Quadra (online round)

Ulyana KravchenkoAmet SeitibraimovIgor SerpakKonstantin Yakunenko

Case questionDevelop Bunge’s strategy response to rising oil prices and growing interest for biofuels

GoalDefine unique positioning, leveraging Bunge’s core business model and strengths, sustaining the balance between integration and decentralisation

Recommendations summaryMaintain focus on food, concentrate on risk management

QUADRA

Contents

1. Framework

2. Impact of Global Trends: 1. Rising Volatility of Commodities’ Prices

3. Impact of Global Trends: 2. Development of Biofuel Markets

4. Impact of Global Trends: 3. Potential for Food Market Growth

5. Resultant Opportunities and Risks for Bunge

6. Analysis of Specific Opportunities

7. Risk Management

8. Summary on Strategy

Ulyana Kravchenko ■ Amet Seitibraimov ■ Igor Serpak ■ Konstantin Yakunenko

Framework

Rising Volatility of Commodities’ Prices

Development of Biofuel Markets

Potential of Food Market Growth

Bunge

Risks Opportunities

Recommendations


Impact of Global Trends:1. Rising Volatility of Commodities’ Prices

• As agricultural commodities became inputs for fuel production, markets for energy and agricultural commodities converge. This adds volatility to the food supply chain.

Energymarket

Agriculturemarket

Transmission of volatility


Impact of Global Trends:2. Development of Biofuel Markets

• We view that biofuel market is positioned to develop thanks to both

– advancement in technologies and

– favourable influences from three groups of interests.

Politicians Environmentalists Businesses

Alleviate dependence on oil

Develop new industries Satisfy economic

interests of electorate Promote politically-

beneficial low prices of oil and food

Promote environmental protection

New investment options Higher prices on markets

with inelastic demand (food, fuel), which generates higher profits

Protection of environment: promotion of less

intensive usage of oil promotion of

alternative “green” fuels


Impact of Global Trends:3. Potential for Food Market Growth

Potential for food market growth

Growing population (1.35% p.a.) Growing income (1.40% p.a.) Increase in meat and fish

consumption among 83% of world population (due to increasing demand for feedstock requirements)

Because of growing biofuels market, agricultural lands are diverted from food production. Therefore, unmet demand on the food market will drive food prices higher

Due to internal potentialDue to impact of biofuel

market


Resultant Opportunities and Risksfor Bunge

OpportunitiesRisks (direct losses or lost

profit opportunities)

Increase in food production to meet growing demand

Higher revenues and profitsdue to growing food prices and inelastic demand

Emergence of new customer segment for agribusiness (biofuels producers)

Entry to emerging biofuel market

Counterparty defaults on contracts due to prices volatility

Distortions of supply due to government export restrictions

High levels of tied working capital due to high prices and long shipment times

Governmental intervention to food market pricing mechanism (e.g. in response to food riots)


Analysis of Specific Opportunities

State Products Pros Cons Conclusion

Brazil (origination)

Sugar farming for ethanol

1. Low-cost 1. Overpriced assets

Reject

2. Idle lands 2. Increasing compeition

3. Strong local presence 3. US trade barriers eliminate cost advantage

4. Required backward integration into farming

Brazil (origination)

Soybeans farming

1. Low-cost

Accept

2. Idle lands

3. Export potential growth thanks to US refocus on corn

4. Expected twofold growth of China's import

5. Strong local presence

6. Leveraging of fertilisers production

China (destination)

Soybeans crushing

1. Expected twofold growth of China's imports 1. Uncertainty regarding government's regulation of market consolidation

Accept2. Likely to decrease reliance on local counterparties

R&D (food)1. Competitive advantage against other oil brands 1. R&D-related risks

Intensify2. Creation of new products

India (destination)

Vegetable oil (trading,

production)

1. Growing market of oils 1. Underdeveloped infrastructure, ethical practices, tax policies

1. Divest production

2. Lack of transparency 2. Export unbranded oil

3. Underdeveloped market of branded oils

Malaysia, Indonesia

Palm oil (production, + input for biofuel

production)

1. Low costs of production 1. Different kinds of plantation-farming environments

Reject2. Growing demand from Europe 2. Unfamiliar political systems

3. Option to sell as input to biofuel production 3. Different business models


Risk Management

• We recommend acquisition of crushers in China, key destination country, …

– … (in addition to existent traders) so as to alleviate the risk of counterparties’ defaults due to both price volatility and long shipment. Therefore, price volatility on commodities markets will have limited impact on physical deliveries and the group’s consolidated financials.

Elevator in Brazil

Crushers in China

Traders in China

100-days transit time+ Volatility on commodities markets

+ Small-capitalisation players

= Risk of local counterparties’ default

Forward integration to mitigate the risk


Summary on Strategy

• Focus on food– Concentrate on exports of soybeans from Brazil, as the low-

cost producer, to China. Engagement into soybean “farming”.

– Divest production of branded oils in India. Maintain exports to India.

– Reject risky expansions to Malaysia, Indonesia.

– Reject entry into non-core and intervention-dependent sugar-and-ethanol business in Brazil.

– Intensify R&D of healthy soy products.

• Focus on risk management– Build on-the-ground presence in China, including

acquisition of crushers, to mitigate the buyers’ default risk.

Documents

Quadra (online round)