Food Products James Lee Karenn Ramirez Luke Park Maggie Mu Simon Whitlock Yi Yang

Agenda Industry Overview Industry Risk Management Archer Daniels Midland Company –Company Overview And Financial Statements –Derivatives ConAgra Foods Inc. –Company Overview And Financial Statements –Derivatives Recommendations

Food Processing Industry Definition characterized by engaging in procuring, transporting, storing, processing and merchandising agriculture commodities and products Products dry grocery, frozen foods, produce, meat, seafood, candy, alcoholic and non- alcoholic beverages

Raw Material Processing

Final Products Shipment and Distributio n Whole Sales and Retails

Market Structure

Market Structure :Food &Beverage In 2001, food and beverage manufacturing plants accounted for 13 percent of the value of shipments from all U.S. manufacturing plants

Market Structure: Food wholesaling a $589-billion business (The U.S. Food Marketing System, 2002) The part of food marketing --retailers, foodservice operators, other wholesalers, government, and other types of businesses. sales to the $422-billion retail food store sector Sales to the $358-billion foodservice sector sales to other wholesalers represent a significant portion (over 25 percent) of total wholesale sales The retail food store wholesaling sector continues to undergo important structural changes. Mergers and acquisitions continue to reshuffle the ranks of leading retail food wholesalers and diminish the share of the retail food distribution market accounted for by traditional third-party wholesalersstructural changes

Market Dynamics Large numbers of food processing establishments (plants) in the U.S. — almost 29,000 owned by about 22,000 companies employ about 1.7 million workers- 10 percent of all U.S. manufacturing employment and just over 1 percent of all U.S. employment. The 20 largest firms in food manufacturing account for about 35 percent of shipments, while in beverage manufacturing the 20 largest account for 66 percent.

Industry Statistics Continued Financial Strength Quick Ratio.605 Current Ratio LT Debt/Equity Total Debt/Equity Mgt. Effectiveness Return on Invstmt % Return on Assets % Return on Equity %

Company Rank-Size HNZ

Industry Index

Food Industry vs S&P, Nasdaq and DOW

Industry Browsers 3 month Price Change: 9.8% 1 yr Price Change: 33.4% Market Capitalization: 345B Price / Earnings: 19.6 Price / Book: 5.0 YoY Qtrly Rev Growth: 12.8% YoY Qtrly EPS Growth: 11.9% Return on Equity: 23.1% Total Debt / Equity: 1.4 Dividend Yield: 2.2%

Company Ranks - Price Performance

Company Ranks - Growth History

Company Ranks - Trading Liquidity

Risk Management

Risk Segments Major Risks: –Price Risk –Interest rate risk –Foreign exchange risk Minor Risks: –Operation risk –Reputational risk

Price Risk The company purchases commodity inputs to be used in operations Commodities are subject to price fluctuations that may create price risk

Managing price risk Commodity hedges –Forward contract (physical goods) –Derivative securities (futures, etc) Limiting the dollar risk exposure for each or its businesses Monitors the amount of associated counter-party credit risk for all non- exchange-traded transaction

Interest rate risk Loses from fluctuations of interest rate Refinancing risk (short term and long term loans) Reinvestment risk (hedging activities)

Managing Interest rate risk Interest rate swaps –Company takes advantage of historically low short- term rates, while continuing to maintain long-term financing

Foreign Exchange Risk Losses from fluctuations of exchange rates Risk arise in purchasing inventory, capital equipment, sales of finished goods and future settlement of foreign denominated assets and liabilities

Managing Foreign exchange risk Hedging –Readily marketable exchange-traded futures contract –Forward contract with banks –Option contract for transactions denominated in a currency

Operation risk Risk which includes organizational behavior, technological systems and legal aspects Specific policies for global market in which it operates (government, accounting, etc.) Seasonal and cyclical risk

Reputational risk Essential to manage all risk elements effectively to mitigate negative reputation A responsibility of anyone who is employed Media control

Potential Hazard Uncertainty of market movement Changing government regulation Technology

Archer Daniels Midland Company Company Overview And Financial Statement

Archer Daniels Midland Company (NYSE: ADM) MISSION: To Unlock the Potential of Nature t o Improve the Quality of Life. Our agricultural products, from grain and food ingredients to a nimal feeds and supplements, are processed to actualize their greatest nutritional and econ omic potential.

Nature of Business The company is principally engaged in procuring, transporting, storing, processing, and merchandising agricultural commodities and products

BUSINESS INVOLVEMENT Oil Seeds Processing Corn Processing Wheat Processing Agricultural Services Others

Profit Structure Coca, Specialty food ingredients, Byproducts, Feed, Natural Health & nutrition, Finical servieces

AMD—Global Franchise

Archer Daniels Midland Company Derivatives of ADM

Risk Sensitive Instruments Commodities Marketable Equity Securities Limited Partnerships Currencies Interest

Commodities Inventories and Derivatives Availability and price of commodities is affected by unpredictable factors Policy to use exchange-traded futures and options contracts Minimize net position of merchandisable agricultural commodities inventories Forward cash purchase/sales contracts

Derivatives in Practice Contd. Futures contracts to fix the price of commodities to be purchased/processed in a future month Futures, options, and swaps to fix the price of the natural gas required

Accounting for Derivatives Unrealized gains classified on the balance sheet as receivables Unrealized losses classified on the balance sheet as accounts payable Gains/losses from open/closed hedging positions are deferred in other comprehensive income Derivative instrument no longer effective  recorded as a part of cost of products sold

Commodity Position ADM ’ s daily net commodity position consists of the following: –Inventories and related purchase/sales contracts –Exchange-traded futures contracts, including those to hedge part of the production requirements Fair value of ADM ’ s position is a summation of the fair values calculated for each commodity at quoted futures prices

Market risk Estimated as the potential loss in fair value resulting from a hypothetical 10% adverse change in quoted futures prices Average position decreased due to a decrease in the daily net commodity position, partially offset by an increase in quoted futures prices

Marketable Equity Securities Exposed to price risk ADM classifies marketable securities as available for sale and trading securities Trading securities unrealized gains/loss not included here, but in net income Gain on marketable securities transactions in 2003 was 2.7 million compared to 38 million in 2002, and a loss of 56 million in 2001

Limited Partnerships Partner in private equity funds that invest in emerging markets that have agro- processing potential Use the equity method of accounting Market risk: potential loss in fair value resulting from a hypothetical 10 % adverse change in market prices of the limited partnerships ’ investments

Limited Partnerships Contd. The valuation of these investments can be subjective and volatile –Illiquidity, less regulated securities exchanges, currency exchange fluctuations, less regulated securities exchanges Company results could vary significantly over future periods (e.g Net income $21 million and in 2003 a net loss of $62 million).

Foreign Exchange Risk Hedge all transactions Exchange-traded futures contracts and forward contracts with banks At June 30, 2003 the amount invested in foreign subsidiaries and affiliates was $3.3 billion compared to $2.7 billion at June 30, 2002 – The 10 % potential loss due to adverse change in quoted foreign currency exchange rates amounts to $331 million for 2003 and $272 million for 2002

Interest Rate Risk Market risk: the potential increase in the fair value resulting from a hypothetical 0.5% decrease in interest rates Increase in fair value  decrease in quoted interest rates and increase in long- term borrowings

Stock Compensation Accounting Principles Board Opinion Number 25 (APB 25 ) The fair value of each option grant as of the date of the grant using Black-Scholes single option pricing model Assumptions used:

Stock Compensation Contd. The effect on net earnings and earnings per share as if the fair value method had been applied to all outstanding and unvested employee stock options

Stock Option Plans Granting of options to employees to purchase common stock of the company at market value on the date of grant Option expires five to ten years after the grant 26 million shares available for future grant

Stock Option Activity

Stock Options Contd. At June 30, 2003 the range of exercise prices was $8.33 to $14.84 and weighted average remaining life of outstanding options was 4 years The weighted average fair values of options granted: –2001=$3.79 –2002=$4.31 –2003=$3.20

Stock Price=$16.14

ConAgra Foods Inc. Company overview And Financial Statement

Company Background ConAgra Foods, Inc. (NYSE: CAG) is one of North America's largest packaged food companies Established in 1867, ConAgra Foods has grown from a small Nebraska company into one of America's largest food companies. About 85 percent of the company's food profits flow from sales of branded and value-added items.

ConAgra Product Lines product line –Packaged Foods Grocery Foods Group International Foods Group Refrigerated Foods Group Snack Foods Group Frozen Foods Group –Food Ingredients Specialty Ingredients Basic Ingredients

Business Strategy Building brands and reputations Generating product preferences Creating competitive distribution advantage Improving customer service

Financial Highlights

Distribution of Operating Profit

Major Recent Transactions The Fresh beef and pork businesses were sold The canned seafood business was sold The cheese processing business was sold Agreement was reached to sell the chicken business

Analysis of Cash Flow $976 million from selling low margin businesses Used proceeds to pay down debt by $222 million, and invested $390.4 million to PP&E Increased cash by $470.7 million

Analysis of Balance Sheet Cash and cash equivalent increased by $470.7 million due to sale of assets Inventories decreased by $802.3 million over the year Total PP&E decreased by $926.4 million due to the sale Equity increased by $313.5 million due to an increase in retained earnings

Stock Price

ConAgra Foods Inc. Derivatives of ConAgra

ConAgra Foods Inc. Uses derivatives to hedge three types of risk –Commodity prices ; inputs in production process –Interest rates ; long term debt –Exchange rate fluctuations ; international operations

Fair value Company recognizes value of derivative instruments (other than swaps) in two accounts. 1.“ Prepaid expenses ” and “ other current assets ” 2.“ other accrued liabilities ” Fair Value – November 2003 Prepaid expenses etc.$51.1 million Other accrued liabilities $16.7 million

Commodities Company purchases wheat, corn, oats, soybean meal, soybean oil, cattle, hogs and energy Hedges price risk using: Physical forward contracts Other derivative instruments (not specific)

Sensitivity of Fair Value in Commodity Hedges Change in Fair value due to 10% change in prices: Grains and Food$32.8 million Meats $5.9 million Energy$11.8 million Hedges have a inverse correlation to price changes

Exchange Rates Enters into agreements in order to reduce the effect of volatility of currency prices on income Includes – purchasing inventory, capital equipment, sales of finished goods, and future settlement of foreign denominated assets and liabilities Uses foreign exchange and currency options

Sensitivity of Fair Value in Exchange Rate Hedges

Accounting Issues (hedging commodities and currency prices) Designated as cash flow hedges Gains and losses are deferred in “ accumulated other comprehensive income ” until the forecasted transaction impacts income

Interest rates ConAgra sometimes uses interest rate swaps to convert fixed rate debt into floating rate debt. In Q2 of 2004 – closed out $2.5 billion of interest rate swaps in order to lock-in existing favorable interest rates

Swaps Fair value hedges and cash flow hedges Fair Value hedges No recognition on income statements Were $2 billion in 2003, 0 in Q Cash flow hedges - were $500 million Used to hedge certain forecasted interest payments Gains and losses deferred to “ accumulated other comprehensive income ”

Other Issues Ineffective hedges are immediately recognized within net sales, cost of goods sold or interest expense, depending on the nature of the hedge

Trading The company also reserves the right to trade using derivatives when it observes opportunities

Management of Derivatives Portfolio Finance and Risk James P. O'Donnell Executive Vice President, Chief Financial Officer and Corporate Secretary

Stock Option Plan

Range of Exercise Prices and Remaining Life

Stock Option Plan Company policy to grant options at fair market value at the time of grant. End of 2003, 35.2 million options –Average weighted prices of $24.76 –Represents 6.7% of shares outstanding Closing Share Price March 12, 2004 –Share price $27.44

Recommendations 1.Traditionally companies in the industry hedge their commodity inputs – This may not be necessary if companies use a diverse set of inputs 2.Be opportunistic when interest rates fall by converting fixed-rate debt into floating rate debt using interest rate swaps 3.Companies should hedge foreign exchange exposure since they operate in numerous countries and forecasting exchange prices would be difficult