1. By Thos Gieskes September 2011 The changing dynamics of commodity supply Possible solutions to this challenge

2. 2 Rabobank International Higher prices and volatility The battle for raw materials Market Update and Outlook Cooperation along the supply chain The big picture Changing dynamics Current landscape The solution? Presentation roadmap Agricultural commodity selling options Cooperation along the supply chain

3. 3 Food & Agribusiness Research and Advisory Demand – surging on the back of Asia Supply- productivity increases are slowing down (Bursts of) scarcity of agri commodities Higher prices Ongoing high price volatility From a world of surplus to a world of scarcity The challenges of managing higher prices and volatility Source: Rabobank International

4. 4 Food & Agribusiness Research and Advisory Tighter and more volatile food markets OversupplyTightTighter On average higher and more volatile prices Chicago Board of Trade (CBOT) corn, wheat and soybean prices Source: Bloomberg, Rabobank International

5. 5 F&A players forced into action The changing dynamics of suppl y Higher prices, continued high price volatility and increased scarcity of agri commodities - from efficiency to risk reduction Price-related risks  Price level dictates working capital requirements  Price volatility dictates gross margin, working capital requirements Volume-related risks  Empty handed – inability to trade  Available quality – implications for reputation if substitutes not available Sourcing as a competitive advantange for F&A companies – if they can work with producers! Source: Rabobank International

6. 6 1.Increasing control over supply:  Investing in land  Backward integration – owning production, storage assets along the chain  ‘Farmer first’ – buyers actively assisting farmers in the production process  Regional diversification – using multiple suppliers in one region. 2.Focus on market power:  Supply contracting – long term supply arrangements becoming more common.  Horizontal partnerships – food retail companies cooperating with competitors for greater negotiating power with competitors  Brand Power – passing on increased commodity costs to the next entity in the supply chain.  Forward integration – set up/buy processing assets later in the supply chain. 3.Adaptive strategies:  Ingredient substitution - commodity substitution if there is a sufficient price signal.  Tolling – ‘cost-plus’ pricing where price fluctuations are passed along the supply chain. Maintaining control in an era of scarcity Strategic sourcing options Source: Rabobank International Strategic sourcing options for F&A companies

7. 7 Food & Agribusiness Research and Advisory ‘Commodity colonialisation’ Source: Rabobank International The battle for raw materials

8. 8 Food & Agribusiness Research and Advisory What is driving the international interest? Example: strategic sourcing of Australian sugar

9. 9 Food & Agribusiness Research and Advisory Australian sugar – a supply opportunity in Asia’s backyard 1 million tonnes sugar, 5 active mills, 2 bulk terminals, no refinery 1.9 million tonnes sugar, 6 mills, 2 bulk terminals, no refinery consolidated by Sucrogen 1.3 million tonnes sugar, 5 mills, 1 bulk terminal, 1 refinery Consolidated by Mackay Sugar 0.7 million tonnes sugar, 5 mills, 2 bulk terminals, 1 refinery 0.4 million tonnes, 3 mills, no bulk terminal, 1 refinery Consolidated by Manildra Mossman Maryborough Sugar Factory (MSF) Tully Sucrogen Proserpine Mackay Sugar Bundaberg Sugar Ltd Isis Central WH Heck NSW Mills Source: Rabobank International, company announcements 4-5 million tonnes of Aussie raw sugar

10. 10 Food & Agribusiness Research and Advisory Increasing physical control over supply Source: USDA, Rabobank International Bridging the supply gap Buy mill  Buy land  Grow cane  Crush cane  Produce raw sugar  Conventional marketing initially  Strategic sourcing in the future Asia’s sugar deficit - 17 million tonne pa and growing

11. 11 Food & Agribusiness Research and Advisory Selling options for agri-commodity producers Farmer grain selling options Go it alone Take what is on offer (bank/tradition al finance) Pool Take spot cash price Actively manage production and distribution Store on farm (just in time finance) Store off farm (bulk handling company finance) Supply contracting with buyers/stakehol ders The current landscape Source: Rabobank International

12. 12 Food & Agribusiness Research and Advisory Producers and buyers – a marriage of convenience? End-users and farmers want some of the same things:  Greater price certainty  Access to alternative ways of funding day-to-day operations  A reduction of their exposure to production risk How can they work together to achieve their individual goals? Source: Rabobank International

13. 13 Food & Agribusiness Research and Advisory Crop FinanceCrop productionHarvest/delivery Crop marketing Proceeds from sale Producer Issue:  Low equity  Low cash reserves Producer Issue:  Production volatility Producer Issue:  Lack of capital to invest in on-farm storage Producer Issue:  Delay marketing to achieve better price  Price volatility Producer Issue:  Doesn't align with cash flow needs Buyer solution:  Provide capital  Barter inputs for commodity Buyers - Providing solutions to producers problems to ensure supply Producers - Want to increase production but need to overcome problems Buyer solution:  Share risk Buyer solution:  Invest in storage so producer commits to selling to buyer Buyer solution:  Higher pricing but producers need to better meet buyers needs Buyer solution:  Pre-payment Cooperation between producers and buyers needed in an era of agri-commodity scarcity Source: Rabobank International

14. 14 Co-production model. InvestorFarmer  Provides expertise equipment and land.  Access to alternative forms of capital outside debt.  Reduces overall risk.  Provides Capital  Owns the Production  Receives an Annual Return  Direct Exposure to soft commodity production Source: Rabobank International

15. 15 Food & Agribusiness Research and Advisory Warehouse cash flow  Grower Warehouses grain in a bulk-handling companies storage facility (i.e. Graincorp)  The Grower sells grain to the provider of the facility at the prevailing market rate and receives an initial payment of up to 60% of the grains value.  The Grower at any time can repay the payment and sell to another party at the current market rate.  The grower captures prospective price upside, but must also manage and is responsible for price downside. A solution ahead of it’s time? Source: Rabobank International

16. 16 Food & Agribusiness Research and Advisory Bartering inputs for grain  Inputs provided to the farmer at the start of the season in exchange for crops delivered at harvest time.  An alternative to farmers finding capital.  An accumulation strategy that works for many end-users/commodity traders.  Common practice in South America.  As much as 35% of Brazilian farm inputs are purchased through barter deals.  Only feasible in relatively low production risk areas.  The battle for agri commodities will be won by those with the most direct access to farmers. Source:Rabobank International

17. 17 Food & Agribusiness Research and Advisory Chinese bartering  China would like to secure supply of crops whilst reducing their dependence on grain trading companies.  Their initial approach of purchasing land and growing their own production has proved difficult in many countries.  Many countries limit foreign ownership of land.  Chinese companies are the leading producers of most farm inputs such as glyphosate.  It is only a matter of time before Chinese companies begin bartering agrochemicals and fertilisers in exchange for crop production. Source: Rabobank International

18. 18 Food & Agribusiness Research and Advisory Today’s conclusions: 30% The World is changing: We are transitioning from an era of abundant agri-commodity supply to an era of scarcity and this will generate change along supply chains Current Dynamics are not helping Farmers face weak signals to expand supply as buyers are hanging onto margins to boost profitability Future depends on cooperation between producers and buyers Aligning risk profiles with ability to fund will boost returns for both parties Source: Rabobank International

19. 19 Food & Agribusiness Research and Advisory Rabobank International DISCLAIMER Professional advice is recommended for all financial and strategic decisions. However, this information is not professional advice and has not been prepared to be used as the basis for, and should not be used as the basis for, any such decisions. This information is general in nature only and does not take into account an individual’s personal circumstances. No representation is made that any forecast or projected information is correct or will eventuate and past performance is not indicative of future performance. Although reasonable efforts have been taken to ensure the accuracy of the contents of this publication, no warranty is given in regard to the total accuracy of the printed contents. Rabobank has no obligation to update this document or correct any inaccuracies and/or omissions or otherwise advise the reader. The persons involved in the preparation and distribution of this information and their related persons disclaim all liability for any direct, indirect, consequential or other loss or damage suffered due to any use of or reliance on the information. Information contained in this publication may not be reproduced or published without Rabobank’s prior written consent. “The financial link in the global food chain”™ Food & Agribusiness Research and Advisory Thos Gieskes Chief Executive Officer Rabobank Australia and New Zealand