online round solution

1. Bunge: Food vs. Fuel ?! Flexible Mind Team, 2011 Philip Shurpik, LarionBabych, Anton Ivinsky 1 Bunge Near 190 years history in food business Growing population and food consumption in the world (in the previous 20 years the world population had grown steadily at 1.35% per year) Growing demand for biofuels, as a result of growing crude oil price “High volatility in the price of crude petroleum is dramatically changing the business landscape of agribusiness companies” Christophe Darbord. Biofuel is renewable energy source

2. Bunge: Food + Fuel ! Flexible Mind Team, 2011 Philip Shurpik, Larion Babych, Anton Ivinsky 2 Agribusiness Fuel Bunge Food Fertilizer Advantages: Diversification of business, that can involve new investors (Bunge is public and widely held company) Integrated production chain (we can use own fuel for production and transporting purposes)

3. Bunge: Food business Food business should stay main due: Historical company mission (”Bunge is about food”, BGA’s veteran CEO, Archie Gwathmay) Food consumption tends to increase caused by growing human population Bunge. Next steps: Bunge should continue investments in R&D – especially in developing new genetically engineering seeds (low-linolenic soybean oil, with a low content of trans-fatty acids.) Expansion to high growing markets: China and India consumption should grown significantly in next 10 years (see case Exhibit 5) Bunge should invest in it’s new fast growing sector - sugar industry to improve production and export of sugar Flexible Mind Team, 2011 Philip Shurpik, Larion Babych, Anton Ivinsky 3

4. Biofuel: three different views Flexible Mind Team, 2011 Philip Shurpik, Larion Babych, Anton Ivinsky 4 Which biofuel corresponds to all three points of view simultaneously? Politics Business ? Bioethanol! Environment

5. Bioethanol. Why? Sugarcane bioethanol business advantages for Bunge: Integrated production chain building (“in Brazil ethanol used widely as transportation fuel”) Brazil “has more than 200 million acres of irrigated land available that are currently idle” Manufacturing cost of one gallon of ethanol in Brazil is significantly lower than in Europe (see case Exhibit 12) As a result of low production cost, ethanol can be exported to other countries, especially Europe. Sugarcane bioethanol politics advantages: Ethanol had replaced 40% Brazil gasoline consumption and this value can grow. Sugarcane bioethanol environmental advantages: Sugarcane based ethanol is more environmentally friendly than corn-based Flexible Mind Team, 2011 Philip Shurpik, Larion Babych, Anton Ivinsky 5

6. Bioethanol. How? We decided to build sugar-ethanol unit in Brazil. Required investment is $200 million. It can crush 2 million tons of sugarcane, which can give 43.4 million gallons of ethanol. This project is not new for the company so we can involve both stock capital (secondary market offering of primary shares) and loans. There are three way for loans: Bank loans Eurobonds Loans in local currency Eurobonds is the best variant of loans for Bunge because the share of export in net sales is 79%, so currency risks are mostly hedged by these factor. (see Exhibit 4) And of course proportion between them have to be equal to debt to equity(D/E)*. Flexible Mind Team, 2011 Philip Shurpik, Larion Babych, Anton Ivinsky 6

7. Bioethanol. Forecast The exhibit 9 shows price of Crude Oil. The correlation between fuel ethanol, gasoline and crude oil is dramatically high. Thus we can take price of crude oil as leading factor for fuel ethanol. Using exponential smoothing for determining trend and the method of least squares for forecasting we have found annual rates of growth of ethanol fuel prices. The chart below shows this calculations. Flexible Mind Team, 2011 Philip Shurpik, Larion Babych, Anton Ivinsky 7 $ per barrel Chart 1

8. Bioethanol. Forecast Due to fact that price of crude oil is leading factor for ethanol price , we suppose that annual rate of price growing for ethanol fuel will be the same as the crude oil, which we can find from chart 1 (2007 – 2011). We have not information about market price for ethanol. But exhibit 12 gives data about it’s cost. Thus we take price 2 $ per gallon, the minimum price we would used for it’s selling. The cost of ethanol in Brazil is taken from exhibit 12 also; We assume growth rate of cost as 5 % per year; Flexible Mind Team, 2011 Philip Shurpik, Larion Babych, Anton Ivinsky 8

9. Bioethanol. NPV & IRR Using our forecasts we can build our DCF model and watch NPV curve. For example if we take WACC equal to 15% percent, DSF model will provide us $54,39 millions NPV curve shows that IRR of such project is about 25%. Usual WACC is taken 10% - 15 %. Due to this we can say that this project is quite stable and perspective. We have counted that payback period – 3 years. And discounted payback period is 4 years for WACC 10-15%. Flexible Mind Team, 2011 Philip Shurpik, Larion Babych, Anton Ivinsky 9

10. Summary As a result Bunge should enhance their positions in its traditional markets (food business and related) by expansion to high growing Asia markets. It will be profitable for Bunge, if it enter new, fast growing fuel market with bioethanol that has some advantages: Bioethanol is verified by main Bunge’s competitors such as ADM and proved to be profitable. In our opinion sugarcane is ideal choose for Brazil because of good climate and the cheapest production cost comparing to other countries. Bioethanol is environment-friendly and renewable fuel and XXI century is time of green technologies! Flexible Mind Team, 2011 Philip Shurpik, LarionBabych, Anton Ivinsky 10