ARCHER DANIELS MIDLAND

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ARCHER DANIELS MIDLAND

• ETHANOL PRODUCTION
• IN SOUTH AFRICA

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BACKGROUND

• World leader in agricultural processing,
  including ethanol
• Looking to expand and diversify bioenergy product
  portfolio
• Market capitalization of 18.2B and earnings of
  1.7B in 2009
• Positioned for growth opportunities
• Invested 6.7B in the construction and
  maintenance of manufacturing plants
• Low WACC (6.7) versus high ROIC (11.9)
  indicates strategic capital investments add value
  to the firm

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MARKET CONDITIONS
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ETHANOL PRODUCTION
As a diversified agribusiness, with existing
scale and expertise in corn processing and a
global transportation and distribution network,
ADM has become a market leader in ethanol
production.

• Factors influencing ethanol demand
• Oil prices
• Government mandates on ethanol blend levels
• Current platforms
• U.S. is the leading ethanol producer in the
  world
• Brazil is 2nd largest producer and leading
  exporter of ethanol in the world
• U.S. and EU have been primary markets for imports
  as consumption increases due to energy demands
  and biofuel targets
• Asia and India are emerging as major import
  market targets

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TECHNOLOGY OVERVIEW

• ADM is an industry leader in dry-mill corn-based
  ethanol production technologies
• 7 corn-based mills in the U.S.
• 1 sugarcane-based mill in Brazil
• Technology improvements include advanced water
  treatment techniques and improved fermentation
  processes

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ADMs ASSETS ARE POSITIONED FOR GLOBAL GROWTH

• Strategy includes expanding ethanol production
  and developing business in emerging African
  markets
• FDI in South Africa meets both of these needs
• Provides new trade platform
• Allows better access to meet growing ethanol
  demand in Europe and emerging Asian markets

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SOUTH AFRICA

• Location provides easy access to shipping routes
  to Europe and Asia
• Access to a surplus of corn
• Modern transportation infrastructure mitigates
  the need to develop transportation routes
• Buying stations located throughout South Africa
  make transport of imports easy

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INVESTMENT COSTS

• Costs of Investing in South Africa
• 165M for manufacturing plant
• 97.6M in production costs with 176M in sales
  annually (based on 110M gallons of output)
• 21 days to establish business entity
• 1.75 years for construction
• 5 years to breakeven
• ADMs strong cash position makes acquiring
  financing for greenfield FDI in South Africa
  relatively straightforward

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OPPORTUNITY COST

• Opportunity Cost of Investment
• Risk-free return on government treasury bills
• Short-term Brazilian (9 yield) or other
  government bonds
• Investment in other market segments
• Must evaluate whether the return on investment is
  greater than the risk premium of the project

Risk areas include financial, technological,
political, and currency
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FINANCIAL TECHNOLOGY RISK

• Price sensitivity to inputs and outputs
• Rising grain prices
• Labor rates and relationships
• Unions exist but high unemployment rate (24)
  reduces their influence
• Abundance of low-skilled labor and relative
  shortage of high-skilled labor
• Energy shortfalls as a result of economic growth
  relative to electricity generating capacity
• Water shortage predicted to continue
• Fluctuating fuel prices

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POLITICAL CURRENCY RISK

• Risk of power shift to leftist parties in 2014
• In favor of state owned industrial centers,
  especially in mining sector
• Call for stricter land expropriation laws
• Impact of public health issues (e.g. HIV rate) on
  future market conditions and health care
  implications for ADM
• Effect of external political environment
• Expansion of Somali piracy
• Decline in Zimbabwes political situation
• Rand projected to increase value placing pressure
  on input costs
• Further decline in US values would increase
  dollar denominated input costs
• Change in SAF macroeconomic policies leading to
  increased current account deficits
• Inflation

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COMPETITIVE ADVANTAGE

• Does SA possess a competitive advantage in
  ethanol?
• Brazil and US combined dominate world ethanol
  production 89 of global total

United States Brazil South Africa
Corn based ethanol Corn subsidies for farmers and tax credits for ethanol producers Sugar cane based ethanol Ethanol production no longer subsidized by the government Non-existent No subsidies for farmers or ethanol producers Corn production surplus
Ad Valorem duty of 2.5 on ethanol imports Secondary duty of 0.54 per gallon of ethanol Recently eliminated tariffs on ethanol imports No existing tariffs on ethanol imports
Labor rates 30 higher than Brazil Labor rates 30 cheaper than US High level of unemployment
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ANALYSIS OF COMPETITIVE ADVANTAGE

• Is it possible to establish a competitive
  advantage through a change in macroeconomic
  policy?
• High taxes on ethanol or other energy imports
  would hurt low and middle class
• South Africa imports 67 of oil consumed
• Per Capita income is only 10,100 population
  cant afford to pay more for oil and gasoline
• Corn-based ethanol is more expensive to produce
  and cannot compete with sugar cane-based ethanol
  without subsidies

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RECOMMENDATION
ADM SHOULD NOT MAKE A FDI IN SOUTH AFRICA

• South Africa does not possess a competitive
  advantage in corn-based ethanol
• Financial, technological, political, and currency
  risk factors increase the risk premium
• Best alternative is expansion of current
  manufacturing efforts in the U.S. and Brazil