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Farmers Cooperatives 2001

October 8, 2001

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CHS Cooperatives - Land O’Lakes

Number of Cooperatives in our System

2000

1400

1100

2300

0

500

1000

1500

2000

2500

1980 1987 1996 2000

Total Trade Area

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Data Base

• 560 Cooperatives

• 16 states

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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

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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

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1999 % 2000 %Sales 11,455 100.0 11,112 100.0

Gross Margin 1,771 15.4 1,852 16.6

Expenses 1,642 14.3 1,737 15.6

Savings 129 1.1 115 1.0

Patronage 170 1.4 132 1.1

Total Savings 299 2.6 247 2.2

Total Profitability 560 Local Cooperatives

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Financial Analysis of 560 Local Cooperatives

2000Number 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)%

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1994 2000 % Change

Total Assets 4,103 5,475 33%

Term Debt 288 707 145%

Member Equity 2,287 2,920 28%

Term Debt/ Equity 12.6% 24.2%

Member Ownership 56.0% 53.3%

Return on Equity 10.8% 8.4%

Local Co-op Trends

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Local Ownership/ Term/ Local Net Worth

Local Ownership 38.4%The guidelines for the ratios are:50% = strong35-50% = acceptable< 35% = concern

Term Debt/ Local Equity 44.4%The guidelines for the ratios are:

< 35% = strong

35 - 75% = manageable

> 75% = concern

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Market Segmentation and

Cooperatives

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Market Segmentation

• What is your market?

• What will your market be?

• What should your market be?

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Local Cooperative Analysis

Number ofAccounts

% TotalSales

%TotalLocalProfit

Term Debtto Equity

%Return

on TotalEquity

% Profitable

Top 10 90 50% 56% 30.8% 9.1% 90%

2nd 10 90 20% 22% 20.7% 8.5% 78%

3rd 10 88 12% 8% 18.1% 6.3% 66%

Other 235 18% 14% 15.2% 7.3% 67%

Total 503 100% 100% 24.2% 8.4% 73%

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Profits by Size of Co-op

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

% of % of Average AverageSize of Number of % of Total Total Sales ProfitAccount Accounts Accounts Sales Profit (million) (million)

Financial Summary560 Cooperatives

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Profits by Size of Co-op

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)

Total RangeSize of Number of Sales Total of Account Accounts Volume Profit Profitability (million)

Financial Summary560 Cooperatives

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State Analysis560 Cooperatives

# Accounts Sales(millions)

Local Profit(millions)

%Profitable

Iowa 76 3,210 19.3 76%Minnesota 109 1,859 30.2 72%West 70 1,218 14.7 74%Wisconsin 80 1,208 11.6 63%Ohio/Michigan 36 1,153 13.9 94%North Dakota 90 1,013 8.8 70%Indiana 33 965 7.3 67%South Dakota 37 913 13.5 71%NE/KS/CO 29 905 13.1 76%

Total 560 12,443 132.4 73%

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Local CooperativesTop 10 Per State/Region - 90 Cooperatives

(Million) (Millions)Sales % Total Local Profit % Total % Profitable

IA 1494 46.5% 7,939 41.2% 90%SD 710 77.7% 11,616 85.9% 100%OH/MI 683 59.3% 9,003 64.9% 100%NE/KS/CO 682 75.3% 11,623 88.2% 100%MN 622 33.4% 13,126 43.4% 100%IN 531 55.0% 4,873 67.1% 80%West 467 38.3% 3,599 24.4% 80%WI 430 35.5% 5,199 45.1% 70%ND 317 31.2% 2,630 29.8% 70%Total 5936 47.7% 69,608 52.5% 88%

Grand Total 12,443 132,400

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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

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-120

-80

-40

0

40

0 1 2

Value Creation at Co-ops

Cumulative local value created at sample co-ops*$ Millions

*Survey of approximately 500 CHS co-opsSource:Member co-op survey; team analysis

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

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Value Created Across Local Co-ops

24

27

26

14

23

1

2

3

4

*Segmented by value created/invested capital**Mean values for co-ops in quartileSource:Member co-op survey; team analysis

Quartile*Revenue**$ Millions

248

-227

-559

-424

-169

Value created**$ Thousands

5.1

-4.8

-3.0

-7.8

Value created/ invested capitalPercent

ROICPercent

14.2

6.3

1.8

-9.3

Cost of capitalPercent

9.2

9.3

9.5

9.4

Total 4.6 9.4

-18.7

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Drivers of Value Creation

*Co-ops segmented by level of value created/invested capital**Numbers may not add due to roundingSource:Member co-op survey; team analysis

Mean metrics for co-ops segmented by local performance*

-18.7-7.8 -3.0

5.1

Q4 Q3 Q2 Q1

EP/IC**Percent

9.4 9.5 9.3 9.2

Q4 Q3 Q2 Q1

WACCPercent

4.7 4.8 5.0 4.9

Q4 Q3 Q2 Q1

Capital turnoverRatio

81.7 84.2 84.1 81.9

Q4 Q3 Q2 Q1

COGSPercent of sales

Operational efficiency• Co-ops in top quartile

expended almost 5% less in expenses than those in the bottom quartile

-9.3

1.8 6.314.2

Q4 Q3 Q2 Q1

Pretax ROICPercent

-2.0

0.4 1.32.9

Q4 Q3 Q2 Q1

Pretax operating profitPercent of sales

20.315.4 14.6 15.8

Q4 Q3 Q2 Q1

ExpensesPercent of sales

16.5 15.3 14.217.1

Q4 Q3 Q2 Q1

Net PP&EPercent of sales

4.3 4.4 4.8 6.1

Q4 Q3 Q2 Q1

Working capitalPercent of sales

Top quartile

Bottom quartile

Q1

Q4

Capital utilization• Bottom quartile co-

ops are 3% more capitalized than those in the top quartile

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Leverage Ratios for Local Co-ops

1

2

3

4

*Segmented by value created/invested capital**Mean values for co-ops in quartileSource:Member co-op survey; team analysis

Quartile*Revenue**$ Millions

Value created**$ Thousands

Long-term debt to equity Current ratio

Total

24

27

26

14

23

248

-227

-559

-424

-169

0.21

0.23

0.32

0.27

0.25

1.76

1.58

1.49

1.29

1.55

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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

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Scale Impact on Co-op Performance

Return on invested capital at sample co-ops*Percent

Co-op revenue$ Millions

*Survey of approximately 500 local co-ops**Co-op segmented by annual revenue***Average for co-ops in quartileSource:Member co-op survey; team analysis

Key metrics for co-ops segmented by revenues

59.4

18.2

9.8

4.7

1

2

3

4

Quartile**

Revenue***$ Millions

1.1

1.1

0.6

Operating marginPercent

5.8

4.5

2.3

ROICPercent

-5

0

5

10

15

20

25

0 25 50 75 100

-0.2-0.7

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Drivers of Scale Impact on Performance

*Co-ops segmented by level of value created/invested capital**Numbers may not add due to roundingSource:Member co-op survey; team analysis

Mean metrics for co-ops segmented by revenue*

3.4 4.1 4.35.5

Q4 Q3 Q2 Q1

Capital turnoverRatio

78.4 79.4 80.7 85.0

Q4 Q3 Q2 Q1

COGSPercent of sales

Operational efficiency• Top quartile co-ops

expended 8% less in expenses than those in the bottom quartile

Capital utilization• Bottom quartile co-

ops are 4% more capitalized those in the top quartile

-0.7

2.34.5 5.8

Q4 Q3 Q2 Q1

Pretax ROIC**Percent

-0.2

0.61.1 1.1

Q4 Q3 Q2 Q1

Pretax operating profitPercent of sales

22.0 20.2 18.2 14.0

Q4 Q3 Q2 Q1

ExpensesPercent of sales

18.8 17.9 14.219.0

Q4 Q3 Q2 Q1

Net PP&EPercent of sales

5.8 5.7 4.110.9

Q4 Q3 Q2 Q1

Working capitalPercent of sales

Top quartile

Bottom quartile

Q1

Q4

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Effects of Scale on Operational Efficiency andCapital Utilization

5

10

15

20

25

30

0 25 50 75 100

ExpensesPercent of revenue

Co-op revenue$ Millions

Source:Member co-op survey

0

2

4

6

8

0 25 50 75 100

Capital turnoverRatio

Co-op revenue$ Millions

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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