september 21, 2010
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September 21, 2010
B A C C B R E A K F A S T S E M I N A R
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
1B A
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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 $55 billion as of June 2009 6
2B A
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Composition in percentages Composition in million dollars
No. Country GDP ($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…
3B A
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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
4B A
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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
5B A
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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 …
6B A
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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
7B A
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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
9B A
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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
10B A
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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
11B A
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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
12B A
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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
13B A
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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
14B A
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Brazil and U.S. take off
15B A
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Agenda
Page
16
Appendix 16
B A
C C
B
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F A
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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)
18A P
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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
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$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
$120B of international trade value. This figure becomes
much higher when we consider the added value that arises
from processing and re-export. U.S., Brazil and China
contribute to over 60% of this value.
Key TakeawayKey Takeaway
Major markets
20A P
P E
N D
I X
Commodity prices have experienced extreme volatility
Source: Bloomberg, FactSet as of 9/10/10
Soybeans (CBOT) ($/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
21A P
P E
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I X
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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