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Michael O’Dea | Risk Management Consultant Commercial Grain Division FCStone, LLC Grain Outlook AUGUST 2012 INTL FCStone Inc. | www.intlfcstone.com.

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Presentation on theme: "Michael O’Dea | Risk Management Consultant Commercial Grain Division FCStone, LLC Grain Outlook AUGUST 2012 INTL FCStone Inc. | www.intlfcstone.com."— Presentation transcript:

1 Michael O’Dea | Risk Management Consultant Commercial Grain Division FCStone, LLC Grain Outlook AUGUST 2012 INTL FCStone Inc. |

2 “It’s tough to make predictions… especially about the future!” Lawrence P. “Yogi” Berra “Anyone who believes that exponential growth can go on forever in a finite world is either a madman or an economist.” Kenneth Boulding (an economist) Disclaimer

3 Commodity trading involves risks, and you should fully understand those risks prior to trading. FCStone Group, Inc., INTL FCStone, Inc., and their affiliates assume no liability for the use of any information contained herein. Neither the information, nor any opinion expressed shall be construed as an offer to buy or sell any futures, options on futures contracts, or OTC products. Past financial results are not necessarily indicative of future performance. Any examples given 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. References to and discussions of exchange traded products are made solely on behalf of FCStone, LLC. References to and discussions of OTC products are made solely on behalf of INTL Hanley, LLC, and OTC products are only available to eligible counterparties. Information contained herein was obtained from sources believed to be reliable, but is not guaranteed as to its accuracy. Any opinions expressed herein are subject to change without notice. Reproduction or use in any format without authorization is forbidden. All rights reserved. Real Disclaimer

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5 We serve more than mainly commercial customers in more than countries through a network of more than employees In offices around the world. 3 INTL FCStone Inc. is a customer-centric business focused on mid-market customers. Serving more than 20,000 CUSTOMERS in more than 100 COUNTRIES through a network of over 1,000 PROFESSIONALS across 39 OFFICES around the world. AS OF SEPTEMBER, 2011…  FCStone, LLC had $1.4 billion in required customer segregated customer assets, and executed more than 28.8 million exchange-traded contracts in fiscal year  INTL FCStone traded more than $75 billion of physical commodities in  Record operating revenues and net income for fiscal year 2011 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.  Our mission is founded on the concept of educating our middle market customers in a transparent fashion.  We provide customers across the globe with execution and advisory services in commodities, capital markets, currencies, asset management and more. MARKET POSITIONING  We have one of the leading franchise’s 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 advice to industry-leading corporations. Corporate Overview

6 Macro Market Price Discovery – Is it art, science or voodoo ? Supply and Demand back in focus World Economy - Demographics Global currencies – USD Vs. Euro Vs. Yuan Global Energy supplies/US Ethanol program –Money flow into commodities Fund money and order flow HFT and market disruption. –Geopolitical Regional Issues Middle East (Syria, Iran) European Politics in wake of Financial Crisis US and World Election Cycle China – South China Sea new flashpoint ?

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8 Maplecroft.com

9 Assumptions: High-fertility: Until 2010, no fertility reduction or only an incipient decline; Medium-fertility: Fertility declining but estimated level still above 2.1 in ; Low-fertility: Total fertility at or below 2.1. Source: Population Division of the Department of Economic and Social Affairs of the United Nations Secretariat, World Population Prospects: The 2010 Revision. 9.3 billion World Population

10 Assumption: Medium-fertility variant. Source: Population Division of the Department of Economic and Social Affairs of the United Nations Secretariat, World Population Prospects: The 2010 Revision. Most Populous Countries

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15 MONEY FLOW INTO COMMODITIES Who are trading these markets now? –Hedgers Grain handlers, consumers and traders. –Speculators Directional traders HFT – High Frequency Traders –Black box – SP/Crude/Currencies – moving into AGS. –View of markets – highly correlated –My view very disruptive Index Funds/ETFS –DB PowerShares Commodity Index as of 6/30/12 –Sector weightings Energy 55%, AG 22.5%(C 5% W 5% S 5% sugar 5%) Ind. Metals 12.5% Precious Metals 10% –Returns ? YTD -3.51% 1 yr % 5 yr. 1.31% Incept 3.02%

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21 CRB has rallied from negative trend

22 China Disposable Income

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25 South China Sea = Resources

26 Wheat United States and World Supply and Demand Information INTL FCStone Inc. |

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29 Wheat Fundamentals Wheat demand outpaces production – increase in exports and feeding.

30 Feeding HRW 335 mb Feeding HRW 50 mb SRW 140 mb SWW 30 mb Total 220 mb

31 CME Wheat/Corn Spread Weekly Chart – wheat market did Its job of moving to feed grain values But now does market need to build Risk premium in and take it out of the feeding equation ?

32 KWZ/CZ SPREAD

33 Sharp increase in US exports dues to smaller estimated world wheat production mainly from the Black Sea countries.

34 Carryout is at a 104 day supply

35 World carryout reduced on smaller production but still above Wheat Fundamentals

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40 If Russian production is 40 mmt or less at the current pace of Exports they would need to shut down exports by October to Maintain a historical carryout to use ratio. WTO entry makes an embargo more problematic but it cannot Be ruled out, interesting to see multinational grain companies Aggressive sellers of Russian wheat in latest tenders.

41 Wheat Fundamentals

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49 Carryout is at a 95 day supply Wheat Fundamentals

50 WHEAT FORWARD LOOK –Fundamentals: World Supply/Demand has shifted. Smaller World production/ending stocks have changed market attitude from bearish to nervous in the short term. Black Sea production issues will shift export demand back to US, Canada and the EU, will the EU need to ration exports ?. –Basis is firm as demand continues to be strong. Feeders and new KC storage rates compete for bushels. Rally in futures has seen producer sell – who will be a seller of this market with corn/bean action ? Basis will have to do the work if flat price or spreads will not. –Over The Horizon Weather Threats – Australia El Nino can sharply lower production, September critical, US HRW areas need rains for fall planting. Break up of CWB still a work in progress – more imports into US but “transparent” exports. Smaller production in Argentina due to Government actions.

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52 Wheat Fundamentals

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54 US Supply Demand Alt/2012/13

55 WORLD S/D World Supply/Demand Notes: These numbers are my estimate on the 12/13 they reflect smaller Black Sea and Australian production from USDA. 2007/8 is listed as a reference but note that C/O to use that year was 20.7% and if demand did stay constant in this estimate the 12/13 C/O % estimate would be on that pace – but I would expect demand to drop with this type of projection as futures prices would cut demand. Remarkable to look at this S/D just 6 months ago estimates had Carryout over 200 mmt.

56 Supply issue Outliers – Corn price elevates wheat VS C/O to USE ratio

57 Corn United States and World Supply and Demand Information INTL FCStone Inc. |

58 Corn Fundamentals

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60 USDA has yield at 123.4/bu acre Harvested Acres at 87.4/million acres

61 Market is in rationing mode.

62 WORLD CORN EXPORTS

63 Ethanol = 40.6% of last years corn crop Ethanol = 41.6% of this years corn crop EPA waiver is not the silver bullet to reduce Corn usage – ethanol is integrated into the US gasoline complex, economics will the issue. Corn Fundamentals

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68 DDG’s - One ton of DGS’s replaces 1.25 ton of corn.

69 Livestock sector to take the brunt of rationing. Corn Fundamentals

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72 Brazilian corn already working

73 Corn Fundamentals Corn carryout at a 21 day supply

74 Corn Fundamentals

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76 Smaller FSU-12 corn exports due to Drought reducing production in the Ukraine and Russia Corn Fundamentals

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79 Corn World Carryout 52 days Supply

80 Corn Fundamentals

81 FARPI Estimate on China corn Imports going forward Record yields/production needed for 13/14 crop cycle

82 Corn Fundamentals USDA has China corn production at 200 mmt What if that number is to high ?

83 China Information provided by Troy Lust, FCStone LLC Risk Manager Des Moines Office

84 Crop scouts after walking a corn field, got a few Army worms,,,

85 Domestic corn prices have not yet reacted to the Rally in CME corn futures.

86 Corn Fundamentals

87 China 49.6% of Hog Production

88 Corn Fundamentals

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90 CORN FORWARD LOOK –Fundamentals: Markets have added Risk Premium. US corn production and corn stocks have been reduced, trade looking for smaller numbers going forward, small crops get smaller, big crops get bigger. Corn futures have rallied to $8.50 and stalled, smaller production can take futures higher post harvest – true rationing will be late in the crop cycle and be done by basis and inverses in the markets. US Ethanol will not go away till they run out of money. –Demand and price. Wheat/Corn spread will encourage more wheat feeding. Producer may be limited seller at harvest – yields and insurance. –Over The Horizon - China corn production reports will be watched closely. Political intervention in markets, ethanol, export taxes etc. New crop corn plantings – prices to encourage more area. Shift to El Nino is good for both US and South American weather.

91 CORN SUPPLY/DEMAND

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93 Soybeans United States and World Supply and Demand Information International Assets Holding Corporation |

94 Soybean Fundamentals

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98 15 Days of Soybean Carryout

99 Soybean Fundamentals

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107 Chinese Soybean Crush

108 Soybean Fundamentals

109 SOYBEANS – FORWARD LOOK –Fundamentals – “Market out of control” USDA Crop report reducing US production and carryout, showing a minimum pipeline of 115 mb a 15 day supply. US can literally run out of soybeans in the spring. –South American production to rebound - USDA estimating South American production up 1.25 bb. South American producer aggressively selling new crop beans as they receive record prices. Shift to El Nino weather pattern will help production. –Over The Horizon - Dislocation of stocks – World forced to source beans from the US until new crop S/A production comes online Even if South American crop rebounds market will face inadequate logistic capacity to supply demand – force more business to US. Disruption of futures markets – potential cash convergence issues in the summer.

110 Soybeans—A look forward

111 Soybean Fundamentals

112 Average age of US Farmer is 60 Biggest threat to US Ag may be demographics

113 The Bubble

114 Commodity trading involves risks, and you should fully understand those risks prior to trading. FCStone Group, Inc., INTL FCStone, Inc., and their affiliates assume no liability for the use of any information contained herein. Neither the information, nor any opinion expressed shall be construed as an offer to buy or sell any futures, options on futures contracts, or OTC products. Past financial results are not necessarily indicative of future performance. Any examples given 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. References to and discussions of exchange traded products are made solely on behalf of FCStone, LLC. References to and discussions of OTC products are made solely on behalf of INTL Hanley, LLC, and OTC products are only available to eligible counterparties. Information contained herein was obtained from sources believed to be reliable, but is not guaranteed as to its accuracy. Any opinions expressed herein are subject to change without notice. Reproduction or use in any format without authorization is forbidden. All rights reserved. DISCLAIMER


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