The Andersons, Viterra, and ADM BUS 419 Presentation

Outline Industry Analysis Economic Market The Andersons Company Overview Risk Management Financial Statement Analysis Viterra Company Overview Risk Management Financial Statements Analysis ADM Company Overview Risk Management Financial Statements Analysis

Industry overview

Agriculture industry Refers to the industrialized production of: Livestock Poultry Fish Crops

History Agricultural production across the world doubled four times between 1820 and 1975 to feed a global population of one billon human beings in 1800 and greater than 7 billion in The number of farms has decreased and their ownerships is more concentrated.

Trends Agriculture Industry is always seeking to improve, by adopting new technologies. The new technologies aim at improving the efficiency of various Agricultural based operations. Biotechnology has assisted in improving the quality of crops manifold. But it depends on the choice of the consumers as consumers opt for natural food. Transgenic rice is produced at a cheaper rate as compared to conventional rice.

Population Growth

Forecasts World agricultural production is expected to grow nearly 1.5% yearly in the next few years, according to the Organization for Economic Co-operation and Development (OECD). Commodity prices are expected to decline from 2011 figures but will average at 20% or less for cereals and 30% or less for meats over the next decade. By 2050, there will be 3 billion more people to feed, by which time meat production demand will grow almost 75% and cereal production will have to increase by 1 billion tons.

U.S. farm sector output

Total food expenditures in U.S. Total food expenditures for all food consumed in the U.S. were $1,240.4 billion in 2010, a 3.4-percent increase from $1,199.8 billion in Food expenditures YearTotal ,053, ,102, ,159, ,204, ,199, ,240,438

Challenges Adoption of manufacturing processes in production as well as processing A system or food supply chain approach to production and distribution Negotiated coordination replacing market coordination of the system A more important role for information, knowledge and other soft assets in reducing cost Increasing consolidation at all levels raising issues of market power and control

Risks Is classified into such categories: Production Marketing Financial Legal Human

Risks

Financing and financial structure Liquidity Company must have the ability to hold accounts receivable on its asset and pay off short-term bonds Solvency Company may have the risk of having not enough income to payoff the bonds maturity in short term

Market prices and terms of trade Product price volatility The price of agricultural products may decrease a lot. As a result, company can suffer great loss when its input price is fixed by the long-term contract Input price volatility Similar to product price volatility, input price may increase a lot.

Financial markets and instruments Foreign exchange For companies with foreign businesses, FX rates have great effect on company’s profit Interest rate Paying for the bonds and borrowing money with great interest cost

Operations and business practices natural hazards Natural hazards can easily disrupt the continuous operation of the company internal processes and controls Operating the facilities in wrong way or negligence can result in broking down the machines

Corn

Soybean

Wheat

Company Overview Listed on NYSE Focuses mainly on grain related services e.g., risk management, marketing, crop insurance and grain transportation A diversified company with interests in the grain, ethanol and plant nutrient sectors of U.S. agruiculture, as well as in railcar leasing and repair, turf products production and general merchandise retailing

Primary Market Segments Grain and Ethanol Grain trading (through Lansing Trade Group 52% stake) Rail Plant Nutrient Cob Retail Stores

Grain Group Operates grain terminals Earns income by: Buying and selling (mostly using forwards) Conditioning for resale Space income(“appreciation or depreciation in the basis value of grain held”)

Ethanol Group Part ownership of 3 LLC’s, each of which owns an ethanol plant operated by The Andersons Grain group has exclusive rights to provide all corn to each plant The company buys from % of the ethanol from each plant for resale Ethanol group provides operations and administration of each plant on a cost-plus contract

Plant Nutrient Group Manufactures and distributes agricultural plant nutrients Operates 27 manufacturing/distribution locations

Wholesale Nutrients(Plant Nutrient Group Cont’d) Manufactures, stores, distributes agricultural nutrients, lime and gypsum pellets Also manufactures and distributes industrial products (de- icers for plane runways, water treatment products)

Farm Centers (Plant Nutrient Group Cont’d) Provides nutrients, crop protection chemicals, seeds, agronomic advice to small farmers Recently purchased Eezy Gro inc., and Immokalee Farmers Supply inc.

Rail Group Repairs, sells, leases locomotives, railcars, containers Fleet management services offered to private railcar owners Invested in Iowa Northern Railway Company

Turf & Specialty Group Turf Products Golf courses, turf care markets Also sells fertilizer Cob Products Processes corncob based products for animal litter, among other things

Retail Group Retail stores “The Andersons” Specialty foods Home improvement products

Financial Statements

Risk Management

The closest thing to a hedging philosophy available “In the case of our off-balance sheet railcars and locomotives, the risk management philosophy of the Company is to match- fund the lease commitments where possible. Match-funding (in relation to rail lease transactions) means matching the terms of the financial intermediary funding arrangement with the lease terms of the customer where the Company is both lessee and sublessor.”

So, they really don’t state what their hedging philosophy is, if they have one.

Risk Management “The market risk inherent in the Company's market risk- sensitive instruments and positions is the potential loss arising from adverse changes in commodity prices and interest rates”

Risk Management Commodity Prices: Uses Futures, Options, and OTC contracts Interest Rate Short-term: Interest Cap Long-term Interest Swap and Cap FX rate Collar contracts

The company is exposed to commodity price risk They have unhedged position limits Above these limits, they use commodity futures, options, and forwards Forwards are for delivery, and rarely extend beyond one year

Commodity In 2010, The Andersons Inc. increased the use of forward commodity contracts substantially

However, in 2011 is was reduced substantially

“we are unable to offset 100% of the price risk of each transaction due to timing, availability of futures and options contracts and third party credit risk. Furthermore, there is a risk that the derivatives we employ will not be effective in offsetting all of the risks we are trying to manage. Our grain derivatives, for example, do not perfectly correlate with the basis component of our grain inventory and contracts.”

Commodity In 2010, the profit margin increase to 1.91% from 1.27%

Commodity Observing the outflow of cash in inventories and commodity derivatives and margin deposits, the increased use of derivatives might be caused by larger inventory

Why the focus on corn? “Any event that tends to negatively affect the supply of corn, such as adverse weather or crop disease, could increase corn prices and potentially harm our share of the ethanol LLCs results.…High costs or shortages could require us to suspend ethanol operations until corn is available on economical terms, which would have a material adverse effect on operating results.”

“Our futures, options and over-the-counter contracts are subject to margin calls. If there is a significant movement in the commodities market, we could be required to post significant levels of margin, which would impact our liquidity.”

“There is no assurance that the efforts we have taken to mitigate the impact of the volatility of the prices of commodities upon which we rely will be successful and any sudden change in the price of these commodities could have an adverse affect on our business and results of operations.”

Sensitivity Analysis (commodity) “The fair value of the position is a summation of the fair values calculated for each commodity by valuing each net position at quoted futures market prices. Market risk is estimated as the potential loss in fair value resulting from a hypothetical 10% adverse change in such prices.”

Interest Rate The Company has other interest rate contracts that are not designated as hedges. While the Company considers all of its interest rate derivative positions to be effective economic hedges of specified risks, these interest rate contracts are recorded on the balance sheet in prepaid expenses and other assets or current and long-term liabilities and changes in fair value are recognized currently in income as interest expense.

Interest Rate Cont’d The company is exposed to interest rate risk through their borrowing and financing To mitigate this, they use long term interest rate swaps

Interest Rate

Sensitivity Analysis (Interest Rate) The fair value of these contracts is estimated based on quoted market termination values. Market risk, which is estimated as the potential increase in fair value resulting from a hypothetical one-half percent decrease in interest rates, is summarized below:

Foreign Currency Risk Railcar repair, leasing etc. in Canada exposes the company to fluctuations in the C$/US$ exchange rate They use a costless collar that establishes a floor of $0.9875/US$ a ceiling of $1.069/US$

Swaptions “In 2011, the Company entered into two $10 million swaptions for Rail purchase options on sale leaseback transactions to manage the risk of higher interest rates in the future.”

“The option to enter into an interest rate swap. In exchange for an option premium, the buyer gains the right but not the obligation to enter into a specified swap agreement with the issuer on a specified future date. 1oUbcpwCd 1oUbcpwCd

From the notes: “While the Company considers its commodity contracts to be effective economic hedges, the Company does not designate or account for its commodity contracts as hedges.”

“The Company has a long-term interest rate swap recorded in other long-term liabilities and a foreign currency collar recorded in other assets and has designated them as cash flow hedges; accordingly, changes in the fair value of these instruments are recognized in other comprehensive income.”

Marking to market “The Company marks to market all grain inventory, forward purchase and sale contracts for grain and ethanol, over-the- counter grain and ethanol contracts, and exchange-traded futures and options contracts.” “Management estimates fair value based on exchange-quoted prices, adjusted for differences in local markets, as well as counter-party non-performance risk in the case of forward and over-the-counter contracts.”

Accounting “Realized and unrealized gains and losses in the value of commodity contracts (whether due to changes in commodity prices, changes in performance or credit risk, or due to sale, maturity or extinguishment of the commodity contract) and grain inventories are included in sales and merchandising revenues.”

Company Overview Production: Food ingredients, animal feeds, feed ingredient, and ingredients for wholesome food Conducts business in over 75 countries Significant Investments in joint ventures

Primary Business Segment Oilseeds Processing Corn Processing Agricultural Services Other Food processing Financial activities

Oilseeds Processing Operates in North America, Europe, and South America 100% ownership in Golden Peanut Major supplier of peanuts and peanut-derived ingredients to both the U.S. and export markets and operator of one peanut shelling facility in Argentina Partial Ownerships in Wilmar (Singapore), Edible Oils Limited (UK), Stratas Foods LLC (U.S.), several other joint ventures

Corn Processing 50% interest in Almidones Mexicanos S.A., operates wet corn milling plant in Mexico 50% in Eaststarch C.V. (Netherlands) 50% interest in Telles, LLC 40% interest in Red Star Yeast Company, LLC which sells in the U.S. and Canada

Agricultural Services Agricultural Services’ transportation network capabilities include truck, rail, barge, port, and ocean-going vessel handling and freight services The Agricultural Services segment also includes the activities related to the processing and distributing of formula feeds and animal health and nutrition products, and the procuring, processing, and distributing of edible beans.

Agricultural Services 80% in Toepfer, 36 sales offices worldwide 45% interest in Kalama Export Company, grain export elevator in Washington

Other activities related to processing agricultural commodities into food ingredient products such as wheat into wheat flour, and cocoa into chocolate and cocoa products. Other also includes financial activities related to banking, captive insurance, futures commission merchant activities, and private equity fund investments.

Other 23.2% interest in Gruma, operates in U.S. Central America, South America, and Europe Wholly owned Bank and Trust Copmany Wholly owned Captive insurance (crop insurance for farmers in the U.S. and South America Wholly owned ADM Investor Services, Inc., commodities exchange and broker services

Financial Statements

Risk Management

Major Risks Competition Commodity Currency

ADM: “ The Company enters into derivative and non-derivative contracts with the primary objective of managing the Company’s exposure to adverse price movements in the agricultural commodities used for, and produced in, our business operations.” Hedging Philosophy

“ The Company will also use exchange-traded futures and exchange-traded and over-the-counter option contracts as components of merchandising strategies designed to enhance margins.”

Risk Management (Competition) operates based principally on price, quality, and alternative products Given the commodity-based nature of its businesses, the Company focuses on managing unit costs and improving efficiency through technology improvements, productivity enhancements, and regular evaluation of the Company’s asset portfolio

Risk Management (Competition) Secured demand from subsidiaries and affiliates Major supplier of agricultural commodity raw materials to Wilmar, Edible Oils Limited, and Stratas Foods LLC

Risk Management (Commodity) The Company’s commodity position consists merchandisable agricultural commodity inventories purchase and sales contracts energy and freight contracts exchange-traded futures and exchange-traded and over-the- counter option contracts including contracts used to hedge portions of production requirements, net of sales

VaR 10% adverse price change

Risk Management (Currencies) Currency exchange contracts Euro, British Pound, Canadian Dollar, and Brazilian Real Contracts Used forward contracts swaps with banks exchange-traded futures contracts and over-the-counter options

Risk Management (Interest) The Company does not use any derivative instruments to hedge against interest rate risks Market risk is estimated as the potential increase in fair value resulting from a hypothetical 50 basis points decreases in interest rates

Fair Value Measurements The Company determines the fair value of certain of its inventories of agricultural commodities, derivative contracts, and marketable securities based on the fair value definition and hierarchy levels

Fair Value Measurement (Cont’d) Three levels are established within the hierarchy that may be used to measure fair value: Level 1: Quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2: Observable inputs, including Level 1 prices that have been adjusted Level 3: Unobservable inputs that are supported by little or no market activity and that are a significant component of the fair value of the assets

Level 1 assets and liabilities include exchange-traded derivative contracts, U.S. treasury securities and certain publicly traded equity securities. Level 2 quoted prices for similar assets or liabilities; quoted prices in markets that are less active than traded exchanges; and other inputs that are observable or can be substantially corroborated by observable market data. Level 3 amounts can include assets and liabilities whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as assets and liabilities for which the determination of fair value requires significant management judgment or estimation.

Note 3. Fair Value Measurement

Note 3. (continued) Except for derivatives designated as cash flow hedges, changes in fair value of commodity- related derivatives are recognized in the consolidated statements of earnings as a component of cost of products sold Changes of fair value of Foreign currency-related derivatives are recognized in the earnings as a component of net sales and other operating income, cost of products sold, and other (income) expense net Changes in the fair value of derivatives designated as cash flow hedges are recognized as a component of accumulated other comprehensive income

Fair Value Measurement (not hedge) The following is the fair values of derivatives not designated as hedging instruments

Impact on Financials

Viterra

Company Overview Vertically integrated global agri-business Founded in 1924, headquartered in Canada Extensive operations across Western Canada and Australia Has offices in Canada, the U.S., Australia, New Zealand, Japan, Singapore, China, Vietnam, Switzerland, Italy, Ukraine, Germany and India Shares traded on TSX and ASX

Viterra: International

International Operations Viterra operate its business in more than 50 countries

Understanding the Business Act as a mediator in the agri-food value chain Generate revenue at each stage of the value chain by providing crop inputs, handling grain, marketing grain and processing Relationship with producers in crucial to the business Markets grain through its commodity merchandisers, international trading offices or through the Canadian Wheat Board

Seasonal Trends North America More than 75% of the annual sales from agri-products operation are generated between mid-April and the end of June Earnings from grain handling and markting operation are generated through the harvest period, between August and the end of October

Seasonal Trends Australia Income generated from the grain handling and marketing operations are earned between October and the end of January

Seasonal Trends Select Quarterly Financial Information

Sale Volumes North America Primary elevator shipments of western Canadian grains totaled 15.3 million tones in 2011 Port terminal receipts were 10.8 million tones South Australia Received 8.6 million tones of grains in its South Australia system

Primary Market Segments Grain Handling and Marketing Agri-products Food Processing

Segment Operations Grain Handling and Marketing Mainly handles wheat, durum, barley, canola and pulses Derives its revenue from accumulating, storing, blending, transporting and marketing these grains from the producer’s farm to end-use markets

Segment Operations Sensitivity analysis of grain handling and marketing operation in North America: For operation in Australia:

Segment Operations EBITDA

Segment Operations Agri-products Viterra sell seed, crop protection product, fertilizer, bulk fuel and small agricultural equipment through a network of retail locations The company has 258 retail locations in Western Canada, represents about 35% of the market

Segment Operations Sensitivity analysis of sell of agri-products in North America:

Segment Operations EBITDA

Segment Operations Processing Viterra has 5 oat and specialty grain milling facilities, 2 pasta processing facilities and a canola processing facility in North America The company is one of the world’s largest industrial oat millers

Segment Operations EBITDA

Segment Operations Consolidated segment revenues

Other Segments Oats and Specialty Grain Milling “Viterra is one of the world’s largest industrial oat millers and operates approximately 39% of the total North American oat milling capacity and approximately 46% of the industrial ingredient supply market. It processes raw oats into food ingredients and has a total milling capacity of 540,000 tonnes of oats per year. The Company’s customers are primarily North American food manufacturers who are consistent brand leaders in breakfast cereals, whole grain and healthy food choices.”

Other Segments Pasta “Viterra’s pasta operations are located in the U.S., where Processing operates a vertically integrated durum wheat milling and pasta production facility, as well as a second pasta production facility. The primary raw material input for pasta products is durum wheat, which is processed through its milling facility into semolina and wheat flours that are then used by Viterra to produce dry pasta products. The milling facility has a durum grind capacity of 340,000 tonnes per year. The two production plants have a combined capacity of 254,000 tonnes of pasta per year.”

Other Segments Canola Processing “In Western Canada, Viterra operates a canola processing plant with an annual processing capacity of 340,000 tonnes. Canola oil and meal from this plant are produced using a double expeller-press process, which does not use solvents, as opposed to the North American standard whereby hexane (a solvent) is used to maximize oil yields. The Company’s joint venture canola processing facility in southern China began operating during the fourth quarter of fiscal 2011, providing oil and meal to end-use customers located in the region. This facility utilizes the hexane oil extraction method to process about 680,000 tonnes of canola annually. The majority of the canola seed requirements for this facility are sourced from Viterra’s grain handling and marketing operation.”

Other Segments Malt “In Australia, Viterra is the largest malt processor with six processing plants that account for 53% of Australia’s malt production capacity. The Company’s Australian malt operation has an annual production capacity of about 440,000 tonnes, of which 340,000 tonnes are destined for export markets and 100,000 tonnes are consumed domestically. Viterra supplies malt to major domestic and international brewers that supply key global markets predominantly in the Asia-Pacific region. Viterra’s malt operations require approximately 530,000 tonnes of malt barley per year, representing 25% of the Australian malt barley crop. The Company is currently building a 110,000 tonne malt facility near Sydney, Australia, which is expected to be completed in the first half of fiscal 2012.”

Other Segments Feed “Feed includes the manufacture, sale and distribution of feed products and other related products for commercial and acreage-based livestock producers. Specialty feed formulations and feed product manufacturing is well diversified between dairy cattle, beef cattle, poultry, swine and other specialty livestock feed varieties. In Canada, feed is manufactured at six feed mills and one pre-mix manufacturing facility. The Company owns an additional six feed mills and commodity blending sites in the U.S. that manufacture complete feeds, supplements, pre-mixes and commodity ingredients for ranchers and dairy farmers in those states and other south central U.S. markets. In New Zealand, the Company operates three storage facilities in close proximity to the prime dairy regions and deepwater ports. It is involved in maize processing and also operates a feed manufacturing and distribution business with three feed mills representing production capacity of approximately 240,000 tonnes annually.”

Strategic Direction optimizing core businesses through improved efficiencies growing shareholder value by maintaining and improving the quality of earnings, managing risk, and keeping a strong balance sheet, optimizing scale and influence in the grains the Company sources and transports to export markets, building sustainable competitive advantages, and seeking balance between business segments to mitigate risk through diversity.

Financial Statements

Risk Management

Major Risk Factors Weather condition Commodity Price Fluctuation Grain volume and quality Foreign Exchange Rate Interest Rate Credit Risk

Risks and Risk Management Enterprise Risk Management (ERM) A framework that developed under the standards of the Committee of Sponsoring Organizations of the Treadway Commission Reflects the appropriate risk tolerances as set out by management and board of directors Identify potential events that impact the company Provide assurance to achieve the company’s objective

Risks and Risk Management Weather risk Viterra’s most significant risk Effect on the production volumes and crop quality The company had grain volume insurance to protect the revenues from a significant drop in grain volumes as a result of weather-related events. For 2011, the company had $75 million of coverage in place for Canadian and Australia exposure

Risks and Risk Management Commodity price and trading risk For all grains, oilseeds and special crops handled and marketed by Viterra, the company is exposed to the risk of price movement during the holding period Company uses exchange-traded futures and options contract as well as OTC contracts to minimize the effects of changes in prices on its agri-business inventories and forward cash purchase and sales contracts

Risks and Risk Management Value at Risk (VaR) A methodology to standardize the commodity price risk assessment globally VaR quantifies potential changes in the value of commodity positions from all sources of risk Management use the daily VaR results to evaluate the impact of different scenarios on the financial results

Risks and Risk Management VaR 10% adverse price change

Risks and Risk Management Foreign exchange risk Viterra is exposed to foreign exchange risk on commodity contracts that are denominated in foreign currencies The company uses foreign currency forward contracts, cross- currency swaps, futures contracts and options to limit exposures to changes in foreign currency exchange rates (CAD against USD, AUD)

Risks and Risk Management Sensitivity analysis

Risks and Risk Management Interest rate risk Viterra expose to interest rate risk relates primarily to the company’s debt obligations The company manages this risk by using a combination of cash instruments, forwards and a mixture of fixed and floating rates Interest rate swaps is also used in managing variable interest rates associated with company’s debt portfolio

Risks and Risk Management Credit risk The Company is also exposed to credit risk in the event of non- performance of its counterparties on its derivative contracts the Company only contracts with pre-authorized counterparties where agreements are in place and the Company monitors the credit ratings of its counterparties on an ongoing basis Exchange-traded contracts are used to hedge future revenues in the Company’s grain business

Risks and Risk Management Credit risk

Risks and Risk Management Liquidity risk Viterra has to generate enough cash for the requirements of margin position, dividend, debt servicing, working capital, etc

Risks and Risk Management Company’s estimated value of remaining contractual maturities for its financial liabilities

Fair Value Measurement “Fair value amounts represent point-in-time estimates and may not reflect fair value in the future. Fair value of financial instruments, including derivative instruments, takes into account the Company’s own credit risk and the credit risk of the counterparties. The measurements are subjective in nature, involve uncertainties, and are a matter of significant judgment”

Fair Value Measurement For those financial instruments where fair value is recognized in the balance sheet, the methods and assumptions used to develop fair value measurements have been prioritized into three levels as per the fair value hierarchy included in GAAP: Level 1 includes quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2 includes inputs that are observable other than quoted prices included in Level 1. Level 3 includes inputs that are not based on observable market data.

Fair Value Measurement The following summarizes the methods and assumptions used in estimating the fair value of the Company’s financial instruments where measurement is required: The fair value of short-term financial instruments approximates their carrying amounts due to the relatively short period to maturity. These include cash and cash equivalents, accounts receivable, and accounts payable and accrued liabilities. Investments classified as available for sale with an active trading market are recorded at their fair value based on closing market quotations and are considered Level 1. The fair value of exchange-traded derivatives and securities is based on closing market quotations and is considered Level 1.

Fair Value Measurement The fair value of commodity forward contracts is estimated based on exchange-quoted prices adjusted for differences in local markets. The adjustments are generally determined using inputs from broker or dealer quotations or market transactions in either the listed or over the counter (“OTC”) markets. Observable inputs are generally available for the full term of the contract and are considered Level 2. The fair value of foreign exchange forward contracts (OTC), natural gas swaps and cross-currency swaps is estimated using observable prices for similar instruments in active markets and is considered Level 2. The fair value of bond forward contracts is estimated by discounting net cash flows of the contracts using forward interest rates for Government of Canada bonds of the same remaining maturity. The methods and assumptions used are considered Level 2.

Fair Value Measurement The fair value of long-term debt with fixed interest rates is estimated by discounting the expected future cash flows using the risk-free interest rate on an instrument with similar terms adjusted for an appropriate risk premium for the Company’s credit profile. When financial instruments lack an available trading market, fair value is determined using management’s estimates and is calculated using market factors for instruments with similar characteristics and risk profiles. The methods and assumptions used in these limited cases would be assessed for significance and may be disclosed as Level 3.

Hedge Accounting “The Company uses hedge accounting to match the cash flows of some of its processed products to be sold in foreign funds with its foreign currency hedging instruments. Under hedge accounting, the effective portion of the change in the fair value of the hedging instrument is recognized in other comprehensive income, while the ineffective portion is recognized immediately in cost of goods sold. Upon maturity of the derivative instrument, the effective gains and losses previously recognized in other comprehensive income are recorded in net earnings as a component of cost of goods sold in the same period the related hedged sales are recorded in net earnings.” “The Company uses hedge accounting for the foreign exchange swaps, cross-currency swaps and foreign denominated debt used to hedge portions of net investments in self-sustaining foreign operations. The effective portions of the hedges are recognized in other comprehensive income while any ineffective portion is recognized immediately in operating, general and administrative expenses.”

Hedge Accounting

Statement of comprehensive income