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BUS 419 Presentation

BUS 419 Presentation. The Andersons, Viterra , and ADM. Outline. Industry Analysis Economic Market The Andersons Company Overview Risk Management Financial Statement Analysis Viterra Company Overview Risk Management Financial Statements Analysis ADM Company Overview

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BUS 419 Presentation

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  1. BUS 419 Presentation The Andersons, Viterra, and ADM

  2. Outline • Industry Analysis • Economic • Market • The Andersons • Company Overview • Risk Management • Financial Statement Analysis • Viterra • Company Overview • Risk Management • Financial Statements Analysis • ADM • Company Overview • Risk Management • Financial Statements Analysis

  3. Industry overview

  4. Agriculture industry • Refers to the industrialized production of: • Livestock • Poultry • Fish • Crops

  5. History • Agricultural production across the world doubled four times between 1820 and 1975to feed a global population of one billon human beings in 1800 and greater than 7 billion in 2012. • The number of farms has decreased and their ownerships is more concentrated.

  6. Trends • Agriculture Industry is always seeking to improve, by adopting new technologies. The new technologies aim at improving the efficiency of various Agricultural based operations. • Biotechnology has assisted in improving the quality of crops manifold. But it depends on the choice of the consumers as consumers opt for natural food. • Transgenic rice is produced at a cheaper rate as compared to conventional rice.

  7. Population Growth

  8. Forecasts • World agricultural production is expected to grow nearly 1.5% yearly in the next few years, according to the Organization for Economic Co-operation and Development (OECD). • Commodity prices are expected to decline from 2011 figures but will average at 20% or less for cereals and 30% or less for meats over the next decade. • By 2050, there will be 3 billion more people to feed, by which time meat production demand will grow almost 75% and cereal production will have to increase by 1 billion tons.

  9. U.S. farm sector output

  10. Total food expenditures in U.S. • Total food expenditures for all food consumed in the U.S. were $1,240.4 billion in 2010, a 3.4-percent increase from $1,199.8 billion in 2009.

  11. Challenges • Adoption of manufacturing processes in production as well as processing • A system or food supply chain approach to production and distribution • Negotiated coordination replacing market coordination of the system • A more important role for information, knowledge and other soft assets in reducing cost • Increasing consolidation at all levels raising issues of market power and control

  12. Risks • Is classified into such categories: • Production • Marketing • Financial • Legal • Human

  13. Risks

  14. Financing and financial structure • Liquidity • Company must have the ability to hold accounts receivable on its asset and pay off short-term bonds • Solvency • Company may have the risk of having not enough income to payoff the bonds maturity in short term

  15. Market prices and terms of trade • Product price volatility • The price of agricultural products may decrease a lot. As a result, company can suffer great loss when its input price is fixed by the long-term contract • Input price volatility • Similar to product price volatility, input price may increase a lot.

  16. Financial markets and instruments • Foreign exchange • For companies with foreign businesses, FX rates have great effect on company’s profit • Interest rate • Paying for the bonds and borrowing money with great interest cost

  17. Operations and business practices • natural hazards • Natural hazards can easily disrupt the continuous operation of the company • internal processes and controls • Operating the facilities in wrong way or negligence can result in broking down the machines

  18. Corn

  19. Soybean

  20. Wheat

  21. Company Overview • Listed on NYSE • Focuses mainly on grain related services e.g., risk management, marketing, crop insurance and grain transportation • A diversified company with interests in the grain, ethanol and plant nutrient sectors of U.S. agruiculture, as well as in railcar leasing and repair, turf products production and general merchandise retailing

  22. Primary Market Segments • Grain and Ethanol • Grain trading (through Lansing Trade Group 52% stake) • Rail • Plant Nutrient • Cob • Retail Stores

  23. Grain Group • Operates grain terminals • Earns income by: • Buying and selling (mostly using forwards) • Conditioning for resale • Space income(“appreciation or depreciation in the basis value of grain held”)

  24. Ethanol Group • Part ownership of 3 LLC’s, each of which owns an ethanol plant operated by The Andersons • Grain group has exclusive rights to provide all corn to each plant • The company buys from 50-100% of the ethanol from each plant for resale • Ethanol group provides operations and administration of each plant on a cost-plus contract

  25. Plant Nutrient Group • Manufactures and distributes agricultural plant nutrients • Operates 27 manufacturing/distribution locations

  26. Wholesale Nutrients(Plant Nutrient Group Cont’d) • Manufactures, stores, distributes agricultural nutrients, lime and gypsum pellets • Also manufactures and distributes industrial products (de-icers for plane runways, water treatment products)

  27. Farm Centers (Plant Nutrient Group Cont’d) • Provides nutrients, crop protection chemicals, seeds, agronomic advice to small farmers • Recently purchased EezyGroinc., and Immokalee Farmers Supply inc.

  28. Rail Group • Repairs, sells, leases locomotives, railcars, containers • Fleet management services offered to private railcar owners • Invested in Iowa Northern Railway Company

  29. Turf & Specialty Group • Turf Products • Golf courses, turf care markets • Also sells fertilizer • Cob Products • Processes corncob based products for animal litter, among other things

  30. Retail Group • Retail stores “The Andersons” • Specialty foods • Home improvement products

  31. Financial Statements

  32. Risk Management

  33. The closest thing to a hedging philosophy available • “In the case of our off-balance sheet railcars and locomotives, the risk management philosophy of the Company is to match-fund the lease commitments where possible. Match-funding (in relation to rail lease transactions) means matching the terms of the financial intermediary funding arrangement with the lease terms of the customer where the Company is both lessee and sublessor.”

  34. So, they really don’t state what their hedging philosophy is, if they have one.

  35. Risk Management • “The market risk inherent in the Company's market risk-sensitive instruments and positions is the potential loss arising from adverse changes in commodity prices and interest rates”

  36. Risk Management • Commodity Prices: • Uses Futures, Options, and OTC contracts • Interest Rate • Short-term: • Interest Cap • Long-term • Interest Swap and Cap • FX rate • Collar contracts

  37. The company is exposed to commodity price risk • They have unhedged position limits • Above these limits, they use commodity futures, options, and forwards • Forwards are for delivery, and rarely extend beyond one year

  38. Commodity • In 2010, The Andersons Inc. increased the use of forward commodity contracts substantially

  39. However, in 2011 is was reduced substantially

  40. “we are unable to offset 100% of the price risk of each transaction due to timing, availability of futures and options contracts and third party credit risk. Furthermore, there is a risk that the derivatives we employ will not be effective in offsetting all of the risks we are trying to manage. Our grain derivatives, for example, do not perfectly correlate with the basis component of our grain inventory and contracts.”

  41. Commodity • In 2010, the profit margin increase to 1.91% from 1.27%

  42. Commodity • Observing the outflow of cash in inventories and commodity derivatives and margin deposits, the increased use of derivatives might be caused by larger inventory

  43. Why the focus on corn? • “Any event that tends to negatively affect the supply of corn, such as adverse weather or crop disease, could increase corn prices and potentially harm our share of the ethanol LLCs results.…High costs or shortages could require us to suspend ethanol operations until corn is available on economical terms, which would have a material adverse effect on operating results.”

  44. “Our futures, options and over-the-counter contracts are subject to margin calls. If there is a significant movement in the commodities market, we could be required to post significant levels of margin, which would impact our liquidity.”

  45. “There is no assurance that the efforts we have taken to mitigate the impact of the volatility of the prices of commodities upon which we rely will be successful and any sudden change in the price of these commodities could have an adverse affect on our business and results of operations.”

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