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					           Feltes Ag
           Report
           Special Report                                                                Richard J. Feltes, VP – Research
           11/3/2011                                                                                 rfeltes@rjobrien.com

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              Summary of USDA Feb 24-25, 2011 Outlook Forum
                          Rich Feltes-R.J. Obrien

Vilsack vs. Clinton: Unlike Vilsack, who expressed confidence that productivity gains will
allow America to meeting expanding demand for bio-fuels, livestock and export demand,
Clinton acknowledged that increasing energy independence via ethanol should not be done
―at the expense of food riots”. Vilsack/Clinton noted that 60% of US crude oil is imported
representing 50% of US trade deficit although neither one referenced vast underdeveloped
US crude oil reserves that are off limits. Ag Secretary believes that world is better equipped
to deal with food shortages than 2008 but acknowledged need for more research and
extension in low productivity areas of the world where US has vested interest in improving
yields to feed another 2.5 bil by 2050. Vilsack, notably more pro-free trade than last year
with strong endorsed passage of S Korea FTA and noted that every $1 bil gain in ag exports
adds 8-9,000 American jobs. Clinton underscored growing US/global income inequality,
increasing global political instability, rise in 3rd world health problems and adverse
repercussions of climate change. Vilsack stressed importance of maintaining farm safety
net, warned against across the board budget cuts and opportunity for US Ag from rapidly
expanding Asian middle class. Audience did not hear any contingency plans in the event of
a 2011 US/Global crop shortfall but Vilsack made strong statement against export bans
while advising other countries to avoid import quotas/tariffs. End users left this historic
session (1st President ever at Outlook Forum) pleased that Clinton advised annual review of
bio-fuel goals by noting ―don’t pretend there on no contradictions” but alarmed by Vilsak‘s
repeated “will not take foot off‖ demand accelerator that could run US livestock industry
over the cliff with even a 5 BPA cut vs. trend in the 2011 US corn yield.

Economic Outlook: C.F. Bergsten, Director of Institute for International Economics,
expects 2011 global GDP to advance nearly 5% amid 6-7% growth in emerging markets, 8-
10% in India/PRC and 3.5-4% in the US. EU and Japan GPD growth in the year ahead
stays under 2%. He does not think fiscal tightening in Asia will choke off the global
economic recovery citing PRC as only 10% of world economy. Bergsten noted however that
emerging markets collectively represent 50% of world economy and are growing 2X faster
than US suggesting that by 2023 emerging markets will comprise 2/3 of world economy.
Troubling headwinds include exploding US debt as % of GDP, reduced ability to respond to
domestic/global problems and potential for additional EU sovereign debt defaults although
this speaker strongly disagreed with Gartman‘s notion that Euro will eventually be
dissolved. Bergsten‘s believes that China, which is spending $1 bil/daily to suppress the
Yuan (which is 30% undervalued vs. the $), will allow its currency to appreciate to dampen
domestic inflation and allow US and emerging nations to increase exports (a critical
element for sustained global recovery). The Yuan will be fairly valued vs. the dollar in 2
years if the current rate of Yuan appreciation continues unabated. This economist, who
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  Special Report

only recently conferred with Obama, was critical of Administration‘s lack of leadership in
pursuing bi and multi-lateral free trade agreements but noted recent change in tone as
White House is pushing Congress to pass S. Korea/US FTA. No mention of any White
House push to finalize Columbia FTA which USDA estimates would prompt a $700 mil
increase in US ag exports. Bergsten believes that important factors in garnering more
public support for free trade include job retraining, health insurance portability and
education given far less support for globalization by Americans with a H.S. degree or less.

More on the economy: Chief economist of IHS Global Insight agreed with Bergsten‘s
―two track‖ assessment of fast vs. moderate global growth nations and expectations for
improving economic growth in 2011. This analyst expects another 10% gain in the CRB in
2011 (his crude oil target is $120-130/barrel) but injected more caution flags going forward
including how emerging nations will address inflation, growing danger of PRC property
bubble (1/3 of apartment buildings vacant in some cities), slowing impact of higher
commodity prices on growth and potential for more UE sovereign debt flare-ups. Excess
capacity in US labor and housing will keep US inflation in check although housing glut as an
economic drag is over-rated as it represents only 6% of US economy. He attributes
increasing food inflation to bad weather and bad policy—not speculation. Additionally, the
US dollar will not lose its status as global reserve currency although dollar will continue to
erode in 2011 due to much faster growth in emerging nations. Both aforementioned
factors support his bullish commodity bias.

Managing Risk: Infinium CEO made compelling case for benefits of increasing electronic
trade including greater transparency, higher liquidity, lower execution costs, 24 hour
market access, tighter bid/ask spreads, faster new product introduction, instant risk
management reporting and ability to spread against international futures markets.
Addressing increasing dissatisfaction with spec participation in futures (some attendees
confronted on DC public transportation by anti-speculator activists passing out leaflets
demanding commodity pride caps), Infinium CEO noted that commercials typically put in
market tops (not specs) and that futures markets with little or no spec participation post
the greatest volatility. $24 high in 2008 HRS contract (almost double CBOT wheat high)
was due in part to less spec participation in MLS contract. Risk management panel also
noted stellar performance of futures markets during 2008 financial crisis despite wide price
swings although prospects for continued high volatility on heels of low global grain stocks
and increasing Asian middle class should increase farmer use of risk management tools and
elevator interest in hedging margin risk. FCM personnel will be called on increasingly to
assist clients in formulating appropriate risk management tools including options. And
although CFTC, unlike bravado of last year, appears more attentive to commercial concerns
over unintended negative consequences of Dodd/Frank, panelists nonetheless expressed
concern that regulator rule making over-reach would drive business offshore. Conversely,
trade is excited about potential for standardized swap trading on exchanges that if
successful will attract more volume accompanied by reduced costs.

Cotton: USDA forecasts global 2011/12 global production to advance 12 mil bales to 127
mil bales prompting a 7 mmt gain (17.5%) in global cotton stocks resulting in a 9/12 global
stks/use ratio above last 2 years but still low relative to average. Projected gain in 2011/12
global cotton stocks would be the first since 2004/05. Total 2011 US cotton area will
advance 2 mil acres prompting 19.5 mil bale 2011 US crop and 9/12 carryover stocks of
2.9 mil bales—vs. 1.0 mil bales vs. 2010/11. USDA estimates 2011/12 on farm cotton
prices at $1.10/lb vs. 81.5 cents for 1010/11. Explosion in global cotton prices due in part

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to 17 mil bale (38%) surge in 2010/11 cotton imports by PRC—the world‘s largest producer
and importer of cotton representing 40% of total 38 mmt of global cotton imports. PRC
started ‗10/11 with cotton stocks at 15 year low and will face further drawdown in cotton
stocks this year before a modest 2.5 mil bale rebound in 9/12 cotton stocks on expected 4
mil bale increase in 2011 production. USDA noted strong correlation between growth in
global GDP and cotton off take. High cotton prices will encourage more substitution of
polyester as textile producers adjust to higher prices—especially in high cotton consuming
nations of India and China where consumers are far more sensitive to rising cotton prices.
Here in the US, apparel and textile companies are in ―panic‖ mode facing decreased
margins with most having failed to employ effective risk management. Thus look for
clothing prices to advance--$2.50/unit on blue jeans alone-- due to cotton price surge.
Higher US apparel inflation will prompt less ―flipping‖ of wardrobes, fewer (but higher
quality) items purchased and further consolidation in US textile/clothing industry. High
priced induced decline in developed world cotton consumption will be offset by increasing
consumption in China and India. Seasoned RJO IB Herman Kohlmeyer noted high
correlation between prices in crude oil prices and cotton while dismissing allegations that
speculative funds are root cause of cotton rally.

US Grains Council: This well known US trade promotion/advocacy group is considerably
more optimistic than USDA on PRC corn imports with expectations that PRC will be 15 mmt
annual corn importer within 5 years vs. USDA Baseline PRC corn import forecast of 4.1
mmt. USGC cites overstated PRC corn stocks, strong growth in mixed feed production (led
by dairy), expanding PRC middle class and increasing percentage (now 65%) of PRC hogs
fed in commercial facilities. For the first time in several years, hog operations in China are
growing more profitable on soaring hog prices relative to corn. USGC noted that PRC
imported 2.4 mmt US DDG 2010 and 1.3 mmt of corn. USGC analyst suggested that the
US be prepared for higher corn exports and concluded that it would be difficult to build US
corn stocks if their PRC corn import forecast is realized--even with trend gains in US corn
yield.

John Baize: This seasoned and widely respected analyst/international consultant
addressing noted that Europeans react to suggested innovations with “why” whereas Asian
clients respond “why not?‖ Baize outlined improving demand for Ag products across SE
Asia (Indo, Mal, Phil, Sing, Thai & Viet) where population with expand by 76 million
(12.5%) over the next 9 years. Vietnam, with the lowest per capita income, is posting the
fastest growth in US ag imports with soy complex and DDG‘s topping the list. SE Asian
2010/11 imports of soy complex, corn and wheat will be 34 mmt according to USDA—up
5.4 mmt (18%) in only 4 years. SE Asian imports of beef, pork, broiler meat and
processed foods are also growing. Baize underscored importance of containerized shipment
of US Ag products to SE Asia due in part to surplus of US containers –a logistical edge not
enjoyed by S America. Additionally, containers have expanded the number of US ag
exporters and increased the number of SE Asian buyers which have added to total sales
rather than reducing bulk sales. 2009/10 SE Asian imports of DDG at 1 mmt is up over 10
fold in 5 years. Keys to continued strong US export growth to SE Asian include providing
quality products on consistent basis, strong personal ties with buyers and working closely
with on-cite US Ag export promotion groups.

Livestock: Total U.S. production of meat and poultry is forecast to remain flat in calendar
year 2011, with slight growth forecast in supplies of pork and poultry but reduced supplies
of beef. Stable

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production, increased exports and some recovery in domestic demand should help maintain
livestock prices near last year‘s historic highs.
Higher feed costs could lead to below average margins for livestock and dairy producers in
2011.

2011 US Acreage: USDA analysts laid out a compelling case for three crop (C/B/W) 2011
US area gain of 7.8 mil acres and a 8 major crop area gain of 9.8 mil acres. Specifically:

    CRP acres are 3+ mil acres less than 2008
    2011 hay, pasture and HRS area will decline
    2011 net returns for major crops are 25% higher than ‗08
    WASDE‘s 2011 4.4 mil acre C/B gain is the same gain as ‗07
    N/C 2011 corn net returns are $80-100 above 2008
    Double crop soy acres will advance on higher soy prices
WASDE‘s ‗11 all crop+CRP area is 1 mil below 2008 & 8 mil acres below ‗96 record all crop
area.

USDA S/D Outlooks: USDA analysts outlined relatively tight 2011/12 US corn and soy
S/D with little cushion for yield adversity while wheat supplies are fully adequate—US and
globally. USDA cautioned against looking solely at world wheat stocks but rather major
exporter stocks which for 2011/12 will still be ample. US 9/12 US corn stocks of 865 mil
bu will be the 2nd lowest since 95/96 although USDA underscored that growth in foreign
production of corn is keeping pace with demand. Meanwhile, WASDE‘s 10/12 US soy oil
stocks are at 7 year low while their 9/12 US soy stks/use forecast is the tightest ever.
USDA‘s 2011/12 average on farm wheat price of $7.50 is $1.20 over 2010/11, their
2011/12 corn price of $5.60 is 20 cents over current year and their record $13 new crop on
farm soybean price is $1.30 over 2010/11—suggesting little downside in soybean prices
relatively to grains.

Tid bits:

      Rural America represents 16% of population but sources 44% of active duty military.

      Every $10 gain in crude oil prices cuts GDP growth 0.2%.

      Japanese per capital income $42K vs. PRC at only $4.5K. Plenary speaker challenged
       attendees to think about implications on commodity demand as PRC consumer
       income advances.

      PRC middle class within 5 years will reach 700 million—2X entire US population.

      PRC has already purchased record quantity of new crop 2011/12 US beans –over 150
       mil bu.

      Peru FTA with US prompting surge in imports of US ag goods whereas languishing of
       Columbia/US FTA in Congress resulting in loss of US ag exports to this rapidly
       growing economy with Argentina stepping in to fill void.




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  Special Report

      USDA‘s graphic of deflated real corn, wheat and soy prices since 1950 shows that
       current prices are only ½ of 1974 highs—a clear ―turn on‖ for hedge and index funds
       looking for value long term.

      PRC represents 91% of growth in global soybean demand according to USDA‘s 10
       year baseline. PRC on average is unloading 3 Panamax soy cargoes daily.

      US growth in corn used for ethanol, which posted annual average gains of 740 mil
       bu/yr from 05/06 to 2009/10, will slow to a nominal 50 mil bu gain in 20111/12 to
       5.0 bil bu—37% of total US corn use—the smallest year to year gain since the late
       1990‘s.

      Ethanol‘s discount to RBOB and US ethanol blender‘s credit will support discretionary
       ethanol blending but growth in ethanol off take constrained by topping out of blend
       wall.

      Growth in S American soy production driven by area gains whereas US soy
       production gains coming from improved yields.

      US 11/12 corn + DDG exports near 60 mmt compares with US corn ethanol use of
       125 mmt and US corn feeding of 129 mmt.

      GMO free beans will cease as EU talking point within 5 years if they wish to continue
       annual import diet of 24 mmt meal and 12 mmt beans as nearly all of US/Arg/Brazil
       will be round-up ready beans within 2 years.

      China reluctantly acquiesced to large soy imports knowing supplies available from 3
       origins. Pulling plug on corn imports a more difficult decision as US (with a distinct
       freight advantage) would be primary origin. Ultimately, however, Beijing leadership
       will act in best interests of population which is struggling with high food inflation.

      Pro-Farmer survey shows that producers favor reducing blender‘s credit with savings
       diverted to improving US ethanol distribution including E-15 pumps. Additionally,
       producers limit down on stepped up EPA farm US regulations and limit up on better
       crop insurance offerings.

      USDA Chief Economist Glauber—“ Despite increased production of corn and
       soybeans, grain and oilseed markets are still forecast to be tight due to strong export
       demand and strong demand for biofuels. Unless this year’s weather is better than
       normal or plantings increase more than expected, stock levels for corn and soybeans
       should see only modest rebuilding in 2011/12. This will likely mean continued
       volatility in those markets”

Wrap Up: Forum speakers underscored improving global economy, prospects for
continuation of tight row crop stocks and expectations for continued strong GDP growth in
China which now accounts for 60% of global soy imports, 40% of global cotton trade and
20% of global soy oil trade. USDA noted that PRC corn imports do not pencil today but left
door open on potential Beijing policy change that would launch higher corn imports. The
2011 N Hemisphere growing season will be crucial to ascertaining if income/population
driven gains in demand will be offset by higher yields and acreage. USDA‘s Meteorologist

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    Special Report

echoed NWS‘s expectations for easing La Nina to prompt continued dryness in US HRW
belt, another warm summer across FSU and southern 1/3 of US and an active summer
storm track across the central US. We sense that end users found little comfort from this
meeting which underscored the importance of timely US planting to maximize acreage,
favorable summer yields to boost yields and a rebound in foreign production of grains and
oilseeds. Corn will remain the floor leader through March 31 stocks report which will allow
traders to calibrate how soon US corn stocks will tighten appreciably. Until then, we think
fund managers emerging from Forum sessions will be encouraged to add to existing longs
knowing that downside is limited until 2011 N Hemisphere growing season takes shape.




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The information and opinions contained herein comes from sources believed to be reliable, but are not guaranteed as to accuracy or completeness. The
risk of loss in trading futures and/or options is substantial. Each investor must consider whether this is a suitable investment. When trading futures
and/or options, it is possible to lose more than the full value of your account. All funds committed should be risk capital. Past performance is not
necessarily indicative of future results.




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