By Thos Gieskes September 2011 The changing dynamics of commodity supply Possible solutions to this challenge.

By Thos GieskesSeptember 2011

The changing dynamics of commodity supply

Possible solutions to this challenge

2Rabobank International

Higher prices and volatility

The battle for raw materials

Market Update and Outlook

Cooperation along the supply chain

The big picture

Changing dynamics

Current landscape

The solution?

Presentation roadmap

Agricultural commodity selling options

Cooperation along the supply chain

3Food & Agribusiness Research and Advisory

Demand – surging on the back of

Asia

Supply- productivity increases are slowing down

(Bursts of) scarcity of

agri commodities

Higher pricesOngoing high

price volatility

From a world of surplus to a world of scarcityThe challenges of managing higher prices and volatility

Source: Rabobank International


Tighter and more volatile food markets

Jan 20

01

Apr 20

01

Aug 20

01

Dec 20

01

Apr 20

02

Aug 20

02

Dec 20

02

Apr 20

03

Aug 20

03

Dec 20

03

Apr 20

04

Aug 20

04

Nov 20

04

Mar 20

05

Jul 20

05

Nov 20

05

Mar 20

06

Jul 20

06

Nov 20

06

Mar 20

07

Jul 20

07

Nov 20

07

Mar 20

08

Jun 20

08

Oct 20

08

Feb 2

009

Jun 20

09

Oct 20

09

Feb 2

010

Jun 20

10

Oct 20

10

Feb 2

011

Jun 20

110

100

200

300

400

500

600

700

CBOT Corn CBOT Wheat CBOT Soybean

USD

/tonne

Oversupply Tight Tighter

On average higher

and more

volatile prices

Chicago Board of Trade (CBOT) corn, wheat and soybean prices

Source: Bloomberg, Rabobank International

5

F&A players forced into action

The changing dynamics of supply

Higher prices, continued high price volatility and increased scarcity of agri commodities - from efficiency to risk reduction

Price-related risks Price level dictates working capital requirements Price volatility dictates gross margin, working capital requirements

Volume-related risks Empty handed – inability to trade Available quality – implications for reputation if substitutes not available

Sourcing as a competitive advantange for F&A companies – if they can work with producers!


6

1. Increasing control over supply: Investing in land Backward integration – owning production, storage assets along the chain ‘Farmer first’ – buyers actively assisting farmers in the production process Regional diversification – using multiple suppliers in one region.

2. Focus on market power: Supply contracting – long term supply arrangements becoming more common. Horizontal partnerships – food retail companies cooperating with competitors for

greater negotiating power with competitors Brand Power – passing on increased commodity costs to the next entity in the supply

chain. Forward integration – set up/buy processing assets later in the supply chain.

3. Adaptive strategies: Ingredient substitution - commodity substitution if there is a sufficient price signal. Tolling – ‘cost-plus’ pricing where price fluctuations are passed along the supply chain.

Maintaining control in an era of scarcity

Strategic sourcing options


Strategic sourcing options for F&A companies


‘Commodity colonialisation’


The battle for raw materials


What is driving the international interest?

Example: strategic sourcing of Australian sugar


Australian sugar – a supply opportunity in Asia’s backyard

1 million tonnes sugar, 5 active mills, 2 bulk terminals, no refinery

1.9 million tonnes sugar, 6 mills,2 bulk terminals, no refinery consolidated by Sucrogen

1.3 million tonnes sugar, 5 mills,1 bulk terminal, 1 refineryConsolidated by Mackay Sugar

0.7 million tonnes sugar, 5 mills,2 bulk terminals, 1 refinery

0.4 million tonnes, 3 mills,no bulk terminal, 1 refineryConsolidated by Manildra

MossmanMaryborough Sugar Factory (MSF)TullySucrogenProserpineMackay Sugar Bundaberg Sugar Ltd Isis CentralWH HeckNSW Mills

Source: Rabobank International, company announcements

4-5 million tonnes of Aussie raw sugar

http://www.ldcommodities.com/




http://www.mitrphol.com/en/index.php

http://www.cofco.com/en/index.asp


Increasing physical control over supply

Source: USDA, Rabobank International

Bridging the supply gap

Buy mill

iBuy land

iGrow cane

iCrush cane

iProduce raw sugar

iConventional marketing

initially

iStrategic sourcing

in the future

Asia’s sugar deficit - 17 million tonne pa and growing


Selling options for agri-commodity producers

Farmer grain selling options

Go it alone

Take what is on offer

(bank/traditional finance)

Pool Take spot cash price

Actively manage production and

distribution

Store on farm (just in time

finance)

Store off farm (bulk handling

company finance)

Supply contracting with buyers/stakehold

ers

The current landscape



Producers and buyers – a marriage of convenience?

End-users and farmers want some of the same things:

Greater price certainty

Access to alternative ways of funding day-to-day operations

A reduction of their exposure to production risk

How can they work together to achieve their individual goals?



Crop Finance Crop production Harvest/delivery Crop marketing Proceeds from sale

Producer Issue: Low equity Low cash

reserves

Producer Issue: Production

volatility

Producer Issue: Lack of capital

to invest in on-farm storage

Producer Issue: Delay marketing

to achieve better price

Price volatility

Producer Issue: Doesn't align

with cash flow needs

Buyer solution: Provide capital Barter inputs for

commodity

Buyers - Providing solutions to producers problems to ensure supply

Producers - Want to increase production but need to overcome problems

Buyer solution: Share risk

Buyer solution: Invest in

storage so producer commits to selling to buyer

Buyer solution: Higher pricing

but producers need to better meet buyers needs

Buyer solution: Pre-payment

Cooperation between producers and buyers needed in an era of agri-commodity scarcity


14

Co-production model

.

Investor Farmer

Provides expertise equipment

and land.

Access to alternative forms of

capital outside debt.

Reduces overall risk.

Provides Capital

Owns the Production

Receives an Annual Return

Direct Exposure to soft commodity

production



Warehouse cash flow

Grower Warehouses grain in a bulk-handling

companies storage facility (i.e. Graincorp)

The Grower sells grain to the provider of the facility

at the prevailing market rate and receives an initial

payment of up to 60% of the grains value.

The Grower at any time can repay the payment and

sell to another party at the current market rate.

The grower captures prospective price upside, but

must also manage and is responsible for price

downside.

A solution ahead of it’s time?



Bartering inputs for grain

Inputs provided to the farmer at the start of the season in exchange for crops delivered at harvest time.

An alternative to farmers finding capital.

An accumulation strategy that works for many end-users/commodity traders.

Common practice in South America.

As much as 35% of Brazilian farm inputs are purchased through barter deals.

Only feasible in relatively low production risk areas.

The battle for agri commodities will be won by those with the most direct access to farmers.

Source:Rabobank International


Chinese bartering

China would like to secure supply of crops whilst reducing their dependence on grain trading companies.

Their initial approach of purchasing land and growing their own production has proved difficult in many countries.

Many countries limit foreign ownership of land.

Chinese companies are the leading producers of most farm inputs such as glyphosate.

It is only a matter of time before Chinese companies begin bartering agrochemicals and fertilisers in exchange for crop production.



Today’s conclusions:

30%

The World is changing:We are transitioning from an era of abundant agri-commodity supply to an era of scarcity and this will generate change along supply chains

Current Dynamics are not helping Farmers face weak signals to expand supply as buyers are hanging onto margins to boost profitability

Future depends on cooperation between producers and buyersAligning risk profiles with ability to fund will boost returns for both parties



Rabobank International

DISCLAIMERProfessional advice is recommended for all financial and strategic decisions. However, this information is not professional advice and has not been prepared to be used as the basis for, and should not be used as the basis for, any such decisions. This information is general in nature only and does not take into account an individual’s personal circumstances. No representation is made that any forecast or projected information is correct or will eventuate and past performance is not indicative of future performance. Although reasonable efforts have been taken to ensure the accuracy of the contents of this publication, no warranty is given in regard to the total accuracy of the printed contents. Rabobank has no obligation to update this document or correct any inaccuracies and/or omissions or otherwise advise the reader. The persons involved in the preparation and distribution of this information and their related persons disclaim all liability for any direct, indirect, consequential or other loss or damage suffered due to any use of or reliance on the information. Information contained in this publication may not be reproduced or published without Rabobank’s prior written consent.

“The financial link in the global food

chain”™

Food & Agribusiness Research and Advisory

Thos Gieskes

Chief Executive OfficerRabobank Australia and New Zealand

By Thos Gieskes September 2011 The changing dynamics of commodity supply Possible solutions to this challenge.

Documents

supply chain slide

rabobank international

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soybean prices source

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