Kingsman Asia Pacific 2010 Sugar Conference:

Kingsman Asia Pacific 2010 Sugar Conference:

The Outlook for Sugar PricesA Global View

A sugar presentation by Michael McDougall

May 2010

2

Velocity!

1. Information Flow- Kingsman, The Global View- Bloomberg, Reuters, Dow Jones- Internet

2. Capital Flow- Across asset classes- Across borders- Around borders- OTC

3. Order Processing - High Frequency, algorithmic, black box systems

dominating

4. Opinion Change- The MTV generation

3

Dow Jones: “Flash Crash”

4

Capital Available (size)

1. Global Fund management $90 trillion (2009)- 1) Pension funds

• $24.0 trillion- 2) Mutual funds

• $18.9 trillion- 3) Insurance funds

• $18.7- 4) Sovereign wealth funds

• $2.0-3.00 trillion - 5) Hedge funds

• $1.5-2.5- 6) Exchange Trade funds (ETF)

• $1.0 trillion- 7) Private Equity

• $500 billion- 8) Commodities

• $283 billion

5

Leverage on top of the money

1. Total world derivatives market notional value is $687 trillion (or, 11 times the world economy) [December 2009]

- $614 trillion in OTCs , reached $683 trillion in June 2008.

• 73% interest rate• 8% Foreign Exchange• 5% Foreign exchange • 1% Equity contracts• 1% Commodities• 12% Other

- $73.1 trillion in exchange futures and options• $51.4 in options• $21.7 in futures

6

Global GDP

1. World $57.93 trillion (2009, IMF)- 1) US $14.25- 2) Japan $5.068- 3) China $4.908- 4) Germany $ 3.352- 5) France $2.675- 6) UK $2.183- 7) Italy $ 2.118- 8) Brazil $ 1.574- 9) Spain $1.464- 10) Canada $ 1.336- 11) India $1.235- 12) Russia $1.229

2. Total Global Bank Assets, $34.29 trillion (Sep 2009)

7

US/global economy showing signs of improvement

1. Global GDP for 2010 +4.6% (OECD)- US %3.2, previous estimate %2.5, China %11, India

%8.3, Brazil %6.5

2. Earnings for US firms improving- Fortune 500 Increased 335% to $391 bi in 2009- Shed 821,000 jobs

3. Consumer spending improving - 70% of US economy

4. New and existing home sales have jumped

8

GDP Growth

9

Personal Consumption

10

Existing Home Sales

11

But there are still big problems1. Developed countries sovereign debt is exceedingly high

- Governments saw high receipts during the boom period and spent the money. - Many countries debt is approaching or exceeding 100% of GDP- US debt $13 trillion, will equal GDP in Q3 or Q4 of 2011

2. Fortune 500 sales declined in 2009 by 8.7% to $9.8 trillion, largest decline since 1983

3. Housing market is struggling - Foreclosures are still on the rise- National medium $173,100 in April, up by 4.0% from April of 2009- Total US mortgage dept reached $10.5 trillion, 73% of GDP

4. Unemployment is still high- April had the 27th consecutive month small business kept steady or reduced

employees- The U-16 number is closer to 17%

5. Consumer confidence still struggling/vehicle sales

6. Losses accrued in 2008/2009 still impacting- $8.3 trillion in losses to the consumer- $1.2 trillion in write downs for US and European banks

7. Chinese property bubble, South Korea/North Korea conflict, Iran

12

S&P CaseShiller Home Price Index

13

Unemployment Rate

14

Consumer Confidence

15

Total US Vehicles Sold

16

Fund flow indicates the recovery lacks conviction

1. Stock markets between Oct 2007-March 2009

- Funds withdrew $257 billion, $250 billion was in the last nine months

2. Stock markets between March 2009 till present

- Funds Received $34 billion

3. Bond funds between March 2009 till present

- Funds received $485 billion

4. Just on May 6th investors pulled $12.4 billion from stock funds

17

Dow Jones Retracement

18

CRB Retracement

19

CRB

20

Dow Jones

21

Solution, $ and Low Interest Rates

1. The US government has committed $13.9 trillion of which $6.8 trillion had been spent until June 2009 .

2. US is going to keep interest rates low for the “foreseeable future.”

3. Eurozone has to keep interest rates low.

4. Japan near zero.

22

Fed Funds vs. Down Jones & CRB

23

Sugar Retracement

24

Bullish Factors

1. Two years of deficits have tightened available stocks. - Near term availability of refined sugar is limited

• Brazilian mills neglected the internal market supply as they had to stay with export commitments

2. El Nino weather phenomenon has impacted crops in some Asian countries.

- Certain areas of Thailand is still suffering

3. Several factors are limiting growth in Brazil: Reduced Credit, High indebtedness, strong currency and limited logistical investment.

4. HFCS complications- China’s growth might be impacted by high corn prices- US consumption is falling due to concern over health

5. Potential enormous expansion in India is sewing the seeds of another cyclical downturn .

25

Two Years of Deficits

1. Kingsman- 2008/2009 -15.98 mt (June 2009)- 2009/2010 - 7.62 mt (May 2010)- 2010/2011 + 3.99

2. USDA- 2008/2009 -8.80 mt (May 2010)- 2009/2010 +0.88 mt (May 2010)

3. FO LICHT- 2008/2009 -13.2 mt (March 2010)- 2009/2010 – 7.7 mt (March 2010)

4. ISO - 2008/2009 -15.6 mt (February 2010)- 2009/2010 -8 mt (May 2010)- 2010-2011 + 2.00-3.00 (May 2010)

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El Nino out…But impact not over

1. According to the Australian weather board El Nino has dissipated.

2. Impacted several countries- China, 2009/2010 10.67 mt for 2008/2009 14 mt- Thailand, 69 million tons crush, potentially the same

or less for 2010/2011- Philippines, 2009/2010, 1.98 mt from an estimated

2.18 mt- Vietnam, 2009/2010, 900,000 mt from 2008/2009,

1,020 mt

27

Trouble in Paradise

1. According to ITAU/BBA the debt in Reais per ton of cane is coming off but still high

- 2008/2009 86.80- 2009/2010 80.20 Estimated sugar price 17 cents- 2010/2011 60.00 Estimated sugar price 20 cents

2. Strong currency- $1.3 billion surplus in April, est for May is $1.4 billion- Estimate for the year is $12.7 billion

3. Logistical difficulties- Port congestion- Ethanol pipeline- Rail investments

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Greenfields

Greenfields

0

5

10

15

20

25

30

35

05/06 06/07 07/08 08/09 09/10 10/11 11/12

29

Chinese Corn and Sugar

30

Indian Export/Import Change

Indian export/import differential

-5,000,000

-4,000,000-3,000,000

-2,000,000

-1,000,000

01,000,000

2,000,000

3,000,000

4,000,0005,000,000

6,000,000

01/02 02/03 03/04 04/05 05/06 06/07 07/08 08/09 09/10 10/11

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Bearish Factors

1. High prices and fear of shortages have provided a large incentive for sugar producers

2. The big turnaround in Indian production at the end of their 2009/2010 has the market spooked, how much will they produce for 2010/2011? 23-30? Exports?

3. Importers paid up and then had to average down. Washout, renegotiation problem, how much? 500,000+?

4. Ethanol prices in Brazil have yet to provide price support. Current hydrous 12.40 and anhydrous 13.60, (May 28th, 2010)

5. Strong dollar, flight to safety could limit investor interest for commodities

32

Indian Export/Import Change

Indian export/import differential

-5,000,000

-4,000,000-3,000,000

-2,000,000

-1,000,000

01,000,000

2,000,000

3,000,000

4,000,0005,000,000

6,000,000

01/02 02/03 03/04 04/05 05/06 06/07 07/08 08/09 09/10 10/11

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Price Equivalence May 2010

10

12

14

16

18

20

22

24

5/3

/2010

5/5

/2010

5/7

/2010

5/9

/2010

5/1

1/2

010

5/1

3/2

010

5/1

5/2

010

5/1

7/2

010

5/1

9/2

010

5/2

1/2

010

5/2

3/2

010

5/2

5/2

010

5/2

7/2

010

Sugar #11 Sugar Anhydrous Hydrous

34

Dollar Index

35

Technical Considerations

1. Gross trade long is the smallest since October of 2006

2. Gross trade short did not expand in 2009/2010 due to credit limitations to trade and origin

3. Index fund long has been static of late

4. Fund and small spec has reduced by two thirds

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Trade Long vs. Sugar Price

37

Trade Short vs. Sugar Price

38

Index Fund Net Long

39

Net Fund and Small Spec Position

40

Macro: Points of Interest

1. Economic uncertainty - Two options to combat the large amount of sovereign debt; 1)

Sovereign default, 2) Print money- The US economy appears to be losing momentum

• Income tax with holding rose 1.2% y-o-y after 3.3% y-o-y in the past three• Online job postings rose 1.0% in May • US consumer is holding on to $10.5 trillion in mortgage debt

- Inflation or deflation? • CPI in April was 0.6% annual basis, the lowest since 1959

2. Has the US and world economy finished a correction and is now ready for another downturn?

- Similarities to the 1929-1931 depression - Adjustment of sovereign debt will take years- What more can Central Banks do?

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Sugar: Points of Interest

1. Brazil’s credit/indebtedness issues will curb short term and particularly long term investment

2. Brazil’s rising ethanol demand will provide a floor for the market but also provide a ceiling as demand shifts and financially stronger mills invest in more flexibility.

3. Brazil’s discovery of pre-sal oil reserves could complicate the ethanol industry or will the problems of BP complicate the pre-sal development?

4. The predominant growth regions for consumption moving forward will be Asia with 60% of the world population (young and growing) and the middle east which also has a young population and no significant production.

5. Production investment in Africa will impact the world market and not just Europe within a year or two.

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Sugar: Points of Interest in sugar (2)

4. India despite an expected rise in production will not be an exporter (except perhaps to Pakistan) for upcoming the 2010/2011 season. Freight and govt subsides are not expected to help like in 2008

5. The US will have to increase imports in the short term (500,000+) but her elevated price should stimulate production growth in Mexico and Guatemala.

6. Commodity investment will continue despite occasional frights, due to long term population growth, limited land/ water resources and in addition the potential for deteriorating/ problematic weather.

7. Resource wars?

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Price Prospects for 2010/2011 1. Current to three months; We see the market finding support at current

levels and a possible recovery to higher levels. So 13.00-17.50 cents. However the weak credit situation of the mills will be a potentially large negative as fixation for October is limited and if there is no adverse weather throughout Brazil’s harvest then 15.00 cents could be a price cap and a potential move down to 12.50-10.50.

2. Three to six months: If the harvest in Brazil runs with normal or less than normal rain delays and the macro situation continues under pressure the chances increase that prices will be pressured to lower levels. The Brazilian currency could come under more pressure thus prices could fall to 11.50-9.50 or basically from where we started the rally which is not unexpected given past history.

3. Six months to a year; If prices don’t recover then expect Brazilian sugar production to stagnate or decline as investment is curbed by the financially weaker mills. Indian mills as well will This will hasten the process of consolidation but also lead to higher prices 6 months to a year. Therefore prices could spike again to reach 18.00-20.00 again or higher.