1. Dr. Robert Wisner: Grain Outlook 3/15/06 Iowa State University AgMarketing Resource Center AgMarketing Resource Center Increasing Risk Exposure & Risk-Management Challenges in Today’s Grain Markets 3/27/08 Dr. Robert Wisner, University Professor & BioFuels Economist

2. BioFuels Lead to Highly Volatile Grain Markets Prices Explosive With Weather Prob. Loss of Marketing Alternatives –Grain industry offers only basis contracts beyond ‘08 crop --Some Buyers offer only basis contracts starting fall ’08 Options + revenue insurance are the remaining risk mgt. tools Basis Risk Greatly Increased

3. Minneapolis Wheat: New definition of highly Volatile market Two contracts created up to $38,500 loss (or gain) in six-day limit locked down move Maximum daily limit increased with days of limit moves Has seen 7 consecutive limit up days A preview of corn & SB with weather problems? Spread risk (Like HTA problem in ’96)

4. Risk Issues, II Some new-generation grain contracts not well tested in extreme mkt. volatility Example: Premium-offer contracts that sell call options for next year’s crop Accumulator contracts (Appear to involve sale of over-the-counter options) Any others that involve sale of options

5. Example Grain Elevator Position From Dr. Roger Ginder, ISU

6. Many elevators don’t have net worth & credit lines to cover such large needs plus other financing.

8. Where is the Risk Coming From & Will it Change?

9. Bio-Fuels: A Global Development -- With Record Low World Grain Stocks Driving Forces: –High crude petroleum prices –Concern over green-house gas Emissions –Government policies –Energy security

10. Corn-ethanol only partial solution to energy challenges  Other feedstocks needed Municipal wastes Animal agriculture wastes Forest product wastes New crops  New automotive technology Hybrid gas/electric vehicles New engine & vehicle designs Hydrogen fuels & fuel cells  Diversification of energy sources  Incentives for increased mass transportation  Wind power use increasing

11. Recent Positive Developments in Biofuels Demand 2007 Energy Bill & mandates & implementation mechanism + penalties New Union Pacific rapid ethanol train receiving & unloading facility in Dallas North Iowa ethanol shipping facility Substantial ethanol market opening in Florida & movement toward opening other southeast markets California state government commitment to reduce green-house gas emissions Higher gasoline prices?

12. West Texas Intermediate Crude Oil 0 10 20 30 40 50 60 70 80 90 100 19601965197019751980198519901995 2000 2005 dollars/barrel (monthly average price) Down-side risk in crude oil prices?

13. U.S. 2007 Energy Bill For 2008: Requires U.S. renewable fuels production at 9 bil. gallons For 2009: 11.1 bil. gallons For 2015: 15 bil. gallons corn-based ethanol (57 bil. liters) For 2009: 500 mil. gallons of biodiesel (1 bil. gallons for 2015)For 2009: 500 mil. gallons of biodiesel (1 bil. gallons for 2015)

14. Source: Dr. Terry Francel, American Farm Bureau Federation & U.S. Energy Dept.

15. Cautions in 2008-09 Grain Markets 1.Fund Traders – index funds as hedgers add potential volatility 2.Bio-diesel economics not good, no mandate until 2009. 2.Domestic user returns tighten with higher corn prices – livestock & fuel

16. Ethanol, demand growth & food inflation shifting China from to corn exporter to importer? 41 Countries Encourage Biofuels

17. U.S. expansion Continuing Changes in U.S. Ethanol Plants, 7/27/07 to 3/14/08 (From DTN) 1/8/08 3/14/08 7/27/07 11/6/07 1/8/08 3/14/08 U.S. Opr. Plants 134 139 163 171 Under Const. 89 91 81 74 35 under construction a year or more Planned plants 329 343 336 341 Total 552 572 580 586

18. Recent Start-ups & Soon to be on Line U.S. Ethanol Plants Location Mil. Gal. Cap. Date Pikely, CA 40 AprilPikely, CA 40 April Lima, Ohio 54 MarchLima, Ohio 54 March Greenville, OH 110 MarchGreenville, OH 110 March Hennepin, IL 100 AprilHennepin, IL 100 April Cambria, WI 40 AprilCambria, WI 40 April Coshocton, OH 60 MarchCoshocton, OH 60 March St. Ansgar, IA 100 MarchSt. Ansgar, IA 100 March Monona, IA 100 AprilMonona, IA 100 April Alexanderia, IN 65 Mid-AprilAlexanderia, IN 65 Mid-April Volney, NY 41 May-JnVolney, NY 41 May-Jn Total 710

19. 2007-08 U.S. corn supplies adequate to meet demand Crop up 24% -- 20% increase in corn hectares But at expense of: –16% decline in soybean planted area –29% decline in cotton area –8% decline in non-durum spring wheat –Declines in minor crops Soybean supplies tighten substantially, increased plantings needed in 2008Soybean supplies tighten substantially, increased plantings needed in 2008 More U.S. corn will be needed in 2009,More U.S. corn will be needed in 2009, 2010, 2011

23. Historical & Needed U.S. Corn Yield Deviation Needed From Trend 0.7 0.0 -10.2 0.0 16.2 1.8 0.9 3.3 3.8 7.5 11.8 13.4 14.0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Other Considerations: Sharp increase in marginal Corn acres  Very tight fertilizer supplies  Corn-on-corn yield drag  Low C-o-C yields in bad weather

26. International Impacts U.S. ethanol plants under construction to use 1.9 bil. bu. of corn (About 65% increase) –Over 3 times the volume of Japan imports of U.S. corn –105% of 2007 EU corn crop –54% of global corn exports Higher food costs ahead, U.S. & globally Major risk-management challenges in Ag. & bioenergy

27. Total 11,693 mil. Bu. Figure 3.

28. Capacity: 159% of 2006 Crop Iowa Corn Processing Plants, Current & Planned, 7/25/07 72 Potential Iowa Plants 11 Just across IA Borders Figure 2. Basis Implications in Short Crop

32. Take-Home Points All grain markets extremely sensitive to U.S. & foreign weather ISU Climatologist Elwynn Taylor sees 70% probability of below trend ‘08 U.S. corn yield Corn & SB basis likely stronger, May-August Strong basis creates high risk for livestock feeders Options Mkts. more important than in the past Options look expensive, but out-of-money strike prices can provide upward price flexibility

33. Thanks! Questions?

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