Commodities 2011 outlook

December 10, 2010

Commodities 2011 Outlook: A Commodity Bull Market

We see most commodity prices moving higher in 2011 as global GDP, at an above-trend 4.2%, bolsters demand, led again by emerging market economies.

After growing by nearly 5.0% in 2010, global GDP growth is poised to grow by 4.2% in 2011 — importantly, over 70% of this growth will come from the commodity-intensive EM, with China, India and Latin America poised to see GDP growth of 9.0%, 8.7% and 4.1%, respectively.

Growing demand, together with a tightening supply side, provides the fodder for our broad constructiveness across the commodity space. Declining inventories will not only lift spot prices but will also improve roll returns (as drawing inventories move markets from contango to backwardation).

We are most constructive on crude oil, copper, gold, and corn and soybeans. We are least constructive on natural gas, live and feeder cattle, and zinc.

Our favorites: The need for increased OPEC production will lower spare capacity, sending oil prices above $100/bbl in 2011, in our view. Copper, our favorite base metal, should continue its move higher as strong OECD demand growth and resilient Chinese demand are contained by supply downgrades. Corn and soybean prices both need to rise to ration demand — simply put, demand is running too hot given tight inventories and limited acreage. Gold will benefit from continued investment demand, stemming from a continued expansion in global money supply and lingering sovereign risks.

Risks: Despite our constructiveness, we expect the ascent in price to be volatile. Lingering sovereign risks, fears of policy missteps in the EM, and bouts of USD strength will all present headwinds.

Table of Contents PageSnapshot 2Energy 3Metals 6Agriculture and Softs 11Livestock 17Forecasts 19

For important disclosures, refer to the Disclosures Section, located at the end of this report.

M O R G A N S T A N L E Y R E S E A R C H G L O B A L

Morgan Stanley & Co. Incorporated Hussein Allidina, CFA

[email protected] +1 212 761 4150

Chris Corda

Tai Liu

Bennett Meier Morgan Stanley Australia Limited Peter G Richardson

[email protected] +61 3 9256 8943

Joel B Crane

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December 10, 2010 Commodities

Snapshot

Commodity Bearish Neutral Bullish Rationale

Crude Oil • Global inventories contracting, with demand reaching an

all-time high in 3Q10. • Spare capacity to decline, falling to 2007/08 levels by 2012.

Corn • Tightest US inventories since 1995/96.

• Drought concerns in South America. • Stiff competition for US acreage in 2011.

Soybeans • Strong demand from Chinese crushers.

• Drought concerns in South America. • Record US exports forecast for 2010/11.

Gold • Fears of currency debasement fuelling demand.

• EU sovereign debt issues driving safe-haven demand. • Declining official sector sales tightening market.

Copper • Strong OECD consumption growth and resilient demand in

China driving tightness in physical markets. • Downgrades to mine production by major producers.

Cotton

• Chinese supply disruptions driving demand for US and Indian exports.

• DM textile demand improving.

Wheat • Comparatively full US balance.

• FSU, Australian supply disruptions forcing more customers to the US.

Nickel • Demand recovery has returned the market to balance.

• Laterite projects likely struggle to meet ramp-up timetables, keeping markets tight.

Sugar • Early end to Brazilian crush leaves inter-harvest balances

tight. • Indian production and export outlook unclear.

Lean Hogs

• Modest retail demand growth prospects in 2011. • Building cold storage and reduced sow slaughter temper our

bullishness through first half of next year.

Aluminum • Market likely to be in surplus until 2012, with strong demand

not eliminating effects of excess capacity. • Physically backed ETFs likely in 2011.

Feeder Cattle • Expected demand slowdown in live cattle and higher grain

prices are challenges. • Herd reductions through 2010 have continued to pare supply,

mitigating bearishness.

Zinc • Chinese mine and smelter capacity has responded quickly to

improved demand from galvanized steel. • Stock-to-consumption ratio has risen in 2010.

Natural Gas • High inventory in North America.

• Drilling remains elevated despite record production. • Substantial overhang of well inventory.

Live Cattle • Heavier live weights and higher slaughter rates in the fall

boosting inventories. • Higher feedlot placements suggest greater supply.

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December 10, 2010 Commodities

ENERGY CRUDE OIL — Returning to a Supply- Constrained Market Through 2010, crude oil prices traded very much in sync with the macro, with flat prices trading mostly between $70-80/bbl. More recently, prices have broken through $80/bbl and are trading either near (WTI and Dubai) or above (Brent) $90/bbl, as oil market fundamentals have tightened in 2H10, as we discussed in our 2010 commodity outlook (2010 Commodity Outlook: Fundamentals Will Matter, Dec 22, 2009). Economic events such as the European sovereign debt crisis (in May and again in November), the double-dip scare, QE2, China’s goldilocks scenario and subsequent inflation worries all moved prices meaningfully through the year. Inventories, though higher than we had envisioned them to be at the start of the year, have drawn significantly in the past few months. Draws were first seen from floating storage at the end of summer, and offshore inventories for Nov now sit at 21.2 mmb, well off the Jan highs of ~109 mmb. With offshore inventories largely depleted, growing demand is being increasingly satiated with onshore inventories — OECD industry inventories fell by 42.8 mmb in Sep (vs. a 5Y average build of 3.7 mmb), while weekly data globally shows further draws in both Oct and Nov. Most notably, US inventories fell 11.6 mmb in Oct and a further 21.2 mmb in Nov (Oct and Nov typically see inventories falling by only 0.5 mmb and 1.1 mmb, respectively), while global inventories excluding the US, captured by weekly data where available, have returned to ‘normal’.

Exhibit 1 Inventories Outside the US Have Already Returned to Normal… (Aggregate of available data from Singapore, ARA, Japan, and China, mmb)

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2007 2008 2009 2010

Source: Norwegian Energy, EIA, Morgan Stanley Commodity Research

Exhibit 2 With Inventories in the US Drawing Sharply of Late (MoM Δ in total US inventories, mmb)

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Aug Sep Oct Nov

2010 5-Year Avg

Source: EIA, Morgan Stanley Commodity Research

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December 10, 2010 Commodities

Exhibit 3 2011 Demand Growth Skewed to the Non-OECD (Total demand growth, YoY % Δ)

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-5.0% 0.0% 5.0% 10.0% 15.0%

Non OECD Europe

OECD Pacific

Other Asia

Total OECD

North America

OECD Europe

World

Latin America

Africa

Total Non OECD

Middle East

FSU

China

India

Source: IEA, Morgan Stanley Commodity Research estimates

We attribute the recent inventory draws to robust demand globally. Total world demand in 3Q10, as reported by the IEA in their latest OMR, reached a record high 88.5 mmb/d, up 3.1 mmb/d YoY, driven largely by the non-OECD. Nonetheless, OECD demand has also improved notably in the past two quarters, as demand has posted seven consecutive months of YoY growth through Sep – a first since Mar 2005. In 2011, we see global demand growing by 1.5 mmb/d to average a record high 88.5 mmb/d, driven again by the non-OECD. We expect robust GDP growth in the EM, particularly in China and India — where we see oil demand growth of 6.5% and 9.8% — to lift non-OECD demand by 1.6 mmb/d (4.0%). The Middle East will again be a noteworthy contributor to global demand growth, higher by 295 kb/d YoY (4.0%). We see demand in the OECD declining only slightly. On the supply side, we see non-OPEC supply falling slightly by ~ 380 kb/d or 0.7% YoY. Increases in production from the Canadian oil sands, the oil shale plays in the US, the deepwaters of Brazil and EOR methods in Colombia are not enough to offset declines in the North Sea, Mexico and Asia. For more details please see, Crude Oil: Tightening Supply to Send Prices Higher, Nov 1, 2010.

If demand grows as envisioned, inventories will decline significantly in 2011, allowing for a continued improvement in curve structure (towards a sustained backwardation) and the need for increased OPEC production — our estimates show the need for increased OPEC flows sometime in 1H11. We believe that a formal increase in OPEC production quotas will force the market’s attention back to supply constraints and dwindling spare capacity — we see spare capacity falling to 4.1 mmb by end-2011, from 5.9 mmb/d currently. Exhibit 4 Increased OPEC Production Needed in 2011 to Prevent Significant Inventory Draws (Left axis: OECD industry inventories, bln bbls; right axis: MoM Δ in OPEC Production, mmb/d)

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2005 2006 2007 2008 2009 2010 2011 2012(1,250)

(750)

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OPEC Crude Prod MoM Δ - RHS OPEC Adds/CutsStocks - LHS (bln bbls) MS Forecast - LHS (bln bbls)Inv. Path without OPEC Invervention

Source: IEA, Morgan Stanley Commodity Research estimates

As spare capacity is poised to tighten meaningfully and with demand relatively inelastic in the short run, we reiterate our view that higher prices are needed to ration demand. We forecast prices in 2011 and 2012 to average $100/bbl and $105/bbl respectively and recommend investors take exposure to Dec ’11 WTI, current trading at $90.14/bbl, well off the 2010 high of $95.45/bbl seen this past May. NATURAL GAS — Systemic US Oversupply Will Continue to Pressure Prices Natural gas prices were challenged through 2010, tumbling by 20% YTD as supply proved to be a significant headwind. Heading into 2011, many of the bearish forces we saw in 2010 are likely to remain in place. Natural gas remains mired in an over-supplied environment with high inventory levels, high drilling activities, elevated production, and limited structural demand growth. On the bullish side, coal prices have risen considerably since our initiation report (Natural Gas – Fundamentally Oversupplied, October 11, 2010), which will encourage natural gas to make more in-roads into the coal stack, a positive for demand.

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December 10, 2010 Commodities

We entered the ’10-’11 heating season with record levels of inventory (+3.8 tcf) and barring a frigid winter, we are likely to exit the ’10-’11 heating season with record amounts of gas in storage (1.9 tcf). The latest EIA data points to Sep dry gas production of 60.4 bcf/d, a 0.5 bcf/d MoM and 4.3 bcf/d YoY increase. Drilling also remains elevated; the latest data from Smith Bits Stats indicate the rig count near 860. The resiliency of rig activity will carry production momentum well into 2011. Exhibit 5 US Gas Production Remains Robust Amid Elevated Drilling Activities (left-axis: rig count; right-axis: bcf/d)

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Sep-07 Mar-08 Sep-08 Mar-09 Sep-09 Mar-10 Sep-1045

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Horizontal Vertical & Directional Production, bcf/d

Source: Smith Bits Stats, EIA, Morgan Stanley Commodity Research estimates

In addition to the bearish production and inventory outlook, there is also a sizable inventory of wells awaiting completion. The oil & gas service industry estimates that some 2,500 to 3,000 wells will remain uncompleted YE2011 (Halliburton, Q310 earnings call). To put this in context, there was an average of 30,500 natural gas wells drilled between 2004 and 2008 in the US. In 2009, when drilling activity slowed markedly, there were still over 19,000 gas wells drilled. An inventory of close to 3,000 wells can easily represent an overhang of 10% in terms of annual wells drilled. This suggests either:

1.) the production momentum will likely be sustained even after rig activity moderates; or

2.) we will see a pickup in production if the service industry brings more capacity online.

On the other side of the balance, demand growth is unlikely to provide much relief. In 2009, industrial gas demand plunged by 1.5 bcf/d YoY as industrial activity declined. In 2010, industrial gas demand recovered significantly as the world economy rebounded. We estimate industrial gas demand will average 18.2 bcf/d in 2010, a YoY increase of 9%. If realized, this represents a complete recovery to 2008 levels. For 2011, we are building in a considerable YoY increase of 4.9% to 19.1 bcf/d (based on an industrial production forecast of 5.1% YoY increase). Unless the industrial sector performs well beyond our expectations, we believe there is little upside potential beyond what we are currently modeling, in our view. There are, however, bullish developments since we published our initiation piece in Oct. With more normalized inventory levels and a strong overseas market, coal prices have risen considerably, and the 12-month coal strip has increased by $10/ton. At current coal and gas prices, the 8,000 btu/kwh gas units in the Southeast are deep in-the-money compared to 10,000 btu/kwh coal units. Unless coal prices pull back from here, we will likely continue to see substantial coal-to-gas substitution in 2011. Weather will also have major ramifications for natural gas demand. During the heating season, the difference between a milder 10-yr normal winter (with 3,776 GWHDD) and a colder 30-yr normal winter (with 3,931 GWHDD) can translate into 200–250 bcf of heating demand. Summer demand is no less prone to these fluctuations. The summer of 2010 was 22% warmer than the 30-yr normal, which translated into an extra 200-250 bcf of gas demand in the power sector. Extreme weather can wear down inventories and support gas prices. While any combination of bullish demand scenarios (extreme weather, strong coal prices, strong economic performance) has the power to draw inventories lower, the root cause of the low gas price environment stems from the supply side. Hence, the onus is on the gas producers to balance this market by scaling back drilling activities. Unless and until this is achieved, natural gas will remain oversupplied. We re-iterate our price forecast of $4/mmBtu for 2011.

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December 10, 2010 Commodities

METALS

Base metals, having undergone a significant correction in 2Q and early 3Q 2010, are expected to show continued price appreciation in 2011-12. In our view, this reflects the combined influence of improving physical market fundamentals (as reflected in strengthening leading indicators such as industrial production, continued investment demand as a result of low interest rates and loose monetary policy in the DM) and, in some metals, inventory financing arrangements or physically backed Exchange Traded Funds (ETFs).

Our preferences in this sector remain copper, tin and nickel — all metals where the potent combination of sustained EM demand growth, limited refined production growth, and low inventories provide the basis for a sustained backwardation in nearby prices and elevated cash prices.

Exhibit 6 Relative Performance of LME Metals in 2010 (Prices Indexed, where Jan 1 = 100)

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Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Nickel Tin Copper Aluminum Lead Zinc

Source: Bloomberg, LME, Morgan Stanley Commodity Research

Currently, we are more cautious on metals such as aluminum, lead and zinc, whose markets will be slower to return to deficit and where supply discipline or restraint is noticeably less evident. However, we are cognizant that inventory financing deals in aluminum, or their successor in the form of physically backed ETFs, will provide price tension and support, despite weaker fundamentals.

ALUMINUM — Bloated Inventories Will Weigh on Prices

Aluminum remains one of the laggards of the base metals sector both in terms of YTD price appreciation (-44.2% vs tin and -21.4% vs nickel), and relative price performance as

Exhibit 6 clearly shows. Although LME on-warrant stocks have declined slowly to their lowest level since 2Q 2009 (4.29Mt at the end of November), reported total stock-to-consumption ratios remain well above the industry clearing level of 5.8 weeks at 8.4 weeks.

Despite continuous market speculation over the potential for a tightening market, we estimate that 2010 will be the fourth consecutive year of global market surpluses in aluminum. Under these circumstances, producers and financial intermediaries have resorted to the innovation of inventory financing deals to prevent a significant fall in prices below marginal costs. This development has come at the cost of a fundamental and effective purging of excess capacity from the global aluminum industry.

Exhibit 7 Aluminum Stock-to-Consumption Ratio – Well Above Average (left axis: Kt, right axis: days of consumption)

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Total commercial stocks (LHS) Stock to consumption ratio (RHS) Avg ratio

Source: World Bureau of Metals Statistics, Morgan Stanley Commodity Research

Data from the World Bureau of Metal Statistics (WBMS) through 3Q10 indicates a supply surplus of 285Kt or an annualized level of 380Kt. This would make the 2010 surplus the smallest since 2007, when the market recorded a surplus of 244Kt. Despite a 78.5% contraction in the market surplus on a YTD basis, details of this market balance indicate an ongoing problem of excess capacity.

Through 3Q10, primary aluminum production increased by 23.3Mt, or 12.2%, to 30.38Mt. Over the same period, adjusted world refined consumption rose 17%, or 4.31Mt, to 29.79Mt. Despite such a substantial increase in consumption, the supply and demand imbalance is largely the result of a 37.3% increase in Chinese production and a 9.1% rise in Indian output.

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December 10, 2010 Commodities

Against this backdrop of improving fundamentals, but ample inventory, a sharp move in cancelled warrants during Sep fuelled speculation about the launch of a physically backed ETF in late 2010 or early 2011.

In our view, while such a product may attract some investors, the existence of a physical fund is unlikely to transform the fundamentals of the market despite an anticipated relocation of exchange stocks into these funds. While a successful launch of physically backed aluminum ETF would, as now, have a price-tensioning impact in the short term, absolute and relative price performance over the longer term will depend on a return to a deficit market. On our current estimates, this will not be before 2012.

COPPER — Tight Physical Market, Diminished Production Driving Sector Favorite

The copper market surprised even the strongest of bulls by defying traditionally weak 3Q inventory and pricing trends in 2010. Despite signs of rising volatility, the upward trend in cash copper prices has continued into Q4 2010 amid signs of an emerging front-end squeeze. Although prices are currently trading close to their all-time high, strong demand trends, low inventory and ongoing supply constraints have reinforced our conviction that copper fundamentals remain the strongest in the base metal complex.

The latest statistics from the International Copper Study Group (ICSG) show the global market recorded a cumulative deficit of 368Kt YTD through Aug 2010 after refined consumption grew by 7.9%; however, refined supply only increased by 5.3%. Non-China demand has surprised to the upside. Consumption, again through Aug 2010, was up 7.5% YoY in the US, 24.3% YoY in Germany, 12% in the EU-15 and 29.5% in Japan. After a 36.8% increase in apparent consumption in 2009, Chinese growth has been more modest this year, rising only 3.6% YoY YTD through Aug. However, this indicates that the impact of de-stocking in China after last year’s aggressive campaign of imports has been modest.

LME stocks have fallen each month since Feb, declining by 36% over this period to 355.8Kt through Nov, their lowest level since Oct 2009. Shanghai exchange stocks ended 3Q 2010 at their lowest level since Aug 2009, while Comex copper stocks ended 3Q at their lowest level since Nov 2009. While a sustained recovery in global demand contributed to this trend, tighter market conditions are also a function of supply constraints.

Production downgrades from some of the world’s largest copper producers (BHP Billiton, Freeport McMoRan, Kazakhmys, Antofagasta and Rio Tinto) have accelerated an already extraordinarily tight concentrate market. The ensuing drop in spot treatment charges and refining charges (TC/RC) prompted a number of smelters to cut production. Spot TC/RCs have since rallied on these smelter cuts and a sharp increase in secondary copper supply (which has risen 20.6% YTD), without altering primary market fundamentals, in our view.

Coupled with weak supply growth, resilient demand has pushed the stocks-to-consumption ratio nearly back to before the global financial crisis levels of 3.4 weeks through 3Q10. This is a remarkable feat given market expectations for a protracted economic recovery on the back of a below-par growth in the DM and risks to EM growth arising from rising inflation.

Exhibit 8 Copper Stock-to-Consumption Ratio – Getting Tight (left axis: Kt, right axis: days of consumption)

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Total commercial stocks (LHS) Stock to consumption ratio (RHS) Avg ratio

Source: International Copper Study Group, Morgan Stanley Commodity Research

NICKEL — Surplus Dwindling; Deficit Likely in 2011

Nickel remains one of our most preferred exposures in the base metals complex, given our expectations the metal will move from a balanced market to a deficit in 2011. According to the latest data from International Nickel Study Group (INSG), the primary nickel market was in a small surplus of 4Kt at the end of Aug-10, compared to a surplus of 71.4Kt at the same time in 2009. Primary nickel demand increased by 16.2% to 932Kt YTD-Aug. At this rate of consumption, primary nickel usage will be the highest since 2006 and very close to an all time record. This recovery reflects the strength of stainless and non-stainless demand, especially in Europe, Asia and the USA.

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December 10, 2010 Commodities

By contrast, production of primary nickel has increased by only 6.9% over the same period to 935.9Kt. The long-running strike at Vale Inco’s Canadian operations and operational difficulties in Australia lowered production by 38.9% and 13.7% YoY, respectively. Elsewhere, primary nickel production increased sharply, with output in China, Indonesia and Brazil increased by 37.9%, 59.4% and 14.8% respectively. According to Brook Hunt, in the past 2-3 months the market has moved from a modest surplus to a deficit of 11Kt, increasing the likelihood that we will move into 2011 against the backdrop of a deficit market and strong demand. The execution of the supply pipeline will likely dominate the degree of price strength in the coming quarters, with risks skewed to the upside against any project delays. Following the return of Vale Inco’s Sudbury operations, the global nickel market will depend on the success of a number of technically complex and high-cost new and brownfield laterite projects. In our view, it is unlikely the projected timetable of production ramp-up will be realized without issue, increasing the likelihood that the refined market will again be in deficit in 2011. After dipping to a 2010 low of 116Kt in late Jul, LME nickel inventories increased by 14Kt before stabilizing amidst strengthening demand. We expect inventories to resume a modest declining trend in 1H11 as stainless steel production accelerates along with industrial production. According to the International Stainless Steel Forum, stainless steel output returned to pre-crisis levels in 1H10. While the destocking cycle appears to be over and inventory levels have normalized, according to the stainless producers, increased order inflow indicates some consumers believe the global economy is strengthening. Total stainless production is currently forecast to increase by 20.7% in 2010, to a new record of 30.3 mt, of which 72.2% is estimated to be in austenitic grades.

Exhibit 9 Nickel Stock-to-Consumption Ratio, 1996-2000 (left axis: Kt, right axis: days of consumption)

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Total commercial stocks (LHS) Stock to consumption ratio (RHS) Avg ratio

Source: International Nickel Study Group, Morgan Stanley Commodity Research

ZINC — High Inventories and Rapid Supply Response Pressuring Prices

Zinc fundamentals remain amongst the weakest of the major base metals, with global inventories close to their highest since May 1995. The monthly stock-to-consumption ratio at the end of Sep was 5.2 weeks compared to an estimated long-run clearing level of 4.3 weeks. Increases in exchange stocks since the end of Q3 suggest that the stock-to-consumption ratio has risen further. According to the latest data from the International Lead and Zinc Study Group (ILZSG), the refined zinc market was in a surplus of 175Kt at the end of 3Q10, compared with a 271Kt surplus at the same time in 2009. This rate of contraction in the supply overhang is less than half the rate of improvement recorded in the aluminum market over the same period. This slower rate of market adjustment is primarily the result of a faster supply response in refined zinc than in aluminum production. ILZSG data indicate in the nine-month period ended Sep-10, refined zinc production increased by 15.3% while primary aluminum production rose by 12.2%. By contrast, consumption of both metals increased by 17% over the nine-month period. Like the aluminum market, the increase in refined zinc production is the result of increased output from Chinese smelters, which increased production by 23.7% YoY, accounting for 58% of the increase in global refined production.

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December 10, 2010 Commodities

The rapidity of the zinc supply response is only partially explained by a ramp-up in mine production, which rose by 885Kt or 10.7% to 9.14Mt, indicating smelters relied on secondary supply and concentrate stocks to lift refined output to 9.46Mt. Almost all of the increase in mine production YTD is also the result of increased mine output in China, which has raised production by 600Kt or 29.6%. Total commercial stocks of zinc at the end of Nov-10 were 1.35Mt, of which 68% were exchange stocks. 632Kt of the exchange stock total were on LME warrant, with the balance of 296Kt on SHFE warrant. Part of the exchange stock increase represents transfer of producer stocks into the LME to take advantage of inventory financing deals. According to Metal Bulletin, this accounted for around 50% of LME metal on warrant as of early Oct. While we expect the refined zinc market will continue to move towards a more balanced market over the course of 2011, we believe zinc prices will continue to underperform relative to other LME metals until we see clear evidence of a reversal in current inventory trends.

Exhibit 10 Zinc Stock to Consumption Ratio (left axis: Kt, right axis: days of consumption)

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Total commercial stocks (LHS) Stock to consumption ratio (RHS) Avg ratio

Source: International Lead and Zinc Study Group, Morgan Stanley Commodity Research

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December 10, 2010 Commodities

GOLD — Expansionary Monetary Policies and Sovereign Risks to Support Prices

We are increasingly positive on the outlook for gold in 2011. This is in part due to the adoption of renewed Quantitative Easing (QE2) by the US FOMC at its meeting on Nov-10. The positive impact on gold prices from QE2 derives from the boost to investor demand for hedges against the threat of imminent deflation or subsequent inflation because of excess growth in the money supply. An age-old fear of inadequate demand, or too much money chasing too few goods, is expected to boost demand for assets such as gold that are likely to perform well in deflationary or inflationary environments. We also expect investment demand for gold to remain strong given the resurgence of the European sovereign debt crisis. Fears of contagion risks should boost gold prices as investors seek out safe havens. However, the anticipated policy response to this contagion risk could also boost gold demand if the European Central Bank moves to adopt quantitative easing through the unsterilized purchase of peripheral Euro members’ government bonds. Following the events of Nov 2010, we also expect strong investment demand for gold in 2011 as the political risk heightens in the Korean peninsula. After eight months of escalating tensions between North and South Korea, the Nov 2010 event was one of the most serious incidents between the two nations since the Korean War ended in 1953. The desire to hedge political as well as financial and economic risks makes the current situation a near perfect storm for an asset such as gold.

Finally, trends in official sales and purchases continue to be supportive for gold’s price outlook. In 3Q10, the sector posted its sixth consecutive quarter of net purchases, with central banks purchases outpacing sales by 21.9t according to the World Gold Council. During the first year of the third Central Bank Agreement on Gold, which concluded at the end of Sep 2010, Eurozone banks sold just 6.9t of the precious metal, the lowest annual sales total since these agreements began in 1999. This markedly reduced desire to dispose of gold reserves is occurring at a time of rising sovereign debt risks and distress in public finances. Within the official sector, only the IMF has shown any material appetite for selling gold this year, with only 52.2t of remaining IMF gold to sell from the original allocation of 403.3t at the end of Q310. As a result of these supportive developments, gold as a percentage of total central bank reserves has risen to 10.1% in 1H10 from a decade low of 8.6% in 2Q07. Exhibit 11 Inflationary Concerns Supportive for Gold Prices (Left axis: USD; right axis: US 5-year tips yields, inverted, % points)

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Gold Price - LHS US 5-year TIPS - RHS

Source: Reuters, Morgan Stanley Research

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December 10, 2010 Commodities

AGRICULTURE AND SOFTS

CORN — Balances Too Tight, Demand Needs to Be Rationed

2010 marked the return of tightness to global corn markets. Despite an increase in planted acres, production in the US declined YoY as a dry hot summer in the Eastern Corn Belt and storms in the Northern Corn Belt during harvest weighed on yields. (Yields are expected to average 154.3 bu/acre, which are still “good” historically though not when compared to the lofty estimates many had expected early in the season.) At current estimates, the US will produce only 12.54 bln bu of corn this year, leaving stocks-to-use (S/U) at only 5.5%, the tightest since the 1995/96 marketing year. Globally, the balance fared no better as marginal production growth failed to offset 3% YoY growth in demand. The result: we expect global S/U this year to fall to 13.7% in 2010/11, its lowest level since the 2006/07 marketing year.

Tightening inventories have sent prices rallying to levels not seen since mid 2008, up 35% YTD. Corn has seen pressure into year-end as speculative longs have taken profits on fears surrounding the likely expiry of the ethanol tax credit, index rebalancing and a typically slow news period. However, we feel that prices will need to move significantly higher in the spring—above $6.00/bu—to ration demand and incentivize needed acreage to keep S/U in the US and globally from falling further.

Exhibit 12 At Current Prices, Global Corn S/U Unlikely to Build Significantly in 2012 (stocks to use, %)

0%

5%

10%

15%

20%

25%

30%

35%

1995/1996 1999/2000 2003/2004 2007/2008 2011/2012e

World US

Source: USDA, Morgan Stanley Research estimates

We expect corn production to increase by 3% YoY in 2011/12 as higher prices encourage additional acreage, particularly in the US and China. These acreage gains are largely contingent on relative performance in the soy and wheat pits, which have shown strength to-date, into 1H2010. We are also monitoring the situation in South America where dry weather in Oct delayed soybean planting in the major agricultural state of Mato Grosso. A delayed bean harvest would tighten the window for planting Safrinha (double-cropped) corn later in their summer. With nearly 40% of Brazil’s corn production coming from the Safrinha crop last year, planting disruptions could materially impact Brazilian supply in 2011.

Exhibit 13 To Gain Acreage from Soy, Corn Prices Must Rise (Nov Soy/ Dec Corn Price Ratio)

1.81.92.02.12.22.32.42.52.62.72.8

2005 2006 2007 2008 2009 2010

SX6/CZ6 SX7/CZ7 SX8/CZ8

SX9/CZ9 SX0/CZ0 SX1/CZ1

Favors corn planting

Favors soy planting

Source: Bloomberg, CBOT, Morgan Stanley Commodity Research

While we predict a slight global production surplus next year, demand will likely continue to grow YoY, limiting the extent to which supply shocks can be absorbed. Higher prices and a surge in the supply of feed-quality wheat available next spring should encourage some limited protein feed switching, driving below-trend growth in global corn feed demand of 0.3% YoY despite surging protein consumption. In the US, ethanol will continue to consume a growing share of domestic production. Under the 2011 RFS mandate, refiners will be required to blend 12.6 bln gal of ethanol into the gasoline pool, translating into baseline demand for 4.58 bln bu of corn. In 2012 the mandate is slated to increase to 13.2 mln gals, requiring 4.8 bln bu corn. While the fate of the tax credit to ethanol blenders remains a question mark at the time of this writing, we have growing confidence in the resilience of discretionary blending into next year, even if corn/ethanol prices pressure blending margins. As such, the risks to our ethanol demand numbers remain squarely to the upside.

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Exhibit 14 Ethanol Mandates Imply Growing Corn Demand (RFS-implied corn demand from ethanol, bln bu)

0

1

2

3

4

5

2007 2008 2009 2010 2011 2012

Source: EPA, Morgan Stanley Commodity Research estimates We suspect that the China will continue to grow as a destination for exports from the US and South America. Despite recent official statements that China’s 2010 crop will ensure adequate supply, we remain skeptical, as Chinese corn prices did not follow the rest of the agricultural complex lower after the government announced a renewed focus on curbing food inflation. Private forecasters in the country have raised questions over official production estimates, and it would not surprise us to see the USDA revise historical stocks numbers lower as recently witnessed with Cotton (see page 14). We continue to expect that China will be an importer of US corn in spring 2011, and becoming an even bigger importer in the years to come.

Given historically tight corn balances, and the need to reserve adequate US acreage against surging soy and wheat values, we reiterate our preference to be long Dec 11 corn (currently trading at $5.60/bu, first recommended in our Oct 25 note Agriculture Update: Still See Further Upside to Corn and Beans Prices).

SOYBEANS — China’s Insatiable Appetite and the Need for New Acres

In similar fashion to corn, record US soybean production in 2010 has barely been able to keep pace with growing demand from crushing industries in the EM, feeding ever-increasing calls for protein feed and cooking oil. US S/U in 2010/11 looks poised to increase only slightly to 4.6%, up from 4.5% last year, though this is down markedly from expectations earlier in the year, as US yields have disappointed.

With crops in China also disappointing, the country has lifted imports to satisfy demand. Much of these beans have been sourced from the US, where total export sales MYTD are up 17% YoY and shipments are up 14% YoY. Exhibit 15 78% of USDA’s US Export Forecast Already Sold (Current MY Total Soybean Export Commitment, mln bu)

300

500

700

900

1100

1300

1500

Sep

Oct

Nov

Dec Jan

Feb

Mar

Apr

May Jun

Jul

Aug

2009/10 2010/11 USDA 10/11 Forecast

Source: USDA, Morgan Stanley Commodity Research

Against this backdrop, we forecast Chinese import demand for MY 2010/11 will grow 13% YoY before flattening out in 2011/12. While we believe that growth in Chinese production next year should limit the need for additional imports, our growth assumptions may ultimately prove too conservative, implying more downward pressure on western hemisphere S/U. In South America, we also anticipate the overall soybean balance to tighten into next year. Argentina is expected to plant a record 46.1 mln acres for soybeans, however, we expect yields to decline YoY in 2010/11 to 41.5 bu/acre, as a result of dryness caused by La Nina. We forecast S/U to decline from 46% in 2009/10 to 38% 2010/11 as strong global consumption (including renewed demand for Argentine exports from China) coupled with positive crush margins should keep demand elevated. In Brazil, we expect soybean acreage will reach a record high of 59.3 mln acres in 10/11. However, dry weather in Brazil has offset the potential for additional acreage expansion as farmers have responded to the reduced likelihood of getting in a Safrinha corn crop by planting cotton instead of soybeans. We are also building in a slight increase in soybean exports for 2010/11 and expect Brazilian S/U to remain largely unchanged at approximately 25%.

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December 10, 2010 Commodities

Exhibit 16 World Heading for Trade Deficit in Soybeans (Soybean Global Trade Deficit, mln bu)

-400

-200

0

200

400

600

800

1,000

1,200

2009/2010 2010/2011e 2011/2012e 2012/2013e 2013/2014e

Source: USDA, Morgan Stanley Commodity Research estimates

In spring 2011, aggregate planted acreage must increase in order to satiate demand in a world of rising consumption. At an average yield of 45 bu/acre, our trade deficit analysis underscores the need for 10, 15, and 25 mln additional acres between 2011/12 to 2013/14, respectively. With many of the major soybean producers at or near historical highs, new acreage is needed. The best hope for new acreage will come from Brazil. However, development of marginal acreage in Brazil requires higher prices as transportation presents a significant cost hurdle. As such, we believe that soybeans next year need to average a price above $12.50/bu in order to incentivize Brazilian farmers to bring marginal acreage into production. With the US balance unable to give up significant acreage, and corn needing to gain at least 2.5 mln acres to keep from plummeting to record tightness, we expect that the fight for spring acreage will be bullish for soybean prices at least through spring 2011. WHEAT — Quality at a Premium after 2010 Rains

The US will likely shoulder much of the world’s demand for wheat as production disruptions in the EU, FSU, and Australia have limited their ability to export. Production disruptions lit a fire under wheat prices late in the summer — similar, but muted relative to the situation in 2007/08 with inventories today more comfortable on a global basis, driven largely by a surplus in the US. Although we are comparatively neutral on wheat (relative to corn and beans), we believe that prices will track higher with rising corn and soybean prices,

albeit not by the same magnitude, in an effort to maintain acreage. Severe drought in Russia devastated the spring wheat crop (responsible for one-third of total Russian wheat production). The greater than 30% YoY drop in Russian production tightened domestic inventories, which are seen falling to below 200 mln bu from 440 mln bu, and prompted an official export ban. While a turn in weather (above-normal rainfall which started at the end of Aug) accelerated Russian winter grain planting, planted area is still estimated to decline 3 mln ha YoY. Additionally, the late planting has resulted in greater winter-kill risk as root structures are weak heading into the winter. Our recent visit to Moscow leads us to believe that exports may remain scarce until late-2011 or even into 2012 as next year’s spring wheat crop is also likely to be smaller than expected — owing to a shortage of seeds. In other major wheat producers, the outlook for the 10/11 crop and beyond is mixed. In Argentina, early season rains provided much-needed moisture into the key kernel development months, and dryness into the harvest period bodes well for quality. Argentine production is likely to offset some of the impact from Russian production disruption; Egypt recently announced that it would resume imports from Argentina to make up for lost supply from Russia. Exhibit 17 US Export Sales Responding to Global Supply Shocks (US Weekly Wheat Export Sales, ‘000 mt)

-800

-300

200

700

1200

1700

2200

Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May

5-yr range 10/11 Average

Russian Export Ban

Australia ProductionWorries

Source: USDA, Morgan Stanley Commodity Research

Recent La Nina-related rains in Eastern Australia, with more forecast through the first half of December, have dashed prior hopes of a stellar 2010/11 crop. Farmers to date have only harvested 8 mln mt out of a forecast 26.8 mln mt as excess soil moisture has kept them from getting into their fields. Quality

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December 10, 2010 Commodities

declines are now a prime concern, with higher than normal percentages of the crop likely to be rated only feed-grade. Meanwhile, drought in the Western Australia will likely halve wheat production YoY from 2009/10 levels of 8.2 mln MT. Rains during the wheat harvest in Germany, a major European supplier of mill grade wheat, also prompted quality declines this fall and resulted in only about 50% of the crop deemed suitable for milling versus 80% in average years. Although the US has the wheat to meet dislocated demand from a continued ban on Russian exports and supply disruptions in Australia, the ability to export record wheat volumes, while also exporting elevated levels of corn and soybeans, may be challenging. Exhibit 18 US Responsible for Outsized Portion of Exporting Country Stocks (Stocks to Use, %)

0%

5%

10%

15%

20%

25%

1995/1996 1999/2000 2003/2004 2007/2008 2011/2012e

Top 5 Exporters Ex-US US

Source: USDA, Morgan Stanley Commodity Research estimates A comparatively full US balance sheet should limit the upside to US prices through the first half of 2011 though we anticipate some divergence between different quality grades. A comparative surplus of feed-quality wheat should pressure prices in those contracts, while high-quality wheat will be in short supply. We expect this to result in Kansas City wheat outperformance against the Chicago contract, though we note that both contracts will likely feel support from questions over the adequacy of US supply. US winter wheat entered its Dec dormancy period rated only 47% Good or Excellent, well below the average for this time of year. While early season ratings don’t definitively translate into lower yields in the spring, they raise the probability of such an event. With the US likely having to pick up the slack from reduced exports from Australia and the FSU, an underperforming winter

wheat crop would suggest the need for increased wheat acreage next year linking wheat prices more closely to the expected appreciation in the corn and soybean pits.

COTTON — Historic Prices Failing to Soften Demand

A host of supply disruptions and resilient textile demand has driven global cotton S/U to 17-year lows of 27% and pushed front month prices to 140-year highs. Chinese 2010/11 production is expected to decline 6% YoY on lower harvested area (down 4% YoY) and lower yields as cold, wet conditions during planting hampered plant development and flooding in late summer resulted in higher rates of abandonment. The USDA currently expects production of 30 mln bales this year (vs. demand of 47 mln bales), although domestic consulting firms give estimates nearly 1.0 mln bales below that. Additionally, the USDA admitted in November to systematically overestimating Chinese mill stocks, lowering their 2010/11 beginning stocks number by 3 mln bales and further corroborating the under-supplied situation in the country which high prices have seemed to indicate. Pakistan’s flooding also devastated cotton growing regions, and we expect production to decline 5% YoY, dislocating 400 mln bales of export demand to other suppliers, likely the US. However, we expect a modest improvement in production of 1% in 2011/12, though infrastructure constraints following the floods may provide barriers to that growth. With strong crops in 2010, the US and India will have to take up much of the slack into 2011. With the US crop just harvested and only now starting to enter warehouses along the Gulf Coast, 13.9 mln bales of exports — out of an estimated 15.75 mln bale total for the marketing year — have already been sold. India expects record production this year, and upside exists to the USDA’s current export forecast for the country of 4.8 mln bales, particularly considering expectations that Chinese prices will remain higher YoY through much of 1H11. Despite record high prices, demand has remained resilient, and we expect this trend to continue well into next year, largely owing to supply shortages in China which have likely postponed some demand there. Nevertheless, Chinese yarn production is already up 15% YoY MYTD through October with garment production up 22% MYTD. Better macro news continues to trickle out of the US (where the MS Economics team expects GDP to grow by 2.9% in 2011), and the core of the euro-zone has shown promise, bullish for textile demand into 2011.

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December 10, 2010 Commodities

Exhibit 19 Global Stocks to Use Likely Flat YoY in 2011/12

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

45.0%

50.0%

1990/1991 1994/1995 1998/1999 2002/2003 2006/2007 2011/2012e

Source: USDA, Morgan Stanley Commodity Research estimates

US retail clothing sales are up 3% YoY in Oct and 3% YoY MYTD. Sales in November look promising despite apparel companies starting to raise prices to offset higher costs. Gross margins at Chinese mills have improved YoY in 2010, encouraging further throughput. Finally, rising oil prices in 2011 should also reduce the appeal of synthetic materials, decreasing the likelihood of a substantial impact from demand substitution. Exhibit 20 Tight Stocks Pushing the Curve into Backwardation (Cotton Futures Curve, USD/lb)

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1 2 3 4 5 6 7 8 9 10 11 12 13

7/28/2010 12/8/2010

Source: Bloomberg, ICE, Morgan Stanley Commodity Research

Although near-dated prices may yet rise further, we prefer to keep our length in Dec 11 (currently trading at $1.38/lb, first recommended in our Mar 1 note Cotton Update: The Fabric of Recovery), where fundamentals still appear constructive. Even if US 2011 planted area increases by the expected 2.65 mln acres YoY, along with expected expansion in Brazil and China, our numbers still suggest a slightly tighter global balance next year, with 2011/12 S/U at 26.6%. We see Dec 11 as continuing to perform, to garner and protect acreage from soybeans and corn.

SUGAR — Prices Will Trade at the Whim of Suppliers

Sugar prices have been extremely volatile to say the least in 2010, having traded in a near-$0.20/lb range. With global sugar inventories at record tight levels following 3 years of production deficits, prices have reacted aggressively to both bullish and bearish news. Earlier in the year, prices reached near $0.30/lb but subsequently fell aggressively to a low below $0.15/lb in May as Indian production estimates increased, Brazilian exports surprised and Europe decided to export. Through the summer, tempered BRL production estimates, coupled with weather-related disruptions in Russia and Pakistan contributed to lifting sugar prices back above $0.30/lb. Concerns over demand from China, post-inflation-controls, drove some speculative interest out of the market. Additionally, sugar production in CS Brazil rebounded unexpectedly in the second half of October, suggesting the crushing season may have a longer tail than expected, and soothing some concerns over tightness in the inter-harvest period. Exhibit 21 CS Brazil Crush Lasting Longer Than Expected (CS Brazil Fortnightly Sugar Production, mln mt)

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

2HMar 1HMay 2HJun 1HAug 2HSep 1HNov 2HDec 1HFeb

06/07 07/08 08/09 09/10 10/11

Source: UNICA, Morgan Stanley Commodity Research

Indian sugar production looks poised to rebound this year as adequate rainfall during this year’s monsoon improved cane yields and sucrose content. However, production estimates have started to step down slightly, with the Indian government now estimating total production of 24.5 mln mt, down from earlier predictions of 25 mln mtwv. In Australia, the prospect of a YoY recovery in sugar production is quickly fading, as heavy rains in the East of the country have delayed harvests and raised the likelihood that cane will be left in the fields. Regional producers estimate that sugar production may only amount to 4 mln mt this year, down 0.6 mln mt from ABARE’s current forecast, with exports down by roughly the same amount.

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December 10, 2010 Commodities

While Australian supply disruptions, if realized, will tighten the trade balance into the spring, we believe that price direction until the start of the next Brazilian harvest in May will be dictated by Indian exports. We estimate that India will find itself sitting on a production surplus of just over 2 mln mtrv this season, though it is yet unclear exactly how much of that amount the government will clear for exports, particularly given the country’s desire to rebuild stocks after two years of disappointing harvests.

We have no trade recommendation in sugar, through believe that prices are likely to move lower as the Indian harvest accelerates into YE and 2011. If India decides to withhold further exports under the open general license scheme, however, prices would likely again rally given depleted global inventories. Any further weather disruptions present significant upside risk from current levels, though price strength should abate with the onset of the Brazilian harvest in May.

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LIVESTOCK — Higher Grains and Increased Supply to Temper Prices

Live Cattle prices appreciated markedly in 2010, as robust demand, both domestic and global, compounded the effect of tight feedlot inventories through much of the year. A weakening USD through 2H10 supported US beef exports to Asia, leaving Australian beef into Korea and Japan relatively uncompetitive — US beef exports YTD through Nov 25 were higher by 31% YoY. Seasonally high cutout prices supported by tighter-than-normal cold storage and robust retail demand, even after the summer grilling season, allowed live cattle prices to increase counter-seasonally into the fall, currently trading near 2-year highs of $1.01/lb. We anticipate live cattle prices to weaken, at least through 1H11 as higher prices have translated into stronger feedlot margins, resulting in increased placements through much of 2H10. Cattle on feed (CoF) inventories on Nov 1 were higher by 3.2% YoY, and 2.9% above the 5-year average, as placements outpaced marketings by 770,000 head. Higher CoF inventories today will ultimately translate into a greater number of live cattle early in 2011, which should allow for live cattle prices to retreat from current highs. Moreover, cold storage levels have started to build, which should limit the call on feeder cattle. Exhibit 22 Cattle on Feed Inventories Building into Year-End (Cattle On Feed, mln head)

9.0

9.5

10.0

10.5

11.0

11.5

12.0

12.5

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

5-yr range 5-yr average 2010 2009

Source: USDA, Morgan Stanley Commodity Research

Cold storage inventories, which trended below 2009 levels through much of the year, increased by 8% MoM in Oct and now stand lower by only 6% YoY — compared to an average monthly YoY deficit of 9.8% through the first 9 months of 2010. Live weights have also trended higher in recent months. With

MTD Nov slaughter up 4% YoY and live weights averaging near 10-year highs, cold storage inventories are poised to build. Morgan Stanley’s FX strategy team is also expecting the USD to strengthen against the AUD through 2011, which may present a challenge to US exports into Japan, potentially allowing Australia to regain some lost market share. Exhibit 23 Heifer Slaughter Up Slightly YoY YTD (Heifer slaughter, mln head)

0.6

0.7

0.8

0.9

1.0

1.1

1.2

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

10-year range 2010 2009

2008 10-year average

Source: USDA, Morgan Stanley Commodity Research

Feeder Cattle prices followed much the same trajectory as live cattle through 2010, hitting new 3-year highs in Nov as feedlot placements continued to run higher YoY. Reduced live cattle demand, as discussed above, should reduce the appetite for feeders from feedlot operators as feedlot margins see pressure. A move higher in grain prices will provide a further headwind. While our bias would be to short feeder cattle in the current environment, our bearishness is somewhat mitigated by the fact that heifer slaughters have remained elevated through 2010, portending a contracting herd — heifer slaughter through Oct was higher by 2% YoY. Lean Hog prices have underperformed beef prices through the fall, having declined by 10% since Labor Day. Despite the fact that the number of hogs slaughtered has declined 17% YoY YTD, a dramatic increase in live weights over the fall has allowed inventories in cold storage inventory to build in the last two months — sending inventories from a 27% YoY deficit in Aug to a much shallower deficit of 7% in Oct. Despite building inventories and production margins that are likely to be negative through May 2011, sow slaughter rates have run at or below 10-year lows for much of 2010, pointing to a lack of discipline that is likely to result in an increase in herd size and production.

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Exhibit 24 Sow Slaughter at 10-year Lows (Sow Slaughter, % of total hog slaughter)

2.0%

2.2%

2.4%

2.6%

2.8%

3.0%

3.2%

3.4%

3.6%

3.8%

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

10-year range 2010 20092008 10-year average

Source: USDA, Morgan Stanley Commodity Research

While we expect that holiday demand, and demand substitution from comparatively expensive beef products, will take some of the edge off recent pork inventory builds, we see a number of headwinds to long-lasting price gains in 2011. While retail demand has increased in the last year, food service demand remains weak and will likely remain so through the first half of the year as elevated unemployment and underemployment do not appear likely to change in the near future. We forecast lean hog prices will average $0.72/lb in 2011, implying limited upside to today’s price of $0.69/lb.

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December 10, 2010 Commodities

MORGAN STANLEY FORECASTS AND FORWARD CURVES Average Year Price As of 03-December-10

Energy 2010 2011 2012

Crude Oil US$/bbl 95* 100 105 forward curve 79 90 89

Bull case 110* 120 150

Bear case 60* 65 70

Natural Gas US$/mmBtu 4.36 4.00 5.50 forward curve 4.40 4.57 5.12

Base Metals 2010 2011 2012

Aluminum US$/tonne 2,100 2,200 2,500 forward curve 2,174 2,344 2,392

Copper US$/tonne 7,300 7,900 8,400 forward curve 7,517 8,653 8,338

Nickel US$/tonne 21,800 23,700 24,700 forward curve 21,789 23,384 22,806

Zinc US$/tonne 2,100 2,200 2,400 forward curve 2,157 2,242 2,244

Precious Metals 2010 2011 2012

Gold US$/oz 1,203 1,315 1,250

forward curve 1,227 1,412 1,427

Silver US$/oz 18.47 20.23 19.53 forward curve 20.2 29.4 29.6

Platinum US$/oz 1,622 1,624 1,783 forward curve 1,612 1,735

Softs ** 2010/11 2011/12 2012/13

Cotton US¢/lb 78 88 94 forward curve 120 94

Sugar US¢/lb 18.0 16.0 15.0 forward curve 26.2 20.4

Coffee US¢/lb 150 150 forward curve 205 195

Grains ** 2010/11 2011/12

Corn US$/bu 6.00 5.75 forward curve 5.69 5.40

Soybean US$/bu 11.75 12.50 forward curve 13.00 12.07

Wheat US$/bu 7.50 7.25 forward curve 7.59 8.05

Livestock 2010 2011 2012

Live Cattle US¢/lb 95 99 100 forward curve 95 108

Feeder Cattle US¢/lb 95 102 106 forward curve 110

Lean Hogs US¢/lb 70 72 75 forward curve 76 81

* Year-End Price** Agriculture commodites are in US marketing years: wheat (Jun-May), cotton (Aug-Jul), corn & soybeans (Sep-Aug), sugar & coffee (Oct-Sep)Source: Bloomberg, Morgan Stanley Commodity Research estimates

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