CME Group and Informa Economics May 16, 2013

1. Pan American Grain and Oilseed Conference CME Group and Informa Economics May 16, 2013

2. Contents Practical Viewpoints on Risk Management • Determining Business Needs • Supply Chain Impacts • Process Framework • Risk Assessment • Risk Management Tools • Policy & Controls • Best Practices

3. Commodity Risk Management OverviewDetermining Business Needs • What is commodity risk management and why do you do it? • In basic terms, it means managing your margins. This could be for sellers (e.g. farmers) or buyers (e.g. food companies). • You project or budget what your costs will be along with your revenue. Hopefully, that results in a positive margin. You then use hedging tools to lock-in that margin or manage it to remain profitable. • Commodity risk management is also called hedging and is defined as buying or selling futures (or physical) contracts as protection against the risk of loss due to changing prices in the cash markets.

4. Commodity Risk Management OverviewSupply Chain Impacts Price volatility exists all along the supply chain and hedging is used by each participant to manage the impact from price changes to their business. • Farm • Risk from lower prices for production (e.g. milk) • Risk from higher costs for inputs (e.g. feed, fertilizer, land, etc.) • Cooperative • Producer forward contracts • Supply/sales contracts • Inventory ownership • Manufacturer/Processor • Risk from higher prices for purchased items • Inventory ownership • Producer forward contracts • Supply/sales contracts • End Users • Risk from higher prices for ingredient costs • Risk to plans/budget from price volatility

5. Commodity Risk Management OverviewProcess Framework After understanding why you need to manage commodity price risks, a structured process can be defined to establish and implement a commodity risk management program. Identify Risk Quantify Risk Set Risk Strategy Hedging Strategies Review and Refine • Identify commodity risk exposures • Understand the impacts each risk has to the company • Quantify the potential impact of market risks on your financial performance • Determine the overall risk to the company given these underlying risks • Evaluate different hedging alternatives in terms of tool selection • Choice of strategy should be consistent with policy objectives • Define the company’s risk tolerance, constraints, and the overall objectives of the hedging program • Assess the effectiveness of hedging tools from an accounting and economic standpoint • Hedging strategies should be adjusted over time as markets are dynamic Adapted from Citi’s Holistic Risk Management Framework

6. Commodity Risk Management OverviewRisk Assessment • Margin risk depends on the ability to pass through commodity cost changes to customers • More coverage should be taken on inputs that cannot pass on cost changes • Less coverage should be taken for inputs that can pass on cost changes • Determine what your risk tolerance is. Which is worse for a buyer? • Uncovered and market goes up (margin contraction) • Uncovered and market goes down (margin expansion) • Covered and market goes up • Covered and market goes down (covered risk) Commodity as % of Product Cost Commodity- Retail Price Elasticity Need for Risk Management Coverage Low Medium High Competitive Response Business Needs Low Medium High Ability to Pass Through Costs

7. Commodity Risk Management OverviewRisk Management Tools There are a variety of risk management tools available to use. The selection of the proper tool depends on factors such as risk tolerance, financial vs. physical settlement, and cost. Hedging strategies range from fixed price to variable price contracts.

8. Commodity Risk Management OverviewPolicy & Controls Given the large amount of financial risk exposure from commodities, hedging activity needs to be governed by robust policies and procedures. A commodity hedging policy can serve as the framework for the definition, measurement, and reporting of price-risks related to commodity hedging activity. Additionally, standard operating procedures are developed for each process step. The commodity hedging policy should contain the following: Scope of Commodity Risk Management Activities Commodity Risk Management Oversight Commodity Risk Management Strategies Commodity Risk Management Tools Controls Risk Measurement Accounting for Commodity Risk Management Activities Authorized Commodity Brokers and Trading Advisors

9. Commodity Risk Management OverviewBest Practices • A best practice is to establish a risk management philosophy and guiding principles that will help you in your decision making. • Align objectives of risk management with company goals • Ensure management understands objectives of risk management • Know your cost structure so you can effectively manage your margins • Have specific, written risk management strategies • Maintain discipline in executing risk management strategies • Work with experienced professionals • Develop policies, controls, and standard operating procedures • Don’t operate in a silo – involve others in the process • Risk management is not speculating and should not be considered a profit center. In fact, not using risk management is speculative.

10. Commodity Risk Management OverviewSummary A successful commodity risk management program helps a company manage their margins and reduces the impact from commodity price volatility. Key steps in the commodity risk management process include: • Determining your business needs • Identifying and quantifying your risk from commodity prices • Developing a structured process for establishing and executing hedging strategies • Focusing on margin management • Ensuring policies and procedures are robust Thanks! Mike McCully mike@themccullygroup.com www.themccullygroup.com