Restructuring for Troubled Times5th Annual Farmer Cooperatives ConferenceNovember 13-15, 2002 St. Louis, Missouri

Applying information and lessons learned from the 2001 Farmer Cooperatives

Conference to Our Cooperative

Thomas D. LarsonExecutive Vice President

Member and Public Affairs

Today’s Discussion

• Review 2001 value creation concept

• What and how CHS implementing

• What and how implementing local co-op

• Performance management module

Overview

• Current co-op financial performance unacceptable

• Ag supply has many untapped opportunities

• Winning in future food landscape will be critical

• Need to execute against a 5-part success model

4

Value creation is a key metric

* Impact of extraordinary items excluded

Value created

Invested capital

Annual return of investment above that expected given risk level

== XXROIC

Rate of return required to compensate investors for risk

Cost of capital––

Return on invested capital*

Value Creation

• Industry

• Regional co-ops

• Local co-ops

6

Most ag segments destroy valueContribution to GDP, $ billions, 1999

152

1,522

57 70 106

797

412

FeedSeedFinancingFuel and electric

16.4% of U.S. GDP

ESTIMATE

Food distri-bution

Secon-daryproces-sing

Primary proces-sing

Farm produc-tion

Input Distri-bution

Ag inputs

EquipmentAg chemFertilizerFarm services

Value createdPercent, share of invested capital

Cost of capitalPercent

0.1 -2.3 -1.1 -5.4 -7.0 -2.0

10.610.810.910.410.911.1

Value created

$ Millions

Value created/ invested capital

Percent

Financial performance ofdistribution particularly poor

ESTIMATE

19

16

11

11

Revenue

$ Billions

Machinery

Feed

Fertilizer

Chemicals

Input Distribution

Total

ROIC

Percent

7.9

8.5

9.1

12.6

3.9

9.157 -360 -2.0

2

-122

-53

-187

0.1

-2.5

-1.3

-3.5

-2,519138 -7.0

Revenue$ Billions

Value created$ Millions

Value created/ invested capitalPercent

ROICPercent

11

8

6

6

1

Farmland

Cenex Harvest States

Land O’Lakes

Agrilink -17

-74

-54

-40

-168

-2.5

-6.4

-4.0

-2.8

-8.6 -0.6

4.1

1.6

5.2

Dairy Farmers of America

Regionals struggled to create value in 1999…

5.2

ESTIMATE

9

Value Created Across Local Co-ops

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

24

27

26

14

23

1

2

3

4

Quartile*Revenue**

$ Millions

248

-227

-559

-424

-169

Value created**

$ Thousands

5.1

-4.8

-3.0

-7.8

Value created/ invested capital

Percent

ROIC

Percent

14.2

6.3

1.8

-9.3

Cost of capital

Percent

9.2

9.3

9.5

9.4

Total 4.6 9.4

-18.7

CHS Value Creation (EVA)

• Mid 1990s

• Executive management and board

• Operating management

• Financial measurement

• Recognition program

EVA (economic value-added)

Earnings minus (equity x minimum acceptable rate of return)

• EVA recognizes there is no free capital

• Equity represents an investment

• Investor expects a return

CHS Co-op Performance Measurements

• Profit

• EVA

• Cash Flow

• ROI

• Investment Grade

Local Co-op value creation

• 4% above cost of borrowed capital

• 9 - 12% ROE

• Numerous meetings

• Benchmarking

Return on Local Equity Analysis

9%+ 216 52% 96% 39% 37%

5-9% 110 15% 15% 20% 16%

0-5% 108 17% 6% 20% 27%

Below 117 16% (17%) 21% 49%

0%

% Greater thanRate of # % of % of Local % of 50% Term Debt/Return Accts. Sales Savings Accounts Local Equity

Cooperative System

Ag Supply Grain $ Sales $(0-10) $(10-25) $(25-50) $(50-75) $(75-100) $(100+) Volume

--------------------------------------------278 accounts

63% savings

23 accounts

(2%) savings

--------------------------------------------49 accounts

49% savings

203 accounts

(10%) savings

# accts. 216savings- 96%

9%+

5-9%

0-5%

Below 0

Return on local equity

Summary# accounts 481 # accounts 72% savings 53% % savings 47%

PFP success modelStrategy

StructureExisting Emerging

Leveragehorizontal scale

1

Pursue operational excellence

2

Exploit vertical opportunities

3

Drive customer integration

4

Create performance obsession

5

Thank you!!