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May 31, 2007

Industry SurveysAgribusiness

THIS ISSUE REPLACES THE ONE DATED DECEMBER 14 , 2006 .THE NEXT UPDATE OF THIS SURVEY IS SCHEDULED FOR NOVEMBER 2007 .

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Joseph AgneseAgricultural ProductsAnalyst

Carol WoodFinancial Writer

CURRENT ENVIRONMENT..................................................................1Cashing in on biofuel

Boom — and bust? Grains: harvest update and forecast Government payments Livestock update S&P Ratings Services View:

Outlook for agribusiness credit quality is stable

INDUSTRY PROFILE.............................................................................11Economics of food production

Agricultural producers Agriprocessors

INDUSTRY TRENDS ...............................................................................13Going global Consolidation trend continues Global food safety issues The rise of organic farming Genetic engineering: expansion and controversy

HOW THE INDUSTRY OPERATES .............................................................20The role of the crop processor How grains are processed Distribution: spreading the bounty It all starts at the farm The main food groups World trade: moving toward freer markets

KEY INDUSTRY RATIOS AND STATISTICS ...................................................27HOW TO ANALYZE AN AGRIBUSINESS COMPANY ......................................28

External factors Looking at the income statement S&P Ratings Services View:

Assessing the creditworthiness of an agribusiness company Evaluating the balance sheet

GLOSSARY .............................................................................................34

INDUSTRY REFERENCES.....................................................................35

COMPARATIVE COMPANY ANALYSIS ..............................................37

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Client Support: 1-800-523-4534Copyright © 2007 by Standard & Poor’sAll rights reserved.ISSN 0196-4666USPS No. 517-780Visit the Standard & Poor’s Web site:http://www.standardandpoors.com

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VOLUME 175, NO. 22, SECTION 1 THIS ISSUE OF INDUSTRY SURVEYS INCLUDES 3 SECTIONS.

Standard & Poor’s Industry Surveys

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Ethanol producers have been scrambling to getin on the latest US gold rush, mining what theyhope become deep lodes of demand for thegrain-based fuel. Their dreams of future richeswere further excited by President George W.Bush, whose 2007 State of the Union speechtossed a large nugget to agriprocessors by call-ing for the nation to produce 35 billion gallonsper year within 10 years — a figure some skep-tics consider too ambitious.

Right now, ethanol demand is enlargingthe market for corn, and, in the long term, itis expected to alter the supply/demand equa-tion as well as prices. In 2006, an estimatedfive billion gallons of ethanol were produced,utilizing about a fifth of the nation’s corncrop. The nation’s 115 ethanol plants arenow capable of making 5.8 billion gallonsper year. Capacity is up from roughly fourbillion gallons in 2005 and 5.4 billion gal-lons in 2006, according to the RenewableFuels Association. Another 86 plants, withcapacity of 6.4 million gallons per year, areunder construction.

In the United States, leading ethanol pro-ducer Archer Daniels Midland believes thatcurrent capacity is far outstripped by poten-tial demand of roughly 14 billion gallons peryear (based on 10% of the gasoline usage onexisting automobiles). In 2006, the companyannounced that it would expand its US

ethanol capacity to 1.65 billion gallons peryear. In a distant second place, US BioEnergyhas a capacity of 250 million gallons per yearwith five more plants under construction. Thecompany’s CEO, Gordon Omen, sees consoli-dation ahead in the industry, and said hisfirm would like to make acquisitions.

As an indication of ethanol’s profitabilityfor processors, ADM reports that in thequarter ended Dec. 31, 2006, operating prof-it for the Bioproducts unit rose 121% over2005, to $366.9 million. Ethanol now repre-sents 30.5% of the company’s operatingprofit, up from 21.3% a year earlier.

The limits to corn ethanol production,however, may be met sooner rather than lat-er. By mid-2008, the nation will produce11.4 billion gallons of the fuel, according tothe ethanol association. Doing so will require4.2 billion bushels of corn, or roughly a thirdof the forecast 2007 crop. If the entire UScorn harvest were allotted to this one prod-uct, it would yield 34 billion gallons per year(based on the projected 2007 crop), fallingjust short of the president’s goal for 2017.

Another question is, will the market con-sume the growing ethanol production? ADMreports that demand from gasoline refinershas boosted prices, although sales volumesfor the quarter ended December 2006 werebelow the comparable year-ago period, whensales exceeded production, and the companysold ethanol out of inventory.

The Economic Research Service (ERS), aneconomic research division within the US De-partment of Agriculture (USDA), estimatesthat corn-based ethanol volumes will exceedthe goals established by the 2005 Energy Pol-icy Act by nearly four billion gallons byaround 2010, based on the USDA’s 2007projections. The question, then, is: Who willbuy this ethanol?

Boom — and bust?

Petroleum remains the primary fuel sourcefor transportation, and will not be dislodged

CURRENT ENVIRONMENT

Cashing in on biofuel

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CORN USED IN ETHANOL PRODUCTION(Millions of bushels)

E-Estimated.Source: US Economic Research Service.

4,000

3,500

3,000

2,500

2,000

1,500

1,000

500

01992 1994 1996 1998 2000 2002 2004 E2006 E2008

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anytime soon. The United States consumedroughly 138 billion gallons of gasoline in2004, according to EIA statistics. Ethanolrepresented just 3.5% of gasoline consumed,according to the ERS.

Nonetheless, use of alternative fuels islikely to increase. Financial incentives fromthe US government, restrictions on use ofgasoline additives, and public concern overemissions of greenhouse gases are helping tostimulate demand.

Although it has been produced for decadesin the US, ethanol got a boost from the Ener-gy Policy Act of 2005, signed into law byPresident Bush in August 2005. The law re-quires refiners to use 7.5 billion gallons ofethanol in gasoline annually by 2012. Beforethe 2005 mandate, ethanol usage had beenspurred by high oil prices and growing con-cerns about the health hazards of methyl ter-tiary butyl ether (MTBE), a fuel oxygenate forwhich ethanol is a common replacement.

The Energy Security Act of 1979 created atax incentive for ethanol to encourage gasmarketers to mix the fuel with their gasoline.The program, through which gas marketersor blenders may claim a tax credit of 51cents per gallon of ethanol blended, was ex-tended through 2010 by the VolumetricEthanol Excise Tax Credit, part of the Amer-ican Jobs Creation Act.

Along with the US, Brazil is the othermain producer of ethanol. Both nations pro-duced about the same levels of ethanol in2005, and together accounted for about 90%of the world total, according to the USDA.

Biodiesel, made from soybeans, remains adistant second as an alternative fuel. Still, ifbiodiesel gains traction as a lubricity additivein diesel fuel, annual US demand could reach

470 million gallons in 2010 and 630 milliongallons in 2020, according to the EIA.

Impact on market, food and feed costsIn late May 2006, ethanol futures

fetched as much as $4.20 a gallon, up fromroughly $1.20 a year earlier. This jump wassparked by rising oil prices and increaseddemand for ethanol as a gasoline additiveto replace MTBE, believed to contaminategroundwater. But ethanol prices nosedivedjust as quickly. As of October 4, Novemberethanol futures were selling for $1.68 pergallon on the Chicago Board of Trade. Asof March 2007, the price had risen to the$2.20 area.

An estimated 1.9 billion bushels of cornwere used in ethanol production in 2006, upfrom 1.6 billion in 2005 and 628 millionbushels in 2000, according to the USDA. Theagency projects that ethanol will consume2.15 billion bushels in 2007.

Volatility in grain futures is generally lim-ited, staying within certain bands for eachcrop. But that may not turn out to be thecase for ethanol. The boost in production ca-pacity now underway could further exacer-bate price volatility. Rising input costs couldalso squeeze margins and reduce producers’appetite for ethanol, whose commercial via-bility is, for now, dependent on subsidies.These added costs may not be recouped byraising prices; according to ADM, ethanolselling prices bear no direct relationship toinput costs.

A sustained rise in food costs worldwidecould spark inflation. The greatest risk ofthis occurring is in developing nations, wherefood represents a much higher percentage ofthe consumer price index — as high as 50%in the Philippines compared with 15% in theUS, according to the Wall Street Journal.Temporary spikes in food prices have set offrecessions in combination with other factors.But a sustained increase in demand for corncould be sufficient to permanently raise foodcosts, according to the Earth Policy Institute,a Washington, DC–based environmentalgroup.

The demand has also led some experts toworry that fuel production will cause foodshortages for humans and livestock. Con-cerned that it will not be able to meet do-mestic demand for corn-based food andanimal feed, China has limited construction

US CORN USAGE BY SEGMENT(In percent)

CHANGECOMMODITY 2005 R2006 IN SHARE

Feed/residual 54.5 50.3 (4.2)Export 19.1 19.3 0.3 Ethanol 14.2 18.5 4.3 High fructose corn syrup 4.7 4.4 (0.3)Starch 2.4 2.4 0.0Sweeteners 2.0 2.1 0.0 Cereal/other 1.7 1.6 0.0Beverage/industrial alcohol 1.2 1.2 0.0Seed 0.2 0.2 0.0

Figures may not add due to rounding. R-Revised.Source: US Department of Agriculture.

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of corn-derived ethanol plants, the WallStreet Journal reported.

Ethanol, made primarily from field (notsweet) corn, as well as from grain and otherbiomass sources, is used as a gasoline octaneenhancer and oxygenate. Ethanol productionuses only the corn kernel’s starch, leaving thevitamins, minerals, protein, and fiber as abyproduct that can be sold for use in high-value animal feed. Thus, US corn demandfrom feed processors still can be satisfied, de-spite greater volumes going to ethanol pro-ducers, according to the Corn GrowersAssociation. Corn prices, however, will feelthe increased pressure.

Through 2011, the USDA sees the ethanoltrend restricting US corn exports. The de-partment projects that, should the reductionstimulate a boost in corn prices, it will notlikely affect Japan and Taiwan, the largestcustomers for US corn, due to their high percapita income levels. Canada might be ex-pected to produce more corn for its own use,just as Argentina and Brazil could take upsome of the slack by boosting their produc-tion and exports. China is likely to producemore corn for its livestock, though it will re-main a net importer. Among lower-incomecountries, however, a price rise could cutconsumption in Egypt, Central America, andthe Caribbean nations, or force them to seeksubstitutes.

In the US, the largest use for corn remainsas livestock feed, but ethanol is gaining rapid-ly. Feed accounted for 51.3% of corn con-sumed during 2006, down 3.2% from 2005,when it held a 54.5% share, according to theUSDA. Meanwhile, ethanol’s share jumped to18.1% in 2006 from 14.2% in 2005, close toovertaking corn exports, whose share fellmarginally to 18.9% from 19.1%.

The National Corn Growers Associationdisputes that ethanol will detract from foodsupply. In a November 2006 paper, the tradegroup projects that corn yields per acre willcontinue to grow over the next decade. (Thehistorical average for 1996–2005 was, asnoted, 138 bushels per acre; in 2006, the av-erage was 149 bushels.) The trade group seescorn yielding 180 bushels per acre by 2015.At that level, the harvest would exceed the1996–2005 average yield by 42 bushels peracre, producing an additional 8.8 billion gal-lons of ethanol. (This rough estimate is basedon 78 million acres under cultivation in 2006

and 2.7 gallons per bushel; it doesn’t takeinto consideration rising yield in ethanol pro-duction or future changes in corn acreage.)With other demands expected to grow slowly(demand for livestock feed and industrial[nonethanol] uses have remained relativelyflat for the past decade), the trade groupconcludes that the increased corn yield willbe available for ethanol production.

Corn’s criticsCritics of the nation’s sudden rush to

corn-based ethanol are sprouting at bothends of the political spectrum, from environ-mentalists to free marketeers, as well as, nat-urally, consumers of grains like livestockproducers. At present, the anti-corn crowddoes not wield significant influence, althoughit is gaining momentum, according to Busi-nessWeek magazine (published by McGraw-Hill Cos., parent of Standard & Poor’s).

While the newfound activity seems topromise economic revival in struggling ruraland farm communities, residents across theCorn Belt are organizing to oppose construc-tion of ethanol plants. Complaints about thecorn-based plants target the smell, air pollutionfrom truck traffic, and their large consumptionof water, plus concerns about fire hazards.

Some environmentalists object to heavyreliance on corn ethanol due to the high re-quirements for water, fuel, natural gas, andfertilizer needed to grow and convert it intoautomotive fuel. Opponents have also arguedagainst the diversion of food crops for gaso-line use, pointing out that rising prices are al-ready hurting the world’s poor.

With one bushel of corn yielding at least2.7 gallons of ethanol, an acre of corn couldtheoretically yield 373 gallons, based onUSDA data. The Corn Growers Association,however, cites 300 gallons per acre as astandard.

Some scientific researchers are also pokingholes in lofty expectations for ethanol. Cornethanol yields 25% more energy than its pro-duction consumes; for soy-based biodiesel, theyield is 93%, according to a study led by theUniversity of Minnesota and published in July2006 by the National Academy of Sciences.

From the perspective of emissions, cornethanol performs worse than biodiesel, ac-cording to the study. Compared with petroleum-based diesel, ethanol reduces car-bon dioxide emissions by only 12%, but

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biodiesel cuts them by 41%. As a 10% addi-tive in gasoline, ethanol can reduce CO2,volatile organic compounds, and fine partic-ulate matter. But more of these pollutants,and more sulfur and nitrogen oxides, are re-leased in the production and transport ofE85 (85% ethanol and 15% gasoline) thanwith gasoline. Biodiesel blended with dieselfuel, however, does reduce emissions duringcombustion and over the entire productioncycle, the University of Minnesota studyfound.

In the end, the longevity of this burgeon-ing industry will mostly hinge on its econom-ics. Corn ethanol is profitable now, but forhow long? Some experts see the fuel as onlya first step in an evolving biofuel market,whose future contours and profitability forfarmers and processors is not yet known.

Just the first step?In a follow-up to the 2005 University of

Minnesota study that was published in De-cember 2006 by Science, one of the study’sauthors describes both corn and soy fuels as“successful first-generation biofuels,” eventu-ally to be replaced by less resource-intensiveinputs. This study indicates that cellulosic al-ternatives offer the most promising sourcefor alternative fuels. They do not have totake productive agricultural land out of culti-vation for food sources, they use less waterand other resources, and cause less damageto environment and animal habitat. A re-search scientist with the Minnesota PollutionControl Agency told the journal Environ-mental Health Perspectives that, given its en-vironmental costs, the “most sensible” use ofcorn ethanol will remain as an oxygenate toreplace MTBE or as a 10%–20% additive togasoline.

Cellulosic ethanol: the alternative to alternative fuels

Pilot projects are currently underway toderive cellulosic ethanol from plant wastes,an alternative to corn-based ethanol. Plantwastes such as switch grass and corn cobsare cheaper, more plentiful, and less water-intensive than grain corn. The fuel couldyield three to six times the energy that isneeded to produce it.

For farmers, this development could pro-vide a new market for their agriculturalwastes. For companies that process biofuels,

the technology could represent a source oflow-cost supplies. Finding a way to economi-cally transport the bulky volumes of wasteswould pose a challenge, however. One acreof corn produces about 5,500 dry pounds ofstover (corn stalks, leaves, and cobs), whichwill produce roughly 180 gallons of ethanol,the USDA reports.

The US Department of Energy estimatesthat 30% of US oil consumption could comefrom cellulosic ethanol, produced from agri-cultural wastes, switchgrass, wood chips, andother low-intensity agricultural products, ofwhich the US could produce more than onebillion tons per year. But this feedstock iscurrently more expensive to process into fuelthan corn and not commercially viable.

Six facilities are scheduled to receive $385million in grants from the Department of En-ergy, which announced the grants on Febru-ary 28, contingent upon the plants achievingcertain goals. Projects include demonstrationplants capable of producing ethanol fromwheat straw, corn cobs and stalks, wood-based products, and switchgrass. Includinginvestment from the projects’ sponsors, thefacilities’ funding will be $1.2 billion. Theyare expected to yield more than 130 milliongallons of cellulosic ethanol per year, accord-ing to the DOE.

This new technology could be 10 to 15years away from being competitive with cur-rent corn ethanol technology, however.Among the technical hurdles to be clearedare developing enzymes to facilitate consis-tent and economical conversion into ethanol,and finding an efficient means of handlinglarge volumes of bulky materials.

In February, the University of Illinois an-nounced that it had been selected to partici-pate in a new research partnership with theUniversity of California at Berkeley and theLawrence Berkeley National Laboratory tostudy renewable fuel sources. The EnergyBiosciences Institute will be funded by a 10-year, $500 million grant from oil firm BPplc. The university’s first research projectswill involve stover and fast-growing, high-yield perennial grasses like miscanthus.

Biodiesel, made from soybean (or other)vegetable oil, is another nonfossil fuel whosestar is rising. Its demand may create a broad-er market for soybeans and ultimately boosttheir price. Demand for 50 million gallons ofsoybean oil per year could increase the oil’s

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price by 15% in 2006–07 and by 20% in2012–13, according to projections issued in2004 by the Energy Information Administra-tion (EIA), the statistical agency of the USDepartment of Energy.

Archer Daniels Midland is seeking to sub-stantially raise its stake in the growingbiodiesel market. The company announcedthat, as of mid-2007, it will have capacity toproduce 135 million gallons of biodieselfrom soybean and canola oil in the UnitedStates, as well as a combined 450 milliongallons in Europe, Brazil, and Indonesia.

US processors should be able to serveboth domestic and foreign markets. USbiodiesel capacity was about 400 million gal-lons per year in 2006, according to the Na-tional Biodiesel Board (NBB); that figure isset to rise to roughly 1.2 billion gallons in2008, based on announced new capacity. Toabsorb the surplus US production, export de-mand could come from the EU, where gov-ernmental targets call for annual productionof nearly 14 million metric tons by 2010, upfrom a target of about six million metric tonsin 2006.

Produced from vegetable oil and methanol(methane derived from natural gas), purebiodiesel can be burned by many gas engineswith little or no alteration. Petroleum-basedblends with up to 20% biodiesel can be usedin almost all diesel engines and require nospecial storage and distribution equipment,which the higher level blends do require.

Efforts to popularize the fuel are comingfrom both the federal government (in theform of tax incentives) and private industry.In addition to big companies like ArcherDaniels Midland, small entrepreneurs aregetting into the act. For example, in Decem-ber 2004, country singer Willie Nelsonformed The Willie Nelson Biodiesel Co. topromote and sell biodiesel to truckers; theproduct is distributed by publicly tradedEarth Biofuels Inc.

Other uses for biodiesel include homeheating and marine fuel. The US Navy, thebiggest consumer of diesel fuel in theworld, directs its Navy and Marine divi-sions to use a 20% biodiesel mixture innontactical vehicles whenever possible, ac-cording to the NBB.

Research is also underway at a Wisconsinbiotech company regarding the use of soy-beans in ethanol production, the Milwaukee

Journal Sentinel reported in March. Thecompany is developing enzymes that wouldtrigger ethanol production from soybeans,and that would separately boost yield andsave energy in corn-based ethanol produc-tion. A South Dakota company, Broin Co.,has invented a way to save energy by pro-ducing ethanol at 90 degrees rather than230–250 degrees.

High-priced substitutesThe 2005 University of Minnesota study

found that both corn ethanol and soybiodiesel required subsidies to achieve cost-competitiveness with petroleum fuels. At thetime of the study, corn ethanol cost twocents more per energy equivalent liter (EEL)to produce than gasoline, and biodiesel 11cents more than diesel. As of February 2007,the cost differentials had grown to 18 centsand 29 cents, according to co-author ErikNelson. The US government provides subsi-dies of 20 cents per liter for ethanol and 29cents for biodiesel.

The growth prospects of soybean-derivedbiodiesel are limited by the relatively highcost of the crop. The EIA projects that, un-less soybean oil falls significantly in price,biodiesel will not become a widespread sub-stitute for petroleum. Its usage will likely belimited to that of an additive to ultra-low-sulfur fuels, where its useful properties arenot outweighed by the cost disadvantage.

Biodiesel also can be produced — atabout half the cost of soybean oil — by us-ing recycled restaurant oil, also known as“yellow grease.” At this cost, biodieselwould come closer to being cost-competitivewith petroleum diesel, according to the EIA.The supply of such oil is limited by its avail-ability from restaurants as well as by de-mand from competing users, who utilize it tomake animal feed additives, as well as soapsand detergents.

Another inherent obstacle to the expan-sion of both corn ethanol and biodiesel is thenatural limit to agricultural land, water, andother resources. Even if the entire US cornand soybean crops were devoted entirely tofuel production, they would replace only12% and 6% of US gasoline and diesel de-mand, according to the 2005 study.

Given that these factors establish the upperlimits of the market in crop-based alternativefuels, cellulosic ethanol may be more cost-

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competitive with petroleum in the long run. Inthe meantime, farmers and processors stand toprofit from the manufacture and sale of mil-lions of gallons of alternative fuels.

Grains: harvest update and forecast

Prices for the three principal grain cropsincreased in late 2006. Drought in wheat-producing countries (including the US) cutinto supplies, pushing up prices, while ex-pansion of production facilities and demandfor biofuels boosted the price of corn andsoybeans. With prices higher for corn, soy-beans, and hay, farm income will rise $6billion in 2007, to $66.6 billion, accordingto the USDA Economic Research Service’sforecast.

CornIn 2006, farmers planted 78.3 million

acres of corn, down from 81.8 million in2005, due to high costs of inputs such as fer-

tilizer and fuel, according to the USDA. Pro-duction of corn for grain fell to 10.5 billionbushels from 11.1 billion in 2005. Yield roseto 149 bushels per acre, up from 148 bushelsin 2005 but down from 160 in 2004.

In the face of reduced supply and in-creased demand, the average per-bushel pricerose to $2.48 from $2.05 in 2005. As of thefourth quarter of 2006, the per-bushel priceof corn averaged $3.35.

High corn prices in the first quarter of2007 have encouraged farmers to grow moreof the crop, and the USDA forecasts thatthey will plant 90.5 million acres of corn, up15% from 2006 and 11% from 2005. Itwould be the second-largest corn crop byacreage since 1944, which totaled 95.5 mil-lion acres. Cash receipts from corn will ex-ceed $30 billion in 2007, the USDA projects.

SoybeansIn 2006, US farmers harvested the largest

soybean crop in the nation’s history: 3.2 bil-lion bushels, up 4% from 2006, which alsoset a record. Planted acreage was up 5%, to75.5 million acres, though yield per acre fellslightly from 2005, to 42.7 bushels, from43.0. The average price of soybeans fell to$5.74 in 2006, from $5.97 in 2005, but inthe fourth quarter of 2006, prices weretrending upward with an average of $6.15.

Since late 2004, soybean futures have lan-guished in the range of $5.00 to $6.25 perbushel (other than a two-month spike above$7.00 per bushel in mid-2005). Soybeanprices began to tick up in September 2006.The USDA projects a price range of $4.90 to$5.90 per bushel for 2006–07, notwithstand-ing the robust harvest. The increase wouldpush up total cash receipts for soybeans by$1.2 billion.

Prices could continue to go up for a cou-ple of reasons. Used as animal feed, soybeansare a cheap alternative to corn, so the highprice of corn could boost soybean sales. Theburgeoning biodiesel market could be anoth-er factor driving prices. AgWeb.com, an agri-cultural news Web site, notes that pricescould also shoot up if farmers decide to re-duce acreage in order to grow more corn,due to the high prices for that crop. Indeed,the USDA projects that acreage will fall 11%in 2007, to 67.1 million acres — whichwould be the lowest acreage since 1996, ac-cording to the USDA.

MAJOR CROPS — ACREAGE, SUPPLY, & PRICES

CROP YEAR

CROP 2002/03 2003/04 2004/05 2005/06 E2006/07

WWHHEEAATT

Acreage planted (mil.) 60.32 62.14 59.67 57.23 57.34

Yield (bushels per acre) 35 44 43 42 39

Production (mil. bushels) 1,606 2,345 2,158 2,105 1,812

Total supply (mil. bushels) 2,460 2,899 2,775 2,727 2,498

Exports (mil. bushels) 850 1,158 1,066 1,009 875

Total consumption (mil. bushels) 1,969 2,353 2,235 2,155 2,026

Farm price ($ per bushel) 3.56 3.40 3.40 3.42 4.20-4.30

Total estimated market value* (bil. $) 8.8 9.9 9.4 9.3 7.6-7.8

CCOORRNN





Exports (mil. bushels) 1,588 1,900 1,818 2,147 2,250



Total estimated market value* (mil. $) 24.5 27.1 26.3 26.5 31.6-35.8

SSOOYYBBEEAANNSS





Exports (mil. bushels) 1,044 887 1,097 947 1,100



Total estimated market value* (mil. $) 16.4 19.4 18.6 18.8 19.4-20.7

E-Estimated. *Standard & Poor's estimate based on production times farm price. Source: US Department of Agriculture.

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Wheat: prices and acreage upWheat prices, meanwhile, are bolstered by

strong demand following a drought-damagedglobal harvest of other grains. Major wheat-exporter Australia cut its crop by nearly one-third in 2006, boosting prices and givingAmerican farmers the chance to pick up a lit-tle extra business. The average per-bushelprice for wheat (Kansas City hard red wheat)was $5.11 in 2006, up from $4.11 in 2005.For 2007, the per-bushel wheat price is ex-pected to hold above $4.35, compared withbelow $4.00 for most months in 2006, ac-cording to ERS.

The USDA forecasts that farmers willplant 60.3 million acres in 2007, up 5%from 2006. Cash prices for wheat are fore-cast to reach a record $8.4 billion in 2007,according to the USDA.

The largest exporters of wheat traditional-ly have been the United States, Australia, theEU, Canada, and Argentina. Black Sea na-tions, such as Kazakhstan and Ukraine, havebeen gaining market share due to their lowproduction costs and ongoing investments inagriculture, and the USDA sees this sharegrowing over the next decade. The region’sextreme weather, however, can cut into yieldsunpredictably, reducing the reliability of theharvest.

Government payments

By the end of the 2006 Congressional ses-sion, Congress had failed to pass 11 appro-priations bills, including agriculture, for the2007 fiscal year. In their place, Congress haspassed a series of resolutions leaving the2007 federal agriculture budget almost un-changed from 2006 levels.

The 2007 agriculture budget proposedby the Bush administration in February2006 had called for an additional 5% cutin subsidies for all crop programs, whichwould have reduced payments by $4.9 bil-lion. The appropriations bill passed by theHouse of Representatives in May wouldhave not only eliminated those cuts, it alsowould have added roughly $5 billion in dis-aster assistance.

The USDA sees government payments tofarmers dropping dramatically in 2007, to$12.4 billion for the year, down from $16.3billion in 2006. Payments in 2005 totaled$24.3 million, when low commodity prices

and large crop supplies triggered price sup-port programs such as loan deficiency andcountercyclical payments. The 10-year his-torical average (1996–2005) is $16.1 billion.

Due to strengthening crop prices, counter-cyclical payments are seen falling to $1.6 bil-lion from $4.1 billion in 2006, with onlyupland cotton and peanuts receiving funds.Direct payments are established in legislationand do not change based on crop prices.

Livestock update

With the price of corn nearly doubling,from an average of $2.00 per bushel in 2006to a projected $3.00–$3.40 average in 2007,and other grains rising in tandem, farmers ofthose crops are rejoicing. But livestock pro-ducers who must purchase feed grain aresquealing in protest. They have been com-plaining to the media, as well as to Congress,which has held hearings on their situation.The National Chicken Council refers to theethanol situation as a “crisis.”

ChickenOf the livestock categories, chicken pro-

ducers will feel the least impact from the ris-ing price of corn, according to Pilgrim’sPride. Producing a pound of chicken meat re-quires 1.9 pounds of feed, versus 3.5 poundsfor pork and 8.3 pounds for beef, accordingto USDA statistics cited by the poultry pro-ducer. The average price over one year asMarch 2007 was $2.49 per bushel, versus$2.36 over five years and $2.31 over 10years.

In fiscal 2006 (ended September 30,2006), the United States produced 42.2 bil-lion pounds of poultry, down from 45.7 billionpounds in fiscal 2005, according to the USDA.Although production increased slightly in thefirst half of 2006, it subsequently declined as

FROZEN CHICKEN IN STORAGE(Millions of pounds)

STOCKS, END OF MONTHMAR. 2006 MAR. 2007 % CHG.

White meat 181.5 146.8 (19.2)Dark meat 209.6 90.6 (56.8)Other parts* 449.5 327.1 (27.2)Whole chickens 28.7 30.0 4.4

Total 869.4 594.4 (31.6)

*Includes pieces that have both white and dark meat.Source: US Department of Agriculture.

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a result of a heat wave and flooding in theEast from a tropical storm — both of whichkilled chickens over the summer.

Nonetheless, in late October, Pilgrim’sPride announced plans to reduce chickenprocessing by 5% year-to-year as of January1, 2007, to try to bring production in linewith demand. By mid-March, slaughter levelswere back to normal.

The USDA reports that a slight decline inmeat yields per bird reduced production inJanuary 2007, despite a small increase in thenumber of birds slaughtered. Prices forJanuary-February 2007 were up 16% fromthe low reached in the 2006 period, with the12-city whole broiler price averaging 73.2cents per pound. The rising prices werelikely responsible for a 7% decline in ex-port shipments in January. The agency pre-dicts that 42.8 billion pounds of chickenwill be produced in 2007.

US consumption of chicken remainsstrong. Annual US per capita consumption ofchicken is projected to rise to 102.1 poundsin 2006 before dipping slightly to 101.9pounds in 2007. In 2005, consumption was99.9 pounds.

Pilgrim’s Pride pushed aside Tyson as thenation’s leading poultry producer in January2007, when it completed its acquisition ofGold Kist. Pilgrim’s Pride now controls24.8% of market, versus 20.7% prior to theacquisition. Combined revenues for fiscal2006 (September) were $7.4 billion, of whichPilgrim’s Pride contributed $5.3 billion. At aprice of $21 per share, the transaction to-taled $1.1 billion, plus the assumption ofGold Kist debt valued at nearly $340 million(including prepayment penalties).

BeefBeef producers have been prompted by

low forage reserves to increase the number ofanimals they send to slaughter. The ERS re-ports that as of March 19, the calf slaughtertotals were up 28% (on a weekly basis) com-pared with the year-ago period. Production,however, was up only 6%.

High feed prices are likely inducing ranch-ers to send more cattle to slaughter, whichraises supplies and causes prices to fall. Theprice range for 2007 is projected to be be-tween $81–$87 per cwt.

The USDA projects the average price forchoice steers (Nebraska direct) at $84–$89per cwt, compared with $85.41 in 2006.Feeder steers (Ok. City) are expected to aver-age $96–$101, from an average of $107.32in 2006. The USDA notes that, when corn is$3.00 per bushel and yearling feeder cattleare $111.00 to 114.50 per cwt, a ranchercan break even when fed cattle fetch $86 to$88 per cwt, compared with an average of85.41 in 2006.

The department forecasts 26.6 millionpounds of beef in 2007, up from 26.2 bil-lion in 2006. Per capita consumption is seendeclining to 66.4 pounds, from 65.8 poundsin 2006.

Pork Higher corn prices are translating into

lower dressed weights for pork — a forecastone pound per hog — as producers rein intheir feed costs, according to the USDA.

The agency sees pork prices strengthening9% in the first half of 2007 over the 2006period, as high broiler prices encourage con-

US MILK PRODUCTION

F-Forecast.Source: US Department of Agriculture.

185

180

175

170

165

160

155

150

18

17

16

15

14

13

12

111996 97 98 99 00 01 02 03 04 05 06 F2007

Average milk price, $ per hundred pounds (right scale)

Billions of pounds(left scale)

POULTRY PRICE(Leg quarters, Georgia dock price, cents per pound)

Source: Georgia Department of Agriculture.

50

40

30

20

10

02003 2004 2005 2006 2007

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sumers to buy more pork as a substitute. Inthe second half, however, broiler pricesshould fall, taking pork down as well. Forthe full year, the agency forecasts $46–$47per cwt for 51%–52% lean hogs.

In 2006, the US produced 21.1 billionpounds of pork, which fetched an averageprice of $42.63 per cwt (barrows and gilts,N. base, l.e.), down from $50.05 per cwt in2005, according to USDA forecasts.

Standard & Poor’s expects US pork ex-ports to remain strong. Demand from SouthKorea and Russia (which has restrictedBrazilian pork imports) will contribute tothat strength, as will weakness in the dollar,which compensates somewhat for high USpork prices. US pork exports reached 3.0million pounds in 2006, up 11% from 2.7 million pounds in 2005. US pork pro-ducers held a 25.5% share of the global mar-ket as of 2006, up from 18.3% in 2003,according to the USDA. ■

US MEAT SUPPLY & PRICES

PRODUCT 2003 2004 R2005 R2006 F2007

BBEEEEFF

Production (mil. lbs.) 26,339 24,650 24,787 26,258 26,680

Total supply (mil. lbs.) 30,036 28,847 29,023 29,814 30,590

Exports (mil. lbs.) 2,518 460 698 1,153 1,345

Total consumption (mil. lbs.) 27,000 27,750 27,754 28,131 28,645

Avg. market price ($ per 100 lbs.) 84.69 84.75 87.28 85.41 84-89

Total estimated market value* (bil.$) 22.3 20.9 21.6 22.4 22.7-22.9

PPOORRKK



Exports (mil. lbs.) 1,717 2,181 2,665 2,997 3,150




BBRROOIILLEERRSS



Exports (mil. lbs.) 4,920 4,784 5,203 5,272 5,405




R-Revised. F-Forecast. *Standard & Poor’s estimate based on production times marketprice.Source: US Department of Agriculture.

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Outlook for agribusiness credit quality is stable

We expect another busy year for the agribusinesssector as we enter the spring planting season and asthe drumbeat continues for greater bioenergy initia-tives, especially ethanol and biodiesel. Yet the over-all credit quality of the US agribusiness companieswe rate should remain relatively stable.

The demand for agri-based energy sources hadUS farmers indicating at the end of March 2007 thatthey intend to plant 15% more corn acreage in 2007,for a total of about 90.5 million acres, the most since1944. The immediate response to this news was adrop of about 5% in the price of corn on the ChicagoBoard of Trade. However, corn prices are still rela-tively high, in the $3.50 to $4.00 a bushel range, andwell above their historical level of about $2.00 abushel. If the US produces a bumper corn crop thisyear — a very big “if” — it is possible that cornprices will decline in the fall. Nevertheless, we stillexpect prices to remain above historical levels in thenear term.

Furthermore, farmers may change their mindsand plant less corn. The most critical factor betweenmid-April and the end of May will be the weather. Asof late April/early May, corn planting in the Southwas on track, but planting in the Midwest was lag-ging by about a week. (Figures on actual plantedacreage will not be available until the end of June.)In addition, since acreage available for planting islimited, an increase in corn acreage would likelycome at the expense of soybean acreage, which ispredicted to fall to its lowest level in 10 years. Butsome farmers may switch back to soybeans, a cropwith a longer planting season, if poor weather ham-pers corn planting or if they believe a large corn har-vest will depress prices in the fall.

While oil prices seem to have taken a temporarybreather from their upward spiral, dampening near-term exuberance for ethanol, the need for alternativefuels remains a global priority. In our view, the co-nundrum of whether to use crops for food or fuel willhave reverberations for some time in the agribusi-ness, meat processing, dairy, packaged food, and

beverage sectors, and ultimately for the consumer.Unless the US develops cellulosic biomass (woodfibers and crop residue) as an economic alternativefeedstock for ethanol, adjustments will eventually berequired in the corn market to meet demand. Thiscould be further exacerbated if US harvests are dis-appointing, as was the case in 2003, which resultedin commodity prices hitting record highs in the springof 2004 and remaining there until the fall harvest.

Evolving industry dynamics seem favorable...for now

Still, weather, disease, input prices, governmentpolicies, and trade agreements can change quickly. Anew US farm bill, which could be affected by the pos-sible resumption of the WTO’s stalled Doha Round oftrade negotiations dealing with export subsidies,market access, and domestic support, will be a hottopic throughout much of 2007.

Other factors that will continue to influence themarketplace this year include increased volatility inthe commodity markets resulting from greater Asianand Chinese demand, and a shift to greater agricul-tural production in South America, especially inBrazil and Argentina. Also important are the continu-ing debate over genetically modified crops, thegrowth of organic farming to meet rising demand forhealthy food choices, and consumers’ growing con-cerns about food safety.

Despite the sector’s changing landscape and near-term challenges, we expect stability overall in ouragribusiness ratings. Nevertheless, many of thesecompanies will face higher working capital needs andincreased short-term debt usage because of higheragricultural commodity prices, which could squeezealready thin margins. Additionally, some rated com-panies are making sizeable capital investments intobioenergy projects to add to their existing market po-sition or to hop on the bioenergy bandwagon, whichhas resulted in a near-term decline in free operatingcash flow. However, as we have seen over the years,the agribusiness companies we rate have shown re-silience in a volatile and ever changing market. ■

—Jayne RossAgribusiness Credit Analyst

S&P Ratings Services View:

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INDUSTRY PROFILE

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The United States is the world’s largest pro-ducer of food and agricultural products, andUS agriprocessors export their productsaround the globe. Total domestic farm sectorreceipts from the sale of agricultural com-modities are projected to total $242.7 billionin 2006, according to the US Department ofAgriculture (USDA). This sum, up from$238.9 billion in 2005, consisted of $121.2billion in livestock receipts and $121.6 bil-lion for crops. The agency forecasts cash re-ceipts of $258.7 billion for 2007, based onprojected sales of $125.2 billion in livestockand $133.5 billion in crops.

The leading commodities, based on cashreceipts, were poultry, cattle, dairy products,and corn. Net farm income in 2007 is esti-mated at $66.6 billion, up from $60.6 billionin 2006 but below the $72.6 billion farmersearned in 2005. Nonetheless, it is $9 billion(16.2%) above the sector’s 10-year averageof $57.4 billion. The USDA sees governmentpayments to farmers dropping dramaticallyin 2007, to $12.4 billion for the year, downfrom $16.3 billion in 2006 and from therecord $24.3 billion received in 2005. The10-year historical average (1996–2005) is$16.1 billion.

The agribusiness industry includes pro-ducers, agriprocessors, and packagers. ThisSurvey covers the producing and processingsectors — largely, the public corporations forwhich data are available. Food packagingcompanies — that is, public and private

companies engaged in later stages of con-sumer food production, such as Kellogg Co.or H.J. Heinz Co. — are covered in theFoods & Nonalcoholic Beverages issue of In-dustry Surveys.

According to the USDA, 2.1 million peopleworked in the US farm sector as of 2002 (lat-est available), and 23.9 million worked in thefood and fiber sectors. Agriculture represented0.8% of US gross domestic product of $12.5trillion in 2005 (latest available); agricultureand related industries (including value-addedoutputs of farms, forestry, fishing, hunting,processed food, beverage, and tobacco prod-ucts, textile and leather apparel, restaurantsand drinking establishments) were 4.5%.

Agricultural producers

Agricultural producers include individualsand organizations — farmers and ranchers,farmers’ cooperatives, and public and privatecorporations — that are involved in the earlystages of making food products. Their func-tions include planting, raising, and harvest-ing crops and breeding and raising livestock.

The consolidation of US meat productionhas increased substantially over the past 15years. While the process is ongoing, compa-nies will be prevented by antitrust regulationfrom gaining more than about 30% of anysegment.

The four largest beef packing firms, in or-der, are Tyson Foods Inc. (25% of the US

Economics of food production

CHICKEN, BEEF, AND PORK PRODUCTION MARKET SHARE, BY COMPANY — 2006

CHICKEN MKT. BEEF MKT. PORK MKT.PROCESSORS SHARE (%) PROCESSORS SHARE (%) PROCESSORS SHARE (%)

Pilgrim's Pride 25 Tyson Foods 25 Smithfield Foods 25 Tyson Foods 21 Excel* 22 Tyson Foods 18 Perdue Farms 8 Swift & Co. 14 Swift & Co. 11 Wayne Farms 5 National Beef 10 Excel* 9 Sanderson Farms 5 Smithfield Foods 6 Hormel 7 Others 37 Others 23 Others 30

*Unit of Cargill Inc.Sources: Tyson Foods Inc.: Pilgrim's Pride Corp.

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commercial cattle slaughter), Excel (a unit ofprivately held Cargill Inc.; 22%), privatelyheld Swift & Co. (14%), and National BeefPacking Co. LLC (majority owned by USPremium Beef LLC; 10%). Collectively, theyaccounted for 71% of beef production in theUnited States as of October 2006, accordingto trade publication Cattle Buyers Weekly.

The four leading pork packers — Smith-field Foods Inc. (with 25% of US commercialhog slaughter), Tyson Foods (18%), Swift(11%), and Excel (9%) — accounted for65% of the segment total in October 2006,according to Cattle Buyers Weekly. This totalcompares with only 40% in 1990, accordingto a study by the University of Missouri.

Meanwhile, in the wake of its takeover ofGold Kist Inc. in January 2007, Pilgrim’sPride’s has taken the lead among poultryproducers, with 24.8% of US production asof February 2007, according to Watt PoultryUSA. Tyson Foods holds 20.7% of the mar-ket, and privately held Perdue Farms Inc.claimed 7.7%. Together the three companiesproduce 53.2% of the country’s chicken,compared with 44% in 1990.

Dairy Farmers of America (DFA) is thelargest US dairy cooperative, with 20,631members in 49 states in 2005. The groupgenerated nearly $8.9 billion in sales andprocessed 34% of the US milk supply in2005 (latest available), compared with $8.5billion in sales and 33% of the US milk sup-ply in 2004. DFA was formed by the mid-1998 merger of four large dairy cooperatives:

Mid-American Dairymen Inc., Milk Market-ing Inc., the southern region of AssociatedMilk Producers Inc., and Western DairymenCooperative Inc.

The leading processor and distributor offluid milk and dairy products in the UnitedStates (and a major customer of DFA) isDean Foods Co., which recorded $10.1 bil-lion in sales in fiscal 2006 (ended December31, 2006). Other competitors include LandO’Lakes Inc. ($7.3 billion in fiscal 2006,ended December 2006) and Darigold Inc.(formerly known as WestFarm Foods), theprocessing and marketing subsidiary of theNorthwest Dairy Association, a cooperativewith about $1.3 billion in annual revenues in2004, according to the USDA.

Agriprocessors

Agriprocessors are public and privatecompanies involved in the early to middlestages of food processing. Their operationsinclude the harvesting, milling, or processingof raw agricultural commodities. While theyalso may plant and raise crops themselves,they generally purchase those commoditiesfrom farmers.

Among processors, the largest user ofcrops is Cargill, with sales of $75.2 billion inits fiscal year ended May 2006. Publiclytraded Archer Daniels Midland Co. is thesecond largest US agribusiness firm, with$35.6 billion in sales for its fiscal year endedJune 2006. Other major crop processors are

LEADING AGRIBUSINESS COMPANIES(Ranked by 2006 revenues)

FISCAL REVENUES (MIL $)

COMPANY YEAR END 2003 2004 2005 2006

Cargill May '06 54,390 62,907 71,066 75,208

Archer Daniels Midland Jun '06 30,708 36,151 35,944 36,596

Bunge Ltd. Dec '06 22,165 25,168 24,275 26,274

Tyson Foods Sep '06 24,549 26,441 26,014 25,559

CHS Inc. Aug '06 9,299 10,952 11,907 14,355

ConAgra Foods May '06 19,839 14,522 14,567 11,579

Smithfield Foods Apr '06 7,905 9,267 11,354 11,404

Dean Foods Dec '06 9,185 10,822 10,506 10,099

Land O'Lakes Dec '06 6,320 7,497 7,336 7,102

Hormel Foods Oct '06 4,200 4,780 5,414 5,745

Pilgrim's Pride Sep '06 2,619 5,364 5,666 5,236

Corn Products International Dec '06 2,102 2,283 2,360 2,621

Gold Kist* Jun '06 1,855 2,261 2,304 2,127

*Acquired by Pilgrim's Pride in January 2007.Sources: Standard & Poor's Compustat Global Data; Company reports.

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leading soybean processor Bunge Ltd. ($26.8billion in the fiscal year ended December2006), and Corn Products International Inc.($2.6 billion in the fiscal year ended Decem-ber 2006).

A large part of agriprocessors’ business in-volves exporting commodities (such as corn,wheat, soybeans, livestock, and dairy prod-ucts) and processed products (such asethanol, high fructose corn syrup, and soy-bean meal).

INDUSTRY TRENDS

US agriprocessors have pursued globalexpansion plans in recent years. While thedomestic market is relatively mature andlikely to exhibit consistent but only modestgrowth in the future, developing markets’demand for protein-rich foods is growingrapidly. In markets such as China and India,disposable income is increasing because ofeconomic growth and industrialization, butagricultural output is growing less rapidlythan consumption. Consequently, the USagribusiness industry is well positioned totake advantage of future increases in world-wide food demand.

These opportunities also present new chal-lenges. To meet demand in these markets,agriprocessors must be attuned to culturaldifferences, changing trade agreements, andvarying food safety standards.

Going global

A growing percentage of US agribusinessindustry revenues are coming from overseasmarkets. US annual agricultural exports rose18.4% from fiscal 2001 (ended September30, 2001) to $62.4 billion in fiscal 2005, ac-cording to the US Department of Agriculture(USDA). The rapid economic expansion ofChina, Southeast Asia, and Eastern Europe,along with the acceptance of more liberaltrade agreements, is opening new markets forfood processors.

Leading US pork processor SmithfieldFoods Inc. has controlling interests in pro-cessing operations in Poland, France, Roma-nia, and the United Kingdom, as well as jointventures in China, Romania, Mexico, andSpain. International operations accounted for10% of sales in the company’s fiscal 2006

(ended April 30, 2006), up from 7.7% in theprior year, despite losses from the temporaryshutdown of the company’s Polish facility inits first quarter. About 8% of the company’spork and 4% of its beef that were domesti-cally processed were exported to other coun-tries in fiscal 2006.

Corn Products International Inc. marketsrefined corn products, including sweeteners,starches, and corn oils, in 70 countries. In itsfiscal year ended December 31, 2006, NorthAmerica accounted for 60.6% of net sales,compared with 60.3% in 2005. The compa-ny is the top seller of refined corn productsin Canada, Mexico, and South America,while ranking only fourth in its home mar-ket, the United States.

With the world’s gross domestic productexpected to rise more than 3% annually be-tween 2005 and 2014, according to USDAprojections, there is ample reason to expectever-growing demands on the world’s agri-culture. When incomes begin to rise, peopleoften upgrade their diets, consuming morefood grains, meat, sweeteners, and vegetableoils. This trend should benefit the US agricul-tural industry, which traditionally exports alarge percentage of high-value products, in-cluding packaged meat and processed foods.

A greater reliance on foreign markets isalso likely to increase the volatility of USfirms’ sales and profits. When the US dollarrises against foreign currencies, it can raisethe price of US agricultural exports in othermarkets, and thus lower sales as consumersbuy cheaper goods from other countries; atthe same time, it reduces income from for-eign operations when those receipts areconverted into dollars. As a result, manycompanies hedge their risks by enteringinto foreign currency forward contracts tominimize income shifts produced by curren-cy fluctuations.

Changing oil prices cause an agriculturalfirm’s transport costs to rise or fall. As fuelprices increased through mid-2006, prices forforeign-produced food rose against locallyproduced goods. Companies may minimizethe impact of fuel costs by operating process-ing plants around the globe.

US agribusiness firms must also conformto changing trade agreements. They can tapnew markets when tariffs fall, but may losesales when a market enacts new tariffs ornontariff barriers.

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For food processors that import ingredi-ents, the long and circuitous trail from pro-ducer to manufacturer creates new hazardsfor adulteration and liability. In April 2007,wheat gluten imported from eastern Chinaand manufactured into pet food in the USwas found to contain melamine, a potentiallytoxic substance. Fifteen pets died from eatingthe food, the FDA confirmed, although thetoll may be in the hundreds, according to theAP. One hundred pet food brands werepulled off the shelves. The gluten was pur-chased by the exporting firm, Xuzhou Any-ing Biologic Technology Development Co.,from regional producers, then shipped toChem Nutra in Las Vegas, which distributedit to pet food manufacturers.

Imports and exportsAgricultural products are a leading US ex-

port. Key products include soybeans, corn,

and livestock. In the 12 months ended Au-gust 31, 2006, US agricultural exports were$63.4 billion, up from $57.9 billion in thesame period in 2005.

The nation’s largest agricultural tradingpartners are Canada, Japan, Mexico, China,and the European Union. Asian countriespurchased 36.1% of US agricultural exportsin 2005, followed by Canada and Mexico(31.2%) and the European Union (11.1%).

Exports to China are increasing at a rapidrate. With the expansion of that nation’seconomy and middle class, Chinese are de-manding more protein in their diet, increas-ing their reliance on Western beef andprocessed meats.

US food imports totaled an estimated $59billion in agricultural products in the 12months ended August 31, 2006, up from $53billion in 2005, with most products comingfrom Canada and Mexico. Key imports in-clude coffee, tea, cocoa, spices, meats, andoilseeds. The biggest growth in imports iscoming from fruits and vegetables.

Partly because the United States exportsmore high-value products (including processedpork and beef goods and dairy products) thanit imports, the nation had an agriculture tradesurplus of $4.7 billion in 2005, comparedwith $17.6 billion in 1990.

Japan, Korea reopen doors to US beef In July 2006, Japan once again lifted its

ban against US beef imports. Japan — previ-ously the largest export market for US beef —had banned the goods beginning in December2003, after a Canadian cow in WashingtonState was discovered to have had bovinespongiform encephalopathy (BSE), commonlycalled mad cow disease. That ban was liftedafter two years but was imposed again sixweeks later, in January 2006, after spinalbones, which carry the risk of contaminationand were prohibited from import, were foundin a shipment of US veal to Japan.

Significant pressure from the UnitedStates, along with assurances as to productsafety, were behind the change. To help as-suage concerns about US beef, the USDAplans to inspect 40,000 animals per year in aBSE surveillance program. The agriculturalappropriations bill passed by the House ofRepresentatives in May 2006 would provide$90 million for BSE detection and preventionactivities.

LEADING DESTINATIONS FOR US AGRICULTURAL EXPORTS(Ranked by exports for fiscal 2006, in millions of dollars)

% CHG.

COUNTRY 2002 2003 2004 2005 2006 2002–06

Canada 8,660 9,300 9,741 10,570 11,930 37.8

Mexico 7,226 7,917 8,494 9,362 10,896 50.8

Japan 8,382 8,935 8,139 7,874 8,422 0.5

European Union 6,145 6,454 6,784 6,834 7,290 18.6

China 2,067 4,992 5,541 5,225 6,724 225.2

South Korea 2,672 2,853 2,488 2,226 2,851 6.7

Taiwan 1,966 2,036 2,064 2,300 2,479 26.1

Indonesia 810 984 925 957 1,102 36.2

Turkey 675 901 943 1,079 1,030 52.7

Egypt 862 1,001 935 837 993 15.1

Source: US Department of Agriculture.

US AGRICULTURAL TRADE(In billions of US dollars)

F-Forecast.Source: US Department of Agriculture.

90

80

70

60

50

40

30

20

10

02001 2002 2003 2004 2005 2006 F2007

Exports Imports

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The agreement with Japan requires thatUS-slaughtered cattle sent to that country notbe older than 20 months. Body parts such asbrains and spinal cords must be removed,and the meat must come from authorizedprocessing plants. The new agreement thusexcludes most US beef, which is older than20 months.

The US trade initiative succeeded despiteJapan’s discovery of its 25th case of a BSE-infected animal in April 2006, according tothe Associated Press. In August, the JapanTimes reported that the Japanese public re-mains suspicious of American beef. TheUSDA does not foresee exports to Japanreaching the levels seen before the ban, whenexports of US beef to Japan generated annualrevenues of about $1.4 billion. As of April2007, the US share of the global beef marketwas 7.7%, up from 7.2% in 2006, but downfrom 18% in 2002.

Korea lifted its ban on American beef inJanuary 2006, though with restrictions: thecattle have to be younger than 30 months atthe time of slaughter, and the meat must beboneless. However, Korea did not accept itsfirst shipment until late October, due to ongo-ing safety concerns, according to the NationalCorn Growers Association, a trade groupwhose members supply corn as cattle feed.Korea’s ban, like Japan’s, was first imposed inDecember 2003. At that time, Korea was im-porting more than 551.2 million pounds ofUS beef a year, worth $893 million.

For US beef producers, growing domesticdemand has partly offset the declines fromlower exports. US consumption of beef isprojected to rise to 66.9 pounds per capita in2006, from 64.9 pounds in 2003. A ban onCanadian imports through mid-2005 keptsupplies tight and limited inventories, whichprevented a major decline in beef prices.(The United States had banned imports ofCanadian beef and cattle in May 2003, fol-lowing the discovery of a case of BSE in Al-berta; that ban was lifted in July 2005.)

In March 2007, the ERS forecast that USbeef exports would rise in 2007 over 2006.Slow growth in exports to Asia, however,had prompted the agency to slightly lower itsforecast for the year. The USDA’s ForeignAgricultural Service sees exports to SouthKorea as remaining small, while the 20-month age limit for cattle, and the need toverify the age, will slow shipments to Japan.

CAFTA callingIn August 2005, President George W. Bush

signed the Central American Free TradeAgreement (CAFTA) into law. The accord isexpected to end most tariffs on $33 billion ingoods traded annually between the UnitedStates and Central America. The NationalCorn Growers Association, a US trade associ-ation, estimates that the accord will boost USagricultural exports in its first year by asmuch as $900 million, with particular growthfor corn, soybeans, and dairy products.

As of July 1, 2006, five countries had im-plemented the treaty: the United States, ElSalvador, Honduras, Nicaragua, andGuatemala. The Dominican Republic hadratified the treaty but not passed legislationto put it into force. Costa Rica has delayedapproval of the trade agreement.

North American partners Notwithstanding trade agreements, mar-

kets can close as well as open. In December2005, to protest rising government subsidiesfor US corn producers, Canada imposed aprovisional antidumping duty (US$1.65 perbushel) on corn imported from the UnitedStates; Canada believed that US farmers weredumping corn into the country at below-market prices. The Canadian InternationalTrade Tribunal voted in April 2006 to lift theprovisional duty and to refund collectedmonies.

In 2002, Mexico enacted a 20% tax onsoft drinks containing high fructose cornsyrup (HFCS), essentially forcing soft drinkproducers to use Mexican sugar cane. Thetax blocked more than $900 million per yearof US corn syrup exports, according to theKiplinger Agriculture Letter, a trade publica-tion. The World Trade Organization (WTO)ruled in the summer of 2005 that the tax vio-lated the spirit of the North American FreeTrade Agreement (NAFTA). Mexico appealedthe ruling, which was upheld in March 2006.Corn Products International noted that itsMexican sales of HFCS returned to pre-2002levels following the ruling.

Consolidation trend continues

The broader agricultural market was oncecharacterized by large numbers of buyers andsellers trading homogeneous commodities onthe open market. Within this market, spot

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prices coordinated the flow of products fromsellers to buyers, with low-cost producersusually the most successful.

Over the past 30 years, consolidation hasdramatically altered the agribusiness indus-try, driven recently by global expansion andvertical integration. It has reduced coststhrough economies of scale, encouragingfarms, like factories, to become larger andmore specialized.

Processors, too, have followed suit. Sincethe 1970s, meat processors have consolidatedat the slaughter capacity level, leading to few-er but larger plants. Recently, companies havefocused on expanding their high-margin,value-added offerings, including prepackagedmeats and ready-to-serve meals, which alsolowers their exposure to commodity pricefluctuations. Tyson Foods Inc. expanded itsvalue-added products to 43% of its totalproduct mix in 2005, or $11.3 billion, upfrom 38% in 2004; the company projectsthat value-added product sales will rise an-other $900 million in 2006. Tyson said thatits goal is to reach 50% of sales from value-added products by 2009.

Acquisitions can increase the proportionof value-added products a company offers.Smithfield Foods, the world’s largest hogproducer and pork processor, acquired Farm-land Foods, the pork production and pro-cessing business of Farmland Industries Inc.,for approximately $363.5 million in 2003.The deal significantly expanded Smithfield’svalue-added processed meat brand names.According to the company, it also “substan-tially expanded retail market share in bacon,lunchmeats, and breakfast sausage.”

Mergers and acquisitions can strengthen acompany’s pricing power within a segment.Having fewer competitors makes it is easierfor remaining firms to set and hold prices,enabling stronger and more consistent profitmargins. Pilgrim’s Pride Corp., one of thelargest US producers of chicken, acquired thechicken division of ConAgra Foods Inc. foran estimated $547 million in 2003, to ex-pand market share. In January 2007, thecompany completed its acquisition of GoldKist Inc., becoming the nation’s largest poul-try producer.

Acquisitions can increase distribution ca-pabilities, making global expansion easier.A company can enter a new market by ac-quiring another company based or doing

business in that market. For instance, lead-ing soybean processor Bunge Ltd. pur-chased a soybean refining plant in China in2005, increasing its exposure to that rapid-ly growing market.

Advocates of consolidation believe thatthe process will lead agricultural producerstoward more efficiency, less dependence ongovernment assistance, and greater globalcompetitiveness. As producers expand andspecialize, they can reduce production coststhrough economies of scale. Opponents ar-gue that, in a highly concentrated market, asmall number of sellers may gain too muchpower. In a less competitive marketplace,companies may raise prices substantially andforce down the prices that they pay forcrops, to the detriment of farmers.

Global food safety issues

In recent years, consumer fears of madcow disease and avian flu have created majorproblems for US meat processors in interna-tional markets. Leading firms that havegreatly expanded international sales, includ-ing Tyson Foods and Smithfield Foods, areexposed to considerable revenue and earn-ings fluctuations as eating habits change inimportant foreign markets.

In the United States, neither mad cow dis-ease nor the avian flu has yielded fatalities,and US consumption patterns remain virtual-ly unchanged. Nonetheless, companies havereported lower earnings because of foreignconcerns about these maladies.

Mad cow diseaseTransmissible spongiform encephalopathy

(TSE) causes microscopic holes in the brain,giving it a sponge-like appearance under amicroscope. TSEs affect both humans andanimals and are always fatal. Bovine spongi-form encephalopathy is the kind of TSE thatoccurs in cattle. Scientists believe that cattleare infected with BSE when they eat feedcontaining remnants of infected animals.

In 1997, to prevent the spread of BSE, theUS Food and Drug Administration (FDA)prohibited the use of most mammalian pro-teins as feed for ruminants (i.e., animals thatchew their cud, such as cattle, sheep, andgoats). The FDA, in conjunction with stateregulatory and health agencies, began inspec-tions at feed mills, protein blenders, feed

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haulers, and farms in 1998. Before decidingto lift the ban on Canadian cattle in 2005,US officials conducted a similar review ofCanadian policies and safeguards, determin-ing that they were in line with US standards.

US beef exports must meet more strin-gent regulations in order to gain re-entry tocertain foreign markets, including Japanand South Korea. The new rules limit theage of the cattle that can be shipped and theparts that can be included. BSE was detect-ed in cattle in the United States in December2003 (in Washington State), in June 2005(Texas), and in March 2006 (Alabama). Thedetection of BSE in December 2003 led tothe closure of many foreign markets to USbeef. Before the ban, exports of US beef toJapan generated annual revenues of about$1.4 billion.

The first cases of BSE in cows were dis-covered in the United Kingdom in 1986. TheUK epidemic reached a peak in early 1993,when almost 1,000 new cases were discov-ered each week.

Humans are vulnerable to a fatal diseasesimilar to BSE, Creutzfeldt-Jacob Disease(CJD). A variant form of CJD (vCJD) maybe caused by eating beef products from BSE-affected cattle. As of October 2006, 197 cas-es of vCJD had been reported worldwide,according to the European and Allied Coun-tries Study Group of CJD.

Avian influenzaHighly pathogenic avian influenza (HPAI)

is an extremely contagious virus that causesmass mortalities of birds in a short period.While flu viruses are common pathogensamong birds, only a few forms, such as theH5N1 virus that first appeared in Korea inDecember 2003, are transmissible acrossspecies (e.g., from birds to humans). Domes-ticated birds, including chickens, become in-fected with the virus either through directcontact with infected birds or through con-tact with cages or feed that have been conta-minated with the virus.

Human exposure is generally believed tocome from contact with live birds, althoughthe virus’s ability to transform into a humanstrain could create a global crisis. Officials ofthe World Health Organization (WHO), aUnited Nations health agency, are concernedthat the influenza could develop into a pan-demic if it mutates into a virus that spreads

easily through human contact. Governments,international agencies, and individual compa-nies and farmers have pledged resources to-ward ensuring early detection, to save livesas well as stabilize commerce.

At least 172 people have died from ex-posure to the H5N1 virus since its outbreakin 2003, according to the WHO. The deathtoll may be even higher due to undiagnosedcases in remote areas. The European Union(EU) estimates that the virus may have beenin circulation as early as 1996, and thateconomic losses following the 2003–04 out-break in Asia cost the region’s economiesalmost eight million euros. In an effort tohalt the outbreak, millions of chickens andducks have been slaughtered in SoutheastAsia.

In the United States, between 1997 and2005, there were 16 outbreaks of low patho-genic avian influenza. People who developthis version can typically be treated with an-tiviral medications and fully recover. In Feb-ruary 2004, an outbreak of HPAI wasdetected and reported in a flock of 7,000chickens in Texas. This was the first out-break of HPAI in the United States in 20years. As of October 2006, no human caseshad been detected in the United States, ac-cording to the US Department of Health andHuman Services.

The US poultry supply is typically consid-ered safer than chicken populations in devel-oping countries, as a result of superiorsanitation and safer feeds. The US govern-ment monitors domestic and imported foodproducts; in 2004, it issued a ban on impor-tation of poultry from countries affected byavian influenza viruses. As of March 2006,there was a ban on poultry from China,Japan, South Korea, Russia, Turkey, andmany Southeast Asian countries.

International focus on bird fluAfter spreading from Southeast Asia into

northern China and Russia in 2005, the vir-ulent H5N1 strain of avian influenza en-tered Turkey in early 2006, infecting somedomestic poultry. In February, wild birds insome European Union (EU) member states,as well as in Bulgaria and the Balkans, werediagnosed with the strain. The outbreakwas contained by the destruction of infectedanimals, the banning of transport of livebirds, and disinfection, according to the EU.

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As of April 11, 2007, 16 human cases hadbeen reported in Egypt, with four deaths,and six cases with five deaths in Indonesia.Human deaths were also reported in Laos(2), Cambodia, China, and Nigeria (1 each),according to the WHO.

The outbreaks have threatening implica-tions for US poultry producers, which shipabout 15% of their production overseas eachyear, according to USDA statistics. Publicfears of the disease could potentially reducepoultry consumption, while a quick-spreadinginfection could devastate domestic flocks.

The USDA projects that US broiler ex-ports will rise from 5,203 million pounds in2005 to 5,411 million pounds in 2006, witha further rise to 5,530 million pounds in2007. The global market share of US poultryproducers is estimated at 38% for 2006 —level with 2002, according to the USDA.

Since 2002, per capita consumption ofchicken has risen in almost all major mar-kets — substantially, in some cases. The ex-ceptions are Thailand, the Philippines, andthe 25 members of the European Union,which saw respective declines of 3.1 pounds,0.4 pounds, and 0.2 pounds.

While the flu has not reduced consump-tion, it has still had an impact on the market,as indicated by poultry prices. Even in themidst of a health scare, producers can sellnearly anything if they price it low enough.This could be the case for US poultry ex-ports. (Dark meat, which is what leg quar-ters contain, is more popular overseas thanin the United States. As a result, the leg quar-ter is the most commonly exported piece ofchicken.)

Pilgrim’s Pride reports that US chickenconsumption has risen 81.3%, or 2.2% com-pound annual growth rate (CAGR) since1980, and turkey 63.1%, or 1.8% CAGR,which beef has fallen 13.3% (0.5%) andpork is down 12.7% (0.5%) in the same pe-riod. In its fiscal 2006 (September), the com-pany reported that concerns over avian fluhad “significantly” reduced export demandfor its poultry, leading to higher inventoryand lower prices. Chicken sales to Mexico,its primary international market were down6.2% by revenue (while volumes were up,prices were down 9.1%), and turkey salesdropped 36.1%. The company lost $34.2million in 2006, down from net income of$265.0 in 2005. In the first quarter of fiscal

2007, the company lost $2.9 million, with a$11.4 million loss in US chicken operationspartly offset by a gain in Mexico and inturkey products.

The rise of organic farming

Organic food sales are growing at a rapidrate, opening new opportunities for foodproducers and processors. The OrganicTrade Association (OTA) estimates that $15billion worth of organic products are sold inthe United States each year, up from only $1billion in 1990.

Certain retailers have taken advantage ofthe strong demand for organic products. Forinstance, Whole Foods Market Inc., thelargest US retailer of natural and organicfoods, reported 19.3% sales growth in thefiscal year ended September 24, 2006, downslightly from 21.6% growth in 2005. Same-store sales rose 11.0%. Between 2002 and2006, the company averaged 20.7% annualgrowth. Larger retailers, such as Wal-MartStores Inc., also have been expanding theirorganic food offerings in recent years. Whileretail food sales in the United States havebeen growing at an annual rate of only about1% since 1990, organic food sales are jump-ing more than 20% per year.

The rapid growth is largely the result ofmuch-publicized food scares and public con-cerns about the use of chemicals, growthhormones, antibiotics, and bioengineering inthe food system. Organic farming relies onecological practices that virtually exclude theuse of synthetic chemicals in crop productionand prohibit the use of antibiotics and hor-mones in livestock.

A survey published in February 2006 bythe International Federation of Organic Agri-cultural Movements (IFOAM), which repre-sents global organic farming interests, foundthat about 3.5 million acres of organic farm-land are under active management in NorthAmerica; more than 76.6 million acres of or-ganic farmland are active worldwide. Thevalue of organic products worldwide was$27.8 billion in 2004 (latest available), withEurope and North America comprising thelargest proportion of sales, according toIFOAM.

Standard & Poor’s sees the growth of or-ganic foods continuing at a rapid pace asfarmers move into organic production, and

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as more processors and distributors expandtheir product lines to meet increasing con-sumer demand.

The popularity of organic foods maydampen demand for antibiotics and hor-mones. For instance, many US dairies areconsidering ending the use of bovine growthhormones in milk cows. This would hurtproducers of animal antibiotics or hormones,such as Monsanto Co.

Without the use of antibiotics and pesti-cides, food producers are more exposed tothe development of potentially serious prob-lems. For instance, organic soybean produc-ers in the United States have few options toprotect themselves from the spread of soy-bean rust, since they do not use traditionalfungicides. However, the growth in organicdairy and poultry farms has led to increaseddemand for organic soybeans used in animalfeed. Thus, while farmers can demand higherprices for organic crops, they also take ongreater risk.

Genetic engineering: expansion andcontroversy

The development of genetically engineeredcrops has increased farm productivity rapidlysince the 1980s. Scientists use genetic engi-neering techniques, which involve changingthe genetic makeup of seeds in the laborato-ry, to produce new plant species with desiredcharacteristics.

Most genetically engineered crops are de-signed to reduce the use of pesticides and in-crease crop yields through better control ofinsects, weeds, and disease. For example,Monsanto produces an herbicide calledRoundup, which kills all plants except thosethat have been modified to resist it — theseeds that Monsanto sells as “RoundupReady” include varieties of corn and soy-beans. According to the company, the net re-sult is a reduction in chemicals and tillageneeded for crop production.

In 2005, genetically engineered cropswere planted on 222.4 million acres in 21countries, up from 27.2 million acres in1997, according to the International Servicefor the Acquisition of Agri-biotech Applica-tions, an advocacy group promoting agricul-tural development and poverty alleviation.Soybeans account for more than 60% of theplantings, followed by corn (about 24%)

and cotton (less than 11%). The UnitedStates generates about 55% of global bio-engineered production.

In 2006, 61% of US corn crop byacreage was planted with biotech seed, upfrom 52% in 2005, according to the USDAEconomic Research Service (ERS). The ris-ing use of genetically modified seed, haspushed seed prices up 74% between 1999and 2007, according to ERS. While theseseeds are more expensive to produce andpurchase than other varieties, farmers de-sire the traits they offer and are willing topay more.

The swift acceptance of this technology inthe United States has substantially boostedrevenues for companies focused on geneti-cally engineered crops, such as Monsanto,but challenges remain in other countries.Concerns exist about the unintended cross-breeding of genetically modified crops withnaturally occurring plants and the potentialfor people to experience allergic reactions tofoods with unexpected characteristics. Someforeign governments have attempted to re-strict the usage of genetically modified or-ganisms (GMOs).

The United States filed a lawsuit with theWTO in March 2003 against a moratoriumon genetically modified foods that the EUput in place in 1998. US farm groupsclaimed that it was costing them $300 mil-lion in lost export sales annually. The EU of-ficially removed the moratorium in 2004, butit continued to delay approval of new geneti-cally modified variants.

In 2006, the WTO ruled that the EU’s banon biotech foods had violated WTO obliga-tions. The decision is expected to increase USagricultural exports to the EU and shouldbenefit companies involved in the develop-ment of genetically engineered seeds, includ-ing Monsanto.

In France, the number of acres plantedwith GMO corn in 2006 rose tenfold over thenumber in 2005, to 12,350 acres, accordingto the Wall Street Journal. GMO Compass, anews site supported by the EU, reports that,in 2005, GMO corn was grown on 135.9 mil-lion acres in Spain, France, Portugal, theCzech Republic, and Germany, representing0.5% of the EU’s total corn crop.

While these figures are a tiny proportionof EU cropland, they may indicate the open-ing of a much larger market. The EU pur-

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chases about 15% of seeds sold globally — a$30 billion market, according to the WallStreet Journal.

HOW THE INDUSTRY OPERATES

Agribusiness companies function in themiddle stages of the food production process.Crop processor operations include the har-vesting or milling of raw agricultural com-modities; crop processors also may plant andraise crops, although they generally buy thesecommodities from farmers. Crop processorstypically sell their products not to con-sumers, but to processors and food pack-agers, which use the ingredients to makefinished consumer food products.

Companies such as Archer Daniels Mid-land Co., Corn Products International Inc.,and Cargill Inc. process and merchandiseraw grains, including corn, wheat, and soy-beans. Their end products include oils,syrups, starches, and meals used in the foodand feed industries, as well as corn sweeten-ers used in soft drinks.

Meat processors, including Tyson FoodsInc. and Smithfield Foods Inc., slaughter andprocess livestock and chickens for retail sale.Dairy processors, such as Dean Foods Co.,process raw milk into packaged milk andother related products, such as cheese andbutter.

Companies engaged in the late stages ofproducing consumer food products aregenerally referred to as food manufacturersor packagers. These companies — includ-ing Kellogg Co., H.J. Heinz Co., and theHershey Co., among others — sell theirfinished goods to retailers, which, in turn,sell the products to consumers. (For moredetail on companies involved in the laterstage processing of foods for consumerconsumption, see the Foods & Nonalco-holic Beverages issue of Industry Surveys.)

For the purposes of this Survey, our dis-cussion focuses on the early to middle stagesof the agricultural industry and its majorplayers: the farmers, crop processors, meatprocessors, and dairy product producers.Due to their size and capital resources, thelarger firms in these areas typically havestronger competitive positions, greater diver-sity of businesses, and greater earnings stabil-ity than do other industry participants, such

as smaller processors or primary producers.Weather disruptions can significantly affectmarkets and prices for all agribusinesses, butthe impact is generally more easily absorbedby the bigger firms.

The role of the crop processor

Crop processors usually modify a raw ma-terial to the level required by processed foodscompanies, which will further enhance theproducts for direct sale to consumers. Forexample, crop processors such as ArcherDaniels Midland or Corn Products Interna-tional buy corn and refine it into high-fructose corn syrup. They sell the syrup tocompanies such as the Coca-Cola Co. or PepsiCo Inc., which use it to manufacturebeverages. Another example of further pro-cessing is the practice of converting grain intodistilled alcohol, which in turn can be used tomake beverages or medicinal products.

Some crop processors have become verti-cally integrated, selling finished products di-rectly to wholesalers, retailers, and consumers.For instance, in addition to its other activities,Archer Daniels Midland makes vitamin E pillsand sells them to retailers. Hormel FoodsCorp. raises and slaughters hogs, while alsomaking value-added consumer products.

Crop processors typically purchase rawmaterials on a daily basis in order to keeptheir production facilities operating at peakefficiency. These raw materials are seasonalproducts, harvested once per year and storedin silos. The availability and price of thesecommodities are subject to wide fluctuations,due to unpredictable factors such as: weatherand plantings; domestic and foreign govern-ment farm programs and policies; changes inglobal demand created by population growthand rising standards of living; and globalproduction of competing crops.

Generally, price changes in agriculturalcommodities can be passed through toprocessed goods. However, ethanol, pro-duced from corn, is one of a small minorityof processed products that must be priced tocompete with products made from other rawmaterials, such as fuels made from naturalgas, hydrogen, and biodiesel (i.e., diesel-equivalent fuels derived from biologicalsources, such as vegetable oils).

To reduce their exposure to the risk ofmarket fluctuations, many companies use the

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commodities market to hedge all or part oftheir inventories and related purchase andsales contracts. The principal hedging instru-ments are readily marketable exchange-tradedfutures contracts. Changes in the market val-ues of these financial instruments have a highcorrelation to the price changes of the hedgedcommodities. In addition, the underlying com-modity can be delivered against such con-tracts. Archer Daniels Midland, for example,buys wheat futures that it can exchange forwheat after six months. As agriprocessorshave become more globally integrated, theyalso have gained the need to hedge against ad-verse movements in the currency markets toprotect operations in other countries.

How grains are processed

Processors turn grains into a variety ofmarketable products through a series ofsteps. Each of these steps can result inbyproducts, which are also valuable as ani-mal feed.

Corn processingAccording to the Corn Refiners Associa-

tion, an industry trade group, the process ofturning corn into chemicals or alcohol (in-cluding ethanol) involves seven key steps (seethe table entitled “Steps in corn processing”).

Corn is removed from the cob during har-vesting on the farm. After arrival at a pro-cessing plant, it is inspected and cleaned,removing any remaining dust or cob rem-nants. In the wet-milling process, the corn issteeped in cold water for up to 40 hours, in-creasing the size and moisture levels. Thisstep loosens the gluten bonds and releases

the starch. Nutrients from the water are cap-tured for use in animal feeds. Cyclone sepa-rators are then used to spin the germ out ofthe water slurry; the germ is then pumpedonto screens.

Mechanical and solvent processes are usedto extract oil from the germ. The oil is thenrefined into finished corn oil. The remnantscan be used in animal feed. In the fine grind-ing and screening process, fiber is extractedfrom a mix of starch, gluten, and fiber, foruse as a key ingredient in animal feeds. Thestarch and gluten mix is then passed througha centrifuge to spin out the gluten (whichalso is used for animal feeds).

The remaining starch is then washed anddiluted to remove traces of protein. The verypure, high quality starch can be sold as un-modified cornstarch or modified into special-ty starches. The starch is suspended in waterand treated with enzymes or acids to createsweeteners, such as corn syrup or pure dex-trose. Dextrose can be processed further andfermented into alcohol, amino acids, or otherbioproducts, such as vitamins.

Corn also may be dry milled to produceethanol. In this process, shelled corn ismashed and fermented mechanically, thencleaned of impurities. It is milled into a finemeal and mixed with water to form slurry.Enzymes are added to form dextrin. It is thencooked to kill bacteria, cooled, and then fer-mented from dextrin into dextrose, whichcan be converted into ethanol and carbondioxide.

Soybean processingSoybeans are processed through some-

what similar steps (see the table entitled

STEPS IN CORN PROCESSING

Source: Corn Refiners Association.

Steeping Germ separation

Oil refining

Corn Oil Feed products Starches Sweeteners Alcohol &chemicals

Grinding & screening

Starch–gluten separation

Starch conversion Fermentation

Germ Fiber Gluten Starchdrying Syrup refining

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“Steps in soybean processing”). According toindustry research group the National Soy-bean Research Laboratory, soybeans are usu-ally harvested and threshed (beans separatedfrom pods) simultaneously by large com-bines, then transported to a drying site.Warm, dry air is circulated around the beans,through forced ventilation in a “dryer,” toensure preservation. Beans are then cleaned,eliminating impurities and debris, such asplant or insect waste. Beans are placed in amotor-driven cleaner-separator, which usessuction to remove impurities.

To process into soybean meal, the beansare cracked and rolled into flakes. Theprocess disrupts the oil cells, allowing the oilto be extracted. The dried, defatted soy

flakes can then be ground or texturized toconvert them into animal feed, flour, or grits.These ingredients also can be used in bakingor dairy products, as well as infant formulas.

Distribution: spreading the bounty

Distribution plays an important role inagribusiness. After crops are harvested oranimals are raised, they must be transportedto food processors, storage centers, or to re-tailers before they can reach the end user(the consumer). Trucking systems and rail-roads are important means of transportingagricultural products. In addition, manyagribusiness companies use barges, whichtravel via river to huge seaside terminals;from there, products are exported on ocean-going vessels.

For instance, Archer Daniels Midlandowns and operates more than 20,000 railcars, 1,500 tractor/trailers, and 2,000 barges.In addition, the company distributes prod-ucts throughout Europe via its Netherlandsdistribution center. It transports productsfrom rail and barge terminals to silos bytruck; the products are then trucked to bak-ers, food producers, and soft-drink makers.

It all starts at the farm

Farms generate the bulk of commoditiessupplied to meat and crop processors. Asprices for crops or unprocessed meat rise,profit margins for processors fall, unless therising prices can be passed along to con-sumers. If demand for the good is inelastic,such as it is for milk, processors have moreleeway to raise prices. If there are sufficientreplacement products, processors will haveless pricing power.

The US farm sector is increasingly domi-nated by large farms, which the US Depart-ment of Agriculture (USDA) defines asreporting annual sales of $100,000 ormore. Large farms comprised 17% of allfarms but received 83% of farm revenue,according to the last (1992) farm censusfrom the Census Bureau.

The number of farms and ranches fellfrom 2.62 million in 1974 to 2.13 million in2002, according to the latest agriculture cen-sus from National Agricultural Statistics Ser-vice (NASS), a division of the USDA. (In1997, the responsibility for conducting the

STEPS IN SOYBEAN PROCESSING

Source: National Soybean Research Laboratory.

WholeSoybeans

SoybeanFlakes

CrackedSoybeans

SoybeanHulls

Mill Feed

SpentFlakes

TexturedSoy Flour

SoybeanProtein

Concentrate& Isolate

CrudeSoybean Oil

SoybeanGums

48% SoybeanMeal

CrudeLecithin

BleachedLecithin

DegummedSoybean Oil

RefinedSoybean Oil

Refined,Bleached,

DeodorizedSoybean Oil

Shortening LightlyHydrogenated

(liquid)

Cleaning, Cracking, Dehulling

Conditioning & Flaking

Solvent Extraction

Grinding & SizingDegumming

Refining

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farm census was transferred from the CensusBureau to NASS.) Of that total, 2.129 mil-lion were farms, with an aggregate 938.3million acres and sales of $200.6 billion.

In terms of ownership structure, 89.7% offarms in 2002 were individually or familyowned (representing 621.8 million acres,$108.9 billion in sales); 6.1% were partner-ships (146.5 million acres, $38.2 billion);3.5% were corporations (108.3 million acres,$57.0 billion); and 0.8% were “other” — co-operatives, trusts, or institutionally owned(61.7 million acres, $2.4 billion).

Tractors came into widespread use around1915. Since then, improved tractor designshave allowed farmers to cultivate as well asplow their fields. Other machinery, such asself-propelled harvesting equipment, also be-gan to be used during the twentieth century;use of farm machinery increased steadily un-til the 1960s, when growth leveled off. In thesecond half of the century, the focus of tech-nological research shifted from mechanics tobiological and chemical sciences. These ef-forts, which have increased productivity andefficiency, have lowered the relative costs toproduce commodities.

Cooperatives help farmers to manage risk

Since the early nineteenth century, USfarmers have joined cooperatives as a meansof defraying costs and sharing risks. Coopera-tives — associations formed by farmer-ownersto market and distribute crops and livestock —allow farmers to gain economies of scale inprocessing, wholesaling, and retailing fooditems and to regain some bargaining power innegotiating with the large agribusinesses thatare their customers. Their profits are sharedamong producing members.

As a result of the increased bargainingpower, cooperatives often can charge proces-sors a premium for milk — as much as 10%over the market price. Prices paid for rawmilk to cooperatives and farmers typically ac-count for about 60% to 70% of the whole-sale milk price, according to the USDA.

Nearly 3,000 farmer cooperatives operatein the United States today. Their member-ships comprise a majority of the more thantwo million US farmers, ranchers, and grow-ers, according to the National Council ofFarmer Cooperatives, a trade group. Majorfood processing companies, such as Archer

Daniels Midland, purchase a significant por-tion of their raw materials from these coop-eratives, which have a US net annualbusiness volume exceeding $100 billion.

The main food groups

The list of commodities that the agribusi-ness industry grows and processes is wideranging and includes field crops, fruits, veg-etables, meats, poultry, fish, and dairy prod-ucts. Generally, companies operate within oneof these major categories and focus on oneor two commodities within that segment. Forinstance, Corn Products International is oneof the world’s largest corn refiners and a ma-jor supplier of food ingredients and industri-al products derived from corn. SmithfieldFoods concentrates on the production andprocessing of pork. Given the importance ofthe raw commodities to the processor, it isimportant to understand the characteristicsof individual commodity segments.

Farmers worldwide raise about 85 majorfood crops, of which cereal grains comprisethe dominant group.

Grains are primary cropsGrain occupies half the world’s cropland

and supplies much of the nourishment in thehuman diet. The chief grains are corn, soy-beans, wheat, barley, millet, oat, rice, rye,and sorghum.

Not all grains are for human consump-tion; some crops are used only to feed live-stock. These forage crops, which includealfalfa, clover, and many grasses, are impor-tant because they make commercial livestockproduction possible.

Crop cycles: from seed to saleCorn, the largest US crop in terms of

acres harvested, is planted in the spring andharvested in the summer and fall. The mar-keting year for corn runs from October 1 toSeptember 30. That is, farmers begin con-tracting for the sale of the current year’scrop as soon as it is harvested. Thus, in Oc-tober, after their corn is harvested, they be-gin marketing that crop. (The futurescontract enables a farmer to establish, inadvance, an approximate price for cropsthat he or she intends to harvest and marketat some future time.) Major corn-producingstates are Illinois and Iowa (which together

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account for more than one-third of the UScrop), Indiana, Kansas, Minnesota, Mis-souri, Nebraska, Ohio, South Dakota, andWisconsin.

Soybeans, the second largest US crop, canbe planted at any time from the springthrough the early fall. Soybeans are some-times planted after a wheat crop or an earlycorn crop has been harvested. Growing soy-beans adds nitrogen to the soil, which corncrops deplete; therefore, a farmer sometimeswill not harvest the beans or will rotate soy-beans annually with corn. As with corn, themarketing season for soybeans runs fromOctober 1 to September 30. Major soybean-producing states are Arkansas, Illinois, Indi-ana, Iowa, Kansas, Minnesota, Missouri,Nebraska, North Dakota, Ohio, and SouthDakota.

Wheat is the third-largest crop in terms ofacres harvested. Its six varieties are hardwinter wheat, soft red winter wheat, hardred spring wheat, durum wheat, hard whitewheat, and soft white wheat. The grain isplanted in 20 US states, chiefly the GreatPlains, the Dakotas, Montana, Minnesota,and the Pacific Northwest.

Winter wheat accounts for about 70% to80% of the total wheat crop value; springwheat represents most of the remainder. Win-ter wheat generally is planted in the fall andharvested in the summer in the region fromNebraska to Texas. Spring wheat, grown inthe northern United States and Canada, isplanted as soon as the farmer can get into thefields in the spring, and it is harvested in thelate summer or fall. The marketing season forwheat runs from June 1 to May 31.

More than just foodThere are more than 3,500 uses for corn.

However, nearly 60% of US corn is used aslivestock feed by poultry, beef, pork, anddairy producers. Most of the rest is exportedor processed into starch, ethanol fuel, dex-trose, or oil products.

For example, cornstarch, corn syrup, dex-trose, and ethanol are used in many industrialand consumer products. Corn is used in in-dustrial products such as adhesives, chemicals,cleaners, paints, and textiles. As a processedgrain, corn is found in many consumer staplessuch as beverages, baked foods, canned prod-ucts, and many meat products. Processed cornalso is used to make ethanol, which in turn is

used in alcoholic beverages, industrial alcohol,and motor fuels.

Used as ships’ ballast during the colonialera, soybeans today have wide-ranging uses.Soybeans are used primarily in oil and inwhole soybean and soybean protein prod-ucts. As oil, soybeans are found in cookingand salad oils, margarine, shortenings, dieselfuels, epoxies, paints, bakery goods, candy,pharmaceuticals, alcohol, yeast, rubber, andcosmetics. Whole soybeans are used in stockfeeds, soy flour, bread, candy, soy sauce, andcooking ingredients. Soybean protein is in-corporated into livestock feed, adhesives, an-tibiotics, cosmetics, plastics, baby food, beer,and meat products.

Like corn and soybeans, wheat also isprocessed as livestock feed. However, itslargest use is to make flour — ground andsifted grain meal. The different types ofwheat flour are all-purpose, bread, self-rising,whole wheat, and other (cake flour, pastryflour, gluten flour, semolina, durum flour, andfarina). Flour is found in many of the staplefood products, such as breads, cakes, pastries,crackers, and pasta.

Livestock and livestock productsLivestock and livestock products comprise

meat animals (i.e., domestic animals raisedfor meat), poultry and eggs, and other simi-lar products. By far, the biggest segment ismeat animals; these products include beef,pork, veal, lamb, and mutton. The poultryand eggs segment consists of chickens, broil-ers (young chickens), turkeys, and eggs.

Among livestock animals, poultry —chickens and turkeys — are the fastest toraise and bring to market. A period of aboutseven months elapses from the time a chickenegg is fertilized and hatched to the chicken’smaturity, when it is ready for slaughter.The ratio of breeding animals to slaughteranimals is relatively small, enabling a poul-try producer to adjust rapidly to marketconditions.

Generally, 85% of eggs are sold for hu-man consumption, while the rest are keptfor the hatching market. Retained eggs arehatched to produce replacement birds forthe egg-laying flocks or to produce broilerchicks to be used for their meat (known asgrow-out operations).

A hog’s life cycle is longer: 20 months areneeded to breed a sow and raise her off-

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spring to maturity. In addition, keeping hogsfor breeding reduces the number of hogs sentto slaughter, thus slowing production. How-ever, most sows farrow at least twice a year,and the average litter size approaches nine.Thus, hog producers have a reasonable abili-ty to respond to changing market conditionsby altering the number of sows they retain.

Smithfield Foods notes that, for the indus-try generally, hog production has become sig-nificantly more stable than in the 1970s,when farmers would use low-cost facilities toraise hogs but quickly get out of the businesswhen times turned hard. Facilities today costmore to build, which raises fixed costs andreduces the incentive to substantially raise orlower production. The availability of asteady supply of meat is attractive to pack-ers, who wish neither to underutilize their fa-cilities nor to exceed their capacity. Porkprices, however, remain highly variable.

Beef producers are at a disadvantage tohog and poultry producers because it takeslonger to build cattle inventories comparedwith other meat producers (pork and poul-try). According to the USDA, the normal cat-tle cycle runs about 10 to 12 years. Cattleherds are increased over a four-year period,the herd peaks for one to two years, andthen a four-to-six year inventory decline fol-lows. As the herd increases, cattle prices be-gin to fall, making the feeding processunprofitable. (Feed prices rise as demand in-creases.) As the herd begins to be liquidated,beef prices fall. As liquidation moves for-ward, herd numbers fall until prices hit a“bottom.” Then the cycle begins again.

The animal products with which con-sumers are most familiar are steaks, chops,sausages, and luncheon meats. However,there are many other uses for processedmeats. For instance, with cattle, almost theentire carcass — including the liver, heart,kidney, tripe, sweetbreads, and tongue —can be used in a variety of meats. A less-known product, derived from beef fat, isoleo stock; it is used to make shortening.Oleo stearine is used in chewing gum.

Pork and beef bones and hides are used tomake gelatin, which is used in everything frommarshmallows to ice cream to canned meats.High-quality gelatin is used in the clarificationof apple juice, wine, and beer, as well as inpharmaceutical capsules. Animal intestines areused to make sausage casing, while hides are

used for leather products such as handbags,shoes, belts, footballs, and baseball gloves.Beef tallow (or fat) is used in many everydayproducts, including lipstick, face and handcreams, toothpaste, and cough medicine.

Chicken and pork processors typically raisetheir own animals. This insulates them fromfluctuations in unprocessed meat prices, but itleaves them exposed to changes in feed prices.

Dairy productsDairy products include milk, butter,

cheeses, nonfat dry milk, and frozen desserts.Given the short shelf life of dairy products,foreign trade is relatively limited, althoughthe United States is increasing exports ofmilk powder to Mexico and Southeast Asia.

As it did for crop farmers, automation hassignificantly reduced dairy farmers’ relianceon human labor. In 1950, a farm with 100milking cows was considered large; today,farms with 5,000 milking cows are common,assisted by the automation of many dairyfarming tasks — including milking. Distribu-tion has changed as well. In 1950, most of themilk sold to consumers was delivered to thehome in bottles, whereas most milk is nowsold at retail in gallon containers.

Unlike some of the other agribusinessmarkets, the dairy industry is very fragment-ed. Standard & Poor’s believes that the dairyindustry is likely to undergo significant con-solidation in the next 10 years because of itsexcess capacity and the low growth in de-mand for fresh milk products. One of themore prominent consolidators in the dairyindustry is Dean Foods.

World trade: moving toward freermarkets

Because the market for food is global, USagribusiness firms are strongly influenced byinternational farm, trade, and environmentalpolicies.

The World Trade OrganizationEstablished on January 1, 1995, the

World Trade Organization (WTO) is the onlyglobal international organization overseeingthe rules of trade between nations. Its goal isto help producers of goods and services, ex-porters, and importers conduct their busi-ness. The organization’s objectives are toencourage member nations to conduct trade

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and economic negotiations in order to raiseliving standards, increase employment, andexpand the production and trade of goodsand services worldwide.

The WTO was created as the successor ofthe General Agreement on Tariffs and Trade(GATT), a set of rules set by the world’s ma-jor economic powers for reducing and limit-ing trade barriers at the end of World War II.The WTO was to continue the global reformprocess begun during the final round of ne-gotiations under GATT — the UruguayRound Agreement on Agriculture (URAA),which concluded in 1994. As of December2005, the WTO had 149 members, and 31additional nations were negotiating to join.(The 31 nations are known as “observers,”as is the Vatican. Those 31 nations must be-come members within five years of attainingobserver status; the Vatican is exempt fromthis requirement.)

Market access and government subsidiesare two areas of WTO concern.

◆ Market access. Increasing market accessamong WTO member nations is crucial inthe quest for fair world trade. The URAA es-tablished tariff and quota guidelines to ac-complish this objective.

The URAA called for all members to con-vert nontariff barriers to tariffs. Nontarifftrade barriers are regulations that governmentsuse to restrict imports from and exports toother countries. These methods include embar-goes, import quotas, and technical barriers totrade. Elimination of nontariff barriers was thefirst step toward allowing farmers worldwideto compete based on efficiency of productionrather than local regulation.

The agreement also called for members tosignificantly reduce tariffs. However, countrieshave tended to cut the smallest tariffs by thegreatest amounts, with large tariffs only mini-mally reduced. For commodities subject to tar-iffs, a special safeguard provision allows theimposition of additional duties in the event ofsurges in import volume or low world prices.

◆ Government subsidies. The URAA ac-knowledged that domestic agricultural poli-cies can distort trade. However, due topolitical considerations, the URAA’s domes-tic support agreement retained a number ofpopular policies that support producers,such as assistance through environmental

policy, disaster relief, regional support, andrural development programs. Nevertheless,member governments commit themselves tonegotiations aimed at improving market ac-cess, reducing and eventually phasing outexport subsidies, and reducing domesticsupports that distort trade.

Regional trade agreementsRegional trade agreements (RTAs) signifi-

cantly influence world agricultural trade.RTAs — agreements among geographicallyproximate nations to reduce trade barriers be-tween them — have been established in everyregion of the world. Examples of such net-works include the European Union; Asia-Pacific Economic Cooperation (APEC), a freetrade initiative encompassing 21 economies,including the United States, Japan, and China;the Association of Southeast Asian Nations(ASEAN) Free Trade Area; the Australia-NewZealand Closer Economic Relations (CER);the North American Free Trade Agreement(NAFTA); and the Free Trade Area of theAmericas (FTAA).

The United States is an active participantin regional trade pacts and networks. In Jan-uary 1994, the United States, Mexico, andCanada entered into the North AmericanFree Trade Agreement (NAFTA), creating thelargest free trade area and richest market inthe world, in terms of member countries’gross domestic products. NAFTA, the mostcomprehensive regional trade agreement evernegotiated by the United States, is scheduledto be fully implemented by 2008.

NAFTA consists of two agreements: onebetween Mexico and the United States, andthe other between Mexico and Canada.These agreements will ultimately lead to thecreation of a free trade zone for agriculturalshipments between the three countries. Theagreements are expected to be of varying im-portance to the agricultural sectors of thethree countries.

US agricultural exports to Canada andMexico (respectively, its first and secondlargest trade partners), increased from $8.9billion in 1993, prior to NAFTA, to $19.5 bil-lion in 2005; imports grew from $7.4 billionto $20.0 billion, according to the USDA. Theagency reports that Canada and Mexico ac-counted for 55% of growth in US agricultur-al exports during that period. Exchangesbetween the United States and Mexico have

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balanced each other during those 12 years,according to the USDA — with exports ris-ing $5.7 billion for the United States, and$5.6 billion for Mexico.

In advance of NAFTA’s adoption, therewere concerns that capital investment in theUS farm sector might decline once the agree-ment was adopted. This did not happen,however, as NAFTA has facilitated the flowof investments in agricultural production andfood processing within North America.

The major agricultural provisions ofNAFTA include the following:

◆ The elimination of nontariff barriers.Nontariff barriers were eliminated upon imple-mentation of the treaty, generally through con-version to tariff-rate quotas or ordinary quotas.

◆ The elimination of tariffs. Many tariffswere eliminated immediately; most of the re-maining tariffs were to be gone within 10years. Tariffs for some sensitive products,such as maize, will be eliminated graduallyover 15 years.

◆ The “country-of-origin” rule. Thisrule’s main provision is to ensure that goodsare wholly obtained or produced in the terri-tory of one or more of the parties. It was de-signed to prevent, for example, Mexico orCanada from serving as a platform for ex-ports from non-NAFTA countries to theUnited States.

Impact on the industryUS farmers and agriprocessors stand to

benefit from a more open and free tradingsystem. Agribusiness processors such asBunge Ltd. and Archer Daniels Midland, aswell as individual US farmers, stand to bene-fit from increased demand for their productsand greater operating efficiencies. Organiza-tions such as the WTO give these farmersand processors a voice in international mar-kets and assurance that they can benefit fromsecure supplies and a greater choice of prod-ucts, components, raw materials, and ser-vices that they use. For example, TysonFoods’ representatives helped the UnitedStates resolve a WTO trade dispute afterRussia banned US chicken imports in 2002.

Trade conflicts are handled by the WTO’sdispute settlement process, where the focus ison interpreting agreements and commitments

and how to ensure that member countries’trade policies conform to them. The ongoingdispute between the United States and theEuropean Union over genetically modifiedorganisms is one such conflict currently be-ing negotiated. (See the “Industry Trends”section of this Survey for more details.)

KEY INDUSTRY RATIOS AND STATISTICS

� Currency exchange rates. Due to thegrowing importance of US agricultural importsand exports, the foreign exchange rates for theUS dollar have an increasing influence on prof-itability for much of the agribusiness industry.

A strong dollar versus foreign currencies,such as the euro, will generally penalize re-ported profits for companies with significantoperations in those markets. This is becausefewer dollars flow back to the United Statesafter exchange translations. The reverse isalso true: when the dollar is weak, foreignoperations report enhanced profits.

Multinational companies often use currency-hedging techniques to reduce their sensitivityto fluctuations in exchange rates. However,this activity usually is not enough to offsettotal losses in periods of unfavorable curren-cy swings.

Many US agriprocessors have sizable for-eign operations. For example, companies suchas Archer Daniels Midland Co. and Bunge Ltd.generate a large portion of revenues and oper-ating profits from international operations.Given the industry’s rush to develop marketsoverseas, currency exchange rates will be ofeven greater consequence in coming years.

Through March 30, 2007, the US dollarfell 9.9% against the euro, to $1.33 per eurofrom $1.21 on March 30, 2006. Against theJapanese yen, the dollar appreciated margin-ally during the period, from to ¥117.6 perdollar to ¥117.9.

� Agricultural exports and imports.These figures, reported by the US Depart-ment of Agriculture (USDA), represent theannual dollar value of exported and import-ed agricultural goods during each federal fis-cal year ending September 30. Agriculturalproducts are one of the leading US exportcategories and generate a surplus toward theUS trade balance.

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US agricultural exports were valued at$68.7 billion in fiscal 2006, while importswere valued at $64.0 billion. The resultingtrade surplus ($4.7 billion) was equal to thatof 2005, but down from $9.7 billion in fiscal2004 and $10.3 billion in fiscal 2003. Thetrade surplus reached a peak of $21.6 billionin fiscal 1996.

The USDA projects that exports will riseto a record $78.0 billion in fiscal 2007. Im-ports are projected to increase to $70.0 bil-lion, for an annual surplus of $8.0 billion.

� Gross domestic product of US exportmarkets. Gross domestic product (GDP) sta-tistics for US agricultural export markets arehelpful in predicting future demand. As acountry’s economic prosperity rises, so doesits consumption of food and other goods.GDP, the market value of all goods and ser-vices produced by a country’s labor and capi-tal, is the broadest measure of economicactivity. These figures (for most countries)are available from research firm Global In-sight Inc. on a quarterly and/or annual basis.

US real (inflation-adjusted) GDP rose3.3% in 2006, compared with 3.2% in2005. As of March 2007, Standard &Poor’s projected that real GDP growthwould fall to 2.4% in 2007, before rising to3.0% in 2008.

Real GDP increased 2.8% in the Euro-zone in 2006, up substantially from 1.5%growth in 2005, according to Global Insight.The research firm expects the region’s econo-my to gain 2.4% in 2007 and 2.0% in 2008.In China, real GDP leapt 10.7% in 2006 and10.4% in 2005; further expansions of 10.0%and 9.0% are foreseen for 2007 and 2008,respectively. Japan reported real GDP growthof 2.2% in 2006 and 1.9% in 2005; GlobalInsight expects the nation’s economy to re-main at 2.2% growth in 2007 before fallingto 1.9% in 2008.

� Commodity prices. Prices are com-piled by the USDA for each major crop andagricultural product, including steers, broil-ers, eggs, and milk. The prices representsimple monthly averages of the daily closingspot prices in the terminal markets. Eachnumber represents an unweighted averageprice that farmers could have received onsales for immediate delivery. These pricescan be compared with year-earlier prices

and historical averages to help assess pricetrends in the industry.

� Supply and utilization. Prices do nottell the whole story; investors and analystsalso should monitor production and con-sumption figures to develop a better sense ofa commodity’s market trends.

For many crops, meats, and dairy prod-ucts, statistics are available from the USDAthat outline the commodity’s production,consumption, exports, and ending stock.This valuable information can help analyststo forecast price movements.

� Farm income. Reported on an annualbasis by the USDA, farm income is an indica-tion of productivity, crop and animal prices,and government support payments. In 2007,net farm income is forecast to rise to $66.6billion, up $6 billion from 2006 and $9 bil-lion (16.2%) above its 10-year average of$57.4 billion, according to the USDA Eco-nomic Research Service.

� Farm real estate values. Compiled an-nually by the USDA, farm real estate valuesare an indicator of the health of the crop-growing and livestock-raising segments ofthe agribusiness industry. The price of USfarmland was $1,900 per acre in 2006, up15.2% from $1,650 in 2005, marking thelargest annual increase since 1981. The in-crease was largely driven by external factors,including low interest rates and demand fornonagricultural land uses.

� Capacity utilization. Capacity utilizationis an important financial measure for foodprocessors. When capacity utilization levels arehigh, customers have less negotiating power insetting contracts, as their chances for findingalternate processors are reduced. While thisstatistic is not reported by individual compa-nies in their financial statements, it is some-times available in management’s discussion.

HOW TO ANALYZE AN AGRIBUSINESSCOMPANY

The first step to take when evaluating anagribusiness company is to consider externalfactors such as economic and market condi-tions. Next, the nature of the company’s

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product lines and any factors unique to thecompany should be assessed. Finally, the in-come statement, balance sheet, and cash flowstatement should be evaluated.

External factors

Economic conditions play a vital role indetermining the health of the agricultural in-dustry. The level of demand for a company’sproducts is determined in part by worldwidepopulation growth, by economic conditionsin developing nations, and by agriculturalproduct market conditions. For example, asglobal economic conditions improve, demandfor high-value products (such as red meats,fruits, and tree nuts) tends to increase. Al-though demand for individual products risesand falls, aggregate sales of agriculturalproducts should advance over time, pro-pelled by increasing worldwide consumption.

Given the international presence of manyUS processors, it is also important to keep aclose eye on the currencies of the countries inwhich a company transacts business.

Product mixWhen focusing on a particular company,

the first thing to determine is the kind ofagricultural products and services that thecompany provides. Is the company focusedon farming (growing crops or raising dairyor meat animals) or does it concentrate onprocessing agricultural goods? Is the compa-ny’s product mix commodity or specialty innature? What are the products’ relative prof-itability levels? Is the company improving itsproduct mix? Is it adding value to the goodsit processes?

Commodity agricultural products are nothighly differentiated; one bushel of grain,wheat, or soybeans is indistinguishable fromanother. For this reason, agricultural compa-nies with significant fixed expenses must pro-duce large volumes to reduce per-unit costs.If volume is rising, a company can spreadfixed costs over more units of production, re-sulting in lower per-unit costs and higherprofits. Conversely, if overall volume is de-clining, a company’s unit costs will rise andprofits will fall. Thus, maintaining adequatecapacity utilization rates is crucial to sustain-ing profit margins.

Value-added products, such as geneticallyenhanced seeds, normally are produced in

smaller quantities than unaltered seeds andare designed for specific applications or cus-tomers. While manufacturers of commodityproducts have little control over selling pricesduring times of shortages or excess supply,companies whose products have more value-added attributes have greater control overpricing.

It is imperative for a company to differenti-ate itself from its peers by making productswith value-added processing. For farmers andagriprocessors, this may entail shifting pro-duction to crops with higher starch content,oil profiles, or milling quality, or developingnew applications for these crops in the food,feed, textile, pharmaceutical, and constructionindustries. Development of crossbred or ge-netically altered crops provides significant op-portunities for product differentiation.

Although a higher-value product mix canhelp reduce exposure to the cyclical fluctua-tions of commodities, it is important to eval-uate the market’s reaction to differentiatedproducts. For example, while geneticallymodified, insect-resistant crops may reducecosts and increase productivity, the economicvalue of such crops could be mitigated byconsumer concern about their environmentalor health risks. Another consideration is thewillingness of the global marketplace to payhigher prices for produce with genetically en-hanced nutritional content. (In this case,higher prices would stem from both the value-added content and the costs of segregatingsuch crops during processing.)

Unique characteristicsIt also should be noted that what is good

for one segment of the industry may beharmful to another. For example, whilefarmers may benefit from higher sellingprices for grain and wheat, buyers of theseproducts, such as agriprocessors and meatand poultry producers, will be hurt by in-creased feed and raw material input costs.

The largest agribusiness companies,whether corporate or cooperative, general-ly have strong competitive positions andwide business diversity. Such a profile givesthem more stability than other industryparticipants. For some industry partici-pants, such as multinational chemical com-panies, agribusiness products and servicesmay represent only a small portion of acompany’s total business activity.

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Looking at the income statement

Key elements of an agribusiness compa-ny’s income statement include sales, operat-ing margins, other expenses, net income, andearnings per share.

SalesFor an agribusiness company, as for most

other industries, income statement analysisstarts with the top line: sales. Revenue growthis good, but it is also relative; a company’ssales growth should be compared with that ofits competitors, as well as with the overallgrowth of its markets.

Compare changes in sales with the compa-ny’s historic growth rates, its competitors’rates, and industry rates. Are the company’s

sales advancing or declining, and why? Are itscore markets or product lines growing fasteror slower than in the past? Is the company be-coming more efficient in using resources togenerate sales? Finally, is it gaining or losingmarket share compared with similar compa-nies? If sales are growing, what is the cause?An increase in price or volume? A change inproduct mix or currency exchange rates? Ac-quisitions? Or some other factor?

Because seasonal factors can influencesales in any given quarter, it is more impor-tant to look at year-to-year sales growth thanat sequential quarter-to-quarter comparisons.

Operating marginsBecause of the volatile nature of agricul-

tural production cycles, operating margins

Assessing the creditworthiness of anagribusiness company

To determine a company’s credit rating, Standard& Poor’s Ratings Services analyzes its business riskand its financial risk. For cyclical industries suchagribusiness, our credit ratings reflect a company’sperformance throughout an operating cycle. To betterreflect its financial performance in our analysis, weaverage its credit protection measures through theyear, or through an agribusiness cycle, to smooth thepeaks and troughs that often occur. We also evaluateany structural changes in the company’s businessprofile or its operating environment. The balancing ofthese two factors in Standard & Poor’s analysis is keyto agribusiness ratings.

The agribusiness firms we rate generally havestronger competitive positions and greater businessdiversity, and thus more earnings stability, than oth-er industry participants do. Nevertheless, the major-ity of our ratings on agribusiness firms are lowerthan the median for the broader universe of industri-al companies, which is ‘BB–’. Many of the smallercompanies we rate lack the critical mass of the topglobal firms, or have taken on significant debt asthey have sought to increase their market positions.

Business riskAgribusiness credits inherently have higher busi-

ness risk profiles relative to most other consumerproduct credits due to their commodity orientationand the volatility of their earnings. The agribusiness

sector is characterized by low prices, high volumes,and thin margins. In addition, it is subject to raw ma-terial cycles of tight or overabundant supplies. Thethin margins reflect the limited value-added natureof agribusiness operations.

Major events or external developments canquickly affect an agribusiness company’s operatingenvironment. Several events that could lead to achange in credit quality are erratic weather patterns,raw material cycles, changing government regula-tions, trade agreements, and commodity prices.

Unusual weather patterns, such as El Niño and LaNiña, can compound the volatility in the commoditymarkets and affect prices, as well as the elusive bal-ance between supply and demand for various crops.This can result in earnings swings for the rated agri-cultural companies.

How a company copes with the industry’svolatility — whether through conservative financialpolicies, diversification, or moving up the foodchain by producing value-added products — is im-portant in our analysis. Financial ratios should bestronger on average than those for other consumerproduct companies to offset potential swings in thecommodities markets. In addition, balance sheetstrength (especially current assets for companiesthat trade commodities) is key. In some instances,however, a broadly diversified portfolio can com-pensate for weaker credit protection measures andlow margins.

The commodity orientation of many productsprocessed or distributed by issuers and the ever-

S&P Ratings Services View:

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for agribusiness companies fluctuate signifi-cantly more than those of general industrialcompanies. Operating margins are calculatedas a company’s total sales figure minus thecost of labor and raw materials, selling, mar-keting, and administration, and research anddevelopment (R&D). The resulting profit fig-ure is divided by the sales figure to get theoperating margin.

Two factors are critical in determining thevolume of product sold and the resultingprofit: government policies and weather.Government policies affect crop acreage andcommodity prices. Weather can affect com-modity prices, seed product performance,and planting decisions by farmers. These fac-tors can affect margin and profitability levelsand are subject to year-to-year fluctuations.

When analyzing a company’s expensesand margins, compare them with those ofthe prior year as well as with those of simi-lar companies. Is the company controllingits expenses? Compared with its competi-tors, is it efficient in its use of assets, per-sonnel, and other resources? Does itsincome statement reflect unusual expensesthat may not occur again? Is the companyunderspending in such areas as R&D, and ifso, could such deficiencies hurt its futureperformance?

For commodity companies, such as meatand dairy producers, costs for raw materials(e.g., grain feed), manufacturing, and depre-ciation account for a larger percentage of to-tal costs than they do for agribiotech orlater-stage processing companies. For

changing conditions of the agricultural environment,both domestically and internationally, are among thecrucial factors for Standard & Poor’s in formulatingthe business risk profiles and debt ratings of agricul-tural companies.

Generally, investment-grade ratings reflect solidand diversified business positions, which lessen po-tential earnings volatility. Cargill Inc. has significantgeographic and product diversification to reduce po-tential earnings swings, and Archer Daniels MidlandCo. (ADM) is an important processor of corn andoilseeds, as well as a major supplier to food and bev-erage companies. ADM’s leading position in ethanolled to stellar results in fiscal 2006. Corn Products In-ternational Inc. enjoys solid positions in starch andsweeteners in the US and worldwide.

Noninvestment-grade ratings frequently reflectlimited product portfolios and higher debt levels.These factors often result in fluctuating earnings andcash flow, in addition to limited financial flexibility toride out a down cycle.

Financial riskModerate to conservative financial policies are

important to an agribusiness company’s financialrisk profile as they allow a firm to ride out thetrough of an agribusiness cycle. Such policies cantake the form of keeping substantial cash on thebalance sheet or limiting debt to moderate to con-servative levels. In addition, a moderate dividendpolicy and/or share repurchase program, if fundedout of cash flow and not through debt issuance,provides a company with greater financial flexibili-ty, especially when working capital needs increase

due to higher commodity prices. We also look atrisk management policies and a company’s appetitefor using derivatives.

Adherence to the corporate governance “bestpractices” followed by publicly held companies alsofigures into our analysis, even though many of thefirms we cover are private or semi-private. Addition-ally, accounting policies and the transparency of re-porting are important elements of our analysis of afirm’s overall financial policies.

For the most part, both investment-grade andnoninvestment-grade agribusiness companies haveEBITDA margins that are fairly thin (in the low to mid-single digits), reflecting the low value-added natureof their businesses. During a downturn in the cycle,these already thin margins usually deteriorate fur-ther. This often results in credit protection measuresthat look weaker than the rating at the bottom of thecycle and can look stronger than the rating at thepeak of the cycle. Because of this, we look to aver-age credit protection measures over the agribusinesscycle, which usually results in a more accurate pic-ture of a company’s financial profile. At the sametime, however, we must balance this against anychanges in a company’s business model or operatingtrends.

Positive operating cash flow, an ability to curtailcapital spending during a downturn, and adequateliquidity are three other key elements in our financialanalysis. Together, they give a company the flexibili-ty to manage through the sector’s inherent volatilityand cyclicality. ■

—Jayne RossAgribusiness Credit Analyst

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agribiotech firms, selling and R&D are alarge percentage of costs.

Changes in the cost of feed — usuallygrains, soybean meal, and corn — will mate-rially affect margins for meat and dairy pro-ducers, whose selling prices may stay thesame or lag the changes in these costs. Atany given time, margins for commodityagribusiness companies may be higher orlower than those of companies further alongthe food production chain.

Other factors that may change a compa-ny’s profit margins are the costs associatedwith recently acquired or divested businesses.Companies that invest in technology must in-cur some initial costs, but in the long term,these investments should improve the pro-duction process and thus reduce costs andimprove profit margins.

Throughout the year, most companiesmake daily purchases of commodities, theprices of which can be highly volatile. Forthis reason, it is important to know how acompany hedges against adverse changes inthe commodities that it purchases. It is alsoimportant to understand how the hedging isaccounted for in the financial statements.

Expense itemsA company’s expense line items — typi-

cally selling, general, and administrative(SG&A) and R&D costs — should be evalu-ated against industry norms. Ideally, theyshould grow at a slower rate than sales.

One exception to this general rule isyoung agricultural biotechnology companieswith high growth prospects. Because thesecompanies must typically increase their per-sonnel base rapidly to keep pace with devel-opment and sales growth, expenses oftengrow faster than sales during their earlyyears. Moreover, in order to sustain a com-petitive advantage in the crop plant geneticssegment of the agribusiness industry, it iscritical to invest sufficiently in R&D.

Net incomeThe bottom line of the income statement

is, of course, net income. In reviewing thisfigure, an analyst should be on the lookoutfor special items that may have distorted it.

For example, special credits (also called“extraordinary” or “nonrecurring” items)could include a profit gain from an assetsale. A company also could derive special

credits from favorable legal settlements orfrom a one-time change in accountingpractices. Special charges can result frombusiness restructuring initiatives, losses de-rived from asset sales, and unfavorable le-gal settlements.

Earnings per shareThe holy grail of fundamental analysis is

earnings per share (EPS). EPS figures firstshould be adjusted for special items so thatmeaningful growth comparisons can bemade among different quarters or years.Growth trends in adjusted EPS over thecourse of a few years are good indicators ofthe company’s underlying health. EPS fig-ures also serve as a reliable benchmark forvaluing the company’s stock against thoseof its peers, as well as against companiesoutside the industry.

Analysts should keep in mind, however,that US accounting standards give companiesthe flexibility to prop up per-share earningsthrough various methods, at least in theshort term. For example, a company can in-crease its stock repurchases or stretch its de-preciation schedule.

Evaluating the balance sheet

An agribusiness company’s balance sheetshould be as strong as possible, as its operat-ing environment and financial position canbe affected unpredictably by erratic weatherpatterns, raw material cycles, changing gov-ernment regulations, trade agreements, andcommodity prices. In addition, because theindustry is capital-intensive (due to neededinvestments in machinery and inventory), aresurgence of inflation can affect a compa-ny’s cost of capital.

A strong balance sheet also enables acompany to make long-term investments andpartake in mergers and acquisitions and/orjoint ventures. Mergers and joint venturesare increasingly important for companies asthey bulk up to obtain economies of scale orto gain access to product advancements.

Financial ratiosFinancial ratios provide a good indication

of the strength of a company’s balance sheet.These measures help define a company’s cap-italization structure and level of liquidity.Some key balance sheet ratios include long-

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term debt to shareholders’ equity and thecurrent ratio.

◆ Long-term debt to shareholders’ equity.This ratio indicates the extent to which acompany has employed debt in its capitalstructure. It is calculated as long-term debtthat the company has incurred divided by theamount that shareholders have invested inthe company (including retained earnings).Due to the need for a conservative capitalstructure, this ratio is less than 1.0 for mostagribusiness companies.

◆ The current ratio. This ratio, defined asa company’s current assets divided by its cur-rent liabilities, measures liquidity. It should begreater than 1.0, and higher ratios are prefer-able. It is important for agribusiness compa-nies to maintain strong liquidity, given theirsusceptibility to external cyclical shocks.

Cash flowCash flow figures, which are closely relat-

ed to earnings, provide insight into how acompany generates its profits and where itputs its funds. In the capital-intensiveagribusiness industry, companies must rein-vest or otherwise use a significant portion oftheir cash proceeds. It is important for acompany to try to find the optimal balancebetween reinvesting surplus cash in its busi-ness and immediately using it to rewardshareholders via increased dividends or sharerepurchases.

Large, established companies generate op-erating cash flows mostly from their opera-tions and seasonal lines of credit. Smallcompanies, especially biotechnology firms,receive a greater portion of their financingfrom capital markets, both debt and equity,and through other financing sources such asmergers, joint ventures, and private place-ments (the direct sale of securities betweentwo parties without using public securitymarkets).

The aforementioned balance sheet ratioscan be used to spot the beginnings of possi-ble cash flow problems. ■

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GLOSSARY

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BBoovviinnee ggrroowwtthh hhoorrmmoonnee — A naturally occurring pro-tein that has been genetically engineered as a syn-thetic compound (now manufactured in largequantities and commercially available to farmers) forthe purpose of increasing the efficiency of a cow’smilk production per unit of feed consumed.

BBoovviinnee ssppoonnggiiffoorrmm eenncceepphhaallooppaatthhyy ((BBSSEE)) — Commonlyknown as “mad cow disease” and initially diagnosedin Britain in 1986, BSE is a slowly progressive, incur-able disease affecting the central nervous system ofcattle. Consumption by cattle of BSE-contaminatedruminant proteins has been cited as one possiblemeans of transmission to humans.

BBrrooiilleerr — A chicken, typically weighing three to fivepounds, that is raised primarily for its meat.

BBuusshheell — A dry volume measure of varying weight forgrain, fruit, etc., equal to four pecks or eight gallons.

CChheecckk--ooffff pprrooggrraamm — A research and promotion pro-gram for farm products that is financed by assess-ments applied to sales of those products byproducers, importers, or others in the industry.

CCooooppeerraattiivvee — An enterprise or organization owned byand operated for the benefit of those using its ser-vices. In agriculture, a cooperative is owned andused by farmers mainly to handle the off-farm part oftheir businesses: buying farm supplies, marketingtheir products, furnishing electric and telephone ser-vice, and providing business services.

CCrroopp iinnssuurraannccee — A program available for a fee (orpremium) to the producers of most crops as protec-tion against significant yield losses from naturalhazards.

CCrroopp mmaarrkkeettiinngg yyeeaarr — This generally refers to a USDepartment of Agriculture-designated 12-month peri-od for a crop that begins with the crop’s typicalmonth of harvest. For example, the 2005 wheat cropyear was June 1, 2005, through May 30, 2006. Theamount harvested during that time was consideredthe “2005 crop.”

EEtthhaannooll — The alcohol product of carbohydrate fer-mentation that is used in alcoholic beverages and forindustrial purposes. Added to gasoline, it is an oc-tane enhancer and oxygenate. Also known as ethylalcohol or grain alcohol.

GGeenneettiiccaallllyy mmooddiiffiieedd oorrggaanniissmm ((GGMMOO)) — A plant or ani-mal that has been genetically engineered.

OOrrggaanniicc mmeeaatt aanndd ddaaiirryy pprroodduuccttss — Products whichcome from animals that have been raised withoutthe use of hormones, antibiotics, or genetic engi-neering, and which have not been irradiated.

MMiillkk mmaarrkkeettiinngg oorrddeerrss — First instituted in the 1930s topromote orderly marketing conditions by, among oth-er things, applying a uniform system of classifiedpricing throughout the farm milk market. Federal milkmarketing orders regulate handlers that sell milk ormilk products within an order region by requiringthem to pay an established minimum price for theGrade A milk that they purchase from dairy produc-ers, depending on how the milk is used.

MMiilllliinngg — The processing of grains into intermediate(such as corn syrup) or finished food products.

RRuummiinnaanntt — A hoofed animal with a multiple-compartmented stomach; ruminants include cows,goats, deer, and giraffes. During digestion, a rumi-nant regurgitates and chews its partially digestedfood, called cud.

SSaallmmoonneellllaa — A pathogenic, diarrhea-producing bac-terium that is the leading cause, among intestinalpathogens, of human food-borne illness.

VVeerrttiiccaall iinntteeggrraattiioonn — Refers to a business operating inmore than one phase of product production. For ex-ample, many large meat production companies havetheir own feedlots, slaughterhouses, meatpackingplants, and distributors.

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INDUSTRY REFERENCES

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PERIODICALS

AAggLLeetttteerrFederal Reserve Bank of ChicagoPublic Information Center230 S. LaSalle St., Chicago, IL 60604(312) 322-5322Web site: http://www.chicagofed.org/ economic_

research_and_data/ag_conditions.cfmQuarterly newsletter; covers agricultural developmentsin the Midwest, including farm real estate values.

AAmmbbeerr WWaavveessEconomic Research ServiceUS Department of Agriculture1800 M St. NW, Washington, DC 20036(202) 694-5050Web site: http://www.ers.usda.gov/AmberWavesPublished five times per year; reports news and statis-tics on global agricultural issues.

MMeeaatt && PPoouullttrryyMilling & Baking NewsSosland Publishing Co.4800 Main St., Ste. 100, Kansas City, MO 64112(816) 756-1000Web sites: http://www.meatpoultry.comhttp://www.bakingbusiness.com/mbnThe first publication is a monthly, focused on the meatand poultry processing industry. The second is a week-ly publication highlighting changes in the grain-basedfoods industry.

OOEECCDD--FFAAOO AAggrriiccuullttuurraall OOuuttllooookk —— 22000066––22001155Organisation for Economic Co-operationand DevelopmentOECD Publications2, rue André Pascal, F-75775 Paris, Cedex 16, France33 1 4524 8200Web site: http://www.oecd.org/document/62/0,2340,

en_2649_37401_37032958_1_1_1_37401,00.htmlAnnual; assesses agricultural trends and prospects inemerging markets.

TRADE ASSOCIATIONS

IInntteerrnnaattiioonnaall DDaaiirryy FFooooddss AAssssoocciiaattiioonn1250 H St. NW, Ste. 900, Washington, DC 20005(202) 737-4332Web site: http://www.idfa.orgRepresents the nation’s dairy manufacturing and mar-keting industries and their suppliers, with a membershipof 530 companies representing a $90 billion industry.

NNaattiioonnaall CCaattttlleemmeenn’’ss BBeeeeff AAssssoocciiaattiioonn9110 East Nichols Ave., #300, Centennial, CO 80112(303) 694-0305Web site: http://www.beef.orgRepresents the interests of cattlemen and the beefindustry.

NNaattiioonnaall GGrraaiinn aanndd FFeeeedd AAssssoocciiaattiioonn1250 I St. NW, Ste. 1003, Washington, DC 20005(202) 289-0873Web site: http://www.ngfa.orgRepresents and provides services for grain, feed, andgrain-related commercial businesses, from elevator op-erators to brokers to processors.

NNaattiioonnaall PPoorrkk BBooaarrdd1776 NW 114th St., Des Moines, IA 50325(515) 223-2600Web site: http://www.porkboard.orgRepresents the pork industry and promotes porkconsumption.

OOrrggaanniicc TTrraaddee AAssssoocciiaattiioonn60 Wells St., Greenfield, MA 01301(413) 774-7511Web site: http://www.ota.comMembership-based business association for the NorthAmerican organic food industry.

GOVERNMENT AGENCIES

NNaattiioonnaall AAggrriiccuullttuurraall SSttaattiissttiiccss SSeerrvviiccee ((UUSSDDAA--NNAASSSS))1400 Independence Ave. SW, Washington, DC 20250(800) 727-9540Web site: http://www.nass.usda.gov/index.aspA division of the USDA, the NASS provides timely, accu-rate, and useful statistics in service to US agriculture.

UUSS DDeeppaarrttmmeenntt ooff AAggrriiccuullttuurree ((UUSSDDAA))1400 Independence Ave. SW, Washington, DC 20250(202) 205-1760Web site: http://www.usda.govA cabinet-level department of the US executive office;performs agricultural research and economic analyses,which are available to the public.

CORPORATE INFORMATION

Many filings with the US Securities and Exchange Com-mission are available through the Internet’s World WideWeb. To search for such documents, go to:http://www.sec.gov/edgar/searchedgar/webusers.htm

Quarterly and annual reports also can be obtained di-rectly from various companies. Some corporate infor-mation is available at company Web sites on the Inter-net. Such sites include:Archer Daniels Midland Co.: http://www.admworld.comBunge Ltd.: http://www.bunge.comCargill Inc.: http://www.cargill.comCorn Products International Inc.:

http://www.cornproducts.comHormel Foods Corp.: http://www.hormel.comMonsanto Co.: http://www.monsanto.comPilgrim’s Pride Corp.: http://www.pilgrimspride.comSmithfield Foods: http://www.smithfieldfoods.comTyson Foods Inc.: http://www.tysonfoodsinc.com

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Operating revenuesNet sales and other operating revenues. Excludesinterest income if such income is “nonoperating.”Includes franchised/leased department income forretailers and royalties for publishers and oil and miningcompanies. Excludes excise taxes for tobacco, liquor,and oil companies.

Net incomeProfits derived from all sources, after deductions ofexpenses, taxes, and fixed charges, but before anydiscontinued operations, extraordinary items, anddividend payments (preferred and common).

Return on revenues Net income divided by operating revenues.

Return on assets Net income divided by average total assets. Used inindustry analysis and as a measure of asset-use efficiency.

Return on equity Net income, less preferred dividend requirements,divided by average common shareholder‘s equity.Generally used to measure performance and to makeindustry comparisons.

Current ratioCurrent assets divided by current liabilities. It is ameasure of liquidity. Current assets are those assetsexpected to be realized in cash or used up in theproduction of revenue within one year. Current liabilitiesgenerally include all debts/obligations falling due withinone year.

Debt/capital ratioLong-term debt (excluding current portion) divided bytotal invested capital. It indicates how highly “leveraged”a company might be. Long-term debt includes thosedebts/obligations due after one year, including bonds,notes payable, mortgages, lease obligations, andindustrial revenue bonds. Other long-term debt, whenreported as a separate account, is excluded; this accountgenerally includes pension and retirement benefits. Totalinvested capital is the sum of stockholders’ equity, long-term debt, capital lease obligations, deferred incometaxes, investment credits, and minority interest.

Debt as a percent of net working capitalLong-term debt (excluding current portion) divided by thedifference between current assets and current liabilities.It is an indicator of a company’s liquidity.

Price/earnings ratio The ratio of market price to earnings, obtained bydividing the stock’s high and low market price for theyear by earnings per share (before extraordinary items).It essentially indicates the value investors place on acompany’s earnings.

Dividend payout ratioThis is the percentage of earnings paid out in dividends.It is calculated by dividing the annual dividend by theearnings. Dividends are generally total cash paymentsper share over a 12-month period. Although payments areusually calculated from the ex-dividend dates, they mayalso be reported on a declared basis where this has beenestablished to be a company’s payout policy.

Dividend yield The total cash dividend payments divided by the year’shigh and low market prices for the stock.

Earnings per shareThe amount a company reports as having been earnedfor the year (based on generally accepted accountingstandards), divided by the number of shares outstanding.Amounts reported in Industry Surveys excludeextraordinary items.

Tangible book value per shareThis measure indicates the theoretical dollar amount per common share one might expect to receive shouldliquidation take place. Generally, book value isdetermined by adding the stated (or par) value of thecommon stock, paid-in capital, and retained earnings,then subtracting intangible assets, preferred stock atliquidating value, and unamortized debt discount. Thisamount is divided by the number of outstanding shares to get book value per common share.

Share price This shows the calendar-year high and low of a stock’smarket price.

In addition to the footnotes that appear at the bottom ofeach page, you will notice some or all of the following:NA—Not available.NM—Not meaningful.NR—Not reported.AF—Annual figure. Data are presented on an annualbasis.CF—Combined figure. In this case, data are not availablebecause one or more components are combined withother items.

DEFINITIONS FOR COMPARATIVE COMPANY ANALYSIS TABLES

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COMPARATIVE COMPANY ANALYSIS — AGRIBUSINESS

AAGGRRIICCUULLTTUURRAALL PPRROODDUUCCTTSS‡‡ADM * ARCHER-DANIELS-MIDLAND CO JUN 36,596.1 A 35,943.8 36,151.4 30,708.0 C 23,453.6 20,051.4 13,314.0 10.6 12.8 1.8 275 270 272 231 176 CPO § CORN PRODUCTS INTL INC DEC 2,621.0 2,360.0 2,283.0 2,102.0 1,870.9 1,887.0 1,524.0 5.6 6.8 11.1 172 155 150 138 123 DLP § DELTA & PINE LAND CO AUG 417.6 366.1 314.9 281.3 257.8 305.8 153.3 A 10.5 6.4 14.1 272 239 205 184 168

OOTTHHEERR AAGGRRIIBBUUSSIINNEESSSS--RREELLAATTEEDD CCOOMMPPAANNIIEESSGKIS GOLD KIST INC/DE SEP 2,127.4 2,304.3 2,260.7 1,855.1 NA NA NA NA NA (7.7) ** ** ** ** NAMON * MONSANTO CO AUG 7,344.0 A 6,294.0 A,C 5,457.0 D 4,936.0 4,673.0 C 5,462.0 NA NA 6.1 16.7 ** ** ** ** NAPPC PILGRIM'S PRIDE CORP SEP 5,235.6 5,666.3 5,363.7 A 2,619.3 2,533.7 2,214.7 A 1,139.3 16.5 18.8 (7.6) 460 497 471 230 222 PORK PREMIUM STANDARD FARMS INC # MAR NA 919.5 927.6 730.7 608.4 NA NA NA NA NA ** ** ** ** NASFD † SMITHFIELD FOODS INC # APR NA 11,403.6 D 11,354.2 9,267.0 A,C 7,904.5 7,356.1 3,870.6 A NA NA NA NA 295 293 239 204 TSN * TYSON FOODS INC -CL A SEP 25,559.0 26,014.0 26,441.0 24,549.0 23,367.0 10,751.0 A 6,453.8 14.8 18.9 (1.7) 396 403 410 380 362

Operating Revenues

Million $ Compound Growth Rate (%) Index Basis (1996 = 100)

Note: Data as originally reported. ‡ S&P 1500 Index group. * Company included in the S&P 500. † Company included in the S&P MidCap. § Company included in the S&P SmallCap. # Of the following calendar year. ** Not calculated; data for base year or end year not available.A - This year's data reflect an acquisition or merger. B - This year's data reflect a major merger resulting in the formation of a new company. C - This year's data reflect an accounting change. D - Data exclude discontinued operations. E - Includes excise taxes. F - Includesother (nonoperating) income. G - Includes sale of leased depts. H - Some or all data are not available, due to a fiscal year change.

Ticker Company Yr. End 2006 2005 2004 2003 2002 2001 1996 10-Yr. 5-Yr. 1-Yr. 2006 2005 2004 2003 2002

AAGGRRIICCUULLTTUURRAALL PPRROODDUUCCTTSS‡‡ADM * ARCHER-DANIELS-MIDLAND CO JUN 1,312.1 1,044.4 494.7 451.1 511.1 383.3 695.9 6.5 27.9 25.6 189 150 71 65 73 CPO § CORN PRODUCTS INTL INC DEC 124.0 90.0 94.0 76.0 63.4 57.0 23.0 18.4 16.8 37.8 539 391 409 330 276 DLP § DELTA & PINE LAND CO AUG 20.2 42.6 5.3 27.8 30.3 32.3 15.3 2.8 (8.9) (52.5) 132 279 35 182 199

OOTTHHEERR AAGGRRIIBBUUSSIINNEESSSS--RREELLAATTEEDD CCOOMMPPAANNIIEESSGKIS GOLD KIST INC/DE SEP (17.7) 112.2 110.9 (51.5) NA NA NA NA NA NM ** ** ** ** NAMON * MONSANTO CO AUG 698.0 157.0 271.0 80.0 129.0 297.0 NA NA 18.6 344.6 ** ** ** ** NAPPC PILGRIM'S PRIDE CORP SEP (34.2) 265.0 128.3 56.0 14.3 42.0 (4.5) NM NM NM NM NM NM NM NMPORK PREMIUM STANDARD FARMS INC # MAR NA 53.1 67.7 (4.6) (38.6) NA NA NA NA NA ** ** ** ** NASFD † SMITHFIELD FOODS INC # APR NA 180.3 296.2 162.7 26.3 196.9 44.9 NA NA NA ** 401 659 362 59 TSN * TYSON FOODS INC -CL A SEP (191.0) 372.0 403.0 337.0 383.0 88.0 86.9 NM NM NM (220) 428 464 388 441

Net Income

Million $ Compound Growth Rate (%) Index Basis (1996 = 100)

Ticker Company Yr. End 2006 2005 2004 2003 2002 2001 1996 10-Yr. 5-Yr. 1-Yr. 2006 2005 2004 2003 2002

Note: Data as originally reported. ‡ S&P 1500 Index group. * Company included in the S&P 500. † Company included in the S&P MidCap. § Company included in the S&P SmallCap. # Of the following calendar year. ** Not calculated; data for base year or end year not available.

Return on Revenues (%) Return on Assets (%) Return on Equity (%)

Ticker Company Yr. End 2006 2005 2004 2003 2002 2006 2005 2004 2003 2002 2006 2005 2004 2003 2002

AAGGRRIICCUULLTTUURRAALL PPRROODDUUCCTTSS‡‡ADM * ARCHER-DANIELS-MIDLAND CO JUN 3.6 2.9 1.4 1.5 2.2 6.6 5.5 2.7 2.8 3.4 14.4 12.9 6.7 6.5 7.8CPO § CORN PRODUCTS INTL INC DEC 4.7 3.8 4.1 3.6 3.4 4.9 3.8 4.1 3.6 3.0 9.8 7.9 9.4 9.0 7.8DLP § DELTA & PINE LAND CO AUG 4.8 11.6 1.7 9.9 11.8 4.1 9.4 1.1 6.8 7.6 11.6 22.5 2.3 13.1 15.4

OOTTHHEERR AAGGRRIIBBUUSSIINNEESSSS--RREELLAATTEEDD CCOOMMPPAANNIIEESSGKIS GOLD KIST INC/DE SEP NM 4.9 4.9 NM NA NM 12.4 13.5 NA NA NM 30.5 47.3 NA NAMON * MONSANTO CO AUG 9.5 2.5 5.0 1.6 2.8 6.3 1.6 2.9 0.9 1.3 11.5 2.9 5.2 1.5 2.0PPC PILGRIM'S PRIDE CORP SEP NM 4.7 2.4 2.1 0.6 NM 11.1 7.3 4.5 1.2 NM 24.7 18.7 13.3 3.7PORK PREMIUM STANDARD FARMS INC # MAR NA 5.8 7.3 NM NM NA 7.2 9.0 NM NA NA 12.2 18.1 NM NASFD † SMITHFIELD FOODS INC # APR NA 1.6 2.6 1.8 0.3 NA 3.0 5.6 3.6 0.7 NA 9.2 16.8 11.2 2.0TSN * TYSON FOODS INC -CL A SEP NM 1.4 1.5 1.4 1.6 NM 3.5 3.8 3.2 3.6 NM 8.3 9.8 8.8 10.9Note: Data as originally reported. ‡ S&P 1500 Index group. * Company included in the S&P 500. † Company included in the S&P MidCap. § Company included in the S&P SmallCap. # Of the following calendar year.

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Current Ratio Debt / Capital Ratio (%) Debt as a % of Net Working Capital


AAGGRRIICCUULLTTUURRAALL PPRROODDUUCCTTSS‡‡ADM * ARCHER-DANIELS-MIDLAND CO JUN 1.9 1.8 1.5 1.6 1.6 27.7 27.7 30.9 33.7 29.6 71.5 81.3 104.2 118.3 117.7CPO § CORN PRODUCTS INTL INC DEC 1.6 1.6 1.4 1.4 1.4 24.1 25.4 26.8 26.3 32.3 150.0 180.5 241.2 295.4 373.9DLP § DELTA & PINE LAND CO AUG 1.3 1.4 1.7 1.7 1.8 0.8 4.1 7.1 0.7 0.6 1.7 7.8 11.0 1.0 0.9

OOTTHHEERR AAGGRRIIBBUUSSIINNEESSSS--RREELLAATTEEDD CCOOMMPPAANNIIEESSGKIS GOLD KIST INC/DE SEP 2.5 2.4 2.6 2.3 NA 23.1 24.2 49.9 63.8 NA 52.5 44.3 82.0 154.1 NAMON * MONSANTO CO AUG 2.4 2.2 2.6 2.6 2.4 20.1 20.6 17.0 19.6 14.1 51.5 58.7 35.4 41.7 32.6PPC PILGRIM'S PRIDE CORP SEP 1.9 1.7 1.6 1.8 1.7 30.0 27.1 33.2 42.5 46.7 104.9 128.2 139.6 197.0 251.4PORK PREMIUM STANDARD FARMS INC # MAR NA 4.0 3.6 4.2 3.3 NA 19.2 26.3 40.7 41.0 NA 72.8 109.6 173.7 209.2SFD † SMITHFIELD FOODS INC # APR NA 1.9 2.3 2.1 2.0 NA 50.4 49.5 47.4 51.3 NA 196.5 148.8 160.6 192.0TSN * TYSON FOODS INC -CL A SEP 1.5 1.6 1.5 1.4 1.5 37.7 35.1 37.7 40.0 46.4 222.7 216.0 244.1 347.5 355.2Note: Data as originally reported. ‡ S&P 1500 Index group. * Company included in the S&P 500. † Company included in the S&P MidCap. § Company included in the S&P SmallCap. # Of the following calendar year.

Price / Earnings Ratio (High-Low) Dividend Payout Ratio (%) Dividend Yield (High-Low, %)

AAGGRRIICCUULLTTUURRAALL PPRROODDUUCCTTSS‡‡ADM * ARCHER-DANIELS-MIDLAND CO JUN 23-12 16-11 30-20 22-15 19-13 18 20 36 34 25 1.5-0.8 1.8-1.3 1.8-1.2 2.3-1.6 2.0-1.3CPO § CORN PRODUCTS INTL INC DEC 22-14 25-13 22-13 17-13 20-13 14 23 20 20 22 1.0-0.6 1.8-0.9 1.5-0.9 1.5-1.2 1.7-1.2DLP § DELTA & PINE LAND CO AUG 76-40 28-21 NM-NM 35-26 29-21 109 46 354 38 25 2.8-1.4 2.2-1.7 2.2-1.7 1.5-1.1 1.2-0.9

OOTTHHEERR AAGGRRIIBBUUSSIINNEESSSS--RREELLAATTEEDD CCOOMMPPAANNIIEESSGKIS GOLD KIST INC/DE SEP NM-NM 11-6 6-4 NA-NA NA-NA NM 0 NA NA NA 0.0-0.0 0.0-0.0 NA-NA NA-NA NA-NAMON * MONSANTO CO AUG 41-29 NM-85 55-27 93-44 69-27 30 111 52 158 98 1.0-0.7 1.3-0.8 1.9-0.9 3.6-1.7 3.6-1.4PPC PILGRIM'S PRIDE CORP SEP NM-NM 10-7 17-8 14-5 43-12 NM 2 3 4 17 5.2-3.7 0.2-0.1 0.4-0.2 0.9-0.3 1.5-0.4PORK PREMIUM STANDARD FARMS INC # MAR NA-NA 11-7 NA-NA NA-NA NA-NA NA 14 0 NA NA 1.8-1.2 2.0-1.3 NA-NA NA-NA NA-NASFD † SMITHFIELD FOODS INC # APR NA-NA 21-16 12-8 17-11 NM-61 NA 0 0 0 0 NA-NA 0.0-0.0 0.0-0.0 0.0-0.0 0.0-0.0TSN * TYSON FOODS INC -CL A SEP NM-NM 18-12 18-11 15-7 14-8 NM 15 14 16 15 1.3-0.9 1.3-0.8 1.2-0.8 2.2-1.1 1.7-1.0


Note: Data as originally reported. ‡ S&P 1500 Index group. * Company included in the S&P 500. † Company included in the S&P MidCap. § Company included in the S&P SmallCap. # Of the following calendar year.

Earnings per Share ($) Tangible Book Value per Share ($) Share Price (High-Low, $)

AAGGRRIICCUULLTTUURRAALL PPRROODDUUCCTTSS‡‡ADM * ARCHER-DANIELS-MIDLAND CO JUN 2.01 1.60 0.76 0.70 0.78 14.61 12.54 11.40 10.52 10.51 46.71-24.05 25.55-17.50 22.55-14.90 15.24-10.50 14.85-10.00CPO § CORN PRODUCTS INTL INC DEC 1.67 1.20 1.28 1.06 0.89 12.99 11.73 9.93 8.64 7.25 37.49-22.92 30.20-16.00 27.92-17.22 18.13-13.57 17.39-11.93DLP § DELTA & PINE LAND CO AUG 0.55 1.11 0.13 0.72 0.79 4.45 4.26 5.19 5.44 5.07 41.55-21.77 30.74-22.80 27.70-20.67 25.49-18.49 23.00-16.90

OOTTHHEERR AAGGRRIIBBUUSSIINNEESSSS--RREELLAATTEEDD CCOOMMPPAANNIIEESSGKIS GOLD KIST INC/DE SEP (0.35) 2.24 2.42 (1.12) NA 8.85 8.44 NA NA NA 21.06-11.26 23.95-12.96 14.70-10.15 NA-NA NA-NAMON * MONSANTO CO AUG 1.30 0.29 0.51 0.16 0.25 6.95 5.99 7.72 7.27 7.23 53.49-37.90 39.92-25.00 28.22-14.03 14.45-6.78 17.00-6.60PPC PILGRIM'S PRIDE CORP SEP (0.51) 3.98 2.05 1.36 0.35 16.79 18.38 13.87 10.87 9.59 29.76-20.85 40.23-28.84 35.00-16.17 18.50-6.90 14.99-4.05PORK PREMIUM STANDARD FARMS INC # MAR NA 1.71 2.19 (0.15) (1.25) NA 12.17 NA NA NA 20.64-13.25 18.54-12.25 NA-NA NA-NA NA-NASFD † SMITHFIELD FOODS INC # APR NA 1.62 2.66 1.48 0.24 NA 11.70 11.59 9.99 7.15 31.10-24.89 34.64-25.69 31.15-20.10 25.75-16.87 26.25-14.59TSN * TYSON FOODS INC -CL A SEP (0.56) 1.08 1.17 0.98 1.10 5.05 5.71 4.49 3.17 2.38 17.33-12.57 19.91-12.50 21.28-12.97 15.10-7.25 15.71-9.27


Note: Data as originally reported. ‡ S&P 1500 Index group. * Company included in the S&P 500. † Company included in the S&P MidCap. § Company included in the S&P SmallCap. # Of the following calendar year. J-This amount includes intangibles that cannot be identified.

The analysis and opinion set forth in this publication are provided by Standard & Poor’s Equity Research Services and are prepared separately from any other analytic activity of Standard & Poor’s. In this regard, Standard & Poor’s Equity Research Serviceshas no access to nonpublic information received by other units of Standard & Poor’s. The accuracy and completeness of information obtained from third-party sources, and the opinions based on such information, are not guaranteed.

agr_0507.qxp 5/22/2007 10:25 AM Page 38

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