Asian Commodities and Derivatives Conference Identifying the Dynamics Drivers in Commodities Trading

Avtar Sandu Phillip Futures

Disclaimer
The information contained in these course materials provided is the option of the Course Trainer and not Phillip Futures. These course materials contain information of a general nature only and are produced for investor education purposes only. They do not constitute investment advice in any manner whatsoever or have any regard to the specific investment objectives, financial situation or individual needs of any particular person receiving them. Examples are used for illustrative purposes only and do not constitute investment advice. Phillip Futures, nor the course trainer, makes no guarantee, warranties, representations of any kind whatsoever, express or implied, including but not limited to, the accuracy, completeness, merchantability, or fitness for any particular purpose, of such information or as to the results obtained by any person from the use of any information or any financial instrument mentioned in the course materials.

Commodity Boom
Greatest Boom in recent history Boom was largely unexpected Fundamentals, speculation and macroeconomic factors all played a role
Continuous Commodity Index

Current commodity boom compared with earlier price hikes

Much longer Price increases also much larger More board based

Features of Commodity Markets

Demand does not change much with price
Neither does supply in the short term So shocks can have a big impact on price

Analysis of recent price increase

Demand Factors A Strucutural Change
Steadily rising population Strong economic development Larger and larger share of annual consumption growth
Slower improvements in resource use

Decreasing interest rates and depreciation of the US dollar

Supply Factors
Weather Related - La Nina and El Nino Producers slow to respond to demand Increase cost of inputs in production process High energy and fertilizer cost

Increased Fund Activity

Well functioning financial markets are critical for well-functioning commodity markets Speculation, hedging and arbitrage are important elements However investment activity shifting out of equities and mortgage related products and into commodities may cause prices to inflate/deflate beyond their fundamentals levels???? But Data analysis have not shown a consistent relationship between rising investment activity and rising prices

The $ and Commodities

Most commodities are priced in Dollars This weakness in the currency in which an asset is denominated would, by definition, result in an increase in the assets price Can changes in commodity prices be fully explained by changes in Dollar value. Each Commodity has its own unique global supply-and-demand profile,

The $ and Commodities

The $ is often a significant secondary driver. As S/D data are usually estimates and piecemeal, its easier to game commodities thru $ real time price data Long term $ weakness

Population Growth

Main increase in urban areas of developing countries. Migration to urban areas causes abandonment of land farmed

Linking global money supply to future inflation

Many investors are raising concerns that strategies put in place by central banks across the globe including what is commonly referred to as quantitative easing to reactivate the world economy and steer it away from a depression will ultimately debase fiat currencies and result in inflation.
Aggregate money supply (US$ billion

BioFuel Production
High crude oil prices causing governments to setup bio-fuel production targets In 2010 4.75% of all EU motor fuel consumption is to met by bio-fuels, US set a target of almost 30bn liters bio-fuel In 2012, Brazil, China and India as well as Thailand has also formulated ambitious targets

Commodity Futures returns

World Consumption & Inventory

Historically inventory to usage ratio of below 25% increases volatility. In 2008, when commodities prices reached their peak, despite a record harvest for maize (up 11%) and wheat (up 15.24%) compared to 2007, average global grain stocks reached 18.7% of annual global utilization, equivalent to 68 days worth of global supply, well below the long-term average.

Grains
Corn Wheat

SoyBeans

Rough Rice

Softs
Arabica Coffee

Raw Sugar

Liffe Cocoa

Edible Oils
Palm Oil SoyBean Oil

Assessing Agriculture
Fundamentals supply, demand, ending stocks, weather View/trend Risk reward ratio, Volatility Technicals/Entry Points Rolls Trading strategies

Coffee Fundamentals - Demand

The United States is the largest importer of coffee. The world typically consumes more than 130 million, 60 kilo bags of coffee per year. Kraft, Nestl, Procter & Gamble, and Sara Lee are the "Big 4" roaster companies that buy about 50 percent of all the annual production of coffee.

Coffee Supply

Total production for crop year 2010/11 is estimated at 133.7 million bags, representing an increase of 8.6% in relation to the preceding crop year. A fall of 3.2% is expected in the Asia & Oceania region where Indonesia has recorded a significant decline due to adverse weather conditions. Production has increased in other regions, particularly in Mexico & Central America and South America, where Brazil has produced at least 48 million bags during crop year 2010/11. Although crop year 2011/12 is an off year in the biennial cycle for Arabica production in Brazil, a total crop of more than 43 million bags is now expected Colombian production is slowly recovering from the low levels of the three preceding crop years and an increase is expected in crop year 2011/12 The difference between the high and low years of the Arabica cycle has fallen in recent years, which appear to indicate that further decreases may continue in the future.

Stocks
World stocks have been significantly eroded due to supply problems and increased exports. The volume of opening stocks in crop year 2010/11 is around 13 million bags, representing a fall of more than 33% compared to the level recorded at the beginning of crop year 2009/10. Inventories held in importing countries were estimated at around 18.3 million bags at the end of December 2010.

Source:ICO

Stocks-to-Use Ratio trending down over years

Green Coffee Stocks-to-Use Ratio

45 40 35 30 25 20 15 10 5 0 2002/3 2003/4 2004/5 2005/6 2006/7 2007/8 2008/9 2009/10 2010/11

Ratio

Source: USDA-FAS

Liffe Coffee Weekly Price Chart July

Contact
Phillip Futures
250 North Bridge Road #07-01 Raffles City Tower Singapore 179101

Avtar Sandu Senior Manager Commodities Desk

(65) 6531 1509

avtar@phillip.com.sg