Screening Opportunities in the Agricultural Markets

1. txho/ho0282/00824cs.ppt • 1/4/2020 4:48:18 AM CONFIDENTIAL Screening Opportunities in the Agricultural Markets ENRON CORP. Discussion document August 31, 2000 This report is solely for the use of client personnel. No part of it may be circulated, quoted, or reproduced for distribution outside the client organization without prior written approval from McKinsey & Company. This material was used by McKinsey & Company during an oral presentation; it is not a complete record of the discussion.

2. txho/ho0282/00824cs.ppt WHERE WE ARE • A high-level assessment of the grains market resulted in an observation that • A conventional Enron stand-alone approach, with a focus on origination and physical-based trading, does not appear to be attractive • Further analysis should be conducted to assess several potential opportunities: • Pursuing origination and physical-based trading through potential JVs with one of the three large, integrated players • Providing risk management products for producers; although farmers are somewhat insulated from risk by government programs, these programs only cover a portion of the risk • Evaluating international origination opportunities • Evaluating opportunities in proprietary trading or basis trading • The most recent phase of the project focused on non-grain market segments. In these markets, our observations are that • Potential opportunities exist in meats to build a broad, origination-based business • Structural characteristics in the softs market create proprietary trading opportunities; origination opportunities appear to be limited although additional analysis is required

3. Today’s focus txho/ho0282/00824cs.ppt LAUNCHING A BUSINESS IN AGRICULTURE • Identify priority segments • Test entry strategies and product concepts • Build the business • Screen agricultural product markets to identify priority segments • Start exploratory trading activity • Develop entry strategies in priority markets • Design/test product concepts • Begin to build the organization • Launch the business • Others TBD • Grains • Partnership opportunities • Producer risk management products and services • Proprietary trading • Market screening • All agriculture products • Softs desk • Market size • Meats • Origination • Proprietary trading • E-commerce • Meats group • Market characteristics • Product attributes • Market structure and risk disaggregation • Trends/discontinuities • Softs proprietary trading • Others TBD • Priority segments and initial hypotheses on entry strategies

4. txho/ho0282/00824cs.ppt SCREENING PROCESS FOR PRODUCT MARKETS IN AGRICULTURE • Market size* (Screen 1) • >$1 billion** U.S. or • >$4 billion* globally • Market attractiveness evaluation (Screen 2) • ~27 products • Grains - wheat, corn, soybeans, rice • Softs – orange juice, sugar, cocoa, tea, coffee • Meats – pork, beef, poultry • Dairy –cheese, butter, nonfat dry milk (NFDM), fluid milk • Fiber – cotton • Fruits/vegetables – tomatoes, potatoes, peanuts, apples, grapes, almonds, lettuce • Other - hay, eggs, tobacco • All agricultural products • Priority products * Represents value on a raw production or consumption basis ** Both raw production or consumption considered

5. L = Low M = Medium H = High • U.S. production • Intermediaries/ processors • Wholesale buyers • Producers • $ 12 • 18 • 20 • 2 • – • 1 • – • – • 9 • 19 • 2 • 12 • 4 • 1 • 2 • 3 • 2 • 3 • 1 • 1 • 50 • 10 • 2 • 1 • 4 • 13 • 3 • L • L • M • L • L • L • L • L • L • L • L • L • L • L • L • L • n/a • n/a • n/a • n/a • n/a • LLL • LLL • M-H • H • M-H • M • M • M-H • L • M • M • H • M • H • M • M • L • H • n/a • n/a • H • n/a • n/a • M • M • L • L-M • L • H • M • MM • L • M • HLL • M • M • M • M • L • L • L-M • H • n/a • n/a • M • n/a • n/a • L • L • L • L-M • LL txho/ho0282/00824cs.ppt • US $ Billions • Market size at farm level1 • Concentration (number of companies, market power) • Global production • U.S. consumption • Meats • Pork • Beef • Poultry • Softs • Sugar • Coffee • FCOJ2 • Tea • Cocoa • Grains • Wheat • Corn • Rice • Soybean • Fiber • Cotton • Fruits/vegetables • Peanuts • Apples • Potatoes • Tomatoes • Grapes • Almonds • Lettuce, head • Dairy • Fluid milk • Cheese • Butter • NFDM4 • Other • Eggs • Hay • Tobacco • $ 11 • 17 • 17 • 2 • 1 • 1 • <1 • 1 • 5 16 • 1 • 8 • 3 • 1 • 2 • 3 • 2 • 3 • <1 • >1 • 50 10 • 2 • 1 • 4 • 13 • n/a 105 76 72 MARKET SIZING (SCREEN 1) • 3 • 3 • 3 • 3 • 3 1 Represents value of raw production/consumption in most recently reported year (1999 in most cases) 2 Frozen concentrate orange juice 3 Assumes consumption equals production in U.S. 4 Nonfat dry milk Source: USDA-FAS; USDA-ERS; EIU-World Commodity Forecasts 7/00; B of A Securities 3/00 Agriculture Quarterly

6. txho/ho0282/00824cs.ppt • Factors favoring market entry • Criteria • Risk exposure • Price transparency* • Concentration along value chain* • Product attributes* • Transportation • Government forces • Technology/trends* • Market Liquidity • Potential for asymmetric information • Information Concentration • Production Concentration • Single event sensitivity • Impact of systematic reporting • Current activity • Platform acceptance • Participants along value chain holding a high degree of risk with limited means of mitigating risk • High degree of volatility (either daily, monthly, yearly) • Capital intensity (long-dated risks) and unmet capital needs • Opaque market pricing (e.g., limited exchange trading and pricing activity occurring from the exchange) • Little current product standardization and recognized premiums for product grades • High degree of fragmentation along value chain and low concentration of pricing power • Presence of many intermediation points along value chain (e.g., product changes title several times) • Ability to store product for long periods of time with little quality degradation at low cost (relative to product price) • Ability to mix and blend products to meet product specs • Ability to create product specs and standards (e.g., bandwidth); fungibility • Ability to secure transportation or create transportation bottleneck • Ability to interpret, anticipate, and capitalize on government programs and policies • Low overall government impact on market forces • Current or projected trend (e.g., technology, regulation) that results in a shift in market forces • Liquid financial market that provides ability to enter/exit quickly with little impact; accomplished by having several counterparties and high velocity • Substantive market moving factors dependent on a few key information points • Production concentrated to limited geographic areas, providing ability to monitor production changes • Ability of single event (e.g., storm, port strike) to materially impact (short-term) product prices or to leverage asymmetric weather information • Ability to anticipate impact of publicly reported information (e.g., government, association reports) • Presence of e-commerce competitors and current/projected activity • Sustainable value proposition and willingness of target users to conduct transactions online • Origination EVALUATING MARKET ATTRACTIVENESS Criteria for assessment • Proprietary trading • E-Commerce * Factors also used to assess e-commerce opportunity

7. txho/ho0282/00824cs.ppt PRELIMINARY RESULTS OF SCREEN #2 • Explore opportunity to . . . • Products • Description • Build broader origination-led business, with additional opportunity to proprietary trade • Conduct market-making and/or proprietary trading activity (with some exploration of origination opportunities) • Do not explore further • Omitted after scan • Promptly omitted • Meats: pork, beef, poultry* • Softs: coffee, cocoa, FCOJ, sugar, tea • Cotton • Apples • Butter • Cheese • Eggs • Almonds • Fluid milk • Grapes • Hay • NFDM • Potatoes • Rice • Lettuce • Tomatoes • Tobacco • Origination opportunity to fill risk management product gap at processed meat level; pork appears most attractive due to lower processor concentration • Structural elements may create opportunity for proprietary trading in coffee, cocoa and FCOJ; potential to create market hub in Brazil centered around FCOJ (includes other products); also, opportunity to create liquid spot market in tea * Poultry is the least attractive among meats because of high levels of vertical integration and the lack of a liquid market Note: Peanut market assessment to be completed

8. Comments • PT – liquid financial market only in live hogs and bellies; information concentrated at processing level • O – currently unhedgeable finished product exposures at processor level; moderate processor concentration (top 4 ~58%), though consolidation ongoing; fragmented elsewhere in chain • Limited number of sites in space, but some players becoming established; consortiums, with major industry participants (IBP, Cargill, Tyson, Smithfield) and first-mover advantage, developing; little liquidity through space today • PT – liquid financial market only in live and feeder cattle(unprocessed), information concentrated at processing level; geographic producer concentration in plains region • O – currently unhedgeable finished product exposures at processor level; high processor concentration (top 4 ~70%), continuing trend to consolidation; fragmented elsewhere in chain • See above • PT – illiquid spot market with only 1 primary transaction point along value chain (after primary processing); no futures market • O – currently unhedgeable finished product exposures; moderate processor concentration (top 4 ~54%), but heavy vertical integration reduces potential number of counterparties • See above txho/ho0282/00824cs.ppt Global PRELIMINARY ASSESSMENT OF MEAT PRODUCTS U.S. consumption Low • Opportunity Medium • Prop Trading (PT) High • Market size • $ Billions • Origination • (O) • E-commerce • (E) • Product • Pork • Beef • Poultry Source: Interviews; analyst reports; press releases; USDA

9. txho/ho0282/00824cs.ppt • Market liquidity • Market characteristics • U.S. production • $ Billions • Notional • value • $ Billions • Velocity* • Degree of vertical integration OVERVIEW OF U.S. MEATS MARKET • Product • Processor concentration • Notables • Others Beef • $18 • $110 • 6 • Low • Unhedgeable price risk on processed beef • Cattle owners (feedlots) could effectively hedge input and output prices but do not due to optimism and lack of sophistication • 80% of U.S. cattle are fed and processed in southern and central plains • IBP Top 4: 70% • Companies 5-10 • Farmland • ConAgra • Cargill • Others • Smithfield Pork • 12 • 50 • 4 • Medium • Unhedgeable price risk on processed pork • Sow producers could hedge inputs and outputs but do not • Increasing vertical integration is expected to stabilize margins Top 4: 58% • IBP • Companies 5-10 • ConAgra • Cargill • Poultry (broilers) • 20 • n/a • n/a • High • Unhedgeable price risk on processed poultry • Vertical integration limits transaction points • Government protection of contract growers impedes inventory management • Others • Tyson Top 4: 54% • Gold Kist • Companies 5-10 • ConAgra * Calculated using domestic production Source: Interviews; analyst reports; press releases; USDA • Purdue

10. Global U.S. consumption • Product • Comments • Coffee • Cocoa • FCOJ • Sugar • PT – production concentration (Brazil, Colombia) and single event sensitivity (port strikes, freezes); liquid market ($177B annual notional value of exchange-traded contracts) • O – limited opportunities at roaster level due to ability to pass through prices; potential opportunity to provide weather derivatives at producer/processor level • E- many sites exist but no true leader with developed trading platform; LIFFE offers click execution on exchange-traded contracts • PT – small, relationship driven market with growing areas concentrated in political unstable countries (Ivory Coast); sensitive to single events (weather, politics); small but highly traded futures market ($40B annual notional value with volume spikes around single events) • O – origination limited to few physical processed products • E-one physical site exists with unknown liquidity; LIFFE offers click execution • PT – illiquid financial market ($13B annual notional value), but volume spikes around single events) and small market size limits opportunity, high production concentration and single event sensitivity (storm damage, freezes) • O – potential to create market hub in Brazil for concentrate (and other softs); high concentration at buying level (top 3 ~70% market share) • E- One online exchange has signed up entities representing 80% of world production; concentration and large scale contracting limits trading • PT – liquid financial market ($244B annual notional value) but information fragmentation requires global presence; low presence of spec players • O – limited to international opportunities (mill financing, absorbing buyer risk) but large market size • E – LIFFE offers click trading; physical trading sites have been identified but liquidity unknown txho/ho0282/00824cs.ppt • Opportunity • Prop Trading (PT) • Market size • $ Billions • Origination • (O) • E-commerce • (E) PRELIMINARY ASSESSMENT OF SOFTS • 1 Source: Interviews; analyst reports; press releases; USDA

11. Global U.S. consumption • Comments • PT – no financial market; small market size limits opportunity; production concentrated geographically (top 4 countries produce 70% of tea); ability to trade physical product through auction houses; low volume of spec trading • O – potential opportunity to create exchange between manufacturer and wholesale buyer; significant amount of contract growing • E- sites exist but liquidity and transaction capability unknown; LIFFE offers click trading • PT – liquid futures market that is impacted by government reports but information and growing area fragmentation • O – manufacturers output (fabrics) prices not correlated to input prices (cotton, synthetic fibers); low concentration along most of value chain, but heavy government involvement and key intermediaries (Louis Dreyfus, Dunavant) • E – one site operated by leading mills and trading houses in the industry txho/ho0282/00824cs.ppt PRELIMINARY ASSESSMENT OF SOFTS • Opportunity • Prop Trading (PT) • Market size • $ Billions • Origination • (O) • E-commerce • (E) • Product • <1 • Tea • Cotton Source: Interviews; analyst reports; press releases; USDA

12. txho/ho0282/00824cs.ppt • Market liquidity • Market characteristics • Notional Value • $ Billions • Velocity* • Global size • $ Billions • Production • concentration • Consumption • concentration • Product • Notables OVERVIEW OF SOFTS MARKET • $177 • Coffee • $8 • 22 • 100% = 106.8 million 60 KG bags • 100% = 98.8 million 60 KG bags • Increased trend towards vertical integration • ACPC instituting export retention program to better control prices • US • Others • Brazil • Others • Ethiopia • Germany • Columbia • Uganda • Guatemala • UK • Japan • Vietnam • Ivory Coast • Brazil • Indonesia • India • Italy • France • Mexico • Cocoa • 3 • 40 • 13 • 100% = 2.7 MMT • 100% = 2.7 MMT • (1998) privatization of Ivory Coast cocoa industry • (1999) Military coup on government introducing uncertainty in Ivory Coast political situation (and cocoa industry) • Netherlands • Other • Cameron • Ivory Coast • Other • US • Nigeria • Germany • Brazil • France • Brazil • Indonesia • Ivory Coast • Ghana • UK • FCOJ • 8 • 13 • 2 • 100% = 53.6 MMT • Manufacturer concentration – US market • Forecasts call for increased production in US resulting in expected decreased dependency on imports • Increase in foreign investments in U.S. processing facilities • Private • label • Brazil • Other • Tropicana • Florida’s • Natural • China • US • Minute Maid • Spain • Mexico * Calculated by dividing notional traded value by physical market size Source: PSI Futures Research; Analyst report – Dresdner Klienwort Benson; CRB Commodity Yearbook; FAS; USDA; www.ldcitrus.com; www.floridajuice.com; www.abecitrus.com; www.fred.ifas.edu

13. txho/ho0282/00824cs.ppt ISSUES TO EXPLORE/RESOLVE IN MEATS AND SOFTS • Building a broad-based origination business in meats • Testing meat processor demand/acceptance for risk management products • Identifying most likely participants on the short side (e.g., food wholesalers, grocers, etc.) • Understanding risks associated with processor concentration (e.g., will Enron always be able to access physical markets? Are there any real barriers to processors developing “me too” products?) • Testing feedlot demand/acceptance of new risk management products • Determining Enron’s ability to capitalize on structural elements for proprietary trading purposes • Identifying how/where Enron will be able to obtain access to asymmetric information at reasonable cost and effort • Weather • Producer dynamics in concentrated markets • Government regulation/activity • Understanding of embedded risks • Potential exposure to and protection against market manipulation by large, established market participants • Ability to unwind positions • Proprietary trading for softs (especially coffee, cocoa, and FCOJ)

14. Global • Market size • $ Billions U.S. consumption • Comments • PT – illiquid financial market; produced in many areas • O – risk passed through by most players; otherwise, Illiquid milk futures available to hedge; heavy government subsidies • E – No current e-commerce players identified; opportunity limited by high degree of contracting and direct sales; however, possible opportunity because of high degree of transactional inefficiency • PT – illiquid financial market; produced over many areas • O – risk passed through by most players; otherwise, illiquid milk futures are used; heavy government subsidies provide price floor • See above • PT – illiquid financial market; limited potential for information concentration • O – minor input to many products; heavy government subsidies and purchases provide price floor • See above txho/ho0282/00824cs.ppt PRELIMINARY ASSESSMENT OF DAIRY PRODUCTS • Opportunity • Prop Trading (PT) • Origination • (O) • E-commerce • (E) • Product • Cheese • Butter • NFDM Source: Interviews; analyst reports; press releases; USDA

15. Global size • $ Billions txho/ho0282/00824cs.ppt • Opportunity PRELIMINARY ASSESSMENT OF OTHER FOOD PRODUCTS (CONTINUED) • Prop Trading (PT) • Origination • (O) • E-commerce • (E) • Product • Comments • PT – ECI (EGG Clearinghouse International) represents small but liquid market primarily to offload excess production (2% of physical market); limited traded market due to contracting and no financial market • O – Risk held at producing level but passed through at other levels along most of value chain, but heavy government involvement • E – ECI captures most of market float • PT – sensitive to single events (e.g., weather, government trends); only 5% of market traded internationally; illiquid futures market • O – limited price transparency; heavy government regulations and subsidies; limited fungibility • E – one exchange identified; CBOT offers electronic trade routing and settlement to facilitate open country execution • PT – illiquid spot market (no futures exchange), dispersed producing regions, stable overall N. American yields (but individual/regional yields vary) • O – LT production contracts between grower and processor (~75% of market); highly concentrated at processor (top 3 ~88% market share in frozen market) and buyer level • E – possibility to create platform in negotiated fresh potato market (25% of market); however, high level of contracting and limited product fungibility • PT – no futures exchange exists; production concentrated in China (37%) but fragmented within country • O – producer bears both ST and LT risk; risk passed through at other points; increased trend toward fixed volume contracts between producers and wholesale buyers • E – few sites identified • Eggs • Rice • 3 • Potatoes • 2 • Apples Source: Interviews; analyst reports; press releases; USDA

16. Product • Rationale for omission • Grapes • Almonds • Hay • Tobacco • Lettuce • Tomatoes • Fluid milk • Limited opportunity for disintermediation; large amount of contract growing; limited fungibility • Highly concentrated along value chain; Blue Diamond owns U.S. market and bulk of production in U.S. • Transportation costs high relative to product value; low volatility; regional market • Heavily subsidized; shrinking market; significant concentration along value chain; contract grown; poor political situation • Small market; perishable; dominated by some big players • Regional market; concentrated production; processing contracted • Limited ability to store combined with low short-term volatility – heavily regulated txho/ho0282/00824cs.ppt PRODUCT OMISSIONS Source: Interviews; analyst reports; press releases; USDA

17. Strategy • Comments • Established processors (e.g., Cargill) and traditional exchanges are adopting functional e-commerce platforms at an accelerating pace. Although current transaction volume is limited and focused towards producers, large industry players are positioning themselves well to compete in this electronic space. Most sites reference risk management initiatives but few deliver any actual products. • Strong content and transaction oriented sites exist in both the live cattle and meat products segments. Opportunities on a go alone basis are limited because upstream and downstream areas are covered by existing sites. Further, an industry consortium (IBP, Cargill, Smithfield, Tyson) has announced plans to target the entire supply chain and provide the necessary liquidity to this online space. • Varying degrees of sophistication and commitment to online initiatives exist across the softs category. However, no large physical players dominate across this space with the exception of cotton. Stand alone online opportunities exist in coffee and cocoa, however, opportunities in the other soft commodities would need to be complemented by origination or other trading activity txho/ho0282/00824cs.ppt PRELIMINARY E-COMMERCE ASSESSMENT • Competitive Snapshot • Product/Service Offering • Enron’s • Potential • Members/ • Partnerships • Stage of • Development • Area • Grains • Meats • Softs

18. Today’s focus txho/ho0282/00824cs.ppt LAUNCHING A BUSINESS IN AGRICULTURE • Identify priority segments • Test entry strategies and product concepts • Build the business • Screen agricultural product markets to identify priority segments • Start exploratory trading activity • Develop entry strategies in priority markets • Design/test product concepts • Begin to build the organization • Launch the business • Others TBD • Grains • Partnership opportunities • Producer risk management products and services • Proprietary trading • Market screening • All agriculture products • Softs desk • Market size • Meats • Origination • Proprietary trading • E-commerce • Meats group • Market characteristics • Product attributes • Market structure and risk disaggregation • Trends/discontinuities • Softs proprietary trading • Others TBD • Priority segments and initial hypotheses on entry strategies

19. txho/ho0282/00824cs.ppt NEXT STEPS IN EVALUATING MEATS • Issue • Next Step • Meat processor demand/acceptance for risk management products • Likely participants on the short side of a potential processor output hedge (e.g., food wholesalers, grocers, etc.) • Risks associated with processor concentration • Feedlot demand/acceptance of new risk management products • Enron’s ability to capitalize on structural elements for proprietary trading purposes • Additional market entry strategies • Conduct interviews and test potential products with selected processors • Evaluate impact of uncorrelated input and output prices on a processor’s earnings, cost of capital and market value • Evaluate status of exchange traded contracts and reasons for success/ failure • Determine market segmentation of buyers (e.g., foodservice co’s, grocery stores) of processed meats • Conduct interviews and test potential products with selected buyers of processed meats • Evaluate scenarios of potential processor responses and associated impact • Conduct interviews and test potential products with selected feedlots • Determine financial impact (e.g., cost of capital, earnings volatility) of uncorrelated input and output prices • Evaluate key information concentration points (e.g., specific feedlots, processing facilities) and ability to capture information • Identify key players in financial markets and respective goals and objectives • Continue to evaluate market dynamics to determine additional entry points

20. txho/ho0282/00824cs.ppt NEXT STEPS IN EVALUATING SOFTS • Issue • Next Step • Identification of where Enron will be able to obtain access to asymmetric information (for each product) • Understanding of embedded risks associated with each product • Potential exposure to and protection against market manipulation by large, established market participants • Ability to unwind positions • Identifying origination opportunities • Determine origin of asymmetric information • Assess potential benefit of information (e.g., value creation) • Evaluate ability and cost to obtain information relative to potential benefit • Assess ability to execute proprietary trades based on market liquidity (how large of a position can Enron take? In what time period must Enron execute? How long would it take to unwind?) • Assess key financial market players and their ability to manipulate markets • Determine other players access to asymmetric information (relative to Enron) and current trading activity based on that information • Explore opportunities for to build an international origination-led business • Determine attractiveness of partnership opportunities

21. txho/ho0282/00824cs.ppt NEXT STEPS IN EVALUATING GRAINS • Issue • Next Step • Attractiveness of partnership with a large integrated grains player • Identification of global opportunities in grains • Ability to offer risk management opportunities to producers • Proprietary trading and basis trading • Estimate total size of opportunity (e.g., how much value might Enron create utilizing the asset/information base of these players and how?) • Evaluate and prioritize alliance opportunities (e.g., Cargill, ADM, ConAgra) • Continue discussions with integrated players • Develop partnership structure options that would avoid sharing of proprietary Enron information and business processes • Conduct market overview of global (outside N. America) grains market • Product flow and regional/global value chain analysis • International market player evaluation • Government activity • Continue explore role of the government programs and impact to producer risk management needs and behavior • Conduct interviews/focus groups with producers to determine risk management needs and appetite • Identify Enron’s ability to obtain access to asymmetric information • Understanding of embedded risks associated with each product