETS Physical Metals FX/Payments/Securities Principal FARMERS COMMODITIES CORP. Commercial AG s Brazil Broker SAUL STONE Exchange Clearing Locals/Floor Brokers FX Prime Brokerage Corporate Overview INTL FCStone Inc. is a customer-centric business focused predominantly on mid-market customers. MISSION We seek to provide high-value-added financial solutions to allow our customers to efficiently and effectively utilize the financial markets to control risk and protect margins. We provide customers across the globe with execution and advisory services in commodities, capital markets, currencies, asset management and more. Our mission is founded on the concept of educating our customers in a transparent fashion. MARKET POSITIONING OF INTL FCSTONE INC. SUBSIDIARIES We have one of the leading franchises in grains and metals markets. We are one of the largest traders of agricultural and softs options and structured products designed to mitigate customer risk. We are a recognized leader in global payments and treasury management services. In many verticals, we are recognized as industry experts providing advisory services to id industry-leading di corporations. AS OF SEPTEMBER FCStone, LLC had $1.7 billion in required customer segregated funds, and executed more than 45.6 million exchangetraded contracts in fiscal year Serving more than 20,000 ACCOUNTS in more than 100 COUNTRIES through a network of more than 1,000 PROFESSIONALS across more than 33 OFFICES around the world. INTL FCStone traded more than $43 billion of physical commodities in Record adjusting operating revenues for fiscal year

3 Global Presence Located in Key Growth Markets U.S. Offices: New York (HQ) Bloomington Bowling Green Chicago Des Moines Indianapolis Kansas City Miami Minneapolis Nashville Omaha Orlando Saint Louis Spirit Lake Topeka International Asunción London Sydney Offices: Beijing Maringá Winnipeg Buenos Aires Montevideo Campinas Porto Alegre Ciudad del Este Recife Dubai São Paulo Dublin Shanghai Goiania Singapore INTL FCStone Corporate Corporate Overview Page 6 Fertilizer Risk Management Past,, Future Past History of Fertilizer Price Risk Management Fertilizer Futures Contracts: Launched in the early 90 s and early 2000 s Failed attempts for various reasons; >Physical delivery in wrong location >No price volatility; tough to get out >Ammonia contract.poor correlation >Limited speculative or fertilizer production participation 9 3

4 Past debacle Notice the correlation between New Orleans and Interior, Hedging opportunity 10 Past debacle 11 Past debacle 12 4

5 Past Impacts: The 08/09 fall in commodity prices Most fertilizer retailers lost big money on inventories as prices fell The tools to protect the risk was limited and not widely used The events of 08/09 changed the face of the fertilizer industry Some operations are now gone. mergers, partnership, so forth Many companies have had to partner with a supplier on storage facilities 13 Recent Price Volatility Recent Price Volatility DAP prices back up $150+, after being $100 lower last fall UAN moving higher in sympathy with urea, moving $70 off the lows Urea prices also moving higher since the Oct lows when most market participants were very bearish on plentiful supply 14 OTC Swaps Available Contracts Urea New Orleans, Urea Yuzhnyy, Urea Egypt DAP Tampa, p, DAP New Orleans UAN New Orleans ***Contract size 500st on all New Orleans based contracts all others 500mt **** Front 6 months, 4 quarters Contracts are cash settled to 3 index publishers FertilizerWeek, Fertecon and FMB 15 5

6 OTC Swaps Available continued Fertilizer Index Settlement Three publishers. 6 prices (3 lows, 3 highs) every Thursday High and low removed and remaining 4 prices posted Averaged each Thursday afternoon At the end of the month each week s pricing is Averaged to create a settlement price for the month Traded bi lateral, once transacted will reside in the customer s OTC account at his/her swap dealer Daily mark to mark, initial margin deposit, margin call potential 16 Liquidity & Volume Liquidity has been and will continue to be an issue in the near term however, more participants will eventually solve the issue Currently OTC bilateral & cleared swaps roughly is a 3.5 MMT market (World physical market is roughly 200MMT) 17 Business Practices Producer Wholesaler forward fertilizer prices.not readily available in forward positions Problem Grower doesn t have the ability to fix a major piece of his per acre profit if he s wanting to for next season Solution Retailers could buy OTC swaps in the forward positions, they could be positioned to increase market share and stay flexible on the ultimate supply source Procuring/buying product well in advance of selling to the grower Problem Puts you into a speculative/risk position and risk continues until tons are sold Solution Hedging the unsold inventory will widen the fill window and get ahead of logistical issues Back to Backing Problem Narrow margins, logistical issues, etc. Solution Hedging 18 6

7 Two Basic Hedge Strategies Short (Storage) Hedge (long unsold product in store/short paper) Long Hedge..(forward contract program with customer/long paper to cover) ****This leads to basis trading which reduces to less flat price risk resulting in more stable (and potentially improved) operation margins 19 Short Hedge (long physical inventory and sell paper to hedge) Offsets the price risk until the inventory is sold to the grower Best used when the forward curve is a carry Best to be aggressive when filling space and getting long the basis ahead of the seasonal periods where the basis is expected to gain Improved margin potential Better utilize storage capacity and logistics This past year farmers were reluctant to lock in fertilizer prices so many retailers were unwilling to get long many tons during summer fill or fall last year. Space set empty then we had rail & water traffic issues all winter making it difficult for inventory to get in place this past spring. Using a short hedge/storage hedge allows a retailer to lay in more product during summer fill and avoid these problems. 20 Short Hedge Scenario Situation #1 Buying Urea.unhedged Long inventory the risk is that prices fall and your inventory looses value Long 5,000 tons UREA, if price falls $10 dollars a ton you have $50,000 of risk or loss in inventory value Situation #1 Buying Urea.hedged Selling OTC, UREA Nola derivatives and being hedged now let you not worry about flat price, you can and should adjust your retail price with the market and basis becomes your focus As physical product is sold to the grower, derivative is bought in 21 7

8 Short Hedge Situation: It s early July, Buying or Long UREA in storage at +50 fob your facility.hedged with sold UREA Nola paper. Hold hedge into seasonal basis strength into year end and liquidate as the grower prices fertilizer. Three possible outcomes: 1) Basis Unchanged Date Physical Paper Basis unch. July 10 $470 bot $420 sold +50 long Nov 10 $500 sold $450 bot Both physical and paper markets appreciate $30/ton, basis remains unchanged at +50, on each 500 tons hedged and held in storage, a $30 gain in the physical market of $15,000 is offset with a $30 loss of $15,000 in the OTC derivative market. (Not including transaction or money costs) 22 Short Hedge Situation: Early July, Buying or Long UREA in storage at +50 fob your facility.hedged with sold UREA Nola paper. Hold hedge into seasonal basis strength into year end and liquidate as the grower prices fertilizer. Three possible outcomes: 2) Basis Gains Date Physical Paper Basis gains July 10 $470 bot $420 sold +50 long Nov 10 $465 sold $390 bot Both physical and paper markets decline, but paper market declined at a greater pace. Seasonal basis gains from +50 in July to +75 in Nov. On each 500 tons hedged and held in storage, (not including the cost of money or transaction costs), a $25 net gain in the hedge and nice improvement to margins. A $25 net gain in the hedge (+$12,500) as a result of the physical market loss of $2,500 offset with a $30 gain in the paper market of $15, Short Hedge Situation: Early July, Buying or Long UREA in storage at +50 fob your facility.hedged with sold UREA Nola paper. Hold hedge into seasonal basis strength into year end and liquidate as the grower prices fertilizer. Three possible outcomes: 3) Basis Loss Date Physical Paper Basis loss July 10 $470 bot $420 sold +50 long Nov 10 $440 sold $400 bot Both physical and paper markets decline, but physical declines at a greater pace. Seasonal basis improvement does not occur as basis of +50 in July backs off to +40 in Nov. On each 500 ton hedged and held in storage, (not including transaction or money costs) a $10 net loss in the hedge. A $10 net loss in the hedge (-$5,000) as a result of the physical market loss of $30/ton and a $20 gain in the paper. 24 8

9 Long Hedge (Buying paper to hedge physical sales) Selling Fixed Price Forward Contracts Best Used when the forward curve is flat or inverted Can be an advantage in gaining market share selling priced contracts to the grower before the fertilizer supplier establishes a price Keeps your options open to find the best market/supplier 25 Long Hedge Situation #2 Selling DAP forward unhedged Short inventory the risk is that prices rise and your margins shrink in value Short 5,000 tons of DAP, price rises $10 dollars a ton you have $50, of risk or loss in margins Situation #2 Selling DAP forward hedged Buying OTC, DAP Nola derivatives and being hedged now let you not worry about flat price, you adjust your retail price with the market and basis becomes your focus At some point (when basis is attractive/weak) physical product is bought and the hedge (long DAP paper) is sold/liquidated 26 Long Hedge Situation: Early spring Selling fall DAP to the grower at +60 (margin not included)...hold hedge into the seasonal basis weakness in Q3. Three possible outcomes: 1) Basis unchanged Date Physical Paper Basis-- unchanged Mar 10 $560 sold $500 bot +60 short Aug 10 $540 bot $480 sold Both physical and paper markets decline $20/ton and basis remains unchanged. Seasonal basis weakness does not occur as basis of +60 in Mar is at the same level in Aug On each 500 ton hedged (long paper vs. forward fixed price sale contract to grower) and held until physical is procured, no basis gain to add to normal margins. $20 gain on the physical market of $10,000 offsets a $20/$10,000 loss on paper. (Not 27 including transaction or money costs) 9

10 Long Hedge Situation: Early spring Selling fall DAP to the grower at +60 (margin not included)...hold hedge into the seasonal basis weakness in Q3. Three possible outcomes: 2) Basis weaker Date Physical Paper Basis-- weaker Mar 10 $560 sold $500 bot +60 short Aug 10 $600 bot $570 sold Our Desired outcome a weaker basis Both physical and paper markets advance, but the paper market is gaining at a greater pace. Seasonal basis weakness has occurred as basis of +60 in Mar is now +30 in August and physical tons are now purchased to replace the paper hedge adding $30/ton to margins On each 500 tons hedged, a $40 loss on the physical market of $20,000 is offset by a $70 gain of $35,000 on the paper instrument.a net of $15,000 (30/ton basis gain) (Not including transaction or money costs) 28 Long Hedge Situation: Early spring Selling fall DAP to the grower at +60 (margin not included)...hold hedge into the seasonal basis weakness in Q3. Three possible outcomes: 3) Basis stronger Date Physical Paper Basis stronger Mar 10 $560 sold $500 bot +60 short Aug 10 $490 bot $410 sold Both physical and paper markets move lower, but the paper market declines at a greater pace. Seasonal basis weakness has not occurred as basis of +60 in Mar is now +80 in August and physical tons are now purchased to replace the paper hedge On each 500 ton hedged, a $70 gain on the physical market of $35,000 is offset by a $90 loss of $45,000 on the paper hedge.a net loss to margins of $10,000 (20/ton basis loss) (Not including transaction or money costs) 29 Future Smaller 25ton Futures contracts available this October on the European Commodity Clearing & London Clearing House Greater market transparency through futures markets Increased open interest and volume Increased basis trading 30 10

11 THANK YOU INTL FCStone Fertilizer Group Bruce Kempf Ext Scott Kleckner Ext Gerry Meiners Ext