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Risk Management and the New Dynamics of Ag MarketsPerspectives from an Exchange, Commercial Participant and Academia

Mike Adams, ModeratorHost, AgriTalk Radio

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Bryan DurkinSenior Managing Director & Chief Operating OfficerCME Group

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Mar-00

Oct-00

May-01

Dec-01

Jul-02

Feb-03

Sep-03

Apr-04

Nov-04

Jun-05Jan

-06

Aug-06

Mar-07

Oct-07

May-08

Dec-08

Jul-09

Feb-10

Sep-10

Apr-11

Nov-11

Jun-12Jan

-130

100,000

200,000

300,000

400,000

500,000

600,000

Corn and Wheat Futures - Average Daily Volume2000-2013

Corn Wheat

Market Evolution: Increased Use of Ag Commodities

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Market Evolution: State of Futures Markets

1980s 1990s 2000s 2010s

Average Daily Volume* (contracts in millions)

0.8M contracts

1.8M contracts

0% electronic

Innovation / Electronification / Demutualization…. Innovation / Diversification / Globalization

• CME Group futures markets have become increasingly electronic

7.3M contracts

12.3M contracts

8% electronic 80% electronicHighest 88% electronic

Averaging 6% privately negotiated/OTC

*The average daily volume graphed assumes that CME, CBOT and NYMEX were combined the entire time – with NYMEX data beginning in 1983

Market Evolution: Factors Impacting Food Prices

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www.cmegroup.com/effectivemarkets

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David BaudlerPresident, Cargill AgHorizons

Nourishing ideas. Nourishing people.TM

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Demand: Rising world population and standard of living

actual and projected

33.5

44.5

55.5

66.5

77.5

82011 Population6.88 billion

GDP/Capita6.200(000 1997 USD)

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Supply: global food production, area and of yield

(grain, rice, major oilseeds)

19751979

19831987

19911995

19992003

20072011

1.21.41.61.82.02.22.42.62.83.0

production – bil mt

+98%

19751979

19831987

19911995

19992003

20072011

90100110120130140150160170180190

area and yield (1975=100)yield +76%

area +12%

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Global food commodity supply / demand(grain, rice, major oilseeds – bil mt)

19751977

19791981

19831985

19871989

19911993

19951997

19992001

20032005

20072009

20111.2

1.4

1.6

1.8

2.0

2.2

2.4

2.6

2.8

3.0production

consumption

1980-2003consumption

trend extended

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World Stocks

19761978

19801982

19841986

19881990

19921994

19961998

20002002

20042006

20082010

2012250.0

300.0

350.0

400.0

450.0

500.0

550.0

600.0

650.0

15.0%17.0%19.0%21.0%23.0%25.0%27.0%29.0%31.0%33.0%35.0%

Stocks / Use Ratio Ending Stocks

MM

T

Source: USDA Includes: Coarse Grains, Wheat, Oil, Rice

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US Wheat Stocks vs Price

19751978

19811984

19871990

19931996

19992002

20052008

20110

500

1000

1500

2000

2500

$2.00

$3.00

$4.00

$5.00

$6.00

$7.00

$8.00

$9.00

Ending Stocks Average Price

MBU

$ / B

ushe

l

Source: USDA

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US Corn Stocks vs Price

19751978

19811984

19871990

19931996

19992002

20052008

20110

1000

2000

3000

4000

5000

6000

$1.00

$2.00

$3.00

$4.00

$5.00

$6.00

$7.00

$8.00

Ending Stocks Average Price

MBU

$ / B

ushe

l

Source: USDA

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Iowa land values$ value per acre

3

1003

2003

3003

4003

5003

6003

7003

8003

9003

2012$8,296/acres

Source: Iowa State University

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Scott IrwinLaurence J. Norton Chair of Agricultural Marketing University of Illinois

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FAO Index of Real Food Commodity Prices,January 1990-May 2012

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“The Masters Hypothesis”

http://www.loe.org/images/content/080919/Act1.pdf

http://www.nytimes.com/2008/09/11/washington/11speculate.html

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CBOT Wheat Futures Prices and Index Trader Net Long Positions, January 2004-September 2009

200

400

600

800

1000

1200

1400

0

50

100

150

200

250Ja

n-04

May

-04

Sep-

04Ja

n-05

May

-05

Sep-

05Ja

n-06

May

-06

Sep-

06Ja

n-07

May

-07

Sep-

07Ja

n-08

May

-08

Sep-

08Ja

n-09

May

-09

Sep-

09

Thou

sand

Con

trac

ts

Nearby Contract Price (right scale)

Index Trader Open Interest (left scale)

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Relationship between CBOT Wheat Returns and Index Trader Net Long Positions,

June 2006-December 2009y = 0.0002x - 0.0798

R² = 0.0187

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

-12,000 -9,000 -6,000 -3,000 0 3,000 6,000 9,000 12,000

% C

hang

e in

Mar

ket P

rice,

Wee

k t

Change in Net Position, Week t

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“The current state of knowledge indicates only a few, and weak, findings that verify the assumption that the rise in financial speculation in recent years has increased (1) the level or (2) the volatility of agricultural commodity prices……Seen in this light, the alarmism about financial speculation should be classified as a false alarm: Those who desire to effectively combat hunger in the world have to take real-economy precautions to ensure that food supplies will match the envisaged increasing demands”

December 2012

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Pricing Function for Storable Commoditiesis Highly Non-Linear

Source: Wright (2009)

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Structural Changes in Commodity Markets in the Last Decade

•Electronic trading

•Online discount brokers

•Index investment

•Exchange-traded funds (ETFs)

•High frequency trading (HFTs)

•Real-time release of gov’t reports

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11

Per

cent

MonthCorn Soybeans Wheat

Percent of Futures Volume Transacted on Electronic Platform, 2004-2011

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