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September 21, 2010

B A C C   B R E A K F A S T   S E M I N A R. Cassio Calil, Managing Director J.P. Morgan. September 21, 2010. S T R I C T L Y   P R I V A T E   A N D   C O N F I D E N T I A L.

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September 21, 2010

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  1. B A C C   B R E A K F A S T   S E M I N A R Cassio Calil, Managing Director J.P. Morgan September 21, 2010 S T R I C T L Y   P R I V A T E   A N D   C O N F I D E N T I A L

  2. The increase in wheat and corn prices is likely to increase the cost of meat and poultry, as both grains are used to fatten livestock. Global meat prices are already at the highest in 20 years… - September 17, 2010 Food inflation in India rose for the second consecutive week, damping hopes of any immediate respite from high prices despite normal monsoon rains -September 9, 2010 U.S. commercial stockpiles of oil and oil products have risen to the highest levels in 27 years, and recent economic data haven't offered any signals that demand will grow fast enough to keep pace… -September 7, 2010 Crude prices dropped on Thursday after new government data signaled slower demand for oil and gas as the economy inches along in the slow lane -September 16, 2010 Food prices rose 5 percent globally during August, according to the United Nations, spurred mostly by the higher cost of wheat -September 3, 2010 Sugar prices rallied to a six-month high on the back of extremely strong physical demand and export bottlenecks in Brazil, the world’s largest exporter -September 7, 2010 This summer, world wheat prices have spiked again. Mozambique has been rocked by food riots. And Russia has banned wheat exports for the second time in three years -September 9, 2010 Corn prices broke above the key $5-a-bushel barrier for the first time in two years, boosted by fears of a tighter supply-and-demand balance as US farmers reported disappointment in the early stages of their harvest -September 17, 2010 Headlines suggests the never ending volatility in the commodity markets B A C C   B R E A K F A S T   S E M I N A R 1

  3. Supply and Demand Drivers in Agricultural Markets Planted Acreage Realized Yield Climate Change • Profitability (income/unit of land) affects crop selection • Land availability (urbanization) • Crop rotation (alternating between crops maximizes yields) • Soil Quality • Technological Advancements • Equipment, farming methods, seeds varieties, i.e. GM seeds • Weather and Disease • Global Warming • Effects crop growth cycle • Shifts arable land to higher latitudes • Extreme weather events Supply Drivers Average grain yields in developing countries are 45% lower than in developed countries 2 Yields of 3 major crops in US (corn, soybean, cotton) could decline by 40% due to warming in next 30 yrs 3 Harvested acreage/capita has declined by 50% over the past 40 years1 Population Dynamics Alternative Use for Crops Investor Appetite • Population growth increases food consumption. Global population estimated to be 9.1 bln by 2050 • Increasing intake of meats in developing world raises demand for livestock grain (~16lbs of grain needed to produce 1lb of meat) • Industrial Uses • Modified starches, pharmaceutical oils • Bio-Fuel Uses • Ethanol (made from sugar) • Increasing investor and speculator involvement in the commodity space raises bullish pressure on prices Demand Drivers B A C C   B R E A K F A S T   S E M I N A R Today, 50% of the growth in global demand for grain is coming from bio-fuel demand 5 Assets in Commodity ETFs in the US stood at over $55 billion as of June 2009 6 Meat consumption in China has grown from 25kg/person per year in 1995 to 53 kg in 2008 4 Key Takeaway Rapid changes in demand and supply increases price volatility in the affected commodity. Increased volatility necessitates greater and better risk management solutions, driving demand for derivatives products Sources: 1. “Principles of Environmental Science” 2. FAO 3. PNAS Study 4. Centre for World Food Studies 5. Informa Economics 6. Financial Times 2

  4. The agriculture sector has room for growth… Nominal GDP sector composition, 2009 B A C C   B R E A K F A S T   S E M I N A R Source: International Monetary Fund, CIA World Factbook 3

  5. …and has gone through its own “Evolution”… • Since the 1940s, agricultural productivity has increased dramatically, due largely to the increased use of energy-intensive mechanization, fertilizers and pesticides. • Between 1950 and 1984, the Green Revolution transformed agriculture around the globe, with world grain production increasing by 250%as world population doubled. • Modern agriculture's heavy reliance on petrochemicals and mechanization has raised concerns that oil shortages could increase costs and reduce agricultural output, causing food shortages. • Agriculture imposes external costs upon society through pesticides, nutrient runoff, excessive water usage, and assorted other problems B A C C   B R E A K F A S T   S E M I N A R 4

  6. … with Brazil and the U.S. being two very important players • Farming in the USA and Brazil is market-oriented and integrated to global markets. It’s a sector totally exposed to global competition • Agriculture is a very risky business. Its performance is influenced by weather, high cost of capital, exchange rate valuation and an enormous lack of infrastructure • In the near future, the agribusiness performance will depend on the expansion of domestic market as well as on the access to protected markets, specially in OECD countries. • The priorities: food security, safety, coupled with sustainable development driving sector consolidation (synergy advantage). • Ample capital to flow into the sector through the traditional capital markets, sovereign wealth funds, alternative sources of capital and in some cases Government subsidies B A C C   B R E A K F A S T   S E M I N A R 5

  7. historicalmin/max denotesquartiles(25th,50th,75th) denotes market peak (6/5/07) denotes current(9/17/10) Risk pricing has subsided from highs experienced during the crisis … Re-pricing of risk 13.6% 80.9% 22.0% 9.9% 01/24/07 11/20/08 16.3% 21.2% 25.8% 4.1% 1.3% 7.1% 8.2% 12/01/08 06/30/99 3.1% 4.3% 4.7% 8.5% 3.0% 6.4% 23.3% 03/05/97 11/26/08 6.0% 7.5% 9.7% 14.8x 17.4x 10.1x 30.7x 03/09/09 03/23/00 19.8x 24.5x 17.2x 24 bps 71 bps 72bps 249 bps 02/26/97 11/21/08 43 bps 59 bps 87 bps 45 bps 107 bps 178 bps 485 bps 05/30/97 11/26/08 95bps 135bps 178bps B A C C   B R E A K F A S T   S E M I N A R 15 bps 59 bps 459 bps 3 bps 10/10/08 09/04/01 24 bps 40 bps 62 bps 3 bps 4 bps 102 bps -37 bps 12/19/08 12/23/98 1 bps 6 bps 15 bps -0.6% 1.4% 2.4% 3.0% 10/27/08 05/04/00 1.5% 2.1% 2.4% 2.6% 2.6% 1.6% 3.9% 03/19/09 01/29/02 2.4% 3.0% 2.2% 0.9% 2.9% 07/31/10 09/30/06 2.0% 2.2% 2.5% Source: Bloomberg; J.P.Morgan ¹ DDM implied MRP = CoE implied by DDM – 10yr risk free; Cost of equity implied by DDM  equal to the solved internal IRR based on the current S&P 500 price level and expected cash flow stream ² BBB spread implied MRP based on CAPM: MRP = (BBB yield – 10yr risk free) / debt beta of 0.20 ³ 5X5 TIPS forward break-even based on data since 2002 6

  8. …with normalizing world wide equity valuations not followed by …. Estimated NTM P/E ratio for world equity indices (2005–2010 YTD) Historical Minimum/Maximum Denotes Current Price Level (09/17/2010) Denotes Percentiles (25th,50th,75th) S&P 500 North America 11/20/08 12/28/09 Dow Jones 02/26/09 06/05/09 Bovespa 05/03/06 12/14/09 DAX Europe 10/24/08 09/28/09 FTSE 100 10/27/08 12/02/09 CAC 40 B A C C   B R E A K F A S T   S E M I N A R 11/21/08 05/16/06 Asia/Asia-Pacific ASX 200 11/20/08 10/15/09 Nikkei 225 05/26/05 08/11/09 Hang Seng 10/27/08 10/30/07 Source: Bloomberg as of 09/17/2010Note: P/E based on Bloomberg BeST estimates 7

  9. …important commodity prices Commodity prices (2000–2010 YTD) Historical Minimum/Maximum Denotes Current Price Level (09/17/2010) Denotes Percentiles (25th,50th,75th) Ethanol(USD/gallon) Energy 02/08/02 07/03/06 WTI Cushing(USD/barrel) 11/15/01 07/03/08 Corn(USD/bushel) Soft commodities 08/10/00 06/27/08 Wheat(Usd/bushel) 08/07/000 02/27/08 Soybeans(Usd/bushel) 01/02/02 07/03/08 Sugar(Usd/lb) B A C C   B R E A K F A S T   S E M I N A R 02/29/00 01/29/10 Proteins Lean Hogs(Usd/lb) 09/03/02 05/04/10 Live Cattle(Usd/lb) 05/21/02 07/02/08 Source: Bloomberg as of 09/17/2010Note: P/E based on Bloomberg BeST estimates 8

  10. There are still very pronounced differences in the agricultural firms’ valuations… Estimated NTM P/E ratio for selected ag firms (2005–2010 YTD) Historical Minimum/Maximum Denotes Current Price Level (09/17/2010) Denotes Percentiles (25th,50th,75th) United States Monsanto 12/20/05 01/14/08 Mosaic 11/20/08 04/22/08 ADM 10/09/08 07/27/09 Bunge 10/22/08 09/13/10 Tyson Foods 11/20/08 05/18/00 Smithfield 11/21/08 07/09/08 Brasil Foods 05/24/06 06/28/10 LatAm JBS B A C C   B R E A K F A S T   S E M I N A R 10/10/08 08/02/10 Marfrig 02/03/09 09/15/10 Wilmar Asia/Asia-Pacific 10/08/08 01/10/08 Noble 10/24/08 01/11/10 Sime Darby 09/11/08 01/12/08 AWB 03/06/09 09/14/10 Source: Bloomberg as of 09/17/2010 9

  11. …that can be justified by historical performance on invested capital and respective cost of capital for both agribusiness firms… Return on invested capital (1999 - 2009) Cost of capital (1999 - 2009) 2009 Median 2009 2009 Median 2009 Potash Potash Monsanto Monsanto Mosaic Mosaic Archer Daniels Midland Archer Daniels Midland Bunge Bunge B A C C   B R E A K F A S T   S E M I N A R Corn Products Corn Products Viterra Viterra Cosan Cosan Source: Bloomberg, Facset, J.P.Morgan Note: ROIC based on year-end NOPAT / (average total debt + average book equity); WACC based on cost of debt by Bloomberg bond yields by rating; cost of equity based on average annual 10yr UST, average annual J.P. Morgan ERP estimates and beta based on 5yr historical regression against S&P 500 10

  12. … as well as protein firms Return on invested capital (1999 - 2009) Cost of capital (1999 - 2009) 2009 Median 2009 2009 Median 2009 Tyson Tyson Dean Foods Dean Foods Smithfield Smithfield B A C C   B R E A K F A S T   S E M I N A R Sanderson Farms Sanderson Farms Brasil Foods Brasil Foods JBS JBS Source: Bloomberg, Facset, J.P.Morgan Note: ROIC based on year-end NOPAT / (average total debt + average book equity); WACC based on cost of debt by Bloomberg bond yields by rating; cost of equity based on average annual 10yr UST, average annual J.P. Morgan ERP estimates and beta based on 5yr historical regression against S&P 500 11

  13. Clearly represented by market valuations of the rate of return of “clicks” vs. “bricks” Market cap comparison ($bn) $163 $163 B A C C   B R E A K F A S T   S E M I N A R Source: FactSet as of 9/8/10 12

  14. Australia, S.E. Asia, N. America Brazil J.P. Morgan Office • Australia is a major exporter of sugar and wheat • Large proportion is sold at world price, so is actively hedged • South East Asia has a number of major exporter and importer nations • Indonesia and Malaysia export Palm Oil • Vietnam exports coffee • North America is a key target, given our franchise and the need for price risk management • Brazil is a major player in the global agricultural arena as the top net exporter of Soybean, Coffee, Sugar, Corn and Orange Juice • J.P. Morgan intends to have a meaningful presence and rapidly gain market share • J.P. Morgan has offices in Belo Horizonte, Porto Alegre, Rio de Janeiro and Sao Paulo Geographic Focus China J.P. Morgan Office • China is a major consumer and net importer of agricultural commodities, particularly soybeans and palm oil • Brazil is China’s key trading partner. China consumes 12.5% of Brazil’s agricultural exports. • J.P. Morgan has 4 branches in China mainland: Guangzhou, Beijing, Shanghai, Tianjin • Intend to work synergistically with the Asia metals team B A C C   B R E A K F A S T   S E M I N A R 13

  15. J.P. Morgan has a world-class Agribusiness team with unparalleled client reach and global scope Select J.P. Morgan agribusiness relationships B A C C   B R E A K F A S T   S E M I N A R 14

  16. Brazil and U.S. take off B A C C   B R E A K F A S T   S E M I N A R 15

  17. Appendix 16 B A C C   B R E A K F A S T   S E M I N A R 16

  18. Some companies have weathered the storm better than others Biofuels Protein players Well timed equity and debt raises Over-leveragedacquisition Opportunisticacquisitions Ag players Unfortunate timing Emergingglobal player A P P E N D I X Fertilizers/Seed Missed opportunity Feeding the world Battle for control 17

  19. Overview of key agribusiness players Market cap ($mm) Firm value($mm) FV/ 2011E EBITDA Business mix A P P E N D I X (China Agri) Source: Company filings, FactSet; market data as of 9/10/10Note: Corn Products pro forma for acquisition of National Starch 18

  20. SWF by region Sovereign wealth funds around the world Americas 2% Others 2% Europe 17% Middle East 44% Asia 35% Total sovereign wealth fund market size is $3,752bn1 Middle East Asia • Abu Dhabi Investment Authority’s (ADIA) – $627bn • Saudi Arabian Monetary Agency (SAMA) Foreign Holdings – $431bn • Kuwait Investment Authority – $203bn • Qatar Investment Authority – $65bn • Investment Corporation of Dubai – $20bn • Mubadala Development Company – $15bn • Mumtalakat Holding Company – $14bn • International Petroleum Investment Company – $14bn • The State Administration of Foreign Exchange (SAFE) Investment Company – $347bn1 • China Investment Corporation (CIC) – $289bn • Government of Singapore Investment Corporation (GIC) – $248bn • National Social Security Fund (NSSF) – $147bn • Hong Kong Monetary Authority Investment Portfolio – $140bn • Temasek Holdings – $122bn • The National Fund of the Republic of Kazakhstan – $38bn • Brunei Investment Agency (BIA) – $30bn • Korea Investment Corporation (KIC) – $27bn • Khazanah Nasional Berhad – $25bn U.A.E. China Saudi Arabia China Kuwait Singapore China Qatar South America Hong Kong U.A.E. A P P E N D I X • Brazilian Development Bank (BNDES) – $201bn • Sovereign Fund of Brazil – $9bn Singapore U.A.E. Brazil Kazakhstan Bahrain Brazil Brunei U.A.E. South Korea Malaysia Source: Sovereign Wealth Fund Institute (SWFI)1 SWFI estimate 19

  21. Exporters Importers Major markets Market value of international trade (2009 Export/Import) US Billion dollars* $1.1  $2.2  $15.5  Soybean USA Brazil Argentina ROW Total ROW Japan EU-27 China Key Takeaway Wheat $4.1  These 6 agricultural commodities represent over $120B of international trade value. This figure becomes much higher when we consider the added value that arises from processing and re-export. U.S., Brazil and China contribute to over 60% of this value. USA EU-27 Russia ROW Total ROW Brazil EU-27 Egypt $0.3  Palm Oil $3.6  Malaysia Indon -esia Papua NG ROW Total ROW India EU-27 China A P P E N D I X Coffee $7.3  $1.8  Brazil Vietnam Colombia ROW Total ROW Japan USA EU-27 Corn $1.2  USA Brazil Argentina ROW Total ROW Mexico S.Korea Japan Sugar $1.0  Brazil Thailand Australia ROW Total ROW USA Russia EU-27 *Values calculated based on average of 12 front month futures contract prices (June 2008-09) Source: 2009 USDA figures 20

  22. Commodity prices have experienced extreme volatility Soybeans (CBOT) ($/bushel) Corn (CBOT) ($/bushel) 2005-2010 Avg: $9.09Current: $10.31 2005-2010 Avg: $3.74Current: $4.78 10.3% 39.3% Crude oil (NYMEX) ($/bbl) Wheat (CBOT) ($/bushel) 2005-2010 Avg: $5.69Current: $7.37 2005-2010 Avg: $74.70Current: $76.45 70.1% 1.3% A P P E N D I X DAP (CFL) ($/metric tonne) Natural gas (NYMEX) ($/MMBtu) 2005-2010 Avg: $464.17Current: $468.35 2005-2010 Avg: $6.89Current: $3.88 6.9% (16.4%) Current soft commodities remain above historical levels Source: Bloomberg, FactSet as of 9/10/10 21

  23. Biofuels: now and the next generation In current use Development stage Very early conceptual stage Corn Sugar Soy Cellulose Jatropha Algae • Technology ready and cheap • Very small global- water footprint • At least 2x better ethanol yield than corn • Half as expensive as corn • Technology ready and cheap • Grows in less-than-favorable conditions • Converts inedible crop residues into fuel • Abundant raw material • Yield is 4x that of soybeans • Ideal feedstock for Indian and African plants • Does not compete with food • Best CO2 capture and use, highest yield per hectare Advantages A P P E N D I X • Difficult to attract further U.S. investment • Seen as driving up price of corn • Insufficient feedstock in the U.S. • Bulky and expensive to transport • Reduces food supply • Possible deforestation from soybean cultivation • No large–scale cellulosic biorefineries • Conversion not cost-effective • Mechanical harvesting is difficult • 3–5 years of growth before first harvest • Commercialization of technology 5 years away • Land cost and availability a limiting factor Disadvantages 230 gal/acre 600 gal/acre 202 gal/acre 1,200 mℓ/bushel 1,604 gal/acre 22 tonnes/hectare Yield Source: Equity research, research reports, websites 22

  24. Grains and Oilseeds • Corn: US and Global Fundamentals Are Unequivocally Bullish for the 2010/11 Season, but Current Market Structure Cause for Some Concern • Near-term (1-2 months) risks • Non-commercial long interest (~350,000 contracts) is record large, some commercial end users have been pushed into hedges as prices have risen  unanimity of market opinion raises risk of liquidation pressure, could push prices back to support above $4.00/bu (vs CZ10 current price of ~$4.95/bu). • Event risks: If USDA September 30 Quarterly Stocks of Grain Report shows larger old-crop inventories or if 2010/2011 yield forecast not revised materially lower in October, high probability of short-term de-risking by longs • Long-term risks • Anecdotal evidence points to still-lower US yields (due to disease and poor weather conditions) and the USDA forecast likely to ultimately be revised lower. Smaller production base tightens US balance sheet. • US export prospects are bullish and are linked to 1) increased foreign demand due to substitution amid decreased Russian and European Union wheat supplies 2) possibility of a shortfall in Chinese production, necessitating renewed imports in order to keep domestic market balanced and price inflation under control. • Limited demand rationing to come from US ethanol industry: discretionary blending economics favor more ethanol offtake, and mandates set baseline level of demand for corn unlikely to be penetrated without Government intervention. • Soybeans: Long-term Neutral at Current Price Levels (near $10.50/bu for mid-2011); Near-term (1-2 Months) Softening Likely but 3-9 Month Risks are Bullish and are Linked to Weather • Near-term risks • USDA yield forecasts suggest comfortably large US production base; September-October likely to prove ‘slow news’ period between US harvest and South American planting. Prices appear at risk of modest ($0.50/bu) correction. • Long-term Risks • Dryness in South America as a result of La Nina is a major bullish production risk; smaller Brazil/Argentine crops would mean lower export availability and (likely) an increase in Chinese demand for US supplies. The US balance sheet in 2010/11, although more comfortable than seen in 2009/10, cannot withstand stress associated with South American supply losses. Associated risk argues for maintenance of risk premium until spring 2011, at which time some downside price pressure may develop if South American crops meet expectations. • US domestic (crush) demand prospects appear constructive given ongoing biodiesel mandates and need to preserve soybean oil inventories. A P P E N D I X 23

  25. Grains and Oilseeds • Wheat: Neutral at Current Price Levels Through late 2010, But Spike Risks Remain For Next 2-3 Months • Near-term (2-3 months) risks • Following production losses in the EU and FSU (Former Soviet Union), the market remains on edge about Southern Hemisphere producers Australia and Argentine; risk premium will remain in market until these crops are successfully harvested and export availability is determined. • Non-commercial market participants spent most of July rally occupied with exiting a historically large net-short position; market is now essentially neutral, such that if a Southern Hemisphere supply problem develops, there is significant potential for larger long participation. • Long-term risks • Large increase in demand for US high-protein varieties (Hard Red Winter and Hard Red Spring) due to production losses in FSU and EU. The USDA has only partially recognized this demand in its forecasts. • FSU winter wheat plantings, which should be undertaken in September and early October, is significantly behind schedule amid continue weather stresses, raising possibility of another suboptimal crop next year in the region and, in turn, another year of limited export availability. • Bearish pressure could ultimately develop as a result of current bullishness  Higher prices are likely to encourage larger winter wheat plantings in the US and EU (and potentially, next year in Southern Hemisphere countries); assuming normal yields, a large uptick in global production next year could mitigate continued FSU supply tightness and push prices back toward low $6.00 level. Further downside potential will be governed by corn market momentum. A P P E N D I X 24

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