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Case Background and Facts: About Bunge:

Bunge was founded in 1818 in Amsterdam to merchandize grains and imports from the Dutch colonies. The companys expansion in the 1980s into textiles, paint, chemicals, cement, banking, insurance, and real estate created some financial problems during the 1990s. Under its new leadership company returned to its roots in agribusiness and food, making several strategic acquisitions, divesting noncore businesses, and restoring financial stability. Bunge successfully went public after more than 180 years as a private company. Bunge helped farmers access the world market by buying their crops and supplying financing, and, in Brazil, by building a profitable fertilizer business to cater to farmers needs. Bunge then processed and sold these agricultural commodities mainly in countries that were net importers of food. Bunge was dealing in branded, differentiated packaged products with food processors, food services, and retail customers, as well as providing bulk oil and meal to large corporate users. Key Divisions of Bunge: o Fertilizers o Food Products o Agro Business Bunge was the largest producer and supplier of fertilizer to farmers in South America, and a major integrated fertilizer producer in Brazil. Bunge had approximately 26% of the market share of NPK fertilizers. Bunges food products division consisted of two business segments: edible oil products and milling products. Bunges agribusiness division managed the purchase, storage, transport, processing, and sale of agricultural commodities and commodity products. Six product lines of Bunge were oilseeds, grains, sugar, ocean freight, energy, and financial services. Risk Management: o Fundamental aspect of Bunges activities. o Correctly analyzing market developments to optimize the timing of purchases, sales, and hedging was essential for the companys efforts to maximize return on assets. o But hedging was never perfect for Bunge.

Organizational Structure: o Decentralized organizational structure but managed its value chain in an integrated fashion. o A strong culture built on shared values. o A balance was maintained between the efficiency of a global entity and the speed of a local business, between the value of a world perspective and the insights and customer relationships born of local knowledge. Launching new businesses: o In July 2002, Bunge acquired France-based Cereol for $1.5 billion (including debt), one of the worlds largest oilseed processors, reputed for innovation, and the leading producer of branded bottled oil, marketing a billion bottles annually. o In 2005, Bunge purchased its first soybean crushing and refining plant in China (61% of participation), located in the port city of Rizhao in Shandong province, for $13 million. In 2006, Bunge acquired 100% of a plant in Nanjing for $26 million, and in 2007 entered into a joint venture with Chia Tai in Tianjin, near Beijing. o Its 2003 purchased a cooking-fat branded business from Hindustan Lever Ltd. o The company recently created the Sugar and Ethanol division in Brazil as part of the companys regional operations, and the division had just started trading sugar. But Bunge was entering the market late. Assets were overpriced and competition was increasing, so it was difficult to get the business started. o In 2003, Bunge moved into R&D. Company formed a strategic alliance with DuPont. The alliance combined DuPonts know-how in plant breeding with Bunges origination and processing capabilities, marketing know-how, and customer base. The objective was to develop genetically engineered seeds with improved quality traits.

Bio Fuels:

Ethanol and biodiesel were increasingly in demand as alternatives, as well as additives, to petroleum-based fuels. Made from farm crops and other renewable natural sources. Bio fuels presented a promising source of energy and a growth opportunity for food and agribusiness companies. Ethanol was produced using corn and other grains, sugarcane, or agricultural waste. Biodiesel was produced from vegetable oils and animal fats, most commonly rapeseed oil and soybean oil. It performed comparably to petroleum diesel, but it burned more cleanly, emitting less carbon dioxide and other greenhouse gases. Biodiesel was used in its pure form or blended with petroleum-diesel to run engines, boilers, and other diesel-powered machinery. Biodiesel demand was especially strong in Europe, although demand was also growing elsewhere. In Asia,

palm oil was being increasingly used in the production of biodiesel, complementing the vegetable oil market. Indonesia and Malaysia produced 80% of the worlds palm oil and had the lowest production costs. Cellulosic ethanol market was worth of $20 billion a year in the U.S. There was enough raw materials available in the U.S. to produce about 100 billion gallons of cellulosic ethanol per year. Climate, soil conditions, and farming practices affected agricultural productivity and thereby feedstock costs. Ethanol production costs varied dramatically because of the varying costs of feedstock around the world. In the case of biodiesel, the major producer was Europe, with an installed capacity of 1,822 million gallons. The cost of production of biodiesel in Europe (rapeseed was the raw material) was $2.56 per gallon, or $1.80 per equivalent gallon of ethanol. For other countries, the cost of growing the feedstock needed to produce bio fuels was unaffordable, and imports were required.

Bio fuels Producers and Competition Different kinds of players participated in the production of biofuels. There were companies focused only on the production of biofuels, like Brazilian distilleries that produced only ethanol, and small ethanol plants set up by U.S. corn farmers. Another type of player included large agribusiness companies like ADM, Cargill, Bunge, and Louis Dreyfus. Some of these companies, like ADM, were investing and growing aggressively in the production of bio fuels. Others, like Cargill, were more cautious about bio fuel production within this category; more focused players like Cosan were also relevant participants. A third category of producers were big petroleum companies like British Petroleum (BP). As early as 2005, BP held around 10% of the global bio fuels business, purchasing 590 million gallons of ethanol for blending as well as 70 million gallons of biodiesel. Bunge and Bio Fuels: The growth of the ethanol fuel industry in the United States could have important implications for Bunge, even if the firm didnt participate actively in the production of bio-fuels. U.S. ethanol industry has important implications for global agriculture, because increased U.S. corn acreage is likely to come at the expense of domestic soy acreage. Lost U.S. soybean production will be made up by increased soybean production in South America. Brazil represents the perfect place for increased soy production because the country has more than 200 million acres of irrigated land available that are currently idle. But there were some concerns about the extent and durability of government subsidies for bio-fuels, future petroleum prices, industrial policies and new technological developments such as cellulosic ethanol. High petroleum prices had increased the volatility and uncertainty in the agribusiness sector. Crop prices are going to be influenced by food factors and energy factors. The energy industry is going through a period of increasing uncertainty and rapid changes in supply and demand. Uncertainty had also increased because more speculators, like hedge funds, had been injecting money into the system and increasing their exposure to agricultural

commodities. Bunge could potentially play in bio-fuels markets in many different ways. One option was to be more active in sugarcane-based ethanol. They want to emulate a leadership in wheat and soy in Brazil. An investment in the order of $200 million was required to build a relatively large sugar-ethanol industrial unit in Brazil. Palm oil in Asia also represented an interesting bio-fuels opportunity. Palm oil was also playing an increasingly important role in the food business given the push to eliminate trans- fatty acids.

Problems/Questions: 1. Discuss and analyse Bunge`s core business model. 2. What are the impact of high energy prices and bio fuels on the Agro Business industry 3. Please evaluate Bunge`s alternatives to high oil and bio fuels, and recommend if Bunge should move into bio fuels or stay out of it. Give reasons for your answers.

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