The Plan would address seasonal planning and ensure that the Mill and growers work each season s production path.

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1 Cane Supply and Processing Agreement 1. The Tully District has significant potential to grow the area that supplies the mill and sugar per hectare productivity. A whole of district Strategic plan developed by growers and the mill could provide some parameters for agreed season length targets, production area and milling capacity among other things, to ensure that future growth is sustainable and profitable. Question: Would you be prepared to partner in a whole of district common strategic plan with Canegrowers so that both Growers and Tully Sugar have a common agreed direction? COFCO is committed to delivering a long term whole of district strategic plan (plan) (e.g. 10 years or more) in conjunction with the whole community. COFCO has made a binding commitment to work with Canegrowers Tully to deliver this Plan for the sugar industry. COFCO believes that the implementation of a coordinated plan will allow all stakeholders to align their interests for a common goal and provide greater security for the region. It would enable COFCO to invest in a clear district-wide strategy that delivers real benefits to the cane growers, the Tully mill, the wider industry and the local community. COFCO believes that, assuming the Plan identifies the key drivers of growth for the region, it would develop long term enforceable agreements with growers, harvesters and other industry stakeholders that build upon and improve existing arrangements including the existing incentive structures. The Plan would address seasonal planning and ensure that the Mill and growers work together to set each season s production path. COFCO believes that the Plan should co-ordinate the expansion of land under cane and milling capacity. Any acquisition of new cane land should be done in a structured manner, in conjunction with local growers, so as to not artificially increase land values and make it more difficult for younger farmers to enter the market. The Plan would need to complement the existing local council economic plans and work within the constraints of State and Federal legislation. It should recognise the social and economic impact on the region and the industry. COFCO would support the setting up of a Planning Group comprising representativess of the Mill, local growers and other harvesting groups to assist in the delivery of objectives under the Plan (see response to question 4). Additional comments As part of our binding commitments, we will be assessing the financial merits of converting land currently under tree plantation back into cane production and have already undertaken some preliminary work with local growers and business community members to identify potential opportunities for the Mill s involvement. We believe it is important that this activity prioritises private ownership over corporate ownership. In the past month, as part of our commitment, we have met with Federal, State and Local Government representatives to seek their support for the development of a district strategic plan and to ensure that any plan provides for the development of a mechanism to attract the next generation of cane growers. COFCO believes that this Plan is critical to deliver security to all parties in the Tully region and ensures the region will be most effective if it has one goal and speaks with one voice. 1

2 2. The current collective cane supply contract is in place until 2013, and is currently due for renegotiation. Many growers are of the view that their negotiating position has weakened since the dispute resolution mechanism was removed from the Sugar Industry Act. Question: Are you prepared to commit to a form of arbitration as part of the contract renegotiations to ensure an outcome that is to the mutual benefit of Growers and the Mill? COFCO selected Australia as an ideal investment model because of its grower centric focus. It has been COFCO s public position that without the grower s support the Mill is useless and our investment will be worthless. We understand the importance and respect the relationship between the Mill and growers. Based on our understanding of the existing sugarcane supply agreement, COFCO believes that a key element of the agreement is to ensure that both parties rights are enforceable and protected. We strongly support the early renewal and extension of the existing agreements which maintain existing incentives to growers and which enhance the transparency on the commercial pricing and associated risks for both the grower and the Mill. We understand the risk and the potential imbalance associated with individual growers negotiating commercial contracts with the Mill. We support Canegrowers Tully as the representative body of growers and are committed to working with you to deliver a strategic plan for the Tully District (see answer to question 1). In the context of any disagreement, we believe that the best way to resolve the dispute is initially through friendly consultation and consensus. If this approach cannot achieve consensus, we will support the reintroduction of an independent arbitration process that provides transparency and logical determinations between growers and the Mill. COFCO is committed to working with Canegrowers Tully to achieve a practical solution for both individual growers and the collective groups. If our offer is successful, we would establish a working group consisting of the Canegrower s Tully representative, young grower representatives, larger and smaller grower representatives, current mill representatives and COFCO representatives to work through the proposed District Plan and associated underlying agreements including the process of appointing future grower directors to the Board of Tully. It is important to provide investment certainty to all parties. Assuming that the strategic plan will have a longer timeframe than that associated with the current cane supply agreements, COFCO supports an early commencement of the negotiation process that takes into account past performance and future expected industry changes identified in the Plan. It is imperative that ongoing cane supply agreements are aligned to the success drivers of the Mill and the growers to support industry profitability and performance. We propose using the current agreement as a base for ongoing improvement. We strongly support the development of negotiating protocols to govern future discussions which can be used to ensure that the agreements give both parties flexibility should market conditions change, while at the same time provide sufficient security to ensure that our joint commitments are delivered. While these protocols would allow the use of arbitration to ensure both parties reach consensus, we would prefer that this is seen as a last resort by both parties. 2

3 3. Security of cane payment is an issue often raised by Growers. Question: Can you outline the mechanism that would ensure that the Growers share of sugar proceeds is quarantined, particularly in the event that QSL is no longer marketing sugar produced in Tully and protected against the Mills creditor s action to recover outstanding loans? COFCO has made a clear and binding commitment to maintaining current industry arrangements and to improve transparency in grower dealings with both the Mill and QSL. Our understanding is that no Australian milling company currently provides security to growers in relation to sugar proceeds. COFCO is a global Fortune 500 company with a strong financial balance sheet and currently holding in excess of US$4 billion in cash. COFCO s credit risk position is therefore low. COFCO has operated for over 20 years in Australia, through its subsidiary Top Glory (Australia) Pty Ltd and has a strong relationship with a number of major banks. It must be recognised that the imposition of any corporate guarantee, selection credit default insurance or other form of security will impose a cost on both the Mill and growers. Similarly, Mill advance payments from QSL create a potential credit exposure to the Mill which would have a similar exposure to individual growers. These risks need to be managed to the same high standard should QSL no longer market sugar produced by Tully Sugar. We are committed to ensuring that Tully Sugar has defined credit metrics to ensure that its financial position is protected and the risk of default is low. These credit metrics can be agreed as part of the Cane Supply Agreement to ensure their enforceability and to also ensure that when the proposed District Plan is developed, we can plan sufficiently to meet these criteria over the life of the Plan. COFCO therefore, subject to a cost-benefit trade-off, would be willing to consider any balanced alternative that improves security and transparency for growers in respect of their entitlement to sugar proceeds and grower advances. 3

4 4. Growers have a view that there are aspects of the current contract that require more grower input to the decision making. Question: Are you prepared to commit to include mechanisms in the supply contract that provide growers with the ability to be a part of the management and planning of the season? COFCO understands that a positive and productive relationship between growers and the Mill is critical for the future success of both parties. COFCO is committed to delivering a long term Plan for the Tully region (as detailed in our answer to Question 1). In order to ensure a sensible investment plan and an effective annual production cycle, it is important that growers are actively engaged in the planning process. COFCO s position is that we intend to work with Canegrowers Tully to establish a seasonal planning group to facilitate an efficient delivery of farm to production process. COFCO sees significant value in having a seasonal planning group. Provided the underlying agreements with growers, harvesters and associated parties are based on common performance drivers (such as sugar quality, timeliness etc), the planning group will be tasked to ensure that all growers, regardless of size, have equitable access to the services and support of the Mill during the entire season. This group should meet regularly prior to and throughout the season to ensure the efficient operation of crop forecasting, harvesting and delivery to the mill. COFCO is committed to appointing three grower representatives to the Board of Tully Sugar Limited. The appointment of these grower directors will involve consultation with both Canegrowers Tully as well as individual growers in the district. These grower directors will provide practical guidance and direct influence over the operation of the mill at a strategic level. As demonstrated by COFCO over the past six weeks, we are keen to learn and adopt this input both for the future of the Mill as well as for our global business. 4

5 Industry R.D and E 5. Tully Sugar Limited makes contributions to research and extension organisations, Tully Cane Productivity Services Ltd and BSES match grower funding contributions. It also subscribes to a local Industry joint Service Level Agreement in conjunction with Tully Canegrowers which forms the basis of the BSES work plan in Tully. Question: What is your intention in relation to future RD and E? COFCO is committed to maintaining the Mill s Research and Development expenditure and we are committed to actively participating alongside other Mill owners in the ongoing programs through the existing industry research bodies. COFCO is very supportive of maintaining the local research assets to improve local responsiveness and is committed to maintaining and improving R&D, particularly in relation to new cane varieties or downstream value added products. COFCO intends to establish a local training facility that can link our internal R&D capability with that of the existing industry bodies and the State Government. We would also support any review that resulted in improving the value and efficiency of research and development to the overall benefit of the Australian Sugar Industry. We would be keen to explore with the Australian Sugar Alliance, how COFCO could partner with other associations including Canegrowers, Australian Cane Farmers Association and QSL to play a more active role for the benefit of the entire industry. COFCO believes that a key focus for any industry will seek to generate productivity and yield improvements which could reduce growth pressure on land area under cane, yet deliver real value to all. COFCO believes that ensuring Tully Sugar headquarters remains in Tully and making Tully the centre of its operations for sugar in Australia, the region has a stronger argument to retain and grow its local research capabilities and assets. 5

6 Sugar Marketing 6. Tully Sugar Limited has an agreement to supply sugar to QSL and the Canegrowers Collective Cane Supply agreement refers to a cane payment based on QSL seasonal pricing pool. The Collective Cane Supply contract also determines that an alternate pricing pool can be determined by agreement with Tully Canegrowers in specific circumstances. Growers have a particular interest in transparency of contracts that a Mill owner may enter into with a Marketer that can impact on the sugar price in the supply contract. Question: What are your intentions in relation to sugar marketing in the future, transparency of pricing and sharing of premiums associated with sales? Along with any effects or undisclosed contacts between the Mill and Marketer. We recognise that the existing sugar marketing and pricing system in Queensland is the result of a long-term evolutionary process and has played an important role in the stability and growth of the Australian sugar industry, the benefit of which is fully recognised by COFCO as a long standing and satisfied customer of Queensland s sugar industry. Should our bid for Tully be successful, we have committed that Tully will continue to operate as an autonomous business group with the mandate to grow and expand its footprint in the sugar industry. The Board of Tully Sugar will be primarily be composed of local cane growers and independent directors, who will continue to be responsible for dealing with the raw sugar supply agreement with QSL. COFCO, through its nominated board representatives, will work in partnership with the board of Tully Sugar on strategic issues including the existing and future raw sugar marketing arrangements with QSL. We also recognise the fact that for the 2010 season, QSL s performance has not been well received and that confidence in QSL s raw sugar pricing management has fallen as a result. Nevertheless, we still believe that there are benefits to the Australian industry of the single voluntary marketing desk from a buyer s, Mill owner and individual grower perspective. We are of course open to improving these arrangements and can bring our significant experience in international trade and in dealing with other groups such as Bunge, Louis Dreyfus and CBH to improve the offer to both Tully Sugar and the growers. In addition, we also recognise that QSL s range of services extends beyond the provision of raw sugar pricing and marketing, to include responsibility for managing the industry s entire logistics platform. COFCO has provided binding commitments to maintain the current industry arrangements and are open to dialog with Canegrowers Tully and growers to improving the current framework. COFCO is committed to ensuring the growers receive a fair share of premiums associated with raw sugar sales. Further, COFCO notes that under the current Raw Sugar Supply Agreements, Tully Sugar (and its growers) have options to use alternative pricing providers and welcomes the opportunity to work with you to enhance the price offerings to Tully growers. It is important to reiterate that we have no plans to change anything associated with current industry practice and will continue to work with the Canegrowers Tully in ensuring long term prosperity for growers in the Tully region. Any changes to the current arrangements should only be made when there is a net benefit to both the Mill and its growers. Should the Board of Tully Sugar or the local Canegrowers Tully suggest changes to this framework to improve the transparency, these will be supported by COFCO. This includes the introduction of an independent audit or review process to provide the growers with additional transparency and greater confidence in the cane payment system. We would reiterate our position that any changes to the current arrangements should only be made when there is a clear net benefit to both the Mill and its growers. To ensure this outcome is achieved, we are willing to enter into a memorandum of understanding with Canegrowers Tully to ensure that the region speaks with one voice in relation to improving and/or materially changing the marketing and sales arrangements. 6