A Wall Street View of the Food

1
A Wall Street View of the Food Agribusiness
Industry

• U.S. Meat Export Federation
• May 22, 2008
• Christine L. McCracken

2
Key Market Insights

• Equity markets VERY sensitive to relatively
  insignificant events
• Commodities equally unpredictable and more global
• Food manufacturers initially in disbelief, now
  managing costs/prices
• Retail and foodservice not prepared and may have
  limited ability to adjust
• Food and food-related stocks may not be as safe
  as they once were

3
So What Is Going on With the Market?

• Market RecoveringIs the Worst Over?
• Fed TighteningNext Move Up
• Weak Dollar Confetti Currency
• Recession? Stagflation?
• Are We in a Bubble?
• Asia (Chindia)
• Commodities
• Consumer Sentiment Will Drive Market

4
Consumer Sentiment Decidedly Negative
Lowest in 28 Years How Low Can it Go?
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But Wall Street Marches On
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So Where is the Disconnect?
Wall Street versus Main Street
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Food News Equally Confusing
Food Safety Food Labeling Renewable
Energy Resource Use Sustainability
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Challenging Times in Food

• Cost inflation is bad and getting worse
• Ag Commodities (protein, dairy, oils)
• Energy Packaging Oil Prices Reach 132BBL
• Labor (ICE Raids Ramping Up) Healthcare
• Trading Down Consumer is only beginning to feel
  the pinch
• Foodservice to Retail
• Casual Dining to Quick Service
• Beef to Chicken/Pork
• Polarization of the Consumer Indulgence vs.
  Private Label
• Pricing and Cost Control Important/Margin
  Maintenance
• Food Safety Now Center Stage (HSUS Campaign)
• Innovation Convenience, Health Wellness,
  Ethnic
• Sustainability The Next Big Thing

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Food Industry TrendsWidespread Commodity Cost
Pressure
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Food Industry TrendsConsumers Trade Down
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Food Industry TrendsInnovation Drives Consumption
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Agribusiness Industry Trends

• China, China, China
• Growing Influence of International Markets
• Australian Drought
• South American Production
• Growing Middle Class in Asia
• European Agricultural Reforms
• Renewable Fuels Debate
• Trade Policy-Anti Trade Sentiment Growing
• Impact of the Funds
• Battle for Acreage Continues
• What Happens If There is A Crop Failure?

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Increases Appear Sustainable
Source USDA
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So What Is Important To Wall Street?

• Expectations vs. Reality
• Focus Is Increasingly Short-Term
• Fundamentals Still Matter
• Herd Mentality
• Relative Valuation

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CRC Company Coverage
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Tyson (TSN) NEUTRAL

• Challenges in Beef and Chicken, But Strong
  Results in Pork
• Beef Turnaround Unclear Packing Overcapacity,
  Canada
• Chicken Expansion Jeopardizes Margins Industry
  Owes Us
• Strategy Questionable Raised Without
  Antibiotics, Big Birds
• Management Change Talent Losses, Setting High
  Expectations
• Focus on Value Added, International Acquisitions
  and Costs
• Street Anticipating A Speedy Recovery

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JBS Friboi (Swift Co.)

• Foreign Ownership Adds Trading Complexity
• Acquisitions of National and Smithfield
• Wall Street Jaded By IPO
• Irrational Behavior Maybe Not?
• Raids Costly for Swift and Industry
• Focused on Value Added, Efficiencies?

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Smithfield (SFD) BUY

• Dominant Player in the Pork Industry
• International Success Mixed
• Needed Exit From Beef Lowers Debt
• Hog Cycle Nearing Bottom Will Be Ugly
• Focus on Consolidating Brands/Plants
• Upside to 38

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Processed Meats/Food Manufacturers

• Oscar Meyer doing well, gaining share.
• Company remains committed to processed meats.
• Morale is improving following management changes.
• In the early innings of a turnaround.

• Processed meats remains a core business.
• Projecting 1-3 sales growth, margins expected to
  double by 2010.
• New management and processed meats personnel.

• Value Added processing a core focus at the firm.
• Expecting year/year drop in hog prices to benefit
  pork margins.
• Turkey business subject to higher feed costs, but
  strong holidays.

• Smaller direct meat involvement with sale to SFD.
  Hebrew National/Healthy Choice still core.
• Management change is key.
• Focus on cost savings and pricing, Could consider
  MA
• Sale of Trading changes dynamic, Could see more

Bottom Line The Competitive Landscape is
Changing
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Commodity Processors

• Archer Daniels Midland (ADM) NEUTRAL
• Benefitting from Strong Global Commodity Demand
  Trade
• World Class Logistics Network
• More Than Just an Ethanol Story
• Higher Corn Costs A Big Deal
• Massive Capital Investment (3B in Next 3 Years)
  to Drive Growth in Plastics Ethanol

• Bunge (BG) BUY
• Best South American Growth Pure Play
• High Fertilizer Prices A Positive
• Appreciation of the Real
• Logistical Network A Positive

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Who Is Cleveland Research?

• Who is Cleveland Research?
• A Research Only Securities Boutique
  headquartered in Cleveland, OH. CRC was founded
  by a group 45 senior research and sales staff
  with the goal of avoiding the conflict of
  interest between banking and research.
• Stock Market Research
• We provide in-depth financial research on
  publicly traded companies across a number of
  sectors. Our clients include large institutional
  investors such as Fidelity, AllianceBernstein, T.
  Rowe Price, as well as hedge funds.
• What Sets us Apart?
• We go to greater lengths than most of our peers
  to find out whats new and changing with the
  companies we cover. This means we spend a large
  amount of our time in the field or talking with
  customers, suppliers, distributors, or
  competitors. Our clients find this to be highly
  value-added and differentiated versus other
  sell-side firms.

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• Christine L. McCracken
• Cleveland Research Company
• 222 North Sepulveda, Suite 1775
• El Segundo, California 90245
• Phone [phone]
• Cell [phone]
• Email cmccracken_at_cleveland-research.com

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Disclosures
Important disclosures for the companies mentioned
in this report can be found at www.cleveland-resea
rch.com/clients/disclosures Buy The stocks
return is expected to exceed the market due to
superior fundamentals and positive
catalysts. Underperform The stocks total
return is expected to underperform the market due
to weak fundamentals and a lack of
catalysts. Neutral The stock is expected to be
in line with the market due to full valuation
and/or a lack of catalysts. Valuation and Risk
Price targets are established under various
valuation methods including P/E, P/S, EV/EBITDA
on financial estimates based on forward earnings.
Price targets are not established for every
stock. The price targets effectiveness may be
affected by various outside factors. Risk
assessments can be found in the most recent
research on these stocks. Other Disclosures I,
Christine McCracken, certify that the views
expressed in the research report(s) accurately
reflect my personal views about the subject
security(s). Further I certify that no part of
my compensation was, is, or will be directly or
indirectly related to the specific
recommendations or views contained in the
research report(s). The analysts responsible
for the preparation of this report have no
ownership stake in this company. Cleveland
Research Company provides no investment banking
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