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Agriculture Current (25 June) (last month): Soybeans, USD 14.79/bu (USD 13.82/bu); Corn, USD 6.09/bu(USD 5.79/bu); Wheat, USD 6.91/bu (USD 6.80/bu) UBS View 6-month target: Soybeans, USD 13.5/bu; Corn, USD 5.10/bu; Wheat, USD 6.00/bu ¢ Besides the overall commodity price backdrop, prevailing dry weather conditions in the US have been price supportive for the grains and added to firmer prices. ¢ While weather-related news flows might support grain prices in the short run (downward revisions in grain yield estimates, especially corn), the 6-12 month price outlook remains negative. Global corn inventories should grow beyond 10% in 2012/13. We think this will more than compensate for firmer wheat fundaments (lower inventory estimates) in the coming months. For soybeans, current price levels sufficiently factor in the poor supply figures seen in recent months. This would be especially true, if South American planting gets a boost due to soybeans’ relative price improvement. e A strong supply backdrop for Brazilian coffee along with a weaker BRL has kept coffee prices under pressure. For 2012/13, Brazilian coffee and sugar exports are likely to increase by 12% and 2% y/y respectively, and keep the global market well supplied in 2012. Cotton prices saw some bouts of strength, but demand has yet to work off high inventory levels at 74-75mn bales. With ample inventories and economic conditions at risk, renewed price weakness is likely. A Positive scenario Soybeans 6-month USD 16/bu e Lower acreage and yield figures for the US can tighten the supply backdrop until 1Q 2013 (until the new South American crop comes). On the demand side, higher soybean use for bio diesel in Argentina and strong Chinese imports (improvements in crush margins) are catalysts for prices to rally. & Negative scenario Soybeans 6-month USD 12/bu e Unexpected Chinese government stock sale of soybeans and deteriorating crushing margins for soybean oil/meal production, would leave soybean prices vulnerable to a price correction. What we're watching Why it matters USDA WASDE report US corn yields could be at risk in the upcoming WASDE release. Key date : 11 (monthly) July 2012 Grains stock report Corn and soybean inventories could be lowered vs. current estimates, reflecting (quarterly) the strong export activity in corn during March—May and higher soybean crushing during the same period. Key date: 28 September 2012 Dry weather conditions in the US has impacted the crop conditions (rating), which deteriorated in recent weeks. Investors have scaled back their long exposure in corn. At the present speed, net positions would close in on zero over the next two months. USDA crop progress (weekly, Monday) COT (weekly, Friday) 3 UBS For further information please contact CIO's asset class specialists Dominic Schnider, dominic.schnider@ubs.com or Giovanni Staunovo, giovanni.staunovo@ubs.com Preference: underweight Recommendations Tactical e The forward curve in corn already factors in a steep decline by the end of the year, thereby mitigating the expected negative return. With lower corn prices, wheat should come under pressure as well. Most agricultural commodities are generally well supplied, so unless the weather surprises on the downside, we expect further weakness. Strategic ¢ Strategic agricultural positions are not recommended at present. Our return outlook for the grains stands at -7.5% to - 5% over the next 12 months. Although the softs have a positive return outlook over the same period, investors should bide their time. Short-term price setbacks of 10% or more are still likely over the next two to three months. Global corn surplus as % of demand to advance towards 5-year high 12% 8% oo 4% -8% 2009/10 2010/11 2011/12 2012/13E mCorn mSoybeans m Wheat Source: USDA, UBS CIO, as of 18 June 2012 Note: Past performance is not an indication of future returns. 38 Please see important disclaimer and disclosures at the end of the document. HOUSE_OVERSIGHT_024173