Compiled on Tuesday, May 11, 2010

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Index (Total Return) Close10May Change YTD Change Contract (AS OF 0719GMT) Price Change Net Change YTD Reuters/Jefferies CRB 261.09 1.58% -6.29% NYMEX light crude $76.23 -0.74% -$0.57 -3.23% S&P GSCI 4288.078 1.82% -5.43% NYMEX RBOB gasoline $2.17 -0.25% -$0.04 5.85% Rogers International 3076.78 -0.63% -6.04% ICE gas oil $670.25 -0.22% -$671.75 5.70% NYMEX natural gas $4.16 -0.29% -$0.01 -25.16% Dow Jones - UBS 128.6608 1.22% -6.43% Spot Gold $1,206.40 0.37% $4.50 9.69% Cont Commod Indx 466.45 0.95% -2.79% LME Copper $7,010 -1.61% -$115.00 -3.46% Other Market Performance LME Aluminium $2,115 -1.17% -$25.00 -3.72% US STOCKS (DJI) 10380.43 3.90% 3.42% CBOT Corn $3.61 -0.55% -$0.02 -12.42% US DOLLAR INDEX 84.156 -0.35% 8.09% CBOT Wheat $4.82 -0.05% $0.00 -10.90% US BOND INDEX (DJ) 255.05 -0.18% 3.41% Malaysia Palm Oil (3M) R2,510 -0.75% -R19 -5.03% CHART OF THE DAY (Click on the chart for full-size image) Join Reuters Editorial Live on 11 May to Discuss USDA Crop Report The Global Ags Forum, Thomson Reuters online chatroom for grain traders and analysts, will host a chat with columnist Gavin Maguire starting at 7:45 am CDT (1245 GMT) Tuesday 11 May after USDA issues its May crop report. This will be USDA's first estimates of the U.S. winter wheat crop and new-crop 2010/11 ending stocks forecasts. To find out more and join the Global Ags Forum click here

TODAY’S MARKETS (Click below to read the full report if you are a 3000 Xtra or RTC user) OIL: Oil fell below $77 as a stronger dollar signalled lingering doubts about a resolution to Europe's debt crisis, while Chinese inflation data raised concern about potential monetary tightening measures. MARKET NEWS (Click on the headlines below to jump to the story) "The euro rallied and then has come back down as the initial relief ENERGY was over," said Stefan Graber, a commodities analyst with Credit • China April refinery runs at a record 8.37 mln bpd Suisse in Singapore. • Valero says Texas refinery unit shut due to fire BASE METALS: Base metals prices fell, as euphoria about a trillion • Ecuador to pay 'fair' price if seizes oil assets dollar plan to prevent a European sovereign debt meltdown, gave • POLL-US crude inventories seen up on imports, way to longer term worries about the outlook for the euro zone and lower runs China. "The markets are still digesting. It soothed some of the fear but it's a band rather than a cure. In the short term it should halt the • Swiss firms easily replaced on Libya projects- panic and give people time to try to solve the problem," said Joel official Crane, analyst at Morgan Stanley. AGRICULTURE PRECIOUS METALS: Gold edged down after a volatile session the • USDA expected to project large corn, soy previous day, but a rise in ETF holdings to another record suggested surpluses that investors remained faithful to the metal. "I think people don't • U.S. soybean plantings double in latest week really buy this rescue package. I think most of the countries' Con- • China corn sales squeezing US top quality supplies gress have yet to approve it before they can release the fund," a bul- • Colombia seen missing its mid-year coffee target lion dealer in Hong Kong said. BASE METALS GRAINS: U.S. corn futures eased ahead of a U.S. government report • Rio Tinto clears Australia environment step, eyes that is expected to show corn supplies at their highest level in five tax years. "We did see a very strong rally in crude oil overnight, a key inflation hedge, and a commodity against which ags/softs have often • China steel output hits new record in April played catch up," said Briggs. • China April refined copper output up 6.1 pct GLOBAL MARKET: A massive relief rally in world stocks on news of a BEYOND THE HEADLINES $1 trillion deal to resolve Europe's debt crisis slowed down in Asia • COLUMN-What's in a word? Senate battle on on nagging doubts about how Greece and other debt-laden euro derivatives: John Kemp zone countries will reduce their budget deficits. • COLUMN: Upcoming USDA Report Preview: EVENTS TO WATCH TODAY (GMT) Gavin Maguire GERMAN APRIL FINAL CPI, WHOLESALE PRICES (0600) • Australia wheat quality woes to shrink market UK MARCH INDUSTRIAL PRODUCTION (0830) share ICSC/GOLDMAN SACHS WEEKLY U.S. CHAIN STORE SALES (1145) • OPEC sees oil price boost on euro zone bailout REDBOOK WEEKLY U.S. RETAIL SALES (1255) • Peabody, Xstrata lead fallout from Australia U.S. WHOLESALE INVENTORIES FOR MARCH (1400) mining tax ABC U.S. WEEKLY CONSUMER COMFORT INDEX (2100) • US SEC, exchanges agree to boost market safeguards CLICK HERE TO SEE UPCOMING EVENTS AND CONFERENCES Daily Commodities Brief Tuesday, 11 May 2010

MARKET NEWS

Rio Tinto clears Australia environment step, eyes tax China April refined copper output up 6.1 pct SYDNEY, May 11 (Reuters) - Rio Tinto has cleared a key HONG KONG, May 11 (Reuters) - China's production of environmental hurdle in its plan to boost capacity at its refined copper rose 6.1 per- Cape Lambert iron ore port, but the project faced uncer- cent in April on the month, tainty due to the new mining tax, the firm said on Tuesday. while output of primary alu- The Western Australian state Environmental Protection minium inched up 0.1 percent Authority has given the Pilbara district project, estimated to rack up its second-highest monthly output on improved by analysts to cost more than $10 billion, approval to boost capacity by 62 percent to 130 million tonnes from 80 mil- power supplies. lion now. The country, the world's top The authority's clearance, subject to a two week appeal consumer of most base metals and producer of aluminium, process, was a "very important step" in meeting its produc- lead and zinc, produced 380,000 tonnes of refined copper and 1.365 million tonnes of primary aluminium in April, tion target of 330 million tonnes in 2015, a Rio spokesman said. data from the National Bureau of Statistics showed on Tuesday. The project faces further environmental scrutiny before construction could start and Rio's board has yet to give its Strong copper prices had encouraged Chinese copper final investment approval for the work. smelters to maintain high production, said Heng Kun, an analyst at Essence Securities. "Smelters were expecting copper prices to stay strong," he said. China steel output hits new record in April SHANGHAI/BEIJING, May 11 (Reuters) - Chinese crude China April refinery runs at a record 8.37 mln bpd steel production hit a fresh all-time high of 55.4 million tonnes in April thanks to strong prices, although high in- BEIJING, May 11 (Reuters) - China's refinery crude ventories and lower prices may curb further production throughput increased 17.1 percent from a year earlier to a rises in coming months. record high of 8.37 million barrels per day (bpd) in April, official data showed on Tuesday. Output grew by 27 percent year-on-year, taking the Janu- The throughput was in line with an earlier Reuters poll that ary-April total to 213.9 million tonnes, according to data from the National Bureau of Statistics. showed top refineries in the world's second-largest con- suming nation would raise April runs to record highs as The enthusiasm of Chinese steel mills has fuelled a surge in plants returned from shutdowns to meet improving domes- steel prices lasting into mid-April, with demand from down- tic fuel sales while awaiting the first fuel increase since No- stream industries still strong as a result of a government vember. stimulus package. These leading refineries would process crude oil in May at "This was expected. Steel prices reached a peak in mid- the second-highest rate on record after Beijing raised fuel April, so definitely, steel mills have been keen to produce as prices last month amid rising seasonal demand, another much as possible," said Zhang Ping, an analyst with the Reuters survey indicated. information consultancy Umetal.com. Beijing raised retail gasoline and diesel prices by around 4 percent and ex-refinery jet fuel by about 10 percent on USDA expected to project large corn, soy surpluses April 14 -- the first such move in five months -- to track higher crude oil costs and take prices to new highs. WASHINGTON, May 11 (Reuters) - U.S. corn and soybean stockpiles will swell to their largest size in recent years as the result of record-large crops this year, the government Valero says Texas refinery unit shut due to fire was expected to project on Tuesday. NEW YORK, May 10 (Reuters) - Valero Energy Corp had an Surpluses would rise as crop production outpaces heavy emergency shutdown on Monday of a unit at its 315,000 feed, export and biofuel usage in the marketing year that barrel-per-day Corpus Christi, Texas, refinery due to a starts on Sept 1, said a survey of traders. It would follow a flange fire, according to a company environmental filing. rise in corn, soybean and wheat surpluses this year. It was not immediately clear which unit was shut but a Soybean supplies would nearly double by the end of Coker Elliot Compressor and Complex 7 were cited as 2010/11, to 340 million bushels, the largest carry-over in sources of emissions related to the incident in the refinery's four years. The corn carry-over would reach 1.901 billion East Plant, added the filing with the Texas Commission on bushels, largest in five years. The wheat surplus, expected Environmental Quality. at 953 million bushels, would be the largest since 1987/88. "Emergency shutdown and depressure of unit due to flange The Agriculture Department was scheduled to release on fire," said the filing. Tuesday its first projections of crops, usage and ending stocks for 2010/11, as well as updating its figures for the current marketing year. It will make its first field-based fore- cast of the winter wheat crop, now nearing maturity. (Continued on page 3) ↑ Back to first page 2 Daily Commodities Brief Tuesday, 11 May 2010

MARKET NEWS

U.S. soybean plantings double in latest week The Andean country produced 2.43 million bags of 60-kg in CHICAGO, May 10 (Reuters) - U.S. farmers seeded 30 per- the first four months of the year, the coffee federation said Monday. In April, output was 647,000 bags, 88 percent cent of their soybean crop so far, a government report showed on Monday, falling short of analysts who forecast higher than the 345,000 produced in April last year. plantings at 34.4 percent finished. The U.S. Agriculture Department said in its weekly crop Ecuador to pay 'fair' price if seizes oil assets progress report that soybean plantings doubled from 15 QUITO, May 10 (Reuters) - Ecuador would pay a "fair price" percent a week ago. They are 17 percentage points ahead to private oil firms for operations leftist President Rafael of where they were at this time in 2009 when plantings Correa says will be taken over if new contracts favoring the were slowed by cool, rainy weather, and ahead of the five- government are not signed, the oil minister said on Mon- year average for 2005-2009 of 19 percent. day. Corn sowings were estimated by USDA at 81 percent, up The smallest member of OPEC, Ecuador has been trying to from 68 percent a week ago, and exceeding the five-year renegotiate contracts with private oil companies for two average of 62 percent. Corn planting, which has been on a years to improve the state's share of profits. record pace in 2010, was seen at 82.6 percent complete, according to the average estimate of nine analysts. Correa warned last month that operations would be nation- alized if new deals were not struck. Traders and analysts were more closely monitoring the soy- bean progress estimate by the USDA. Most market watch- "The companies are going to try to reach an agreement but ers assume the rest of the corn crop will be planted in a in case an agreement is not reached we will proceed with timely fashion. ending the contract -- setting a fair price for the expropria- tion," oil policy minister Wilson Pastor said.

China corn sales squeezing US top quality supplies POLL-US crude inventories seen up on imports, lower runs CHICAGO, May 10 (Reuters) - Surprise corn sales to China, the world's biggest grain and NEW YORK, May 10 (Reuters) - U.S. crude inventories likely oilseeds buyer, has set off a rose last week on higher imports and slightly lower refinery scramble among exporters utilization, a preliminary Reuters poll of analysts ahead of and processors to buy re- weekly inventory reports showed on Monday. maining free supplies of top The average forecast among nine analysts polled showed a quality corn in the United 1.6 million barrel rise in crude stockpiles. States, grain sources said. The poll also called for an average increase of 1.2 million The current competition to barrels in distillate stocks and 700,000 barrels in gasoline secure top quality corn, which can meet export require- supplies. ments for feed as well as foods such as vegetable oil, has boosted cash premiums and is even affecting deliveries at Refinery utilization was forecast down 0.1 percentage point, the Chicago Board of Trade. to 89.5 percent of capacity, the poll showed. Cash traders said corn graded No. 2 yellow (test weight 54 lbs/bushel with maximum 14.5 percent moisture) is selling Swiss firms easily replaced on Libya projects-official from 15 to 35 cents a bushel above No. 3 yellow corn (52- lb test weight) at rural elevators and export terminals. Nor- DOHA, May 10 (Reuters) - Swiss-registered firms involved mally, the spread is about 3 to 4 cents. in Libya's energy projects can be replaced with little disrup- tion to its upstream developments, Tripoli's top oil official said on Monday. Colombia seen missing its mid-year coffee target Libya slapped a trade embargo on Switzerland in March as BOGOTA, May 10 (Reuters) - Colombia probably will miss tensions between the two escalated following the arrest of its lowered mid-year coffee production target of 4.5 million leader Muammar Gaddafi's son Hannibal in 2008 on 60-kg bags despite solid output in May and June, the coun- charges -- later dropped -- of mistreating two domestic try's coffee exporting association chief said. staff. Jorge Lozano, executive president of Asoexport, told "There are plenty of companies who can replace those Reuters, Colombia must produce as much as 1 million bags firms," Libya's Shokri Ghanem told reporters on the side- in May and June to fulfill the revised target set by the cof- lines of an industry conference. fee federation of 4.5 million 60 kg bags for the first half. He did not specify if this meant the Libyan authorities "It is a bit too optimistic to think Colombia will be able to would require international oil companies operating oil and produce 1 million bags in May and June. It is difficult to gas permits to replace Swiss-registered companies with believe in those figures," Lozano told Reuters. other firms.

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MONTH AHEAD EVENTS CALENDAR

Date Events/Indicator Location

Energy Arab Energy Conference: Energy and Arab cooperation (to May Today 12). DOHA International Renewable Energy Conference and Exhibition, May 12 RETECH Egypt 2010, opens (to May 12). CAIRO Energy Efficiency Global Forum and Exposition (EE Global) 2010 May 12 (to May 12). WASHINGTON Metals

Today 5th Steel Tube & Pipe Conference (to May 18). ISTANBUL

May 17 International Tin Conference 2010 (to May 19). VANCOUVER, CANADA

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BEYOND THE HEADLINES COLUMN: This is a much broader mandate than the Commission cur- rently enjoys and emphasises that Congress is giving the What's in a word? Senate battle on derivatives: CFTC a lot of flexibility in deciding how to police the market John Kemp most effectively. -- John Kemp is a Reuters market analyst. The views ex- FIRST SENATE BILL -- "MAY" pressed are his own -- The Senate's version has undergone a more tortured evolu- By John Kemp tion and remains the subject of fierce lobbying. LONDON, May 10 (Reuters) - May or shall. Even one small The original bill, promoted by Senate Banking Committee word can make a big difference. Lobbyists for financial ser- Chairman Chris Dodd (S 3217) and reported out of his vices firms and officials from the Commodity Futures Trad- committee last month, used a weaker formulation: "the ing Commission (CFTC) and the U.S. Treasury are sparring Commission may, by rule or regulation, establish limits over a single word in the derivatives reform legislation be- (including related hedge exemption provisions) on the ag- ing considered by the U.S. Senate. gregate number or amount of positions". At issue is the Commission's authority to impose position The change from "shall" to "may" is permissive. The Com- limits on major energy contracts. mission can, but need not, impose limits. The Commission believes it has all the authority it needs to This reading does not say whether or not the CFTC must impose limits on exchange-traded energy contracts under make a necessity finding. But it does suggest the Commis- Section 4a of the Commodity Exchange Act. It is currently sion has considerable discretion. Any court reviewing its asking Congress to extend that authority to over-the- decision would expect the CFTC to exercise that discretion counter (OTC) markets and derivatives traded on foreign reasonably and might require it to show necessity before exchanges so it can impose aggregated limits. imposing limits. By contrast, industry representatives insist the Commission Dodd's original bill is much closer to the industry's view- cannot act because it has made no factual finding that lim- point and shows the impact of fierce lobbying efforts. its are "necessary" to diminish, eliminate or prevent specu- The Senate Banking Committee report accompanying the lation -- or even that excessive speculation is a real threat bill confirms this interpretation. "Section 724 Position Lim- to big and liquid energy markets. its ... authorises the CFTC to establish aggregate position The industry has asked the CFTC to postpone further rule- limits". Note the wording: it authorises but does not com- making until the outcome of the congressional debate is pel the CFTC to set limits. known. In any litigation, the courts would take the report into ac- In the meantime, both sides are struggling to change the count as an indication of what Congress intended when text of derivatives legislation before Congress in a bid to interpreting the law. boost their argument before the Commission takes a final AMENDMENT TUG-OF-WAR vote, and ahead of any court challenge. But the original Dodd language marked only the beginning. FINAL HOUSE BILL -- "SHALL" A tug-of-war has broken out as the bill is repeatedly The version passed by the House of Representatives in De- amended on the floor. A flurry of amendments has changed cember 2009 (HR 4173) adds extra language to Section 4a the word from "May" to "shall" and back again. to clarify that: In an initial amendment proposed by Dodd himself to incor- "the Commission shall by rule, regulation, or order establish porate the tougher derivatives language drafted by Senator limits on the amount of positions, as appropriate, other Blanche Lincoln's Agriculture Committee the instruction than bona fide hedge positions, that may be held by any was changed back to "shall": "the Commission shall, by rule person with respect to contracts of sale for future delivery or regulation, establish limits". or with respect to options on the contracts or commodities A subsequent amendment proposed by Senator Barbara traded on or subject to the rules of a designated contract Boxer (D, California) confirmed the "shall" instruction. It market". was approved by the full Senate by a huge margin of 96-1 Use of the word "shall" seems to back the Commission's on May 5 (Roll Call 130). argument that it has been given a direct instruction by That was not the end of the complicated dancing, however. Congress to impose limits. It is not conditional on any fact- Senator Richard Shelby, the senior Republican on the Bank- finding exercise to prove the threat of excessive specula- ing Committee and the party's lead negotiator on financial tion is real rather than theoretical. reform, subsequently promoted his own amendment It gets more support later on, when the text says the Com- switching the language back to "may". mission "shall set limits ... in its discretion". It is given this Shelby's amendment was co-sponsored by Dodd. It too was power to diminish, eliminate or prevent excessive specula- approved by the Senate by a lopsided margin of 93-5 the tion; deter and prevent corners, squeezes and market ma- same day (Roll Call 131). nipulation; ensure sufficient liquidity for hedgers; and en- sure the market's price discovery function is not disrupted.

(Continued on page 6)

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BEYOND THE HEADLINES In the space of a few hours, the Senate voted 96-1 to tell The friendly planting weather will also have stirred things the Commission it "shall" impose limits, and by 93-5 to tell up since the March 31 planting projections, and will no the Commission it "may" do so. doubt lead to some tweaks down the road with regard to MAY REIGNS -- FOR NOW the actual number of planted acres of each crop given that farmers regularly overshoot projections when the weather Both were part of comprehensive amendments making conditions are conducive to widespread fieldwork. other changes, so the inconsistency is not completely sur- prising. Nonetheless, it shows how fluid the negotiations Below are outlines of some of the main issues impacting each crop? A more detailed analysis of the USDA's projec- have become and how much effort is being expended by both sides to control the wording. tions will follow after the report's release on Tuesday. For the time being, the Shelby amendment "may" prevails. CORN - SOLID DEMAND, BUT ACREAGE TO CREEP Unless there is yet another amendment, it is the language HIGHER the full Senate will eventually be asked to approve when the Piecing together snippets of the USDA's assumptions re- bill comes to a final vote on the Senate floor. garding the 2010 corn crop via the March 31 Prospective Plantings report and the March USDA Outlook Forum, it is But it will still have to be reconciled in conference commit- tee with the language in the final House bill which says lim- possible to cobble together a 2010 balance sheet that hints its "shall" be imposed. at planted acres of 88.8 million, a national yield just shy of 161 bushels an acre, steady feed usage and a rise in ethanol Meanwhile, the Senate is grinding its way through more demand. Combined with an assumption of a rise in exports than 150 amendments to the bill. Less than a dozen have so to more than 2 billion bushels (gleaned from the Outlook far been considered. Forum), corn inventories at the end of the year (ending The function of most remains obscure. They are "place stocks) could show a year-over-year decline that overall markers", allowing interested senators to file amendments paints a fairly supportive picture of the US corn market. later on behalf of interested parties. The purpose will be However, there is reason to dispute more than one of the revealed if and when they are proposed for consideration. above assumptions. First off, corn acreage will in all likeli- So the switchback ride is set to continue -- may versus shall hood end up closer to 90 million thanks to the very friendly -- all the way to the House-Senate conference. planting conditions that have allowed planters to roll much earlier than usual. This higher planted acreage total will In the end, it may not be decisive. The Commission believes result in higher harvested acres that in turn will generate a it already has sufficient power under the existing language higher output potential. of Section 4a to go ahead and impose limits, while the in- dustry disagrees. On the usage side, the improving margins of the meat- producing industry suggests a modest increase in feed de- But both sides clearly think the issue is sufficiently impor- mand can't be ruled out, while consumption from the etha- tant that they are expending considerable effort to alter the nol industry seems to be persistently match or surpass bill's language back and forth. USDA estimates. So an upward revision may be seen there too. COLUMN: However, despite China's recent rare incursion into the corn import market, and current U.S. corn exports running Upcoming USDA Report Preview: Gavin Maguire about 8% ahead of last year's pace, we must expect stronger corn export competition from Argentina over the -- Gavin Maguire is a Reuters market analyst. The views ex- coming months that should limit U.S. corn export totals pressed are his own. To get his real-time views on the mar- over the year. ket, please join the Global Ags Forum. -- Using the higher acreage total combined with fairly steady By Gavin Maguire demand assumptions, there is a modest rise in ending CHICAGO, May 10 (Reuters) - The U.S Agriculture Depart- stocks that leads to a slight deterioration in this market's ment releases its first stab at compiling supply and demand overall appeal. balance sheets for the corn, soybean and wheat markets on Corn balance sheet: ( http://link.reuters.com/jav43k ) Tuesday. Traders, producers and end users alike are all anx- iously awaiting this first glance at the government's main WHEAT TO GRAPPLE WITH HIGH STOCKS LEVELS assumptions on availability and usage of the country's ma- Despite a meaningful drop in planted acreage on the year, jor crops over the upcoming year. the wheat market continues to be burdened with huge in- FILLING IN THE GAPS ventories both domestically and abroad. Until those stocks levels are drawn down to more manageable levels, it'll be As the USDA has already released its acreage projections hard for wheat to sustain any fundamentally-driven rally. for corn and soybeans in the March 31 Prospective Plant- ings report, the focal point of Tuesday's report will mainly As the table below shows, the U.S. stocks-to-use ratio re- be on consumption side of the equation. The USDA's Agri- mains at more than 40%, hinting at more than ample sup- cultural Outlook Forum laid out some broad expectations plies. on usage in February, but price action and developments in Wheat balance sheet:( http://link.reuters.com/kav43k ) end user profitability since then means there is room for maneuver on a number of fronts in next week's numbers. (Continued on page 7)

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BEYOND THE HEADLINES SOYBEANS VULNERABLE TO A JUMP IN STOCKS But the quality woes have sent customers to other sources. Using a combination of the March 31 projected acres and "APW (Australian Premium White) from Western Australia the demand hints from the Ag Outlook Forum, it is easy to has always been a problem and this year also the quality is paint a fairly bullish picture of the soybean market based on not very good," said a trader based in Singapore, who de- strong usage levels and a limited build in inventories. clined to be identified because company policy bars speak- However, if you use a higher and more realistic acreage ing to the media. total to reflect the ample acreage availability, as well as trim Indian traders, who bought containers of Australian wheat the exports total to acknowledge more heated export com- to supply flour mills in the country's south, had complained petition from Latin America over the coming months, you about quality, he added. get a balance sheet by year-end that hints at more than Last month customs officials at India's southern port of adequate U.S. inventories. Chennai seized 1,250 tonnes of im- Soy balance sheet:( http:// ported Australian wheat, after finding link.reuters.com/mav43k ) pesticide levels that were higher than permitted. In all, while the USDA's projections will make a valid start to compiling 2010 Regular buyers such as Indonesia es- balance sheets for the major crops, caped the problem as they used wheat more realistic assessments will be based blended with grain from other regions, on more ample acreage for corn and the trader said, adding that quality is- soybeans, stronger export competition sues centred on medium-protein grain from other major growing regions, and such as APW. slightly heftier ending stocks numbers across the board. "Australian wheat quality (for medium grades) is poor, but not bad enough for shipments to be rejected by millers." Australia wheat quality woes to shrink market Countries including Russia, Ukraine and Kazakhstan have made big inroads in south Asian markets this year, leaving share Australian grain export terminals overflowing. By Bruce Hextall Australia's share of world wheat exports is expected to fall SYDNEY, May 10 (Reuters) - Quality concerns threaten to to around 12 percent this year from a high of 17 percent further squeeze flagging wheat exports from Australia, the following a bumper harvest in 2005/06. world's fourth largest shipper of the grain, and swell bulg- WHEAT EXPORTS FALTER ing stockpiles if large carry-over stocks accumulate. Australian wheat exports were down more than 8 percent Industry officials and traders say some for the first seven months of the market- exporters have damaged Australia's ing year, which runs from October 2009 reputation as a supplier of high quality to September 2010, versus a year ago. wheat as it struggles to win sales in a weak global market, hobbled by a About 7.7 million tonned has been strong currency that saps export com- shipped to markets spanning Southeast petitiveness. Asia to the Middle East and Africa by the end of April, compared with 8.4 million Australia is losing sales in South-East tonnes a year ago. Asia to suppliers of U.S. soft white wheat out of the Pacific North-West Traders have cut estimates of wheat to and Black Sea suppliers also stand to gain if buyers shun be shipped in the 2009/10 marketing year, because of the Australian wheat. weak sales performance that has made quality issues even more critical as global prices hover at four-year lows. Australian quality worries centre on the country's growing containerised wheat trade, but some Australian exporters now expect to ship around 13 million bulk shipments have also been found tonnes in 2009/10, down from earlier below par since the trade was freed up estimates as high as 15 million tonnes. two years ago. Even to meet the reduced target Austra- "Many buyers I talk to are unhappy with lia will have to export 1.1 million tonnes the general direction of Australian wheat a month, a tough task as new crop quality," said Tim Dewan, head of Mel- northern hemisphere supplies flow into bourne-based firm Global Grain, which the global market from July. has close links to Asian grain importers That raises the spectre of carry-over such as Malaysia's Soon Soon Group. stocks swelling to around 4.2 million Markets generally seek Australian wheat for its whiteness tonnes at the end of the 2009/10 marketing year -- or as well as its very low screenings and moisture content, about one million tonnes more than a year ago. which flour millers prefer. (Continued on page 8) ↑ Back to first page 7 Daily Commodities Brief Tuesday, 11 May 2010

BEYOND THE HEADLINES Trade sources say some exporters have been undercutting The $1 trillion emergency fund is aimed at stabilising world the market to win sales but are also letting quality slip. Aus- financial markets and preventing the Greek debt crisis from tralia allowed independent exporters to ship wheat over- destroying the euro currency. seas in containers in 2007. "I think the market will look positively at this development," The following year a system of licensed exporters for bulk OPEC Secretary-General Abdullah al-Badri told reporters on wheat replaced the single desk marketing system run by the sidelines of the Arab Energy Conference. AWB Ltd . "I assume prices would go back to normal, where it STANDARDS SLIP AS EXPORTERS PROLIFERATE was...back up to $80 plus." Freeing up Australia's wheat trade opened the way for new- U.S. crude oil futures rallied to above $77 a barrel on Mon- comers, small and large, to market wheat overseas -- a day due to prospects the rescue package will strengthen move many attribute the slipping standards to. energy demand. AWB, the former Australian Wheat Board, is among those Global equities markets and the euro also rebounded as airing such views, saying they reflect complaints from cus- news of the rescue package helped calm risk aversion. tomers. "We were expecting that," Algeria's Oil Minister Chakib "The risk to the Australian industry is that buyers look else- Khelil said of the emergency fund, adding he saw prices where, to other origins, to meet their requirements," said heading back up to $85 a barrel. Mitch Morrison, AWB's commodities general manager. "It's already had a small effect on prices, once the impact A Malaysian wheat buyer said quality had become a key shows, the price would go back to $80 to $85," he said. issue. Libya's Shokri Ghanem was more bullish, predicting the "I hope they set up a better quality control system to con- rescue plan would push crude as high as $87 a barrel. trol the quality of export wheat as there are too many trad- Algeria's Khelil added the oil cartel had no plans to meet ers who will do anything to make a fast buck," said the before its scheduled October meeting. The producer group buyer, who declined to be identified because of the sensi- has kept its oil supply policy unchanged since 2008, when tivity of the topic. it undertook deep curbs on production. GrainCorp , which handles most of the wheat shipped out UAE oil minister Mohammed al-Hamli said on Monday of Australia's east coast, played down concerns about qual- compliance "could be better". ity despite the Indian rejection of container exports. Core Gulf Arab members Saudi, the UAE and Kuwait have "We need to keep in mind that incidents such as these re- been the most disciplined in holding to output restraints. late to a fraction of total grain exports from Australia," Chief Executive Ian Wilton said recently. The bulk handler concluded there was no overall fall in the quality of wheat Peabody, Xstrata lead fallout from Australia from farmers. mining tax But worries persist, with Australia's Productivity Commis- sion saying in a draft report on wheat exports that it had By James Regan received quality complaints. SYDNEY, May 10 (Reuters) - Several global mining giants The country's wheat exporters must set up an independent scaled back or warned over their Australian investment body to help buyers with complaints on quality, Dewan ar- plans on Monday as the backlash against the government's gued. "super profits" tax intensified. "They don't necessarily want a return to full regulation, but Xstrata PLC suspended copper exploration in Australia, they do feel we have thrown the baby out with the bathwa- coal giant Peabody Energy cut its offer price for Macarthur ter." Coal and BHP Billiton warned that approving key expan- sion projects would be difficult given the new tax.

Until now, mining companies like industry behemoths BHP OPEC sees oil price boost on euro zone bailout Billiton and Rio Tinto had only threatened to take invest- By Simon Webb and Regan E. Doherty ments off the table if Prime Minister Kevin Rudd proceeded with his plan to boost corporate mining taxes to 40 per- DOHA, May 10 (Reuters) - OPEC expects a $1 trillion res- cent, effective in 2012. cue package to boost oil prices back up above $80 a barrel, but warns of wild price swings as the global economy con- But on Monday, some of the warning became reality as Pea- tinues on its path to recovery. body cut its offer for Macarthur to $3.4 billion from $3.6 billion, while Xstrata put A$30 million in exploration spend- Arab oil ministers at an energy summit in the Qatari capital ing in Queensland state on hold as it seeks to clarify what predicted the deal hammered out by European Union fi- the tax means. nance ministers, central bankers and the International Monetary Fund would send crude back up, once it takes effect.

(Continued on page 9)

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BEYOND THE HEADLINES "Exploration activities are high risk and, while the targets Olympic Dam currently has the capacity to yield 200,000 we had identified are prospective, the proposed tax has tonnes of copper and 4,000 tonnes of uranium each year, introduced great uncertainty about the potential impact on with the expansion aimed at boosting output to 730,000 the economics of developing resources into viable opera- tonnes of copper and 19,000 tonnes of uranium. tions in Australia," Steve de Kruijff, Chief Operating Officer Macarthur's shares dropped 1.5 percent at A$13.48 after Xstrata Copper North Queensland, said. Peabody said it was cutting its offer price, bucking an up- De Kruijff said it would also change the relative economics trend in the wider market. "There is still some doubt as to of the Australian prospects compared with exploration pro- whether the offer's going to be successful," said Neil Boyd- grammes that Xstrata is pursuing in other parts of the Clark, portfolio manager at Fortis Investment Partners. world. A spokeswoman later told Reuters the action would not curtail production in Australia, where Xstrata produces US SEC, exchanges agree to boost market safe- about 200,000 tonnes per year. guards "It's really about future additional resources," the Xstrata By Rachelle Younglai and Jonathan Spicer spokeswoman said. WASHINGTON/NEW YORK, May 10 (Reuters) - U.S. market The actions by both companies follow a weekend warning watchdogs and six major exchanges agreed new safeguards from BHP Chief Executive Marius Kloppers that it would be were needed to curb trading in plunging markets, an effort difficult to approve billions of dollars worth of projects on to address last Thursday's mysterious market free fall. BHP's drawing board until it had a better handle on the Securities and Exchange Commission Chairman Mary complex tax, which was revealed last week. Schapiro met on Monday with the leaders of major stock Kloppers warned that the tax could jeopardise expansion in and option exchanges, as well as the brokerage industry iron ore mining along with a push to more than triple the watchdog, the Financial Industry Regulatory Authority size of its Olympic Dam copper and uranium mine, which (FINRA). analysts estimate would cost $20 billion. "As a first step, the parties agreed on a structural frame- While no investment decisions on Australian projects were work, to be refined over the next day, for strengthening imminent, Kloppers said it means BHP will be forced to pay circuit breakers and handling erroneous trades," Schapiro twice as much tax in Australia than it paid in Canada, Brazil, said in a statement that provided no further detail. China and other resource-heavy countries. Regulators still have not pinpointed the exact cause of last "The uncertainty is in place, it would be very difficult to week's 20-minute market roller coaster, when many stocks approve any of those projects," Kloppers told Australian usually regarded as safe dropped precipitously for several Broadcasting Corp. television on Sunday. minutes before recovering most of their losses. The final shape of the tax is under negotiation and the im- One source said the general agreement on revamping mar- pact will only be known once it is approved by the Austra- ket safety valves included a circuit breaker, or pause in trad- lian parliament. ing, that would apply across all trading venues, if an individ- ual stock falls sharply. There was also agreement on updat- Mining companies in Australia have been racing to boost ing the existing broad circuit breakers for severe market production for everything from iron ore and coal to copper declines, said the source who requested anonymity because and bauxite to feed the recovery in global industrial mar- the talks are private. kets. Currently, if the market falls more than 10 percent in a day Iron ore sells for more than twice last year's price and coal before 2 p.m. local time, a circuit breaker is triggered and for steel making is up 55 percent. shuts the market down for one hour. If the market falls "There is a boom going on in commodities and now is not more than 20 percent after 2.30 pm, the market shuts for the time to be cutting back," said Eagle Mining Research the rest of the day. analyst Keith Goode. Both the Dow Jones Industrial Average and Standard & Before a meeting with mining executives last week, Rudd Poor's 500 index never reached the crucial trigger point on was presented with a pair of boxing gloves by Andrew May 6. The Dow fell as much as 9.2 percent and the S&P Forrest, chief executive of iron ore miner Fortescue Metals was off as much as 8.6 percent during the latter half of Group , who has labelled the tax a "40 percent nationalisa- Thursday's trading day. tion" of the mining industry. Schapiro held a two-hour Monday morning meeting with BHP acquired the Olympic Dam mine, the world's fourth- the leaders of the New York Stock Exchange, the Nasdaq largest copper deposit, in 2005 and immediately set out to Stock Market, BATS, Direct Edge, the International Securi- increase output. ties Exchange and Chicago Board Options Exchange. "Obviously, we are getting very close to the end of that NYSE Euronext Chief Executive Duncan Niederauer, Finra process... this new tax proposal does upset the apple cart CEO Richard Ketchum and others told reporters afterward there a little bit," Kloppers said. that the discussions were constructive, without providing details.

(Continued on page 10) ↑ Back to first page 9 Daily Commodities Brief Tuesday, 11 May 2010

BEYOND THE HEADLINES U.S. Treasury Secretary Timothy Geithner urged a speedy That market fragmentation is also slowing down regulators' response to last week's events when he met with the ex- ability to piece together what happened, two sources famil- change heads on Monday afternoon, along with Schapiro iar with the matter said on Monday. and Commodity Futures Trading Commission Chairman The NYSE introduced a trading curb on its floor Thursday Gary Gensler. that forced most trading to all-electronic exchanges such "During the briefing, Secretary Geithner reinforced the as the Nasdaq Stock Market and NYSE Euronext's elec- need for a coordinated and timely response to help ensure tronic Arca venue, which did not have similar curbs -- a lack the proper functioning of our markets," said Treasury of uniformity seen as having worsened the wider market's spokesman Andrew Williams. drop. The SEC and other regulators are scheduled to appear with Now, regulators and the industry appear to be eyeing exchange executives before a House Financial Services sub- something like NYSE's system as a template for the whole committee hearing on Tuesday. marketplace. STILL LOOKING FOR ANSWERS The NYSE and Nasdaq, the two U.S. exchanges that list stocks, want to handle the reopening of markets following Four days after the market plunge and quick rebound, regu- any future trading halts due to a circuit breaker, sources lators are still scrambling for answers, multiple sources fa- said. miliar with the investigation said. The Dow Jones Industrial Average briefly went into a 1,000-point tailspin on May 6, TUESDAY HEARING rattling investors worldwide. Due to appear at Tuesday's subcommittee hearing are Stock exchanges have canceled trades on more than 200 NYSE Euronext Chief Operating Officer Lawrence Leibowitz, largely NYSE-listed companies, upsetting investors in other CME Group Inc Executive Chairman Terrence Duffy and companies who sold their stock at the bottom. NASDAQ OMX Group Inc Transaction Services Executive Vice President Eric Noll. Sources familiar with the investigation say a good deal of attention if being focused on a popular futures contract SEC's Schapiro, SEC division of trading and markets direc- linked to the S&P 500 index. tor Robert Cook, and CFTC Chairman Gensler will also tes- tify. A massive $1 trillion rescue package to safeguard indebted European nations cheered investors on Monday, with U.S. The Senate, which is working on a broad rewrite of rules for stocks racking up their best one-day gain in over a year. financial markets and firms, has also gotten involved. The CBOE VIX volatility index, known as Wall Street's fear Senator Charles Schumer, a Democrat from New York, gauge, fell 29.6 percent -- the largest percentage drop in its called on Monday for new systemwide circuit breakers that history -- to end at 28.84 after leaping to its highest level in would put the brakes on free-falling individual stocks when more than a year on Friday. a circuit breaker on one of the major exchanges is trig- gered. One prevailing theory is that the sharp fragmentation of the U.S. stock marketplace and the accompanying patchwork Senate Banking Committee Chairman Christopher Dodd of circuit breakers and safeguards exacerbated the market said the panel will meet as early as next week with regula- swoon. tors to discuss the causes of the market plunge.

↑ Back to first page 10 Daily Commodities Brief Tuesday, 11 May 2010

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