Current (24 Oct) (last month): Soybeans, USD 15.17/bu (16.12); Corn, USD 7.54/bu (7.44)

Agriculture Current (24 Oct) (last month): Soybeans, USD 15.17/bu (16.12); Corn, USD 7.54/bu (7.44); Wheat, USD 8.84/bu (8.87) UBS View 6-month target: Soybeans: USD 17.0/bu; Corn: USD 9.0/bu; Wheat: USD 9.5/bu ¢ Major US supply surprises on the grains side are rather unlikely in the near term as harvesting is in full swing. However, we think that demand is unlikely to drop as quickly as the USDA expects. According to the latest USDA grain stocks and WASDE reports, feed demand remained surprisingly resilient in 3Q12. To effectively ration demand, especially on the feed side, in an environment of critically low US corn and soybean stocks, higher prices are still required. For wheat, global production estimates were further lowered due to production losses in Australia, EU, Russia for 2012/13, which likely keeps prices supported in the near term. We expect corn and soybean prices to appreciate by 15% in the coming months. ¢ On the other side, the softs are likely to remain well supplied, which should keep prices under pressure. Improved export activity of coffee and strong stock selling from Vietnam in 4Q12 should weigh on coffee prices in the short-term. For sugar, higher production from Brazil and other producers should continue to burden prices in the near term, but also offer buying opportunities on a 12-month perspective. e Aggregating the above points, the risk/reward for being long across the entire sector is not a given. We therefore reiterate our neutral sector stance. 4 Positive scenario Corn 6-month USD 10/bu; Soybeans 6-month USD 19/bu ¢ With a reduced probability of El Nifio, the yield potential for South American crops is likely to be lower. Any deterioration in South American supply prospects would require additional demand to be rationed. & Negative scenario Corn 6-month USD 6/bu Soybeans 6-month USD 12.5/bu e A change of the US ethanol-gasoline blending mandate would be a game changer. Increases in planted acreage combined with a steep decline in US demand for exports and feed would weigh on prices. What we're watching Why it matters Revisions in acreage and yield estimates for the US crops remain a topic. Demand estimates are important, too, as they are key drivers behind inventory levels at the end of the year. Key date: 9 Nov The latest stocks data is not correctly reflecting the demand for Jun-Aug’12 as it contains both old and new crop stock figures. We expect stocks as of 1 Dec to reflect the true demand picture. Key date: Jan 2013 USDA WASDE report (monthly) US grains stock report (quarterly) USDA crop progress (weekly, Monday) COT (weekly, Friday) 2 UBS Faster US grain harvests than usual have been exerting downward pressure on prices in the short run, which have reversal potential at a later stage. Investors’ net long positions in grain futures are still at high levels, but stable Preference: neutral Recommendations Tactical e Despite the recent setback in corn prices, risk-seeking investors should still hold on to long positions in corn. Demand rationing is still required to limit the drag on inventories. The expected return target for a long position in corn stands at 15%. Strategic e Our expected return outlook for grains stands at around -10% over the next 12 months. With grain prices not far below historical highs, the supply side is highly likely to expand meaningfully in 2013/14 and pressurize prices at a later stage. On the soft side, 3Q12 does not offer the right timing to build up positions. US grains stocks continue to drop, demand remains resilient Values in mn tons 50 40 30 | 20 | [/ Ist Sep'10 1st Sep'11 1st Sep'12 Jun- Aug'11 Jun- Aug'10 Jun- Aug'12 Demand m Soybean Stocks mcCorn a Wheat Source: USDA, UBS, as of Oct. 2012 Note: Past performance is not an indication of future returns. For further information please contact ClO's asset class specialists Dominic Schnider, [email protected] or Giovanni Staunovo, [email protected] Please see important disclaimer and disclosures at the end of the document. HOUSE_OVERSIGHT_025285