Soybean Reverse Iron Butterfly (CBOT: S X8C, S X8P)

Owen Wing and Marwan Hassan

FEBRUARY 2018
 TABLE OF CONTENTS

I. INTRODUCTION
II. OVERVIEW
III. INVESTMENT DRIVERS
IV. TRADE LOGISTICS

2
2
I. INTRODUCTION
TEAM RECOMMENDATION: LONG VOLATILITY

• Price of Reverse Iron Butterfly: $64.63

• Maximum Profit: $15.38

1 • Weak U.S. Dollar and Potential Crop Disruptions

• Potential Demand Disruptions and Supply

2 Expansion

INTRODUCTION 4
II. OVERVIEW
OVERVIEW
($ in millions)
SOYBEAN DESCRIPTION SOYBEAN END PRODUCTS

 Soybean prices tend to be the most volatile during the growing

season
– Weather and supply data move the market
Soybean Oil
 Crop disease and infestation play a major role in volatility 19%
 Growing season varies by location

– South America harvests from February to June

– United States harvest from late September to November
– China harvest from September to October Soybean Meal
81%
 Soybeans generally cannot be stored for long periods of time as
they deteriorate
– Typically can maintain standard moisture for six months

GEOGRAPHIC BREAKDOWN: PRODUCTION GEOGRAPHIC BREAKDOWN: CONSUMPTION

Other
Other United States
17%
21% 17%
United States
35% India
Brazil
3%
Argentina 13%
17%

Argentina
China 14%
Brazil 32%
31%

Source: Soybean Producers Association, Bloomberg COMPANY BACKGROUND 6

SOYBEAN PRODUCTS
($ in millions)
HUMAN FOOD ANIMAL FEED OTHER USES
 Soybean processed for its oil  High protein fiber that remains after  Soybean oil can be converted into
 Soybean oil is used for cooking and frying processing removes oil is heated and biodiesel through transesterification
foods converted into animal feed  Biocomposites are building materials made
 Margarine, salad dressing and mayonnaise  Poultry and swine industries are major from recycled newspaper and soybeans
are made with soybean oil consumers of soybean oil  Particleboard and laminated plywood use
 Tuna, sardines, baked breads, crackers,  Typically one bushel of Soybeans yield 48 soy-based wood adhesives
cakes, cookies and pies typically contain pounds of soybean meal  Other products that can be partially
soybeans derived from soy include candles, soyink,
crayons, lubricants, hydraulic fluid and
foams

PRICE BY PRODUCT (DOLLARS PER POUND) ANIMAL FEED USES

$0.35

$0.30

$0.25 Cattle and Pet

Food
$0.20 23%

Poultry
$0.15 52%

$0.10 Swine
25%
$0.05

$-
Soybean Soybean Meal Soybean Oil

Source: Bloomberg, Soybean Producers Association COMPANY BACKGROUND 7

ANNOTATED STOCK CHART

SOYBEAN FUTURES PRICES (DOLLARS PER 5000 BUSHELS)

$1,200.00

U.S. rains ease

$1,150.00 crop concerns and
USDA releases
weekly grain boost yield
The USDA’s
USDA sees U.S. inspections report, potential
Drought outlook for
$1,100.00 soy supply rising whereby soybean expansion across production
in FY2016 inspections were the northern soybeans came
762.00 k tons vs reaches of the above analyst
962.00 k the previous U.S. Great Plains estimates
$1,050.00 week

$1,000.00

$950.00
South America
harvest a record of
~108.00 MM Tensions
Argentine Argentine drought metric tons of escalating
$900.00 Domestic
soybean caused soybean soybeans, between
inventory outlook
estimates production to fall exceeding analyst China and
climbed as the
lowered to 47.00 ~30.00% y/y estimates the U.S.,
U.S. faces waning
$850.00 MM tons, down causing
export demand
2.00 MM tons supply
amid fierce
from a week forecasts to
competition
earlier decline
$800.00
Feb-15 Aug-15 Feb-16 Aug-16 Feb-17 Aug-17 Feb-18

S 1 COMB Comdty (R1)

Source: Data from Bloomberg as of 02/27/2018 COMPANY BACKGROUND 8

III. INVESTMENT DRIVERS
WEAK U.S. DOLLAR AND POTENTIAL CROP DISRUPTIONS

FURTHER WEAKENING OF THE U.S. DOLLAR ARGENTINIAN CROP DISRUPTIONS

 Weak U.S. dollar and surging exports may be outweighing production
 Soybeans respond to the dollar more than any other major agricultural
commodity
 By the end of FY2017, soybeans experienced a similar declining trend as the
dollar which is unusual
– Soybean prices declined ~4.00% y/y coincident with a ~9.00% y/y
decline in the Bloomberg Dollar Index
 Since FY2004, the soybean price annual negative beta to the dollar is 3.20x
– Indicates potential volatility in the prices of soybeans
 Exporting over 50.00% of U.S. production for the first time is likely to
increase the soybean/dollar negative relationship
 February rain is at its lowest since before FY1980
– Crucial timing as March is the main soybean harvesting month in South
America
 In FY2017, global economy was under the influence of El Niño effects, but
have recently moved into conditions meeting the La Niña pattern, reducing
rainfall and resulting in potential drought conditions
 According to the Climate Change Center , La Niña conditions have a 65.00%
- 75.00% chance of prevailing through to the February - April period
 Soybean estimates lowered in Argentina to 47.00 MM tons
– Production forecasts decreased by 2.00 MM tons in the past week, down
from 57.30 MM in FY2017
– If crops continue to receive less than half of normal rain, crop could
decrease to 42.00 MM tons

SOYBEAN PRICES AND U.S. DOLLAR CORRELATION LA NIÑA AND RAINFALL

1300.00
1700.00
1250.00

1500.00 1200.00

1150.00
1300.00
1100.00

1100.00 1050.00

1000.00
900.00
950.00

700.00 900.00

S 1 Comdty (L1) BBDXY Index (R1)

Source: Bloomberg INVESTMENT DRIVERS 10

POTENTIAL DEMAND DISRUPTIONS AND SUPPLY EXPANSION

CHINESE DEMOGRAPHIC OUTLOOK BRAZILIAN MARKET SHARE EXPANSION

 In FY2017, China bought 50.93 MM tons from Brazil, accounting for
53.30% of total purchases
 Chinese buyers mainly use soybeans to churn out cooking oil and ingredients
for animal feed
– In FY2015, China repealed its one-child policy, causing the country’s
birth rate soaring by approximately 1.30 MM in the year after
– Large families are considered a burden in a society where work is hyper-
competitive, cost of housing is rising rapidly and delayed marriages are
deterring couples from having two children
– ~630.00 k fewer babies born in China in FY2017 than FY2016
 Hence, lower anticipated birth rates leads to lower meat consumption and
middle class growth rates
 Chinese protein consumption per capita is already ~80.00% of Western
levels, therefore demand for livestock is expected to slow
 Brazil’s share of the export market is on track to keep growing in FY2018
– Crops estimated to be ~114.00 MM, matching last year’s all-time high
production
 Due to a larger harvest, Brazil’s marketing season is anticipated to extend into
October-November rather than ending around September as traditional
 “Soybean inventories everywhere are so large that there is nothing like U.S.
marketing season or South American marketing season any more.”
– Said by veteran soybean trader at one of China’s state-run trading
companies
 “Brazil has started harvesting new-crop beans while it is still not done selling
last year’s crop”
 In FY2018, Brazil’s market share is expected to increase as restrictions by
Beijing on U.S. shipments from January 1st increase
 U.S. losing market share due to incomparable prices and quality

CHINESE BIRTH RATES MAINTANANCE IN ALL - TIME HIGH SUPPLY

14.00% 120.00

13.50% 100.00
Production in MM metric tons
13.00% 80.00

12.50% 60.00

12.00% 40.00

11.50% 20.00

11.00% 0.00
Jan-01 Jan-03 Jan-05 Jan-07 Jan-09 Jan-11 Jan-13 Jan-15 Jan-17 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17 2017/18

Source: Bloomberg INVESTMENT DRIVERS 11

IV. TRADE LOGISTICS
 TRADE LOGISTICS
($ in millions)

Reverse Iron Butterfly Nov. 18

Strike Buy Call Price Buy Put Price Sell Put Sell Call Sell Put Price Sell Call Price Total Price
$ 980.00 $ 81.63 $ 32.63 $900.00 $1,060.00 $ 7.00 $ 45.38 $ 61.88
$ 1,000.00 $ 71.25 $ 41.50 $920.00 $1,080.00 $ 11.00 $ 38.75 $ 63.00
$ 1,020.00 $ 62.13 $ 51.13 $940.00 $1,100.00 $ 15.13 $ 33.50 $ 64.63
$ 1,040.00 $ 53.88 $ 64.00 $960.00 $1,120.00 $ 21.88 $ 29.00 $ 67.00
$ 1,060.00 $ 46.88 $ 79.50 $980.00 $1,140.00 $ 30.75 $ 24.50 $ 71.13
$ 1,080.00 $ 40.75 $ 93.25 $1,000.00 $1,160.00 $ 40.00 $ 20.88 $ 73.13

Delta Gamma Vega

Nov-18 940 Put -0.20349 0.02279 2.35797
Nov-18 1020 Put -0.43397 0.02826 3.25458
Nov-18 1020 Call 0.55122 0.02798 3.25678
Nov-18 1100 Call 0.36008 0.02438 3.10708

Source: Data from Bloomberg as of 2/27/18 VALUATION & CONSIDERATIONS 13

TRADE LOGISTICS
($ in millions)
Buy Call/Put Strike
$980.00 $1,000.00 $1,020.00 $1,040.00 $1,060.00 $1,080.00
Sell Call/Put Strike
$900.00 $920.00 $940.00 $960.00 $980.00 $1,000.00
$1,060.00 $1,080.00 $1,100.00 $1,120.00 $1,140.00 $1,160.00
Cost of Trade
Price on Nov. 18 $61.88 $63.00 $64.63 $67.00 $71.13 $73.13
$ 860.00 $18.13 $17.00 $15.38 $13.00 $8.88 $6.88
$ 880.00 $18.13 $17.00 $15.38 $13.00 $8.88 $6.88
$ 900.00 $18.13 $17.00 $15.38 $13.00 $8.88 $6.88
$ 920.00 -$1.88 $17.00 $15.38 $13.00 $8.88 $6.88
$ 940.00 -$21.88 -$3.00 $15.38 $13.00 $8.88 $6.88
$ 960.00 -$41.88 -$23.00 -$4.63 $13.00 $8.88 $6.88
$ 980.00 -$61.88 -$43.00 -$24.63 -$7.00 $8.88 $6.88
$ 1,000.00 -$41.88 -$63.00 -$44.63 -$27.00 -$11.13 $6.88
$ 1,020.00 -$21.88 -$43.00 -$64.63 -$47.00 -$31.13 -$13.13
$ 1,040.00 -$1.88 -$23.00 -$44.63 -$67.00 -$51.13 -$33.13
$ 1,060.00 $18.13 -$3.00 -$24.63 -$47.00 -$71.13 -$53.13
$ 1,080.00 $18.13 $17.00 -$4.63 -$27.00 -$51.13 -$73.13
$ 1,100.00 $18.13 $17.00 $15.38 -$7.00 -$31.13 -$53.13
$ 1,120.00 $18.13 $17.00 $15.38 $13.00 -$11.13 -$33.13
$ 1,140.00 $18.13 $17.00 $15.38 $13.00 $8.88 -$13.13
$ 1,160.00 $18.13 $17.00 $15.38 $13.00 $8.88 $6.88
$ 1,180.00 $18.13 $17.00 $15.38 $13.00 $8.88 $6.88
$ 1,200.00 $18.13 $17.00 $15.38 $13.00 $8.88 $6.88
Source: Data from Bloomberg as of 2/27/18 VALUATION & CONSIDERATIONS 14
TRADE LOGISTICS
($ in millions) Profit Loss with Different Strikes
$40.00
Current Price

$20.00

$0.00
$850.00 $900.00 $950.00 $1,000.00 $1,050.00 $1,100.00 $1,150.00 $1,200.00

-$20.00

-$40.00

-$60.00

-$80.00

$980.00 $1,000.00 $1,020.00 $1,040.00 $1,060.00 $1,080.00

Source: Data from Bloomberg as of 2/27/18 VALUATION & CONSIDERATIONS 15

TRADE LOGISTICS
($ in millions)

Soybean Price with Triggers

$1,200.00
$1,150.00
$1,100.00
$1,050.00
$1,000.00
$950.00
$900.00
$850.00
$800.00
Feb-16 Jun-16 Oct-16 Feb-17 Jun-17 Oct-17 Feb-18

Last Price Max Trigger Lower Trigger

Source: Bloomberg VALUATION & CONSIDERATIONS 16

TRADE LOGISTICS
($ in millions)

Soybean Price Chart 15 Year (Dollars per Bushel)

$20.00

$18.00

$16.00

$14.00

$12.00

$10.00

$8.00

$6.00

$4.00

$2.00

$0.00
Feb-03 Feb-05 Feb-07 Feb-09 Feb-11 Feb-13 Feb-15 Feb-17

Source: Bloomberg VALUATION & CONSIDERATIONS 17

TRADE LOGISTICS
($ in millions)

• Prices to Trigger Maximum Profit - $940.00 and $1100.00

• Breakeven Prices - $955.37 and $1084.63
• Currently trades at $1035.00

Required to Trigger 6.28% Upside

9.18% Downside

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
To Minimum 35.73% 10.93% 32.16% 16.05% 41.48% 15.73% 46.20% 40.03% 12.84% 40.01% 10.27% 10.60% 1.59% 34.66% 2.91%
To Max (7.46%) (48.83%) (11.44%) (9.02%) (7.26%) (42.40%) (3.13%) (4.12%) (15.29%) 0.86% (14.86%) (36.14%) (16.23%) (0.64%) (10.86%)
Trigger Maximum Profit Yes Yes No Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes No

Source: Bloomberg VALUATION & CONSIDERATIONS 18

TRADE LOGISTICS
($ in millions)

• Maximum profit per contract - $15.38

• Price of Iron Condor/Maximum Loss - $64.63
• Maximum percent profit if realized - 23.80%
• Annualized profit if realized - 31.73%
• If drivers change, move out of position at ~10.00% profit

VALUATION & CONSIDERATIONS 19