September 21, 2010

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Cassio Calil, Managing Director J.P. Morgan

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Headlines suggests the never ending volatility in the commodity markets

This summer, world wheat prices have spiked again. Mozambique has been rocked by food riots. And Russia has banned wheat exports for the second time in three years

-September 9, 2010

Food prices rose 5 percent globally during August, according to the United Nations, spurred mostly by the higher cost of wheat

-September 3, 2010

Corn prices broke above the key $5-a-bushel barrier

for the first time in two years, boosted by fears of a

tighter supply-and-demand balance as US farmers

reported disappointment in the early stages of their

harvest-September 17, 2010

Sugar prices rallied to a six-month high on the back of extremely strong physical demand and export bottlenecks in Brazil, the world’s largest exporter

-September 7, 2010

U.S. commercial stockpiles of oil and oil products have risen to the highest levels in 27 years, and recent economic data haven't offered any signals that demand will grow fast enough to keep pace…

-September 7, 2010

Crude prices dropped on Thursday after new

government data signaled slower demand for oil and

gas as the economy inches along in the slow lane

-September 16, 2010

Food inflation in India rose for the second consecutive week, damping hopes of any immediate respite from high prices despite normal monsoon rains

-September 9, 2010

The increase in wheat and corn prices is likely to

increase the cost of meat and poultry, as both grains

are used to fatten livestock. Global meat prices are

already at the highest in 20 years…

- September 17, 2010

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Supply and Demand Drivers in Agricultural Markets

Profitability (income/unit of land) affects crop selection

Land availability (urbanization)

Crop rotation (alternating between crops maximizes

yields)

Planted Acreage

Soil Quality

Technological Advancements

• Equipment, farming methods, seeds varieties,

i.e. GM seeds

• Weather and Disease

Realized Yield

Global Warming

• Effects crop growth cycle

• Shifts arable land to higher latitudes

• Extreme weather events

Climate Change

Supply DriversSupply Drivers

Population Dynamics

Population growth increases food consumption. Global population estimated to be 9.1 bln by 2050

Increasing intake of meats in developing world raises demand

for livestock grain (~16lbs of grain needed to produce 1lb of meat)

Alternative Use for Crops

Industrial Uses

• Modified starches, pharmaceutical oils

Bio-Fuel Uses

• Ethanol (made from sugar)

Investor Appetite

Increasing investor and speculator involvement in the

commodity space raises bullish pressure on pricesDemand

DriversDemand Drivers

Key TakeawayKey Takeaway

Rapid changes in demand and supply increases price volatility in the affected commodity. Increased volatility necessitates greater and better risk management solutions, driving demand for derivatives products

Harvested acreage/capita has

declined by 50% over the past 40 years

1

Sources: 1. “Principles of Environmental Science” 2. FAO 3. PNAS Study 4. Centre for World Food Studies 5. Informa Economics 6. Financial Times

Meat consumption in China has grown from 25kg/person per year

in 1995 to 53 kg in 2008 4

Today, 50% of the growth in global demand for grain is coming

from bio-fuel demand 5

Average grain yields in developing

countries are 45% lower than in developed countries 2

Yields of 3 major crops in US (corn, soybean, cotton) could decline by

40% due to warming in next 30 yrs 3

Assets in Commodity ETFs in the

US stood at over $55 billion as of June 2009 6

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Composition in percentages Composition in million dollars

No. Country GDP ($mm) Agriculture Industry Services Agriculture Industry Services

- World $57,937,460 6.0% 30.6% 63.4% $3,476,248 $17,728,863 $36,732,350

- European Union 16,447,259 1.9% 25.2% 72.8% 312,498 4,144,709 11,973,605

1 United States 14,256,275 1.2% 21.9% 76.9% 171,075 3,122,124 10,963,075

2 Japan 5,068,059 1.6% 21.9% 76.5% 81,089 1,109,905 3,877,065

3 China 4,908,982 10.6% 46.8% 42.6% 520,352 2,297,404 2,091,226

4 Germany 3,352,742 0.9% 26.8% 72.3% 30,175 898,535 2,424,032

5 France 2,675,951 1.8% 19.3% 78.9% 48,167 516,459 2,111,325

6 United Kingdom 2,183,607 1.2% 23.8% 75.0% 26,203 519,698 1,637,705

7 Italy 2,118,264 1.8% 25.0% 73.1% 38,129 529,566 1,548,451

8 Brazil 1,574,039 6.1% 25.4% 68.5% 96,016 399,806 1,078,217

9 Spain 1,464,040 3.3% 26.8% 70.0% 48,313 392,363 1,024,828

10 Canada 1,336,427 2.3% 26.4% 71.3% 30,738 352,817 952,872

11 India 1,235,975 17.0% 28.2% 54.9% 210,116 348,545 678,550

12 Russia 1,229,227 4.7% 34.8% 60.5% 57,774 427,771 743,682

13 Australia 997,201 4.1% 26.0% 70.0% 40,885 259,272 698,041

14 Mexico 874,903 4.3% 32.9% 62.8% 37,621 287,843 549,439

15 South Korea 832,512 3.0% 39.4% 57.6% 24,975 328,010 479,527

Nominal GDP sector composition, 2009Nominal GDP sector composition, 2009

Source: International Monetary Fund, CIA World Factbook

The agriculture sector has room for growth…

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…and has gone through its own “Evolution”…

Since the 1940s, agricultural productivity has increased dramatically, due largely to the increased use of energy-intensive mechanization, fertilizers and pesticides.

Between 1950 and 1984, the Green Revolution transformed agriculture around the globe, with world grain production increasing by 250% as world population doubled.

Modern agriculture's heavy reliance on petrochemicals and mechanization has raised concerns that oil shortages could increase costs and reduce agricultural output, causing food shortages.

Agriculture imposes external costs upon society through pesticides, nutrient runoff, excessive water usage, and assorted other problems

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… with Brazil and the U.S. being two very important players

Farming in the USA and Brazil is market-oriented and integrated to global markets. It’s a sector totally exposed to global competition

Agriculture is a very risky business. Its performance is influenced by weather, high cost of capital, exchange rate valuation and an enormous lack of infrastructure

In the near future, the agribusiness performance will depend on the expansion of domestic market as well as on the access to protected markets, specially in OECD countries.

The priorities: food security, safety, coupled with sustainable development driving sector consolidation (synergy advantage).

Ample capital to flow into the sector through the traditional capital markets, sovereign wealth funds, alternative sources of capital and in some cases Government subsidies

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denotes current(9/17/10)

historicalmin/max

denotesquartiles(25th,50th,75th)

denotes market peak (6/5/07)

Source: Bloomberg; J.P.Morgan

¹ DDM implied MRP = CoE implied by DDM – 10yr risk free; Cost of equity implied by DDM equal to the solved internal IRR based on the current S&P 500 price level and expected cash flow stream

Re-pricing of riskRe-pricing of risk

11/20/0821.2%16.3% 25.8%

9.9% 80.9%13.6%

01/24/07

22.0%

40 bps24 bps 62 bps

459 bps59 bps

10/10/08

3 bps

09/04/01

15 bps

24 bps 72bps 249 bps

59 bps 87 bps43 bps 11/21/0802/26/97

71 bps

1.3% 7.1%4.1%

12/01/083.1% 4.7%4.3%06/30/99

8.2%

11/26/087.5%6.0% 9.7%

3.0% 23.3%

03/05/97

8.5%6.4%

-0.6%

2.1% 2.4%1.5% 05/04/00

3.0%

10/27/08

2.4%

6 bps1 bps 15 bps

102 bps4 bps

12/19/08

-37 bps

12/23/98

3 bps

0.9%

2.2% 2.5%2.0% 09/30/06

2.9%

07/31/10

2.2% 2.4% 3.0% 01/29/02

1.6% 3.9%

03/19/09

2.6% 2.6%

17.2x 19.8x 24.5x 03/23/00

10.1x 30.7x

03/09/09

17.4x14.8x

² BBB spread implied MRP based on CAPM: MRP = (BBB yield – 10yr risk free) / debt beta of 0.20

³ 5X5 TIPS forward break-even based on data since 2002

1.4%

45 bps 178 bps 485 bps

135bps 178bps95bps 11/26/0805/30/97

107 bps

Risk pricing has subsided from highs experienced during the crisis …

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…with normalizing world wide equity valuations not followed by ….

Estimated NTM P/E ratio for world equity indices (2005–2010 YTD)Estimated NTM P/E ratio for world equity indices (2005–2010 YTD)

Denotes Current Price Level (09/17/2010)Historical Minimum/Maximum Denotes Percentiles (25th,50th,75th)

Dow Jones

Source: Bloomberg as of 09/17/2010Note: P/E based on Bloomberg BeST estimates

S&P 500

Bovespa

FTSE 100

DAX

ASX 200

Nikkei 225

CAC 40

11/20/08 12/28/09

02/26/09 06/05/09

05/03/06 12/14/09

10/24/08 09/28/09

10/27/08 12/02/09

11/21/08 05/16/06

11/20/08 10/15/09

05/26/05 08/11/09

10/27/08 10/30/07Hang Seng

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…important commodity prices

Commodity prices (2000–2010 YTD)Commodity prices (2000–2010 YTD)

Denotes Current Price Level (09/17/2010)Historical Minimum/Maximum Denotes Percentiles (25th,50th,75th)

WTI Cushing(USD/barrel)

Source: Bloomberg as of 09/17/2010Note: P/E based on Bloomberg BeST estimates

Ethanol(USD/gallon)

Corn(USD/bushel)

Soybeans(Usd/bushel)

Wheat(Usd/bushel)

Lean Hogs(Usd/lb)

Live Cattle(Usd/lb)

Sugar(Usd/lb)

02/08/02 07/03/06

11/15/01 07/03/08

08/10/00 06/27/08

08/07/000

02/27/08

01/02/02 07/03/08

02/29/00 01/29/10

09/03/02 05/04/10

05/21/02 07/02/08

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There are still very pronounced differences in the agricultural firms’ valuations…

Estimated NTM P/E ratio for selected ag firms (2005–2010 YTD)Estimated NTM P/E ratio for selected ag firms (2005–2010 YTD)

Denotes Current Price Level (09/17/2010)Historical Minimum/Maximum Denotes Percentiles (25th,50th,75th)

Source: Bloomberg as of 09/17/2010

Monsanto 12/20/05 01/14/08

Mosaic 11/20/08 04/22/08

ADM 10/09/08 07/27/09

Bunge 10/22/08 09/13/10

Tyson Foods 11/20/08 05/18/00

Smithfield 11/21/08 07/09/08

Brasil Foods 05/24/06 06/28/10

JBS 10/10/08 08/02/10

Marfrig 02/03/09 09/15/10

Wilmar 10/08/08 01/10/08

Noble 10/24/08 01/11/10

Sime Darby 09/11/08 01/12/08

AWB 03/06/09 09/14/10

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…that can be justified by historical performance on invested capital and respective

cost of capital for both agribusiness firms…

Return on invested capital (1999 - 2009)Return on invested capital (1999 - 2009)

3.1%

4.6%

0.7%

13.6%

12.1%

45.8%11.4%

3.0%

22.0%22.0%

3.0%8.8%

27.6%

8.7%13.2%

1.6%12.0%

7.8%6.2%

-0.8%4.0%

-3.8% 22.1%14.6%

-20% -10% 0% 10% 20% 30% 40% 50%

Potash

Mosaic

Bunge

Cost of capital (1999 - 2009)Cost of capital (1999 - 2009)

2009

Monsanto

Archer Daniels Midland

Corn Products

Source: Bloomberg, Facset, J.P.MorganNote: ROIC based on year-end NOPAT / (average total debt + average book equity); WACC based on cost of debt by Bloomberg bond yields by rating; cost of equity based on average annual 10yr UST,

average annual J.P. Morgan ERP estimates and beta based on 5yr historical regression against S&P 500

Median 2009

Viterra

Cosan

9.8%

5.1%

4.8%

4.7%

8.3%

7.8%

5.4%9.8%

10.5%10.3%

13.7%13.7%

8.1%

7.7%7.2%

9.7%9.5%

5.5%8.3%

7.8%5.8%

9.4%15.8%9.4%

0% 5% 10% 15% 20%

2009 Median 2009

Potash

Mosaic

Bunge

Monsanto

Archer Daniels Midland

Corn Products

Viterra

Cosan

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… as well as protein firms

Return on invested capital (1999 - 2009)Return on invested capital (1999 - 2009)

9.2%

5.2%

-3.4%

0.2%

31.9%

2.7%-0.2%

7.4%9.4%

-1.7%0.6%

12.4%

15.8%35.5%

2.9%24.3%

2.1%1.8%

-20% -10% 0% 10% 20% 30% 40% 50%

Tyson

Smithfield

Cost of capital (1999 - 2009)Cost of capital (1999 - 2009)

2009

Dean Foods

Source: Bloomberg, Facset, J.P.MorganNote: ROIC based on year-end NOPAT / (average total debt + average book equity); WACC based on cost of debt by Bloomberg bond yields by rating; cost of equity based on average annual 10yr UST,

average annual J.P. Morgan ERP estimates and beta based on 5yr historical regression against S&P 500

Median 2009

Sanderson Farms

JBS

Brasil Foods

8.6%

4.9%

5.8%

4.3%

10.1%

5.2%8.6%

7.6%7.0%

10.1%10.1%

5.5%

8.8%7.6%

7.7%7.5%

7.6%9.7%

0% 5% 10% 15%

2009 Median 2009

Tyson

Smithfield

Dean Foods

Sanderson Farms

JBS

Brasil Foods

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Clearly represented by market valuations of the rate of return of “clicks” vs.

“bricks”

Market cap comparison ($bn)Market cap comparison ($bn)

Source: FactSet as of 9/8/10

$33

$30

$26

$12

$12

$10

$9$6$6$3

$20

Food value chain Google

$163 $163

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BrazilBrazil

Brazil is a major player in the global agricultural arena as the top net

exporter of Soybean, Coffee, Sugar, Corn and Orange Juice

J.P. Morgan intends to have a meaningful presence and rapidly

gain market share

J.P. Morgan has offices in Belo Horizonte, Porto Alegre, Rio de

Janeiro and Sao Paulo

ChinaChina

China is a major consumer and net importer of agricultural

commodities, particularly soybeans and palm oil

Brazil is China’s key trading partner. China consumes 12.5% of Brazil’s

agricultural exports.

J.P. Morgan has 4 branches in China mainland: Guangzhou,

Beijing, Shanghai, Tianjin

Intend to work synergistically with the Asia metals team

Australia, S.E. Asia, N. AmericaAustralia, S.E. Asia, N. America

Australia is a major exporter of sugar and wheat

- Large proportion is sold at world price, so is actively

hedged

South East Asia has a number of major exporter and importer

nations

- Indonesia and Malaysia export Palm Oil

- Vietnam exports coffee

North America is a key target, given our franchise and the need for

price risk management

J.P. Morgan Office J.P. Morgan Office

Geographic Focus

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J.P. Morgan has a world-class Agribusiness team with unparalleled client reach

and global scope

Select J.P. Morgan agribusiness relationshipsSelect J.P. Morgan agribusiness relationships   

  

  

  

  

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Brazil and U.S. take off

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Agenda

Page

16

Appendix 16

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Pro

tein

pla

yers

Pro

tein

pla

yers

Ag

pla

yers

Ag

pla

yers

Some companies have weathered the storm better than others

Well timed equity and debt raises

Over-leveragedacquisition

Opportunisticacquisitions

Unfortunate timingEmerging

global player

Fer

tili

zers

/See

dF

erti

lize

rs/S

eed

Missed opportunity

Battle for control

Biofuels

Feeding the world

17A P

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NA NA NA Merchandising/handling and multigrain processing

$20,982 $27,112 7.4x Merchandising/handling and multigrain processing

8,005 10,251 6.1x Merchandising/handling and soybean/sugar processing

2,778 4,424 6.6x Corn processing

3,239 4,050 7.2x Merchandising/handling and wheat/barley processing

NA NA NA Merchandising/handling and sugar processing

NA NA NA Merchandising/handling, distribution and trading

31,116 35,372 11.6x Merchandising/handling and

palm oil processing and distribution

7,699 10,554 9.1x Merchandising/handling and distribution

4,635 7,494 13.1x Merchandising/handling

5,015 6,393 10.9x Soybean processing and distribution

NA NA NA Sugar processing

Overview of key agribusiness players

Market cap ($mm)

Market cap ($mm)

Firm value($mm)

Firm value($mm) FV/ 2011E EBITDAFV/ 2011E EBITDA Business mixBusiness mix

Source: Company filings, FactSet; market data as of 9/10/10Note: Corn Products pro forma for acquisition of National Starch

(China Agri)

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Sovereign wealth funds around the world

Source: Sovereign Wealth Fund Institute (SWFI)1 SWFI estimate

South America

Brazilian Development Bank (BNDES) – $201bn

Sovereign Fund of Brazil – $9bn

Asia

The State Administration of Foreign Exchange (SAFE) Investment Company – $347bn1

China Investment Corporation (CIC) –

$289bn

Government of Singapore Investment Corporation

(GIC) – $248bn

National Social Security Fund (NSSF) – $147bn

Hong Kong Monetary Authority Investment Portfolio – $140bn

Temasek Holdings – $122bn

The National Fund of the Republic of Kazakhstan –

$38bn

Brunei Investment Agency (BIA) – $30bn

Korea Investment Corporation (KIC) – $27bn

Khazanah Nasional Berhad – $25bn

Middle East

Abu Dhabi Investment Authority’s (ADIA) –

$627bn

Saudi Arabian Monetary Agency (SAMA) Foreign

Holdings – $431bn

Kuwait Investment Authority – $203bn

Qatar Investment Authority – $65bn

Investment Corporation of Dubai – $20bn

Mubadala Development Company – $15bn

Mumtalakat Holding Company – $14bn

International Petroleum Investment Company –

$14bn

Total sovereign wealth fund market size is $3,752bn1Total sovereign wealth fund market size is $3,752bn1

SWF by region

Middle East 44%

Asia 35%

Others 2%Americas 2%

Europe 17%

Brazil

Brazil

U.A.E.

Saudi Arabia

Kuwait

Qatar

U.A.E.

Bahrain

U.A.E.

China

China

Singapore

China

Hong Kong

Singapore

Kazakhstan

Brunei

South Korea

Malaysia

U.A.E.

19A P

 P E

 N D

 I X

$5.1 $1.4 $5.8 $27.8 $10.9 

$13.6 

Argentina

$2.2 

JapanUSA

$1.1 

ROWBrazil EU-27ROWTotal China

$15.5 

$1.6 $1.5 $1.4 

$22.1 $26.6 $11.0 

$5.2 $6.3 

EU-27ROW Brazil EgyptROW TotalRussia

$4.1 

EU-27USA

Soybean

Wheat

$10.0 

$9.5  $1.1  $20.8  $11.0 

$3.4  $2.8 

ROWPapua NG Total EU-27IndiaMalaysia

$3.6 

$0.3 

Indon

-esia

ROW China

Palm Oil

$2.9 $1.2 $1.2 $9.5 $14.9 $4.0 $1.8 $7.9 

$1.2 

BrazilUSA Mexico JapanS.KoreaTotalArgentina ROW ROW

Corn

$1.1 $0.8 $0.7 $10.7 $13.4 $5.0 

$1.6 $5.8 $1.0 

EU-27RussiaUSAROWTotalROWAustraliaThailandBrazil

Sugar

ExportersImporters

*Values calculated based on average of 12 front month futures contract prices (June 2008-09) Source: 2009 USDA figures

$3.5 $1.1 $4.7 $16.6 $6.8 $3.1 $4.9 

EU-27

$7.3 

USAJapanROWTotalROWColombia

$1.8 

VietnamBrazil

Coffee

Market value of international trade (2009 Export/Import) US Billion dollars*Market value of international trade (2009 Export/Import) US Billion dollars*

These 6 agricultural commodities represent over

$120B of international trade value. This figure becomes

much higher when we consider the added value that arises

from processing and re-export. U.S., Brazil and China

contribute to over 60% of this value.

Key TakeawayKey Takeaway

Major markets

20A P

 P E

 N D

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Commodity prices have experienced extreme volatility

Source: Bloomberg, FactSet as of 9/10/10

Soybeans (CBOT) ($/bushel)Soybeans (CBOT) ($/bushel)

Wheat (CBOT) ($/bushel)Wheat (CBOT) ($/bushel)

Corn (CBOT) ($/bushel)Corn (CBOT) ($/bushel)

Current soft commodities remain above historical levelsCurrent soft commodities remain above historical levels

Crude oil (NYMEX) ($/bbl)Crude oil (NYMEX) ($/bbl)

DAP (CFL) ($/metric tonne)DAP (CFL) ($/metric tonne) Natural gas (NYMEX) ($/MMBtu)Natural gas (NYMEX) ($/MMBtu)

$0

$2

$4

$6

6/10 9/10

39.3%

$0

$2

$4

$6

$8

9/05 9/06 9/07 9/08 9/09 9/10

2005-2010 Avg: $3.74Current: $4.78

$8

$9

$10

$11

6/10 9/10

10.3%

$0

$5

$10

$15

$20

9/05 9/06 9/07 9/08 9/09 9/10

2005-2010 Avg: $9.09Current: $10.31

$70

$75

$80

$85

6/10 9/10

1.3%

$0

$50

$100

$150

$200

9/05 9/06 9/07 9/08 9/09 9/10

2005-2010 Avg: $74.70Current: $76.45

$4$5$6$7$8

6/10 9/10

70.1%

$0

$5

$10

$15

9/05 9/06 9/07 9/08 9/09 9/10

2005-2010 Avg: $5.69Current: $7.37

$420

$440

$460

$480

6/10 9/10

6.9%

$0

$500

$1,000

$1,500

9/05 5/07 1/09 9/10

2005-2010 Avg: $464.17Current: $468.35

$3

$4

$5

$6

6/10 9/10

(16.4%)

$0

$2

$4

$6

$8

$10

9/05 9/06 9/07 9/08 9/09 9/10

2005-2010 Avg: $6.89Current: $3.88

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Biofuels: now and the next generation

Development stage Very early conceptual stageIn current use

Corn Sugar Jatropha Algae

Ad

van

tag

esA

dva

nta

ges

Dis

adva

nta

ges

Dis

adva

nta

ges

Technology ready and cheap

Very small global- water footprint

Difficult to attract further U.S. investment

Seen as driving up price of corn

Yie

ldY

ield 230 gal/acre 600 gal/acre 202 gal/acre 1,200 mℓ/bushel 1,604 gal/acre

At least 2x better ethanol yield than

corn

Half as expensive as corn

Insufficient feedstock in the

U.S.

Bulky and expensive to

transport

Soy

Technology ready and cheap

Grows in less-than-favorable

conditions

Reduces food supply

Possible deforestation from

soybean cultivation

Yield is 4x that of soybeans

Ideal feedstock for Indian and African

plants

Mechanical harvesting is

difficult

3–5 years of growth before first

harvest

Does not compete with food

Best CO2 capture

and use, highest yield per hectare

Commercialization of technology 5

years away

Land cost and availability a

limiting factor

Source: Equity research, research reports, websites

Cellulose

Converts inedible crop residues into

fuel

Abundant raw material

No large–scale cellulosic

biorefineries

Conversion not cost-effective

22 tonnes/hectare

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Grains and Oilseeds

Corn: US and Global Fundamentals Are Unequivocally Bullish for the 2010/11 Season, but Current Market Structure Cause for Some Concern Near-term (1-2 months) risks

– Non-commercial long interest (~350,000 contracts) is record large, some commercial end users have been pushed into hedges as prices have risen unanimity of market opinion raises risk of liquidation pressure, could push prices back to support above $4.00/bu (vs CZ10 current price of ~$4.95/bu).

– Event risks: If USDA September 30 Quarterly Stocks of Grain Report shows larger old-crop inventories or if 2010/2011 yield forecast not revised materially lower in October, high probability of short-term de-risking by longs

Long-term risks– Anecdotal evidence points to still-lower US yields (due to disease and poor weather conditions) and the USDA forecast likely to ultimately

be revised lower. Smaller production base tightens US balance sheet.– US export prospects are bullish and are linked to 1) increased foreign demand due to substitution amid decreased Russian and European

Union wheat supplies 2) possibility of a shortfall in Chinese production, necessitating renewed imports in order to keep domestic market balanced and price inflation under control.

– Limited demand rationing to come from US ethanol industry: discretionary blending economics favor more ethanol offtake, and mandates set baseline level of demand for corn unlikely to be penetrated without Government intervention.

Soybeans: Long-term Neutral at Current Price Levels (near $10.50/bu for mid-2011); Near-term (1-2 Months) Softening Likely but 3-9 Month Risks are Bullish and are Linked to Weather Near-term risks

– USDA yield forecasts suggest comfortably large US production base; September-October likely to prove ‘slow news’ period between US harvest and South American planting. Prices appear at risk of modest ($0.50/bu) correction.

Long-term Risks– Dryness in South America as a result of La Nina is a major bullish production risk; smaller Brazil/Argentine crops would mean lower

export availability and (likely) an increase in Chinese demand for US supplies. The US balance sheet in 2010/11, although more comfortable than seen in 2009/10, cannot withstand stress associated with South American supply losses. Associated risk argues for maintenance of risk premium until spring 2011, at which time some downside price pressure may develop if South American crops meet expectations.

– US domestic (crush) demand prospects appear constructive given ongoing biodiesel mandates and need to preserve soybean oil inventories.

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Grains and Oilseeds

Wheat: Neutral at Current Price Levels Through late 2010, But Spike Risks Remain For Next 2-3 Months Near-term (2-3 months) risks

– Following production losses in the EU and FSU (Former Soviet Union), the market remains on edge about Southern Hemisphere producers Australia and Argentine; risk premium will remain in market until these crops are successfully harvested and export availability is determined.

– Non-commercial market participants spent most of July rally occupied with exiting a historically large net-short position; market is now essentially neutral, such that if a Southern Hemisphere supply problem develops, there is significant potential for larger long participation.

Long-term risks– Large increase in demand for US high-protein varieties (Hard Red Winter and Hard Red Spring) due to production

losses in FSU and EU. The USDA has only partially recognized this demand in its forecasts.– FSU winter wheat plantings, which should be undertaken in September and early October, is significantly behind

schedule amid continue weather stresses, raising possibility of another suboptimal crop next year in the region and, in turn, another year of limited export availability.

– Bearish pressure could ultimately develop as a result of current bullishness Higher prices are likely to encourage larger winter wheat plantings in the US and EU (and potentially, next year in Southern Hemisphere countries); assuming normal yields, a large uptick in global production next year could mitigate continued FSU supply tightness and push prices back toward low $6.00 level. Further downside potential will be governed by corn market momentum.

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