What’s the plan? PAT JOYCE, CEO/CFO

Disclaimer The information contained in this presentation is

intended solely for informational purposes only. Any opinions contained in this presentation are those of the presenter and not those of the Kerber Companies. The information is intended to be reliable but in no way guaranteed. The information presented is hypothetical or simulated and has inherent limitations. No representation is being made that the reader of this information will or is likely to achieve profits or losses similar to what is presented.

IF ASKED, “HOW DO YOU MANAGE RISK FOR YOUR BUSINESS?” - WHAT IS YOUR RESPONSE?

•DO YOU BELIEVE THERE IS A NEED TO MANAGE RISK?

•DO YOU HAVE A CLEAR RESPONSE?

•DO YOU HAVE A DOCUMENTED PLAN SUMMARIZING HOW A STRATEGY IS DESIGNED AND EXECUTED?

•DOES YOUR PLAN PROVIDE FOR REPORTING NEEDS?

•DOES YOUR PLAN PROVIDE A PLATFORM OF ACCOUNTABILITY?

•COULD YOU FORWARD A COPY OF YOUR PLAN (IF YOU WERE SO INCLINED TO SHARE)?

Opening Comments:

Overview of discussion

• What is risk management?

• Is risk management essential?

• “I am ready to define a plan, but…”

• How do I get started? …a brief example.

• Execution: science or art?

• Summarizing “Elements of Change”

• Related risk considerations

Risk Management: What is it?

“…the identification, assessment, and

prioritization of risks followed by coordinated

and economical application of resources to

minimize, monitor, and control the probability

and/or impact of unfortunate events or to

maximize the realization of opportunities.” Wikipedia

Wikipedia goes on to say…

• “Methods, definitions and goals vary widely…”

• “The strategies to manage risk include

transferring the risk to another party, avoiding

the risk, reducing the negative effect of the risk,

and accepting some or all of the consequences

of a particular risk.”

…please go on, Wikipedia.

“Certain aspects of many of the risk management

standards have come under criticism for having

no measurable improvement on risk even

though the confidence in estimates and

decisions increase.“

An interesting statement to find in Wikipedia – a profound statement

relative to the dilemma when establishing a plan.

Volatility

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$20

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$120

Lean Hog Market $-

$1

$2

$3

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$9

Corn Market

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$50

$100

$150

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$250

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1/1

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986

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988

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Soybean Meal Market

If you study futurists, 90% of the time

they are wrong…

At the end of the day, the market will win.

Is managing risk essential?

Managing risk is essential! • Volatility over the past 5 years has increased to

unprecedented levels. Overriding factors: – Domestic and foreign political policy

– Domestic and foreign economic policy

– Changing global supply and demand balance

– Regional weather and natural occurrences affecting supply and logistics

• The equity and working capital necessary to operate the same volume of business has nearly doubled.

• MORE IS AT STAKE!: greater potential for profit, greater risk of substantial loss

There is more at stake than your

equity. It goes beyond the assets…

• Owners: emotional connection to a business

that has been built for years.

• Employees: livelihood, expectations that their

daily efforts contribute to a successful, ongoing

business.

• Lenders/Investors: trust and credibility

Why does the emotion of risk management

trump the other emotions tied to our

business?

The notion of emotion.

• Risk management should exist to take emotion

out of the equation and allow leadership to

focus on people, operations, vision, re-

investment, etc.

When do good decisions get made?

…when acting with confidence?

…when reacting to fear?

Margin Management

• Margin: “a measure of profitability”

• Risk management, if used to manage margin in

a proactive and disciplined manner, can reduce

the emotional investment tied to risk.

• Emotion is reactive…

“I am ready…but”

Top reasons a plan is not implemented:

1. Conviction that the right plan has been formulated.

2. “We are in uncharted territory.”

3. The desired profitability doesn’t exist (“greed”).

4. Herd mentality (what is everybody else doing?).

5. Financial limitations.

6. Not ready for accountability.

7. Not comfortable with tools to manage risk: futures

contracts, options, forward pricing, etc.

8. Not comfortable managing margin that far out in

advance.

Starting a plan… 1. Define margin.

– LH – Corn – SBM = Margin

– LH – Corn – SBM – Other Growing Costs = Margin

NOTE: the market, in general, does not care about your other variable or fixed costs. You may choose to include them for reference purposes.

2. Study history. – Evaluate margin opportunities for specific periods

of time.

– Reconcile how history has performed to your expectations. Be realistic.

Starting a plan… (Cont.) 3. Test a plan against history

– Run scenarios for entry point

• The entry point is key to understanding how conservative or aggressive you may want to be

– A conservative plan will have a higher success rate at limiting substantial loss, but reduces potential for larger gains

– An aggressive plan will allow for more profit when available, but will also increase the risk of substantial loss when markets do not allow a minimum margin if the entry point is too high.

– Run scenarios for incremental margin targets

• The incremental target is the amount of margin you desire to trigger execution beyond your entry point.

• Considerations to selecting incremental targets should be consistent with the desired outcome

– Conservative: lower risk of loss

– Aggressive: allow opportunity for more profit

$(1.19) $(0.57) $(0.48) $0.40 $0.90 $1.07 $1.14 $0.26 $0.92 $0.73 $0.33 $0.32 $(1.91) $(2.85) $(3.23)

$(5.40)

$(30)

$(20)

$(10)

$-

$10

$20

$30

$100 $101 $102 $103 $104 $105 $106 $107 $108 $109 $110 $111 $112 $113 $114 $115

2011 2010 2009 2008 2007 2006 2005 Average

Entry Point Scenarios

Studying a specific plan…

DEC lean hog period: Oct.15-Dec.15

For the example above, margin was defined as lean hog price less corn/sbm costs for each year (on a wean-to-finish basis).

Therefore, each entry point represents a starting point of a specific plan. Although $105-$106 entry points resulted in the highest

average, $108 is used for this study as it is performed very well and is more aggressive. Incremental targets were established at

every $2.50 over the entry point requiring an additional 20% of coverage at each target until 100% covered.

Estimated Profit / Head

…more data from the study

Averages: 1YR 2YR 3YR 4YR 5YR 6YR 7YR

Crush $ (0.11) $ (11.66) $ (16.92) $ (19.25) $ (22.09) $ (20.15) $ (16.57)

Plan Results $ 4.62 $ 0.27 $ 6.97 $ (1.33) $ 0.08 $ 0.02 $ 0.92

Plan vs. Crush $ 4.73 $ 11.93 $ 23.89 $ 17.92 $ 22.16 $ 20.17 $ 17.49

To review: •Calculated lean hog (LH) revenue for each of the last 7 years for the DEC lean hog period.

•Calculated corn and sbm (C/SBM) costs based on today’s inclusions in the diet and applied to

each of the last 7 years’ markets for the same period (i.e. DEC).

•LH – C/SBM = Crush (or Margin)

•Subtracted all other costs (other feed costs, pig cost, variable and fixed costs) to summarize on a

“per head” basis (for reference purposes only).

NOTE: utilizing today’s non-corn/sbm grow-out costs vs. prior year crush may exaggerate prior

losses actually realized if today’s costs are higher (i.e. CWG at $0.53/lb today vs. under $0.30/lb

historically); however, applying the plan design to the same cost structure illustrates how effective

the plan would have been using today’s cost structure.

Starting a plan… (Cont.)

4. Define plan.

– Approve margin targets

• Finalize an entry point and incremental targets

• In addition to the example, entry points can also be

defined based on:

– Percentile of margin vs. history

– Profit level

– Return on Investment

Starting a plan… (Cont.)

5. Execute Plan

– Utilize tools to track margin for the specific

period(s) daily.

– Execute strategy to secure desired quantities and

prices of inputs and output.

LH – C/SBM

Margin/HD Target %

Tier 1 $ 108.20 20%

Tier 2 $ 110.70 20%

Tier 3 $ 113.20 20%

Tier 4 $ 115.70 20%

Tier 5 $ 118.20 20%

Planned 100%

NOTE: If the DEC market

provides for greater than $118 of

margin, then the plan would have

achieved a minimum of a $113

average.

Crush (LH-C/SBM): $113

Pig and all other costs $105

Max. Net Profit $ 8

Executing the plan…

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

$60.00

$70.00

$80.00

$90.00

$100.00

$110.00

$120.00

$130.00

Targ

et

% (

Pla

n)

LH

– C

/SB

M C

rush

Market & Plan Summary

LHCS Crush Cum Target %

Executing the plan…

$100.00

$105.00

$110.00

$115.00

$120.00

$125.00

$130.00

$135.00

$140.00

$145.00

$150.00

$155.00

$160.00

$165.00

$170.00

$175.00

$180.00

$185.00

$190.00

6/15/2010 7/27/2010 9/7/2010 10/19/2010 11/30/2010 1/11/2011 2/22/2011 4/5/2011 5/17/2011

Lean Hogs Plan vs. Actual

LH Plan LH Actual LH DEC.11

Executing the plan…

$3.00

$3.20

$3.40

$3.60

$3.80

$4.00

$4.20

$4.40

$4.60

$4.80

$5.00

$5.20

$5.40

$5.60

$5.80

$6.00

$6.20

$6.40

$6.60

$6.80

$7.00

$7.20

$7.40

6/15/2010 7/27/2010 9/7/2010 10/19/2010 11/30/2010 1/11/2011 2/22/2011 4/5/2011 5/17/2011

Corn Plan vs. Actual

Corn Plan Corn Actual

Executing the plan…

$220.00

$230.00

$240.00

$250.00

$260.00

$270.00

$280.00

$290.00

$300.00

$310.00

$320.00

$330.00

$340.00

$350.00

$360.00

$370.00

$380.00

6/15/2010 7/27/2010 9/7/2010 10/19/2010 11/30/2010 1/11/2011 2/22/2011 4/5/2011 5/17/2011

SBM Plan vs. Actual

SBM Plan SBM Actual

6. Monitoring the Plan…

Performance: Per Head Est. Total

Plan vs. Crush $ 3.88 $ 31,026

Actual vs. Crush $ (1.70) $ (13,608)

Actual vs. Plan $ (5.58) $ (44,634)

Breakdown: Plan vs. Crush Act. Vs. Crush Act. Vs. Plan

Lean Hogs $ (1.46) $ (1.70) $ (0.24)

Corn $ 5.13 $ - $ (5.13)

SBM $ 0.20 $ - $ (0.20)

TOTAL $ 3.88 $ (1.70) $ (5.58)

Measures the

performance of the plan

vs. the market and vs.

what got executed.

Shows the components

of the managed margin.

Calculated gross impact on

number of head expected to

market (e.g. 8000hd).

Execution: Science or Art? • In an industry so dominated by science and

information, is it feasible to think that managing risk should be an “art”? How do you hold “art” accountable?

• The journey to accountability for risk management – Uncertainty only of timing for each organization

– Not direction

• For some, this line of thinking changes the business model: – a redirection of working capital to risk management,

– a redirection of resources and technology advancements to administrate business

A fundamental shift in

how risk is managed.

Element of Change Today Future

Price/Margin

Management

“Talk margin”, but do not

necessarily “walk

margin”.

Defined, disciplined,

information-based,

aligned with

organizational objectives

Basis Risk Management What is that? Value-Added Strategies

Reporting Accounting needs only Daily position and

monitoring

Forecasting/Projecting Fragmented / Time

Intense

Efficient / Real-time

Accountability Difficult to define

expectations / evaluate

decisions

Review and document

variances from plan and

results of decisions.

Execution Reactive Proactive

Don’t forget…

• Are you planning for physical procurement of inputs

if you are solely managing price risk with paper?

• Consider how much of your system’s production

you are comfortable exposing to risk management.

– Does your flow have the potential to flex?

– Are there concentration risks that could impact a high %

of your production?

• Basis risk can be managed; however, if you are not

disciplined in managing price risk, you may not be

ready to manage basis risk.

Don’t forget…

• Disease and global threats are playing a greater

role not only in your profitability, but also the value

of your existing inventory and assets.

• Your lender needs to understand your plan. A well

executed plan may require considerable capital.

Your lender is a supporter of protecting collateral

value.

• Someday you will want to (or need to) transition

risk management responsibilities. Will you cross

your fingers and say “good luck”, or will you lay a

foundation of disciplined performance?

Parting thoughts: • You are responsible to someone for your performance in this area.

It may be your CFO or CEO, a committee, a Board, or your family.

• There is greater business risk in retaining the status quo than moving forward with a disciplined management risk plan.

• It’s not about what outcomes need to change, it is more about what behaviors need to change or be managed.

• Guidelines, plans, or policy aren’t necessary for the broker or trader. They are necessary for the CEO, CFO, and the system to allow planning and proper allocation of time and resources.

• Imagine your answer to the question, “Do you have a plan?” Following is an example response.

STAKE HOLDER:

Do you have a plan? (Cont.) •YES!!!

•OUR RISK MANAGEMENT PLAN OPERATES ON A DISCIPLINED APPROACH TO MANAGE THE QUANTITIES AND PRICE OF INPUTS RELATIVE TO SELLING OPPORTUNITIES IN A WELL-BALANCED, MARGIN FRAMEWORK. QUANTITY AND PRICE TARGETS ARE SET TO ACHIEVE DESIRED RESULTS AS CALCULATED USING OUR KNOWN COST STRUCTURE AS COMPARED TO MARGINS FUTURE MARKETS ARE ALLOWING. ENTRY POINTS AND TARGETS ARE SET BASED ON HISTORICAL AVERAGES FOR DEFINED TIME PERIODS IN AN ATTEMPT TO OPTIMIZE MARGIN AND MINIMIZE RISK OF LOSS. WE MANAGE PRICE/MARGIN RISK FIRST – THEN WE WORK TO ADD VALUE BY MANAGING BASIS RISK.

•OUR PLAN IS MANAGED AGGRESSIVELY THROUGH DAILY REPORTING OF CURRENT POSITIONS VERSES THE PLAN. DEVIATIONS FROM THE PLAN ARE ALLOWED, HOWEVER, SUCH DEVIATIONS MUST BE DOCUMENTED AND A NEW PLAN ESTABLISHED. WE ALLOW FOR DEVIATIONS AS FACTORS SOMETIMES EXIST THAT MAY NOT BE PRESENT HISTORICALLY. HOWEVER, WE ALWAYS TRACK THE PERFORMANCE OF OUR PLAN DEVIATIONS VS. THE ORIGINAL PLAN.

STAKE HOLDER:

Do you have a plan? (Cont.) •THE PLAN IS DESIGNED BY A TEAM OF OUR FINANCIAL AND OPERATIONAL

MANAGERS AND IS APPROVED BY THE CEO AND BOARD IN AN EFFORT TO

MEET ORGANIZATIONAL GOALS. THE OFFICER OF OUR COMPANY THAT IS

DESIGNATED THE RESPONSIBILITY OF MANAGING RISK IS EVALUATED ON

ACHIEVING THE PLAN’S RESULTS AS MARKET OPPORTUNITIES ALIGN WITH

PLAN TARGETS.

•BECAUSE THE PLAN IS CLEARLY DEFINED AND MONITORED, THE EXECUTION

OF THE PLAN IS EASILY ABLE TO BE DELEGATED OR TRANSITIONED AS

NECESSARY TO PROFESSIONALS INTERNALLY OR EXTERNALLY.

•WE HAVE INTEGRATED THE TRANSACTIONS CREATED THROUGH OUR RISK

MANAGEMENT PLAN WITH OUR ACCOUNTING AND FORECASTING SYSTEMS.

THIS IS AN INTEGRAL STEP TO BEING ABLE TO EVALUATE THE IMPACT OF

VOLATILE MARKETS ON OUR BUSINESS, FORECAST EFFICIENTLY AND

ACCURATELY, AND PLAN AND COMMUNICATE EFFECTIVELY WITH INTERNAL

AND EXTERNAL STAKEHOLDERS IN A TIMELY MANNER.