Is it time for a boneless beef trimmings derivative contract? David Farley 1 st March 2012

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1 Is it time for a boneless beef trimmings derivative contract? David Farley 1 st March 2012

2 Why does AAco care? 680,000 head of cattle Substantial price risk over which AAco has limited ability to take protection AAco

3 Number of contracts outstanding Why this is different? CME Live Cattle Futures Open Interest the markets have grown! Boneless beef futures market operating on the CME Chicago Mercantile Exchange (CME), 2011

4 Key Characteristics of a Successful Futures Contract Substantial price volatility Homogeneous product Large and growing cash market Large number of buyers and sellers Little pricing intervention by government Large deliverable supply Good information on cash markets

5 Key Characteristics of a Successful Futures Contract Substantial price volatility Homogeneous product Large and growing cash market Large number of buyers and sellers

6 USd/lb Increasing trim prices US domestic 90CL Jan Mar May Jul Sep Nov yr Avg USDA, 2011

7 USd/lb Very high volatility in trim markets US domestic fresh and imported frozen 90CL Domestic Fresh 90CL Imported Frozen 90CL Informa Economics/ AAco 2012

8 USd/lb Australian and New Zealand context Australian US Cow, NZ Cow and NZ Bull Prices Jan 11 - Present Feb 08-Jun Australia US Cow N. Zealand Cow ( k cwt) N. Zealand Bull ( cwt) AAco, 2012

9 04/26/03 07/26/03 10/26/03 01/26/04 04/26/04 07/26/04 10/26/04 01/26/05 04/26/05 07/26/05 10/26/05 01/26/06 04/26/06 07/26/06 10/26/06 01/26/07 04/26/07 07/26/07 10/26/07 01/26/08 04/26/08 07/26/08 10/26/08 01/26/09 04/26/09 07/26/09 10/26/09 01/26/10 04/26/10 07/26/10 10/26/10 01/26/11 04/26/11 07/26/11 10/26/11 US$/k Increasing volatility in trim markets, the volatility is widespread 3.50 Manufacturing Meat Prices Uruguay Manufacturing Argentina Manufacturing AAco 2012

10 Key Characteristics of a Successful Futures Contract Substantial price volatility Homogeneous product Large and growing cash market Large number of buyers and sellers

11 USd/lb Homogenous product price relationships USA Beef Trimmings Dom 90 85CL 75CL 65CL 50CL Informa Economics, USDA 2012

12 But what about primal cuts? USDA 2012

13 Key Characteristics of a Successful Futures Contract Substantial price volatility Homogeneous product Large and growing cash market Large number of buyers and sellers

14 Global protein consumption increasing 7.5% 41.4% 47.7% 29% 70.2% 23.7% 32.2% 48.7% 23.3% Food and Agricultural Policy Research Institute (FAPRI), 2010: Protein consumption over the past ten years

15 Thousand Metric Tons Developing countries increasing consumption 12,000 Beef consumption (including veal) 10,000 8,000 6,000 4,000 2, Brazilian Chinese Indian Other African Other Asian Food and Agricultural Policy Research Institute (FAPRI), 2011

16 Apr-03 Jul-03 Oct-03 Jan-04 Apr-04 Jul-04 Oct-04 Jan-05 Apr-05 Jul-05 Oct-05 Jan-06 Apr-06 Jul-06 Oct-06 Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 USD/kg World Steer Prices: Brazil, USA, Australia, Uruguay, Argentina 5.00 Global Manufacturing Prices Uruguay Best, +460k Argentina Domestic k Brazil Sao Paulo USA Steers Australia Trade Steer ( k) AAco, 2012

17 Cow and Bull Slaughter (000s) US Beef Imports (million lbs) US cow and bull slaughter v imports Cow & Bull Slaughter US Beef Imports USDA, Informa, 2011

18 Beef and veal imports 3,500,000 US Beef and Veal Imports by Country 000 pounds 3,000,000 2,500,000 2,000,000 1,500,000 1,000, , Canada Australia New Zealand Total U.S. Dept Commerce, Bureau of the Census, 2011

19 Key Characteristics of a Successful Futures Contract Substantial price volatility Homogeneous product Large and growing cash market Large number of buyers and sellers

20 Large number of buyers and sellers Californian dairy sector Japanese Importers Traders Hedge funds Day traders Pastoralists International trading houses Speculators Uruguayan exporters Packing houses Feedlotters JBS/ Cargill Australian beef processors New Zealand bull farmers New Zealand processors AAco New Zealand dairy sector Australian beef producers

21 1,000 Metric Tons Global beef (including veal) production (p) 2011(f) USDA/FAS, Informa, 2011

22 Key Characteristics of a Successful Futures Contract Substantial price volatility Homogeneous product Large and growing cash market Large number of buyers and sellers

23

24 Current reporting mechanisms USDA Blue Sheet (domestic) USDA mandatory pricing Yellow Sheet (imports) Is this sufficient?

25 Key Characteristics of a Successful Futures Contract Substantial price volatility Homogeneous product Large and growing cash market Large number of buyers and sellers

26 Is it time for a boneless beef derivative contract? David Farley 1 st March 2012

27 Scott Hansen Managing Director - MLA SAFF Livestock Industry Seminar

28 CME Group Agricultural Products Brisbane, March 2012

29 CME Group Agricultural Products Grains & Oilseeds Livestock Dairy Forestry Commodity Indexes Weather OTC Clearing 2011 CME Group. All rights reserved 29

30 2011 CME Group. All rights reserved 30

31 2011 CME Group. All rights reserved 31

32 ADV (in thousands of round turns) 600 OTC Clearing Services: CME ClearPort Strong track record in energy markets with deep liquidity in key industry benchmarks , , , ,197* , , ,720 1,200+ products 14,000 users ,137 56,971 0 Product Launches Key Product Additions Coal Nat Gas Crude Petroleum Products Crude Crude Petroleum Products Crude Natural Gas Electricity Crude Petroleum Products Cleared OTC Ag and GSCI Swaps Cleared OTC London Gold Forwards Freight, Coal, Iron Ore Legacy CME/CBOT ex pit transactions Electricity Delivered Nat Gas Ferrous Metals Electricity Refined Products *As of 12/8/ CME Group. All rights reserved 32

33 Bilateral vs. Cleared Swaps Bilateral Cleared Credit Exposure Credit exposure to the swap counterparty Credit exposure is to CME Clearing Margin Requirements Documentation Counterparties Depends on the relative credit worthiness of the counterparties Swaps trade under an ISDA master agreement and schedule of amendments that can take 4-16 weeks to get in place Limited to market makers with whom the swap user has an ISDA and credit line Exchange sets margin with possible offsets against other exchange traded products For customers with an existing futures account, you can register online Open to any swap market maker who will give up the transaction to be cleared on CME Flexibility Complete flexibility Limited flexibility but may be greater than exchange traded futures Exit Liquidity May be limited to the original trade counterparty depending on structure Open to any OTC provider who will give up the transaction to be cleared on CME 2011 CME Group. All rights reserved 33

34 Existing Swap Volume Over the past 12 Months Feb, to date 2011 CME Group. All rights reserved 34

35 Disclaimer Futures trading is not suitable for all investors, and involves the risk of loss. Futures are a leveraged investment, and because only a percentage of a contract s value is required to trade, it is possible to lose more than the amount of money deposited for a futures position. Therefore, traders should only use funds that they can afford to lose without affecting their lifestyles. And only a portion of those funds should be devoted to any one trade because they cannot expect to profit on every trade. All references to options refer to options on futures. CME Group is the trademark of CME Group, Inc. The Globe Logo, Globex and CME are trademarks of Chicago Mercantile Exchange Inc. CBOT is the trademark of the Board of Trade of the City of Chicago. NYMEX is the trademark of the New York Mercantile Exchange, Inc. The information within this presentation has been compiled by CME Group for general purposes only. CME Group assumes no responsibility for any errors or omissions. Although every attempt has been made to ensure the accuracy of the information within this presentation, CME Group assumes no responsibility for any errors or omissions. Additionally, all examples in this presentation are hypothetical situations, used for explanation purposes only, and should not be considered investment advice or the results of actual market experience. The information contained in this presentation represents the views and opinions of the speaker and are not necessarily the views of CME Group. All matters herein pertaining to requirements for membership and clearing membership, clearinghouse procedures, contract specifications and other matters governed by our rules are made subject to and are superseded by official CME, CBOT, NYMEX and COMEX rules and other governing documents. Current rules should be consulted in all cases concerning contract specifications. Copyright 2011 CME Group. All rights reserved CME Group. All rights reserved

36 2011 CME Group. All rights reserved

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