2011 MF Global

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INSTITUTIONAL USE ONLY MF Global Daily Report

Market Commentary | US EDwARD MEIR +1 203-656-1143Senior Commodity Analyst emeir@mfglobal.com

The information contained in this report has been taken from trade and statistical services and other sources which we believe are reliable. MF Global Inc. does not guarantee that such information is accurate or complete and it should not be relied upon as such. Any opinions expressed reflect judgments at this date and are subject to change without notice. The principals of MF Global and others associated or affiliated with it may recommend or have positions which may not be consistent with the recommendations made. Each of these persons exercises independent judgment in trading, and readers are urged to exercise their own judgment in trading. © by MF Global Inc. (2011) 440 S Lasalle Street, Chicago, Illinois, 60605.

Commodities Monthly Roundup - August 2011

TABLE OF CONTENTS

Market Highlights / Outlook............. 1-3Energy ............................................... 4Energy, Emissions, Uranium ............. 5LME Metals........................................ 6LME Metals, Steel, Iron Ore .............. 7Precious Metals................................. 8Grains, FFA....................................... 9Tropicals............................................10Currencies.........................................11Financials .........................................12

Highlights for July: Commodities pushed a little higher over the course of July, but given the historic headlines that have been crossing our screens over the last month, the trading range in the Thompson-Reuters CRB index (boxed area, below) has been remarkably constrained. We note, for example, that the index basically fluctuated within a relatively tight 20 point range in July and within a 30-point range since May (dashed lines).

If direction has been so unclear this past month, it is easy to see why. Simply put, the news that investors have had to process over the course of the month, beginning with the Greek rescue package and ending with the torturous stand-off in the US debt ceiling talks, were of such importance, that they arguably called the integrity of the financial system itself into question, presumably forcing many to the sidelines.

Here in the US, the relatively routine matter of raising the debt ceiling turned into a harrowing political standoff after the requested

Reuters-Jefferies CRB Index

increase was attached to spending cuts. Although deficit-cutting is always a noble undertaking, what unnerved the markets (particularly US equities, which suffered their worst weekly fall in more than a year last week) was the fact that various players dug themselves into their respective corners and showed little inclination for compro-mise. This brought the country dangerously close to default on August 2 and opened the door to an unprecedented downgrade of the US's AAA credit. It was not until late on Sunday, July 31-- and hours before Asian markets were to open-- did a compro-mise emerge, only to be passed on Monday in the House and just now in the Senate. The details, as we understand them, revolve around cuts in the order of $2.4 tril-lion over 10 years, with $100 billion coming from discretionary spending and another $1.5 trillion to be determined by a committee. (Yes, yet another committee). Of the $100 billion of cuts, there will not be any this year and only around $20 billion in 2012. Another $900 billion in cuts come in after 2016. Absent an agreement on the yet-to-be-determined $1.5 trillion in cuts, an automatic sequester process would start, but not until 2013. In the meantime, whether $2.4 trillion is enough to avert a ratings downgrade is not clear: S&P suggested that something closer to $4 trillion would be needed, but it has downplayed that possibility this week.

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MF GLOBAL COMMODITY ROUNDUP - JULY 2011

The information contained in this report has been taken from trade and statistical services and other sources which we believe are reliable. MF Global Inc. does not guarantee that such in-formation is accurate or complete and it should not be relied upon as such. Any opinions expressed reflect judgments at this date and are subject to change without notice. The principals of MF Global and others associated or affiliated with it may recommend or have positions which may not be consistent with the recommendations made. Each of these persons exercises independent judgment in trading, and readers are urged to exercise their own judgment in trading. © by MF Global Inc. (2011) 440 S Lasalle Street, Chicago, Illinois, 60605.

Out of Europe, the fate of the Euro hung in the balance during early July, as markets awaited details of what the Europeans were going to do with respect to the Greek debt issue. The package that eventually was rolled out consisted of several com-ponents and seems to have stabilized the Euro since then. Among the key provisions: 1) The Greeks were given a bailout worth €109 billion, this on top of the €110 billion already granted a year ago. Banks and other private investors will contrib-ute some €37 billion to the package by either rolling over Greek debt, swapping it for new bonds with lower interest rates, or selling the bonds back to Greece at a lower price. 2) The Eurozone will provide some form of guarantees to the new Greek bonds so that Greek banks will be able to continue to access liquidity support from the ECB, (which only accepts bonds ranked as investment grade). 3) Loan rates to Greece, Ireland, and Portugal will be lowered, with interest rates pegged at 3.5% instead of 4.5%, while and loan maturities will also be extended, pushing them out to 15 years from the current 7.5. And finally, the Eurozone bailout fund will provide credit lines to other countries in the Euro area who are currently not receiving any assistance and will also be authorized to buy debt across European borders (pending parliamentary approval).

Outlook: Although late-month developments in July saw markets pull back from the brink on both sides of the Atlantic, we are not "out of the woods" in either region just yet. In Europe's case, markets are already starting to have second thoughts about the Greek rescue package. For one thing, the restructuring hardly makes a dent in the country's overall debt profile, trimming it by some $50 billion out of an overall total of roughly $500 billion after both the debt buyback program and the bond exchange program are both put through. More importantly, there is some concern about the size of the European stabi-lization fund; it was not only left unchanged in terms of size, but some are questioning whether it will be large enough to sta-bilize national bond markets that are already exhibiting signs of stress. Italy and Spain are the most worrisome in this regard, and just this week, Italian bond yields hit their highest level on record, ominously reaching the same level as Spain's. The Italian stock market has now slumped to a 27-month low, dragged down by banks with a heavy exposure to local debt. with a debt-to-GDP ratio of 120%, the world's third largest bond market, and a government embroiled by scandal, the spotlight on Italy will not fade anytime soon and the country will likely join other "problem" nations in the Euro regime, notably, Ireland, Portugal, and Spain.

Here in the US, the deficit reduction package agreed to merely decreases the rate of growth in government spending and does not reverse it, which is why the job of getting further spending cuts and entitlement reform in the months ahead will assume critical importance. The markets are unsure if the poisoned political atmosphere will support a reform attempt and are also uncertain whether the debt-rating agencies will be suitably impressed to avoid slapping a downgrade on US paper. On top of all this, US macro numbers have deteriorated markedly over the last two weeks, but more on that later.

where does all this leave the commodity markets as we head into the second half of the year? we think that the European and US financial crises were something of a sideshow for commodities complex over the past two months in that they both diverted focus away from the more important growth and macro picture. For most of July, commodities were tracking the dollar and largely holding their own, but we suspect that over the course of the next two months, the asset class will likely decouple from the "dollar watch" it has been on, as more pressing macro concerns rise to the surface. In this regard, the US economic outlook is the most urgent; growth seems to have stalled badly over the first half of the year, with the government reporting last week that second-quarter GDP came in at a much slower-than-expected 1.4% increase, while first quarter readings were revised to an anemic +.4%. On the manufacturing side, numbers released this week show that activity barely grew in July, falling to 50.9% from 55.3% in June, the lowest reading since July 2009. More importantly, there is not much we can see in terms of momentum that could lift the economy going into the second half. The labor market remains depressed, as the encouraging job growth numbers evident earlier in the year have tailed off substantially. And although there have been flickers of hope in some of the housing numbers of late, the data is by no means uniform and has yet to reflect broad-based recovery in the sector. with rates already close to zero, the Fed is out of bullets as well, and any talk of QE3 will likely decimate the dollar.

The information contained in this report has been taken from trade and statistical services and other sources which we believe are reliable. MF Global Inc. does not guarantee that such information is accurate or complete and it should not be relied upon as such. Any opinions expressed reflect judgments at this date and are subject to change without notice. The principals of MF Global and others associated or affiliated with it may recommend or have positions which may not be consistent with the recommendations made. Each of these persons exercises independent judgment in trading, and readers are urged to exercise their own judgment in trading. © by MF Global Inc. (2011) 440 S Lasalle Street, Chicago, Illinois, 60605. ©2011 MF Global

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MF GLOBAL COMMODITY ROUNDUP - JULY 2011

Outside of the US, there are increasing signs of a slowdown. In China, although Q2 GDP readings were strong, coming in at 9.5% vs. 9.7% in Q1, other indicators suggest that third quarter growth will moderate. In this regard, HSBC’s China “flash” manufacturing purchasing managers’ index fell to a 28-month low of 48.9 in July, down from 50.1 in June and marks the first time the gauge has dipped into contraction territory since July 2010. Despite moderating growth, the government is seeing lit-tle relief on the inflation front; consumer prices climbed 6.4% in June, the highest in three years, driven by a 14% gain in food prices. Resilient pricing pressures suggest that the government's rate-raising campaign is far from over and will likely extend into the second half. Out of India, the Reserve Bank hiked its key lending rate by a larger-than-expected half percentage point to 8% last month, its 11th move since March of 2010. As is the case with China, the bank has yet to exert any meaningful con-trol over inflation, with prices rising by 9.44% in June. Last week, Fitch lowered its growth forecast for India’s current fiscal year (to March 2012) to 7.7% from 8.3% previously and below the RBI’s own 8% forecast. Out of Brazil, which is laboring under the weight of a strong Real, industrial production plunged 1.6% in June, its second biggest contraction since 2008 and four times more than what economists had expected. Out of Europe, services and manufacturing growth weakened to its slowest pace in almost two years this past month, with a key index now on the verge of crossing into contraction territory. Germany's composite PMI staged the biggest one-month fall since late 2008, and things were only marginally better in France where the index fell to a 23-month low.

The rapidly deteriorating macro backdrop suggests that commodities will likely struggle over the next month or tow, with the case for rising prices over the 2nd half of the year looking increasingly far-fetched to us. we can expect little relief on the inter-est rate front either; with inflation readings stubbornly high in China, India, Brazil, and creeping higher in the Eurozone, none of these central banks will be inclined to lower rates anytime soon and most likely will continue to raise them.

Individual markets: we discuss the individual markets in the pages that follow. Of the group, we think oil and copper are par-ticularly vulnerable, as they are seen as "China plays" and could experience declines going into Q3 if Chinese macro numbers continue to come in on the softer side. Copper has confounded the bears thus far, as the market has focused on supply-related issues as opposed to any potential demand slowdown. In this regard, the ongoing strike at Escondida is still playing out and going into its third week, although there are strong indications that it could be settled soon. In addition, Chinese refined June imports were up some 9% month-over-month, leading credence to the view that a period of restocking will be setting in over the second half. However, with Shanghai inventories still comfortable and rising, while the arbitrage remaining neutral, we are not sure that the bump in import demand will be as strong as expected. On the energy side, prices remain fairly stable despite indi-cations that demand is moderating. In this regard, Chinese crude oil imports in June were off some 8.6% from a month ago, falling to their lowest level in eight months, while US demand continues to lag. Continued Mid-East turmoil is providing a mea-sure of support, but we think the complex will nevertheless be under pressure as we head into Q3, given that OPEC's output is now at a three-high amid a relatively comfortable inventory picture.

we are seeing a sideways drift in many of the agricultural commodities after prices recovered off their June lows. Most are holding up on account of the hot and dry weather conditions seen in the US, and we suspect that they will likely hold their own for a while longer, at least until future crop prospects come into better focus. The tropicals are a mixed bag, with sugar prices close to six-month highs on concerns about the Brazilian crop, while cocoa and coffee are both struggling.

On the currency front, it is very difficult to get a clear picture on what the dollar will do over the next several weeks, as there are crosscurrents pulling the currency in different directions. Further upheaval in Europe could see the dollar strengthen, while the debt deal in washington may also lend a measure of support (although the goodwill generated in this regard seems to be dwin-dling rapidly). On the other hand, rising rates in other countries will keep the pressure on the greenback as differentials widen. we are certainly more friendly to other currencies for the moment, and see the yen, the Canadian dollar, and the Swiss franc as preferred alternatives to either the Euro or the dollar. Of course, the Chinese Yuan should be sitting on top of the currency heap, but it is appreciating only modestly under government control. Gold hit record highs in July and should continue to out-perform, since it is increasingly adopting the role of an alternative store of value to paper currencies. It will likely keep the rest of the precious complex fairly buoyant as well, although none of the others enjoy the same universal investment appeal that gold does.

Finally, US equity markets have had a sloppy July and are not doing much better as we head into August despite strong earn-ings. Stocks were badly scarred by the political tussle that just ended in washington. More alarmingly, the real possibility that the US economy has stalled and could now tip into a recession could weigh over stocks at least over the course of August and into September. Bond markets should, however, continue to do well, as charts look very solid, while the prospect of a "default-free" vehicle will now hold additional appeal to those seeking to sit out the heightened volatility and the uncertain tone evident in most markets.

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MF GLOBAL COMMODITY ROUNDUP ‐ AUGUST 2011

ENERGY

WTI NEARBY CONTINUATION LIGHT CRUDE OIL Last: 95.7 High: 100.62 Low: 94.95 7/31/2011

BRENT NEARBY CONTINUATION BRENT CRUDE OIL Last: 116.74 High: 119.05 Low: 115.75 7/31/2011

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WTI  prices  fluctuated  between  $90‐$100  dollars  during much  of  July,pretty much in line with the trading range we put forward in last month'snote. To some extent, the complex seems to have divorced itself from thefundamentals, tracking the movements of the dollar instead for much ofthe month, which  is why  prices  have  retained  a measure  of  resiliency.Another bullish element was the fact that the IEA inventory release of 60mbpd was not having much of a desired impact in lowering prices, whiletalk of a  second  release  seems  to have been abandoned. On  the otherhand,  keeping  the  upside  somewhat  in  check,  is  the  fact  that  demandreadings remain poor, particularly from the US given that national pumpprices have pretty much stabilized in July after a rather precipitous fall inJune. Chinese demand has also moderated, with  June crude oil  imports off by some 8.6% from a month ago, and falling  to  their  lowest  level  ineight months. Over  the  course of August, we  suspect prices  could drift down for a retest of the $89 low, while on the upside, resistance at $102should continue to remain in place. 

Similar  to  the WTI, Brent has held onto a  fairly stable  trading  range  formuch of July, and we suspect that we could be  in store for more of thesame over the course of August. The arbitrage has come  in slightly, butstill  remains at a  relatively high $20. Brent has held up  far better  thanWTI this year as the latter has been subject to bearish pressure emanat‐ing  from  rising  stocks  accumulated  at  Cushing. Moreover  as  the more free‐wheeling global oil contract of the two, Brent seems to better posi‐tioned  to  reflect both  the offtake emanating  from  the Far East and  thegeopolitical premium now embedded  in oil prices given the ongoing tur‐moil  in  the Middle  East. Over  the  course  of  the month, we  see  Brentworking towards the  lower end of the trading range at  just about $114,and very possibly breaking through sometime later in the month given in‐creasing signs of a global slow‐down. On the upside, there  is good resis‐tance at $120. 

RBOB NEARBY CONTINUATION RBOB GASOLINE Last: 311.29 High: 318.16 Low: 306.76 7/31/2011

HEATING OIL NEARBY CONTINUATION HEATING OIL Last: 309.62 High: 313.79 Low: 306.6 7/31/2011

©2011 MF Global Ltd. Source for charts: Bloomberg

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Gasoline  prices worked  higher  over  the  course  of  July,  but  seemed  tohave had trouble breaking above $3.12‐$3.15 resistance. Frankly, we arequite  surprised  by  the  resiliency  that  prices  have  displayed  this  pastmonth  given  the  deteriorating  labor  market,  persistently  high  unem‐ployment, and the fact that US demand readings remain fairly weak. We expect  to  see  gasoline  test  $3  support  imminently,  and  likely  breakthrough it later in the month, possibly getting to $2.90 as a first stop. On the upside, resistance  is at $3.15, and at $3.20 above that, but we thinkneither level is achievable over the short‐term. 

We are  seeing chart patterns  in heating oil approximating what we areseeing  in  gasoline, with prices  fluctuating within  relatively  tight  trading ranges  and held up by  a  relatively  firm  crude  complex.  In heating oil’s case,  there  is  good  resistance  around  the $3.15 mark, while  support  is evident at $3.05. We expect heating oil prices  to  likely drift  lower overthe course of August  in  line with what we  think will be a softer  tone  inboth crude and gasoline.  

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MF GLOBAL COMMODITY ROUNDUP ‐ AUGUST 2011

ENERGY, EMISSIONS, AND URANIUM

NATURAL GAS NEARBY CONTINUATION NATURAL GAS Last: 4.145 High: 4.459 Low: 4.138 7/31/2011

CRACK SPREADS CRACK SPREADS Gasoline Crack (Red); Heating Oil Crack (Blue) 7/31/2011

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Natural gas prices have drifted  lower over  the  course of  July, as disap‐pointed  longs  threw  in  the  towel after prices  failed  to break above  the$4.50 mark earlier in the month. On a longer‐term basis, natural gas pric‐es are still fluctuating within a $4.00‐$5.00 trading range basis the nearbycontract, and we do not expect much  to change over the course of Au‐gust. For the time being, we would rather stay on the sidelines and  look to position ourselves on  the  long  side  closer  to  the $4.00 mark, as  therisk‐reward profile looks somewhat more attractive at those levels. Resis‐tance is at $4.60, and at $4.90 above that. 

Crack spreads remain quite high, as the disconnect between the artificial‐ly depressed WTI contract versus products continues to point to very highmargins. “Real‐world” margins, however, are not as high, given that pric‐es for more commercially popular oil grades used in the US are trading at a premium to WTI and therefore are not capturing the same kind of mar‐gins that our theoretical charts suggest.  

EMISSSIONS EMISSIONS Last: 12.12 7/31/2011

 

URANIUM URANIUM Last: 51.85 7/31/2011

©2011 MF Global Ltd. Source for charts: Bloomberg

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#REF!#REF!#REF!Jul'10Jul

European  carbon  prices  have  been  bouncing  between  12‐13  Euros  formuch of July in very subdued trading.  There was some sign of life at onepoint in July when European CO2 permits hit an 11‐day high of 13.38 Eu‐ros, but    the ascent quickly reversed  itself as selling came  in. SecondaryCERs  suffered more  than EUA’s, with  the December 2011 CER  contractshedding 24 points to 9.93 Euros, a discount of 3 euros to the EUA con‐tract. UniCredit  carbon  analysts believe  the EUA‐CER  spread will widenfurther as the EUA market continues to climb. Looking forward, the mar‐ket will be under pressure on expectation that a growing number of par‐ticipants will  leave the carbon market amid a lack of demand and uncer‐tainty about the future of the market, while reduced investment interestcould also take  its toll. Figures released  in May by the World Bank showthat  the volume of  trade  in  the EU ETS rose only 1%  in 2010, while  theprimary market  for  credits generated  from  the  clean development me‐chanism (CDM) almost halved last year to $1.5 billion. 

It was another quiet month for uranium. Spot prices were modestly lowerand the tone  is  likely to remain subdued given the recent crisis  in Japan and  the  German  announcement  of  a  rollback  of  its  nuclear  program. Looking further out, TradeTech says  that “the majority of buyers expect the spot uranium market to remain flat or trend down slightly in comingweeks and are extremely  reticent  to commit  to purchases." Among  thebright spots, the Japanese government announced that it was on track toregain control of its damaged nuclear reactor, while more importantly, ithas not yet used  the  issue  to renounce nuclear power  (as  the Germans have done). France also said  it will  invest $1.4 billion  in  its nuclear pro‐gram, differentiating itself from the Germans in this regard as well. 

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MF GLOBAL COMMODITY ROUNDUP ‐ AUGUST 2011

LME BASE METALS

3‐MONTH LME COPPER COPPER Last: 9811.25 7/31/2011

3‐MONTH LME ALUMINUM ALUMINUM Last: 2596.75 7/31/2011

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Copper prices pushed higher over the course of July, as a number of ele‐ments coalesced to provide the market upward momentum. A strugglingdollar, strike action, and adverse weather conditions in both Chile and In‐donesia, encouraged perceptions of  tight  supply, while on  the demand side, offtake  remained steady. Specifically, we had constructive Chineseimports number out in mid‐June, with refined copper imports up by some 8.7% from May. This was important in that many investors are waiting fora "restocking bounce"  in copper  imports, and having not gotten  it  in ei‐ther April or May, the June increase was quite reassuring. There was not much  change  on  the  inventory  front;  LME  stocks  increased  by  some11,000 tons over the course of the month, but this was more than offsetby the 21,000 ton increase seen in Shanghai. We see a continued tradingrange market  for  copper during August, with $10,180  (the previous all‐time high) marking resistance. However, the odds of a move to $9300 is more  likely given  the  likelihood of an eventual  settlement  in Escondida and the ongoing impact of bearish macro data now becoming more pre‐valent pretty much across most geographies. 

Aluminum prices had a very choppy July, selling off to a three‐month low of $2450 early on, before bouncing impressively to finish the month around $2630. Once again, the complex is shadowing energy quite close‐ly, although it seems with about a two‐week lag. Despite the move high‐er, we remain wary about aluminum's price prospects going forward, par‐ticularly on any push above $2650‐$2700. One reason for our caution has to do with the fact that more metal seems to be leaving LME warehouses, with some 160,000 tons out of storage since the beginning of March. Pre‐sumably, this metal originates from financing deals that have expired and which are not being extended. Should the outflows continue, we likely will see prices (and to a lesser extent premiums) remain under pressure. On the supply side, the IAI said in late July that global aluminum produc‐tion was up 5% in the first half of 2011, but the figure underestimates the ramp‐up evident in more recent months.  Our year‐long recommendation of putting on sell hedges on ali on a scale‐up basis between $2500‐$2800 

Ifhich

3‐MONTH LME ZINC ZINC Last: 2465.75 7/31/2011

3‐MONTH LME LEAD LEAD Last: 2594.75 7/31/2011

©2011 MF Global Ltd. Source for charts: Bloomberg

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p g g p $ $remains in place. 

Zinc prices pushed higher over the course of July, but the rally seems tohave stalled once we hit $2500 resistance.  Despite very uninspiring fun‐damentals, zinc prices could start to flat‐line here, as the complex  is be‐having more  like aluminum.  In this regard,  it  is estimated that financingdeals have  tied up about 60% of zinc stocks stored  in LME warehouses,while premiums are also holding up exceptionally well. However, we arestill not sure how demand will hold up, particularly out of China.  In thisregard,  imports of  refined  zinc have been  trending  lower  over  the  lastfew months, as have  imports of zinc ore and concentrate (off some 22%month‐ over‐month and down almost 14% year on year). In addition, LMEinventories continue to rise‐‐ up some 30,000 tons over the course of Ju‐ly, and we have to suspect that not all of this is being tied up in financingdeals. Finally,  latest  ILZSG shows the market to be  in a 214,000 ton sur‐plus through May. We expect prices to trade between $2300‐$2560 overthe course of August. 

Lead had a decent month  in July, closing slightly higher over the period,and trading pretty much within our  forecast  range of $2600‐$2850. De‐spite  rapidly moderating car sales growth, particularly  in emerging mar‐ket countries, the complex seems to be well supported by relatively ba‐lanced fundamentals  in that massive metal stockpiles are not burdening the  complex.  In  fact,  the  average  of  18  forecasts  compiled  by  Reuters projects lead to be in a 57,500 tons surplus this year before moving into a27,000 tons deficit  in 2012. The  ILZSG shows the  lead surplus running at about 74,000 tons through May and projects the overall year  to be  in a124,000  ton surplus. Even  if we take the bigger number, we should notsee a materially negative impact on the ending stock ratio, meaning that inventories will remain relatively low, at least judged by this measure. Inaddition, Chinese  supply  seems  to be getting pinched given  the aggres‐sive  government  responses  to  shut  down  smelters  and  battery makerswho have violated environmental  regulations. We expect  the market  to continue  to  trade  in  firm  fashion,  likely  between  2400‐$2700  over  the course of the month. 

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MF GLOBAL COMMODITY ROUNDUP ‐ AUGUST 2011

BASE METALS, STEEL, IRON ORE

3‐MONTH LME NICKEL NICKEL Last: 24954 7/31/2011

3‐MONTH LME TIN TIN Last: 28022 7/31/2011

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Nickel has been pushing higher over the course of July, and closed the month near three‐month highs despite the fact that stainless demand has been relatively soft on account of maintenance closures taking place over Q2. However, we suspect the better tone we have been seeing is attri‐butable to several factors: 1) Stainless plants are coming of maintenance and the market is perhaps discounting better offtake going forward; 2) LME stocks have been declining this year, and are off by about 36,000 tons since the beginning of January 3) Pig iron prices are now no longer as competitive with nickel, as tightening supply and rising prices have shaved the differential to nickel to only about 4‐5%. 4) The nickel market may not be as burdened with as high a surplus as initially thought. Al‐though the International Nickel Study Group still projects the market to be in a 60,000 tons surplus for 2011, it projected a 9,300 ton deficit for the first five months of this year, increasing the odds of an eventual full‐year revision. For now, we would stick to a $23,000 to $28,000 price fore‐cast for the balance of the year.    

 

Tin  followed nickel’s trajectory this past month, bottoming out in mid‐June and then starting to push higher to close the month at a ten‐week high. We were friendly to tin in our last note, pointing out that LME stocks increases have reversed course and are now declining; that trend continued through July, with another 1500 MT coming off warrant.  We think tin remains attractively priced at current levels, and would likely add to the purchase we recommended at around the $25,000 level in our last note. Supporting the bullish case, is the fact that the market is ex‐pected to be in deficit this year, while overall stocks are not that high. Furthermore, the market is critically dependent on only a few producers ‐‐Indonesia, and to a lesser extent, Peru and Bolivia. Demand remains strong, and unlike supply, is spread out over a number of sectors. We could see tin rally to just under $31,500 over the second half of the year, while on the downside, we think $26,500 support should hold. 

LME STEEL STEEL BILLETS Last: 605 7/31/2011

IRON ORE IRON ORE Last:  7/31/2011

©2011 MF Global Ltd Source for charts: Bloomberg

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Iron Ore 62% Fe CFR China

Vale, the world's largest iron ore producer, enlightened us with their market outlook last week: Among our take‐aways:  1) The global market remains tight and will remain so "for at least the next couple of years"; (2) China's property sector, notwithstanding credit tighten‐ing, is performing well; (3) China’s 12th 5yr Plan, including social housing program, and urbanization process, offer structural support (4) There remains huge challenges to output expansion ; (5) High quality iron ore is becoming increasingly scarce; (6) Rapid increases in opex and capex (particularly at the top end of the cost curve) are squeezing margins,  requiring  higher prices (7) Greater industry scale means repletion rates are rising, (i.e., running faster to stand still). While we agree with Vale’s overall view, in particular on supply side challenges, the main risk to monitor is point (2), namely, the state of affairs in China's property market. (Contribution by Andrew Gardner in Sydney). 

LME billet prices have worked higher over the course of July, with pricesnow  trading  above $600,  and well  above  their early April  low of $510.However, we suspect the market will eventually join the weaker tone weare  seeing  in  other  pockets  of  the  steel  industry;  in  this  regard,  Steel Business Briefing  reports  that Chinese exporters  are  seeing demand  forHRC and CRC shrinking drastically since the beginning of May, with pricesdiscounts  of  about  $30‐$50/MT  readily  apparent. On  the  fundamental side, a record amount of steel is expected to come into system this year,about 8% more  than  last year's  record. This  increased output  could hit the market  just as demand starts to weaken over the second half of the year. Given the spate of weaker macro numbers from a number of coun‐tries out over the last few weeks, such a demand slowdown may have al‐ready commenced. 

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MF GLOBAL COMMODITY ROUNDUP ‐ AUGUST 2011

PRECIOUS METALS

GOLD COMEX NEARBY CONTINUATION GOLD Last: 1628.3 High: 1634.9 Low: 1602.8 7/31/2011

Lead

SILVER NEARBY CONTINUATION SILVER Last: 40.106 High: 41.42 Low: 39.3 7/31/2011

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We misjudged gold's performance in July, as we thought that continued –Euro‐zone troubles would benefit the dollar much more so than the pre‐cious metal. What instead took place, was that investors‐‐ alarmed by thedeteriorating situation  in both Europe and  the US‐‐ concluded  that goldwas the preferred alternative store of value compared to either currency.As a result, the precious metal soared to new highs over the course of themonth, and only retraced briefly whenever  the dollar enjoyed a bounce(which was not often). Having  said  that, with uncertainty  regarding  theGreek bailout and the US debt ceiling no  longer as threatening as  it wasonly a few weeks ago, we think gold’s climb will likely moderate over the course  of  August  and  going  into  September. Nevertheless, we  are  notlooking  for any  type of  sell‐off below $1570  support, as buying  interestremains  strong.  In  fact,  the World Gold Council  said  that demand  fromChina and India accounted for 58% of gold purchases during Q1 of 2011,up from 34% only five years ago. With inflation continuing to rise in bothcountries, gold buying from these origins should remain intact.  

Silver prices exceeded our $37 upside  target  last month, and pushed  tojust under $42 an ounce before retracing to the $39  level at the time ofthis writing. The complex has been rising  in  large part on account of the stronger action seen  in gold. However,  the steep price correction  silver experienced  in  late April  continues  to  traumatize  investors,  and  conse‐quently, we do not expect to see a mad rush back into the metal anytime soon even if gold continues to forge on to record highs. We expect to seea  trading  range market set  in over  the course of August  for silver, withprices fluctuating between $37‐$42.  

PLATINUM NEARBY CONTINUATION PLATINUM Last: 1785.3 High: 1798 Low: 1779 7/31/2011

PALLADIUM NEARBY CONTINUATION PALLADIUM Last: 827.7 High: 847.55 Low: 800.3 7/31/2011

©2011 MF Global Ltd Source for charts: Bloomberg

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Platinum gained  about $100/ounce over  the  course of  July, ending the month around $1790/ounce, very much within the range we had forecastlast month  ($1670‐$1780). Despite  its  steadier  tone,  the metal’s upside potential  is being  limited by a sizeable surplus,  likely  to  remain  in placedespite  the  fact  that Chinese platinum  jewelry demand  ticked higher  in the  latest  quarter  (up  some  10%).  However,  a  rather  significant  slow‐down  in  car  sales,  practically  the world  over,  should more  than  offset this. Having said this, as long as gold is well bid, it is difficult to see any ofthe precious metals, including platinum, from selling off substantially, al‐though tipping back into recession should decouple the group from gold. Finally, a Reuters poll of 35 analysts expect platinum’s median averageprice  to  be  $1,804/ounce  this  year  and  $1,900  in  2012. We  expect  a $1730‐$1830 trading range to remain in place for most of this month.  

Palladium tested multi month‐highs  in July, benefiting from the flight tosafety  into  precious  metals  on  lingering  debt  concerns.  The  complexended  July at around $836 an ounce, up a not‐too‐shabby 11.5%. Palla‐dium’s  surge contrasts  somewhat with  its more negative  fundamentals. In this regard, refiner Johnson Matthey says that both palladium and pla‐tinum  industrial demand will shrink due to  increasingly poor automotive demand. Nevertheless, the latest Reuters survey (out in July) is fairly up‐beat, with the analyst community expecting palladium prices to average$800 an ounce in 2011 and $868 in 2012. Chart‐wise, should prices man‐age to break $830 and pull away from it decisively, we could set the stagefor a retest of the record high of $860. However, we likely will not be get‐ting there this month, and suspect that prices will instead retrace back in‐to the trading range, likely drifting to $770 at some point in the month. 

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MF GLOBAL COMMODITY ROUNDUP ‐ AUGUST 2011

GRAINS, FFA

CORN NEARBY CONTINUATION CORN Last: 665.5 High: 693 Low: 662.25 7/31/2011

WHEAT NEARBY CONTINUATION WHEAT Last: 672.5 High: 714.75 Low: 669.75 7/31/2011

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900.00Despite terrible  looking charts at this time  last month, wheat prices ma‐naged to stem the bleeding over the course of July and instead mounteda rather respectable rally that took prices all the way to $6.72 by month’send. The turn‐around was largely attributable to production being small‐er than estimated in the US, as heavy rains in the Great Plains could now result  in  less  output  of  hard‐red  spring  wheat,  this  according  to  theWheat  Quality  Council.  The  USDA  also  weighed  in,  saying  that  in  theweek ending July 24, about 83% of spring wheat was beginning to formgrain compared to an average of 95% in the past five years. More broad‐ly, the International Grains Council expects global production to rise to arecord 1.82 billion tons  in 2011‐2012, but this will  likely still fall short ofconsumption.  The  price  bias  will  likely  be  higher  for  wheat  over  thecourse of the month, with a trading range of $6.50 to $7.25 in place.   

Corn prices posted consistent gains over the first half of July, recoveringfrom the steep  losses experienced at the end of June.   Prices perked uplate in the month on reports of hot, dry weather that may have caused ir‐reversible  damage  to  the  US  crop.  In  addition,  dangerously  low worldcorn  inventories are only exacerbating any kind of weather concerns.  In this regard, inventories are projected to fall 16% to 120.88 million metrictons  from a year earlier,  this according  to the USDA’s  latest number.  In addition, the  latest USDA weekly crop progress report posted  its biggest drop in four years in July after the USDA marked the corn crop at  being only  at  61%  in  terms  of  falling  into  the  “good  to  excellent”  category, largely on  account  of heat damage. We expect  a  steadier  tone  in  cornover the course of August as key crop reports are still ahead of us, as  isthe continuing hot weather. Look for prices to trade between $6.50‐$7.40 over the course of the month.  

SOYBEANS NEARBY CONTINUATION SOYBEANS Last: 1354.25 High: 1388 Low: 1349 7/31/2011

FFA FFA Baltic Prices 7/31/2011

©2011 MF Global Ltd. Source for charts: Bloomberg

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Capesize Panamax Supramax Handysize

Soybeans held $12.80 support last month, and along with the rest of the grains, has worked higher since then.  In fact, a two‐week rally over the first two weeks in July was the longest advance since 2007, fueled by concerns about hot, dry weather in the US and its impact on yields. The rally cooled off somewhat later in the month, as rain in key growing areas led to speculation that yields could now tick higher, but forecasting about the crop at this stage remains dicey considering that soybeans had to be planted later than usual this year due to flooding in May and June. This means that crops will have to be left in the fields into the fall, putting them at risk of frost damage. Given continued weather concerns and the unrelenting heat in the US, we could see prices moving higher over the course of August, with odds of breaking $13.80 resistance being quite good. On the downside, $12.80‐$13.00 remains good support. For what its worth, large speculators raised their net long stake in both corn and soybeans for the third straight week last week, presumably anticipating further heat‐related issues. 

The Baltic Exchange's main freight fell to its lowest level in three monthsby the end of July, as slow bookings and growing vessel supply took theirtoll. Year‐to‐date, the BFI has shed some 21% in what seems to be a nev‐er‐ending downward price spiral. Panamax quotes have been holding uprelatively better on account of higher coal shipments, but capesize ratesremain depressed due  to sluggish  iron ore bookings. Scrapping of Pana‐max dry bulk vessels are on course to hit an all‐time high this year as thesector faces growing pressure from a record number of new ships enter‐ing the fleet, this according to ship broker SSY. However, this activity hashad little impact in tightening supply as of yet. 

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MF GLOBAL COMMODITY ROUNDUP ‐ AUGUST 2011

TROPICALS

SUGAR NEARBY CONTINUATION SUGAR Last: 29.81 High: 31.68 Low: 29.22 7/31/2011

COCOA NEARBY CONTINUATION COCOA Last: 2974 High: 3065 Low: 2956 7/31/2011

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Sugar had an explosive July, racing to a five‐month high, and not puttingin the correction we thought had more room to run when we  last wroteabout the complex last month. Fears about Brazilian output kept the rallyintact, as worries grew about how the size of the crop. In fact, according to  industry group Unica, Brazil’s output for the current season will dropto 32.4 million metric tons, the  first decline  in six years.  In addition, the International  Sugar  Organization  has  also  cut  its  forecast  for  Brazilian production in 2011/12 to 38.5 million tons from 40.5 million tons. Despitethese cuts, we should note that prospects  in other key producing coun‐tries, such as Thailand, India, and Russia, remain favorable, and so these gains may argue against sugar resuming a bull run.  In addition, most re‐search firms, including the ISO and F.O. Licht, project rather sizable global surpluses  in 2011/12,  another  factor  that  could work  against  the bulls. Shorter‐term,  and  over  the  course of August, we  see  the  #11  contracttrading between $.3180, the recent trading range high, while $.26 could be the low, possibly achievable on an outlook change for Brazil’s crop.  

It was a  largely downward trending month for cocoa  in July, with pricesgetting  down  to  the mid‐£2900 mark  by month’s  end,  not  far  off  the£2900 target highlighted in last month’s report. Prices were pressured by signs of increasing supply in both Cameroon and the Ivory Coast that will only add to a growing surplus. In addition, cocoa deliveries to ports in the Ivory Coast climbed 25% to 1.35 million metric tons, this according to anindustry  regulator, an  important metric  in getting  the country’s exportsback on track. Estimates of the global surplus now stand at 292,000 tonsfor  the  year  (this  according  to  Rabobank,  which  boosted  its  estimatesome 51% over  its previous projection). Despite  the  recent decline, weare seeing some buying set in, as the thinking is that cocoa prices are nowgetting  more  attractively  priced,  especially  in  light  of  respectable  Q2grind data (up 6.2% and 8.3% in the US and Europe, respectively). In fact,speculators  increased net  long positions  in  the  latest week  for a  fourthstraight week the highest level in three months

COFFEE NEARBY CONTINUATION COFFEE Last: 239.55 High: 247.35 Low: 237.2 7/31/2011

COTTON NEARBY CONTINUATION COTTON Last: 102.08 High: 104.66 Low: 93.5 7/31/2011

©2011 MF Global Ltd. Source for charts: Bloomberg

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Coffee prices struggled over the course of July, ending at five‐month lowsas the peak frost window in Brazil came to a close, with nothing particu‐larly alarming showing up. More broadly, there  is a lack of consensus as to what the supply/demand balance for coffee will  look  like this year. In the most  recent  Reuters  survey,  the median  forecast  for  global  coffeesupply and demand called for a 2 million bag deficit, but estimates are all over the place, ranging from a 10 million bag deficit to an 8 million bagsurplus. Technically, the charts do not look particularly good, and suggestthat a further decline to about the $2.25 level could be in the cards giventhe inability to easily hold and bounce off $2.40 support.  

Cotton fell to a seven‐month low this past month on signs of rising supplyand shrinking demand. In fact, futures have now plunged some 57% from their March highs, and incredibly, the complex has gone from one of thebest performers  in  last year’s commodity  rankings  to among  the worst,with prices now off some 30% year‐to‐date. Consumption continues to bethe main worry;  in  this  regard,  Chinese  customs  data  out  last monthshowed that cotton imports slid 17% from May levels, while overall glob‐al consumption was also showing signs of slowing. The complex did havea late‐month bounce (with prices up some 7% over three days in late Ju‐ly) on concern about hot weather  in  the US.  In addition,  the USDA saidthat as of July 24th, about 41% of the crop was in very poor or poor condi‐tion, compared with 8% a year earlier. Still, other producers are having decent crop output, and so the complex  is not as strained on the supplyside as it was earlier in the year.  

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MF GLOBAL COMMODITY ROUNDUP ‐ AUGUST 2011

CURRENCIES

EURO EURO Last: 1.4398 High: 1.4536 Low: 1.423 7/31/2011

YEN YEN Last: 76.764 High: 78.548 Low: 76.764 7/31/2011

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100.00The relatively tight trading range in the yen that was evident during muchof June  finally broke down  in July, as the currency soared to new highs.We suspect that the yen was the natural beneficiary of money that wasfleeing both  the Euro and  the dollar given  the dual  crises  that was  im‐pacting each of those regions. Moreover, there were increasing signs thatthe Japanese economy was finally started to recover, as a myriad of sta‐tistics  reflected  notable  improvement  in  exports,  manufacturing,  andoverall  output.  Japanese  car  companies,  in  particular,  are  coming  backstrong, with Toyota now  running  its domestic and overseas productionlevels at around 90% of pre‐crisis  levels. Technically, given the breakoutin the yen charts, we suspect the currency will likely move even higher, asit consolidates its role as an alternative to the Euro and the dollar. Inves‐tors are also not  likely to fear any type of Bank of Japan  intervention ei‐ther, as the last attempt to do so backfired badly on the central bank.

The Euro  lost modest ground over the course of  July,  faring particularlybadly during the middle of the month when  it sank to $1.38 on growingconcern  that  the Greek  sovereign debt  crisis was  rapidly spreading  intoother markets. After days of frenzied meetings amid intense market pres‐sure, the authorities  finally cobbled  together a rescue plan whose mainpoints were discussed at  the beginning of our  report. The package ma‐naged to turn the Euro around  late  in the month, while  further  lift wasprovided by the unfolding US debt ceiling crisis that was just getting un‐derway. However, we think the Greek rescue plan and the accompanyingplans made  to  fight  further  contagion  are only  temporary  “Band‐Aids”, and will likely not prevent further crises from sprouting up. In fact, therehas been growing concern about  Italian and Spanish paper over the  lasttwo weeks and whether the stabilization fund in place is large enough tohandle any problems that may arise  from either of these countries. Weexpect  the  euro  to  trade  between  $1.40‐$1.45  over  the  next  severalweeks,  but  likely  weaken  more  definitively  going  into  the  Septem‐ber/October  period,  as  by  then,  the  deeper  fissures will  start  to  showmore clearly. 

STERLING STERLING Last: 1.6426 High: 1.6471 Low: 1.6261 7/31/2011

DOLLAR INDEX DOLLAR INDEX Last: 73.9 High: 74.51 Low: 73.42 7/31/2011

©2011 MF Global Ltd. Source for charts: Bloomberg

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Similar to the yen, sterling has benefited from being a “safe refuge” from the travails of both the Euro and dollar despite weakening growth. After hitting a monthly low of $1.58 against the dollar at one point in mid‐July, sterling has since staged an abrupt reversal, getting to a high of just un‐der $1.65 in late July before easing somewhat to around $1.62. It has also gained ground against the Euro, hitting a two‐month high of around 87 pence just this week. This is an  impressive performance given that inter‐est‐rate differentials continue to work against sterling. In this regard, the ECB’s refinancing rate is at 1.25% versus a record low of 0.5% maintained by the Bank of England for two years now. Given the sluggish growth out‐look in the UK juxtaposed against heightened inflationary readings out of Europe,  the gap could widen  in  the months ahead, but as an “outside”currency, we expect sterling retain a measure of strength against the Eu‐ro. Against  the dollar, we  likely will  see  range‐bound action  continuing, with $1.60‐$1.65 likely holding during August. 

The dollar index did not do much over the course of July, finishing practi‐cally unchanged over the course of the month. The index rallied early onwhen European debt  issues boosted the dollar, but the  index started toslip  later  in the month as  investors pulled back, alarmed by the politicalquagmire on display in Washington, coupled with the unimaginable pros‐pect of a default. Although an eventual agreement did revive the dollar's fortunes as we went out with this note, we think the measure agreed towas  itself quite a modest undertaking, as  it postpones the difficult deci‐sions to a later date. In addition, macro data out of the US has been un‐usually weak over the  last few weeks, and this, coupled with the  limited progress made on the deficit issue, will likely keep the dollar index on thedefensive as we head  into the second half of the year. A big wild card  iswhen the European authorities will next be tested and how well they farein fighting off the contagion still radiating through the debris of the Greek crisis. 

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MF GLOBAL COMMODITY ROUNDUP ‐ AUGUST 2011

FINANCIALS

S&P 500 S&P 500 Last: 1292.3 High: 1344.3 Low: 1282.9 7/31/2011

10‐YEAR NOTE 10‐YEAR NOTE Last: 125.7 High: 125.9 Low: 123.8 7/31/2011

Source for chart: Bloomberg

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We  were  somewhat  wary  about  the  short‐term  prospects  for  the  US stock market  in our  last report, highlighting the fact that weakening ma‐cro data and the likelihood of down‐to‐the wire negotiations would likelyunnerve the markets. In fact, last week's decline in the S&P 500 (coincid‐ing with the worst of the goings‐on in Washington) was the index’s worstshowing  in  about  a  year.  Even  the  eventual  relief  rally  that  set  in  the wake of an agreement on Monday did have much staying power and fiz‐zled out over the course of the day. Although the drama  in Washington and the potential of default is now fading, another equally pressing issue has replaced  it, namely, whether the US economy could  indeed tip backinto  recession  given  the  continued  spate  of weak  data we  are  seeing.Corporate earnings have been coming  in on the strong side  for most oflast month; of the 327 S&P 500 companies that have reported, 73% have beaten  estimates,  but  this  has  done  little  to  reverse  the weaker  tone. Technically, charts suggest we likely will push lower from here, with nextsupport around 1250, the lower end of the trading range.  

We were  friendly  to  the 10‐year note market  in  last month’s  commen‐tary, noting that continued Eurozone concerns and the likelihood of slop‐py  debt  talks  in Washington  should  benefit  the  sector. Moreover,  thestrong price action that was taking place suggested that investors did not take the possibility of default in the treasury market that seriously, even though the complex would presumably suffer considerably under such anunimaginable scenario. Ten‐year yields are now at a nine‐month  low of just under 2.7%, and although the Greek crisis and the US debt talks havefaded  somewhat  in  terms  of  intensity,  a marked  slowdown  in  the  US economy, typified by weak first half GDP readings and soggy manufactur‐ing  data,  are  now  offering  a measure  of  support. We  expect  treasuryprices to continue to push higher over the course of August, as the falloutfrom continued Euro zone  troubles,  (now extending  to  Italy and Spain),coupled with a  likelihood of further weakness  in both US stocks and thegeneral economy, will keep prices well bid.

Source for charts: Bloomberg

©2011 MF Global Ltd.

JulJulJul'09general economy, will keep prices well bid.   

The information contained in this report has been taken from trade and statistical services and other sources which we believe are reliable. MF Global Inc. does not guaranteethat such information is accurate or complete and it should not be relied upon as such. Any opinions expressed reflect judgments at this date and are subject to change with‐out notice. The principals of MF Global and others associated or affiliated with it may recommend or have positions which may not be consistent with the recommendationsmade. Each of these persons exercises independent judgment in trading, and readers are urged to exercise their own judgment in trading. © by MF Global Inc. (2010) 440 SLasalle Street,  Chicago, Illinois, 60605.