RussellStone International

Safex opportunity: Wheat

2012

Block 1 Monument Office Park 71 Steenbok Avenue Monument Park Pretoria South

Introduction: Based on fluctuations in commodity pricing, wheat may become attractive in ruminant diets, replacing a portion of maize and barley in rations. Traditionally, the milling of wheat produces flour for human use and appreciable quantities of by-products for animal feeds. The Hard Winter Wheat is generally high in protein, averaging 13-15%, whereas the Soft White Wheat tends to be lower in protein, averaging 11-12%. The amino acid distribution of wheat is better than that of most cereal grains and wheat is a very palatable and digestible feed, having a relative value equivalent to corn for most animals. As with many other cereal grains, wheat is primarily a source of energy in the form of carbohydrates. Available energy expressed as either digestible energy (DE) or metabolizable energy (ME) is higher per unit of dry matter (DM) relative to corn, than other major grains Specific Feed: Swine: 1. Wheat may be used as a partial or sole grain source in diets for all classes of swine. 2. Diets containing wheat should be balanced for lysine instead of crude protein. Wheatsoybean meal diets will be higher in crude protein content than comparable corn-soybean meal diets. 3. Wheat contains more lysine than corn, thus those producers who mix their own diets using a soybean meal-premix program can save 20kg of soybean meal per ton of mixed diet 4. Those producers who mix their own diets using a complete protein-vitamin-mineral supplement should replace corn with wheat on a pound for pound basis 5. Wheat should be coarsely ground or rolled for use in swine diets 6. Wheat is worth up to 5% more than corn on an equal weight basis for those who can take advantage of wheat's higher lysine content.

Beef: Feeding wheat to ruminants requires some caution as wheat tends to be more apt than other cereal grains to cause acute indigestion in animals which are un-adapted to it. The primary problem appears to be the high gluten content of wheat which in the rumen can result in a "pasty" consistency to the rumen contents and reduced rumen motility. Whole wheat may be efficiently used by cattle, but its nutritive value is improved by some form of processing. It is generally conceded that its feeding value is optimized by dry-rolling, coarse grinding or steam-rolling to produce a thick flake. Fine grinding of wheat generally reduces the feed intake and is likely to cause acidosis and/or bloat. Never-the-less, when available for feed, it can be substituted equally for corn on the basis of TDN to a maximum of 25% of dry matter intake for beef.

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Sheep: Whole-grained wheat intended for adult sheep need not be ground or processed before incorporating into rations since these species chew feed more completely. In the case of earlyweaned and artificially-reared lambs, the palatability of whole-grain wheat is improved by pelleting. Poultry: Feed companies can use a feed enzyme that will break down the complex polysaccharides in the gut of the chicken resulting in improved energy utilization and a higher ME content in the Wheat. As stated early one of the benefits of wheat is the high protein content of around 12-14% compared to 8.5% in Corn. One of the down sides of Wheat in the Poultry industry is the increase in sudden dea th Sy ndro me ( SDS). Two a c t io n s c an be t a k e n to m i n im i z e this e ffe ct . One to supplement the diet with a meat-meal and with vitamin biotin, which is present in wheat but in an unavailable form. The second is to alter the lighting program so that the growth of the birds are slowed in the first 3 weeks and then increased in the next 3 weeks. The use of wheat in the layer industry causes the egg yolk to be a pale yellow, sometimes almost white. To the uninformed consumer the chickens and eggs fed on a wheat based diet may appear to be anemic and sick. Broiler carcass appears to be firmer when the diets are wheat based as corn contains higher amounts of fat compared to wheat

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History

In the history of the market it has only happened twice before that Corn has traded at a premium to Wheat. The mean premium that wheat should trade to Corn is about $1-00/bu. Currently the Spread is Square.

With the listing of Corn and Chicago Wheat on Safex this trade becomes an opportunity on the local market as access to the opportunity without having to open accounts in Chicago or worry about exchange rates. The contracts listed on Safex are directly derived from the prices on CBot. There are three trading options that one can use to get involved in this Spread, they are Jul, Sep and Dec. Although we suggest using a combination, in order to spread the risk and allow for a better average price. One is always able to roll open position forward to a future trading month

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Currently the Listed REDW/Corn spread for Jul is trading at a negative of around R85-00/ton.

September is trading at a premium of around R85-00/ ton 4|Page

December is trading at a premium of around R235-00/ton

The Trade The market concerns are currently that there is not enough carry over stock on Corn, this explains the increase in Maize prices on an international front. Recently the USDA world supply and demand estimates report showed that ending stocks for Maize around 125.35 mil tons adjusted from the 128.14 mil tons last month. Wheat Stocks have come in to an all-time record of 213.1 mil tons. However the high Corn prices will lead to an increase in the planting acreage, this in turn will be bearish for Corn prices and be a driving factor to rectify the norm of this spread. In order for this to be priced in one needs to note when the World Corn supply will be coming in, China and the European Union harvest corn from August to October, this consists of about 30% of the worlds production. The US which is by far the largest producer of Corn in the world, producing a staggering 39% of Worlds Corn production is harvested through October to November. It has been noted that America has planted the largest hectare age since 1940, 2.1 million hectares more than 2011. Therefore the trade will be as follows long Sep REDW short Sep CORN, then rolling forward to Dec, currently the open interest on September REDW is only 100 contracts, where December is 538. The premium at which Sep REDW is trading is currently around R100-00/ton, as the REDW is a newly listed contract only market makers are trading, they will be taking a small profit as their role as a market maker. This profit is about 1 -1.5%.

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