Fundamental Factors Affecting Agricultural and Other Commodities Research & Product Development Updated July 11, 2008
Outline Review of key supply and demand factors affecting commodity markets World stocks-to-use levels for corn, wheat and soybeans Current events impacting corn, wheat and soybean prices Impact of U.S. dollar depreciation on commodity prices Global growth of agricultural futures market Index fund positions as a percentage of open interest Non-commercial positions and their correlations to price changes Margin and speculative position limits 2
Highlights Our Markets are Working Many Factors Affect Commodity Prices Basic Supply and Demand Principles Weather and disease limiting supply Growing demand from developing countries Higher input costs related to increasing energy prices Falling U.S. dollar Biofuel production increases Limited additional farmland in the short run Restrictive export policies from some major exporters No Evidence Index Funds or Non-Commercial Participation is Adversely Affecting Grain and Oilseed Markets Index fund participation has decreased or remained steady Non-commercial participation in our markets has low correlations to recent changes in prices 3
Agricultural Commodity Stocks Are Extremely Low World Stocks-to-Use Ratio 4 Current ratio versus the 10-year average ratio: Corn at 13% vs. 22% Wheat at 19% vs. 28% Soybean at 21% vs. 22% 35% 3 Soybean Wheat Corn 25% 21% 19% 15% 13% 1 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Source: www.usda.gov 4
Events Impacting Corn Prices Since June 2006 Price $8.00 Global supply concerns increase, as consumption rises faster than production. World stocks-to-use ratio at historical low in 2007 at 14.2% and projected to decline further to 12.6% in 2008. Corn Price $6.00 Battle for acreage due to increase in renewable fuels mandates. Prices stabilize due to largest planted crop since 1946. Over 93 million acres planted. 30 Day Average $4.00 Flooding occurs throughout the U.S. Midwest that could decrease yield and overall production. $2.00 $0.00 6/12/06 8/12/06 10/12/06 12/12/06 2/12/07 4/12/07 6/12/07 8/12/07 10/12/07 12/12/07 2/12/08 4/12/08 6/12/08 5
Events Impacting Wheat Prices Since June 2006 Price $14.00 $10.50 $7.00 Australian crop cut almost in half due to drought. Australian crop cut almost in half for the second year in a row due to drought. Late spring frost occurred in the U.S. that damaged emerging crop. Wheat Price 30 Day Average $3.50 Spring wheat supplies almost depleted prior to harvest leading to a record high for all wheat classes. Following the record high, prices consolidated nearly 3 as prospects for a successful harvest relieved supply concerns. $0.00 6/12/06 8/12/06 10/12/06 12/12/06 2/12/07 4/12/07 6/12/07 8/12/07 10/12/07 12/12/07 2/12/08 4/12/08 6/12/08 6
Events Impacting Soybean Prices Since June 2006 Price $18.00 $15.00 $12.00 Following harvest, prices continued to increase due to concerns that too many acres would be shifted to corn to meet the new renewable fuels mandates. Wet and cool spring turning into a hot and dry summer led to increased crop stress. In addition, planted acres were reduced, as corn acreage hit a record high. Battle for 2008 acres and a very thin U.S. carry-out led prices to a historical high. Soybean Price 30 Day Average $9.00 Flooding occurs throughout the U.S. Midwest that could decrease yield and overall production. $6.00 $3.00 $0.00 6/12/06 8/12/06 10/12/06 12/12/06 2/12/07 4/12/07 6/12/07 8/12/07 10/12/07 12/12/07 2/12/08 4/12/08 6/12/08 7
Weak U.S. Dollar is a Key Driver of Increasing Commodity Prices Cents per Bushel 800 Corn Prices Cents per Bushel 1400 Wheat Prices 700 1200 600 1000 500 800 400 600 300 400 200 Jan. 3, 2006 Jul.1, 2008 200 Jan. 3, 2006 Jul.1, 2008 Cents per Bushel 1600 1400 1200 Soybean Prices Nearby Corn Futures Nearby Wheat Futures Nearby Soybean Futures Currency Adjusted (U.S. Dollar Index) Nearby Futures for each respective product 1000 800 600 Corn, wheat and soybean prices would be at least 20 percent lower if the U.S. Dollar had maintained its value from January 2006 400 Jan. 3, 2006 Jul.1, 2008 Source: Bloomberg 8
Index Fund Net Long Positions Have Decreased in Corn Futures Market Index Net Long (Short) Positions as % of OI Corn Nearby Price Cents per Bushel 7 800 6 700 Though index fund positions as a percentage of open interest declined from 27% to 21% over the last two years, prices increased 224%. 5 4 3 27% 21% 600 500 400 300 200 1 100 Jan 2006 Index corn positions as % of open interest Nearby corn futures Jun 2008 0 Source: www.cftc.gov 9
Index Fund Net Long Positions Have Decreased in Wheat Futures Market Index Net Long (Short) Positions as % of OI 10 Wheat Nearby Price Cents per Bushel 1,400 9 1,200 Though index fund positions as a percentage of open interest declined from 49% to 41% over the last two years, prices increased 151%. 8 7 6 5 4 3 49% 41% 1,000 800 600 400 200 1 Jan 2006 Index wheat positions as % of open interest Nearby wheat futures 0 Jun 2008 Source: www.cftc.gov 10
Index Fund Net Long Positions Have Remained Steady in Soybean Futures Market Index Net Long (Short) Positions as % of OI 7 Soybeans Nearby Price Cents per Bushel 1,800 6 1,600 Index fund positions as a percentage of open interest increased slightly from 24% to 27% over the last two years while prices increased 139%. 5 4 3 24% 27% 1,400 1,200 1,000 800 600 400 1 200 Jan 2006 Index soybean positions as % of open interest Nearby soybean futures Jun 2008 0 Source: www.cftc.gov 11
Changes in Non-Commercial Positions in Corn Have Low Correlations to Price Changes Corn Net Long (Short) 4 Nearby Price Cents per Bushel 800 35% 3 25% 15% 1 5% 700 600 500 400 300 200 100 Non-commercial net long positions decreased as a percent of open interest even as the corn market has rallied. The correlation between changes in their positions and price changes is 0.15. Dec 2007 Nearby Corn Futures Non-Commercial net long (short) positions as a percentage of open interest 0 Jun 2008 Source: www.cftc.gov 12
Changes in Non-Commercial Positions in Wheat Have Low Correlations to Price Changes Wheat Net Long (Short) 25% Nearby Price Cents per Bushel 1200 15% 1 5% Dec 2007 12/31/2007 Jun 2008 1000 800 600 400 Net positions for non-commercial participants have changed several times over this period from being net long to net short. The correlation between changes in their positions and price changes is 0.37. -5% -1 Nearby Wheat Futures Non-Commercial net long (short) positions as a percentage of open interest 200 0 Source: www.cftc.gov 13
Changes in Non-Commercial Positions in Soybeans Have Low Correlations to Price Changes Net Long (Short) Soybeans Nearby Price Cents per Bushel 5 1800 45% 4 35% 3 25% 15% 1 1600 1400 1200 1000 800 600 400 Non-commercial participants continue to hold net long positions in soybeans. The correlation between changes in their positions and price changes is 0.27. 5% 200 Dec 2007 Nearby Soybean Futures Non-Commercial net long (short) positions as a percentage of open interest Jun 2008 0 Source: www.cftc.gov 14
Prices in Commodity Markets with Little or No Speculator Participation Also Have Increased Prices for commodities - that do not have speculator participation - also are on the rise as demand outpaces supply Source: CME Group and Bloomberg 15
Rough Rice Prices Increase as Consumption Outpaces Production $25.00 $23.00 $21.00 Rough Rice prices have increased 188% since the first of 2005 and 42% since the beginning of 2008 Adverse weather leading to short crop and disease issues in major rice producing countries around the world. $19.00 $17.00 $15.00 $13.00 Prices steadily increasing due to production growing at a slower pace than consumption & the world stocks-to-use ratio being at its lowest level in over 20 years. $11.00 $9.00 $7.00 $5.00 1/3/2005 2/3/2005 3/3/2005 4/3/2005 5/3/2005 6/3/2005 7/3/2005 8/3/2005 9/3/2005 10/3/2005 11/3/2005 12/3/2005 1/3/2006 2/3/2006 3/3/2006 4/3/2006 5/3/2006 6/3/2006 7/3/2006 8/3/2006 9/3/2006 10/3/2006 11/3/2006 12/3/2006 1/3/2007 2/3/2007 3/3/2007 4/3/2007 5/3/2007 6/3/2007 7/3/2007 8/3/2007 9/3/2007 10/3/2007 11/3/2007 12/3/2007 1/3/2008 2/3/2008 3/3/2008 4/3/2008 5/3/2008 6/3/2008 $ per Hundred Weight Expectation of export tariffs being lifted in major rice producing countries eased world rice prices. Source: CME Group 16
Over Regulating US Commodity Markets Will Encourage Flow to the Already Active OTC Markets and Overseas Exchanges 65% growth in OTC commodities in two years while overseas exchange traded commodity market is now 58% of global annual volume OTC commodity market is estimated at 5 times the size of the exchange traded commodity market $9,000 $8,000 Amounts Outstanding of OTC Other Commodity Forwards, Swaps, and Options (including energy) 1,600 1,400 Annual Volume Turnover for Exchange Traded Commodity Derivatives mount outstanding in $ Trillions A $7,000 $6,000 $5,000 $4,000 $3,000 Number of contracts in millions 1,200 1,000 800 600 Overseas Markets US Markets $2,000 400 $1,000 200 $0 2005 2006 2007 0 2005 2006 2007 Source: BIS 17
8 7 6 5 4 3 1 $0 $7,000 $6,000 $5,000 $4,000 $3,000 $2,000 $1,000 $0 18 Jan-08 Apr-08 Jan-03 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 Apr-08 Margin Levels Have Increased As Annualized Volatility Has Increased 5 Corn $2,500 4 $2,000 3 $1,500 $1,000 1 $500 $0 6 5 $6,000 $5,000 4 $4,000 3 $3,000 $2,000 1 $1,000 Jan-03 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 Jan-03 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 Soybeans Margins are highly correlated with price volatility, which has been at record highs given low stocks-to-use ratios and growing global demand. Corn Volatility Wheat Volatility Soybean Volatility Margin Wheat Source: CME Group Volatility Margin Volatility Volatility Margin Margin
Margin Levels Have Already Been Increased $2,500 $2,000 $1,500 $1,000 $500 Corn 9% 8% 7% 6% 5% 4% 3% 2% Margins as a % of contract value increased 21% in corn, 99% in wheat and 79% in soybeans since Jan 03. Currently, margins as a % of contract value are 5.5% in corn, 14.3% in wheat and 7.3% in soybeans. 1% $0 $7,000 $6,000 1 Soybeans Wheat $6,000 9% $5,000 $4,000 $3,000 $2,000 $1,000 8% 7% 6% 5% 4% 3% 2% 1% $5,000 $4,000 $3,000 $2,000 $1,000 $0 $0 18% 16% 14% 12% 1 8% 6% 4% 2% 19 Jan-03 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 Jan-03 A pr-03 Jul-03 Oct-03 Jan-04 A pr-04 Jul-04 Oct-04 Jan-05 A pr-05 Jul-05 Oct-05 Jan-06 A pr-06 Jul-06 Oct-06 Jan-07 A pr-07 Jul-07 Oct-07 Jan-08 A pr-08 Jan-03 A pr-03 Jul-03 Oct-03 Jan-04 A pr-04 Jul-04 Oct-04 Jan-05 A pr-05 Jul-05 Oct-05 Jan-06 A pr-06 Jul-06 Oct-06 Jan-07 A pr-07 Jul-07 Oct-07 Jan-08 A pr-08 Margin Corn Margins Margin as a % of Contract Value Wheat Margins Soybean Margins Margin as a % of Contract Value Margin Margin as a % of Contract Value Margin Margin as a % of Contract Value Source: CME Group
Speculative Position Limits for Ag Markets Have Not Increased Since December 2005 Speculative position limits are federally mandated in CFTC Reg 150.2. They are determined by a formula and have not been increased since Dec 2005 1. Spot Month speculative limits have not changed during this time. They are 600 contracts for Corn, Soybeans, Wheat, and Oats; 540 contracts for Soybean Oil; and 720 contracts for Soybean Meal. Single Month Position Limits All Months Combined Position Limits Prior July '99 July '99 - July '05 July '05 - Dec '05 Post Dec '05 Prior July '99 July '99 - July '05 July '05 - Dec '05 Post Dec '05 Corn 3,400 5,500 9,500 13,500 5,000 9,000 15,500 22,000 Soybeans 2,400 3,500 5,000 6,500 4,000 5,500 7,750 10,000 Wheat 2,100 3,000 4,000 5,000 3,200 4,000 5,250 6,500 Oats 900 1,000 1,200 1,400 1,200 1,500 1,750 2,000 Soybean Oil 2,000 3,000 4,000 5,000 3,100 4,000 5,250 6,500 Soybean Meal 2,200 3,000 4,000 5,000 3,400 4,000 5,250 6,500 1 Single month and all month combined speculative position limits must be no greater than 1 of the average combined futures and delta adjusted month end open interest for the most recent calendar year up to 25,000 contracts with a marginal increase of 2.5% of the remaining open interest thereafter. 20
Summary When basic supply and demand principles are studied, it is clear that many factors affect commodity prices There is no evidence that the participation of non-commercials is adversely affecting grain and oilseed markets Speculators help form efficient, liquid markets Speculators have continued to hold relatively constant percentages of open positions in most markets CME Group margin levels are reflective of the current market conditions and are closely monitored by CME Clearing House Speculative position limits for ag products are federally mandated and have been unchanged since December 2005 Over regulating US markets will encourage additional flow to growing OTC commodity markets and overseas exchange traded commodity products CME Group s commodity products serve as the benchmark for the world and these markets are working 21