1. 1 www.codevasf.org.br Investment Opportunity in Lemon in the Valley of the São Francisco River INTEGRATED SUSTAINABLE BUSINESS PROJECT

2. 2 www.codevasf.org.br Project Team PRESIDENT OF THE REPUBLIC MINISTER OF NATIONAL INTEGRATION Luiz Inácio Lula da Silva Geddel Vieira Lima CODEVASF DIRECTORY President: Orlando Cezar da Costa Castro Cabinet Chief: Manoel Geraldo Dayrell Director of the area of Integrated Development and Infra-Structure: Clementino Souza Coelho Executive Secretary: José Eduardo Borella Director of the area of Irrigation Companies Management: Raimundo Deusdará Filho Executive Secretary: Frederico Calazans Machado Director of the Area of Hydrografic Basins Revitalization: Jonas Paulo de Oliveira Neres Executive Secretary: Silas Macedo Executive Manager of Strategic Administration: Alexandre Isaac Freire Executive Secretary of Administrative Management and Logistic Support: João Honório Carvalho Ramos

3. 3 www.codevasf.org.br Agenda Introduction Business Model Profitability Analysis Irrigation Projects (CODEVASF)

4. 4 www.codevasf.org.br INTRODUCTION Project Description The project is a governmental initiative, aiming to attract investments to the Valley of the São Francisco River (web page:http://www.fundace.org.br/pins). PENSA Agribusiness Intelligence Center. PENSA researchers are responsible for the business models proposition, economic and marketing analysis and for interacting with potential investors tailoring the analysis to their particular needs (web page: http://www.pensa.org.br). CODEVASF São Francisco and Parnaíba Development Company, which the mission is to develop economically and socially the Valley of the São Francisco and Parnaiba Rivers (web page : http://www.codevasf.gov.br).

5. 5 www.codevasf.org.br Global Lemon Demand From 1990 to 2005, world consumption growth was 73,26%. Source: FAO. Why investing in Lemon Production? World Lemon Demand from 1990 to 2005 6,58 6,89 7,08 7,52 7,81 8,10 8,34 8,65 9,14 9,57 10,07 10,46 10,87 11,12 11,32 11,39 6,00 7,00 8,00 9,00 10,00 11,00 12,00 1990199119921993199419951996199719981999200020012002200320042005 Ano Million tons

6. 6 www.codevasf.org.br Global Lemon Demand The Brazilian lemon exports growth in the same period was an impressive 3,3371.11%. In the last couple of years, despite de dollar currency value has decreased (16%), it also increased its total financial value. (84,38%). The Brazilian lemon exports growth in the same period was an impressive 3,3371.11%. In the last couple of years, despite de dollar currency value has decreased (16%), it also increased its total financial value. (84,38%). Source: FAO Why investing in Lemon Exports? Lemon and Limo Exports from 1996 to Oct-2007 0,76 0,91 1,42 2,96 4,64 7,64 9,89 16,95 18,30 26,30 33,74 32,91 - 5.00 10.00 15.00 20.00 25.00 30.00 35.00 40.00 199619971998199920002001200220032004200520062007 Ano Exports (in millions US$ FOB)

7. 7 www.codevasf.org.br Why Investing in Lemon in the Valley of the São Francisco River? Selling opportunities in market windows, mainly regarding São Paulo region (from July to December); low incidence of fungus; Lower occurrence of plagues and diseases; Higher yields with irrigation; Climate conditions favor product standardization; Land availability; Growth of international demand;

8. 8 www.codevasf.org.br Business Model Sales Contracts Vertically Integrated Area: 36 ha Growers Area : 216 ha – Quasi-Integration Contracts Packing House (PH) + Cooperative Contract to PH Growers Cooperative Grower (36 Ha) Vertically Integrated PH (36 ha) Grower (36 Ha) P Grower (36 Ha) Grower (36 Ha)

9. 9 www.codevasf.org.br Coordinated GrowersCooperativeAnchor CompanyInfra-Structure Firm -Producing lemon contracted with the Agricultural Anchor, following agreed quality standards; - Implementing on farm irrigation systems; - Coordination of small holders; - Technical assistance; - Joint use of equipments; - Joint purchase of selected inputs; - Representation of small holders; - The right to use the land will be conceded to selected growers; - Sustainable contracts with selected coordinated growers; - Determination of quality standards; - Packing or industrialization of raw material; - Marketing; - Payment of the water to the water management firm; - Farming on its own area; -Supplying water for irrigation at the right quality and quantity; - Maintenance of the common infra structure for irrigation; Players’ Role Specification

10. 10 www.codevasf.org.br Agric Production Processing Plant LEMON Economic Analysis Processing Plant Inputs Investments Graphs Processing Cash Flow Detailed Cost Results and Cash Flow Cash Flow Detailed Cost Agric Cost Consolidated Cash Flow Consolidated Analysis Growers Anchor Firm Standard Sheets for Economic Analysis

11. 11 www.codevasf.org.br Assumptions – Packing house (along with agricultural production) Exporting 3 containers/week; Average production capacity: –Vertically integrated area: 36 ha => 33,969.77 (box of 27,5 Kg); –Small holders : 216 ha => 203,818.61 (box of 27,5 Kg); –Current processing capacity : 291,000 box per year. PH will be built during the orchards implementation; 20-year project; Packing House Investment: R$ 960,000.00 (100% own capital); Average cost per box: R$ 10.72; Product destination: 35% external market, 55% internal market and 10% of losses; Average selling price: –US$ 8,97/box of 4.5 Kg (external market); –R$14,91/box of 27.5 Kg (internal market); Exchange Rate: US$ 1 = R$1.85;

12. 12 www.codevasf.org.br Economic Analysis PACKING HOUSE – Annual Turnover $14,85 $0,00 $2,00 $4,00 $6,00 $8,00 $10,00 $12,00 $14,00 $16,00 1234567891011121314151617181920 Years Turnover (Million US$) Source: PENSA Exchange Rate: 1 US$ = R$ 1.85

13. 13 www.codevasf.org.br PACKING HOUSE – Deailed Costs $0,00 $2,00 $4,00 $6,00 $8,00 $10,00 $12,00 $14,00 1234567891011121314151617181920 Ano de investimento Million US$ InvestmentCost of Lemon bought from growersIrrigationFreightsFinantial expensesTaxesLabor Economic Analysis Source: PENSA Exchange Rate: 1 US$ = R$ 1.85

14. 14 www.codevasf.org.br NPV PACKING HOUSE Project pays back is on January of the second year, It reaches a NPV of around R$30 million. Accumulated NPV $5.000,00 $0,00 $5.000,00 $10.000,00 $15.000,00 $20.000,00 $25.000,00 $30.000,00 $35.000,00 jan/13jan/01jan/02jan/03jan/04jan/05jan/06jan/07jan/08jan/09jan/10jan/11jan/12jan/14jan/15jan/16jan/17jan/18jan/19jan/20 Months NPV (Mill US$) Return on Investment Jan/02 Economic Analysis Source: PENSA Exchange Rate: 1 US$ = R$ 1.85

15. 15 www.codevasf.org.br Accumulated NPV For The PACKING HOUSE - Without Agricultural Production Packing House project has its pay back on the fourth operating month, when analyzed without the vertically integrated agricultural production. R$ (5,000,000.00) R$ - R$ 5,000,000.00 R$ 10,000,000,00 R$ 15,000,000.00 R$ 20,000,000.00 R$ 25,000,000,00 R$ 30,000,000.00 R$ 35,000,000.00 R$ 40,000,000.00 R$ 45,000,000.00 dez/00dez/01dez/02dez/03 dez/04 dez/05dez/06dez/07dez/08dez/09dez/10dez/11dez/12dez/13 dez/14 dez/15dez/16dez/17dez/18 dez/19dez/20 Months NPV in US$) April/01 Economic Analysis Source: PENSA Exchange Rate: 1 US$ = R$ 1.85

16. 16 www.codevasf.org.br Sensitivity Analysis PACKING HOUSE CriteriaColor < R$ 0.0Red R$0,00-R$5MillionOrange >R$5MillionBlue Source: PENSA Exchange Rate: 1 US$ = R$ 1.85

17. 17 www.codevasf.org.br Assumptions – Growers Average Yields: 1,235 boxes of 27.5 Kg/year (36 ha); 20-year project; Investment in Agricultural production: –R$ 623,075.84 (100% own capital); Irrigation Investment: –R$ 542,255.30 (1005 financed); Product destination: 100 % to the PH; Average selling price : R$10.72/box of 27.5 Kg; Exchange rate (R$/US$): R$1.85;

18. 18 www.codevasf.org.br Price Sazonalities Price received by Lemon Growers from 2001 to Out/2007. R$ 0.00 R$ 5.00 R$ 10.00 R$ 15.00 R$ 20.00 R$ 25.00 R$ 30.00 R$ 35.00 R$ 40.00 R$ 45.00 R$ 50.00 JanFevMarAbrMaiJunJulAgoSetOutNovDez Months Price per BOX of 27,5 Kg 2001200220032004200520062007 Source: PENSA Exchange Rate: 1 US$ = R$ 1.85

19. 19 www.codevasf.org.br Lemon Growers Production Year -- 790,57 1.185,85 1.581,14 1.976,42 1.581,14 1.185,85 988,21 -- 790,57 1.185,85 1.581,14 1.976,42 - 500.00 1,000.00 1,500.00 2,000.00 2,500.00 1234567891011121314151617181920 Year Number of boxes of 27,4 Kg Economic Analysis Source: PENSA

20. 20 www.codevasf.org.br Lemon Production Cost for the Growers Economic Analysis Source: PENSA Exchange Rate: 1 US$ = R$ 1.85

21. 21 www.codevasf.org.br Financial Analysis Source: PENSA Agricultural Production (size of 36 ha) Packing House (with ag. production) Packing House (without ag. product) Consolidated Analysis IRR: 20.56 %IRR: 126.37 %IRR: 492.51 %IRR: 66.90 % NPV: R$ 360,000.00NPV: R$ 30,799,101.38NPV: R$ 41,178,272.11NPV: R$ 32,959,101.38 Exchange Rate: 1 US$ = R$ 1.85

22. 22 www.codevasf.org.br Grower Profit Growers Annual revenue per farm R$ 17,100.00 Payments for the loan to implement the irrigation equipment (8 years) (R$ 1,871.02) Cash Flow Adjustment First 2 yearsNeed to complement the growers profit to make the project sustainable for them too.

23. 23 www.codevasf.org.br Comparative Analysis Implementation Costs R$ 1.487,00 R$ 728,00 R$ 1.487,00 R$ 728,00 R$ 1.115,25 R$ 983,00 R$ 478,00 R$ 737,25 R$ 14.820,00 R$ 894,00 R$ 16.824,28 R$ 2.088,00 R$ 16.128,00 R$ 965,00 R$ 9.676,80 R$ 546,00 R$ 380,25 R$ 507,00 R$ 358,50 R$ 185,25 R$ 247,00 R$ 478,00 R$ 247,00 R$ 2.898,28 R$ 894,00 R$ - R$ 579,00 R$ 345,00 R$ 575,00 R$ 851,00 R$ 461,00 R$ - R$ 5,000.00 R$ 10,000.00 R$ 15,000.00 R$ 20,000.00 R$ 25,000.00 R$ 30,000.00 R$ 35,000.00 R$ 40,000.00 Year1Year 2 Year 3 Year 1Year 2Year 3Year 1Year 2Year 3 SP with no irrigationSP with irrigationSão Francisco River Valley Investment (R$/ha) Mechanical OperationsLaborIrrigationAg inputs Total = R$ 10,541.00 Total = R$ 41,417.00Total = R$ 37,567.10 Source: PENSA Exchange Rate: 1 US$ = R$ 1.85

24. 24 www.codevasf.org.br Growers Cash Flow Cash Flow R$ (372.860,85) R$ (250.214,99) R$ 12.038,19 R$ 65.424,25 R$ 212.803,34 R$ 360.182,43 R$ 298.107,41 R$ 150.728,32 R$ 3.349,23 R$ (70.340,32) R$ (372.860,85) R$ (250.214,99) R$ 12.038,19 R$ 65.424,25 R$ 212.803,34 R$ 360.182,43 R$ (500,000.00) R$ (400,000.00) R$ (300,000.00) R$ (200,000.00) R$ (100,000.00) R$ - R$ 100,000.00 R$ 200,000.00 R$ 300,000.00 R$ 400,000.00 1234567891011121314151617181920 Years Million R$ Source: PENSA Exchange Rate: 1 US$ = R$ 1.85 Economic Analysis

25. 25 www.codevasf.org.br Growers NPV Return on investment happens at the 8 th year. Economic Analysis Source: PENSA Exchange Rate: 1 US$ = R$ 1.85

26. 26 www.codevasf.org.br Sensitivity Analysis Growers - NPV CriteriaColor < R$ 0,00Red R$0,00-R$ 0,36 MilhõesOrange > R$ 0,36 MilhõesBlue Yields (t/ha)6,00R$ 7,00R$ 8,00R$ 9,00R$ 10,00R$ 11,00R$ 12,00R$ 13,00R$ 14,00R$ Average 30(0,67)R$ (0,57)R$ (0,47)R$ (0,37)R$ (0,27)R$ (0,17)R$ (0,07)R$ 0,03R$ 0,13R$ (0,27)R$ 31(0,65)R$ (0,54)R$ (0,44)R$ (0,34)R$ (0,23)R$ (0,13)R$ (0,03)R$ 0,08R$ 0,18R$ (0,23)R$ 32 (0,63)R$ (0,52)R$ (0,41)R$ (0,31)R$ (0,20)R$ (0,09)R$ 0,01R$ 0,12R$ 0,23R$ (0,20)R$ 33(0,61)R$ (0,50)R$ (0,39)R$ (0,28)R$ (0,17)R$ (0,06)R$ 0,05R$ 0,16R$ 0,27R$ (0,17)R$ 34(0,59)R$ (0,48)R$ (0,36)R$ (0,25)R$ (0,13)R$ (0,02)R$ 0,09R$ 0,21R$ 0,32R$ (0,13)R$ 35(0,57)R$ (0,45)R$ (0,34)R$ (0,22)R$ (0,10)R$ 0,02R$ 0,13R$ 0,25R$ 0,37R$ (0,10)R$ 36(0,55)R$ (0,43)R$ (0,31)R$ (0,19)R$ (0,07)R$ 0,05R$ 0,17R$ 0,29R$ 0,41R$ (0,07)R$ 37(0,53)R$ (0,41)R$ (0,28)R$ (0,16)R$ (0,03)R$ 0,09R$ 0,21R$ 0,34R$ 0,46R$ (0,03)R$ 38(0,51)R$ (0,38)R$ (0,26)R$ (0,13)R$ (0,00)R$ 0,13R$ 0,25R$ 0,38R$ 0,51R$ (0,00)R$ 39 (0,49)R$ (0,36)R$ (0,23)R$ (0,10)R$ 0,03R$ 0,16R$ 0,29R$ 0,42R$ 0,55R$ 0,03R$ 40(0,47)R$ (0,34)R$ (0,20)R$ (0,07)R$ 0,06R$ 0,20R$ 0,33R$ 0,47R$ 0,60R$ 0,06R$ 41(0,45)R$ (0,31)R$ (0,18)R$ (0,04)R$ 0,10R$ 0,24R$ 0,37R$ 0,51R$ 0,65R$ 0,10R$ 42(0,43)R$ (0,29)R$ (0,15)R$ (0,01)R$ 0,13R$ 0,27R$ 0,41R$ 0,55R$ 0,69R$ 0,13R$ 43(0,41)R$ (0,27)R$ (0,12)R$ 0,02R$ 0,16R$ 0,31R$ 0,45R$ 0,60R$ 0,74R$ 0,16R$ 44 (0,39)R$ (0,24)R$ (0,10)R$ 0,05R$ 0,20R$ 0,34R$ 0,49R$ 0,64R$ 0,79R$ 0,20R$ 45(0,37)R$ (0,22)R$ (0,07)R$ 0,08R$ 0,23R$ 0,38R$ 0,53R$ 0,68R$ 0,83R$ 0,23R$ 46(0,35)R$ (0,20)R$ (0,04)R$ 0,11R$ 0,26R$ 0,42R$ 0,57R$ 0,73R$ 0,88R$ 0,26R$ 47 (0,33)R$ (0,17)R$ (0,02)R$ 0,14R$ 0,30R$ 0,45R$ 0,61R$ 0,77R$ 0,93R$ 0,30R$ 48(0,31)R$ (0,15)R$ 0,01R$ 0,17R$ 0,33R$ 0,49R$ 0,65R$ 0,81R$ 0,97R$ 0,33R$ 49(0,29)R$ (0,13)R$ 0,04R$ 0,20R$ 0,36R$ 0,53R$ 0,69R$ 0,85R$ 1,02R$ 0,36R$ 50 (0,27)R$ (0,10)R$ 0,06R$ 0,23R$ 0,40R$ 0,56R$ 0,73R$ 0,90R$ 1,07R$ 0,40R$ Average(0,47)R$ (0,34)R$ (0,20)R$ (0,07)R$ 0,06R$ 0,20R$ 0,33R$ 0,47R$ 0,60R$ 0,06R$ Price paid to the contracted Grower (R$/box of 27,5 kg) Source: PENSA Exchange Rate: 1 US$ = R$ 1.85

27. 27 www.codevasf.org.br –The regional production is focused on Mangos, Grapes and Banana. Therefore diversification is very important; –Investment in the local economy of around R$ 24 million has a very positive effect on local development; –Job generation: 2 jobs/ ha is expected in lemon production areas; –Agricultural jobs: 580 directed employed people; 856 indirectly employed people; Packing house will employ around 40 people; –Tax Generation: City taxes = R$ 0.44 Millions; State Taxes = R$ 1.99 Millions; Federal taxes R$ 1.94 Millions; Total = R$ 4.38 Millions. –Extra Revenues for Ag input Firms: R$ 2.13 Millions; –Extra Revenues for Logistics Firms: R$ 2.78 Millions; Benefits for the Social and Economic Development

28. 28 www.codevasf.org.br Responsible Team CODEVASF Director of the area of Integrated Development and Infra-Structure Clementino de Souza Coelho Board Assistant of the area of Integrated Development and Infra-Structure Alvane Ribeiro Soares First Secretary of the area of Integrated Development and Infra-Structure Guilherme Almeida Gonçalves de Oliveira PENSA Coordinator: Prof. Dr. Marcos Fava Neves Executive Manager of the Project: Luciano Thomé e Castro Executive Manager of the Project : Ricardo Messias Rossi Executive Assistant of the Project : Vinicius Mazza da Silva Executive Assistant of the Project : Marina Darahem Mafud Technical Team Responsible Researcher: Matheus Kfouri Marino Assistant Researcher: Christiano França da Cunha Contributor: Renata A. P. Fonseca Translation: Central de Traduções

29. 29 www.codevasf.org.br For further Information: E-mail: pins@fundace.org.brpins@fundace.org.br Mail Address: Av. Pres. Vargas, 2001- Conj. 143/144, Jardim América Ribeirão Preto - SP - CEP: 14.020-260 Tel.: +55 (16) 3911 6088 INTEGRATED SUSTAINABLE BUSINESS PROJECT