Business potential and challenges from the private sector perspective

Business potential and challenges from the private sector perspective

The Argentine crushing industry can be an efficient ally of the Chinese low cost meat producers, combining strengths in favor of the consumers.

Key issues Soy products demand increased dramatically in China during the last decade and will duplicate towards 2020. Sharp increase in per caput and aggregate pork, broiler and edible oil demand. Trade and tax regulations in China almost banned soybean meal imports and created very positive local crushing margins. Crush capacity increased steadily. Local crush of imported soybeans from USA and Mercosur satisfied the majority of the soy products requirements at a significant higher cost for the meat industry and the final consumer. South America could supply most of the expected increase in soybeans or soy products equivalent demand. Argentine cost efficient industry could be a strategic partner for the Chinese meat industry.

Molinos Río de la Plata Founded in 1902, Molinos Río de la Plata S.A is a key player in the Argentine oilseeds crushing industry and a large scale branded food manufacturer. Branded Food (0.8 BiU$S) Dry Pasta (31%) Wheat flour and premixes Edible Oils Rice (21%) Sausages and Hamburguers Chicken nuggets (83%) Frozzen Vegetables (51%) Wines (12%) Infusions Crush Industry (1.8 Bi U$S) Soybean Complex: Hi Pro soybean meal, Crude Soya Oil, Soybean hulls, Olein, Biodiesel Sunseed Complex: Crude & Refined Oil, High-Oleic Oil, Sunflower pellets

Crushing Capacity (Million Tons) Argentine Soybean Crushing Capacity 60.0 MRP Others 50.0 40.0 30.0 20.0 10.0 0.0 2004 2005 2006 2007 2008 2009 2010 2011 2012 Source: Molinos Research Department

Soybean Crushing Share by Co. Bunge 15% LDC 13% MRP 14% 3 National Otros 8% Vicentín 12% Companies crush 39% of total Noble 5% Nidera 2% Cargill 18% AGD 13% soybean crushing

Argentina & China Argentina China 2000 2010 2000 2010 Country Area (Sq. Km) 2,791,810 9,596,960 Population (Million people) 37,3 40 1,264 1,341 GDP (Million U$S) 284,204 368,712 1,198,480 5,878,629 GDP per cápita (Current U$S) 7,460 8,450 930 4,260 Total Exports (% of GDP) 11% 21% 23% 27% Total Imports (% of GDP) 12% 16% 21% 22% Foreing Direct Investment (Current Million U$S) 10,418 3,902 38,399 78,193

Bilateral Trade between Argentina and China Argentina is a net exporter of agricultural products to China. China is the second largest destination and origin of argentine exports and imports. Argentina is 26th origin and 44th destination of Chinese imports and exports. Imports from Argentina Non Agric. Products, 16% Exports to Argentina Agricultur al Products, 1% Agricultur al Products, 84% Non Agric. Products, 99% Source: China Customs / Agric. Min. Argentine Embassy in China.

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Production (Th Tons) China Meat Production Increasing pork and poultry production and consumption in China. 60,000 50,000 40,000 30,000 20,000 10,000 0 Swine Broiler Source: PS&D Online USDA.

Meals Dom. Coms. (Th Tons) Meals Domestic Consumption SBM main source of vegetable protein for meat production. 70,000 60,000 50,000 40,000 30,000 20,000 10,000 0 Cottonseed Fish Peanut Rapeseed Soybean Sunflowerseed Source: PS&D Online USDA.

SBM Consumption (Th Tons) SBM Domestic Consumption SBM in China represents more than 25% of the world SBM Consumption. 200,000 180,000 China Others 160,000 140,000 120,000 100,000 80,000 60,000 40,000 20,000 0 Source: PS&D Online USDA.

Consumption(Th Tons) China SBM Consumption for Meat Production China soybean meal demand will exceed 80 million in 2020 (100 million soybeans equivalent). 120000 100000 SBM Beans Equiv. 80000 60000 40000 20000 0 1990 1995 2000 2005 2010 2015* 2020* Source: PS&D Online USDA / MRP Research Department.

Th Tons China Soybean Production & Crushing Soybean production has been stagnated in the level reached in the 90 s, but crushing capacity grew very fast during the last 10 years. 70,000 60,000 Crush Production 50,000 40,000 30,000 20,000 10,000 0 Source: PS&D Online USDA.

1990/91 1991/92 1992/93 1993/94 1994/95 1995/96 1996/97 1997/98 1998/99 1999/00 2000/01 2001/02 2002/03 2003/04 2004/05 2005/06 2006/07 2007/08 2008/09 2009/10 2010/11 2011/12 Beans Import (Th Tons) Soybean Imports China soybeans imports represent 60% of World Trade. 100,000 90,000 80,000 China Others 70,000 60,000 50,000 40,000 30,000 20,000 10,000 0 Source: PS&D Online USDA.

1990/91 1991/92 1992/93 1993/94 1994/95 1995/96 1996/97 1997/98 1998/99 1999/00 2000/01 2001/02 2002/03 2003/04 2004/05 2005/06 2006/07 2007/08 2008/09 2009/10 2010/11 2011/12 Import Equiv. (Th Tons) China imports SBO & SBM equivalent imported as soybeans 60000 50000 SBM Eq. SBO Eq. 40000 30000 20000 10000 0 Source: PS&D Online USDA.

SBM (1000 Tonnes) SBO (1000 Tonnes) China SBM & SBO equivalent of imported beans compared to SBM & SBO World Trade 90000 80000 China Import WT 25000 China Import WT 70000 20000 60000 50000 15000 40000 30000 10000 20000 5000 10000 0 2000 2005 2010 2015* 2020* 0 2000 2005 2010 2015* 2020* Source: PS&D Online USDA/ Molinos Research Department.

Dom. Consumption (Th Tons) China Oils Domestic Consumption Soybean oil and palm oil support the increasing aggregated edible oil demand 35000 30000 25000 20000 15000 10000 5000 0 Cottonseed Palm Palm Kernel Peanut Rapeseed Soybean Sunflowerseed Source: PS&D USDA - 2011.

SBO Import (Th Tons) China Imports Origins Soybean Oil Declining soybean oil imports. Argentina used to be the main origin 3000 2500 2000 1500 1000 500 0 2007 2008 2009 2010 Argentina Brazil USA Others Source: Oil World.

Main Destinations for South American SBO China 1,8 MM Tons India 1,4 MM Tons S. Korea 0,35 MM Tons Bangladesh 0,34 MM Tons 0.5 MM Tn 4 MM Tn Venezuela 0,4 MM Tons Peru 0,26 MM Tons Colombia 0,17 MM Tons Chile 0,13 MM Tons Argentina 4,6 MM Tons Brazil 1,7 MM Tons Paraguay 0,24 MM Tons Bolivia 0,18 MM Tons 6.7 MM Tn Source: Oil World Annual 2010.

Chinese trade policies Import permits based on quarantine reasons for grain and oils, which are given by health and quarantine Authorities of China Regulation #73: quarantine requirements for agricultural products and its derivatives (oils, meals and grains) Regulations in new limits of tolerance for solvent residues in crude and refined soybean oil Application of Value Added Tax in Imports Refund of Value Added Tax for SBM Exports Refund of Income Tax for exporter Companies Import tax differentials in the soybean complex (Beans = 3%, SBO = 9% and SBM = 5%)

Chinese trade policies consequences Soybean meal imports almost banned Restrictions for soybean oil imports, particularly from the argentine origin. Very profitable local crushing margins on imported soybeans. Strong competition for raw materials at the origin (USA, Brazil and Argentina). Higher soybean meal cost for the Chinese meat sector

Argentina trade policies Export tax rate differential for value added products over raw materials. Restricted exports licenses for wheat and corn since 2008 Brazilian trade policies Tax and credit support to value added production (Poultry, Swine) State/regional taxation promoting soybeans exports

Brazil and Argentina policies consequences Brazil became a larger exporter of soybeans, poultry and pork. Argentina developed al large scale very efficient crushing industry for export. Argentina became the largest world exporter of soybean meal, soybean oil and biodiesel. Brazil and Argentina are consuming increasing quantities of soybean oil to supply the local biodiesel market. Argentina is gradually becoming a more relevant broiler exporter. Agricultural land will keep on growing in LA, but with more restrictions on deforestation and limited access for foreigners.

Biodiesel Production (Th Tons) Argentina Biodiesel Production 2500 2000 1500 1000 500 0 2007 2008 2009 2010 2011 Source: Molinos Research Department

Th Tons SBO & Biodiesel Exports from Argentina 8000 7000 6000 5000 4000 3000 2000 1000 0 2007 2008 2009 2010 2011 SBO Export SBO Domestic Biodiesel Export Biodiesel Domestic Source: Molinos Research Department

Meats (Th Tons) Meats (Th Tons) Argentine and Brazil Meat Production & Exports Evolution 2,000 1,800 1,600 1,400 1,200 1,000 800 600 400 200 - Argentina Meats (Th Tons) 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Prod. Broiler Prod. Swine 300 Argentina Meats (Th Tons) 250 200 150 100 50-1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Exp. Broiler Exp. Swine

Potential business: facts and challenges FACTS: Chinese soybean meal demand will duplicate to 80 million metric tones in next eight years. Brazil and Argentina could increase their soybean production to cover the majority of this significant jump of the soybean meal demand. Soybean crush in Latin America will raise to produce incremental quantities of biodiesel. This will result in lower soybeans export surpluses, but larger and cheaper availability of soybean meal. CHALLENGES: Argentine crushing industry, supplying lower cost soybean meal, could be a very efficient strategic partner of the Chinese swine and poultry industry. Removal of trade barriers will result in cost efficiency along the supply chain. Chinese venture agreements to produce food in Latin America should be seriously analyzed

Main tasks in search of efficiency: The Argentine crushing industry and the Chinese Meat companies should work together to remove import barriers on soybean meal in China. Continued supply from the Argentine origin should be assured not only by the private sector but also by the Argentine authorities, both on meal and oil. Chinese Meat producers directly or through state run importer companies should celebrate soybean meal supply frame contracts with Argentine crushers. (target : one million metric tone /month). The Chinese meat sector should also explore opportunities to produce broilers and pork in Argentina, benefiting on very cheap feed raw materials. Import barriers on other soft oils like sunflower oil should be removed. State run Chinese edible oil importers should sign supply agreements with Argentine crushers (target 0.2 million metric tone/month). World Bank should provide finance support to cost efficient projects based on natural or technological national advantages.