understanding commodity trends · best-performing members worst-performing members 137.85 130.92...

Understanding Commodity TrendsTuesday, April 27, 20108:00 AM - 9:15 AM

Speakers:Carole Brookins Managing Director Public Capital AdvisorsCarole Brookins, Managing Director, Public Capital AdvisorsPaul Fribourg, Chairman and CEO, Continental Grain CompanyAndrew Halle, Chairman of the Managing Board, ECOM Agroindustrial Corp. Ltd.Joshua Harris, Senior Managing Director, Apollo Global Management LLC;

Managing Partner and Co-Founder, Apollo Management LPC. Larry Pope, President and CEO, Smithfield Foods Inc.

Moderator:Robert Bucklin, Chief Corporate Banking Officer, Executive Vice President, Rabobank International

Commodity trading definitely isn't for the faint of heart — but it can offer dramatic rewards. The past few years have been nothing short of a roller-coaster ride. What's the outlook going forward? Can gold continue its amazing run? What are the prospects for global commodity demand and supply? Will we see spikes in food prices as we did in 2008? Panelists will discuss price trends, the most promising sectors and the impact of China's growing appetite for energy and materials.

Background Slides

Inflation risk ahead?Percent change of consumer prices (year-to-year)

10Percent Emerging and

developing economies

2

4

6

8World

Source: World Economic Outlook, International Monetary Fund, April 2010 update.

-2

0

2

2002 2003 2004 2005 2006 2007 2008 2009 2010

Advancedeconomies

Outlook for commodity prices Monthly, 2003–2011

450Commodity prices, Jan. 2003 = 100

Oil

Metals

Overall250

350

450

Forecast

Sources: International Monetary Fund, Milken Institute.

50

150

2003 2004 2005 2006 2007 2008 2009 2010 2011

What is the outlook for grains and oilseeds? Major food crop stock-to-use-ratios, 1975–2010

35Percent

Grains

Oilseeds15

20

25

30Forecast


Oilseeds

0

5

10

1971 1981 1991 2001 2011

Have crude oil prices stabilized? Daily, January 1, 2004–March 31, 2010

160US$ per barrel

80

120

July 3, 2008: $145.3 per barrel

Sources: Datastream, Milken Institute.

0

40

01/2004 01/2005 01/2006 01/2007 01/2008 01/2009 01/2010

March31, 2010: $83.8 per barrel

What is the outlook for metals? Selected metal prices, January 2006–March 2010

400Jan. 2006 = 100

NickelLead

200

250

300

350


Copper

Aluminum50

100

150

2006 2007 2008 2009 2010

Copper rebounds after weak 2008 Daily, January 1, 2004–March 31, 2010

10,000March 31 2010: $7 759/metric ton

Grade A Cash US$/metric tone

4,000

6,000

8,000

March 31, 2010: $7,759/metric ton


0

2,000

2004 2005 2006 2007 2008 2009 2010

Global commodities price indicesMonthly, January 2000–March 2010

1,800Price index

600800

1,0001,2001,4001,6001,800

UBS CMCI Price Index

S&P GSCI Index

Sources: Bloomberg, Milken Institute.

0200400600

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

S&P GSCI Index

JPMorgan Aggregate Price Index

Commodity ranked return2007–2009

Best-performing members Worst-performing members

112.78

100.22

71.15

66.41

49.49

Cocoa

Soybeans

Sugar

Gold

RBOB gasoline

-33.55

-34.03

-34.59

-39.32

-46.09

Cotton

Live cattle

Corn

Wheat

Aluminum


25.96

24.54

22.66

18.91

Silver

Gas oil

Lead

Copper

-51.96

-75.71

-86.02

-116.56

Zinc

Nickel

Lean hogs

Natural gas

Commodity ranked return2008–2009

Best-performing members Worst-performing members

137.85

130.92

104.32

103.50

100.98

Copper

Lead

Sugar

Zinc

PBOB gasoline

18.99

17.09

4.33

-7.49

-10.63

Cocoa

Coffee

Feed cattle

Corn

Live cattle


56.13

56.81

48.81

36.31

Nickel

Crude oil

Silver

Cotton

-19.56

-26.61

-45.09

-56.26

Kansas wheat

Wheat

Lean hogs

Natural

Effective federal funds and target federate funds rates

3Percent

1

2

Effective federal funds rate

Target federal funds rateApr. 30, 2008: 2%Oct. 8, 2008: 1.5%Oct. 29, 2008: 1%Dec. 16, 2008: 0-0.25%

Sources: Federal Reserve, Milken Institute.

0

1

Jun 2008 Sep 2008 Dec 2008 Mar 2009 Jun 2009 Sep 2009 Dec 2009 Mar 2010

Is the outlook for natural gas negative?Daily, January 1, 2004–March 31, 2010

20US$/mmbtu

10

15

Dec. 9, 2005: $15.1/mmbtu March31, 2010: $3.8/mmbtu


0

5

01/2004 01/2005 01/2006 01/2007 01/2008 01/2009 01/2010

What is the outlook for gold? Monthly, April 2000–April 2010

1,200USD/troy ounce

400

600

800

1,000

1,200


0

200

400

04/2000 05/2001 06/2002 07/2003 08/2004 09/2005 10/2006 11/2007 11/2008 11/2009

Commodity real price developments Real commodity price indices, monthly; average 1990–99=100

P k M hTrough

F b ADec-09

Peak March 2008

February 2009

Average 2000–09

Commodity price index 172.1 230.6 123.2 133.6Nonfuel 106.2 131.4 85.2 89

Food 97.4 122.7 88.9 82.6Beverages 120.1 110.7 99.6 77.6

Industrial inputs 114 2 143 7 79 4 97 6


Industrial inputs 114.2 143.7 79.4 97.6Agricultural raw materials 73.8 77.7 58.9 75.2Metal 162.3 222.3 103.9 124.3

Fuel 271.9 380.9 180.7 201.1Crude oil 283.5 392.6 161.5 203.3

Commodity real price developments Commodity real price volatility (percent)

2009 2008 2000–09 1991–99 Commodity price index 5.2 10 5.2 4Nonfuel 2.7 6 2.8 1.7

Food 3.8 6.2 3.2 2.2Beverages 3 7 4.6 6

Industrial Inputs 4.1 6.4 3.7 2.2A i lt l t i l 4 1 4 4 3 1 2 7


Agricultural raw materials 4.1 4.4 3.1 2.7Metal 5.2 8.1 4.9 3.7

Fuel 7.2 12.5 7.5 5.5Crude oil 8.5 13.9 8.8 9.2

Robert Bucklin’s Slides

The rebound in risk appetite has seen the return in index/institutional and speculative investors to agriculture markets...

Open Interest Held by Investment Community in Major Agriculture Commodity MarketsThousand Contracts

500

1000

1500

2000Thousand Contracts

Long

Total

Source: Rabobank.

-1000

-500

0

Jan 00 Jan 01 Jan 02 Jan 03 Jan 04 Jan 05 Jan 06 Jan 07 Jan 08 Jan 09 Jan 10

Short

Commodity indexes wild ride…

700

800Fuel and Non Fuel Commodities index

200

300

400

500

600

700 Fuel and Non Fuel Commodities index

Non-Fuel Primary Commodities index

Food commodities index

Beverage commodity Index

Metals index

Energy Index

Source: Rabobank.

0

100

90% Volatility

Unprecedented commodity volatility- subsided for now?

20

30

40

50

60

70

80 S&P GS Commodity IndexS&P GS Agri Commodity IndexS&P GS Energy IndexS&P GS Industrial Metals Index

0

10

20

Source: Rabobank.

Increased correlation between index/institutional length and commodity prices in agriculture markets...

5501600IndexThousand Contracts

350

400

450

500

550

600800

1000120014001600 Index Trader Net Length (LHS) S&P GS Agri Commodity Index (RHS)

Source: Rabobank.

200

250

300

0200400

Jan 06 Jul 06 Jan 07 Jul 07 Jan 08 Jul 08 Jan 09 Jul 09 Jan 10

Commodities - the fuel for global growth!$/buPopulation growth 484 million (+8.8%) in 10 years in selected countries

Expected world nominal GDP growth: 96% in 10 years in selected countries

400

600

800

1,000

1,200

1,400

1,600

atio

n (m

illio

n pe

ople

) Growth 2020

Population 2010

10,000

15,000

20,000

25,000

30,000

GD

P (U

SD b

illio

n)

Growth 2020

GDP 2010

0

200

400

Popu

la

Source: Rabobank.

0

5,000

G

The effect of economic growth and population growth: Food markets to grow by 109% in ten years

3 000

3,500Growth 2020

1,000

1,500

2,000

2,500

3,000

Size

of f

ood

mar

ket

(USD

bill

ion)

Food markets 2010

Sources: Rabobank, based on KEO, Economist Intelligence Unit and FAO.

0

500

C. Larry Pope’s Slides

Growth of ETF'sCommodity as an investment or speculation?

US$ billion110

405060708090

100 Metals Energy All Other Commodities

0102030

2004 2005 2006 2007 2008 2009 2010Source: JP Morgan.Note: Additional $100 billion not publicly available.

Meat consumption Lbs per person per year

4 5 billion people World population estimate World

DevelopedCountries

4.5 billion people6.7 billion people

0.9 billion people

1.1 billion people

p pfor 2050: 9 billion people

Sources: USDA & U.S. Census Bureau.

0 50 100 150 200 250

2009 1980

DevelopingCountries

3.6 billion people5.7 billion people

U.S. corn price$/bu

7

8 Volatile and New Plateau

3

4

5

6

7EPA biofuel

policy (Aug 05)

Avg. = $2.50 / bu 15% mandate

$3.70 - $4.25 / bu

Source: CBOT Futures.

0

1

2

Jan-80 Jan-85 Jan-90 Jan-95 Jan-00 Jan-05 Jan-10 Jan-15

Avg. = $3.70 / bu

Joshua Harris’ Slides

Commodity markets definedSizing the commodities market

Physical market for commodities is $7.1 trillion(1),(2)

C ditiU S D bt k t W ld E it M k t

$6$4$1$2

$4

$6

$8

ze ($

trill

ions

)

CommoditiesU.S. Debt markets World Equity Markets

32%17%

$17

$7

$2

32%

17%

$4 $4 $4$1 $1

$0

$2

Corporate High Yield

LeveragedLoans

US Japan UK China

Siz

(1) Source: Goldman Sachs, September 2007 and Apollo estimates.(2) Excludes reserves.

PhysicalMarket (2)

FinancialMarket

Energy Agriculture Metals

51%

61% 12%27%

$2

Commodities – uncorrelated returnsto other asset classes

Annualized returns (15-year)(1)

Return correlation with commodities (15-year)(1)(15-year)( ) commodities (15-year)( )

7.5%

5.8%

4.2%

7.7%

6.2%

4%

6%

8%

10%

0.140.24

0.40

-0.3

-0.1

0.1

0.3

0.5

rela

tion

Coe

ffici

ent

(1) Measured quarterly over a 20-year period (03/31/95 through 03/31/10). Commodities measured by GSCI Spot Index, US Equities measured by S&P 500, Global Equities measured by MSCI World Index, US High Yield measured by CS High Yield Index, and US Government Bonds measured by Bloomberg US Government Bond Index.

0%

2%

Commodities USEquities

GlobalEquities

US HighYield

US GovtBond

-0.40-0.5

USEquities

GlobalEquities

US HighYield

US GovtBond

Cor

r

Adding commodities to a portfolio improves risk/return tradeoffHistorical efficient frontier with and without commodities

15 Efficient Frontier of Stocks & Bonds With Commodities

stor

ical

Ret

urn

A

B

6

9

12Efficient Frontier of Stocks & Bonds Without Commodities

Bonds With Commodities

Source: Ibbotson Associates. Efficient frontier created using treasury bills, US bonds, International bonds, TIPS, US Stocks & International Stocks from 1970 – 2004.

Historical Standard Deviation (Risk)

His

0

3

0 5 10 15 20 25

Over the long run commodities are correlated to inflationCorrelation with inflation rates (CPI) by sector (Jan-90 – Dec-08)

Source: Bank of America, March 2009

Including unemployment further strengthens correlationUS CPI year-on-year change vs. a model based on US unemployment and commodities

6%• Correlation of

inflation (as measured by CPI) to commodity prices combined with the US unemployment rate is 93% over the l

----- US CPI, year-on-year change (NSA)----- Correlation = 93%

6%

5%

4%

3%

2%

1% long run

Source: SG Cross Asset Research, based on yearly returns

1%

0%

-1%

-2%1992 1994 1996 1998 2000 2002 2004 2006 2008

…but periods of dislocation existInflation vs. commodity prices (2009 – Q1 2010)

• More recently, commodity prices have been driven by the growing demand from emerging markets, which is uncorrelated with US Inflation

140%

160%

180%

200%

220%

Crude

Copper

80%

100%

120%

Jan-09 Mar-09 May-09 Jul-09 Sep-09 Nov-09 Jan-10 Mar-10

CPI

Corn

Source: Bloomberg.

Supply and demand imbalanceNear-term global liquids supply and demand

Crude oil spare capacity was effectively exhausted last year

Rising costs have driven the increase in long-dated prices, particularly oil$/bbl

Million b/d

Marginal cost

Long-dated oil prices

$/bbl

140

120

100

80

60

90

80

70

60

50 Global output

Global production capacity

By 2011 the market is back to capacity

Sources: IEA, GS Global ECS Research, Goldman Sachs Equities Research, NYMEX.

Total Capacity Total Production

40

20

01991 1995 2000 2005 2010

50

40

30

201965 1974 1983 1992 2001 2013

capacity constraints

China is the largest driver of global commodities demand

• China is a much larger influence on global commodity consumption compared to the 1990’s

• China is 9% of Global GDP, but ~25% of global commodities consumptionChina is 9% of Global GDP, but 25% of global commodities consumption

Chinese consumption as a % of world consumption

Sources: USDA, DOE & Goldman Sachs

Majority of invested capital in commodities through passive strategies

• Total AUM in Commodities Total AUM invested in commodities

= $283 billion for institutional and retail investments as of March 31, 2010

• 80% of total AUM invested in commodity indices and yexchange-traded products (ETPs)

Source: Barclays Capital. AUM figures as of March 31, 2010

Public financial market value vs. private market value

Aluminum Shipping(1)

Oil & Gas

1.35x Cost

1.00x Cost

$50.83

$35.38

(2)(1)

(1) May 2007 spot price, which was the date Apollo bought Noranda Aluminum.(2) Weighted-average 12-month forward price as of September 2009, which was the date Apollo bought Parallel Petroleum.

Financial Market Price Physical Market Price

Commodities is an attractive asset class

P id i k di ifi ti ith t d i t d t• Provides risk diversification without decreasing expected return

• Inflation hedge over the long term

• Attractive supply/demand fundamentals driven by emerging market growth and short-term supply constraints

• Ability to buy real assets at significant discount to financial assets

Price pickle

understanding commodity trends · best-performing members worst-performing members 137.85 130.92...

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