Cargill Risk Management © 2017 Cargill, Incorporated. All rights reserved.CONFIDENTIAL. This document contains Cargill Confidential information. Disclosure, use or reproduction outside Cargill or insideCargill, to or by those who do not have a need to know is prohibited. © 2017 Cargill, Incorporated. All rights reserved.
Risk Management
Cargill Risk Management
October 3, 2017
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Source: USDA
If realized this would be the third highest yield ever for corn.
4
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Source: USDA
1,685 1,673 1,708
1,128
989
821
1,232
1,731 1,737
2,350
2,335
0
500
1,000
1,500
2,000
2,500
07/08 08/09 09/10 10/11 11/12 12/13 13/14 14/15 15/16 16/17 17/18 Sep
CORN ENDING STOCKSThis would be the second straight year ending stocks could end above the trendline.
5
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Source: USDA
12,092
13,092 12,447 12,360
10,755
13,829 14,215 13,602
15,148 14,184
13.9%13.1%
8.6%7.9% 7.4%
9.2%
12.6% 12.7%
16.1% 16.4%
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
-
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
US CORN PRODUCTION VS STOCKS TO USE
Production Stocks to Use Source: USDA
6
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Hedge Fund Corn Position
7
-161615
67073
39802
-17073
-64945
-109723
-200000
-150000
-100000
-50000
0
50000
100000
Week ending8/1/2017
Week ending8/8/2017
Week ending8/15/2017
Week ending8/22/2017
Week ending8/29/2017
Week ending9/5/2017
CZ7 closed at $3.56 3/4CZ7 closed at $3.88
Source: CFTC
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Corn – Short Term Market FactorsSouth American competition with the U.S. exports along with potential for increased Chinese imports
Year over year increase of U.S. ending stocks on the back of the third highest yield
South American weather; early dryness & initial talk of La Nina
Commodity Funds potential to add to short position or reduce
Farmer profitability
8
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Source: USDA
Record Yield
10
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Source: USDA
683.95 687.24
649.46
697.32
658.60
715.08
727.98735.30
753.31743.18
26.6%
31.3%30.5%
28.8%
25.8%
28.2%
31.1%
33.9%34.6%
35.9%
25.0%
27.0%
29.0%
31.0%
33.0%
35.0%
37.0%
39.0%
41.0%
43.0%
45.0%
580.00
600.00
620.00
640.00
660.00
680.00
700.00
720.00
740.00
760.00
780.00
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
GLOBAL WHEAT PRODUCTION VS STOCKS TO USE
Production % Ending Stocks of Domestic Use Source: USDA
11
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Source: USDA
2,512
2,209 2,163 1,993
2,252 2,135
2,026 2,062
2,310
1,739
28.7%
48.6%
36.4%33.4%
29.9%
24.2%
37.3%
50.0%53.4%
43.6%
15.0%
25.0%
35.0%
45.0%
55.0%
65.0%
75.0%
0
500
1,000
1,500
2,000
2,500
3,000
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
US ALL WHEAT PRODUCTION VS STOCKS TO USE
Production Stocks to Use Source: USDA
12
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Source: USDA
306
657
976
861
743 718
590
753
976
1,184
933
38.1
0.0
10.0
20.0
30.0
40.0
50.0
60.0
0
200
400
600
800
1,000
1,200
1,400
07/08 08/09 09/10 10/11 11/12 12/13 13/14 14/15 15/16 16/17 17/18Sep
U.S. Wheat Ending Stocks
ENDING STOCKS Harvested Acres
Less planted acres will lead to lower ending stocks.
13
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Hedge Fund Wheat Position
14
12190
-14101
-34236
-66751
-77529-86570
5418748935
34609
2377018060 14985
10808 10708 8159 8724 8119 7442
-100000
-80000
-60000
-40000
-20000
0
20000
40000
60000
80000
Week ending8/1/2017
Week ending8/8/2017
Week ending8/15/2017
Week ending8/22/2017
Week ending8/29/2017
Week ending9/5/2017
WHT (SRW) WHT (HRW) WHT(HRS)
Source: CFTC
Funds have been aggressive sellers of Chicago and Kansas City wheat since the August10 report.
14
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Wheat – Short Term Market FactorsReductions in U.S., Australian, & German crops offset by record Russian Production
Russian export flows limited by capacity constraints & competition for corn and barley exports
US stocks reducing off of last year’s highs due to the lowest planted acres in over 100 years, Spring Wheat high protein crop a supply concern
Commodity Funds increased short position in Chicago and maintain long position in Kansas City and Minneapolis
Growing season weather in Southern Hemisphere and winter conditions in North
15
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Source: USDA
398,979
447,518 461,144 447,637475,568
504,222537,580
521,350
572,526 578,598
14.1%
17.6%19.1%
14.3% 14.5%15.8%
17.9% 17.3%
19.6% 19.1%
8%
13%
18%
23%
28%
200,000
250,000
300,000
350,000
400,000
450,000
500,000
550,000
600,000
WORLD OILSEED PRODUCTION VS STOCKS TO USE
(COPRA, COTTONSEED, PALM KERNAL, PEANUT, SOY, SUNFLOWER)
Production Stocks to Use Source: USDA
17
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Source: USDA
134,943142,436
149,080158,415 161,614
171,802177,184 176,687
185,750195,093
12.0% 12.1%13.4%
14.9% 13.9% 14.5% 14.2%11.4% 10.2% 10.8%
5%
10%
15%
20%
25%
30%
35%
40%
100,000
120,000
140,000
160,000
180,000
200,000
220,000
World Vegetable Oil Production vs Stocks to Use
(Coconut, Cottonseed, Olive, Palm, Palm Kernal, Peanut, Rapeseed, Soy, Sunflower)
Production Stocks to Use Source: USDA
18
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3,274 4,896
63,191
5,794
29,415
55,742
17,007
-
10,000
20,000
30,000
40,000
50,000
60,000
70,000
Coconut OilConsumption
Cottonseed oilConsumption
Palm OilConsumption
Peanut OilConsumption
Rapeseed OilConsumption
Soybean OilConsumption
Sunflowerseed OilConsumption
MM
TGlobal Consumption
2013/2014 2014/2015 2015/2016 2016/2017 2017/2018
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48,61351,894
55,66358,567 61,070
58,08361,557
66,855 66,8553788
3175
24382659
22662485
3109
2737 2737
0
500
1000
1500
2000
2500
3000
3500
4000
0
10,000
20,000
30,000
40,000
50,000
60,000
70,000
80,000
Thou
sand
Met
ric T
ons
Palm Oil Global Production/Consumption
Total Production Total Consumption Futures
20
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Source: USDA
205
138151
215
169
141
92
191 197
345
475
0
50
100
150
200
250
300
350
400
450
500
07/08 08/09 09/10 10/11 11/12 12/13 13/14 14/15 15/16 16/17 17/18
US Soybean Ending Stocks 2017/18
The highest ending stocks since 2006/07 - 573 million bushels
21
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Source: USDA
Record Yield
Could be the second largest yield (If realized).
22
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Hedge Fund Soybean Position
23
39795
12913
-14399
-23394-28367
-11944
-40000
-30000
-20000
-10000
0
10000
20000
30000
40000
50000
Week ending8/1/2017
Week ending8/8/2017
Week ending8/15/2017
Week ending8/22/2017
Week ending8/29/2017
Week ending9/5/2017
The funds switched to a short position after the USDA raised the estimated yield surprising the market on the August 10 report.
Source: CFTC
Cargill Risk Management © 2017 Cargill, Incorporated. All rights reserved.
Hedge Fund Soybean Oil Position
24
6791365015
46030 44604
66871
88634
0
10000
20000
30000
40000
50000
60000
70000
80000
90000
100000
Week ending8/1/2017
Week ending8/8/2017
Week ending8/15/2017
Week ending8/22/2017
Week ending8/29/2017
Week ending9/5/2017
This is their longest position since January 2017
Source: CFTC
Cargill Risk Management © 2017 Cargill, Incorporated. All rights reserved.
Vegetable Oils – Short Term Market Factors
10 year production high for 6 major oilseed crops
Palm oil production led by Indonesia and Malaysia at multi year highs
Strong South American crop last year followed by a strong US crop
South American weather and early prognosis for La Nina a swing factor
Biodiesel policies in US, South America and Europe a demand swing factor
25
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• Align to business objectives
• Manage exposure based on robust risk measures
• View this as a competitive advantage
Cargill Risk Management © 2017 Cargill, Incorporated. All rights reserved.27
• Defend market share (prevent lost ground to competition)• Protect margins (maintain profit margins in the face of
pricing pressure)• Secure budgets (achieve a more predictable and
profitable future)• Stabilize pricing (mitigate swings in commodity prices)• Eliminate surprises (avoid being caught off guard by the
unknown)• New avenues of business (engage in new opportunities)
Where others see risk we see opportunity
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Audit
Risk Management: It’s a balancing act
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EFFECTIVE HEDGING STRATEGY29
Hedging strategies should involve a diverse set of components and scaling into positions.
Cargill Risk
ManagementTailored
Solutions%
Cargill Risk
ManagementVanilla
Options%
Other Pricing
Mechanisms%
Portfolio Diversification
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1. The non-correlated behavior of different tools.
2. Reduces cost and volatility.
3. Outcome of each tool is different, complements each other’s weaknesses.
Why this combination of tools?
30
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Risk management collaboration
31
•Regular face to face meetings
•Regular conference calls to align market opportunities with gameplans
•Swaps, Options, and Cargill Risk Management Instruments
•Understand customer objectives
•Continue to stress & calibrate against plan
•Daily valuation of positions
•Monthly statements
Tracking Planning
CommunicationExecution
Cargill Risk Management © 2017 Cargill, Incorporated. All rights reserved.32
1. Design a hedging policy. Establish boundaries, rules and limits to guide work objectives.
2. Establish a Risk Committee. Representatives from commercial, trading, credit, control and treasury should meet regularly and deliberate about positions, results, stress testing, portfolio concentration, sudden changes in market conditions and limits.
3. Identify and hire the right talent. A combination of experienced talent from within the organization and individuals from outside the confines of the company can create a complementary and fresh approach.
4. Set up a recurring review schedule. Establish weekly meetings to review exposures, trends, market data, policy, proposals and exceptions.
The 8-Step Checklist
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5. Define the max concentration of each tool within your hedging portfolio. Every tool within your portfolio needs to have a defined goal of why is it used and how it helps achieve specific objectives--as well as its downsides. Define a max concentration limit for each tool to avoid excesses.
6. Practice recurring stress testing. Put the team and company through the paces of different financial scenarios (i.e., “stress testing”) and share the results at the weekly committee meetings.
7. Set up schedules for annual external reviews and benchmarks. Bring in an independent financial consultant/firm to review results from the prior year, assess risks, and help create benchmarks to measure against in the year ahead.
8. Set strict limits for exception approvals. Create a short list of executives within the organization who can approve exceptions.
The 8-Step Checklist
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