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S. K. Patil and Associates, Inc.

STRATEGIC REVIEW OF GLOBAL CORN STARCH INDUSTRY & MARKETS - STARCH DERIVATIVES, SWEETENERS AND CO-PRODUCTS - August 2010

By: Sakharam K. Patil, Ph.D. August 2010

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Disclaimer: Although the information and data contained in this report have been produced and processed from sources (including the originator of this report) believed to be reliable, no warranty, expressed or implied, is made regarding accuracy, completeness, legality or usefulness of any information contained herein

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Table of Contents

I. EXECUTIVE SUMMARY......................................................................................................... .................................5 II. BRIEF OVERVIEWOF CORN AND WET MILLING PROCESS......................................................................7 A. CORN ............................................................................................................................. ................................................7 B. OVERVIEW OF CORNWETMILLING PROCESS...............................................................................................................9 III. MARKETS...............................................................................................................................................................13 A. FOOD & BEVERAGEMARKET PROFILE......................................................................................................................................... 13 B. STARCH PRODUCTS SITUATION AND FORECAST.......................................................................................................15 C. SUPPLY AND DEMAND SITUATION ............................................................................................................................22 D. POTENTIAL CHANGES ANDMARKET DRIVERS..........................................................................................................23 E. NATIVE AND MODIFIED STARCH PRODUCTS OVERVIEW .........................................................................................24 F. OVERVIEW OF MODIFIED STARCHES .........................................................................................................................27 G. MODIFIED STARCHMARKETS ...................................................................................................................................36 IV. SWEETENERS AND MALTODEXTRINS ....................................................................................................,...46 A. SWEETENERS............................................................................................................................. .................................46 B. CORN SYRUPS ­ HFCS (HIGH FRUCTOSE CORN SYRUP) AND OTHER SYRUPS .......................................................46 C. MALTODEXTRINS ......................................................................................................................................................54 V. ETHANOL AND CO - PRODUCTS BRIEF REVIEW.......................................................................................59 A. ETHANOL ...................................................................................................................................................................59 B. GROWTH OF FUEL ETHANOL AND ITS EFFECT ON THE INDUSTRY ..........................................................................63 C. CO-PRODUCTS: ..........................................................................................................................................................64 D. ISSUES AND CHALLENGES ........................................................................................................................................67 VI. COMPANIES IN NORTH AMERICA ...............................................................................................................69 A. COMPANIES AND PRODUCTS ....................................................................................................................................69 B. CONSOLIDATION IN THE STARCH INDUSTRY ...........................................................................................................70 C. PRODUCTSMANUFACTURED BY CORN REFINERS ...................................................................................................70 D. INDUSTRY CHOICES TO SUPPLY STARCH FOR POTENTIAL LARGE NEW APPLICATION.......................................... 70 F. ANALYSIS OF STRENGTHS ANDWEAKNESSES OF PLAYERS (SWOT)......................................................................74 G. PLAYERS - OTHER DIFFERENCES..............................................................................................................................78 H. INVESTMENT RISK AND DECISIONS..........................................................................................................................79 I. R & D INVESTMENTS..................................................................................................................................................80 VII. COSTS................................................................................................................... .................................................83 A. PRODUCT PROFITABILITY..........................................................................................................................................83 B. COST OF PRODUCTION ..............................................................................................................................................84 C. MARGINS AND OVERHEAD........................................................................................................................................85 D. MANUFACTURINGMETRICS......................................................................................................................................86 E. PRICING INFORMATION .............................................................................................................................................87 F. SHIPPING AND TRANSPORTATION.............................................................................................................................88 G. GOVERNMENT POLICIES AND ITS EFFECT ON PRICE ...............................................................................................88 H. PROCESSING ASSETS AND IMPLICATIONS ON THEMANUFACTURING: ...................................................................91 VIII. INDUSTRY CAPACITY.... ..............................................................................................................................93 A. CAPACITY UTILIZATION ISSUES ...............................................................................................................................93 B. EFFECT OF CAPACITY UTILIZATION ON COSTS........................................................................................................93

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C. NEW POTENTIAL CAPACITY ......................................................................................................................................93 D. CO-PRODUCTS MANAGEMENT ..................................................................................................................................94 E. INCREMENTAL CAPACITY ..........................................................................................................................................95 F. SMALLER INCREMENTS ..............................................................................................................................................96 G. CAPITAL ASSOCIATED WITH THE INCREMENTAL BUSHEL PROCESSED ..................................................................96 H. CAPACITY BY PLAYERS IN THE US ...........................................................................................................................96 I. HISTORICAL PERSPECTIVE OF CAPACITY INCREASE .................................................................................................99 J. STARCH AND ETHANOL ASSETS INTERCHANGEABILITY...........................................................................................99 IX. FUTURE TRENDS ........................................................................................................... ...................................103 A. TECHNOLOGICAL DEVELOPMENTS..........................................................................................................................103 B. BUSINESS, TECHNOLOGY TRENDS AND ISSUES THAT WILL IMPACT CORN PROCESSORS.................................. 104 C. STARCH PRODUCTS AND TECHNOLOGY DEVELOPMENTS FEW EXAMPLES: ........................................................ 105 RESISTANT STARCH - INGREDIENT SITUATION..........................................................................................107 RASISTANT STARCH - PROCESSING ASPECTS...............................................................................................110 COMMERCIAL RESISTANT STARCHES ..........................................................................................................................110 I. BIOTECHNOLOGY (MODIFIED STARCHES, EFFECT ON YIELD AND PRODUCTION COSTS) ........................................113 J. IMPROVEMENT OF STARCH YIELD AND EXTRACTION:..............................................................................................114 K. PATENT SCAN AND NEW OPPORTUNITIES ..............................................................................................................115 L. TECHNOLOGY TRANSFER.............................................................................................................................. ...........115 M. MARKET DEVELOPMENT OF CO-PRODUCTS ...........................................................................................................116 J. GMO TECHNOLOGY EFFECT ON THE IMPORT/EXPORT ............................................................................................119 X. GLOBAL ISSUES, POLICIES AND PLANT LOCATIONS ............................................................................121 A. MEXICO EXPANSION PLANS AND BENEFITS OF NAFTA .......................................................................................121 B. STARCHMARKETS: CORN (MAIZE), POTATO, WHEAT AND TAPIOCA ....................................................................121 C. GLOBAL LIST OF STARCH MANUFACTURERS...........................................................................................................124 D. GOVERNMENT POLICIES AND POTENTIAL EFFECT ON THE PRICES ........................................................................130 E. DUTIES AND SUBSIDIES............................................................................................................................................133 F. OPPORTUNITIES AND POTENTIAL BENEFITS OFMANUFACTURING LOCATION DUE TO DUTIES, SUBSIDIES AND INVESTMENT INCENTIVES............................................................................................................................................137 XI. FUTURE OUTLOOK & SUMMARY..................................................................................................... ...........139 LIST OF REFERENCES.................................................................................................................142 LIST OF FIGURES ANT TABLES................................................................................................143 APPENDIX I INDUSTRY PRODUCTS........................................................................................146 APPENDIX II US AND EU ADDITIONAL PLANTS LIST................................................................148 APPENDIX III ASIA PLANTS LIST............................................................................................162

ABSTRACT & SAMPLE PAGES NEXT

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Strategic Review of Global Corn Starch Industry & Markets - Starch Derivatives, Sweeteners and Co-Products

ABSTRACT

This report is a comprehensive document with detail information and industry data along with description of how industry or plants are managed. Report includes detail review of several areas that cannot be found in other publications. It is also a very informative representation of production, markets, products, costs, capacity and the players in the US. The data sets of sweeteners, starch derivatives, co-products and the impact of trade regulations are provided. None of this is available in any currently marketed reports, as we have attempted to compile in this report. In the last section of report is a complete list of plants of small to large global players of this industry. We provide deep insights into how this industry operates its costs, products and markets; an insider's view with almost 100+ yrs. of experience of our associates. Our expertise in technology and marketing includes several aspects of this industry, several assignments in the operations, research and development; marketing and technology transfer in the U.S. and Europe. A great tool for current and future processors, suppliers, customers and an excellent resource to train new professionals in various functional departments within an organization or those who desire to enter this industry. Starch processing and refining plants are highly sophisticated bioprocess operations that produce range of products (listed in Corn Annual) such as citric acids, lactic acids, lysine, threoninie, xanthan gums, erythritol, sorbitol, xylitol, mannitol, hydrogenated starch hydrolyzates, maltodextrins, glucose hydrolyzates and the most recent nutritional products Sucromalt (more on this later). DuPont's 1, 3 propendiol (PDO) a monomer for 3 GT polymer an alternative to synthetic fiber and Cargill Dow's polylactate for biodegradable film to replace plastic film are other examples that can replace petroleum based products, there will be many more to come such as integration of wet and dry milling could be one of the major changes. Further merging of these technologies with petroleum refining model will enhance the contribution of this bioprocessing industry to renewable fuels. The total utilization of dried starch in the world in 2009 per our estimate for 2010 is 68 million tons with annualized global growth of 2-3%. We previously estimated this would reach 70 million tons by 2010; we missed this mark by 2 million tons manly due to slowdown in US and EU. China had the biggest growth with 17.5 million tons production and has surpassed US with 13 million tons for dry starch and fermentation; not including sweeteners and alcohol. The US , EU and Japan has lower growth of ~2%/year, EU at ~2%, and Japan at 1-2%; in China and India the growth is strong as expected to be 4-5 % the rest of the world grows at 3-4%. Both the US and EU will have to compete for this growth in China, India, other regions. There are only few starch processors left in the US and even ADM and Cargill are positioning themselves in EU and Asia. National Starch remains a dominant specialty player in the US. Cassava in SE and S Asia and Central America will become more dominant starch commodity as more production technology is deployed. Cassava is 7.5 % of world starch. This figure will have been rising faster as China, India, South America and SE Asia continue to improve their production economics. Above values do not include corn utilization for dry corn ethanol which more than double of corn used for corn wet milled products derivatives. Corn processing industry has undergone many evolutionary changes and is currently under tremendous pressure to maintain/improve margins. The industry has experienced consolidation in the past few years and this trend will continue to restructure and streamline scale and

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efficiencies. Starch processing industry is in unique position in this global economy to fulfill the need as we move forward. This year, 2010; CPI agreed to acquire National's Food portfolio and this is now approved by FTC. This will greatly enhance CPI's specialty starch portfolio and create synergies in many other areas. Recent demand on starch from ethanol has greatly enhanced the margins including HFCS. The HFCS demands have flattened due to concerns of obesity and glycemic trends. Corn ethanol production and co-products increased dramatically from 2003 to 09. Modified starches and the derivatives by using bioprocessing present excellent opportunities to grow value added high margin specialties. This new starch processing report has several improvements, new information, insights since we are now in a global economy. Several developed economies globally remain in recession and as the recession ends there will be great opportunities for starch processing industry especially to fulfill the demands of new developing economies in Asia, South America and Africa. Brazil, Russia, India and China and other developing economies are current growth engines. This executive summary is an introduction to this report and not compilation of sections of each chapter as presented in other similar reports, we do not want to duplicate the contents of chapters. This report remains a comprehensive leading document that has industry data along with description of how industry or plants are managed. It provides in-depth review of several areas that cannot be found in other publications. There are many details of production, markets, products, costs, capacity, investment, costs, players in the US and data sets of sweeteners, starch derivatives, co-products including the impact of trade regulations. None of this is available in a reports format as we have attempted to compile in this report. In the last section of report is a complete list of global players of this industry. This enhance August 2010 revision of our report presents analysis and presentation of data along with insights into several aspects of this industry based on experience of my associates and I, which included several assignments in the operations, research and development; marketing and technology transfer in the U.S. and Europe. This is a comprehensive report with lot of data and insights in to how this industry operates and how one can position in the changing global markets. This report has also served as an excellent tool for industries that do business with corn processing industry, a training tool for operations, marketing, purchasing and R & D groups. One of our separate detail report focused on Global Modified starches 09 can be excellent source to compliment this main report. .

Sakharam K Patil, Ph. D.

S. K. Patil & Associates

August 2010

III.

Markets

A. Food & Beverage Market Profile

USDA estimates total size of Processed Food Markets in the US at ~550 billion dollars; restaurant and other channels is another ~ 500 billion; of this export accounts for approximately ~70 billion dollars. The structure of food industry has changed significantly since the mid - 90's. Concentration has increased sharply in some areas most notably in major commodity processing industries such as meatpacking and beverages. Many branded consumer products are driven by desire to improve health & nutrition.

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According to nutrition Business Journal the $135 billion-plus global healthy-foods revolution is well and truly underway. In 2008 the California-based journal noted 7.4 per cent growth in healthy foods compared to 2.4 per cent for the rest of the global food industry. In this climate, food and beverage manufacturers -- both large and small -- are working more closely than ever with ingredients suppliers to bring the next wave of healthy products to market. New product introduction ­ focused on convenience, speed of preparation and health/nutrition along with foods for specific nutrition segments such managing diabetes are main drivers to develop the products. This has created new opportunities for starch derivatives The organic & natural food category continues to grow at faster pace albeit fanatic 20 % growth of past several years, however this has slowed to ~ 7 % in 2008 mainly due to the economic crises that started in 2008. Food processors and retailers are scrambling to fill the gap. Strong performance of Wal-Mart in the declining economy is evident of this change. Trends toward greater levels of pre-packaging, especially the growth of single-serve portions/packages. Continued growth of global GDP and population growth with higher income creates rising demand and opportunity for US pre-packaged foods. Higher incomes drive the growth of processed foods, meats, etc. Strong growth of natural, organic and functional food will continue Finally but not the last the health/nutrition driven products, the bulk commodities such as flour, whole grain, starch derivatives with specific nutritional attributes for diabetes, digestibility, slow/controlled energy for mainstream staples such a bread, soups ,etc will drive the demand for commodities ingredients worldwide.

Table 34 SWOT of US corn processors

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Strengths Cargill Joint ventures with: Dow-PLA, DegussaLysine, Wacker, Mitsubishi, Hofffman LaRoche-Vit.E, Monsanto-Feed and Food Ingredients, St. Lawrence Starch (Canada)membrane technology, Hayashibra-trehelose sweetener Major push in H/N ingredients, sucromalt, Isomaltulose, erythritol, RS, Stevia natural non caloric sweetener, beta glucan and other Recent entry into ethanol and bio-processing provides additional diversity, economy of scale and platforms to market new products

Weaknesses

Some issues with their corporate platform and business units Perceived commodity company

Managing very large company and to transition in to specialties is difficult

Business units issues

VII.

COSTS

A. Product Profitability

The discussion on profitability of some of these products is provided in this section. Earlier tables 8 and 9, in section III provide the estimated prices for different products. This industry produces a range of products for food and industrial applications. Thousands of food products use corn sweeteners and starch products. This is also true in the case of nonfood industrial products such as paper, paints, adhesives, etc. The functional properties were briefly described in the earlier sections. Most profitable products in the Industry: Table 30 in this section provides the estimate of margins of major categories of food ingredients from corn processing. Following is a list of examples of profitable products in order of their profitability. Figure 14: Modified food starch market share by US starch processors ­ 2008

FIGURE

Table 36 Approximate cost (dollars) estimates per CWT (100 lbs) 2008 Est.

Modified-oxidized or ethylated starch Cost Activity (estimates) Net Corn cost per CWT of finished HFCS 6.27 =(2.85x2.2) 7.69 =(2.85x2.7)

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product

VIII.

A.

Industry Capacity

Capacity Utilization Issues

Capacity by each player is shown in Table 32 under section VII-H, Item 24 where specific question of capacity is addressed. One factor to remember in reviewing the statistics in Table 32 is that certain players are producing ethanol. This data applies to U.S. production only. For 2007, the capacity utilization is estimated to improve to about 88 to 90 % due to combination of factors such as acquisition, restructuring of plants and ethanol growth from corn wet milling operations.

E. Incremental Capacity

The capacity increase starts with the milling process, which is common to all the finishing channels. Any capacity increase in a given product line must balance with what the mills can supply as a starch slurry or raw material and the desired finished product downstream. Following are few scenarios. Steep, mills, separation and washing equipments are added for given capacity. In the finishing channels the reaction tanks, pumps, washing batteries, dryer supply tanks and

IX.

Future Trends

A. Technological Developments

Carbohydrate-based products have the potential to improve the sustainability of natural resources, environmental quality and national security while competing economically to expand the U.S. and world industrial base. Biobased products have a wide range of uses in energy and intermediate chemicals for food, industrial, consumer and pharmaceutical applications. Agriculture crop producing rural areas are well positioned to support regional processing facilities dependent on locally grown crops.

XI.

Future Outlook & Summary

During the last century petroleum-based industrial products gradually replaced bio-based products once made from biological materials. During past almost 100 years the petrochemical business model is built on very efficient conversion of hydrocarbon feed to produce very diver's products for numerous industrial applications. Now, biobased industrial products are beginning to compete with petroleum-derived products that once displaced them. We are now back to a carbohydrate economy where the carbohydrates starch and cellulosics are utilized to produce the material where the petroleum based energy, fine chemicals and the intermediates are starting to replace the fossil material. This progress has been made possible by the wealth of knowledge on the scientific basis for conversion of biomass to sugars and other chemicals, particularly the knowledge of biochemical and fermentation fundamentals and related progress in process technology and agricultural economics.

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Replicating the petrochemical business model will be the hallmark of biorefineries to compete or exploit what has been learned for petroleum refineries. One also has to consider that biorefineries can be a significant threat to petroleum refineries which could lead to conversion or modification of these to biorefineries. New discoveries occurring in microbial, chemical, and genetic engineering research, in particular, could lead to technological advances necessary to reduce the cost of biobased products.

This 165 page report has many more details, data and insights not found in other reports.

Sakharam K. Patil, Ph. D. President S K PATIL AND ASSOCIATES MUNSTER, IN 46321 219-922-1033 [email protected] www.skpatilassociates.com August 2010

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