ag slides

Fundamental Factors Affecting Agricultural and Other Commodities

Research & Product DevelopmentFebruary 2011

© 2011 CME Group. All rights reserved

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

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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

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Agricultural Commodity Stocks Are Extremely Low

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SoybeanWheatCorn

WorldStocks-to-Use Ratio Current ratio versus the 10-year average ratio:

Corn at 13% vs. 17%Wheat at 21% vs. 24%

Soybean at 19% vs. 22%

13%

19%

21%


U.S. Planted AcresCorn and Soybean planted acres are at record levels as the industry attempts to keep pace with increasing world demand.

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Corn Soybeans All Wheat

USDA JanuaryEstimate


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Corn Price 30 Day Avg

Global supply concerns increased as consumption rises faster than production. World stocks-to-use ratio at historical low in 2008 at 12.6%.

Events Impacting Corn Prices Since January 2008

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Overall macro economic weakness adversely affected commodity prices during the last half of 2008.

Corn prices remained range bound for most of 2009 as a weak U.S. dollar, reduced feed demand and a larger than expected U.S. crop kept prices in check.

Corn prices surged during harvest in 2010 as reports filtered in from farmers that yields were far below trend line estimates. Early estimates were looking for a yield of 164.7, but the December 2010 USDA estimate was ratcheted down to 154.3 bushels per acre.


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30 Day Avg Wheat


Events Impacting Wheat Prices Since January 2008

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Spring wheat supplies almost depleted prior to harvest leading to a record high for all wheat classes. Prices then consolidated nearly 30% as prospects for a successful harvest relieved supply concerns.

Wheat prices remained primarily range bound for most of 2009 as a weak U.S. dollar and increasing world production kept prices from surging.

Severe drought hit the FSU damaging a majority of the region’s crop. This led to a wheat export ban from the world’s third largest wheat exporter. In addition to this, Australia’s crop was heavily damaged again due to drought conditions in some areas and major flooding in other wheat growing territories.


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Soybean Price 30 Day Avg

Events Impacting Soybean Prices Since January 2008

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Battle for 2008 acres and a very thin U.S. carry-out led prices to a historical high.


Prices started inching higher following low production numbers out of South America and lower than expected planting estimates for the U.S.

Prices stabilized as better than expected yields were reported in 2009 and demand stabilized.

Reports of dry conditions in South America which could lead to lower production in the region and continued demand from China led prices higher in the last half of 2010.


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Weak U.S. Dollar is a Key Driver of Increasing Commodity Prices

9Source: Bloomberg

Nearby Corn FuturesNearby Wheat FuturesNearby Soybean FuturesCurrency Adjusted (U.S. Dollar Index) Nearby Futures for each respective product

Wheat Prices

17%

Soybean Prices

17%

Corn Prices

17%

Corn, wheat and soybean prices would be at least 17 percent lower if the U.S. Dollar had

maintained its value from June 2006


Index Fund Net Long Positions Have Remained Steady in Corn Futures Market

10Source: www.cftc.gov

Index Net Long (Short) Positionsas % of OI Corn

Nearby PriceCents per Bushel

20%20%

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Index Net Long Positions as % of Open InterestNearby Corn Settlements

Though index fund positions as a percentage of open interest remained constant at around 20% over the last three years,

prices increased 25%.


Index Fund Net Long Positions Have Remained Steady in Wheat Futures Market

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Index Net Long (Short) Positions as % of OI

Nearby PriceCents per BushelWheat

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Index Net Long Positions as % of Open InterestNearby Wheat Settlements

Though index fund positions as a percentage of open interest remained steady over the last three years, prices have been consolidating for most of

this time period.

Source: www.cftc.gov


Index Fund Net Long Positions Have Declined in Soybean Futures Market

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Index Net Long (Short) Positions as % of OI

Nearby PriceCents per BushelSoybeans

24%21%

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Index Net Long Positions as % of Open InterestNearby Soybean Settlements

Index fund positions as a percentage of open interest declined 3% over the last three years while prices

increased 16%.



Changes in Non-Commercial Positions in Corn Have Low Correlations to Price Changes

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Corn Nearby PriceCents per BushelNet Long (Short)

Jan2008

Dec2010

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Non-Commercial Net Long (Short) as a % of Open Interest

Nearby Corn Settlements

Non-commercial positions varied over the last 3 years despite prices being fairly

stable. The correlation between changes in their

positions and price changes is 0.41.



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Non-Commercial Net Long (Short) as a % of Open InterestNearby Wheat Settlements

Changes in Non-Commercial Positions in Wheat Have Low Correlations to Price Changes

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Nearby PriceCents per BushelNet Long (Short) Wheat

Jan2008

Dec2010

Net positions for non-commercial participants are primarily net short

despite the recent increase in price. The correlation between changes in their




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Non-Commercial Net Long (Short) as a % of Open InterestNearby Soybean Settlements

Changes in Non-Commercial Positions in Soybeans Have Low Correlations to Price Changes

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Nearby PriceCents per Bushel

Net Long (Short) Soybeans

Jan2008

Dec2010

Non-commercial participants continue to

hold net long positions in soybeans. The correlation between changes in their




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Overseas Markets US Markets

Over Regulating US Commodity Markets Will Encourage Flow to the Already Active OTC Markets and Overseas Exchanges

16Source: BIS

*Through September 2010

Amounts Outstanding of OTC “Other” Commodity Forwards, Swaps, and Options (including energy)

Annual Volume Turnover for Exchange Traded Commodity Derivatives

7,861

12,580

4,0323,194

2,521 2,434

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Source: BIS

• The amount of outstanding OTC “Other” declined by almost 68% for the second half of 2008.• This sharp decline was tied to the overall weakness in commodity prices since the middle of

2008• Over 68% of exchange traded commodity derivatives are now traded in oversea markets.


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Margin Levels Have Increased As Volatility Has Increased

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Corn Volatility

Wheat Volatility

Soybean Volatility

Margin

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Margins are highly correlated with price volatility, which has been at record highs given low stocks-to-use ratios and growing global demand.


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Margin Levels Have Already Been Increased

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Corn Margins

Wheat Margins

Soybean Margins

Margin as a % of Contract Value

Corn

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gin

Mar

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% o

f Con

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Val

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Soybeans

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gin

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% o

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ue Wheat

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% o

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Val

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• Margins as a % of contract value increased 23% in corn, 46% in wheat and 34% in soybeans since January ‘08.

• Currently, margins as a % of contract value are 6.44% in corn, 8.50% in wheat and 6.30% in soybeans.


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 20051.

• 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.

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1 Single month and all month combined speculative position limits must be no greater than 10% of the average combined futures anddelta 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.


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’s commodity products serve as the benchmark for the world and these markets are working

• Over regulating US markets will encourage additional flow to growing OTC commodity markets and overseas exchange traded commodity products

• Speculative position limits for ag products are federally mandated and have been unchanged since December 2005

• CME Group’s commodity products serve as the benchmark for the world and these markets are working

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ag slides

Technology

bushel wheat prices

bushel corn prices

soybean prices impact

expected prices higher

increasing energy prices

commodity prices basic

bushelcorn prices cents

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