Risk Management For Agricultural Markets Steven Stasys +1 September, 10th 2015

© 2013 CME Group. All rights reserved.© 2015 CME Group. All rights reserved. Market Risk Summary 2 RISK Accept It Don’t Fear It Manage It Conquer it If you don’t manage risk, you are assuming risk If you are assuming risk, you are speculating!!!

© 2015 CME Group. All rights reserved. Hedging: Price Risk Management Cash Market Futures Market

© 2015 CME Group. All rights reserved. Legally binding agreement to accept delivery of or make delivery of a standardized ______ and ______ of a commodity to a standardized _____ during a standardized ____ period for a _____ discovered in an organized futures exchange. Futures Contract: Defined quantityquality place time price

© 2015 CME Group. All rights reserved. Price Discovery: Supply & Demand Prices are Discovered Prices are NOT set by the Exchange Closest form of “perfect competition” Two-way Price Impact Transparent Prices

© 2015 CME Group. All rights reserved. Hedging Mechanics

© 2015 CME Group. All rights reserved.

Hedging With Futures - Notes Take advantage of current purchase and sale prices Protect against adverse prices Basis may improve purchase or sale price Assists with planning & budgets Protects inventory value Not tied to a specific buyer or supplier Financial integrity of CME Clearing

© 2015 CME Group. All rights reserved. Basis: The Key Factor to Successful Hedging Cash Price Futures Price Basis

© 2015 CME Group. All rights reserved. Basis: Concepts BASIS Cash minus Futures Locational & Quality Differences Sellers want Stronger Buyers want Weaker Less Volatile Seasonal & Historical Trends

© 2015 CME Group. All rights reserved. Basis: Components

© 2015 CME Group. All rights reserved. Basis Movement Strengthen Cash Gains Relative* to Futures More positive or Less negative Benefits Short Hedgers *Basis can strengthen or weaken regardless of the price direction Weaken Cash Declines Relative* to Futures Less positive or More negative Benefits Long Hedgers

© 2015 CME Group. All rights reserved. Basis Summary Cash price relative to a futures price Relatively less volatile than futures Seasonal & historical trends Tool for purchases and sales Buyers want basis to weaken over time Sellers want basis to strengthen over time Can have a negative or positive value

© 2015 CME Group. All rights reserved. Types of Traders Cash Market Risk Liquidity Speculator Hedger Risk Liquidity Cash Market Speculators provide what hedgers need! LIQUIDITY

Potential Grain and Oilseed Hedgers Cash Market Farmer On-Farm Use / Storage Livestock Operation Elevator System Feed Manufacturer Export Markets Consumer FUTURES MARKET Energy Sector Non-Food Item Production Food/Beverage Processors Millers / Refiners Retail / Wholesale Seed Company RestaurantsGrocery Stores

© 2013 CME Group. All rights reserved. What is Volatility? Example: Wheat Futures at $6.00 Compare Market Volatility: 20%, 30%, 50% At what volatility level is your risk greatest? At what volatility level is your opportunity greatest? Note: 2 Standard Deviations is 95% probability and 3 Standard Deviations = 99% probability Annualized Volatility 68% Probability Price Range 20%$4.80 – $ %$4.20 – $ %$3.60 – $8.40

Products

© 2015 CME Group. All rights reserved. Agricultural Commodity Product Complex Grains and Oilseeds: Corn Futures, Options & Swaps Wheat Corn Spread Options Mini-sized Corn Futures Ethanol Futures, Options and Swaps Oat Futures and Options Rough Rice Futures and Options Soybean Futures, Options & Swaps Mini-sized Soybean Futures Soybean Meal Futures and Options Soybean Oil Futures and Options Soybean Corn Price Ration Options Crude Palm Oil Futures Wheat Futures, Options & Swaps Mini-sized Wheat Futures Corn, Wheat, Soybeans, SoyOil, SoyMeal Calendar Spread Options Livestock: Feeder Cattle Futures and Options Live Cattle Futures and Options Lean Hogs Futures and Options Live Cattle & Lean Hog Calendar Spread Options Dairy Products: Butter Futures and Options Butter Spot Call Cash-Settled Butter Futures Milk Class III Futures and Options Milk Class IV Futures and Options Cheese Nonfat Dry Milk Futures and Options Dry Whey Futures

Options

© 2013 CME Group. All rights reserved.© 2015 CME Group. All rights reserved. Primary Option Pricing Concepts 20 When Buying Options – Pay Premium When Selling Options – Receive Premium Contract between two parties that conveys a RIGHT but not an obligation to buy or sell a specific commodity at a specific price within a specific time period for a premium.

© 2013 CME Group. All rights reserved.© 2015 CME Group. All rights reserved. Types of Options 21 Contains the right to BUY CALLS Contains the right to SELL PUTS

© 2013 CME Group. All rights reserved.© 2015 CME Group. All rights reserved. 22 Option ExpiresOption ExerciseOption Offset Options expire: month prior to the underlying futures Calls Call option buyer gets a long futures position Call option seller gets a short futures position Requires the opposite position in the same option. Same strike price, month, type and commodity Options have zero time value after expiration Puts Buying a put offsets an existing short put position Selling a put offsets an existing long put position Offset recovers both intrinsic and time value Automatic exercise of options with intrinsic value on last trading day Exercise recovers only intrinsic value Remaining time value is lost What Happens to Options

© 2013 CME Group. All rights reserved.© 2015 CME Group. All rights reserved. Premium Components Premium Time Volatility Interest Rates Supply & Demand

© 2013 CME Group. All rights reserved.© 2015 CME Group. All rights reserved. Time Value Curve 24 Time Value  Decreases at an increasing rate  Time value is zero at option expiration Days to expiration 0 Time value 100 0

© 2013 CME Group. All rights reserved.© 2015 CME Group. All rights reserved. 25 Non-Standard Options Short Dated New Crop Weeklies Calendar Spread Options (CSOs) Inter-Commodity Spread Options Corn Soybeans SRW Wheat HRW Wheat Soybean Meal Soybean Oil Corn Soybeans SRW Wheat HRW Wheat Soybean Meal Soybean Oil Corn Soybeans SRW Wheat HRW Wheat Live Cattle Soybean-Corn Price Ratio SRW Wheat- Corn MGEX-KC Wheat MGEX-SRW Wheat KC-SRW Wheat SRW- Soft Red Winter (Chicago) HRW- Hard Red Winter (KC) MGEX- Hard Red Spring (Minneapolis)

© 2015 CME Group. All rights reserved. Definition: -The Short-Dated Options on the deferred (new crop) months are early expiring options that reference the December Corn Contract, November Soybean Contract and July Wheat Contract Key Benefits: -Cost-effective: lower premiums due to lesser time value -Facilitate hedging early in the planting and growing season -Manage risk during specific windows of the growing season at reduced costs -Useful for trading around key USDA reports -Allow Greek sensitivity hedging -Can be used to hedge old/new crop positions -Arbitrage opportunities between outrights, CSOs and Short-Dated options Short-dated New Crop Options

© 2013 CME Group. All rights reserved.© 2015 CME Group. All rights reserved. Short-Dated New Crop Option Listing Cycle

© 2013 CME Group. All rights reserved.© 2015 CME Group. All rights reserved. 28 Weekly Options Same contract specs as standard and serial options, except for the listing cycle/expiration date. American exercise into the nearby futures contract. Expire every Friday that is not already a expiration date for standard or serial options. Four weekly options listed at any time. When one weekly option expires, a new weekly option will be listed on the following business day. Weekly options have a life span of about 28 days.

© 2013 CME Group. All rights reserved.© 2015 CME Group. All rights reserved. Side by Side Comparison - (Corn) 29 ProductExpiration Days Until Expiry Underlying * Approx Straddle ATM Volatility Weekly (Week 1) 7/3/20147 September Future 24 cents36 Short-Dated New Crop Option 8/22/ December Future 40 cents27 December (Standard Option) 11/22/ December Future 57 cents25

© 2013 CME Group. All rights reserved.© 2015 CME Group. All rights reserved. 30 Calendar Spread Options – CSO’s A Calendar Spread Option is based on the difference between two unique futures contracts looking at the same underlying. For example, a July soybean contract vs. a November soybean contract. The spread is defined as the closest contract to maturity minus the deferred or farthest away contract: Front Contract – Deferred Contract = Spread Price CSOs are sensitive only to the value and volatility of the spread itself, rather than the price of the underlying commodity. Grain CSO’s Corn Wheat Soybeans Soybean Oil Soybean Meal

Financial Integrity

© 2015 CME Group. All rights reserved. CME Clearing: The Central Counterparty Clearing Model

© 2015 CME Group. All rights reserved. Daily Settlement Process No Debt System CME Clearing Losses collected Profits paid out

© 2015 CME Group. All rights reserved. Types of Margin Initial Amount of money required per contract to initiate a futures position Required by both buyer and seller Different forms of capital accepted Maintenance Minimum balance (equity) that must be maintained at all times If balance falls below maintenance level, you receive a margin call  Margin Calls must be made with cash Hedge initial margin is same as Spec Maintenance Margin

Benefits of CME Group Products Variety of Ag ProductsFlexible UsesLiquidity & TransparencyRegulation & Financial Integrity Choice of Trading PlatformsCustomer Service

© 2013 CME Group. All rights reserved.© 2015 CME Group. All rights reserved. Disclaimer 36 Futures trading is not suitable for all investors, and involves the risk of loss. Futures are a leveraged investment, and because only a percentage of a contract’s value is required to trade, it is possible to lose more than the amount of money deposited for a futures position. Therefore, traders should only use funds that they can afford to lose without affecting their lifestyles. And only a portion of those funds should be devoted to any one trade because they cannot expect to profit on every trade. All references to options refer to options on futures. Swaps trading is not suitable for all investors, involves the risk of loss and should only be undertaken by investors who are ECPs within the meaning of section 1(a)12 of the Commodity Exchange Act. Swaps are a leveraged investment, and because only a percentage of a contract’s value is required to trade, it is possible to lose more than the amount of money deposited for a swaps position. Therefore, traders should only use funds that they can afford to lose without affecting their lifestyles. And only a portion of those funds should be devoted to any one trade because they cannot expect to profit on every trade. Any research views expressed are those of the individual author and do not necessarily represent the views of the CME Group or its affiliates. CME Group is a trademark of CME Group Inc. The Globe Logo, CME, Globex and Chicago Mercantile Exchange are trademarks of Chicago Mercantile Exchange Inc. CBOT and the Chicago Board of Trade are trademarks of the Board of Trade of the City of Chicago, Inc. NYMEX, New York Mercantile Exchange and ClearPort are registered trademarks of New York Mercantile Exchange, Inc. COMEX is a trademark of Commodity Exchange, Inc. KCBOT, KCBT and Kansas City Board of Trade are trademarks of The Board of Trade of Kansas City, Missouri, Inc. All other trademarks are the property of their respective owners. The information within this presentation has been compiled by CME Group for general purposes only. CME Group assumes no responsibility for any errors or omissions. Additionally, all examples in this presentation are hypothetical situations, used for explanation purposes only, and should not be considered investment advice or the results of actual market experience. All matters pertaining to rules and specifications herein are made subject to and are superseded by official Exchange rules. Current rules should be consulted in all cases concerning contract specifications. Copyright © 2015 CME Group. All rights reserved.