Farmers Cooperatives 2001 October 8, 2001

1. CH-757PE-017cgMK Farmers Cooperatives 2001October 8, 2001

2. CH-757PE-017cgMK CHS Cooperatives - Land O’Lakes

3. CH-757PE-017cgMK Data Base • 560 Cooperatives • 16 states

4. CH-757PE-017cgMK Industry Trends • Continued emphasis on critical mass • Continued use of E-Business • Continued analysis of service income vs. product margins • Constant challenge to find, hire, and retain quality people • A general trend of greater returns being generated by larger operations

5. CH-757PE-017cgMK Local Cooperative Issues • Build a unified cooperative system • Ability to generate adequate returns and cash flow • Enhance marketing strategies and skills • Human Resources programs and development • Develop and implement coordinated E-Commerce strategy

6. CH-757PE-017cgMK Total Profitability 560 Local Cooperatives

7. CH-757PE-017cgMK Financial Analysis of 560 Local Cooperatives • 2000 • Number Profitable 73% • Trends Total • Sales volume down (2.9)% • Margins up 4.5% • Expenses up 5.7% • Local savings down (10.8)% • Patronage down (22.3)% • Total savings down (17.3)%

8. CH-757PE-017cgMK Local Co-op Trends

9. CH-757PE-017cgMK Local Ownership/ Term/ Local Net Worth • Local Ownership 38.4% • The guidelines for the ratios are: • 50% = strong • 35-50% = acceptable • < 35% = concern • Term Debt/ Local Equity 44.4% • The guidelines for the ratios are: • < 35% = strong • 35 - 75% = manageable • > 75% = concern

10. CH-757PE-017cgMK Market Segmentation and Cooperatives

11. CH-757PE-017cgMK Market Segmentation • What is your market? • What will your market be? • What should your market be?

12. Local Cooperative Analysis CH-757PE-017cgMK

13. % of % of Average Average Size of Number of % of Total Total Sales Profit Account Accounts Accounts Sales Profit (million) (million) Over $100 million 11 1.9% 15.1% 12.1% 172 1.5 $75 - $100 million 10 1.7% 6.6% 8.8% 83 1.2 $50 - $75 million 37 6.6% 18.1% 23.3% 61 .8 $25 - $50 million 84 15.0% 24.1% 24.2% 36 .4 $25 and below 418 74.8% 36.1% 31.6% 11 .1 560 100.0% 100.0% 100.0% 22 .2 CH-757PE-017cgMK Profits by Size of Co-op Financial Summary 560 Cooperatives

14. Total Range Size of Number of Sales Total of Account Accounts Volume Profit Profitability (million) Over $100 million 11 1,890 16.1 3.9 - (1.4) $75 - $100 million 10 829 11.7 2.0 - .2 $50 - $75 million 37 2,254 30.9 3.7 - (1.1) $25 - $50 million 84 3,004 32.1 2.3 - (1.0) $25 and below 418 4,466 41.6 1.7 - (1.0) Total 560 12,443 132.4 3.9 - (1.4) CH-757PE-017cgMK Profits by Size of Co-op Financial Summary 560 Cooperatives

15. CH-757PE-017cgMK State Analysis560 Cooperatives

16. CH-757PE-017cgMK Local CooperativesTop 10 Per State/Region - 90 Cooperatives

17. CH-757PE-017cgMK Key Findings • Although local co-ops destroy value in the aggregate, a significant fraction do create value on an individual basis • Although a sample of 500 local co-ops destroyed $105 million in 1999 on $2.2 billion invested, 30% of the co-ops created value • Operational efficiency and capital utilization are the most significant drivers of whether a local co-op creates value • Co-op performance improves substantially with scale

18. CH-757PE-017cgMK Value Creation at Co-ops • Cumulative local value created at sample co-ops* • $ Millions • Although local co-ops destroy value in aggregate . . . • On $2.2 billion in capital invested, $105 million of value was destroyed • . . . a significant fraction do create value individually • 30% of co-ops created value on an individual basis • Value created by these co-ops equals $28 million on $0.7 billion invested • 30% of co-ops create value • Cumulative capital invested • $ Billions * Survey of approximately 500 CHS co-ops Source: Member co-op survey; team analysis

19. CH-757PE-017cgMK Value Created Across Local Co-ops • Value created/ invested capital • Percent • Cost of capital • Percent • Revenue** • $ Millions • Value created** • $ Thousands • ROIC • Percent • Quartile* • 1 • 14.2 • 9.2 • 2 • 6.3 • 9.3 • 3 • 1.8 • 9.5 • 4 • -9.3 • 9.4 • -18.7 • Total • 4.6 • 9.4 * Segmented by value created/invested capital ** Mean values for co-ops in quartile Source: Member co-op survey; team analysis

20. Q1 Q4 Top quartile Bottom quartile CH-757PE-017cgMK Drivers of Value Creation • Mean metrics for co-ops segmented by local performance* • COGS • Percent of sales • Pretax operating profit • Percent of sales • Q4 • Q3 • Q2 • Q1 • Operational efficiency • Co-ops in top quartile expended almost 5% less in expenses than those in the bottom quartile • Expenses • Percent of sales • Q4 • Q3 • Q2 • Q1 • Q4 • Q3 • Q2 • Q1 • Pretax ROIC • Percent • Q4 • Q3 • Q2 • Q1 • Net PP&E • Percent of sales • Capital utilization • Bottom quartile co-ops are 3% more capitalized than those in the top quartile • EP/IC** • Percent • Capital turnover • Ratio • Q4 • Q3 • Q2 • Q1 • Q4 • Q3 • Q2 • Q1 • Working capital • Percent of sales • WACC • Percent • Q4 • Q3 • Q2 • Q1 • Q4 • Q3 • Q2 • Q1 • Q4 • Q3 • Q2 • Q1 * Co-ops segmented by level of value created/invested capital ** Numbers may not add due to rounding Source: Member co-op survey; team analysis

21. CH-757PE-017cgMK Leverage Ratios for Local Co-ops • Revenue** • $ Millions • Value created** • $ Thousands • Long-term debt to equity • Quartile* • Current ratio • 1 • 2 • 3 • 4 • Total * Segmented by value created/invested capital ** Mean values for co-ops in quartile Source: Member co-op survey; team analysis

22. CH-757PE-017cgMK KEY FINDINGS • Although local co-ops destroy value in the aggregate, a significant fraction do create value on an individual basis • Co-op performance improves substantially with scale • While smaller co-ops benefit from larger gross margins . . . • . . . the advantage is eroded by subscale operations and overcapitalization

23. CH-757PE-017cgMK Scale Impact on Co-op Performance • Return on invested capital at sample co-ops* • Percent • Key metrics for co-ops segmented by revenues • Operating margin • Percent • Revenue*** • $ Millions • ROIC • Percent • Quartile** • 1 • 2 • 3 • -0.2 • 4 • -0.7 • Co-op revenue • $ Millions * Survey of approximately 500 local co-ops ** Co-op segmented by annual revenue *** Average for co-ops in quartile Source: Member co-op survey; team analysis

24. Q1 Q4 Top quartile Bottom quartile CH-757PE-017cgMK Drivers of Scale Impact on Performance • Mean metrics for co-ops segmented by revenue* • COGS • Percent of sales • Pretax operating profit • Percent of sales • Q4 • Q3 • Q2 • Q1 • Expenses • Percent of sales • Operational efficiency • Top quartile co-ops expended 8% less in expenses than those in the bottom quartile • Q4 • Q3 • Q2 • Q1 • Q4 • Q3 • Q2 • Q1 • Pretax ROIC** • Percent • Q4 • Q3 • Q2 • Q1 • Net PP&E • Percent of sales • Capital utilization • Bottom quartile co-ops are 4% more capitalized those in the top quartile • Capital turnover • Ratio • Q4 • Q3 • Q2 • Q1 • Working capital • Percent of sales • Q4 • Q3 • Q2 • Q1 • Q4 • Q3 • Q2 • Q1 * Co-ops segmented by level of value created/invested capital ** Numbers may not add due to rounding Source: Member co-op survey; team analysis

25. CH-757PE-017cgMK Effects of Scale on Operational Efficiency andCapital Utilization • Expenses • Percent of revenue • Capital turnover • Ratio • Co-op revenue • $ Millions • Co-op revenue • $ Millions Source: Member co-op survey

26. CH-757PE-017cgMK Successful Co-ops • Vision and Mission • Outstanding Management/Staff • Understand the producers’ needs for value-added strategies • Efficient, profitable • Manage equity and capital for long-term success • Integral piece of co-op system