Wheat Procurement Analysis Conducted by Advance Trading, Inc In Coordination with Sultan Qaboos University Muscat, Oman March 21, 2016

Advance Trading, Inc. is a forward thinking, non-proprietary commodity futures/options/derivatives brokerage firm providing risk management analysis, development of and planning/execution of hedging strategies. Introduction to ATI - Established in 1980 by grain trade veterans. - Headquarters in the Central U.S. with 37 branch offices - 20 Commercial Consultants in main office, over 40 remote. - In house Research Department, Analysts/Economists - Domestic and Global client base. - Average volume of four to five billion bushels in grain contracts traded annually.

Oman Wheat Purchase Study Volatility in commodity markets shape the landscape in Global Agriculture Agriculture – unique industry full of challenges: -Involves the annual growth cycle of a living organism -Greatly affected by weather -Greatly affected by global economies and geopolitical challenges -Greatly affected by price volatility, supply/demand shifts as a result of price changes -Provides sustainability/nourishment to the global population

Oman Wheat Purchase Study Chicago Wheat Price Volatility

Oman Wheat Purchase Study Kansas City Wheat Price Volatility

Oman Wheat Purchase Study What is a Hedge, When and Why Hedging is a transfer of risk without purchasing insurance policies. Employs various techniques and tools. Involves taking an equal / opposite position in two different markets (cash versus futures/options). NOT trading positions based on an individuals opinion or predictions – NOT speculation. PRICE IS UNPREDICTABLE

Oman Wheat Purchase Study What is a Hedge, When and Why For the consumer/end user, hedging manages price fluctuations prior to and/or after a commodity has been priced. Managing/locking in output margin. Hedgers use futures/options/derivatives to protect them from price volatility that could negatively impact profitability or sustainability.

Commodity Price Risk Management Futures vs Options Futures Hedge Establishes purchase price level Options Hedge Establishes Maximum Purchase Price

Oman Wheat Purchase Study

Process of creating study and analyzing data -Assess correlation of cash wheat prices of: - Australian - French - Russian -Versus CME Chicago SRW and Kansas City HRW futures. -Exchange with strongest correlation then used for the study showing results of various hedging practices.

Correlation Coefficients: The above analysis suggests that Kansas City HRW FOB values correlates “best”with prices from other origins with the exception of S Australian APW. As a result the HRW contract was chosen as the appropriate hedging medium. Oman Wheat Purchase Study

Our team determined a needed part of this study was to run simulations using data provided: Simulation Using Monarchy of Oman Purchase Dates: -Procurement plan utilizing price risk management six months prior to cargo purchase – buying futures or call options. -Simulation covered time set of sixteen events provided that could most accurately be analyzed.

Oman Wheat Purchase Study Simulation Using Monarchy of Oman Purchase Dates: Simulation Results: -August 13, 2013 through October 9, Futures, $2.1375/bu loss to $0.81/bu gain -Options, $0.60/bu loss to $0.4013/bu gain -Futures loss over period of $0.0513/bu -Options loss over period of $0.0533/bu

Oman Wheat Purchase Study Our team also ran two simulations to assess the viability of a more regimental hedge plan: Simulation 1: -Procurement plan utilizing price risk management six months prior to cargo purchase, followed by downside price risk management at the time of pricing through the time the cargo was utilized. -Strategy followed over five year period.

Oman Wheat Purchase Study Simulation 1 example – for Cargo purchased June 3, 2010: -Calls purchased on December 3, 2009 (*Sept calls*) -Calls liquidated on June 3, September Puts purchased on June 3, One month in transit /placing of wheat to location -Began liquidating Puts as wheat is utilized evenly over month of July. -Liquidated Puts each Thursday (July 1,8,15,22, and 29)

Oman Wheat Purchase Study Simulation 1 : Simulation Results: -June 2009 through Dec, Futures range from $1.16/bu loss to $1.45/bu gain -Options range from $0.25/bu loss to $1.01/bu gain -Futures loss over period of $0.17/bu -Options loss over period of $0.05/bu

Oman Wheat Purchase Study Simulation 1A: -Procurement plan utilizing price risk management six months prior to cargo purchase, followed by downside price risk management at the time of pricing through the time the cargo was utilized. -Plan followed over five year period.

Oman Wheat Purchase Study Simulation 1 A Example – for July usage: -Calls purchased on December, 2009 (*Sept calls*) -Calls liquidated in June, cargo price fixed -September Puts purchased in June One month in transit /placing of wheat to location -Began liquidating Puts to simulate utilization of wheat evenly over month of July. -Liquidated Puts each Thursday (July 1,8,15,22, and 29)

Oman Wheat Purchase Study Simulation 1 A Results

Oman Wheat Purchase Study Simulation 1A : Simulation Results: -June 2009 through Dec, Futures range from $0.28/bu loss to $0.39/bu gain -Options range from $0.15/bu loss to $1.21/bu gain -Futures gain over period of $0.08/bu -Options gain over period of $0.04/bu

Oman Wheat Purchase Study Simulation 2: -Entire annual import needs were purchased (nearby futures) on December 1 of the previous year, futures were then liquidated(nearby) at an even rate from the end of May through the middle of the following May. Simulation 2A: -Monthly amount of import needs were purchased (nearby futures) six months ahead of cash purchase, then liquidated(nearby) six months later.

Oman Wheat Purchase Study Simulation 2 Example – purchase of annual usage upfront: -Dec 5, buy July HRW wheat futures at the market, amount equating to full year usage. -June 27, 2014 – begin selling nearby HRW wheat futures evenly over a twelve month period of time.

Oman Wheat Purchase Study Simulation 2 : Simulation Results: -December 2007 through Dec, Futures range from $2.45/bu loss to $2.25/bu profit -Average loss for period of $0.46/bu

Oman Wheat Purchase Study Simulation 2A Example – purchase a month of usage every month: -Dec 5, buy July HRW wheat futures at the market equal to June usage. -June 27, 2014 – sell futures amount equivalent to one months usage. -Jan 1, 2014 buy month of usage, July 28, 2014 sell month of usage.

Oman Wheat Purchase Study Simulation 2A : Simulation Results: -December 2007 through Dec, Futures range from $1.88/bu loss to $1.92/bu profit -Average loss for period of $0.31/bu

Oman Wheat Purchase Study Twenty Year Simulation – What would it look like?

Oman Wheat Purchase Study Looking back twenty years: Simulation Results: -All front end wheat usage hedged resulted in a $2.45/bu loss to a $3.81/bu gain -Monthly hedging usage strategy range was between a $1.88/bu loss and a $2.67/bu gain. -Five year average

Oman Wheat Purchase Study Summary and Conclusion: -Following a consistent hedging program is a viable mechanism in managing price volatility and should be implemented. -Spreading out the execution of a hedging strategy over a period of time provides a more efficient hedge. -The use of Options in wheat procurement hedging is a viable method of providing a sound hedging mechanism that also provides transparency. -More finite management of hedge positions could provide even more advantageous results.

Commodity Price Risk Management A Procurement Plan built on price prediction will be volatile and will add risk to your business. The goal of hedging is to eliminate price fluctuation risk, using proven risk management tools and approach. Consistent adherence to price risk management practices provides long term viability to those exposed to market volatility.

Disclaimer T his material is a solicitation to enter into a derivatives transaction. The information and data contained herein have been obtained from sources believed to be reliable but Advance Trading Inc. ("Advance") does not warrant their accuracy or completeness. Recommendations and opinions contained herein reflect the judgment of Advance as of the date hereof, are subject to change, and are based on certain assumptions, only some of which are noted herein. Different assumptions could yield substantially different results. You are cautioned that there is no universally accepted method for analyzing financial instruments. Advance does not guarantee any results and there is no guarantee as to the liquidity of the instruments involved in our analysis. Advance, its affiliates, and its and their officers, directors, and employees may sell or purchase, for their own account or for customers, positions in futures, options or other instruments which may be similar or different from the positions referred to herein. As a matter of policy, Advance does not give tax, accounting, regulatory or legal advice to clients. Clients therefore should consult their own advisors regarding the tax, accounting and legal implications of the recommended strategies before transactions are affected. Trading commodity futures and options involves significant risk and is not appropriate for all investors. Information relating to past performance is not necessarily indicative of future results. Reproduction in any form without Advance's express written consent is strictly forbidden.

Futures Hedge 1)Buy futures at $5.19/bu to hedge cash purchases in six months. 2)Sell futures at $8.02/bu, gain of $2.82bu. Purchase cash. Sell futures at $8.02/bu to hedge cash purchase until sold 3)¼ cash sold, buy ¼ futures at $8.59/bu, loss of $0.57/bu 4)¼ cash sold, buy ¼ futures at $8.69/bu, loss of $0.67/bu 5)¼ cash sold, buy ¼ futures at $8.86/bu, loss of $0.84/bu 6)¼ cash sold, buy ¼ futures at $9.33/bu, loss of $1.31/bu Average: futures price of $8.87/bu, loss of $0.85/bu

Option Hedge 1)Buy 520 call option at $0.58/bu to hedge cash purchases in six months 2)Sell call option at $2.82/bu, gain of $2.24/bu. Purchase cash. Buy 800 put option at $0.59/bu to hedge cash purchase until sold. 3)¼ cash sold, buy ¼ put option at $0.18/bu, loss of $0.41 4)¼ cash sold, buy ¼ put option at $0.13/bu, loss of $0.46 5)¼ cash sold, buy ¼ put option at $0.05/bu, loss of $0.54 6)¼ cash sold, buy ¼ put option at $0.01/bu, loss of $0.58 Average: Option price of $0.09/bu, gain of $0.50/bu

Futures Hedge 7)Buy futures at $8.79/bu to hedge cash purchases in six months. 8)Sell futures at $7.18/bu, loss of $1.61bu. Purchase cash Sell futures at $7.18/bu to hedge cash purchase until sold. 9)¼ cash sold, buy ¼ futures at $6.89/bu, gain of $0.29/bu 10)¼ cash sold, buy ¼ futures at $7.02/bu, gain of $0.16/bu 11)¼ cash sold, buy ¼ futures at $7.02/bu, gain of $0.16/bu 12)¼ cash sold, buy ¼ futures at $7.27/bu, loss of $0.09/bu Average: futures price of $7.05/bu, gain of $0.13/bu

Option Hedge 7)Buy 880 call option at $0.76/bu to hedge cash purchases in six months 8)Sell call option at $0.04/bu, loss of $0.72/bu. Purchase cash Buy 720 put option at $0.35/bu to hedge cash purchase until sold. 9)¼ cash sold, buy ¼ put option at $0.46/bu, gain of $ )¼ cash sold, buy ¼ put option at $0.37/bu, gain of $ )¼ cash sold, buy ¼ put option at $0.35/bu, gain/loss of $ )¼ cash sold, buy ¼ put option at $0.23/bu, loss of $0.12 Average: option price of $0.35/bu, gain/loss of $0.00/bu