Land O'Lakes Inc. Annual Report 2002

Land O'Lakes continues to build on its 82-year heritage as a market-driven, farmer-owned enterprise focused on delivering value to members and customers.

In recent years, we have achieved significant growth in pursuit of that goal—moving from a regional cooperative to a national, farmer-owned system with competitive size and scale in key core business segments. We've taken the actions necessary to achieve competitive size and scale in our core Feed and Agronomy businesses; achieve appropriate strategic growth in Seed; and build a national dairy procurement and processing system to support our national brand and marketing system in Dairy Foods.

Our focus shifted somewhat following the strategic Purina Mills acquisition in the fall of 2001, with even greater intensity on translating our increased size and scale into improved financial performance and accelerated debt reduction. As we look to the future, the three fundamental drivers in these efforts will be our commitment to people, our dedication to proactive portfolio management and our passion for performance.

People—Success in today's challenging economic environment depends on having the best people giving their best efforts at all levels of our organization. This is why recent years have seen our leadership team focus on building the organizational culture and operating state necessary to attract, retain and develop a world-class work force. We continue to pursue this goal through a steadfast dedication to Our Values; an unwavering belief in teamwork; an intensified focus on leadership development and succession planning; and a Performance Management System and formalized Leadership Expectations that make individual and team accountabilities clear.

As noted author and business consultant Jim Collins asserts (Good to Great...Why Some Companies Make the Leap and Others Don't), "The old adage 'People are your most important resource' turns out to be wrong. People are not your most important resource. The right people are." Land O'Lakes is committed to having the right people—with the right skills, the right commitment and the right attitude—in the right places.

Proactive Portfolio Management—In today's economic environment, size, scale and the attainment of number-one or number-two market shares are critical elements in business success. Achieving this requires ongoing investment in our system. As we pursue further focused investment, we recognize the importance of continued portfolio management and balance sheet strength to our ability to access capital.

Land O'Lakes continues to focus on channeling our investments into those core businesses which will help us compete, win and deliver value to members and customers—and repositioning under-performing, non-strategic assets which do not meet these standards.

We've already noted the growth Land O'Lakes has achieved as we've built competitive size and scale in our core business portfolio. Today, our members own North America's leading feed company and go to market with two of the most powerful feed brands (LAND O LAKES and Purina). They also own the nation's leading crop inputs marketing organization (the Agriliance joint venture) and the nation's fourth-largest farm seed company and a strong seed brand (CROPLAN GENETICS).

In Dairy Foods, we've achieved significant growth in procurement and processing. However, while we continue to maintain the number-one market share in such core segments as butter, deli cheese and nonfat dry milk, we still have not achieved the size and scale we would like. Long-term, we see a need to grow our successful Dairy Foods Value-Added businesses beyond where we are today.

We also have intensified our efforts to reposition our swine business, scale back international investments and accelerate the restructuring of our Upper Midwest Dairy Foods manufacturing operations. These portfolio-driven efforts continue as priorities for 2003.

Performance—Positive business and financial performance is essential to long-term business success. Historically, cooperatives have faced unique challenges in relation to performance because of our long-standing ties to volatile commodity markets. This past year, in fact, Land O'Lakes overall performance was adversely affected by slumping markets in virtually all of our commodity businesses. That, however, cannot be used as an excuse for not meeting our performance expectations. We remain committed to benchmarking against the very best in our commodity and Value-Added businesses. As we move into 2003, we are dedicated to:

accelerating the resolution of key portfolio and performance issues;
optimizing productivity, reducing costs, and increasing earnings across all our businesses; and
building on the strength and positive performance of our branded and proprietary, Value-Added business segments.

2002 Overview

This past year, Land O'Lakes faced significant performance issues in all of our commodity businesses. Notwithstanding the cyclical nature and dramatic downturn in the commodity markets, our 2002 results were unacceptable (despite our $99 million in net earnings, driven primarily by gains from vitamin price-fixing litigation settlements). Even as we deepen our dedication to improved results in 2003, however, we should recognize that the year saw:

positive performance in our Dairy Foods and Ag Services value-added segments;
further reduction in our debt levels; and
progress on strategic initiatives intended to position our system for future success.

Dairy Foods

The strength and value of the LAND O LAKES brand is reflected in our Dairy Foods results. Overall butter volume (branded and private label) was up and we achieved positive performance and earnings in the Foodservice and Deli segments of our Value-Added business.

We did see significant losses in Dairy Foods Industrial, primarily due to slumping mozzarella, whey and nonfat dry milk markets; ongoing milk supply/processing demand balance issues in the Upper Midwest; and higher than anticipated costs related to the start-up of our new West Coast processing facility (Cheese and Protein International - CPI).

Going forward, we are focusing intensely on resolving Dairy Foods Industrial performance issues, where our priorities include accelerated progress in repositioning our Upper Midwest manufacturing operations and the successful completion of the CPI start-up. Dairy Foods will also continue its focus on bringing the value of the LAND O LAKES brand to new markets and products.

Feed

Despite significant challenges in the livestock/commodity feed markets, 2002 saw Feed produce positive earnings; achieve significant growth in its branded lifestyle feed and proprietary product segments; make significant progress in cost-savings related to the Purina Mills acquisition; and take strategic actions in response to ongoing restructuring in the swine and dairy industries.

Despite these successes and our strong position in Feed, continued consolidation and restructuring in both the livestock and feed industries will require ongoing and increased emphasis on efficiency and productivity. Feed's focus will be on continued cost reductions and increased operating efficiency; improved performance in commodity feeds; and building on the success of our branded and proprietary products.

Swine

Structural changes in the swine industry, coupled with a dramatic slump in hog prices, contributed to unacceptable losses in our swine operations. We are committed to completing the repositioning of our underperforming swine assets in 2003, while we continue to find ways to support independent producers and local cooperatives.

Seed

In 2002, Seed delivered positive earnings, while building the strength of our CROPLAN GENETICS brand. The year saw significant volume growth in CROPLAN GENETICS corn, and we reaffirmed our leadership position in alfalfa genetics and production.

Seed will continue to focus on delivering the very best in seed genetics and traits to our customers and members, growing the strength of the CROPLAN GENETICS brand and contributing to the success of our member-cooperative seed dealers.

Agronomy

Land O'Lakes position in Agronomy is defined by our 50-percent ownership in Agriliance. Like many large-scale organizations, this joint venture, established in January 2000, experienced early growing pains. In 2002, Agriliance made strides in reducing costs and increasing operating efficiency. While we saw continued challenge in the crop nutrients market, Agriliance grew its crop protection product business and increased sales of its own AgriSolutions brand of adjuvants, seed and grain protectants, insecticides and fungicides.

As we look to the future, we remain dedicated to taking further steps to leverage our increased size and scale in Agronomy into improved performance, enhanced service and increased earnings.

2003 and Beyond

Land O'Lakes remains deeply committed to its Vision of being "one of the best food and agricultural companies in the world." We are confident we have the right strategies in place to make progress toward that Vision—in our commitment to people, our dedication to portfolio management, and our passion for performance.