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Lehman Brothers does and seeks to do business with companies covered in its research reports. As a result, investors shouldbe aware that the firm may have a conflict of interest that could affect the objectivity of this report.

Customers of Lehman Brothers in the United States can receive independent, third-party research on the company or companiecovered in this report, at no cost to them, where such research is available. Customers can access this independent research awww.lehmanlive.com or can call 1-800-2LEHMAN to request a copy of this research.

Investors should consider this report as only a single factor in making their investment decision.

PLEASE SEE ANALYST(S) CERTIFICATION(S) ON PAGE 53 AND IMPORTANT DISCLOSURES BEGINNINON PAGE 54

1

Please also see our industry note (230 pages) published concurrent with this company-specific note.

August 13, 2008

Bunge Limited (BG - US$ 90.85) 3-UnderweightInitiation of Coverage

Finding Shelter?

Investment Conclusion

We have initiated coverage of Bunge Limited (BG)with a 3-Underweight rating, based on our near-to-intermediate term macro view and a relativevantage across the grain and protein processorswithin our universe of agribusiness stocks. Our$97 price target is predicated on a multiple of14.5x our mid-cycle EPS estimate of $6.69 -- a35% premium to BGs historical mid-cycle multipleof 10.8x to primarily account for a number ofpotential points of insulation (geographic and end-product diversification) that could help sustainBGs earnings at levels markedly above what wedconsider "normalized." That said, against verydifficult YoY comparisons (particularly in fertilizer)and with BG trading more than a full standard

deviation above its historical mid-cycle P/Emultiple, we do anticipate increased investor focuson macro headwinds, including risks to animalfeed demand (particularly in North America) andpotential demand destruction in other endmarkets.

Christopher M. Bleds1.212.526.78

[email protected], New Y

United States of Ameri

Consum

Agribusiness Processo

Reuters BG

Bloomberg BG

ADR

EPS (US$) (FY Dec)

2007 2008 2009 % Change

Actual Old New St. Est. Old New St. Est. 2008 20091Q 0.05A 2.10A 2.10A N/A N/A 2.86E N/A 4100% 36%2Q 1.35A N/A 4.73A N/A N/A 4.26E N/A 250% -10%3Q 2.72A N/A 3.46E N/A N/A 3.38E N/A 27% -2%4Q 2.25A N/A 2.71E N/A N/A 2.52E N/A 20% -7%

Year 6.45A N/A 13.00E N/A N/A 13.01E N/A 102% %

P/E 7.0 7.0

Market Data

Market Cap (Mil.) 11047

Dividend Yield 0.77

52 Week Range 135.00 - 80.73

Financial Summary

Revenue TTM (Mil.) 49035

Stock Overview

BUNGE LIMITED - 8/ 13 / 2008

Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug

Source: LehmanLive

82.5

97.5

112.5

127.5

Volume

10M

Stock Rating Target Price

New: 3-Underweight New: US$ 97.00Old: 0-Not Rated Old: N/A

Sector View: 1-Positive


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Bunge Limited (BG - $90.85; 3-Underweight)

We have initiated coverage of Bunge Limited (BG) with a

Underweight rating, based on our near-to-intermediate term mac

view and a relative vantage across the grain and prote

processors within our universe of agribusiness stocks. Our $

price target is predicated on a multiple of 14.5x our mid-cyc

EPS estimate of $6.69 -- a 35% premium to BGs historical mi

cycle multiple of 10.8x to primarily account for a number

potential points of insulation (geographic and end-produ

diversification) that could help sustain BGs earnings at leve

markedly above what wed consider normalized. That sai

against very difficult YoY comparisons (particularly

fertilizer) and with BG trading more than a full standa

deviation above its historical mid-cycle P/E multiple, we

anticipate increased investor focus on macro headwinds, includi

risks to animal feed demand (particularly in North America) a

potential demand destruction in other end markets.

In our view, the longer-term dynamics for global, well-capitaliz

grain processors, particularly BG, appear quite favorable a

firmly supported by a robust worldwide consumption and cr

production outlook. Furthermore, the recent pullback in mid-cyc

valuation and possible above-Consensus EPS results in the balan

of fiscal 2008 may lend some support to the shares at curre

levels.

Importantly, however, in the near-to-intermediate term, tcombination of possible demand destruction in animal feed a

potentially other end markets for grains points to a slowing ra

of EPS growth in FY09, in our view. While it remains early da

for evidence of broad-baseddemand destruction, we have seen cle

indications of this within certain end-markets. Specificall

cutbacks by protein producers in North America appear to be taki

hold more firmly, easing volume growth and pricing power of grai

derived animal feed products (corn and soybean meal) a shi

that we believe could gain momentum in coming quarters. And, wi

our analysis suggesting that other important growth drivers oug

to be closely monitored, like dietary shifts in the developin

world, we believe BG could well be on tap for a slowing rate

EPS growth into 2009.

Closer in, we view BG as somewhat better insulated than oth

processors from potential US crop risk a function of its produc

and geographic diversification. Despite more recently improv

growing conditions in the Midwest, we expect the combination of

shallow roots attributable to excessive early season moisture a


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2) heightened risk of frost-related crop damage (and of su

optimal photosynthesis) owing to a protracted harvest season,

keep investors focused intently on crop development in comi

months, particularly as such concerns could increase the resolv

of vertically integrated protein processors to maintain the

production cutbacks. Should we see a return of supply-driv

inflationary pressures through the US harvest season, we estimathat upwards of 36% of BGs oilseed processing asset network cou

be directly exposed to adverse utilization implications a

possible demand destruction, but wed also expect BGs oth

geographies, particularly South America, to see a benefit b

filling this void. In addition, higher grain and oilseed prices

irrespective of whether its supply-push or demand-pull driven

should prove a positive for fertilizer application rates.

Still, while BG may prove fairly well insulated in such a scenari

and wed note a reversal in grain prices would likely translate t

an easing of working capital constraints, a significant portion

an improving cash outlook already appears to be tagged f

spending behind capacity expansion projects in coming period

While the robust long-term demand outlook would suggest su

spending is warranted, including the planned $2 billion investme

in expansion of local production of phosphate rock a

intermediate fertilizers, it nevertheless limits near-term ca

returned to shareholders. Although our analysis does suggest th

capacity expansion has historically proven a positive for tho

investors with a 5+ year investment horizon, it would also appe

as though agricultural investments are an industry wide phenomen

at their highest level in more than 15 years. Taken together,

believe this ultimately raises the near-term risk, in our view,

step-function increases in capacity that could reverse rece

upward momentum in profit spreads, further inhibiting invest

sentiment on grain processors shares.

With respect to BGs recently announced all-stock acquisition

CPO (expected completion in calendar 4Q), we believe firmly in t

long-term strategic rationale and see revenue/cost syner

opportunities well beyond managements initial guidance of $10

$120 million. Among grain processors, Bunges business model

already one of the best capitalized and largest scale is on

pro forma basis even better capitalized, larger scale, and mo

diversified by both geography (on the margin) and end-mark

(fertilizer, oilseeds andcorn/sweeteners, among others). If

were to assume no change in CPOs fiscal 2009 P&L versus 200

plus factor $120 million of cost synergies, wed look for t

acquisition to be net neutral to BGs EPS by the end of fisca


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2009. Still, the combination of the acquisitions price tag

premium multiple, at least at the time, at a peak cycle?) a

possible corn co-product risk in 2009 appear to have temper

near-term investor enthusiasm for the combination, in our view,

these headwinds, if they materialize, could push back t

accretion/dilution timetable absent incremental cost synergies.

All in, we believe company-specific points of insulation (the

are several) could limit significant downside in BGs shares, bu

a premium mid-cycle earnings multiple versus ADM likely reduc

investor tolerance for even marginal evidence that such offse

may be inadequate against potential macro headwinds. In t

following pages, we take a closer look at key points of insulatio

provided by BGs product lines and geographies, and therefo

risks to our rating.

Risks to Our Rating: Key risks to our rating include continu

strength in global demand trends for BG's food, feed an

fertilizer products, including a reversal in BRL strength whi

would enhance the competitive position of BG's Brazilian-bas

agricultural products. More specifically

Capacity could remain tight: Oilseed crushing and tradition

corn milling capacity has tightened significantly in the pa

decade following several rounds of sector consolidation a

robust global growth trends. To the extent that th

consolidation has indeed created a more rational environme

and grain/oilseed processors are therefore willing to igno

expansionary market signals, then above-trend profitabili

could prove more sustainable than implied by curre

expectations.

Protein production cuts could prove too shallow or short-liv

to impact grain demand: Given feed-to-liveweight conversi

ratios of 2x-8x in commercial farm animals, we view BG

profitability as intricately connected to demand for soybe

meal and corn feed. If protein processors fail to take t

necessary measures to return profitability to normalized leve

via supply contractions, then demand for BGs feed produc

could lend to better than anticipated volume and profitabili

in the companys grain and oilseed processing businesses.

Recent sell-off may cause the shares to rally on evidence

sustainability of above-average performances: On a year-to-da

basis, BGs shares have underperformed the S&P 500 by

percentage points (-21% vs. -11%, respectively), pushing t


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shares to 1.3x book value, or one full standard deviation bel

its historical 1.8x book value multiple and not far from i

prior trough of 1.1x. To the extent that current valuati

levels already discount potential FY09 headwinds and concer

about sustainability beyond FY08, we believe evidence to t

contrary could cause the shares to rally.

Savvy hedging strategies may insulate profitability:

regularly uses its in-house crop expertise and global presen

to take proprietary trading positions, which can insulate t

company from headwinds that may otherwise have adverse

impacted its business units. Transparency around the

positions is limited and could create an upside earnin

surprise in any given quarter.

Global market dislocations in response to protectionist

nationalist government policies could continue to create mark

share and arbitrage opportunities: BGs global ass

infrastructure, coupled with the assets of its JV partner

have been well positioned to capitalize on market dislocatio

stemming from border closures and protectionist measures

certain regions of the world. While generally these have be

viewed as non-recurring dislocations, we believe another st

function increase in agricultural commodity inflation could s

off another round of policy changes, with additional favorab

implications for BGs agricultural services functions.

The US government may opt to alter its subsidization of corn

based ethanol: We believe the highly inflationary environme

of the past twelve months has increased political pressure

US government officials to repeal or reduce various suppor

provided to the corn-based ethanol industry. Should su

changes include a reduction in the sugar-based ethanol impo

tariff, wed expect BGs expanding sugar presence to direct

benefit from increased demand, while its sizable Brazili

agricultural asset infrastructure could see a further indire

benefit from improved utilization levels. Likewise, pro for

for its acquisition of CPO, we believe profitability in co

sweeteners businesses could improve under such a scenar

(hedges aside), as more corn becomes available (presumably at

less expensive cost) for non-energy related uses, while cor

based sweeteners a substitute for sugar -- become mo

competitive globally in response to likely inflationary sug

trends.


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Fertilizer profitability may remain above-average for t

foreseeable future: In our view, aside from BGs geograph

fertilizer advantage, which we estimate translates to a $40-$

per metric ton transportation advantage in catering locally

expanding acreage and application trends in South America,

also believe BGs vertical integration in phosphate-bas

fertilizers could help bolster the sustainability of abovtrend profitability in this business given the high cost a

lengthy duration of Greenfield expansion projects in phosphat

based fertilizers.

BG Potential 09 Macro Headwinds, but Better Insulated than Some

In our view, against a backdrop of tight industry capacity, BG

diversified model has positioned the company quite favorably as

beneficiary of the robust global consumption environme

experienced in the past several years. However, this diversifi

model also exposes BG to certain macro-level risks, which anticipate will draw increased investor focus in coming quarters

Looking into 2009, we believe record prices for grain

exacerbated by supply-side shocks like flooding in the Midwest a

a late start to the growing season, raise the need for pas

through pricing and therefore create risk of broad-based dema

destruction for certain end-products, particularly fe

consumption and emerging market food consumption. By extensio

although increased raw material costs tend to create market sha

opportunities for BG relative to less well-capitalized players,

raises working capital requirements and deteriorates certa

credit measures (something that CPOs clean balance may help

address). Nevertheless, we expect demand destruction in grains

negatively tilt the bias of earnings growth in 2009, placi

disproportionate reliance on better insulated geographies (e.g.

America, an admittedly big business for BG) and business lin

(e.g. trading and/or fertilizer, also a big business for BG)

maintain the pace of earnings growth on a consolidated basis.

All in, incrementally less bullish investor sentiment has weigh

on the shares of grain processors. Still, we feel that BG

business lines and geographic exposure relative to peers off

more specific points of insulation (greater percent of reven

from S. America and fertilizer) even against what could prove

be meaningful headwinds: potentially less robust corn co-produ

margins in 2009 (assuming approval of the CPO acquisition), dema

destruction taking hold in North American animal feed, reduc

processing utilization levels in the US related to a likely low

tonnage harvest, and worldwide industry capacity expansion.


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Figure 1: BG - Agricultural Merchandising, Processing, Food Products and Fertilizer

Asset Footprint

Merchandising Processing

Owned Leased Total Owned Leased Total Metric Tons (M) Met Tons (M) / Yr

Company Total (excluding CPO)

North America NA NA NA NA NA NA 7.055 21.9Rest of World NA NA NA NA NA NA 14.178 91.8

Worldwide NA NA 307 NA NA 157 21.563 113.6

Agribusiness*

Processing (Oilseed, Wheat and Corn)

North America NA NA NA NA NA NA NA NA

Rest of World NA NA NA NA NA NA NA NAWorldwide NA NA 302 NA NA 56 17.335 46.2

Fertilizer**

Mining & BlendingNorth America NA NA NA NA NA NA NA NA

Rest of World NA NA 4 NA NA NA NA NAWorldwide NA NA 4 NA NA 44 3.347 55.7

Food Products

Segment Total (Disclosed)

North America NA NA NA NA NA NA NA NARest of World NA NA NA NA NA NA NA NA

Worldwide NA NA 1 NA NA 57 0.881 11.7

BG's Additional Lines of Business

*Agribusiness

Sugarcane mill and ethanol plant (Brazil) and Sugar Trading platform

Minority investor in biodiesel producer Diester Industries Int'l (Europe)

Financing intermediary for farmers (Brazil)

**Fertilizer

Controlling stake in Fosfertil (Catalao, Tapira and Salitre Brazil mines, w/ 1m, 300k, and 500k MT of capacity/yr)

Other: Corn Products Int'l (acquisition pending approval)

Merchandising Processing

CapacityFacilities

Source: Company filings and Lehman Brothers estimates

Diversified Model Exposes BG to Potential NT Macro Headwinds

Below, we discuss several key watch points which we believe wi

draw increased investor focus in coming quarters, with possib

implications for Bunge. These include: 1) inflation-induced dema

destruction in key markets, 2) a lower tonnage US harvest as

result of early summer flooding / crop rotation with utilizati

implications for North American processing assets (less tonna

produced), and 3) step-function increases in industry capacity

grain/oilseed processing as well as fertilizer production.


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Figure 2: Key Macro Events/Themes in Agriculture and Potential Implications for 2009

Major Theme Where When Implications Explanation/Significance +/- in '09 for Line of Business* Potential P&L Impact

Crop Rotation N. America Spring '08 Corn to Soybeans crop rotation necessary for health of soil

Harvest Less Tonnage in Fall '08 soybeans yield fewer bushels per acre than corn - N.A. Ag Services Lower Volume- N.A. Corn Processing Lower Volume+ N.A. Soybean Processing Higher Volume

Prices: Higher Corn / Lower Soybean less corn supply, more soybean supply - N.A. Corn Processing Lower Margin+ N.A. Soybean Processing Higher Margin

Less Fertilizer Used in Spring '08 soybeans require less fertilizer than corn + N.A. Fertilizer Easy YoY Comparison

Implications for S. America: reliance on SA corn increases + S.A. Corn Processing Higher Volume, Margin

reliance on SA soybeans decrease - S.A. Soybean Processing Lower Volume, Margin

Excess Precipitat ion N. America C'1H08 Limited Farmer Access to Fields too wet for equipment to work effectively

La te Start to Pl antings Vo lum e: Rotati on from Corn to Soybean less corn supply, mo re soybean supply - N.A. Corn P rocessing Lower Volumecorn g rowing season sta rts ear lier than soybean + N. A. Soybean Process ing Higher Volumesoybeans yield fewer bushels per acre than corn - N.A. Ag Services Lower Volume

Volume: Soybean Plantings Also Limited excess rain / limited availability of rust resistant seeds - N.A. Soybean Processing Lower Volume

Prices: Higher Corn / Higher Soybean less corn supply, less soybean supply in US - N.A. Corn Processing Lower Margin- N.A. Soybean Processing Lower Margin

Demand shift to South America Reliance on SA soybeans/corn increase + All S.A. Processing Higher Volume, Higher Margin

Floods after Emergence High W ater Levels Create Risk to Floodwalls barge capacity reduced (increases '08 barge rates) - N.A. Ag Services Difficult YoY Comparison

Reapplication of Fertilizer (Modest) fertilizer may have been reapplied where feasible - N.A. Fertilizer Difficult YoY Comparison

Demand shift to South America Reliance on SA soybeans/corn increase + All S.A. Business Lines Higher Volume, Higher Margin

Market Dislocat ions Global C'1H08 Margin & Market Share Opportunit ies heightened concern around distr ibut ion/access

Distribution Re-Routing / Availability Concerns pricing power on long-haul utilization, availability concerns - Ag Services Difficult YoY Comparison

Abitrage Opportunities local market info provides edge on global commod trading - Trading Difficult YoY Comparison

Inflation Global** C'2H08-09 Demand Destruction inability of grain-procurers to remain profitable

Grain Inflation Protein Production Cuts feed conversion ratio = 2x-8x depending on protein - All Global Business Lines Lower Volume, Lower Margin

Watchpoint Risk to Emerging Market Food Consumption higher elasticities than developed world food consumption - All Global Business Lines Lower Volume, Lower Margin

General Inf lation N. America Watchpoint Fed Tightening Cycle (USD Strengthening) makes US commodities less competi tive globally - A ll N.A. Business Lines Lower Volume, Lower Marginmakes S. Amer ican commodit ies more a ttr ac tive + Al l S .A . B us iness L ines Higher Vo lume, Higher Marg in

S. America makes S. American commodities more attractive + All S.A. Business Lines Higher Volume, Higher Margin

Capacity Expansion Global** Watchpoint Processor Competition asset expansion = step-function capacity increases - All Lower Margin

*Assumes no hedges in place

**Global, but N. America is major global protein supplier

Source: Lehman Brothers analysis

Risk #1: Potential inflation-induced demand destruction in k

markets: In our view, markets with traditionally high elastici

levels remain the most at risk in todays elevated commodity pri

environment. In particular, we view North American fe

consumption and developing market food consumption as most

risk, posing potential adverse implications for BG.

North American Feed Consumption: BG CEO Alberto Weisser comment

at an industry conference in June that the company was beginni

to see weaker feed demand in North America. ADM followed su

with similar commentary on its fiscal 4Q08 conference call

August 5th. Animal feed accounts for more than 40% of total co

and soybean consumption in the US, clearly an important end-mark

for grain processors serving the US market. By our math, t

companys Agribusiness unit accounts for roughly 45% of normaliz

EBIT and houses its oilseed processing assets. If we were

assume that two-thirds of BGs oilseed processing capacity

allocated to protein meal (and the majority of this to anim

feed), we estimate that roughly 30% of company-wide profitabili

is potentially exposed to animal feed elasticity headwin

globally. However, only 36% of the companys oilseed processi


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capacity is located in North America, implying total exposure

11% of company-wide profitability.

Figure 3: BG Estimated Exposure to North American Feed Operations

Figure: BG - % of EBIT (Normalized) Figure: BG - Processing Capacity Figure: BG - NA Feed Exposure

N.America

Feed,24%

All Other,76%

Other,

55%

Processi

ng, 45%

N.America

Feed,11%

All Other,

89%

Source: Lehman Brothers estimates

To put this into context, simply looking at the level of prote

production cuts currently implied by forward looking indicato

(egg sets, sow slaughter, and cattle on feed), and taking in

account weight reductions, we calculate that the US prote

industry is on tap to reduce total meat production by nearly -6

effectively reducing total meat production from 67.2 billi

pounds of retail weight to 63.3 billion pounds i.e. a -3

billion pound reduction, led by pork (-2.1 billion pounds), th

chicken (-938 million pounds) and then beef (-813 million pounds

assuming current forward looking indicators hold (see analys

below). If we were to apply the -6% protein production cut

this 11%, we estimate that it would create a utilization gap

less than 1% of BGs total company-wide processing capacity

smaller than the estimated 1.5% gap for ADM. Still, the glob

nature of these commodities can present implications for non-

geographies, in our opinion.


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Figure 4: Corn & Soybean Demand Destruction Related to Animal Feed (Tonnage and

Acreage Implications)

US Consumption % of Production Reduction(M lbs.) Consumption Cut Basis in M Lbs.

Chicken 31,594 47% -3.0% eggs set (-4.2%), weight (+1.2%) -938Beef 18,071 27% -4.5% cattle on feed (-4.1%), weight (-0.4%) -813Pork 17,556 26% -12.4% sow slaughter (+11.9%), weight (-0.5%) -2,183

Combined 67,221 100% -5.9% weighted average -3,934

Reduction Feed Conv.in M Lbs. Ratio Corn Soy Corn (M lbs.) Soy (M lbs.) Corn (M bu.) Soy (M bu.) Corn Soy Combined

Chicken -938 2.7 67% 33% -1,702 -838 -30 -14 -0.2% -0.5% -0.3%Beef -813 12.9 67% 33% -7,009 -3,452 -125 -58 -1.0% -2.2% -1.2%Pork -2,183 4.6 67% 33% -6,779 -3,339 -121 -56 -0.9% -2.2% -1.1%

Combined -3,934 5.9 -15,490 -7,629 -277 -127 -2.1% -4.9% -2.6%

Corn Soy Corn Soy Corn Soy Combined Corn Soy Combined

Chicken -30 -14 151 41 -0.20 -0.34 -0.54 -0.2% -0.5% -0.3%Beef -125 -58 151 41 -0.83 -1.40 -2.22 -0.9% -2.2% -1.4%Pork -121 -56 151 41 -0.80 -1.35 -2.15 -0.9% -2.1% -1.4%

Combined -277 -127 151 41 -1.83 -3.09 -4.92 -2.0% -4.9% -3.1%

*% of US Production based on 2007 production of:

US Production (Million Bushels)

Corn 13,074

Soybeans 2,585

Combined 15,659

**based on '07 avg yields

***% of US Acreage based on '07 Planted Area

US Production (Million Bushels)

Corn 93.6

Soybeans 63.6

Combined 157.2

Feed Mix % of Total US Production* (tonnage)Implied Chg in Feed Demand

% of Total US AcreageChg in Feed Demand (M bu) Bushels/Acre** Acreage Reduction (M)


Given the time lag implied by the forward looking indicators us

in this analysis, wed expect most of this reduction to come

fruition in 2009. As illustrated below, we have already begun

see cutbacks in herds and livestock put into motion even befo

the most recent rise in feed related to flooding in the Midwes

which in our view likely accelerated cutbacks. Importantly, th

has implications not only for protein pricing, but also for dema

for crops. Taking into account factors like feed-to-prote

conversion ratios for commercial farm animals, the mix of fe

represented by corn and soybeans, and average yields per acre,

estimate that the aforementioned -6% decline in protein producti

would, in a vacuum, result in a -2.6% decline in tot

corn/soybean tonnage consumed and a -3.1% decline in total

acreage required. Interestingly, this decline is rough

equivalent to the +3.2% increased acreage requirement between 20and 2008 necessary to satisfy ethanol mandates. In a vacuum, o

supply/demand models suggests that this decrease in acrea

requirement would translate to a $0.35/bushel decrease in the co

of corn and roughly a $3/bushel decrease in the cost of soybe

meal.


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Figure 5: Eggs Set - 10-Week Forward-Looking Chicken Supply

Data

(YoY % Change)

-6.0%

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

02 Wk 30 03 Wk 30 04 Wk 30 05 Wk 30 06 Wk 30 07 Wk 30 08 Wk 30

Source: USDA National Agricultural Statistics Service

Figure 6: Boar & Sow Slaughter 9-mo Forward-Looking Pork

Supply Data

(YoY % Change)

200

250

300

350

400

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

2008 2007 2006


Figure 7: Cattle Place on Feed 6-mo Forward Looking Beef

Supply Data

(1,000 head)

0

500

1,000

1,500

2,000

2,500

3,000

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

2008 2007 2006



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Developing Market Food Consumption: BG is more closely link

today to food consumption in the developing world, especially mu

of Asia, than at any time in its history (see below).

Figure 8: BGs Global Asset Network and Businesses (2008 vs. 2001)

2001 2008

Source: Bunge Limited presentation (June 2008)

Given the more favorable environment for crop production in Nor

America and South America relative to Asia (see rainfall levels

figure below and left) as well as Asias faster population grow

and more robust per capita GDP trends (changing diets below an

right), BG has capitalized on its extensive global reach

connect its processing assets (concentrated most heavily in t

Americas) with this growing source of demand. Likewise, BG h

made further inroads by bringing the asset base closer to t

demand via Greenfield expansion, acquisition, and joint ventures

Figure 9: Worldwide Rainfall Figure 10: Global Dietary Shiftpropor tion of w orldw ide prec ipitati on

proportion of all people living on US $10 -$20/ day of purchasing p ower parity

Copyright 2006 SASI Group (University of Sheffield) and Mark Newman

(University of Michigan)

Source: Worldmapper.org

Copyright 2006 SASI Group (University of Sheffield) and Mark Newman

(University of Michigan)

Source: Worldmapper.org


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While we view this push into faster-growth markets as

significant long-term positive for BG, we nevertheless acknowled

that such exposure is not without risk, particularly given the

markets historically high demand elasticity levels relative

consumption in the developed world.

In developing markets, the combination of a dietary shift to mocalories, more meat-based calories, and population growth h

fueled demand for grains. As discussed previously in this repo

and again in more detail later (see Supplement and Append

sections), we believe the health of per capita GDP trend

particularly among BRIC countries (Brazil, Russia, India a

China) is an important watch point for investors in gra

processing stocks. On this score, we note that several BR

countries have already exceeded the duration of their historic

economic expansionary period. And, in our view, although emergi

markets still only make up a fraction of total demand relative

domestic consumption, the influence of per capita GDP trends a

inflation is nevertheless magnified as a result of higher dema

elasticity for food than in the United States. Whereas a

increase in general consumer inflation leads US consumers to c

back consumption of grains and meat by a mere 0.04% and 0.09

respectively, consumption in BRIC countries is more than 5x

sensitive, according to a study by the USDAs Economic Resear

Service.

Accordingly, applying historical grain and meat elasticity rat

to current inflationary pressures in each of the four BR

countries is equivalent to returning roughly 3.5% of total wor

corn and soybean production (or 10% of US production) back on

the market (see Figure: Protein Production Cuts Ease Gra

Requirements in the pages below). In addition, if we were

assume an average correction to per capita GDP trends of the fou

BRIC countries and apply the historical elasticity rates, w

calculate that this would have the equivalent effect of returnin

4.0% of the worlds total corn and soybean production (roughly 1

of US production) back onto the market (see figure below

Appendix for complete analysis).


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Figure 11: Equivalent % of World Corn & Soybean Production Returned to the Market

Assuming

Historical Elasticity Response to Current Inflation Rate

1.1%

0.4%

0.3%

0.9%

0.0%

0.2%

0.4%

0.6%

0.8%

1.0%

1.2%

Brazil Russia India China

Hist. Elasticity Response to Avg Per Cap GDP Correction

1.4%

0.5%

0.4%

1.7%

0.0%

0.2%

0.4%

0.6%

0.8%

1.0%

1.2%

1.4%

1.6%

1.8%

Brazil Russia India China

Source: USDA (Economic Research Service) and Lehman Brothers analysis

Risk #2: A sub-par US harvest: Several factors appear poised

deflate US crop production this year, with potential implicatio

for BGs profitability through next year. These factors inclu

crop rotation from corn to soybeans (a lower tonnage per bush

crop versus corn), a late start to the growing season (creatin

risk of frost and/or too little daylight for photosynthes

related to a late harvest), and severe Midwest flooding (some lo

acreage). While it would appear as though the crop has been qui

resilient to early season flooding and excess moisture,

continue to believe that it warrants watching, as there a

several important implications of a weak US harvest and associat

supply-push inflation, including cost pressures (without fu

pass-through pricing power, particularly in ethanol), potenti

demand destruction, system wide working capital constraints, a

impaired utilization levels. Naturally, those processors wi

proportionately fewer assets within the US are better insulate

As noted previously, we estimate that BGs processing capaci

exposure in North America is roughly 36%, or half of ADMs 70

exposure.

Supply-Push Inflation:Although price inflation is generalpositive for grain processors when it is demand-pull driven (s

figure below), it can be considerably less so when the source

inflationary pressures is supply-side led. In the demand-pu

inflation of recent years, BG has sufficiently preserved i

margin structure on the back of strong pricing power (demand f

end-products) and higher utilization levels (spreading fixed cos

over more units), which has allowed the company to offset high

raw material costs.


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15

Figure 12: BGs Product-Line Exposure (small circles) to Demand-Pull Grain Inflation

(large circle)

Margin Positive Margin Positive

Corn Sweeteners (HFCS, Dextrose, Glucose, Maltose) NPK Fertilizers Chicken Grow-Out Corn Sweeteners (HFCS, Dextrose, Glucose, Maltose)

Milling: Starches (Industrial, Food) Sweeteners Turkey Production Milling: Starch (Industrial, Food), Co-Product (Feed, Meal, Oil)Co-Product (Feed, Meal, Oil) Starches Hog Production Ethanol

Ag Services Co-Products Feedlot Operations Ag Services

Soybean Oil Oil Corn Ethanol Ethanol Soybean Oil

Crushing: Meal Meal Milling: Bio-Diesel Crushing: Meal

Ag Services Ag Services Bio-Diesel

Soybean Bio-Diesel Ag Services

Fertilizer: NPK Blends Crushing: Fertilizer: N/A

Fertilizer: N/A

Poultry & N/A Poultry & Chicken Grow-Out

Livestock Poultry & Poultry & Livestock Producers Livestock Turkey Production

Livestock Protein Processors Hog Production

Feedlot Operations

Corn Sweeteners (HFCS, Dextrose, Glucose, Maltose) Corn N/A Corn Sweeteners (HFCS, Dextrose, Glucose, Maltose)

Milling: Starch (Industrial, Food), Co-Product (Feed, Meal, Oil) Milling: Milling: Starches (Industrial, Food)

Ethanol Co-Product (Feed, Meal, Oil)

Ag Services Soybean N/A Ag Services

Soybean Oil Crushing: Soybean Oil

Crushing: Meal Crushing: Meal

Bio-Diesel Fertilizer: NPK Blends Ag Services

Ag Services

Fertilizer: N/A Margin Negative*** Margin Negative Fertilizer: NPK BlendsChicken Grow-Out Poultry & Non-Vertically Integrated Protein NPK Ferti lizers

Turkey Production Livestock Processing Operations (Beef Sweeteners

Hog Production Packing, Pork Processing) Starches

Poultry & Chicken Grow-Out Feedlot Operations Co-Products Poultry & N/A

Livestock Turkey Production Ethanol Oil Livestock

Hog Production Bio-Diesel Meal

Feedlot Operations Ag Services

* Assumes no hedging and no forward contracting

**Certain circumstances may cause results to vary

***Margin negative unless the product is the source of the inflationary pressure

Bargaining power shifts upstream to growers and to processors of grains. Consumers of grain-derived end

products (feed, ethanol, HFCS) compete for raw material, thereby driving grain prices higher. Global demandfor grain-derived end products leads to high capacity utilization among processors and facilitates pass-through

pricing, except where pricing is determined by unrelated cycles (protein, ethanol).

Bargaining power shifts downstream to the consumers of grain-derived end products. (feed, ethanol, HFCS)

easing competition for raw material, thereby driving grain prices lower. Weak global demand for grain-derivedend products leads to low capacity utilization among processors and impairs pass-through pricing, except

where pricing is determined by unrelated cycles (protein, ethanol).

Adverse Price Driver for

Beneficial Price Driver for Beneficial Cost Driver for

Not a Direct Price Driver for

Not A Direct Cost Driver for

Duration Influenced by: Economic Cycles (Food, Fuel & Industrial Product Demand), Protein Production (Feed Demand), Currency Trends, Gov't Policy

CORN & SOYBEAN GLOBAL DEMAND-DRIVEN PRICE CYCLE (PRODUCT IMPLICATIONS)

Adverse Cost Driver for

Strong Corn & Soybean Demand Weak Corn & Soybean Demand


In supply-push driven inflationary environments (see illustrati

below), bargaining power shifts upstream to surviving growers

grains, as limited raw material availability drives gra

processors to compete for supply, in turn driving grain pric

higher. Still, grain processors can recover some of this co

pressure, as their customers own concerns about the availabili

of grain-derived end-products may facilitate the ability to pas

through higher raw material prices. However, the consumption bi

for grain-derived end-products tilts negatively in such a scenar

given the potential for inflation-induced demand destructio

ultimately threatening to create a less favorable prici

environment among processors competing for fewer contracts.


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16

Figure 13: BGs Product-Line Exposure (small circles) to Supply-Push Grain Inflation

(large circle)

Margin Positive Margin Positive

Corn Sweeteners (HFCS, Dextrose, Glucose, Maltose) NPK Fertilizers** Ethanol Corn Sweeteners (HFCS, Dextrose, Glucose, Maltose)

Milling: Starches (Industrial, Food) Bio-Diesel Milling: Starch (Industrial, Food), Co-Product (Feed, Meal, Oil)Co-Product (Feed, Meal, Oil) Chicken Grow-Out Ethanol

Ag Services Turkey Production Ag Services (when corn price trend is demand driven)

Soybean Oil Corn Ethanol Hog Production Soybean Oil

Crushing: Meal Milling: Feedlot Operations Crushing: Meal

Ag Services Sweeteners Bio-Diesel

Soybean Bio-Diesel Starches Ag Services (when soy price trend is demand driven)

Fertilizer: NPK Blends Crushing: Co-Products Fertilizer: N/A

Oil

Fertilizer: N/A Meal

Ag Services

Poultry & N/A Poultry & Chicken Grow-Out

Livestock Poultry & Poultry & Livestock Producers Livestock Turkey Production

Livestock Protein Processors Hog Production

Feedlot Operations

Margin Negative Margin Negative

Corn Sweeteners (HFCS, Dextrose, Glucose, Maltose) Ethanol Corn N/A NPK Fertilizers** Corn Sweeteners (HFCS, Dextrose, Glucose, Maltose)

Milling: Starch (Industrial, Food), Co-Product (Feed, Meal, Oil) Bio-Diesel Milling: Milling: Starches (Industrial, Food)

Ethanol Chicken Grow-Out Co-Products (Feed, Meal, Oil)

Ag Services Turkey Production Soybean N/A Ag Services (when corn price trend is demand driven)

Soybean Oil Hog Production Crushing: Soybean Oil

Crushing: Meal Feedlot Operations Crushing: Meal

Bio-Diesel Sweeteners Fertilizer: NPK Blends Ag Services (when soy price trend is demand driven)

Ag Services Starches

Fertilizer: N/A Co-Products Fertilizer: NPK Blends (when corn price trend is demand driven)Oil Poultry & Non-Vertically Integrated Protein

Meal Livestock Processing Operations (Beef

Ag Services Packing, Pork Processing)

Poultry & Chicken Grow-Out Poultry & N/A

Livestock Turkey Production Livestock

Hog Production

Feedlot Operations

* Assumes no hedging and no forward contracting

**Certain circumstances may cause the converse

Bargaining power shifts upstream to surviving growers of grains, as limited raw mat'l drives grain processorsand consumers of grain-derived end products to compete for supply, driving grain prices higher. End-product

demand remains unchanged but utilization suffers. Availability concerns may facilitate pass-through of prices tograin-derived end-products, except for unrelated cycles (protein, ethanol).

Bargaining power shifts downstream to processors of grains and consumers of grain-derived end products.Wide availability of raw material eases competition for grains, driving grain prices lower. End-product demand

remains unchanged but utilization improves. Availability of grain-derived end products may force the pass-through of lower prices, except for unrelated cycles (protein, ethanol).

Adverse Price Driver for

Beneficial Cost Driver for

Not A Direct Cost Driver for

CORN & SOYBEAN DOMESTIC SUPPLY-DRIVEN PRICE CYCLE (PRODUCT IMPLICATIONS)

Beneficial Price Driver for

Not a Direct Price Driver for

Adverse Cost Driver for

Domestic Corn & Soybean Supply Shortage Domestic Corn & Soybean Supply Surplus

Duration Influenced by: Annual Domestic Crop Production (Acres Planted and Yield Per Acre) and Intra-Season International Production


Altogether, while elements of demand-pull inflation appear like

to remain in place (and possibly for quite some time), the nea

term pull from certain end-markets, like protein processors, cou

be more tepid, thus creating a less favorable profit dynamic th

had been in place for much of 2007 and 2008. In addition, we wi

continue to closely monitor crop development through the harve

season for any indication that US grain processing assets mig

also contend with supply-push elements that had not previous

been in place.

Processing Utilization Levels: Likewise, the full adverse effe

on margins is often not realized until the following year, wh

the prior years fall harvest is consumed. With less to harvesthough, the risk to asset utilization levels suffers, eith

because of reduced availability of supplies in affected regions

because of inflation-induced demand destruction more generall

As a result of lower utilization levels and marginally le

pricing power (relative to the pricing power of their farm-lev

suppliers), margin preservation for grain processors becomes mo

difficult to achieve.


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17

Utilization Levels for Origination Assets: Aside from utilizati

levels for grain elevators, storage facilities and processi

plants, wed note that a poor harvest can create asset utilizati

headwinds for origination assets, like BGs grain elevators.

our view, utilization levels on assets that handle US crops m

suffer in 2009 against a difficult 2008 comparison, as the lar

2007 corn-heavy crop, which came to harvest last fall and currently being marketed, has also propped up demand for capaci

in 2008. In order for these assets to repeat results seen

2008, they will have to overcome the reduced yields resulting fr

flooding and from crop rotation to lower tonnage per ac

soybeans.

Risk #3: Industry-wide capacity expansion: In our view, tig

capacity creates industry pricing power. Conversely, capaci

expansion, in a vacuum, threatens industry pricing power an

creates a possible headwind for profit margin expansio

Accordingly, we believe recent trends in capacity expansion m

give some investors cause for concern.

ADM: For its part, wed note that as of ADMs fiscal 2007 10

filing last summer, it had intended to spend $3.0 billion

capacity expansion and other capital projects through fiscal 20

(June 30 year end). But, as of June 2008, the company indicat

that through March 2010 it expects to have already spent $2

billion of this total, with fiscal 2009 spending representing th

potential peak. Specifically, ADM has indicated that it

expanding its South American barge fleet by 30%, adding 1,800 ta

cars to its fleet of 21,000 railcars, and improving import/expo

capacities. It is constructing two new ethanol plants (C3Q09 a

C1Q10 completion), building a PHA biodegradable corn-bas

plastics plant (C2Q09 completion), expanding its cocoa processi

capabilities (C3Q09 completion), adding a new propylene glyc

plant (C3Q09 completion), and undertaking other capital projec

as well. ADMs construction of two new dry corn milling plan

will increase the companys annual ethanol production capacity

550 million gallons to 1.7 billion gallons.

BG: But, this trend is not unique to ADM. Similar initiatives a

taking place throughout the industry. BG, for instance,

increasing its canola crushing capacity by about 50% (to 1,4

metric tons per day) with the expansion of its Nipawin, Canad

facility. Likewise, the company is expanding its access

fertilizer raw materials, including the Araxa mine expansion (la

2009) and Fosfertil Tapira and Catalao mines (early 2010), whi

coupled with other fertilizer expansion initiatives is expected


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EQUITY RESEAR

18

provide BG with a 65% boost in phosphate rock production capaci

by 2011. And, the company is expanding its Santa Juliana Sugarca

Mill in Mato Grasso, Brazil, from 1.6 million metric tons of can

milling capacity to 4 million metric tons. Several other maj

initiatives, namely the build-out of oilseed crushing/refini

facilities spanning four continents, are underway as well.

Industry-Wide: By the numbers, large cap grain processors a

spending more on capacity expansion initiatives (as measured

capital expenditures as a percent of the prior years n

property, plant and equipment asset base) than at any point

time in the last 15 years. As shown below, the industry h

increased its spending on capital expenditures five-fold fr

roughly 5% of the prior years Net PP&E in 2001 to more than 2

estimated in 2008 a clear indication, we believe, of more th

just maintenance capex spending. Also as illustrated below,

believe the reduction in capex (as a % of prior years Net PP&E

during the 1996 to 2001 period helped set the stage for

subsequent recovery in grain processors Return on Assets, whi

tripled from a trough level of 2% in 1999 to 6% in 200

Accordingly, the dramatic rise in capacity expansion in the la

seven years warrants watching as it may pose a risk to indust

returns.

Figure 14: Grain Processors Return on Assets vs. Capacity

Expansion

Source: Company filings and Lehman Brothers analysis

Industry-wide capacity expansion initiatives are not limited

processing assets. Fertilizer capacity is expanding as well. F

instance, in June 2008, Canpotex a consortium led by fertiliz

producers Potash Corp, Mosaic, and Agrium and responsible f

exporting all potash produced in the Saskatchewan province


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19

Canada -- plans to begin two terminal projects that collective

will provide a two-fold increase (from 12 million tons to

million tons) in its available capacity. While terminal capaci

itself is not a concern to fertilizer profitability, perhaps mo

important is the production intention of the consortium behind t

projects. Canpotex CEO Steven Dechka indicated, "With Canpot

shareholders working to significantly increase production over tnext several years, we have a responsibility to build on our long

term ability to deliver this essential nutrient to offsho

markets. Not surprisingly then, in July Potash Corp. announc

plans for an additional 2.7 million metric tonnes of pota

capacity by 2012, enabled by brownfield expansion at

Saskatchewan plants. Importantly, in our view, the co

efficiency and plug and play nature (with existi

infrastructure) make brownfield expansion an attractive option f

fertilizer producers, which could very well erode fertiliz

pricing power over time.

Figure 15: World Potash Projects vs.

Demand Growth

Figure 16: Brownfield vs. Greenfield

Expansion Costs

based on committed projects including POT's Saskatchewan brownfield expansion

Million Tonnes KCI, Cumulative Growth

0

2

4

6

8

10

12

14

16

2008 2009 2010 2011 2012

POT's Saskatchewan Brownfield

Committed Capacity Expansion Projects4% Demand Growth (4.5% '08 projection)

Billion Dollars per Million Tonnes of Potash

$1.4

$0.6

$-

$0.2

$0.4

$0.6

$0.8

$1.0

$1.2

$1.4

$1.6

green brown

Source: Potash Corp (June 08), Fertecon, and Lehman

Brothers analysis

Source: Potash Corp filing (July 08) and Lehman Brothers

analysis

While the theme of capacity expansion holds true acro

fertilizers, we would note that BGs primary profit exposure (an

vertical integration model) is to phosphate, not potash. In o

view, the higher barriers to entry in phosphate and the duratiof Greenfield expansion, coupled with an increased emphasis

South American production (the primary geography serviced by BG

fertilizer business) may better insulate the company fr

potential margin pressures associated with capacity expansi

initiatives in other fertilizers (see Supplement). Nevertheles

the companys operating margin has expanded from 2.8% in 2005 to

mid-teens level most recently (a long-term average of 10.5%

While it may be some time before we see 2.8% operating margi


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20

again, we would not be surprised to see margins, over time, com

off of current levels.

Margin Implications: In our view, given the strong long-te

global demand outlook for grain-derived products, we believe th

incremental spending is warranted. But, warranted or no

capacity expansion may threaten near-term industry pricing powand create a possible headwind for profit margin expansion

margin and $ margin). While capacity expansion appears to

firmly rooted in robust global demand projections, we

nevertheless note that the sheer size of the plants and the un

processing capacity necessary to create scale advantages lead

step-function increases in industry capacity rather than

perfectly smooth scaling up along the consumption curve.

Cash Implications: Separate from the potentially adverse marg

impact, construction of new capacity also limits cash returned

shareholders. By our math, as shown below, large cap gra

processors are pouring a larger percent of their free ca

generation into capital expenditures than at any point since 199

With a group average dividend yield of 1.3% (0.8% for BG) versu

the S&P 500 dividend yield of 2.2%, wed anticipate renew

management focus, particularly as working capital requiremen

eventually ease, on striking a better balance between investmen

in long-term projects and cash returned to shareholder

Likewise, with industry-wide capacity expansion at peak levels,

more conservative approach by management may now be warranted wh

evaluating expected financial returns on capacity expansi

projects.

Figure 17: Grain Processor Capex % of

OCF* vs. ROIC

Figure 18: Capex vs. Prior Year PP&E (BG

vs Peers)

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Capex%

ofOCF(excl.wkg

cap

chg)

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

RO

A

Capex % of OCF (before Wkg Cap Changes) ROIC

9%

12%

15%

23%

34%

21% 21%

17%

19%20%

9%

11%

13% 13%14%

0%

5%

10%

15%

20%

25%

30%

35%

40%

2004 2005 2006 2007 2008

ADM BG CPO

*Before changes in working capital

Source: Company filings and Lehman Brothers analysis Source: Company filings and Lehman Brothers analysis


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CPOs Co-Product Exposure a Potential 09 Headwind for BG

In our view, the same macro trends that allowed CPO to meet, an

in some cases, handily exceed its five-year financial target

which include low double digit EPS growth and an 8.5%-10%+ retu

on capital employed (ROCE) appear likely to remain intact for mo

of the balance of 2008 (albeit at a moderating pace).

addition, we see the long-term strategic rationale for BG

proposed merger with CPO as quite firm. That said, it appears

us that much of the upside in CPOs results in 1H08 have be

driven by co-product pricing, i.e. the companys policy to lock-

its corn requirements in North America, without capping securin

pricing for many non-starch co-products, like corn oil, corn fee

and corn meal, which collectively make up between 20% and 30%

CPOs revenue. In our view, even with the recent pullback in t

grain markets, co-products may continue to provide YoY upsi

earnings potential through the balance of the year. But, wi

inflation-induced demand destruction already taking hold in animfeed (11% of CPOs revenue, we estimate) as a result of prote

producers cutbacks, and with possible additional volume risk mo

broadly, we have some concern that not only will CPOs co

milling businesses face a difficult YoY comparison to 2008 bu

that it will also face some margin headwinds in North America

BG integrates the business in 2009 (pending shareholder approv

in what we expect to the October/November timeframe).

BG May Prove Better Insulated from 09 Macro Headwinds than Some Peers

As explained below, we see several reasons why BG may prove bettinsulated from Macro headwinds in 2009 than some of its peer

including: 1) implications of geographic diversificati

(particularly BGs strong South American presence), and 2) o

expectation for continued strong profitability in BGs fertiliz

business.

Geographic Diversification: Among grain processors, BG enjoys o

of the most geographically diverse asset networks (see figure

Heading into 2009, we believe the companys exposure to processi

businesses outside of North America will better insulate it fr

several potential macro conditions, including a lower tonnage U

harvest and a potential fed tightening cycle, which could pro

risks for US-based processors.


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Figure 19: BG Oilseed Processing Network by Region

Europe,24%

South

America,

37%

Asia, 3%

NorthAmerica,

36%

Source: Company filings

For starters, a weak US harvest increases the onus on other par

of the world to meet global consumption demands, most notab

South America given its agricultural infrastructure and favorab

growing climate. With 37% of BGs oilseed processing capaci

located in South America, primarily Brazil, we view BG as the bes

positioned oilseed processor to benefit from this shif

Likewise, the companys proposed merger with CPO the #1 mark

share player in South American corn milling further insulat

it, we believe, since CPOs US exposure ($1.0 billion in reven

in 2007) is balanced by its South America exposure ($925 milli

in revenue), where profit margins are already structurally highe

This is not to say that BG wont face an incrementally le

favorable profit environment in its oilseed and/or corn milli

(post-CPO) businesses. In fact, North America houses 36% of i

oilseed processing capacity and the US represents 30% of CPOcorn milling capacity). But, such risks are reasonably we

balanced, in our view, against businesses that could well benef

from a lower tonnage US harvest.

Not merely in the near-term, but also over time we believe th

South America presents a more significant crop expansi

opportunity for agribusiness processors, both via yie

improvements and acreage expansion. Of course, land acquired f

crop production can often take 3+ years to bring up to adequa

production levels. Thus, much of todays crop production growwas set in motion three years ago. For soybeans BGs prima

raw material 2005 acreage was some 65% above 2000 level

Further acreage expansion opportunities exist and as shown bel

by the change in SLC Agricolas expansion plans, we believe th

market is responding to expansionary price signals. Specificall

in April 2008 the company -- one of Brazils largest owners a

operators of farmland had anticipated a mid-teens planted ar

expansion rate in each of the next several years (also reflecti

second-crop opportunities). Since then, this forecast has be


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23

revised upward a full 10 percentage points, with the company n

anticipating a CAGR in the mid-20% range through 2010. While mu

of this expansion is via acquisition of existing farmland, SL

Agricola highlights greater efficiency (better yields a

increased second crops) as an important part of its value creati

proposition.

Figure 20: SLC Agricola Planted Area

Expansion Plan

As of 4/30/2008

Figure 21: SLC Agricola Planted Area

Expansion Plan

As of 7/31/2008

Source: SLC Agricola Source: SLC Agricola

As such, acreage is only part of the story. Efficiency of t

land is another key component one that stands to benefit BG

two ways: 1) increased raw material for production, and 2) dema

for fertilizer. Currently, Brazilian soybeans yield 2.85 tons p

hectare or roughly -1% less productive than US farmers, thou

we are familiar with some land in Brazil garnering as much as 3.2

tons per hectare when optimized. Perhaps more interesting,

corn yields are 2.7x Brazilian corn yields (9.36 tons per acre o

average versus 3.64). However, we are aware of some Brazili

land garnering corn yields of closer to 9.7 tons per acre wh

optimized and thats before accounting for second-cr

opportunities (October to December planting window and a Janua

to February window).


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24

Figure 22: Corn Seed Trait Adoption in South America

Source: Monsanto

Figure 23: Oilseed Seed Trait Adoption in South America


25/57

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25

Source: Monsanto

In addition, BGs non-US exposure (including Fertilizer, 35%

normalized EBIT, and roughly two-thirds of its oilseed processi

capacity, an estimated 30% of normalized EBIT) also serves as

hedge against a possible reversal in the weak US Dollar

particularly important should the Fed enter a rate tightenicycle. Under such a scenario, we believe the competitiveness

commodities originating in the US may be at risk. In fact, while

stronger dollar may well alleviate domestic inflation pressure

it could have the opposite effect abroad, where US agricultur

commodities absent a correction would become more expensive

a local currency basis. In our view, under such a scenario, t

purchasing power of importing countries is reduced such that t

aforementioned demand elasticities may become evident in volu

trends. Alternatively, if agricultural commodity prices were

fully correct in response to potential interest rate tighteni(see figure), we believe that too would have consequences f

financial returns of domestic grain processors. Under su

circumstances, those processors with proportionately fewer asse

within the US are better insulated.

Figure 24: Commodity Prices versus US Dollar Trends

250

300

350

400

450

500

550

600

Jan-

05

Apr-

05

Jul-

05

Oct-

05

Jan-

06

Apr-

06

Jul-

06

Oct-

06

Jan-

07

Apr-

07

Jul-

07

Oct-

07

Jan-

08

Apr-

08

CRB

Index

$0.55

$0.60

$0.65

$0.70

$0.75

$0.80

$0.85

$0.90

USD/EUR

CRB Index USD/EURpositive correlation

negatve correlation

Source: FactSet and Lehman Brothers analysis

Should the US dollar strengthen, and therefore weaken t

competitive position of US agricultural commodities globally, BG

South American operations, which account for 37% of its ass

footprint and depend largely on the health of the Brazili

soybean farmer, may benefit. BG has indicated in the past that th

health of the Brazilian soybean farmer may be in jeopardy as


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26

soybeans approach $11 per bushel. If the dollar were

strengthen against the Brazilian Real, this $11 per bushel ra

would translate to a higher dollar amount relative to the Real

again assuming the negative correction in the underlying commodi

price is not more severe than the inverse correction in the

dollar.

Fertilizer: BG derives an estimated 35% of its normaliz

operating profit from fertilizer, which we believe provides it

partial offset from US crop damage. While the company

fertilizer products are distributed most heavily in South Americ

its pricing is nevertheless tied to global fertilizer prices.

the extent that early season US crop damage encouraged t

reapplication of fertilizer (not entirely clear, at this stag

and/or accelerated development of farmland in South America,

may have buoyed demand for fertilizer on a global basis a

therefore prices, thereby widening margins for producers

fertilizers. While this may create a headwind in 2009 vers

strong 2008 levels, we believe that US crop rotation back to co

(from soybeans) may lend support to high fertilizer prices, sin

corn is a more fertilizer-intensive crop. Also of significanc

we estimate that BG enjoys a $40-$60 per metric ton transportati

advantage versus much of the rest of the fertilizer market

South America, which is import-driven. As biofuel displacement

transportation fuel slows (because biofuel producers are forced

run idle given higher corn and soybean costs), BGs transportati

advantage versus importers may widen further.

Plus, BGs primary profit exposure in fertilizer is to phosphat

where the company is vertically integrated. We believe exposu

to phosphate may provide it some insulation from more aggressi

capacity expansion initiatives in other fertilizer bases.

fact, the required Greenfield expansion period for phosphate ro

is 3-4 years and the cost of Greenfield expansion is $1.5 billio

per million metric tons higher than both potash and nitrogen.


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27

Figure 25: Fertilizer Greenfield

Expansion (# of Years)

Figure 26: Fertilizer Greenfield

Expansion ($Bn/MMT)

6.0

3.5

3.0

0

1

2

3

4

5

6

7

Potash Phosphate Nitrogen

$1.5

$1.4

$1.0

$-

$0.2

$0.4

$0.6

$0.8

$1.0

$1.2

$1.4

$1.6

Phosphate Potash Nitrogen

Source: Potash Corp presentation (June 2008) Source: Potash Corp presentation (June 2008)

When the phosphate market first began to tighten in 2004, litt

new capacity expansion had been announced. In light

projections for continued solid demand for acreage expansion, thmarket may remain tight over the near-to-intermediate ter

Likewise, the high capital costs of Greenfield expansion

phosphate provide a barrier to entry. As a result, we belie

phosphate margins may be better insulated. Still, as BGs o

capacity expansion initiatives in this market attest, the econom

incentives for expansion are firmly in place. Plus, the tren

line growth in phosphate demand over the past five years has bee

below that of potash (3.8% versus 5.6% for potash). Although

does sell fertilizer blends, it is not vertically integrat

outside of phosphate.

Figure 27: World Potash Projects vs

Demand Growth

Figure 28: New Phosphate Rock Capacity vs

Demand

based on committed projects including POT's Saskatchewan brownfield expansion

Million Tonnes KCI, Cumulative Growth

0

2

4

6

8

10

12

14

16

2008 2009 2010 2011 2012

POT's Saskatchewan Brownfield

Committed Capacity Expansion Projects4% Demand Growth (4.5% '08 projection)

based on committed projects

Million Tonnes Rock, Cumulative Growth

0

5

10

15

20

25

2008 2009 2010 2011 2012

Committed Capacity Expansion Projects

3% Demand Growth (3% '08 projection)

Source: Potash Corp presentation (June 2008) Source: Potash Corp presentation (June 2008)

LT Favorable Bias: Flexibility in Assets, Trading Platform and Balance Sheet

In addition to our expectation that BGs geographic exposure a

business mix should provide some insulation against potenti

macro headwinds, our long-term bias on large cap grain processo


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is decidedly more constructive than our near-to-intermediate ter

For instance, while we anticipate inflation induced dema

destruction on the margin in the near-to-intermediate term,

also expect any associated easing in prices will in short ord

draw any number of buyers competing for agricultural resources

whether ethanol producers, protein processors, food manufacturer

or the like. This same dynamic should also allow for capaciexcesses associated with new construction to be absorbed in a mo

timely fashion than perhaps weve seen in the past. And, beyo

2009, wed also expect the risks from a weak US harvest in 2008

related to unusually high precipitation levels -- and cr

rotation to soybeans to revert (alleviating potential utilizati

pressures on BGs North American assets).

At its most basic level, the worlds need for food and renewab

fuels is growing and only a handful of large, well capitalize

agribusiness players are able to satisfy this demand. Althou

agricultural processing is arguably a commodity business

thriving (and sometimes merely surviving) in this business hing

on: 1) being among the most efficient, lowest cost producers, a

2) having the flexibility to quickly adapt to changing mark

conditions. In our view, to be the most efficient, lowest co

producer requires scale, scale, and more scale. By the sa

token, to adapt to changing market conditions requires having th

right asset footprint in the right place at the right time or,

a minimum, the ability to swing assets (or the functionali

thereof) in response to sophisticated forecasting tools, de

institutionalized knowledge, and cross-organizational glob

information flow.

Altogether, the barriers to entry in this industry are high,

the market is not particularly hospitable to those processors wi

a small asset footprint, less sophisticated trading/informati

systems, or limited access to capital. For this reason, we do n

anticipate a significant threat from new entrants in tradition

agribusiness processing segments, but rather believe the indust

consolidation that has taken place prior to the most recent up

cycle should keep todays well capitalized players in the driver

seat. Even in emerging agricultural businesses, like ethanol,

ultimately expect a round of consolidation to drive out tho

processors less able to operate with scale and flexibility

their assets.

In addition, BG enjoys a trading platform that allows it

capture arbitrage opportunities as they arise and/or mitigate i

exposure to fluctuations in the commodities market thou


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29

visibility into such activity is generally quite limited and c

complicate earnings forecasts in the near term. We will

listening closely over the course of the CPO integration to gau

whether BG believes it can enhance returns over time in t

acquired business by adopting a different risk management strate

than traditionally employed by CPO.

Furthermore, we do not underestimate the importance of balan

sheet strength and access to capital markets -- not only in troug

periods, but equally important in periods of rising commodi

costs where working capital requirements can become burdensome a

stress liquidity positions. Those processors with strong balan

sheets are arguably advantaged in their ability to capture mark

share, expand capacity, and consolidate distressed asset

Interestingly, on this basis, our math suggests that, if approve

BGs all-stock acquisition of CPO one of the least levered name

in the large cap agribusiness sector would noticeably impro

its liquidity profile. Given the below average leverage profi

of CPO, the BG/CPO combinations pro forma balance sheet a

credit ratios may also enhance BGs ability to secure

additional round of new debt financing. In this sense, aside fr

the strategic rationale for BGs announced acquisition of CPO, w

also view the transaction as a pseudo balance she

recapitalization maneuver and one that very well may serve as

case study for other agribusiness processors in the futur

Separately, wed note that if grain and oilseed prices were to se

recent declines hold, this would likely reduce working capit

needs (although not necessarily a positive for credit metrics ti

to the companys income statement).

Figure 29: BG - Potential Financing Surplus (Before and After CPO Acquisition)

BG (standalone) BG (pro forma for CPO)


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Note: Cash surplus (gap) based on discretionary FCF of $296M and $446M in NT and FY09 respectively, normalized $940M/yr

thereafter

Note: Coverage and Leverage ratios calculated on an 8-quarter rolling basis

*Near Term (NT) implied cash surplus (gap) is net of current cash and ST securities

*ST revolving credit facilities, including BG's $600M CP program, total $1.6bn, with $426M drawn upon as of March 31, 2008

**FY10 onward based on normalized discretionary cash flow

***LT revolving credit facilities total $2.1bn due through 2011, with $760M drawn upon as of March 31, 2008 (and $0 of

CPOs $500M revolver)

****excludes equity units / convertible notes of $690 million after 2018

Source: FactSet, company filings and Lehman Brothers' estimates and analysis

Aside from Co-Product Risk in 09, CPO Addition a LT Positive for BG

Relative to ADM and BG (standalone), Corn Products Internation

(CPO purchased by BG on 6/23/08, pending approvals) operates

considerably more focused network of assets and sells a far le

diversified portfolio of end products. While the form

processors derive scale partly from their product breadth,

would argue that Corn Products derives scale within its business

via its concentration of assets (CPO ranks third in installed co

processing capacity in North America and first in South America

In fact, while BG and ADM each generated more than 10x the revenu

generated by CPO in calendar 2007, they generated only 3.8x an

6.1x the operating profit of CPO, respectively. In other word

CPOs concentration of assets within corn processing and i

selection of end-markets have translated into a sizable marg

differential on a consolidated basis versus its peers, one whi

now stands to benefit BG.

Figure 30: Grain Processor RevenueComparison Figure 31: Grain Processor EBITComparison

$ in millions / multiples are indexed vs. CPO

$3,391

$-

$10,000

$20,000

$30,000

$40,000

$50,000

$60,000

CPO BG ADM

11.2x

15.6x

$ in millions / multiples are indexed vs. CPO

$341

$-

$500

$1,000

$1,500

$2,000

$2,500

CPO BG ADM

3.8x

6.1x

Source: Company filings and Lehman Brothers analysis Source: Company filings and Lehman Brothers analysis

This is not to suggest that CPOs model is necessarily superi

(in fact, returns on invested capital for these processors are n

dissimilar; see figure), but rather to highlight that there a

important differences in operating models between CPO and i

grain processing peers that we believe are worth exploring, as

they may have implications for operating performance over the ne

12 months and 2) over the long term, may provide some takeawa

that can be incorporated into BGs operating philosophies.


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Figure 32: Grain Processor ROIC Trend Comparison (2003-

2007)

0%

2%

4%

6%

8%

10%

12%

14%

16%

2003 2004 2005 2006 2007

ADM BG CPO


Importantly, certain business models provide greater insulation

supply-push inflation. Several differences exist in CPOs mod

that may insulate it from aforementioned risk factors heading in

2009. Specifically, these differences include: 1) a practice

its North American operations of hedging corn cost exposure up

securing customer supply contracts at fixed prices, 2) a larg

percent of operating profit derived outside of North America, 3)

market leadership advantage in South America with favorab

implications for corn milling operations, and 4) a focus o

traditional processing business, with limited or no dire

exposure to ethanol production or ag services.

For instance, supply-side events tend to be regionalized, su

that grain processors (like those within our coverage univers

who enjoy a fairly well geographically-diversified asset base a

able to offset headwinds in one region with profit tailwinds

another. Similarly, those processors whose portfolios a

concentrated more heavily in higher value-added business line

like CPO, may also be better suited, in our view, to manag

supply-push inflation pressures by commanding pricing powe

Likewise, a portion of CPOs contracts with customers tend to

based on tolling agreements, which effectively shift the risk

grain prices to the customer, while raw material requirements fo

other contracts are hedged at the time the contract is signed

And, given that grain requirements are often hedged but c

products (e.g. corn feed, corn oil, corn meal) are sold closer

the market, processors like CPO have, perversely, be


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beneficiaries from supply-push inflationary pressures, at lea

during the hedged period.

North American Risk Management Practices: In North America, CPO

history has been to lock-in corn costs upon securing custom

supply contracts at fixed prices. With other customers,

sometimes operates under tolling agreements. This spremanagement philosophy, particularly in starch-based product

like high fructose corn syrup, tends to insulate the company

North American operating profits from unfavorable increases

corn costs, like the recent spike brought about by the late sta

to the growing season and flooding in the Midwest. In fact,

discussed previously, this operating philosophy actually enabl

CPO to benefit during a period of rising raw material costs. Th

is because pricing of the raw material (corn) tends to drive pass

through pricing of co-products (corn feed, corn oil, and co

meal). To the extent that CPO is exposed to favorable pricin

but has locked in its raw corn requirements, it allows the compan

to realize incremental profit.

Of course, the converse may also be true in a falling corn co

environment. And, risk management only delays the onset of high

costs, which eventually will be passed through in the form

higher prices on negotiated contracts. We believe the ability

pass through the entirety of the input cost increase hing

largely on whether the cost pressures are supply-push driven

demand-pull driven. Demand-pull driven cost pressures imbue so

degree of leverage with the processors, particularly in

environment characterized by tight processing capacity. On t

other hand, supply-push inflation creates risk of elasticity

demand, particularly where excess processing capacity is in pla

and acts as a limiting factor in pricing power. As we look to t

key end-of-year contract renegotiation period and price setti

for 2009, although capacity currently remains tight, the source

the inflationary pressure has become increasingly supply-pu

driven as a result of a likely weak US harvest an importa

watch point, in our view.

Geographic Diversification: Just 30% of Corn Produc

Internationals revenue was generated in the US in 2007. Whi

not immaterial, the combination of geographic diversification a

spread management policies in North America may provide great

insulation to CPO relative to other processors within our covera

that are more exposed to a likely weak North American harvest.


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Not only is CPO geographically diversified, but the company enjo

a strong leadership position in its South American corn milli

operations, including the largest installed processing capacity

Argentina, Brazil, Chile, Colombia, Peru and Venezuela. In o

view, this leadership position lends support to CPOs abov

average operating margins in this business (15.2% in South Ameri

versus 6.9% in North America since 2003). Also notable, in oview, is that this leadership position has provided somewhat mo

profit stability than in North America (1 standard deviation

operating profit is 75% from the long-term mean in South Ameri

versus 97% in North America) an even more impressive fe

considering that tolling agreements and hedge policies on fix

price contracts are less widely employed in CPOs South Americ

operations. Rather, we believe this is a function of t

companys pass-through pricing capability in the region.

And, as a final note, since the availability of corn in Sou

America has not been impacted directly by the likely lower tonna

US harvest, we believe CPOs asset utilization in the region wi

not suffer. Furthermore, the company may be able to offs

weakness in its US operations by utilizing its non-US assets

take advantage of market share opportunities in other parts of t

world. If the US were to enter down the path toward an intere

rate tightening cycle, we believe this effect would be even mo

pronounced.

A Focus on Traditional Processing Operations: Unlike ADM

exposure to ethanol, trading, and ag services, or BGs exposure

fertilizer, CPO has very little exposure to non-tradition

agricultural processing businesses. While at times some may arg

this limits its opportunity to participate in other, mo

profitable or faster growing markets, we believe this focus o

traditional processing will hold the company in good stead headi

into 2009. Specifically, although fertilizer profitability m

remain intact, wed note that trading profits are near

impossible to forecast, ethanol profitability has been squeezed

the combination of high corn prices and a glut of producti

capacity, and ag services is facing very difficult YoY compariso

along with a set of new headwinds. CPOs focus on tradition

processing operations has had another unintended benefit, in ou

view, for shareholders. It has kept spending on capaci

expansion at more balanced levels, allowing for more cash to b

returned to shareholders. In fact, CPOs diluted share cou

between 2003 and 2007 has increased only 5.6% compared with

27.2% increase for BG. Also during this period, CPO has increas

its dividend on average 15% per year, compared with ADMs 14% an


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BGs 11%. Interestingly, this discipline has also kept CPO

balance sheet in very healthy shape seemingly a selling poin

for BG in its announced acquisition of CPO.

Figure 33: Capital Expenditures vs. Prior Year's PP&E

9%

12%

15%

23%

34%

21% 21%

17%19%

20%

9%

11%13% 13%

14%

0%

5%

10%

15%

20%

25%

30%

35%

40%

2004 2005 2006 2007 2008

ADM BG CPO


This is by no means to imply that CPO has neglected grow

opportunities in the business. In fact, the company has a lo

history of innovation, particularly in the sweeteners marke

dating back to its patent on crystalline dextrose in 1923. T

company was also a pioneer in the development of high fructo

corn syrup, which it began producing in 1976. And more recent

(April 2008), CPO unveiled one product in its sweetener pipeli

that we believe may have significant potential in the market --

new low calorie, all natural sweetener, called Enliten, made fro

the Stevia plant. Specifically, CPO announced that it had enter

into a long-term agreement with Morita Kagaku Kogyo Company Lt

of Osaka, Japan. The agreement gave CPO the exclusive license

Moritas patented stevia strain, its manufacturing technology, a

global marketing and distribution rights. Given Cargill

exclusive Stevia-based partnership with Coca Cola (Truvia),

believe that CPO is well positioned to be the supplier of choi

to other beverage manufacturers. And, wed note that t

sweeteners list of applications extends well beyond t

carbonated soft drink market, and includes yogurts, cereals a

snack bars, among other items.

BG Valuation: Points of Insulation Support Premium vs. Grain Peers

Our $97 price target is predicated on a multiple of 14.5x our mid

cycle EPS estimate of $6.69 -- a premium versus both BG

historical mid-cycle multiple of 10.8x and BGs closest peer A

(11.9x). Looking into 2009, we believe BGs premium is warrant


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in light of the aforementioned insulation points provided by t

combination of the companys geographic exposure and business mi

Beyond this, we also believe BGs growth algorithm may

structurally advantaged by its relative exposure to the cr

production expansion potential of South America. In addition,

believe favorable demand-side fundamentals are likely to remain

place ove

lehman brothers initiation

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