World map of the agricultural cooperative movement and its critical issues Summary report

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World map of the agricultural cooperative movement and its critical issues Summary report 2012 International Summit of Cooperatives October 2012

Editorial PwC has published the first report on the Top 100 agricultural cooperatives worldwide. The cooperative industry is currently facing new challenges. With their unique organizational model and local footprint, cooperatives are faced with strategic development choices. They must become more international, through mergers and alliances, extending their market involvement both upstream and downstream, if they are to fend off stiff competition from noncooperative companies in the food industry. They will have to rethink their financing and governance to increase their competitiveness and safeguard their unique model.

The majority of the world’s 100 largest agricultural cooperatives are located in Europe Europe is the world leader with 62 of the world’s 100 largest cooperatives. This vitality is the result of their historic roots in Europe.

Cooperatives in Europe tend to be specialized cooperatives in the north and multi-purpose in the south The leader in North America is CHS Inc., a multi-purpose cooperative

62

24 South America is primarily made up of smalland medium-sized cooperatives

Major national leaders in the agricultural sector

3

2 5

Key:  Large cooperatives (Sales > €1 billion) identified

Oceania is made up of players that are consolidated in different sectors.

4

World map of the agricultural cooperative movement and its critical issues

In Europe and Asia, there is a significant number of large cooperatives compared to non-cooperative companies The role of cooperatives in the food industry is greatest in Europe, with sales* of the Top 40 reaching €136 billion, over half of the amount of noncooperative groups, whereas in North America this figure is ten times lower. In Asia cooperatives dominate the market, with major national leaders.

Sales*: Top 40 non-cooperative companies in the food industry

Area

Ratio: non-coop/ coop in the food industry

Sales*: Top 40 cooperatives

South America

80

North America

522

52

x 10

Europe

225

136

x 1.7

44

37

x 1.2

n.a.

11

n.a.

Asia Océania

3

x 27

(*) Sales in billions of euros

Increased competition from ordinary non-cooperative companies with a strong international focus With sales rising annually over 10% between 2007 and 2011, compared to 8% for the Top 40 global agricultural cooperatives over the same period, noncooperative companies in the food industry that have a strong international presence represent strong competition. (see figures 1 and 2)

On average, cooperatives have lower financial results. The financial performance of agricultural cooperatives hinders their ability to adequately meet financing requirements for their ambitious development. (see figure 3)

1

Cooperatives have not been as active in industry consolidation: over the last three years, almost all the largest mergers and acquisitions in the agricultural sector were carried out by non-cooperative companies, in particular Cargill Inc. and Glencore. (see figure 4) (*) Minimum level of €150 million

2 Changes in sales for the 40 largest cooperatives – 2007 vs. 2011

Changes in sales for the 40 largest non-cooperative companies in the food industry – 2007 vs. 2011

300.0

1 000 900 800 700 600 500 400 300 200 100 -

250.0 200.0 150.0

Total: €239.6 billion

AAGR: + 8.1 % Total: €175.2 billion 1.7 7.4 28.9

36.8 52.3

32.0 100.0 50.0

135.8

105.3

2007

3.4 11.3

2011

South America Oceania Asia North America Europe

3

AAGR: + 10,1 % Total: €592.7 billon 20.1 20.6 184.3 184,3

Total: €871.6 billion 44.4 80.4 224.8

367.7

522.2

2007

2011

Asia South America Europe North America

4 Average EBITDA margin of the five largest cooperative and private players in the grain sector

Companies involved in the 22 largest acquisitions in the food industry between 2009 and 2012 (in number of acquisitions)

14.0%

16 14 12 10 8 6 4 2 -

11.8 %

12.0% 10.0% 8.0% 6.0% 4.0%

4.1 %

2.0% 0.0% Agricultural cooperatives

Non-coopérative companies

EBITDA: Earnings Before Interest Tax Depreciation and Amortization

14

5 2 Cargill Inc.

Glencore International AG

AAGR: Average annual growth rate

4.1 % Others

Limagrain

2012 – 1

Major regulatory changes expected Agricultural cooperatives must defend the cooperative model to ensure that they will continue to grow now that national and regional policy is becoming less protectionist.

A sector that is being deregulated – Common Agricultural Policy (CAP) reform in Europe in 2013 – The end of milk quotas in Europe – The end of the Canadian Wheat Board

Agricultural cooperatives are also faced with new societal and economic challenges

Most European countries, as well as many other developed countries, have seen a steady decrease in the number of farmers. This downward trend gives agricultural cooperatives less opportunity to seek out a larger contribution from members in the form of shares in their structure. It also results in the fact that the remaining farmers who are better educated and informed, may question the intermediary role of agricultural cooperatives (with, for example, direct access to agricultural commodity markets). (see figure 2)

1 Hectares of arable farmland per capita worldwide

0,53 Hectare per capita

Strong volatility in commodity prices makes it harder for producers to anticipate price trends. Price speculation in particular makes it more difficult to establish a sale price and threatens margins for cooperatives. (see figure 3)

0,25 0,18

1950

Climate change and sustainable development requirements have led to drastic changes in production and processing in order to preserve farming and land throughout the world. Agriculture consumes 70% of the world’s fresh water and is responsible for 13% of greenhouse gas emissions worldwide.

2000

Change in the number of farmers in France (in thousands)

1 200 1 000 800 600 400 200 1988

2000

2010

3 Change in corn and wheat price trends between September 2010 and September 2012

964 $/bu

1 000

Main ecological challenges for the agricultural sector:

- 34 %

900 800 700 600 500

635 $/bu

400

– Saving energy and water during production and processing – Avoiding pollution and land degradation – Preserving biodiversity in land and water ecosystems – Fighting against deforestation

2 – PwC

2050

2

En $ / Bushels

The world’s growing population will require that the industry feed 9 billion people by 2050, despite the decreasing amount of arable land per capita: 0.53 hectares available per capita in 1950, 0.25 in 2000 and 0.18 in 2050. (see figure 1)

Price of corn

Price of wheat

(*) Farmers operating individually or jointly

World map of the agricultural cooperative movement and its critical issues

Supporting competitiveness with strategic development choices Consolidation Milk

Upstream integration Supply

Downstream integration Sugar

International development Meat

The merger and acquisition strategy allows cooperatives to reach the critical size needed to compete on globalized markets and invest in R&D and innovation. Thanks to their historic roots in agricultural collection, upstream development allows cooperatives to increase their competitive edge and secure their supplies by controlling access to commodities. With downstream development however, cooperatives focus on the processing, distribution and sale of the end-product. The objective is to be involved throughout the value chain. International development lets cooperatives diversify into new markets within a globalized environment and anticipate market trends in new territories.

Greater financing needs Cooperatives have to deal with significant financing needs.

– Capital-intensive activity – High working capital requirements – Limited financial resources – Withdrawal of governments

Owing to structural needs: large investments, high working capital requirements (seasonality, inventory levels, etc.). – Consolidation – Development throughout the value chain – International development

Owing to strategic development choices such as consolidation, access to new markets and development throughout the value chain.

2012 – 3

New financing options Once cooperatives have identified their investment priorities for innovation projects, their members can decide to finance these projects with the cooperative’s earnings, and they may also explore other types of financing.

Sources of financing

Contributions from members – Capital investments – Retained earnings

Financing from outside the cooperative – Loans – State subsidies

Financing from outside the cooperative

Changing the cooperative’s legal status

– Acquisition of ownership interests – Initial public offering

– Converting the cooperative into a noncooperative company owned by investors

Traditional sources of financing

New sources of financing

Adapting governance Access to development financing may call into question the organization and the governance - of the cooperative. Members can also use their AGMs to vote to open up the capital of their agricultural cooperatives. In some cases, this could even mean that a cooperative is floated on the stock exchange. Organizational restructuring can be used to maintain the cooperative model while still moving towards new ways to create access to financing.

Long-term cooperative spirit – Member producers own the cooperative’s share capital – Decisions are made based on members’ views and thus favor long-term choices to safeguard members’ productive capital

Short-term corporate view

vs

– Opening the share capital up to outside investors will reduce members’ influence on strategic decisions and give management more power – Certain cooperatives have to deal with complex governance situations when a considerable portion of their sales is generated by activities managed by non-members

In order to grow, cooperatives increasingly have to accept short-term oriented business models, and this clashes with their founding philosophy. This shift should be made very carefully, in consultation with all stakeholders.

4 – PwC

World map of the agricultural cooperative movement and its critical issues

Conclusion Although cooperatives face the same challenges as non-cooperative companies, they also aim to preserve a sustainable and collaborative model over the long term. However, they must continue to grow in order to stay in the race and finance their expansion plans. This will require a new mindset, in terms of the way they deal with risk, profitability, strategy and skills.

2012 Study, available on request (see contacts)

Contacts Yves Pelle Partner, Agricultural Cooperatives [email protected] +33 2 99 23 17 05 +33 6 09 70 62 63 Ludivine Allardon Marketing & Business Development [email protected] +33 1 56 57 10 13

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