UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549




FORM 20-F




 ̈
            REGISTRATION
      STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE
              SECURITIES
      EXCHANGE ACT OF 1934


OR


x
            ANNUAL
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
              EXCHANGE
      ACT OF 1934


For
the fiscal year ended December 31, 2009


OR


 ̈
            TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
              EXCHANGE
      ACT OF 1934


OR


 ̈
            SHELL
      COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
      SECURITIES
              EXCHANGE
      ACT OF 1934




Date
of event requiring this shell company report ____________


For
the transition period from ____________ to ___________


Commission
File Number:  333-7480




INDUSTRIAS
BACHOCO, S.A.B. DE C.V.


(Exact
name of Registrant as specified in its charter)




Bachoco
Industries


(Translation
of Registrant’s name into English)





The
United Mexican States


(Jurisdiction
of incorporation


or
organization)





Avenida
Tecnológico No. 401


Ciudad
Industrial C.P. 38010


Celaya,
Guanajuato, Mexico.


(Address
of principal executive offices)





Daniel
Salazar Ferrer


Avenida
Tecnológico No. 401


Ciudad
Industrial C.P. 38010


Celaya,
Guanajuato, Mexico


Telephone:  (+011-52-461-618-3555)


Facsimile:  (+011-52-461-611-6502)


Email:  inversionistas@bachoco.net


(Name,
Telephone, E-mail and/or Facsimile number and Address of Company Contact
Person)





Securities
registered or to be registered pursuant to Section 12(b) of the
Act:




Title of each class
                
                Name of each exchange on which
      registeredAmerican
      Depositary Shares, each representing twelve Series B
    Shares.
                
                New
      York Stock Exchange





Securities registered or to be
registered pursuant to Section 12(g) of the
Act:None





Securities for which there is a
reporting obligation pursuant to Section 15(d) of the
Act:None




Indicate
the number of outstanding Shares of each of the issuer’s classes of capital or
common stock as of the close of the period covered by the annual
report:




Series B
Capital Stock: 600,000,000
Shares





Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.




Yes  ̈Nox




If this
report is an annual or transition report, indicate by check mark if the
registrant is not required to file reports
pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934.




Yes xNo ̈





Note:  Checking
the box above will not relieve any registrant required to file reports pursuant
to Section 13 or 15(d) of the Securities Exchange Act of 1934 from
their obligations under those Sections.




Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days:




Yes xNo ̈




Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of
this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such files).




Yes o No  ̈




Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer.  See definition of
“accelerated filer and large accelerated filer” in Rule 12b-2 of the
Exchange Act.  (Check one):




Large
accelerated filer  ̈                                            Accelerated
filer x                                    Non-accelerated
filer ̈




Indicate
by check mark which basis of accounting the registrant has used to prepare the
financial statements included in this filing:




U.S.
      GAAP  ̈
                    International
      Financial Reporting
                    Other
      xStandards
      as issued by the InternationalAccounting
      Standards Board        ̈




If “Other
has been checked in response to the previous question, indicate by check mark
which financial statements item the registrant has elected to
follow:





Item 17   ̈Item 18x




If this
is an annual report, indicate by check mark whether the registrant is a shell
company (as defined in Rule 12b-2 of the Exchange Act).




Yes  ̈No
x




(APPLICABLE ONLY TO
ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE
YEARS)




Indicate
by check mark whether the registrant has filed all documents and reports
required to be filed by Sections 12, 23 or 15(d) of the Securities Exchange
Act of 1934 subsequent to the distribution of securities under a plan confirmed
by the court.




Yes  ̈Noo


ii


TABLE
OF CONTENTS




PagePART
      I
                      
                      
                      3ITEM
      1.
                      IDENTITY
      OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
                      
                      3ITEM
      2.
                      OFFER
      STATISTICS AND EXPECTED TIMETABLE
                      
                      3ITEM
      3.
                      KEY
      INFORMATION
                      
                      3A.
                      Selected
      Financial Data
                      
                      3B.
                      Capitalization
      and Indebtedness
                      
                      6C.
                      Reasons
      for the Offer and Use of Proceeds
                      
                      6D.
                      Risk
      Factors
                      
                      6ITEM
      4.
                      INFORMATION
      ON THE COMPANY
                      
                      12A.
                      History
      and Development of the Company
                      
                      12B.
                      Business
      Overview
                      
                      16C.
                      Organizational
      Structure
                      
                      25D.
                      Property,
      Plant and Equipment
                      
                      26ITEM
      4.A.
                      UNRESOLVED
      STAFF COMMENTS
                      
                      27ITEM
      5.
                      OPERATING
      AND FINANCIAL REVIEW AND PROSPECTS
                      
                      27A.
                      Operating
      Results
                      
                      32B.
                      Liquidity
      and Capital Resources
                      
                      41C.
                      Research
      and Development, Patents and Licenses, etc.
                      
                      42D.
                      Trend
      Information
                      
                      42E.
                      Off-Balance
      Sheet Arrangements
                      
                      42F.
                      Tabular
      Disclosure of Contractual Obligations
                      
                      42G.
                      Safe
      Harbor
                      
                      43ITEM
      6.
                      DIRECTORS,
      SENIOR MANAGEMENT AND EMPLOYEES
                      
                      43A.
                      Directors
      and Senior Management
                      
                      43B.
                      Compensation
                      
                      48C.
                      Board
      Practices
                      
                      48




iii





D.
                    Employees
                    
                    49E.
                    Share
      Ownership
                    
                    49ITEM
      7.
                    MAJOR
      STOCKHOLDERS AND RELATED PARTY TRANSACTIONS
                    
                    49A.
                    Major
      Shareholders
                    
                    49B.
                    Related
      Party Transactions
                    
                    50C.
                    Interests
      of Experts and Counsel
                    
                    51ITEM
      8.
                    FINANCIAL
      INFORMATION
                    
                    51A.
                    Consolidated
      Statements and Other Financial Information
                    
                    51B.
                    Significant
      Changes
                    
                    52ITEM
      9.
                    THE
      OFFER AND LISTING
                    
                    53A.
                    Offer
      and Listing Details
                    
                    53B.
                    Plan
      of Distribution
                    
                    54C.
                    Markets
                    
                    54D.
                    Selling
      Shareholders
                    
                    56E.
                    Dilution
                    
                    56F.
                    Expenses
      of the Issue
                    
                    56ITEM
      10.
                    ADDITIONAL
      INFORMATION
                    
                    56A.
                    Share
      Capital
                    
                    56B.
                    Memorandum
      and Articles of Association
                    
                    56C.
                    Material
      Contracts
                    
                    65D.
                    Exchange
      Controls
                    
                    65E.
                    Taxation
                    
                    65F.
                    Dividends
      and Paying Agents
                    
                    71G.
                    Statement
      by Experts
                    
                    71H.
                    Documents
      on Display
                    
                    71I.
                    Subsidiary
      Information
                    
                    71ITEM
      11.
                    QUANTITATIVE
      AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
                    
                    71




iv





ITEM
      12.
                  DESCRIPTION
      OF SECURITIES OTHER THAN EQUITY SECURITIES
                  
                  73A.
                  Debt
      Securities
                  
                  73B.
                  Warrants
      and Rights
                  
                  73C.
                  Other
      Securities
                  
                  73D.
                  American
      Depository Receipts
                  
                  73PART
      II
                  
                  
                  73ITEM
      13.
                  DEFAULT,
      DIVIDEND ARREARAGES AND DELINQUENCIES
                  
                  73ITEM
      14.
                  MATERIAL
      MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF
      PROCEEDS
                  
                  73ITEM
      15.
                  CONTROLS
      AND PROCEDURES
                  
                  73ITEM
      16.
                  [RESERVED]
                  
                  75ITEM
      16.A.
                  AUDIT
      COMMITTEE FINANCIAL EXPERT
                  
                  75ITEM
      16.B.
                  CODE
      OF ETHICS
                  
                  76ITEM
      16.C.
                  PRINCIPAL
      ACCOUNTANT FEES AND SERVICES
                  
                  76ITEM
      16.D.
                  EXEMPTIONS
      FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
                  
                  76ITEM
      16.E.
                  PURCHASES
      OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED
    PURCHASERS
                  
                  77ITEM
      16.F.
                  CHANGES
      IN REGISTRANT’S CERTIFYING ACCOUNTANT
                  
                  77ITEM
      16.G.
                  CORPORATE
      GOVERNANCE
                  
                  77PART
      III
                  
                  
                  82ITEM
      17.
                  FINANCIAL
      STATEMENTS
                  
                  82ITEM
      18.
                  FINANCIAL
      STATEMENTS
                  
                  82ITEM
      19.
                  EXHIBITS
                  
                  82INDEX
      OF EXHIBITS
                  
                  82




v


Industrias
Bachoco, S.A.B. de C.V. is a holding company with no operations other than
holding the stock of its subsidiaries. During an extraordinary stockholders’
meeting held on November 23, 2007, our shareholders approved our name
change from Industrias Bachoco S.A. de C.V. to Industrias Bachoco, S.A.B. de
C.V., by operation of law and amended article one of our bylaws. Our principal
operating subsidiary is Bachoco, S.A. de C.V. (“BSACV”), which owns the
principal operating assets of Industrias Bachoco, S.A.B. de C.V. and accounted
for 91.9% of consolidated total assets on December 31, 2009. References
herein to “Bachoco,” “we,” “us,” “our,” “its” or the “Company” are, unless the
context requires otherwise, to Industrias Bachoco, S.A.B. de C.V. and its
consolidated subsidiaries as a whole.




We are
incorporated under the laws of the United Mexican States (“Mexico”), and all of
our operations are in Mexico. Our principal executive offices are located at
Avenida Tecnológico No. 401, Ciudad Industrial C.P. 38010, Celaya, Guanajuato,
Mexico, and our telephone number is +52 -461- 618-3555.




Presentation
of Information




We
publish our financial statements in Mexican pesos and present our financial
statements in accordance with Mexican Financial Reporting Standards (“Mexican
FRS”) in effect as of the balance sheet date and include the recognition of the
effects of inflation on the financial information through December 31, 2007,
based on the Mexican National Consumer Price Index (NCPI) published by Banco de
Mexico (the “Central Bank”).




Mexican
FRS B-10 supersedes Bulletin B-10 "Recognition of the effects of inflation on
the financial information" and its five amendment documents as well as the
related circulars and Interpretation of Financial Reporting Standards 2. The
principal considerations established by this FRS are:




Recognition
of the effects of inflation – An entity operates in (a) an inflationary economic
environment when cumulative inflation over the immediately preceding 3-year
period is equal to or greater than 26.0%; and (b) a non-inflationary economic
environment, when inflation over the aforementioned period is less than 26.0%.
For more detail, see Note 2-c in our Audited Consolidated Financial
Statements.




With
respect to (a) above, similarly to the superseded Bulletin B-10, the
comprehensive recognition of the effects of inflation is required. For case (b),
the effects of inflation are not recognized; however, at the effective date of
this FRS and when an entity ceases to operate in an inflationary economic
environment, the restatement effects determined through the last period in which
the entity operated in an inflationary economic environment (in our case 2007),
must be kept and shall be reclassified on the same date and using the same
procedure as that of the corresponding assets, liabilities and stockholders'
equity. Should the entity once more operate in an inflationary economic
environment, the cumulative effects of inflation not recognized in the periods
where the environment was deemed to be non-inflationary should be recognized
retrospectively.




Except as
otherwise indicated, all data in the financial statements included below in Item
18 (which together with the attached notes constitute the “Audited Consolidated
Financial Statements”) and the selected financial information included
throughout this Form 20-F (this “Annual Report”) have been presented in nominal
pesos for the years 2009 and 2008 and in constant pesos as of December 31, 2007
for the years 2007 - 2005.




Mexican
FRS differs in certain respects from generally accepted accounting principles in
the United States (“U.S. GAAP”). For a discussion of certain significant
differences between Mexican FRS and U.S. GAAP as they apply to us, together with
a reconciliation of consolidated operating income, consolidated net income,
consolidated stockholders’ equity to U.S. GAAP, and a consolidated statement of
cash flows under U.S. GAAP, see Note 21 to the Audited Consolidated Financial
Statements. The effect of price-level restatement under Mexican FRS has not been
reversed in the reconciliation to U.S. GAAP. See Note 21 to the Audited
Consolidated Financial Statements.




1


References
herein to “U.S. dollars,” “U.S.$” or “$” are to the lawful currency of the
United States of America. References herein to “pesos” or “Ps.” are to the
lawful currency of Mexico. This Annual Report contains translations of certain
peso amounts into U.S. dollars at specified rates solely for the convenience of
the reader. Unless otherwise indicated, such U.S. dollar amounts have been
translated from pesos at an exchange rate of Ps.13.08 to U.S.$1.00, the exchange
rate on December 31, 2009.




As used
herein, the term “tonnes” refers to metric tons of 1,000 kilograms (equal to
2,204.6 pounds) and the term “billion” refers to one thousand million
(1,000,000,000). One square meter is equivalent to 10.764 square
feet.




Market
Data




This
Annual Report contains certain statistical information regarding the Mexican
chicken, beef, egg, balanced feed (or “feed”), turkey and swine markets and our
market share. We have obtained this information from a variety of sources,
including the producers’ associations Unión Nacional de Avicultores (the
National Poultry Union or the“UNA”), Consejo Nacional Agropecuario (the
National Agricultural Council or“CNA”); Consejo Mexicano de Porcicultura
(the Mexican Pork Council or“CMP”), as well as Banco de Mexico (the Central
Bank), Secretaría de
Agricultura, Ganadería, Desarrollo Rural, Pesca y Alimentos(“Ministry of
Agriculture, Livestock, Rural Development, Fishing and Food” or “SAGARPA”) and
publications of the U.S. Department of Agriculture (“USDA”). The producers’
associations rely principally on data provided by their members. Information for
which no source is cited was prepared by us on the basis of our knowledge of the
Mexican chicken, egg, feed, turkey and swine markets and the wide variety of
information available regarding these markets. The methodology and terminology
used by different sources are not always consistent, and data from different
sources are not readily comparable.




Forward-Looking
Statements




We may
from time to time make written or oral forward-looking statements in our
periodic reports to the Securities and Exchange Commission on Forms 20-F
and 6-K, in our annual report to stockholders, in offering circulars and
prospectuses, in press releases and other written materials and in oral
statements made by one of our officers, directors or employees to analysts,
institutional investors, representatives of the media and others.




Examples
of such forward-looking statements include, but are not limited to:
(i) projections of revenues, income (or loss), earnings (or loss) per
Share, capital expenditures, dividends, capital structure or other financial
items or ratios; (ii) statements of our plans, objectives or goals or those
of our management, including those relating to new contracts;
(iii) statements about future economic performance; and
(iv) statements of assumptions underlying such statements. Words such as
“believe,” “anticipate,” “plan,” “expect,” “intend,” “target,” “estimate,”
“project,” “predict,” “forecast,” “guideline,” “should” and similar expressions
are intended to identify forward-looking statements but are not the exclusive
means of identifying such statements.




Forward-looking
statements involve inherent risks and uncertainties, and a number of unexpected
changes could cause actual results to deviate from our plans, objectives,
expectations, estimates and intentions. We recognize that the accuracy of our
predictions and our ability to follow through on our intentions depend on
factors beyond our control. The potential risks are many and varied, but include
unexpected changes in: economic, weather and political conditions; raw material
prices; competitive conditions; and demand for chicken, eggs, turkey, balanced
feed and swine.


2


PART
I




ITEM
      1.
            Identity
      of Directors, Senior Management and
Advisers




Not
applicable.




ITEM
      2.
            Offer
      Statistics and Expected Timetable




Not
applicable.




ITEM
      3.
            Key
      Information




A.
            Selected
      Financial Data




The
financial information set forth below is derived from Bachoco’s Audited
Consolidated Financial Statements, which are included in Item 18. In this
disclosure, we explain the figures and year-to-year changes in our Audited
Consolidated Financial Statements.




In
preparing the Audited Consolidated Financial Statements, we followed Mexican
FRS, which differ in certain respects from U.S. GAAP. Note 21 to the Audited
Consolidated Financial Statements provides a description of the main differences
between Mexican FRS and U.S. GAAP as they apply to us; a reconciliation from
Mexican FRS to U.S. GAAP of total stockholders’ equity, net income, and a
condensed statement of cash flows under U.S. GAAP as of December 31, 2009
and 2008 and for the years ended December 31, 2009, 2008 and 2007. Our
financial statements were prepared pursuant to Bulletin B-10, as superseded by
Mexican FRS B-10, as well as Bulletin B-12, as superseded by Mexican FRS B-2,
both issued by the Consejo Mexicano para la Investigación y Desarrollo de Normas
de Información Financiera, A.C. (the “Mexican Board for Research and Development
of Financial Reporting Standards” or “CINIF”). See the summary on Mexican FRS
B-10 in “Presentation of information” above.




Except as
otherwise indicated, all data in the Audited Consolidated Financial Statements
included below in Item 18 and the selected financial information included
throughout this Form 20-F (this “Annual Report”) have been presented in
nominal pesos for the years 2009 and 2008 and in constant pesos as of
December 31, 2007 for the years 2005 - 2007. The effects of this
price-level restatement under Mexican FRS have not been reversed in the
reconciliation of Mexican FRS to U.S. GAAP. See Note 21 to the Audited
Consolidated Financial Statements.




As of
January 1, 2008, a new financial reporting standard came into effect, which
eliminates the recognition of inflationary effects in our financial information.
Consequently, financial information corresponding to periods prior to
December 31, 2007 is expressed in millions of Mexican Pesos with purchasing
power as of December 31, 2007, while the financial information for
December 31, 2009 and 2008, is stated in millions of nominal Mexican
Pesos.


3





As
      of and for the year ended December 31,2005
                  
                  
                  2006
                  
                  
                  2007
                  
                  
                  2008
                  
                  
                  2009
                  
                  
                  2009(2)Income
      Statement Data
                  
                  in
      millions of constant pesos as of December 31, 2007 for years 2005 –
      2007 and in
                    millions
      of nominal pesos for years 2009 and 2008(1)
                  
                  
                  In
      millions of
                    U.S.
      dollars(1)Mexican
      FRS:Net
      revenues
                  
                  Ps.
                  15,617.7
                  
                  
                  Ps.
                  15,551.0
                  
                  
                  Ps.
                  18,219.6
                  
                  
                  Ps.
                  20,125.3
                  
                  
                  Ps.
                  23,262.9
                  
                  
                  
                  1,778.5Cost
      of sales
                  
                  
                  11,234.2
                  
                  
                  
                  12,053.0
                  
                  
                  
                  14,477.9
                  
                  
                  
                  17,482.5
                  
                  
                  
                  19,326.8
                  
                  
                  
                  1,477.6Gross
      profit
                  
                  
                  4,383.5
                  
                  
                  
                  3,498.0
                  
                  
                  
                  3,741.8
                  
                  
                  
                  2,642.9
                  
                  
                  
                  3,936.1
                  
                  
                  
                  300.9Operating
      income
                  
                  
                  2,378.1
                  
                  
                  
                  1,425.4
                  
                  
                  
                  1,496.3
                  
                  
                  
                  230.1
                  
                  
                  
                  1,413.8
                  
                  
                  
                  108.1Comprehensive
      financing income (loss)
                  
                  
                  (74.0
                  )
                  
                  
                  61.4
                  
                  
                  
                  19.1
                  
                  
                  
                  (1,369.2
                  )
                  
                  
                  (133.2
                  )
                  
                  
                  (10.2
                  )Net
      controlling interest income (loss)
                  
                  
                  1,908.4
                  
                  
                  
                  906.2
                  
                  
                  
                  1,270.9
                  
                  
                  
                  (879.0
                  )
                  
                  
                  797.6
                  
                  
                  
                  61.0Net
      consolidated income (loss) per Share(3)
                  
                  
                  3.2
                  
                  
                  
                  1.5
                  
                  
                  
                  2.1
                  
                  
                  
                  (1.5
                  )
                  
                  
                  1.3
                  
                  
                  
                  0.1Net
      consolidated income (loss) per ADS(4)
                  
                  
                  38.2
                  
                  
                  
                  18.1
                  
                  
                  
                  25.4
                  
                  
                  
                  (17.5
                  )
                  
                  
                  16.0
                  
                  
                  
                  1.2Dividends
      per Share(5)
                  
                  
                  0.44
                  
                  
                  
                  0.61
                  
                  
                  
                  0.59
                  
                  
                  
                  0.59
                  
                  
                  
                  0.42
                  
                  
                  
                  0.03Weighted
      average Shares outstanding (thousands)
                  
                  
                  599,694
                  
                  
                  
                  599,571
                  
                  
                  
                  600,000
                  
                  
                  
                  600,000
                  
                  
                  
                  599,946
                  
                  
                  
                  599,946U.S.
      GAAP:Net
      revenues
                  
                  Ps.
                  15,617.7
                  
                  
                  Ps.
                  15,551.0
                  
                  
                  Ps.
                  18,219.6
                  
                  
                  Ps.
                  20,125.3
                  
                  
                  Ps.
                  23,262.9
                  
                  
                  
                  1,778.5Operating
      income
                  
                  
                  2,356.0
                  
                  
                  
                  1,395.7
                  
                  
                  
                  1,481.0
                  
                  
                  
                  185.6
                  
                  
                  
                  1,391.0
                  
                  
                  
                  106.3Majority
      net income (loss)
                  
                  
                  1,893.3
                  
                  
                  
                  895.6
                  
                  
                  
                  1,261.9
                  
                  
                  
                  (869.4
                  )
                  
                  
                  787.0
                  
                  
                  
                  60.2Statement
      of Financial Position DataMexican
      FRS:Cash
      and cash equivalents
                  
                  Ps.
                  3,419.9
                  
                  
                  Ps.
                  3,583.9
                  
                  
                  Ps.
                  3,039.9
                  
                  
                  Ps.
                  1,998.2
                  
                  
                  Ps.
                  2,551.0
                  
                  
                  
                  195.0Total
      assets
                  
                  
                  16,530.9
                  
                  
                  
                  17,559.2
                  
                  
                  
                  19,116.4
                  
                  
                  
                  19,455.0
                  
                  
                  
                  19,877.9
                  
                  
                  
                  1,519.7Short-term
      debt(6)
                  
                  
                  100.0
                  
                  
                  
                  9.8
                  
                  
                  
                  58.8
                  
                  
                  
                  234.2
                  
                  
                  
                  591.9
                  
                  
                  
                  45.2Long-term
      debt
                  
                  
                  56.0
                  
                  
                  
                  35.5
                  
                  
                  
                  50.8
                  
                  
                  
                  391.7
                  
                  
                  
                  372.0
                  
                  
                  
                  28.4Total
      stockholders’ equity
                  
                  
                  13,502.7
                  
                  
                  
                  14,102.9
                  
                  
                  
                  15,127.2
                  
                  
                  
                  14,079.4
                  
                  
                  
                  14,638.5
                  
                  
                  
                  1,119.1Capital
      Stock
                  
                  
                  2,294.6
                  
                  
                  
                  2,294.9
                  
                  
                  
                  2,294.9
                  
                  
                  
                  2,294.9
                  
                  
                  
                  2,294.9
                  
                  
                  
                  175.5U.S.
      GAAP:Total
      controlling interest equity
                  
                  
                  13,499.0
                  
                  
                  
                  14,053.2
                  
                  
                  
                  15,071.7
                  
                  
                  
                  13,786.7
                  
                  
                  
                  14,329.2
                  
                  
                  
                  1,095.5Selected
      Operating DataSales
      volume (thousands of tonnes):Chicken
                  
                  
                  773.0
                  
                  
                  
                  773.7
                  
                  
                  
                  837.2
                  
                  
                  
                  878.1
                  
                  
                  
                  918.1Eggs
                  
                  
                  140.6
                  
                  
                  
                  143.4
                  
                  
                  
                  147.8
                  
                  
                  
                  143.6
                  
                  
                  
                  143.4Swine
      and Others
                  
                  
                  9.6
                  
                  
                  
                  8.9
                  
                  
                  
                  16.1
                  
                  
                  
                  18.8
                  
                  
                  
                  19.0Balanced
      Feed
                  
                  
                  389.6
                  
                  
                  
                  484.4
                  
                  
                  
                  438.8
                  
                  
                  
                  370.7
                  
                  
                  
                  337.9Margins
      (Mexican FRS)Gross
      margin (%)
                  
                  
                  28.1
                  %
                  
                  
                  22.5
                  %
                  
                  
                  20.5
                  %
                  
                  
                  13.1
                  %
                  
                  
                  16.9
                  %Operating
      margin (%)
                  
                  
                  15.2
                  %
                  
                  
                  9.2
                  %
                  
                  
                  8.2
                  %
                  
                  
                  1.1
                  %
                  
                  
                  6.1
                  %Consolidated
      net margin (%)
                  
                  
                  12.2
                  %
                  
                  
                  5.8
                  %
                  
                  
                  7.0
                  %
                  
                  
                  (4.4
                  )%
                  
                  
                  3.5
                  %Total
      employees
                  
                  
                  20,432
                  
                  
                  
                  21,035
                  
                  
                  
                  23,088
                  
                  
                  
                  23,248
                  
                  
                  
                  24,065


(1)  Except
per share and per ADS amounts and operating data.


(2)  Peso
amounts have been translated into U.S. dollars, solely for the convenience of
the reader, at the rate of Ps.13.08 per U.S. dollar.


(3)  Net
income per share has been computed based on the weighted average number of
common Shares outstanding.


(4)  Net
income per ADS has been computed by multiplying net income per share by twelve,
to reflect the ratio of twelve Shares per ADS.


(5)  Dividends
per share have been computed by dividing the total amount of dividends paid by
the weighted average Shares outstanding.


(6)  Includes
notes payable to banks and current portion of long term debt.


4


Exchange
Rates




During
2005, the Mexican peso was volatile, mainly at the beginning and at the end of
the year, and trended towards appreciation with respect to the U.S.
dollar.  At the end of 2005, the Mexican peso finished stronger
against the U.S. dollar.




During
2006, the Mexican economy showed signs of stability with an annual inflation
rate of 4.1%. After showing volatility during the first part of the year, the
Mexican peso showed a reasonably stable peso-dollar exchange rate with a final
depreciation of 1.6%, compared with the exchange rate at the end of
2005.




In 2007,
the Mexican economy was stable overall, with an annual inflation rate of 3.8%,
while the peso-dollar exchange rate at year-end depreciated by 1.1% with respect
to December 31, 2006.




In 2008,
the Mexican economy suffered a sharp slowdown and ended the year with an
inflation rate of 6.5%.  The exchange rate of the peso against the
U.S. dollar was highly volatile.  While during the first half of the
year, the Mexican peso strengthened its position with respect to the U.S.
dollar, the Mexican peso experienced a steep depreciation during the second half
of the year and the peso-dollar exchange rate at year-end had depreciated by
21.0% with respect to December 31, 2007.




During
2009, the Mexican economy continued to be affected by the global economic
crisis, ending the year with an inflation rate of 3.57%.  However,
although the Mexican peso-dollar exchange rate depreciated during the first half
of 2009, the peso stabilized and strengthened its position in the second half of
2009, leading the Mexican peso-dollar exchange rate to appreciate 5.4% in 2009
with respect to the exchange rate in effect on December 31, 2008.




The
following table sets forth for the periods indicated the high, low, average and
year-end exchange rates for the purchase and sale of U.S. dollars (presented in
each case as the average between such purchase and sale rates):




Exchange Rate(1)
                      (in current pesos per U.S. dollar)Year Ended December 31,
                  
                  High
                  
                  
                  Low
                  
                  
                  Average(2)
                  
                  
                  Year End2005
                  
                  
                  11.41
                  
                  
                  
                  10.41
                  
                  
                  
                  10.89
                  
                  
                  
                  10.632006
                  
                  
                  11.46
                  
                  
                  
                  10.43
                  
                  
                  
                  10.91
                  
                  
                  
                  10.802007
                  
                  
                  11.27
                  
                  
                  
                  10.67
                  
                  
                  
                  10.93
                  
                  
                  
                  10.922008
                  
                  
                  13.94
                  
                  
                  
                  9.92
                  
                  
                  
                  11.14
                  
                  
                  
                  13.832009
                  
                  
                  15.41
                  
                  
                  
                  12.63
                  
                  
                  
                  13.50
                  
                  
                  
                  13.08


(1)
              The
      exchange rates are the noon buying rates in New York City for cable
      transfers in pesos as certified for customs purposes by the Federal
      Reserve Bank of New York (the “noon buying
  rate”).


(2)
              Average
      of month-end rates for each period
shown.




Exchange
      Rate(1)
                      (in
      current pesos per U.S. dollar)Period
                  
                  High
                  
                  
                  LowDecember 2009
                  
                  
                  13.08
                  
                  
                  
                  12.63January 2010
                  
                  
                  13.03
                  
                  
                  
                  12.65February 2010
                  
                  
                  13.19
                  
                  
                  
                  12.76March 2010
                  
                  
                  12.74
                  
                  
                  
                  12.30April 2010
                  
                  
                  12.41
                  
                  
                  
                  12.16May 2010
                  
                  
                  13.14
                  
                  
                  
                  12.27


(1)
              The
      exchange rates are the noon buying rates in New York City for cable
      transfers in pesos as certified for customs purposes by the Federal
      Reserve Bank of New York.


5


On
June 14, 2010, the exchange rate for cable transfers in pesos as certified
for customs purposes by the Federal Reserve Bank of New York was Ps.12.54 per
$1.00 U.S. dollar.





B.
            Capitalization
      and Indebtedness




Not
applicable




C.
            Reasons
      for the Offer and Use of Proceeds




Not
Applicable





D.
            Risk
      Factors




Risks
Relating to Mexico, Other Emerging Market Countries and the U.S.
Economy




Mexico
has experienced adverse economic conditions




If the
Mexican economy experiences decreased output in a recession, or if inflation or
interest rates significantly increase, consumers may not be able to purchase our
products.  These and other effects could have adverse consequences on
our business, financial condition and results of operations.




The chart
below includes Mexican gross domestic product (“GDP”) and Inflation Rate data
from 2005-2009,as provided by
the Central Bank.




Period
                  
                  GDP
                  
                  
                  Inflation
      Rate2005
                  
                  
                  3.0
                  %
                  
                  
                  3.33
                  %2006
                  
                  
                  4.8
                  %
                  
                  
                  4.05
                  %2007
                  
                  
                  3.3
                  %
                  
                  
                  3.80
                  %2008
                  
                  
                  1.3
                  %
                  
                  
                  6.50
                  %2009
                  
                  
                  -6.5
                  %
                  
                  
                  3.57
                  %




Depreciation
or fluctuation of the peso relative to the U.S. dollar could adversely affect
our financial condition and results of operations




The
single largest component of our cost of sales, our feed, is comprised partially
of ingredients we purchase from the United States, where prices are denominated
in U.S. dollars.  In addition, the prices of ingredients we purchase
in Mexico may be influenced by U.S. commodity markets.  Therefore,
should the peso fall relative to the U.S. dollar, the cost of our operations,
some accounts payable due and our debt payments would increase. Any future
depreciation or devaluation of the peso may result in further net foreign
exchange losses.




·
            In
      2005, the Mexican peso appreciated with respect to the U.S. dollar by 4.9%
      at the end of the year and the average value of the Mexican peso was 3.6%
      higher.




·
            In
      2006, the Mexican peso was reasonably stable in its peso-dollar exchange
      rate with a final depreciation of 1.6%, compared to the end of
      2005.  The average value of the Mexican peso was 0.1% lower than
      the average of 2005.




·
            In
      2007, the Mexican peso remained reasonably stable in its peso-dollar
      exchange rate.  According to the U.S. Federal Reserve Bank, the
      peso depreciated with respect to the U.S. dollar by 1.1% at
      year-end.  The average value of the Mexican peso was 0.2% lower
      than the average of 2006.




6


·
            In
      2008, the Mexican peso was highly volatile during the year in its
      peso-dollar exchange rate with a final depreciation of 21.0%, compared to
      the end of 2007.  The average value of the Mexican peso was 1.9%
      lower than the average in 2007.




·
            In
      2009, the Mexican peso experienced greater stability during the second
      half of the year in its peso-dollar exchange rate, with a final
      appreciation of 5.4%, compared to the end of 2008. The average value of
      the Mexican peso was 17.4% lower than the average in
  2008.




The
Company uses financial instruments to counter financial risks on the exchange
rate of the Mexican peso versus the U.S. dollar; a drastic change in the
exchange rate could have an adverse impact on the financial position of the
Company.




Severe
devaluation or depreciation of the peso may also result in disruption of the
international foreign exchange markets and may limit our ability to transfer or
to convert pesos into U.S. dollars for the purpose of making timely payments of
interest and principal on our indebtedness and some accounts
payable.  While the Mexican government does not currently restrict,
and for many years has not restricted, the right or ability of Mexican or
foreign persons or entities to convert pesos into U.S. dollars or to transfer
other currencies out of Mexico, the government could institute restrictive
exchange rate policies in the future.  Currency fluctuations will
probably continue to affect our revenues and expenses.




Furthermore,
fluctuations in the exchange rate between the peso and the U.S. dollar will also
affect the U.S. dollar equivalent of the peso price of our Shares (the “Shares”
or “Series B Shares”) in the Mexican Stock Exchange and the price of American
Depository Shares (“ADSs”) on the New York Stock Exchange.  Because we
pay cash dividends in pesos, exchange rate fluctuations will affect the U.S.
dollar amounts received by holders of American Depository Receipts (“ADRs”) upon
conversion of such cash dividends by the Depositary.




High
levels of inflation and high interest rates in Mexico could adversely affect our
financial condition and results of operations




According
to the Central Bank, the average interest rates on 28-day Mexican treasury
bills, or Cetes, was
9.2%, 7.2% , 7.2%, 7.6%  and 5.4% during 2005, 2006, 2007, 2008 and
2009, respectively.  On June 14, 2010, the 28-day Cetes rate was
4.6%.  High interest rates in Mexico could adversely affect our
costs.  Our earnings may also be affected by changes in interest rates
due to the impact those changes have on our variable-rate debt instruments and
may benefit from the interest we earn in our cash balance.




Political
events in Mexico could affect Mexican economic policy and our
operations




Felipe
Calderón was elected as President of Mexico in July of
2006.  President Calderón’s party, the Partido Acción Nacional, or
PAN, obtained a plurality of the seats in the Mexican Congress after the
election; no party succeeded in securing a majority in either chamber of the
Mexican Congress.  The absence of a clear majority by a single party
and the lack of alignment between the president-elect and the legislature have
continued following the 2009 Congressional election.  This situation
may result in government gridlock and political uncertainty, which could have an
adverse effect on our business, financial position and results of
operations.  We cannot provide any assurance that future political
developments in Mexico over which we have no control will not have an adverse
effect on our financial position or results of operations.


7


Developments
in other emerging marketcountries may adversely
affect our business or the market price of our securities




The
market value of securities of Mexican companies is, to varying degrees, affected
by economic and market conditions in other emerging market
countries.  Although economic conditions in such countries may differ
significantly from economic conditions in Mexico, investors’ reactions to
developments in any of these other countries may have an adverse effect on the
market value of securities of Mexican issuers.  We cannot assure you
that the market value of our securities will not be adversely affected by events
elsewhere, especially in emerging markets.




Developments
in the U.S. economy may adversely affect our business




Economic
conditions in Mexico are heavily influenced by the condition of the U.S. economy
due to various factors, including commercial trade pursuant to the North
American Free Trade Agreement (“NAFTA”), U.S. investment in Mexico and
emigration from Mexico to the United States.  Events and conditions
affecting the U.S. economy may adversely affect our business, results of
operations, prospects and financial condition.




Risks
Relating to our Organization




The
chicken industry is characterized by long-term price declines and cyclical
periods




The
Mexican chicken industry, like the chicken industry in other countries, has been
characterized by a long-term decline in prices in real terms.  The
industry has undergone cyclical periods of higher prices and profitability,
followed by overproduction, leading to periods of lower prices and
profitability.  Real prices for eggs and swine in Mexico have also
declined over the long term and have varied cyclically.  The market
that we serve is subject to volatility with respect to supply, which affects
prices.  We cannot assure you that future cyclicality, excess supply
and downturns in real prices will not adversely affect our results.




The
price of feed ingredients is subject to significant volatility




The
largest single component of our cost of sales is the cost of ingredients used to
prepare feed, including sorghum, soybean meal, corn, fish meal, meat meal and,
for certain chicken products, marigold extract.  The price of most of
our feed ingredients is subject to significant volatility resulting from
weather, the size of harvests, transportation and storage costs, governmental
agricultural policies, currency exchange rates and other
factors.  Given the long-term declining trends in real chicken prices,
we may experience difficulty or delays in passing any increase in grain costs to
customers.  Accordingly, increases in the prices of the main
ingredients used in the preparation of feed may have a material adverse effect
on our margins and results of operations.  Since we purchase many feed
ingredients in U.S. dollars, from time to time we may acquire financial
instruments to protect us against exchange rate fluctuations that may affect
future purchases of feed ingredients.




In
particular, corn prices began to decline in comparison with previous years by
the end of 2008.  In 2009, such prices were lower and more
stable.




We can
offer no assurance that corn and soybean meal prices will not continue to
experience strong volatility in the future.  If such prices begin to
increase again, our profits could be adversely affected.




The
Company uses financial instruments to counter financial risks as protection
against adverse fluctuations in the prices of corn and soybean.  A
drastic change in grain prices could have an adverse impact on the financial
position of the Company.


8


Our
operations depend on raising animals and meat processing, which are subject to
risks such as diseases, contamination, adverse weather conditions or natural
disasters




Our
operations involve raising animals and are subject to a variety of
risks.  Chickens in particular are susceptible to infections by a
variety of microbiological agents.




In the
past, we have experienced limited outbreaks of various diseases that have
resulted in higher mortality rates.




During
2005, there was an ample diffusion in the media worldwide of a particular strain
of AIV (H5N1), mainly in Asia and some European countries, which affected
consumption of chicken in those countries.  At the present time, this
strain has not been found in birds in the United States or in Latin
America.




Meat and
eggs are subject to contamination during processing and
distribution.  We do not believe that contamination of individual
shipments during distribution would have a material adverse effect on our
operations.  Contamination during processing, however, could affect a
larger number of our poultry products and therefore could have a more
significant impact on operations.




Hurricanes
or other adverse weather conditions could result in additional losses of
inventory and damage to our plants and equipment.  Our facilities near
Mexico’s coast are most vulnerable to the risk of severe weather. In 2006, we
experienced a loss of chickens in our Norwest Complex due to the effects of
Hurricane Lane.




In April
2010, the table eggs operation located in Mexicali, B.C. was affected by an
earthquake that hit northwestern Mexico on April 4.  The earthquake
partially affected almost all of the farms located in this region, including our
farm.  Our affected farm represents approximately 9.0% of our total
egg production.  Other facilities, such as feed mill and distribution
centers, were essentially undamaged.




The
use of nutritional supplements and the possibility of contamination expose us to
risk of loss of consumer confidence in the chicken industry




To reduce
contamination, we use specialized feedstock and nutritional supplements that
have been approved by the Mexican government and meet international industry
standards.  We can offer no assurance, however, that in the future we
will not be materially adversely affected by claims or consumer concerns arising
out of the use of these products in raising our animals.




Our sales
are entirely dependent on consumer preferences, and the loss of consumer
confidence in the products sold by Mexican meat and egg producers as a result of
disease, contamination or other reasons, even if not related to our own
products, could have a material adverse effect on the results of our
operations.




We
face significant competition from other chicken producers in all of our
geographic markets and product lines




According
to the UNA, we are Mexico’s largest chicken producer, but we face competition
from other producers in all of the markets in which we sell our
products.  In 2009, we accounted for approximately 34.0% of total
chicken production in Mexico.  There are two other major vertically
integrated chicken producers in Mexico, which together with Bachoco account for
approximately 59.0% of Mexican chicken production, with the balance distributed
among 178 small and medium-sized integrated and non-integrated
producers.


9


Each of
the two other major companies has substantial financial resources and strengths
in particular product lines and regions.  We expect to continue to
face strong competition in every market, as our existing or new competitors are
likely to broaden their product lines and extend their geographic
coverage.  Accordingly, we cannot assure you that our performance will
not be adversely affected by increased competition.




We
face increased competition from U.S. producers




Since
2003, chicken (excluding leg quarters for which the Mexican government imposed
some temporary restrictions), eggs and swine import quotas were eliminated
through the North America Free Trade Agreement or “NAFTA”.  Poultry
producers in the United States have developed extremely low-cost production
methods and have been successful in exporting primarily frozen and value-added
poultry to other countries, especially in periods of overcapacity in the United
States.  As tariff barriers decline under NAFTA, U.S. producers can be
expected to increase exports to Mexico, which could have a material adverse
effect on our performance.




On
January 1, 2008, the restrictions for leg quarters were phased out. At
present there are no restrictions on importing these products into
Mexico.




We
are a holding company with no substantial operations and depend on our
subsidiaries for cash flow




We are a
holding company with no substantial operations and, consequently, we are
dependent on dividends and other payments from subsidiaries for virtually all of
our cash flow, including cash flow to pay taxes, service debt, make equity
investments, finance the growth of subsidiaries and pay dividends to
stockholders.  Together with Mexican law, our ability to pay dividends
may, in the future, be limited by financial covenants in debt instruments that
we, or our subsidiaries, may acquire.




Risks
Relating to the ADS, and the Shares in the Mexican Market




The
Robinson Bours family controls our management and their interests may differ
from other security holders




Certain
members of the Robinson Bours family hold the power to elect a majority of the
members of our Board of Directors and have the power to determine the outcome of
certain other actions requiring the approval of our stockholders, including
whether or not dividends are to be paid and the amount of such
dividends.  The Robinson Bours family has established two Mexican
trusts, which they control (“Control Trust”), that together held
496,500,000Shares
outstanding on December 31, 2007.  In November of 2008, the
Robinson Bours family created a third trust with 102,000,000 Shares, which were
taken from one of the existing trusts.  The purpose of this new trust
was to serve as collateral for the Company’s loan indebtedness. In the second
half of 2009, this third trust was eliminated and the Shares were returned to
the original trust.   The trusts together accounted for
496,500,000 Shares outstanding on December 31, 2009 and there has been no
change in the position of each holder.




Future
sales of Shares by the controlling stockholders may affect prevailing market
prices for the ADS’s and the Shares trading at the Mexican Market.




The
prevailing market prices for the ADS’s and the Shares could decline if the
Robinson Bours family sold substantial amounts of their Shares, whether
directly, or indirectly, through the Mexican trusts through which they hold
their Shares, or if the perception arose that such a sale could
occur.




The
protection afforded to minority stockholders in Mexico is different from that in
the United States




Under
Mexican law, the protection afforded to minority stockholders is different from
those in the United States.  In particular, the law concerning
fiduciary duties of directors is not well developed, there is no procedure for
class actions or stockholder derivative actions, and there are different
procedural requirements for bringing stockholder lawsuits.  As a
result, in practice it may be more difficult for the minority stockholders of
Bachoco to enforce their rights against us or our directors or our controlling
stockholder than it would be for stockholders of a U.S.
company.


10


Our
bylaws restrict the ability of non-Mexican stockholders to invoke the protection
of their governments with respect to their rights as stockholders




As
required by Mexican law, our bylaws provide that non-Mexican stockholders shall
be considered as Mexicans with respect to their ownership interests in Bachoco
and shall be deemed to have agreed not to invoke the protection of their
governments in certain circumstances.  Under this provision, a
non-Mexican stockholder is deemed to have agreed not to invoke the protection of
its own government by asking such government to interpose a diplomatic claim
against the Mexican government with respect to the stockholder’s rights as a
stockholder, but is not deemed to have waived any other rights it may have,
including any rights under the U.S. securities laws, with respect to its
investment in Bachoco.  If you invoke such governmental protection in
violation of this agreement, your Shares could be forfeited to the Mexican
government.




Our
bylaws may only be enforced in Mexico




Our
bylaws provide that legal actions relating to the execution, interpretation or
performance of the bylaws may be brought only in Mexican courts.  As a
result, it may be difficult for non-Mexican stockholders to enforce their
stockholder rights pursuant to the bylaws.




It
may be difficult to enforce civil liabilities against us or our directors,
officers and controlling persons




We are
organized under the laws of Mexico, and most of our directors, officers and
controlling persons reside outside the United States.  In addition,
all of our assets and their assets are located in Mexico.  As a
result, it may be difficult for investors to affect service of process within
the United States on such persons or to enforce judgments against
them.  This pertains also to any action based on civil liabilities
under the U.S. federal securities laws.  There is doubt as to the
enforceability against such persons in Mexico, whether in original actions or in
actions to enforce judgments of U.S. courts, of liabilities based solely on the
U.S. federal securities laws.




Non-Mexican
stockholders may not be entitled to participate in future preemptive rights
offerings




Under
Mexican law and our bylaws, if we issue new Shares for cash as part of a capital
increase, we must grant our stockholders the right to purchase a sufficient
number of Shares to maintain their existing ownership percentage in the Company
(“preemptive rights”).  We can allow holders of ADSs in the United
States to exercise preemptive rights in any future capital increase only in one
of the following two circumstances: (i) we file a registration statement with
the Securities and Exchange Commission with respect to that future issuance of
Shares; or (ii) the offering qualifies for an exemption from the registration
requirements of the Securities Act.




We make
no promises that we will file a registration statement with the Securities and
Exchange Commission to allow holders of ADSs in the United States to participate
in a preemptive rights offering.  As a result, the equity interests of
such holders in the Company may be diluted proportionately.  In
addition, under current Mexican law, it is not practicable for the depositary to
sell preemptive rights and distribute the proceeds from such sales to ADS
holders.




Corporate
disclosure and accounting in Mexico may differ from other countries




There may
be less, or different, publicly available information about issuers of
securities in Mexico than is regularly published by or about issuers of
securities in other countries with highly developed capital
markets.  In addition, due to country-by-country differences in
accounting and other reporting principles and standards, our corporate
disclosures may differ in content from disclosures made under other principles
and standards, such as U.S. GAAP.


11


ITEM
      4.
            Information
      on the Company




A.
            History
      and Development of the Company




Our legal
name is Industrias Bachoco, S.A.B. de C.V., and we frequently refer to ourselves
commercially as Bachoco.  We were
incorporated in Mexico on April 17, 1980.  Our headquarters are
located at Avenida Tecnológico No. 401, Ciudad Industrial 38010, Celaya,
Guanajuato, Mexico, telephone +52461 618-3500 and +52461
618-3555.  Our investor relations agent in the U.S. is Grayling, which
is located in New York, New York.  Our main product lines
are:  chicken, table egg, balanced feed and swine.  At
present, almost all of our production and almost all of our sales are in
Mexico.




According
to the UNA, we are the largest poultry producer in Mexico.  In 2009,
we produced approximately 9.5 million chickens per week and accounted
for approximately 34.0% of total chicken production in Mexico.  As a
vertically integrated producer, we control virtually all aspects of the
production and distribution process, which enables us to exercise cost controls
and to maintain high standards of quality, service and
efficiency.  With over 800 production and distribution facilities
dispersed throughout Mexico, our operations include the following: preparing
balanced feed, breeding, hatching and growing chickens, and processing,
packaging and distributing chicken products.




Sales of
chicken products accounted for 78.3% of our net revenues in
2009.  Please also see the table under Item 5.
A.  “Operating Results.”




We are
also a significant producer of commercial balanced feed.  We sell our
feed both through distributors and directly to small
producers.  During 2009, we sold 338 thousand tons of balanced feed to
external customers, which amounted to 6.3% of our total revenues for that
year.




Currently,
Bachoco is the second largest producer of table egg products.  In
2009, we sold approximately 143 thousand tons.  Table egg sales
accounted for 10.1% of our net revenues in 2009.




As part
of our other product lines we also sell swine on the hoof to meat packers for
pork product production, miscellaneous poultry-related products, and in 2007, we
entered into two new business lines:  turkey and beef value-added
products.  In 2009, sales of swine and these other lines accounted for
5.3% of our net revenues.


12


The
following table sets forth, for each of the periods presented, the volume of
chicken, balanced feed, table eggs and swine that we sold:




Bachoco
      Sales Volume
                      (in
      thousands of tonnes)Year
      Ended December 31,2005
                    
                    
                    2006
                    
                    
                    2007
                    
                    
                    2008
                    
                    
                    2009Chicken
                    
                    
                    773.0
                    
                    
                    
                    773.7
                    
                    
                    
                    837.2
                    
                    
                    
                    878.1
                    
                    
                    
                    918.1Eggs
                    
                    
                    140.6
                    
                    
                    
                    143.4
                    
                    
                    
                    147.8
                    
                    
                    
                    143.6
                    
                    
                    
                    143.4Swine(1)
                    
                    
                    9.6
                    
                    
                    
                    8.9
                    
                    
                    
                    16.1
                    
                    
                    
                    18.8
                    
                    
                    
                    19.0Balanced
      Feed
                    
                    
                    389.6
                    
                    
                    
                    484.4
                    
                    
                    
                    438.8
                    
                    
                    
                    370.7
                    
                    
                    
                    337.9


(1) Includes
Swine, Turkey and Beef products.




In the
Mexican poultry industry, few producers operate in multiple
regions.  We believe we have the broadest geographic market coverage
in the Mexican poultry industry and that we are one of the largest poultry
suppliers in the Mexico City metropolitan region (which accounts for a
significant portion of overall Mexican chicken consumption).  We
currently compete in every major product category and channel of distribution
for poultry products within the regions that we serve.  We expect to
continue to do so in order to meet growing consumer demand and
needs.




Background
and Ownership Structure




Founded
in 1952 by the Robinson Bours family as a small commercial table egg operation
in the state of Sonora, we grew by expanding our existing facilities and
acquiring additional facilities from other poultry producers.  In
1974, we established operations in Celaya, located in the agricultural region of
Bajio, to begin serving the Mexico City metropolitan
region.  Beginning in 1988, our management recognized the potential
for growth in Mexican chicken consumption, as well as the advantages of a large,
vertically integrated operation.  As a result, we began to seek
opportunities for geographic expansion and to increase production capacity and
market share.  We extended our market coverage (particularly in 1993
and 1994) by purchasing fixed assets and inventory from major regional producers
that faced financial difficulties.  Following each acquisition, we
made substantial investments to apply our production and distribution methods
and reap the benefits of vertical integration and economies of scale, improving
the performance of the acquired facilities.




In
April 1995, Robinson Bours stockholders created a trust (the “Control
Trust”), the principal purpose of which was to hold a controlling interest in
our Series B Shares.  Before September 2006, our common stock
(“Common Stock”) consisted of Series B Shares and Series L Shares of limited
voting stock (“Series L Shares”) (collectively, the “Old
Shares”).  The Old Shares were grouped into units.  Each
unit (“Unit”) consisted of one Series B Share and one Series L
Share.  Each B Unit (“B Unit”) consisted of two Series B
Shares.




In
September 1997, we made an initial public offering of Units representing
17.25% of the outstanding Old Shares.  Following such offering, the
Control Trust held Units and B Units representing 68.0% of the outstanding
Series B Shares.




In
September 2006, we separated the units trading on the Mexican Exchange into
their component. The Series L Shares was converted into Series B Shares, on a
one-to-one basis, thereby creating a single Share class, the Series B Shares,
which represent our entire Common Stock.  This change did not modify
the face value of the Shares.  These Shares trade on the Mexican stock
market.  The ADS still consist of twelve underlying Shares, but they
are all Series B Shares, with full rights.


13


As of
December 31, 2009, the Robinson Bours Stockholders owned B Shares
representing 82.75% of the Series B Shares outstanding.  As a result,
the Robinson Bours Stockholders continue to have the power to control the
Company.




Members
of the Robinson Bours family, together with certain of our executive officers,
hold a majority of the seats on our Board of Directors.




In
November 1998, we approved a stock repurchase plan (the “Repurchase Plan”),
which allows us to repurchase Shares outstanding and trading on theMexican
Stock Exchange (Bolsa Mexicana
de Valores), in accordance with Mexican securities laws.  To
execute the Repurchase Plan, we created a reserve of Ps. 180.0 million (Ps.
$303.9 million in constant Mexican pesos as of December 31, 2007), which
reduced retained earnings on our balance sheet.  See Note 15d to the
Consolidated Audited Financial Statements for more detail. During 2009, we
undertook certain repurchases as disclosed in Item 16.F below. As of
June 18, 2010, we had no Shares repurchased.




On
June 29, 2005, we acquired certain assets of Grupo Sanjor, a private
poultry company located in the Yucatan Peninsula, with production of
approximately 300 thousand chickens per week and 100 thousand table egg laying
hens, which allow us to reinforce our leadership in this region of the
country.




In
December 2006, we acquired most of the assets and inventories of Del
Mezquital to start a new complex in the State of Sonora, located in northern
Mexico, close to the border with the United States.




In
February 2007, we reached a business agreement with Grupo Libra, a Company
in the Northeast of Mexico, that includes the buying of all their inventories
and long term rent agreement of their facilities to strengthen our presence in
that market. See Item 5: “Operating and Financial Review and Prospects -
Acquisitions and Dispositions” in this Annual Report for more details on these
transactions.




In
December 2007, we reached an agreement with “Grupo Agra,” a table eggs
company located in the states of Nuevo Leon and Coahuila in Northeast
Mexico.  The agreement provides for leasing of their facilities, which
include laying hen farms (with a capacity of approximately 1.0 million hens), a
processing table eggs plant, distribution centers and the Agra
brands.  In addition, we acquired their entire inventory.




In July
2009, the Company undertook several measures to improve capacity and efficiency
in our Northeast production complex headquartered in Monterrey,
N.L.  These were: (i) acquiring the assets of a balanced feed mill and
a soybean processing plant from Productora de Alimentos Pecuarios de Nuevo León,
S.A. de C.V. through our Campi subsidiary; (ii) acquiring the assets of a
chicken processing plant from Avi Carnes Monterrey, S.A. de C.V. through our
Bachoco subsidiary with a production capacity of 9,000 chickens per hour; (iii)
entering into agreements to rent breeder farms and egg incubation plants from
Reproductoras Asociadas, S.A. de C.V. and one-day-old breeder capacity farms and
egg incubation plants from Producción Avicola Especializada, S.A. de C.V.; and
(iv) making arrangements with contract growers to acquire their
inventories.




Business
Strategy




Over the
past decade, we have substantially increased our chicken production,
establishing ourselves in every major product category and distribution channel
for chicken and expanding to cover a geographic market in Mexico that is more
widespread than any other chicken producer.  We have also increased
the efficiency of our production process and built a reputation for the
freshness of our chicken products and quality of our customer
service.


14


The
Mexican poultry industry has experienced considerable consolidation in the last
years, in which we have participated.  We continue to evaluate
possible acquisitions of other poultry producers or production facilities from
time to time and may pursue certain opportunities consistent with our business
strategy.




The key
elements of our business strategy are as follows:




·
            Increased market penetration
      through expanded distribution.We have an extensive
      distribution network, supported by our own transportation fleet, superior
      knowledge of existing wholesale channels and strategically located cold
      storage warehouses and facilities.  We have substantially
      increased our distribution routes during the past years.  We
      plan to continue to develop and improve our distribution network and
      systems in every product category and throughout our expanded geographic
      coverage in Mexico.




·
            Increased service and market
      responsiveness.We seek to remain a leader in the
      Mexican poultry market by maintaining high standards of customer service
      and continuing to be responsive to the changing needs of varying market
      segments.  As part of this strategy, we have structured our
      operations in such a way as to enable us to vary the size, weight, color
      and presentation of our chicken products, depending upon the particular
      demands of the market segment.  In addition, we have
      decentralized order and sales services from our headquarters to our cold
      storage warehouses and facilities, which serve as midpoints in the
      distribution chain to wholesalers and local customers.  This
      strategy allows us to stay closer to our customer base and to better
      cultivate growing customer segments, such as food-service operators,
      supermarkets and food wholesale
clubs.




·
            Low-cost production and
      operating efficiency.We are among Mexico’s lowest-cost
      producers and distributors of chicken, due in part to economies of scale
      and vertically integrated operations.  We pursue on-going
      programs to increase operating efficiencies and reduce operating
      costs.




·
            Continued brand
      differentiation.We developed a brand image for premium
      fresh chicken and table eggs in Mexico.  Building on the success
      of our branded products to date, we seek to continue to promote our brand
      name through billboards, packaging, special publicity campaigns and
      through development of brand loyalty among wholesale and retail
      distributors. We successfully launched Bachoco’s new image two years ago,
      which was well-received by our
clients.




Capital
Expenditures




Over the
last three years, we have financed our capital expenditures with resources
generated by our operations.  We made the following capital
expenditures (in nominal pesos):




·
            In
      2007, we made capital expenditures of Ps. 991.7 million net, with which
      we:




-
            Began
      the construction of the new complex in the state of
  Sonora.




-
            Finished
      the construction of our new feed mill in the state of
      Aguascalientes;




-
            Increased
      capacity in the production of live
chicken;




-
            Increased
      capacity of the secondary processor at some of our processing plants;
      and




-
            Updated
      our transportation fleet, processing plants and feed
  mills.




·
            In
      2008, we made capital expenditures of Ps. 1.1 billion, with which
      we:




-
            Increased
      capacity and implemented new technology in the processing plants located
      in Celaya and Culiacan;




15


-
            Increased
      chicken capacity in farms located in Mérida and
  Veracruz;




-
            Finished
      the construction of new farms located in Ciudad Obregon and
      Hermosillo;




-
            Began
      the construction of new farms located in the state of Chiapas;
      and




-
            Updated
      our transportation fleet;




·
            In
      2009, we made capital expenditures of Ps. 988.2 million, with which
      we:




-
            Entered
      into a business agreement with a company located at the Northeast of
      Mexico;




-
            Increased
      capacity in chicken farms in the states of Chiapas, Sonora, and the
      Peninsula de Yucatan; and




-
            Updated
      our transportation fleet.




B.
            Business
      Overview




Chicken
Market




Mexican
consumers value distinct characteristics in their chicken.  Virtually
all chicken sold by us and other major chicken producers in Mexico is
fresh.  Fresh chicken is a central ingredient in many traditional
Mexican dishes and it is the leading meat consumed in Mexico according to data
from the UNA.  Traditionally, value-added chicken products, such as
heat-and-serve products, frozen dinners, chicken nuggets and other similar
foods, have found limited acceptance among Mexican consumers due to historical
consumer preferences for fresh chicken.




The
value-added chicken products are a new market in Mexico; we participate
significantly in the market and try to lead the supply of these
products.  According to the UNA, value-added chicken products
currently account for approximately 3.0% of the chicken sold in Mexico; this
represents a decrease from the 4.0% market share in 2008.




Mexican
consumers traditionally prefer chicken with pronounced yellow skin pigmentation,
a characteristic found mainly in our public-market and supermarket-broiler
chicken products that we attain by including marigold extract in our chicken
feed.  We have also noticed an increased demand for smaller, whole,
fresh chicken from various fast-food outlets, principally chicken roasting shops
(rosticerías), which
have developed rapidly in Mexico.




According
to data obtained from the UNA, total Mexican chicken consumption per capita
increased by 1.6% from 2007 to 2009.  Chicken is the leading meat
consumed in Mexico, and it accounted for approximately 50.0% of all meat
produced in Mexico in 2009.  The following table sets forth total
Mexican production of chicken, pork and beef for 2007 to 2009:




Mexican
Production of Chicken, Beef and Pork


(in
thousands of tonnes)




2007
                
                
                2008
                
                
                2009Chicken
                
                
                2,683
                
                
                
                2,853
                
                
                
                2,781Beef
                
                
                1,628
                
                
                
                1,673
                
                
                
                1,700Swine
                
                
                1,116
                
                
                
                1,149
                
                
                
                1,162


Source:  UNA




The
Mexican chicken industry, like chicken industries in other countries, is
characterized by a long-term decline in real prices in real terms in conjunction
with cyclical periods of higher profitability leading to overproduction followed
by periods of lower prices and lower profitability.


16


During
2007, our chicken prices increased by 8.3% as compared with 2006, due to
increases in the price of the main feed ingredients and a strong demand for
chicken.




In 2008,
our chicken prices increased by 4.4% compared to prices in 2007, which was
primarily a result of increases in the prices of raw materials, partially offset
by (i) excess domestic supply, particularly during the second half of the year,
and (ii)a
decrease in the purchasing power of the average consumer.




In 2009,
our chicken prices increased by 12.6% compared to prices in 2008 due to a good
balance between supply and demand, mainly during the first half of
2009.




We
believe that changes in Mexican chicken consumption correlate closely with
changing chicken prices and their effect on consumer purchasing
power.  According to data from the UNA, chicken per capita consumption
increased 3.5% in 2005, 2.6% in 2006, 2.5% in 2007, 5.3% in 2008 and decreased
by 3.5% in 2009.




Chicken
Products




Six main
product categories exist for fresh chicken in Mexico: live, public market,
rotisserie, supermarket broiler, chicken parts and value-added
products.




Below is
a brief description of each chicken product line as well as its respective
percentage of the total Mexican chicken production in 2009:




-
            Live chicken,is
      delivered alive to small independent slaughtering operations or to
      wholesalers that contract with independent slaughtering operations for
      processing.  The freshly slaughtered chicken is then sold to
      chicken shops and other specialized retailers for sale to consumers and in
      some areas is sold directly to consumers by the
      slaughterhouse.  According to the UNA, live chicken accounted
      for approximately 29.0% by volume of the chicken sold by producers in
      Mexico.




-
            Public market chicken,is a whole broiler presented either uneviscerated or eviscerated,
      generally sold within 48 hours after slaughter in public markets
      throughout Mexico, but primarily concentrated in the Mexico City
      metropolitan region.  According to the UNA, public market
      chicken accounts for 20.0% by volume of the chicken sold by producers in
      Mexico.




-
            Rotisserie chickenis a
      whole broiler presented eviscerated and ready to
      cook.  Rotisserie chicken is sold by wholesalers and directly by
      producers to small shops, stands called rosticerías and
      supermarkets, which cook the chicken and sell it whole and freshly cooked
      to the end-consumer, providing an economical form of
      fast-food.  According to the UNA, rotisserie chicken accounts
      for 26.0% by volume of the chicken sold by producers in
      Mexico.




-
            Supermarket chickenis a
      fresh whole broiler presented with the edible viscera packed
      separately.  In most cases, it is sold directly by producers to
      supermarkets and, in some regions, to other independent food
      shops.  Mexican consumers’ preference for freshness requires
      regular deliveries of chicken to supermarkets and other food
      shops.  According to information provided by the UNA, the
      supermarket broiler chicken accounted by the 14.0% of the volume of the
      chicken sold by producers in
Mexico.




-
            Chicken parts,refers to
      cut-up fresh chicken parts sold wrapped in trays or in bulk principally to
      supermarket chains, the fast-food industry and other institutional
      food-service providers.  Producers generally sell directly to
      the supermarket chains and deliver the chicken directly to the
      outlet.  Sales to the institutional market often require
      customized cutting and presentation.  According to the UNA,
      chicken parts accounts for 8.0% of the chicken volume sold by producers in
      Mexico.




17


-
            Value-added Products,refers mainly to cut up fresh chicken parts with value-added
      treatment like marinating, breading and individual quantity frozen, sold
      mainly wrapped in trays principally to supermarkets and other
      institutional chains.  Producers generally sell directly to the
      supermarket chains and deliver the chicken directly to the
      store.  Sales to the institutional market often require
      customized cutting and presentation.  According to the UNA,
      these products accounted for 3.0% of the chicken volume sold by producers
      in 2009.




We sell
value-added chicken products mainly to supermarkets and other
retailers.  The following table sets forth, for the periods indicated,
the sales volume in tonnes and as a percentage of the total volume of chicken
sold for each of our principal lines of chicken products:




Bachoco’s
      chicken volume sold2007
                        
                        
                        2008
                        
                        
                        2009Tonnes
                        
                        
                        %
                        
                        
                        Tonnes
                        
                        
                        %
                        
                        
                        Tonnes
                        
                        
                        %Public
      market and rotisserie
                        
                        
                        371.0
                        
                        
                        
                        44.3
                        
                        
                        
                        402.1
                        
                        
                        
                        45.8
                        
                        
                        
                        418.2
                        
                        
                        
                        45.5Supermarket,
      chicken parts and others(1)
                        
                        
                        245.1
                        
                        
                        
                        29.3
                        
                        
                        
                        239.0
                        
                        
                        
                        27.2
                        
                        
                        
                        217.1
                        
                        
                        
                        23.7Live
                        
                        
                        221.2
                        
                        
                        
                        26.4
                        
                        
                        
                        237.0
                        
                        
                        
                        27.0
                        
                        
                        
                        282.8
                        
                        
                        
                        30.8Total
                        
                        
                        837.2
                        
                        
                        
                        100.0
                        %
                        
                        
                        878.1
                        
                        
                        
                        100.0
                        %
                        
                        
                        918.1
                        
                        
                        
                        100.0
                        %


(1)
            “Other”
      comprises sales of value-added poultry products, viscera and other
      products.




Our
product mix varies from region to region in Mexico, reflecting different
consumption and distribution patterns.  Based on market demand, we
believe that fresh, rather than frozen, chicken will continue to dominate the
Mexican market.  Furthermore, we believe that consumer demand for
value-added fresh chicken products, such as rotisserie chicken, supermarket
broilers and chicken parts, will increase over time.  Accordingly, we
continue to focus principally on producing fresh chicken, including value-added
fresh chicken products.




Chicken
Marketing, Sales and Distribution




We have
developed an extensive distribution system that we believe is the largest and
most modern of any chicken or egg producer in Mexico.  We use various
distribution channels in every major product category to service different
market segments.  We use our own fleet to transport the majority of
rotisserie chickens, supermarket broilers and other chicken products to our
customers.  We try to cooperate with existing distribution channels
and do not compete with wholesale distributors, except in areas where we supply
our own distribution capacity where needed for market penetration.




We
distribute products from our processing plants located in: Celaya, Culiacan,
Puebla, Lagos de Moreno, Coatzacoalcos, Mérida, Gómez Palacio, Monterrey and
Hermosillo to our cold-storage facilities and warehouses, which serve as a
midpoint in distribution to wholesalers and local customers.  From our
cold-storage facilities, we service wholesalers (who in turn deliver to their
customers), retailers and transport certain products directly to supermarkets
and food-service operations.  Our distribution infrastructure includes
58 cold-storage warehouses and facilities and a large fleet of
vehicles.  The decentralized sales force permits us to remain attuned
to developments in the regions we serve and to develop close relationships with
customers.


18


Below is
a summary of the expansions we have made to our distribution network (which now
covers almost all of Mexico) in the last five years:




-
            In
      2005, we acquired assets of Grupo Sanjor, a private producer of chicken
      and table eggs located in the Yucatán
Peninsula.




-
            At
      the end of 2006, we acquired assets of Del Mezquital a private broiler
      producer located in the state of
Sonora.




-
            At
      the beginning of 2007, we reached a business agreement with Grupo Libra, a
      chicken producer located in northeast Mexico.  We also started
      to build a new complex in Hermosillo
City.




-
            In
      2008, we finished several projects to expand our facilities in Mérida and
      continued increasing our production in Northern Mexico, specifically in
      the city of Hermosillo and in the state of
  Chiapas.




-
            In
      2009, we (i) acquired the assets of a balanced feed mill and a soybean
      processing plant from Productora de Alimentos Pecuarios de Nuevo León,
      S.A. de C.V. through our Campi subsidiary; (ii) acquired the assets of a
      chicken processing plant from Avi Carnes Monterrey, S.A. de C.V. through
      our Bachoco subsidiary with a production capacity of 9,000 chickens per
      hour; (iii) entered into agreements to rent breeder farms and egg
      incubation plants from Reproductoras Asociadas, S.A. de C.V. and
      one-day-old breeder capacity farms and egg incubation plants from
      Producción Avicola Especializada, S.A. de C.V.; and (iv) made arrangements
      with contract growers to acquire their
  inventories.




In the
following paragraphs, we provide a description of our marketing, sales and
distribution strategies for each of our major chicken products.




-
            Live Chicken – We sell
      live chicken primarily to wholesalers, which contract out the processing
      to independent slaughterhouses and then resell the processed product as
      public market chicken.  To a lesser extent, we sell to small,
      independent slaughterhouses in the southeast, where live chicken continues
      to be the standard for consumption.  Additionally, customers can
      purchase live chicken directly from us on our farms.  However,
      we believe that the market as a whole is moving slowly away from live
      chicken.




-
            Public Market Chicken–
      We believe that we are the largest producer of public market chicken in
      Mexico.  We regularly sell to more than 50 of the approximately
      200 whole fresh chicken wholesalers operating in the Mexico City
      region.  Most of our wholesale customers rely primarily on us
      for public market chicken, although we have no exclusive supply
      agreements.  Our principal focus in this market has been to
      provide superior distribution and service to selected wholesalers in order
      to maintain and further develop loyalty.  Public market chicken
      is ordinarily sold to consumers without any packaging or other
      identification of the producer, but our distribution system encourages
      wholesalers to sell to retailers in containers from our own “Bachoco”
      trailers, reinforcing our reputation for freshness and efficiency of
      service and fostering brand loyalty among retailers.  We believe
      we have developed excellent relationships with the wholesalers we
      serve.




-
            Rotisserie Chicken– We
      sell rotisserie chicken directly to rosticerías and
      supermarkets.  We attribute the growth in our sales of
      rotisserie chicken in large part to the rapid growth of the market for
      freshly cooked chicken sold by these stores and in the rotisserie sections
      of supermarkets.  We expect this market to continue to grow
      because of an ever-increasing consumer demand for convenient, low-priced
      and high-quality fast food.  Success in supplying rotisserie
      chicken depends on consistency and good service, and only larger producers
      with more modern processing facilities and distribution capacity can
      compete in this market.




19


-
            Supermarket Chicken – We
      sell supermarket broilers, as well as chicken parts and eggs, directly to
      the principal supermarkets, convenience store chains and wholesale clubs
      in Mexico.  In order to build consumer loyalty for our
      supermarket broiler chicken, we emphasize our brand image as well as our
      superior service, reinforced by frequent delivery to ensure
      freshness.  Each chain negotiates purchases centrally, but we
      deliver directly to many points of sale, ordinarily at least once every 48
      hours.  We believe that we lead the market in frequency of
      deliveries to supermarkets.




-
            Chicken Parts – We sell
      chicken parts principally to supermarkets, using the same marketing
      strategy that we use for supermarket broiler chicken.  We are
      also an important supplier of chicken parts to the growing franchise
      fast-food and institutional food-service industries.  We
      continue to develop custom-cutting processes to help meet demand from
      fast-food and institutional customers for a wider variety of chicken
      parts.




-
            Value-Added Products –
      Mexican consumers have a greater preference for fresh chicken than their
      U.S. counterparts.  Frozen, heat and serve and other further
      processed poultry products make up only a small proportion of total
      Mexican poultry consumption today.  Demand for these kinds of
      fresh products is growing rapidly.  The potential for
      substantial growth in this market is large and we believe that our
      distribution network, our large market share for supermarket chicken
      sales, our brand name and our experience in a wide range of existing
      Mexican distribution channels will be important competitive strengths in
      this area. Even though sales of value-added products have increased during
      recent years, fresh chicken still dominates the industry and its growth
      rate will depend on the purchasing power of consumers.  The
      Company is constantly developing new, convenient value-added
      products.




Table
Eggs




According
to the UNA, Mexico has one of the largest per capita consumption of table eggs
in the world with 22.2 kilograms per capita consumed per year, compared with
21.7 kilograms per capita consumed in 2008.  This high level of
consumption is due in part to the fact that eggs are among the cheapest sources
of protein in Mexico.




The
Mexican table egg industry is more fragmented than the chicken industry but has
experienced some degree of consolidation in recent years, including acquisitions
made by us.  According to the UNA, the nine largest producers of table
eggs in Mexico now account for approximately 44.0% of the market.




Eggs in
Mexico have traditionally been distributed in large 360-egg cases through
wholesalers to retailers.  The retailers, which are typically small
grocery shops, sell the eggs by weight to consumers.  At present, the
15.0% of the eggs sold in Mexico are sold in packaged form, 5.0% are sold in
processed form and approximately 80.0% are sold in bulk to
wholesalers.  The sales trendin recent years has
slowly been moving towards packaged and processed egg sales.  We
expect that the convenience, the development of brand loyalty and the growth of
supermarket chains will contribute to the continuance of this trend toward
packaged eggs.




We are
the second largest producer of table eggs in Mexico with approximately 10.0% of
the market.  We sell both brown and white eggs.  We are the
largest producer of brown eggs in Mexico.  Our marketing efforts for
egg products focus on increasing our brand recognition.


20




The
branded carton of brown eggs is a premium product in the Mexican
market.  We believe that brown eggs are less vulnerable to price
fluctuations than white or unbranded eggs, because consumers perceive them to be
of higher quality.  Brown eggs command a small premium over white
eggs.




In some
regions, however, we have reallocated part of our production from brown eggs to
white eggs due to local market preferences.  Our marketing strategy in
the eggs business is to gradually move from bulk to packaged white
eggs.  Packaged eggs are less vulnerable to price fluctuation and
create brand loyalty.




In 2005,
as part of the acquisition of Grupo Sanjor, we acquired some table egg farms
located in the Yucatán Peninsula.




In
December 2007, we reached an agreement with Grupo Agra, located in the
states of Nuevo Leon and Coahuila in Northeast Mexico.  The agreement
provides for leasing of their facilities, which include laying hens farms with a
capacity of approximately 1.0 million hens, a processing table eggs plant,
distribution centers and the Agra brands.  In addition, we acquired
all of their working capital.




In 2007,
we began to enter into foreign markets.  We are testing our brand by
selling table eggs in the southern U.S. states with products produced in the
U.S.  This test will allow us to see how our brand is received and
identify opportunities and strategies going forward.




In 2008
and 2009, our table egg production remained stable with a slight reduction in
production capacity due to some adjustments we made in production.




In April
2010, the table eggs operation located in Mexicali, B.C. was affected by an
earthquake that hit northwestern Mexico on April 4.  The earthquake
partially affected almost all of the farms located in this region, including our
farm.  Our affected farm represents approximately 9.0% of our total
egg production.  Other facilities, such as feed mill and distribution
centers, were essentially undamaged.




We have
designed our egg distribution system to transport eggs from our laying farms at
Celaya, Los Mochis, Obregón, Mexicali, Tecamachalco, Mérida, Saltillo and La
Laguna regions to customers in all sales regions.  We sell packaged
eggs directly to all of the principal supermarket chains in Mexico, with daily
deliveries directly to their outlets.




Seasonality




Our sales
are moderately seasonal, with the highest levels of sales, in general, in the
second and fourth quarter due to higher chicken consumption during the holiday
season.




Balanced
Feed




The Consejo Nacional de Fabricantes de
Alimento Balanceado y de la Nutrición Animal, A.C. (”CONAFAB”), estimates
that Mexican production of balanced feed has been in constant growth, increasing
from 24.6 million tons in 2005 to an estimated 26.6 million tons in
2009.  In 2008, Mexico was ranked the third largest producer of feed
in the world and the second largest in Latin America. Information for 2009 is
not yet available.




Local
production is composed of commercial and integrated
manufacturers.  Commercial manufacturers produce for the market, while
integrated manufacturers mostly produce for themselves and occasionally for
other producers.  Integrated producers account for approximately 63.0%
of total production.  Imports of feed come almost entirely from the
United States and represent approximately 1.0% of the total consumption in
Mexico.




21


We
entered the feed business as a result of our acquisition of Grupo Campi at the
end of 1999.  We sell to small livestock producers and through a
network of small distributors located mainly in central and southern
Mexico.  We have benefited from economies of scale and synergies
derived from producing feed both for our own internal consumption and for sale
to third parties.  Currently, we have four feed plants dedicated to
producing balanced feed to third parties.




We
estimate that our balanced feed business currently comprises approximately 3.4%
of the market share of the commercial (non-integrated) balanced feed business in
Mexico, a reduction from the 3.9% market share in 2008.  The decrease
in our balanced feed sales volume is due to a reduction in our production levels
as we improve our sales mix.




Swine




We
purchase breeder swine live from the United States and breed them at facilities
in the state of Sonora.  We then raise swine to maturity at our farms
in Celaya and three other locations in Mexico.  Mature swine is sold
on the hoof to Mexican swine meat packers for the production of pork
products.




In 2007,
swine prices decrease 5.5% as a result of over-supply conditions in the swine
market.  In 2008, our swine prices increase by 19.6% as a result of a
better balance in the commercial market.  During 2009, swine business
remained generally stable as prices increased 10.7% for the whole
year.  Traditionally, Mexicans consume fewer swine products than
chicken and egg products.




Turkey
and Prepared Beef Products




In 2007,
as a result of the “Del Mezquital” and “Grupo Libra” agreements, we introduced
two new product lines:  turkey and value-added beef and pork
products.  We do not raise either turkey or cattle; we only process
these products. See Item 5: “Operating and Financial Review and Prospects -
Acquisitions & Dispositions” in this Annual Report for more details on the
“Del Mezquital” and “Grupo Libra” agreements.




In 2009,
these product lines represented less than 1.0% of our total
sales.  However, we see opportunities to grow these businesses by
taking advantage of our distribution network.




Raw
Materials




We
purchase our breeding stock for broilers and layers from high-quality
suppliers.  All of our breeder swine currently come from one supplier,
but we have changed suppliers from time to time and have numerous alternative
sources of supply.




The
largest single component of our cost of sales is the cost of ingredients used in
the preparation of feed including, principally, sorghum, soy meal, corn, fish
meal, meat meal, and for certain chicken products, marigold
extract.  The price of these ingredients is subject to significant
volatility resulting from weather, the size of harvests, transportation and
storage costs, governmental agricultural policies, currency exchange rates and
other factors.  To reduce the potential adverse effect of grain price
fluctuations, we vary the composition of our feed to take advantage of current
market prices for the various types of ingredients used.




Under
NAFTA, corn tariffs were eliminated on January 1, 2008.  This new
condition has been positive for the Company, allowing us more flexibility in our
cost of production as the cost of our ingredients more closely tracks prices in
the international commodity markets.




Throughout
all of 2007 and most of 2008, prices of corn and soybean meal have experienced
high volatility and have demonstrated historically high prices
world-wide.  By the end of 2008, prices of corn and soybean meal
started to decrease and have continued their downward trend into the year 2009,
where we observed more stable prices for these ingredients.




22


We take
advantage of lower-cost feed ingredients from Mexican sources, when
available.  In 2009, we obtained approximately 50.0% of our total
grain from the domestic market.  We believe that the quality of local
feed ingredients, particularly sorghum, is superior to that of imported feed
ingredients.  In addition, the use of local feed ingredients allows us
to save on transportation costs and import duties. However, in southern
Mexico domestic crops and feed ingredients are limited.  As such, our
complexes use mainly imported grain.  The Company engages in hedging
of its feed costs in order to assure more stable cost of grains.




Competition




Chicken




According
to the UNA, we are Mexico’s largest chicken producer.  We face
significant competition from other producers in all of the markets in which we
sell our products.  When combined with our two largest vertically
integrated competitors, we account for approximately 59.0% of total Mexican
poultry production; the balance is distributed among approximately 170 small and
medium-sized integrated and non-integrated producers.  The major
producers, including Bachoco, have substantial cost advantages over smaller,
non-integrated producers arising from economies of scale and control of feed
preparation.  To varying degrees, each of these companies has
substantial financial resources and strengths in particular product lines and
regions.  We believe, however, that we have substantial competitive
strengths over our competitors, including a broader range of chicken products
and broader geographic coverage.




Furthermore,
there are considerable barriers to entry into large-scale chicken production and
distribution in Mexico, including, among others, the consumer preference for
fresh chicken, the weaknesses of transportation infrastructure and varying
regional consumer preferences among the various product
categories.  The channels for distribution of chicken products, in
particular, are highly specialized and varied, and they call for in-depth
experience in market practices.




Nonetheless,
we expect that we will continue to face strong competition in every market and
that existing or new competitors are likely to broaden their product lines and
to extend their geographic coverage.




Poultry
producers in the United States have developed low-cost production techniques and
have been successful in exporting primarily frozen and value-added poultry to
other countries, especially in periods of overcapacity in the United
States.  As tariff barriers have declined under NAFTA, we have
experienced increased competition from U.S. poultry
producers.  According to the UNA, in 2009, imports of poultry products
increased 17.4% in volume over imports in 2008.  This increase was due
to lower level of prices in the U.S. and others foreign markets.




We expect
that competition from U.S. exporters could increase.  However, Mexican
consumer acceptance of frozen poultry products is still low.




Table
Eggs




We are
one of the largest producers of table eggs in Mexico, with approximately 10.0%
of total Mexican egg production at the end of 2009.  The Mexican table
egg industry is very fragmented and the principal 9 companies only account for
44.0% of total table egg production in Mexico.




23


Balanced
Feed




The
Consejo Nacional de Fabricantes de Alimento Balanceado y de la Industria Animal,
A.C. (“CONAFAB”), estimates that the balanced feed production in Mexico recorded
a cumulative increase of 3.5% from 2007 to 2009, where the integrated firms
produce approximately 63.0% of total production for their internal use, and the
remaining 37.0% is produced for sale to third parties.  We estimate a
market share of approximately 3.4% in our balanced feed product
line.




Swine




The
Mexican swine industry is highly fragmented, and no producer has more than 15.0%
of the market.  On December 31, 2009, we had less than 1.0% of
the Mexican market share in swine.  U.S. producers compete in this
market in Mexico.




Mexican
Regulation




Mexican
Import Regulation and Price Controls




As
required by NAFTA, the Mexican government eliminated all permanent quotas and
tariffs on poultry, table eggs and swine in January 2003.  With
certain specific exceptions described below, there are now no quotas or tariffs
on imports of poultry, eggs and swine from the United States.  We
expect the elimination of these trade protections to stabilize the level of
imports over time and to permit improved private control over imports, which may
result in increased competition from importers.




Import
Status




Effective
January 1, 2008, there is a free chicken market between Mexico and the
U.S.  This allows U.S. producers to export any amount of chicken leg
quarters free of tariffs to Mexico.




In
addition to NAFTA, Mexico has entered into free trade agreements with several
other countries including Chile, Europe, Colombia and
Venezuela.  Although such agreements may result in lower tariffs on
our own products, we believe that imports from such countries will not increase
substantially in the future due to high transportation and distribution
costs.




Antitrust
Regulations




The Ley Federal de Competencia
Económica (“Mexican Economic Competition Law”), which took effect on
June 22, 1993, regulates monopolies and monopolistic
practices.  Under this law, all companies (including Bachoco) are
required to notify the Comisión Federal de
Competencia (“Federal Competition Commission”) of all proposed
transactions exceeding specified threshold amounts as set forth in the Mexican
Economic Competition Law.  The Federal Competition Commission can
impose conditions on, and prevent or unwind, any such transactions by Mexican
companies.  We have complied with all requirements under this
law.




On
December 2009, Mexico’s Federal Commission of Economic Competition published a
notice announcing an investigation of the Mexican poultry sector regarding
possible monopolistic business practices. No specific companies have been cited
as conducting business in this manner.   We, along with other
companies, were required to provide information to the commission.  We
expect that the commission will require additional information.




24


Environmental
and Sanitary Regulation




Our
operations are subject to Mexican federal and state laws and regulations
relating to the protection of the environment.  The principal laws are
Ley General de Equilibrio
Ecológico y Protección Ambiental(General Law of Ecological Balance and
Environmental Protection—the “Environmental Law”) and Ley de Aguas Nacionales(“National Waters Law”).  The Secretaría del Medio Ambiente y
Recursos Naturales (Ministry of Environment and Natural Resources, or
“Semarnat”) administers the Environmental Law, and Comisión Nacional del Agua(“National Water Commission”) administers the National Waters
Law.




The
Environmental Law regulates water pollution, air pollution, noise control and
hazardous substances.  Semarnat can bring administrative and criminal
proceedings against companies that violate environmental laws, and after certain
administrative procedures, it also has the power to close non-complying
facilities.  Every company in Mexico is required to provide Semarnat
with periodic reports regarding compliance with the Environmental Law and the
regulations thereunder.




The level
of environmental regulation in Mexico has increased in recent years, and
enforcement of the law is improving.  We expect this trend to continue
and to intensify with international agreements between Mexico and the United
States.




In
particular, Mexican environmental laws set forth standards for water discharge
that are applicable to poultry processing operations.  Our processing
plants have water treatment facilities that comply with Mexican environmental
standards.  We are implementing other investment projects in
anticipation of stricter environmental requirements in the future.  We
do not expect that compliance with those Mexican federal environmental laws or
Mexican state environmental laws will have a material effect on our financial
condition or performance.




The
production, distribution and sale of chicken, eggs and swine are subject to
Mexican federal and state sanitary regulations.  The principal
legislation is Ley General de
Salud (“General Health Law”) and Ley Federal de Sanidad Animal(“Federal Animal Health Law”).  The Federal Animal Health Law
was enacted in 1993, and, since then, we have been working closely with Mexican
authorities to develop regulatory standards and inspection methods for chicken
processing.  Currently, Mexican authorities do not monitor production
or inspect products to the same degree as sanitary authorities in other
countries, such as the USDA in the United States.  However, we believe
that we are in compliance with all applicable sanitary regulations.




C.
            Organizational
      Structure




We are a
holding company with no operations other than holding the stock of our
subsidiaries, all of which are incorporated in Mexico, and engaging in
transactions with our subsidiaries.  Our principal operating
subsidiary is BSACV, which owns our principal operating assets, and which
accounted for 91.9% of consolidated total assets as of December 31, 2009,
and 92.1% of our consolidated revenues for the year ended December 31,
2009.  All of our subsidiaries are directly owned by us in the
percentage listed below.




25


The
following table shows our main subsidiaries as of December 31, 2007, 2008
and 2009:




Percentage Equity Interest2007
                
                
                2008
                
                
                2009Acuícola
      Bachoco, S.A. de C.V.
                
                
                100
                
                
                
                100
                
                
                
                -Aviser,
      S.A. de C.V.
                
                
                100
                
                
                
                100
                
                
                
                100Bachoco,
      S.A. de C.V.
                
                
                100
                
                
                
                100
                
                
                
                100Bachoco
      Comercial, S.A. de C.V.
                
                
                100
                
                
                
                100
                
                
                
                100Campi
      Alimentos, S.A. de C.V.
                
                
                100
                
                
                
                100
                
                
                
                100Huevo
      y Derivados, S.A. de C.V.
                
                
                97
                
                
                
                97
                
                
                
                97Operadora
      de Servicios de Personal, S.A. de C.V.
                
                
                100
                
                
                
                100
                
                
                
                100Pecuarius
      Laboratorios, S.A. de C.V.
                
                
                64
                
                
                
                64
                
                
                
                64Secba,
      S.A. de C.V.
                
                
                100
                
                
                
                100
                
                
                
                100Sepetec,
      S. A. de C.V.
                
                
                100
                
                
                
                100
                
                
                
                100Servicios
      de Personal Administrativo, S.A. de C.V.
                
                
                100
                
                
                
                100
                
                
                
                100Induba
      Pavos, S.A. de C.V.
                
                
                100
                
                
                
                100
                
                
                
                100





In
December 2006 and July 2007, we created Induba Pavos, S.A. de C.V. and
Bachoco Comercial, S.A. de C.V. respectively.  They are both 100.0%
owned subsidiaries of Industrias Bachoco.




In 2009,
Acuícola Bachoco, S.A. de C.V. merged with Campi Alimentos, S.A. de
C.V.




D.
            Property,
      Plant and Equipment




Our
production and storage facilities are located throughout the regions we serve in
order to ensure freshness and minimize transportation time and
costs.  The most extensive facilities are grouped in nine complexes
that include farms and processing plants.  The largest of our
complexes is in Celaya, where we have broiler grow-out farms, a broiler
processing plant and egg production farms.  The complex at Culiacán
includes broiler grow-out farms and a broiler processing plant, as do the
complexes located in Puebla, Lagos de Moreno, Coatzacoalcos, Mérida, Hermosillo
and Monterrey.  There are smaller egg production farms at Los Mochis,
Ciudad Obregón, Puebla and Mexicali.  In Gómez Palacio and Saltillo,
we have a complex which consists of broiler grow-out farms, a broiler processing
plant and egg production farms representing nearly half of our total egg
production capacity.




The
following table summarizes the types and number of each type of our production
facilities as of March 2010:




Bachoco Production Facilities
              
              NumberChicken
      breeding farms
              
              183Broiler
      grow-out farms
              
              529Broiler
      processing plants
              
              9Egg
      incubation plants
              
              25Egg
      production farms
              
              106Swine
      breeding farms
              
              1Swine
      grow-out farms
              
              10Feed
      mills
              
              18Further
      process plants
              
              3




On
September 16, 2006, Hurricane Lane hit the southern part of the state of
Sinaloa affecting some of our chicken growing farms in that
region.  We were able to provide a proper supply to our customers in
that region from our other complexes.




26


On
April 13, 2008, the secondary processor at our processing plant in
Monterrey caught fire.  While the fire destroyed the entire secondary
processor, the primary processor, which is physically separate from the second,
did not suffer any damage and is operating under nearly normal
conditions.  The assets were properly covered by an insurance
policy.




In April
2010, the table eggs operation located in Mexicali, B.C. was affected by an
earthquake that hit northwestern Mexico on April 4.  The earthquake
partially affected almost all of the farms located in this region, including our
farm.  Our affected farm represents approximately 9.0% of our total
egg production.  Other facilities, such as feed mill and distribution
centers, were essentially undamaged.




We
operate 18 feed mills for our own chickens, feed sales to third parties and egg
and swine operations.  The total production capacity of our feed
plants is approximately 419,000 tons per month.  We estimate that we
are the largest producer of animal feed in Mexico.




Our other
facilities include two poultry manure-processing plants.  Our
headquarters are located in Celaya Guanajuato, Mexico, and we have 58 sales
centers throughout the regions we serve.




We own
most of our facilities.  We lease a limited number of farms and sales
centers, all of which we do not consider material.  We also employ a
network of contract growers.




Our fleet
of trucks carries part of the feed from feed mills to farms, live chickens from
farms to processing plants, day-old chickens from egg incubation plants to
farms, eggs from farms to distribution centers and, ultimately, products from
distribution centers to customers.




ITEM
4.A.        Unresolved Staff
Comments





None





ITEM
      5.
            Operating
      and Financial Review and Prospects




The
following discussion should be read in conjunction with our Audited Consolidated
Financial Statements.  The Audited Consolidated Financial Statements
have been prepared in accordance with Mexican FRS, which differs in certain
respects from U.S. GAAP.  Note 21 to the Audited Consolidated
Financial Statements provides a description of the principal differences between
Mexican FRS and U.S. GAAP, as they relate to us, and a reconciliation to U.S.
GAAP of consolidated stockholders’ equity, net income, a consolidated statement
of stockholders’ equity and a consolidated statement of cash flows under U.S.
GAAP as of December 31, 2008 and 2009 and for the years ended
December 31, 2007, 2008 and 2009.




As of
January 1, 2008, we have adopted the new standard related to “Inflationary
Effects” in accordance with Mexican FRS (Mexican FRS B-10).  Due to
the relatively low inflation that the country has consistently achieved during
the past several years, a new financial reporting standard came into effect on
January 1, 2008, which terminates the recognition of inflationary effects
in our financial information.  Consequently, financial information
corresponding to periods prior to December 31, 2007 is expressed in
millions of Mexican Pesos with purchasing power as of December 31, 2007,
while the financial information for periods after December 31, 2007 is
stated in millions of nominal Mexican Pesos. The effects of this price-level
restatement in accordance with Mexican FRS have not been reversed in the
reconciliation from Mexican FRS to U.S. GAAP.  See the Audited
Consolidated Financial Statements for more detail.




27


General




In the
following discussion we describe various trends and how they affected our
results of operations for the years ended December 31, 2007, 2008 and
2009.




Mexican
Economic Conditions




In 2007,
the Mexican economy was stable with an annual inflation rate of 3.8% and a final
dollar-peso depreciation rate of the peso against the dollar of 1.1%, as
compared to the end of 2006.  Rates on 28-day Cetes had an average of
7.19% for the year.




During
2008, the Mexican economy was very volatile.  In the first half of the
year, the Mexican economy showed little signs of volatility.  However,
as a result of the global economic slowdown and particularly the financial
crisis in the U.S., the Mexican economy experienced a drastic downturn in the
second half of the year.  In particular, the Mexican peso experienced
a sharp depreciation; the Mexican economy had a general slowdown and economic
forecasts deteriorated.




In 2008,
the annual inflation rate was 6.5% and the final dollar-peso depreciation rate
of the peso against the U.S. dollar was approximately 21.0%, as compared to the
end of 2007.  The rate on 28 day Cetes had an average of 7.6%
for the year.




During
2009, the Mexican economy continued to show signs of volatility as a result of
the global economic slowdown and particularly the financial crisis in the United
States.  In particular, the Mexican peso experienced significant
volatility during the first half of the year but tended to appreciate against
the U.S. dollar towards the end of the year.




In 2009,
the annual inflation rate was 3.57%.  The Mexican peso appreciated
5.4% against the U.S. dollar as compared with the end of 2008.




Effects
of Economic Conditions on the Industry and the Company




A
contraction of the purchasing power of Mexican consumers may adversely affect
demand for our products and, as a result, our net revenues and
profitability.  Inflation and changing prices affect our ability to
raise prices as well as consumer demand, supplier prices and other costs and
expenses, consumer purchasing power and competitive factors, all of which in
turn affect our net revenues and operating results.  Peso devaluations
and high inflation levels could further adversely affect our operations and
financial position.




Mexican
economic conditions have had an important impact on Mexico’s chicken market,
especially in the feed costs and the exchange rate as we noted
above.  Balanced feed constitutes a substantial portion of our cost
and is priced mostly in U.S. dollars.




We use
financial instruments to mitigate the cost of goods sold in currencies other
than Mexican pesos.  See Note 2-q and Note 10-a of the Audited
Consolidated Financial Statements.




In 2007,
average Mexican producer prices increased by approximately 10.0% mainly due to
increases in the cost of raw materials and a balance between supply and demand
in the market, particularly in the second and third quarter of the
year.




During
2008, average Mexican producer prices increased by approximately 0.2% mainly due
to increases in the cost of raw materials, partially offset by oversupply
conditions primarily in the second part of the year.




28


In 2009,
average Mexican producer prices increased by approximately
18.8%.  This increase is mainly attributable to (i) the adequate
balance between supply and demand present during the first half of the year, and
(ii) the general increase in the cost of raw materials throughout the
year.




Our
outstanding total indebtedness at the end of 2009 increased to Ps. 963.8 million
as compared to the Ps. 625.9 million in 2008, as we increased our debt in order
to ensure sufficient liquidity.  In 2009, we had a foreign exchange
loss of Ps. 37.9 million due to fluctuations in the exchange rate of the peso
against the U.S. dollar, as compared to a foreign exchange gain of Ps. 160.2
million in 2008 and a foreign exchange loss of Ps. 3.4 million in 2007. Our
valuation effects of financial instruments were a loss of Ps. 174.6 million in
2009, compared to a loss of Ps. 1.7 billion in 2008, as a result of a lower
amount of financial instruments. See note 10-a in our Audited Consolidated
Financial Statements.




Volume
of Chicken Sold




The 8.2%
increase in the volume of chicken sold in 2007 was mainly due to the business
agreements entered into in 2007, domestic growth and productivity
efforts.




In 2008,
the Company reported an increase in volume of chicken sold of 4.9%, compared to
2007.  This increase is due mainly to new farms in the cities of
Hermosillo and an expansion in capacity at our Mérida and Coatzacoalcos
complexes.




In 2009,
the Company increased its volume of chicken sold by 4.6%, compared to 2008,
mainly due to the business agreement reached with producers in the Northeast, as
mentioned above in Item 4: “Information on the Company – History and Development
of the Company – Background and Ownership Structure.”




Trends
in Product Prices for Bachoco




Our
results of operations may also be significantly affected by the cyclical and
volatile nature of Mexican prices for chicken, feed, eggs and
swine.




Chicken
Prices




In 2007,
our chicken prices increased 8.3% as a result of a stable market conditions and
increases in the cost of our main raw materials.




In 2008,
our chicken prices increased 4.4% as a result of increases in our costs of
sales, partially offset by oversupply conditions, which were present throughout
the year.




During
2009, chicken prices increased 12.6% as a result of increases in our cost of
sales and a more stable supply-demand balance during the first half of the
year.




Egg
Prices




In 2007,
our egg prices increased 18.5% as a result of a strong demand, particularly in
the second half of the year.




In 2008,
our egg business was strong and egg prices increased by 23.9% as a result of a
better balance between the demand and supply in the market and improvements in
our mix of products sold.




During
2009, our egg business continued its strong performance as prices increased
12.0% over the previous year as a result of strong demand in the Mexican
market.




29


Balanced
Feed Prices




Through
2007, international corn prices increased significantly as a result of lower
inventories and increases in alternative uses of corn, such as ethanol
production.





International
grain prices also increased dramatically in 2007, reaching historically high
prices worldwide, due mainly to strong demand and alternative uses for grain,
such as ethanol production. Soybean meal prices also increased, particularly in
the second half of the year, due to strong demand, and lower inventories
worldwide.





In 2007,
balanced feed prices increased by 15.1% in comparison with the prior year, as a
result of increases in the costs of raw materials.





In 2008
our balanced feed prices increased by 19.4% over 2007, however such increase did
not fully reflect the worldwide increase of feed ingredient costs and oversupply
conditions which resulted principally from the global economic
slowdown.





During
2009, balanced feed prices increased by 9.3% as a result of an increase in the
cost of feed ingredients. See “Trends in Prices of Feed Ingredients”
below.





Swine
Prices




In 2007,
our swine prices declined 5.5% as a result of greater competition from imports
and a more fragmented Mexican market.




During
2008, demand and supply were stable for most of the year and swine prices
increased by 19.6% as compared to 2007.




In 2009,
swine prices increased 10.7% over the previous year as a result of a stable
supply of swine.




In
general, we believe that, among other factors, industry price competition may
continue to exert downward pressure on chicken prices, and that prices for
chicken, feed, eggs and swine are also likely to remain volatile and subject to
cyclical variation, due to the time needed to complete the chicken growth
cycle.  Chicken producers generally cannot adjust production to
respond immediately to cyclical variations, and, accordingly, in times of
oversupply, prices may decline due to overproduction.




Trends
in Prices of Feed Ingredients




The
single largest component of our cost of sales is the cost of ingredients used to
prepare feed, including sorghum, soybean meal, corn, fish meal, meat meal and,
for certain chicken products, marigold extract.  The prices of these
feed ingredients are subject to significant volatility due to a number of
variables, including, among other factors, weather, harvest size, transportation
and storage costs, government agricultural policies and currency exchange
rates.  The price at which we may obtain feed ingredients from Mexican
producers relative to U.S. producers is also subject to volatility depending on
these variables.




At
present, Mexican feed prices tend to parallel U.S. and international
prices.  In 2007, the percentage of grain purchased from domestic
markets was 36.4%, in 2008 it was approximately 48.0% and in 2009 it was
approximately 50.0%.




During
2007, international corn prices increased significantly as a result of lower
inventories and increases in alternative uses of corn, such as ethanol
production.




30




Beginning
in 2007 and throughout most of 2008, international grain prices increased
drastically reaching new historically high prices worldwide and exceeding the
corn prices reached in 2004, due to strong demand and lower inventories
worldwide.  These price increases put strong pressure on our
production costs.




Restrictions
on importing grain under NAFTA have been phased out as of the beginning of
2008.  We expect this development to benefit the Company and result in
a reduction of the costs associated with importing our feed
ingredients.




In 2009,
international corn prices showed more stability and were in fact lower when
compared with previous years.  However, the high level of inventories
and exchange rate volatility did not result in a net decrease in our cost of
sales.




Acquisitions
& Dispositions




Our
operations have been affected during the periods we discuss herein, by a series
of acquisitions and production arrangements that we have made in recent
years:




·
            In
      February 2007 and December 2007, the Company reached a business
      agreement with “Grupo Libra” and “Grupo AGRA,” respectively, as described
      below:




a)
            Grupo
      Libra is a company located in northeast Mexico.  The agreement
      establishes a lease for the use of their facilities, which included
      breeders and chicken farms with a capacity of approximately 3.0 million
      chickens per cycle, along with a slaughter plant, and a processing
      center.  In addition, Bachoco acquired all of Grupo Libra’s
      inventories and brands.


b)
            Grupo
      Agra is an egg producing company located in the states of Nuevo Leon and
      Coahuila in Northeast Mexico.  The agreement provides for
      leasing of their facilities, which include laying hens farms with a
      capacity of approximately 1.0 million hens, a processing table eggs plant,
      distribution centers and the Agra brands.  In addition, we
      acquired all their inventories.





The two
transactions in 2007 individually represent less than 1.0% of our total
sales.  We analyzed both transactions to determine whether these
agreements should be considered as business acquisitions, under SFAS141R
(previously SFAS141) “Business Combination”.  Per the terms of the
agreements, we did not acquire any employees, customer base or production
techniques.  For these and other reasons, we concluded that the
transactions did not qualify as a business in accordance with SFAS141R
(EITF98-3) “Determining Whether a non-monetary transaction Involves Receipt of
Productive Assets or of a Business” (paragraph 6) and therefore were not
deemed to be business combinations, in accordance with FAS 141.





Instead,
these transactions were accounted for as asset acquisitions.  The
accounting is the same for Mexican FRS.  The FAS 141 disclosure
requirements described in paragraph 51-53 therefore do not apply to these
transactions.





Additionally,
we analyzed the appropriate accounting treatment related to leases as described
in FASB 13, “Accounting for Leases,” and concluded that the transactions were
operating leases.  These transactions did not qualify as capital
leases because there was no transfer of ownership of the property to Bachoco
before the end of the lease term, the lease did not contain an option to
purchase the leased property at a bargain price, the lease term was not equal to
or greater than 75.0% of the estimated economic life of the leased property and
the present value of rental and other minimum lease payments was not equal to or
greater than 90.0% of the fair value of the leased property. We concluded that
these were operating leases under both the Mexican FRS and U.S. GAAP. The lease
commitments were appropriately included in footnote No. 11 to the Audited
Consolidated Financial Statements. For more detail, see Note 2-j of our Audited
Consolidated Financial Statements.


31




·
            On
      April 13, 2008, the second phase of our production process at our
      processing plant in Monterrey caught fire. While the fire destroyed the
      entire second phase of our production process, the first phase of our
      production process, which is physically separate from the second, did not
      suffer any damage and is operating under nearly normal conditions. All the
      assets were properly covered by an insurance
  policy.




·
            In
      July 2009, the Company made several asset acquisitions and reached a
      series of agreements to improve productivity and efficiency in the
      Northeast production complex headquartered in Monterrey,
      N.L.  The specific acquisitions and agreements made
      were:




a)
            The
      acquisition of the assets of a balanced feed mill from Productora de
      Alimentos Pecuarios de Nuevo León, S.A. de C.V. through our Campi
      subsidiary.  The purpose of this acquisition was to improve the
      quality and production capacity of balanced feed. The mill’s production
      capacity is about 3,000 tons of pellet feed per
  week.


b)
            The
      acquisition of the assets of a chicken processing plant from Avi Carnes
      Monterrey, S.A. de C.V., through our Bachoco subsidiary, with a production
      capacity of 9,000 chickens per hour.  The goal of this
      acquisition was to reduce production costs, replace the Monterrey
      processing plant and to increase production capacity and diversify the
      chicken business in that region.


c)
            An
      agreement to rent breeder farms and egg incubation plants from
      Reproductoras Asociadas, S.A. de C.V. and one-day-old breeder capacity
      farms and egg incubation plants from Producción Avicola Especializada,
      S.A. de C.V.


d)
            The
      Company also made arrangements with contract growers to acquire their
      inventories.





After
analyzing these transactions for 2009, and the terms of the agreements, we did
not acquire any of their employees, customer base, or debt or production
techniques.  As a result, we concluded that the transactions did not
qualify as a business in accordance with ASC topic 805 “Business Combination”
before SFAS141R (EITF98-3) “Determining Whether a non-monetary transaction
Involves Receipt of Productive Assets or of a Business” (paragraph 6) and
therefore were not deemed to be business combinations, in accordance with FAS
141R.





A.
            Operating
      Results




Summary




The
following table sets forth selected components of our results of operations as a
percentage of net revenues for each of the periods indicated:




Year
      Ended December 31,2007
                    
                    
                    2008
                    
                    
                    2009(percentage
      of net revenues)Net
      revenues
                    
                    
                    100.0
                    %
                    
                    
                    100.0
                    %
                    
                    
                    100.0
                    %Cost
      of sales
                    
                    
                    (79.5
                    )
                    
                    
                    (86.9
                    )
                    
                    
                    (83.1
                    )Gross
      profit
                    
                    
                    20.5
                    
                    
                    
                    13.1
                    
                    
                    
                    16.9Selling,
      general and administrative expenses
                    
                    
                    (12.3
                    )
                    
                    
                    (12.0
                    )
                    
                    
                    (10.8
                    )Operating
      income
                    
                    
                    8.2
                    
                    
                    
                    1.1
                    
                    
                    
                    6.1Comprehensive
      financing income (loss)
                    
                    
                    0.1
                    
                    
                    
                    (6.8
                    )
                    
                    
                    (0.6
                    )Taxes
                    
                    
                    (1.7
                    )
                    
                    
                    1.4
                    
                    
                    
                    (1.7
                    )Net
      income (loss)
                    
                    
                    7.0
                    
                    
                    
                    (4.4
                    )
                    
                    
                    3.5




32




The
following table sets forth, for each of the periods indicated, our net revenues
of chicken, feed, eggs, swine and other products as a percentage of total net
revenues in each period:




Year
      Ended December 31,2007
                                        
                                        
                                        2008
                                        
                                        
                                        2009(percentage
      of net revenues)Chicken
                                        
                                        
                                        77.6
                                        %
                                        
                                        
                                        76.9
                                        %
                                        
                                        
                                        78.3
                                        %Feed
                                        
                                        
                                        8.0
                                        %
                                        
                                        
                                        7.3
                                        %
                                        
                                        
                                        6.3
                                        %Eggs
                                        
                                        
                                        9.6
                                        %
                                        
                                        
                                        10.5
                                        %
                                        
                                        
                                        10.1
                                        %Swine
      and Others
                                        
                                        
                                        4.8
                                        %
                                        
                                        
                                        5.3
                                        %
                                        
                                        
                                        5.3
                                        %Total
                                        
                                        
                                        100.0
                                        %
                                        
                                        
                                        100.0
                                        %
                                        
                                        
                                        100.0
                                        %





Results
of Operations for the Years Ended December 31, 2008 and 2009




General




The
global financial crisis continues to affect the Mexican economy as the inflation
rate for 2009 increased by 3.57%, while national GDP experienced a sharp
contraction of 6.5%, according to information provided by the Central
Bank.




In 2009,
the exchange rate of the peso against the U.S. dollar appreciated 5.4% when
compared to the year-end exchange rate for 2008.




According
to the UNA, the production volume of the Mexican chicken industry decreased by
2.5% in 2009 due to lower demand for these products and lower purchasing power,
which resulted from the economic crisis in Mexico.




On the
other hand, the table egg industry, which is a low cost protein option in
Mexico, increased by 3.3% in terms of domestic production when compared to
fiscal year 2008, as a result of a better balance between supply and demand in
this market.




Additionally,
Bachoco achieved good operating results in several of its productive and
commercial operations of the Company as a result of adequate logistics, cost
controls, efficiency efforts and the continuous improvement in all our
processes.




Net
revenues




Bachoco’s
net sales during 2009 were Ps. 23.3 billion, 15.6% higher than the Ps. 20.1
billion reported in 2008. This was as a result of higher net sales in our main
business lines. For more detail see the table included in Item 5: “Operating and
Financial Review and Prospects - Summary” above.




Chicken
sales increased 17.6% compared to 2008, resulting from an increase in the price
of chicken of 12.6% and an increase in volume sold of 4.6%.




Table egg
sales rose 11.8%, as compared to 2008, mainly due to increases in selling prices
of 12.0%, partially offset by a decrease in volume sold of 0.2%.  The
increase was also a result of the strong demand for this product throughout
2009.




Balanced
feed sales decreased 0.4% from the previous year and volume sold fell 8.9% as a
result of a decrease in demand, and was mainly attributed to high raw materials
costs. In 2009, prices for balanced feed rose 9.3%, as compared with 2008 as a
result of the increase in the costs of raw materials.




The
Company sells live swine to local processors. Swine sales increased 11.7% as a
result of a 10.7% increase in the price of swine and a 0.9% increase in the
volume of sales, as compared to 2008.




33


Sales of
our other business lines (including turkey and beef processed products)
increased by 16.2% as compared to 2008. This increase was mainly driven by an
increase in sales of turkey and by-products, such as poultry
manure.




In 2008
and 2009, we recognized an increase of Ps.16.3 million and decrease of Ps. 7.2
million, respectively, in revenue as a result of the fair valuing of the
Company’s biological assets and agricultural products .  See Note 2-g,
and Note 6-b in our Audited Consolidated Financial Statements for more
detail.




Cost
of sales




The costs
of our raw materials were stable, but continued to remain high, especially for
soybean meal during the first half of the year. The high prices of raw
materials, coupled with higher costs associated with the increase in the volume
sold of chicken, lead us to a 10.5% increase in the cost of sales during 2009,
as our costs of sales amounted Ps. 19.3 billion compared to the Ps. 17.5 billion
reported in 2008.




Gross
profit




Gross
margin for 2009 was 16.9% in 2009, compared to the 13.1% reported in 2008, this
as a result of the sales increase of chicken and egg products.




Selling,
general and administrative expenses




Total
operating expenses in 2009 were Ps. 2.5 million, an increase of 4.5%, as
compared to 2008, which resulted primarily from the increase in our distribution
expenses. Total expenses accounted for 10.8% of the Company’s total net
revenues, a decrease when compared with the 12.0% reported for year
2008.




Operating
income




The
consolidated operating result for 2009 was a profit of Ps. 1.4 billion,
representing an increase from the Ps. 230.0 million reported in 2008. The
operating margin for 2009 was 6.1%, as compared to the 1.1% reported in
2008.




Other
income (expense), net




In 2009,
we had other expenses, net of Ps. 65.2 million, as compared to other expenses,
net of Ps. 21.0 million in 2008, mainly due to lower income attributable to
sales of waste animals, raw materials and by products and lower tax
incentives.  See Note 17 to our Audited Consolidated Financial
Statements for more detail.




Comprehensive
financial results




During
2009, we recorded a comprehensive financing cost of Ps.133.2 million, compared
with a cost of Ps. 1.4 billion in 2008, which resulted from a reduction in the
valuation of financial instruments. Net interest position and the impact on the
valuation of our financial instruments was a loss of Ps. 95.3 million in 2009,
much lower than the loss of Ps. 1.5 billion reported in 2008.  See
Note 10-a to our Audited Consolidated Financial Statements for more
detail.





Income
(loss) before income  taxes and non-controlling interest




Income
before income taxes and non-controlling interest was Ps. 1.2 billion 2009 as
compared to a loss of Ps. 1.2 billion in 2008.  This increase is
mainly attributable to an increase in gross profit and a decrease in our
comprehensive financing cost.




34


The total
taxes recognized by the Company at 2009 year end totaled Ps. 406.4 million; this
amount includes a one-time charge of Ps. 188.8 million based on the recognition
of a deferred income taxes relating to a change in the tax rate for 2010
following the Mexican tax reforms and does not affect the Company’s cash
flow.  See Note 16-d of the Audited Consolidated Financial Statements
for more details.




Net
(loss) income




Net
income for 2009 was Ps. 809.0 million, representing a net income per share
outstanding of Ps. 1.35 pesos (or U.S. $1.24 per ADS), compared with a net loss
in 2008 of Ps. 886.0 million, or a loss of $1.48 per share (loss of U.S. $1.35
per ADS).  This reversal was largely a result of our positive
operating and financial results, partially offset by the increase in our total
taxes.




Results
of Operations for the Years Ended December 31, 2007 and 2008




General




The
global financial crisis had severe repercussions in the Mexican economy,
especially in the second half of the year.  In particular, there was a
slowdown in the Mexican economy and a reduction in economic growth
forecasts.  In addition, the exchange rate of the peso against the
U.S. dollar experienced a sharp depreciation of 21.0% when compared to the
year-end exchange rate for 2007.




The
Mexican economy had a growth rate of only 1.3% and the annual inflation rate
increased to 6.5%.




According
to the UNA, the production volume of the Mexican chicken industry grew by
approximately 6.4% in 2008 as a result of consumer preference for healthier meat
products, income increases per capita and chicken as a low-cost protein
alternative to other meat sources.




With
respect to the table egg industry, domestic production increased by 1.2%, which
led to a better balance between supply and demand in the market.




Even
though we were able to increase sales in all our main product lines and sold our
entire production, the Mexican economic slowdown, the continued increases in the
cost of our main raw materials and oversupply conditions in the chicken markets
negatively affected our operating and financial
results.  Consequently, we achieved an operating margin of 1.1%, which
is lower than the 8.2% reached in 2007 and one of the weakest margins in the
Company’s history.




Net
revenues




Net sales
during 2008 were Ps. 20.1 billion, 10.5% higher than the Ps. 18.2 million
reported in 2007.  This was due to an increase in sales in all of our
business lines.  For more detail, see the table included in Item 5:
“Operating and Financial Review and Prospects - Summary” above.




Chicken
sales grew by 9.5% as compared to sales in 2007.  The increase was due
to an 4.4% price increase.  Even when there were oversupply issues
throughout the year, the Company was able to sell its entire chicken
production.  Chicken volume grew by 4.9% due to increases in capacity
driven by increases in capacity at several farms located in our Mérida and
Veracruz complexes and new farms located in Hermosillo.




Table egg
sales grew by 20.4% in 2008 as compared to sales in 2007 due to a 23.9% price
increase, partially offset by a 2.8% decrease in volume.  The sales
increase was due to stable supply in the Mexican table eggs industry and strong
demand for our table eggs products during most part of the year, of which more
than 50.0% are packaged under our brand name.




During
2008, balanced feed sales grew slightly by 0.9% and the volume of balanced feed
sold dropped 15.5% in comparison to 2007.  This business line was
strongly affected by high increases in the prices of raw
material.  The 19.4% increase in our balanced feed prices was not
enough to offset the increases in our production costs.




35


We
increased our pork sales by 35.3% in 2008 as compared to sales in 2007, due to a
13.1% increase in volume sold and a 19.6% increase in our pork prices which
resulted from stable demand in the Mexican market and a slight reduction in
imports of pork products.




In 2008
and 2007, we recognized Ps.16.4 million and Ps. 10.8 million, respectively, in
revenue as a result of the fair valuing part of the Company’s biological assets
and agricultural products.  See Note 2-g, and Note 6-b in our Audited
Consolidated Financial Statements for more detail.




Cost
of sales




Our
consolidated cost of sales in 2008 was Ps. 17.5 million, an increase of 20.8%
with respect to 2007, as a result of the substantial increases in the prices of
raw materials, particularly grains, which are the most important components of
our costs of sales.




Gross
profit




As a
percentage of net sales, gross profit was 13.1% in 2008, compared to 21.0%
reported in 2007.  The decrease was mainly due to a sharp increase in
the cost of sales.




Selling,
general and administrative expenses




The
operating expenses of the Company in 2008 amounted to Ps. 2.4 billion, an
increase of 7.4% as compared to 2007, primarily due to increases in sales and
distribution expenses.  Total expenses accounted for 12.0% of the
Company’s total net revenues, representing a decrease of 0.3% when compared with
the 12.3% reported for 2007.




Operating
income




The
consolidated operating result for 2008 was a profit of Ps. 230.1 million, lower
than the Ps. 1.5 billion profits reported in 2007.  The operating
margin was 1.1% in 2008, as compared to the 8.2% reported in 2007.




Other
income, net




Other
income, net represented a net cost of Ps. 21.0 million in 2008 as compared to a
gain of Ps. 69.6 million in 2007, mainly due to lower income for sales of waste
animals, raw materials and by products, lower tax incentives and higher employee
profit sharing contributions.  See Note 17 of the Audited Consolidated
Financial Statements for more detail.




36


Comprehensive
financial results




The
Company had negative comprehensive financial results of Ps. 1.4 billion in 2008,
as compared to the comprehensive financing income of Ps. 19.1 million achieved
in 2007.  This reversal was primarily due to negative results in our
exchange rate derivative instruments and grain hedge positions.  Our
net interest position and the impact on the valuation of our financial
instruments was a loss of Ps. 1.5 billion in 2008, partially offset by our
foreign exchange gain of Ps. 160.2 million.  See Note 10-a of our
Audited Consolidated Financial Statements for more detail.




Income
(loss) before income taxes, and non-controlling interest




Loss
before income taxes and non-controlling interest was Ps. 1.2 billion in 2008, as
compared to an income of Ps. 1.6 billion in 2007.




At
December 31, 2008, the Company recognized an income tax benefit in an
amount totaling Ps. 274.0 million, compared to an income tax expense of Ps.
312.7 million reported in 2007.  See Note 16-a of the Audited
Consolidated Financial Statements for more details.




Net
(loss) income




The
Company reported a consolidated net loss of Ps. 886.0 million for 2008,
representing a loss per share of Ps. 1.48 (equivalent to U.S.$1.35 per ADS), as
compared to a consolidated net profit in 2007 of Ps. 1.3 billion or Ps. 2.12 per
share (equivalent to U.S.$1.95 per ADS).  This decrease is due to the
lower operating income and the negative comprehensive financial results in
2008.




Income
Tax, Asset Tax and Flat Rate Business Tax, Year 2009




Industrias
Bachoco and all of its subsidiaries file separate income tax
returns.  Bachoco, the Company’s main subsidiary, is subject to the
simplified regime, which rate has been set at 19.0% since 2007.  This
simplified regime is applicable to agriculture, cattle-raising and fishing,
among others.





Income Tax




In 2009,
a tax reform was authorized by which, as of 2010, the tax rate was increased
from 19.0% to 21.0% in the simplified regime and from 28.0% to 30.0% in the
general regime. The Company recognized the result of this change in 2009, in a
charge to results of Ps. 188.8 million, which is reflected in deferred taxes
under the line item “Adjustment to deferred tax assets and liabilities for
enacted changes in tax law and rates.”




Flat
Rate Business Tax (IETU)




On
October 1, 2007, new laws were published and a number of tax laws were revised
relating to the Flat Rate Business Tax (IETU). These laws came into effect on
January 1, 2008. The IETU rate was set at 16.5% for 2008, 17.0% for 2009 and
17.5% for 2010 and thereafter, based on cash flows, and limits certain
deductions. The IETU is required to be paid only when it is greater than the
income tax to be paid in any given year. To determine the IETU base
in  a given  year, gross income tax (before subtracting
deductions) is subtracted from the net income tax (after subtracting
deductions), with the difference being the IETU base.  If a negative
IETU base is determined because deductions exceed income tax, there will be no
IETU payable.  Instead, the amount of the negative IETU payable base
multiplied by the IETU rate results in an IETU credit, which may be applied
against the income tax due for the same year or, if applicable, against any IETU
payable in the next ten years.




37




Asset
Tax (AT)




In 2007,
a new law was enacted that resulted in the derogation of the asset tax law
beginning on January 1, 2008.  In 2007, the asset tax rate was payable
at 1.25% and liabilities were no longer deductible from the asset tax
base.  At December 31, 2009, the Company had Ps. 4.5 million in asset
tax credits. See Note 16-c to the Audited Consolidated Financial Statements for
more detail.




Base Year
            
            Asset tax restated at
              December 31, 2009
            
            Year of
              expiration2005
            
            
            1.5
            
            20152006
            
            
            3.2
            
            2016Million
      of Ps.
            
            
            4.7




Reconciliation
to U.S. GAAP




The
Company’s Audited Consolidated Financial Statements are prepared in accordance
with Mexican Financial Reporting Standards (“MexFRS”), which differ in certain
respects from U.S. GAAP.




The
principal differences between MexFRS and U.S. GAAP, as they relate to us, with
an explanation, where appropriate, of the method used to determine the
adjustments that affect income and stockholders’ equity, and any additional
applicable disclosures as applicable are described in the Note 21 of our Audited
Consolidated Financial Statements. Our consolidated majority net income under
U.S. GAAP was Ps. 1.3  billion in 2007, a net loss of Ps.
869.4 million in 2008, and a net income of Ps. 787 million in 2009 compared
to a net income of Ps. 1.3billion, a net loss of Ps. 886.0 million and net
income of Ps. 809.0 million, respectively, under Mexican FRS.




Bachoco
has applied Statement of Financial Accounting Standards (SFAS) No.109, (included
in FASB ASC Subtopic 740-10- Income taxes – Overall) (FIN 48.) Accounting for
Income Taxes, for all periods presented. The deferred tax adjustment included in
the net income (loss) and stockholders’ equity reconciliations includes the
effect of deferred taxes on all U.S. GAAP adjustments reflected in the
reconciliation from Mexican FRS to U.S. GAAP. Under U.S. GAAP, the Company
recognizes a deferred tax liability associated with profits originated during
the simplified regime that have not paid income tax previously, but would be
subject to taxation upon future distributions under the Mexican tax law. Due to
the accounting change in Mexican FRS in 2008, this concept generates a
reconciling difference to U.S. GAAP. The deferred tax liability under this
concept amounted Ps. 284.2 million and Ps. 275.0 million as of December 31, 2008
and 2009, respectively.




For U.S.
GAAP purposes, goodwill is reviewed for impairment at least annually in
accordance with the provisions of FASB ASC Topic 350, Intangibles – Goodwill and
Other (Statement No. 142, Goodwill and Other Intangible Assets.) Up to December
31, 2004, we recognized an accumulated effect (increase in equity) of Ps. 58.7
million for the non amortization of goodwill, under U.S. GAAP. In 2007, 2008 and
2009, we performed the required impairment tests of goodwill and did not result
an impairment charge.




The fair
value of financial instruments is the amount at which a financial instrument
could be exchanged in a current transaction between willing parties other than
in a forced sale or liquidation. When possible, we use quoted market prices to
determine fair value. Where quoted market prices are not available, the fair
value is internally derived based upon appropriate valuation methodologies with
respect to the amount and timing of future cash flows and estimated discount
rates for both counterparty and entity’s own risk. However, considerable
judgment is required in interpreting market data to develop estimates of fair
value, so the estimates are not necessarily indicative of the amounts that could
be realized or would be paid in a current market exchange. The effect of using
different market assumptions or estimation methodologies could be material to
the estimated fair values.




38


Fair
value information presented in Note 21 to our Audited Consolidated Financial
Statements is based on information available at December 31, 2009 and 2008.
Although we are not aware of any factors that would significantly affect the
estimated fair value amounts, such amounts have not been updated since those
dates; therefore, the current estimates of fair value at dates after December
31, 2009 and 2008, could differ significantly from these amounts.




Use
of Estimates in Certain Accounting Policies




In
preparing our Audited Consolidated Financial Statements, we make estimates
concerning a variety of matters.  Some of these matters are highly
uncertain, and the estimates involve judgments based on the information
available to us. The discussion below identifies matters for which the financial
presentation would be materially affected (a) if we relied on different
estimates that we could reasonably use, or (b) if in the future we change our
estimates in response to changes that are reasonably likely to
occur.




The
discussion below addresses only those estimates that we consider most important
based on the degree of uncertainty and the likelihood of a material impact if we
used a different estimate.  There are many other areas in which
we use estimates about uncertain matters, but the reasonably likely effect of
changed or different estimates would not be material to our financial
results.




Estimated
Useful Lives of Property, Plant and Equipment




We
estimate the useful lives of our property, plant and equipment in order to
determine the amount of depreciation expense to be recorded in each
period.  The current estimates of useful lives are based on estimates
made by an independent appraiser in 1996.  Those estimates have been
adjusted when applicable, based on historical experience with similar assets
that we own.




Accumulated
depreciation expense for property, plant and equipment in 2009 amounted to Ps.
7.7 billion.  As applied to our 2009 financial results, the
depreciation was Ps. 662.6 million, or 3.0% of our net revenues.  For
further explanation, see Notes 2-h and 7 to the Audited Consolidated Financial
Statements.




Allowance
for Productivity Declines




The
allowance for decline in productivity of our breeder chickens and swine is
estimated based on expected future life under straight line
method.  See Note 2g in our Audited Consolidated Financial Statements
for more detail.




Inventory
Valuation




Inventories




At
December 31, 2008 and 2009, our inventories are stated at the lower of
historical cost determined by the average cost method or market (replacement
cost), provided that replacement cost is not less than net realizable
value.




Agriculture




Our
Audited Consolidated Financial Statements recognize the requirements of Mexican
FRS E-1, “Agriculture,” which establishes the rules for recognizing, measuring,
presenting and disclosing biological assets and agricultural
products.




Mexican
FRS E-1 requires biological assets and agricultural products (the latter at the
time of harvesting) to be valued at their fair value, net of the estimated costs
at the point of sale. Bulletin E-1 also establishes that whenever the fair value
cannot be determined in a reliable, verifiable and objective manner, the assets
are to be valued at their production cost, net of impairment loss.




39


Agricultural
products are live chickens, processed chickens, commercial eggs and pigs
available for sale. The Company’s biological assets are comprised of poultry in
their different stages, incubatable eggs and breeder pigs.




Broiler
chicks less than six and a half weeks old, incubatable eggs, breeder pigs and
laying hens are valued at production cost since it is not possible to determine
their fair value in a reliable, verifiable and objective manner.




Broilers
more than six and a half weeks old through their date of sale are valued at fair
value net of estimated point-of-sale costs, considering the price per kilogram
of processed chicken at the valuation date.




Processed
chicken and commercial eggs are valued at fair value net of estimated
point-of-sale costs, considering the price per kilogram of processed chicken and
commercial eggs at the time such items are considered as agricultural products.
From such date through the date of sale, the fair value is considered to be the
cost of processed chicken or commercial eggs, not in excess of net realizable
value.




We are
exposed to financial risks due to changes in the price of chicken. We estimate
that the price of chicken will not fall sharply or significantly in the near
future; consequently, we have not entered into any derivative agreement or any
other type of agreement to offset the risk of a drop in the price of
chicken.




For more
details, see “Inventories and biological assets” in Note 6 of the Audited
Consolidated Financial Statements.




Allowance
for Doubtful Accounts




The
Company’s policy is to record an allowance for doubtful accounts for balances
which are not likely to be recovered. In establishing the required allowance,
management considers historical losses, current market conditions, and our
customers’ financial condition, the amount of receivables in dispute originated
by price differences and the aging of our current receivable and current payment
patterns.




Pension
Plan




We have a
retirement plan in which all non-union workers participate.  Pension
benefits are based on the salary of workers in their final three years of
service, the number of years worked and their age at retirement.  See
Note 2-m and Note 14 to our Audited Consolidated Financial
Statements.





This plan
includes:




·
            Defined
      contribution plan: This fund consists of employee and Company
      contributions. The employee contribution percentage ranges from 1.0% to
      5.0%.  The Company contribution ranges from 1.0% to 2.0% in the
      case of employees with less than 10 years seniority, and the same
      contribution percentage as the employee (up to 5.0%) when the employee has
      more than 10 years’ seniority.




·
            Defined
      benefit plan: This fund consists solely of Company contributions and
      covers the Company's labor obligations with each
  employee.




Seniority
premiums and severance payments are paid to workers as required by Mexican labor
law.





We
recognize the liability for pension benefits, seniority premiums and termination
benefits (severance payments), based on independent actuarial computations using
the projected unit-credit method and financial assumptions net of
inflation.


40


Valuation
Allowance for Deferred Tax Assets




In
assessing our ability to realize deferred tax assets, management considers
whether it is more likely than not that part or all of the deferred tax assets
will not be realized taking into account that the final ability to
realize our deferred tax assets is dependent upon the generation of future
taxable income during the periods in which such assets  become
deductible. We also consider the scheduled reversal of deferred tax liabilities,
projected future taxable income, and tax planning strategies in making this
assessment. The valuation allowance for deferred tax assets as of January 1,
2008 and 2009 amounted to Ps. 4.6 million and Ps. 28.0 million, respectively.
See note 16-e to our Audited Consolidated Financial Statements.





B.
            Liquidity
      and Capital Resources




Our
working capital (current assets less current liabilities) increased year over
year from Ps. 4.6 billion on December 31, 2008 to Ps. 5.2 billion on
December 31, 2009.  Such increase was mainly due to an increase
in the cash and investments and a decrease in derivative financial instruments
as current liabilities accounts.  The ratio of current assets to
current liabilities on December 31, 2009 was 2.9.




Cash and
investments were Ps. 2.6 billion on December 31, 2009, representing an
increase of Ps.553 million or 27.7% from the previous year.  The
increase was primarily due to our positive operating results.




Inventories
were Ps. 3.6 billion as of December 31, 2009, representing a decrease of
Ps. 360 million or 9.1% from the previous year, due mainly to a decrease in our
inventories in raw materials.




Total
debt, including the current portion of long term debt, equaled Ps. 963.8 million
as of December 31, 2009, higher than the Ps. 625.9 million reported as of
December 31, 2008.  This 54.0% of increase is due to new debt
obligations taken in 2009, an increase in notes payable to banks to Ps. 234.3
million in 2009 from Ps. 40.0 million in 2008 and an increase in current
installments of long-term debt to Ps. 357.6 million in 2009 from Ps. 194.2
million reported in 2008.




Long term
debt on December 31, 2009 represented 2.5% of our capitalization, compared
to 2.7% reported on December 31, 2008.




Stockholders’
equity increased by 3.4%, to Ps. 14.6 billion on December 31, 2009 from Ps.
14.1 billion on December 31, 2008.




In 2009,
capital investments amounted to Ps. 988 million, most of which were financed
with resources generated from our own operations.  These capital
investments were used mainly to finance a business agreement, productivity
projects, production growing capabilities and infrastructure improvements to
keep facilities in good operating conditions. See Item 4: “Capital
Expenditures”  for more detail.




We are a
holding company with no significant operations of our own. We principally engage
in transactions with our subsidiaries.  We will have distributable
profits and cash to pay dividends only to the extent that we receive dividends
from our subsidiaries, principally BSACV.  The amount of dividends
payable by our subsidiaries and us is also subject to general limitations under
Mexican corporate law. See our Consolidated Statement of Cash Flow in our
Audited Consolidated Financial Statements for more details.




41


We
consider our current level of working capital to be sufficient for our
operations.




We
expect to finance our capital expenditures, additional working capital, and debt
service obligations from our current liquidity and capital resources, cash flows
and from additional borrowings from our existing sources of debt financing,
although we will also consider other sources of debt financing if they are
available on advantageous terms.  For a discussion of our use of
hedging instruments, please see Note 10-a and 10-b of our Audited Consolidated
Financial Statements.




We
entered into operating leases for certain offices, production sites, computer
equipment, and automobiles.  These agreements have terms ranging
between one and five year periods and some of them contain renewal
options.  Rental expenses under these leases for 2007, 2008 and 2009
were Ps. 153.2 million, Ps. 167.9 million and Ps. 177.3
million,  respectively.  See Note 11 to our Audited
Consolidated Financial Statements for more detail.




C.
            Research
      and Development, Patents and Licenses,
etc.




None





D.
            Trend
      Information




For a
description of trends in our product lines, see Item 5:  “General
– Trends in Product Prices for Bachoco” above.





E.
            Off-Balance
      Sheet Arrangements




We do not
have any off-balance sheet arrangements of the type that we are required to
disclose under this Item.




F.
            Tabular
      Disclosure of Contractual
Obligations




Our major
categories of indebtedness included the following:




·
            As
      of December 31, 2009, we have Ps. 591.9 million in notes payable to
      banks and current installments of long term
  debt.




·
            Long
      term debt to banks, as of December 31, 2009, was Ps. 372.0 million
      outstanding (excluding current portion), which is less than the Ps. 391.7
      million outstanding on December 31, 2008.  The weighted average
      interest rates on long term debt for 2008 and 2009 were 12.9% and 6.8%,
      respectively.  See Note 9 of the Audited Consolidated Financial
      Statements for more detail.




The
following table summarizes long-tem debt as of December 31,
2009.  The table does not include short-term debt, accounts payable or
pension liabilities.




Payments
      Due by Period
                          (millions
      of constant pesos as of
      December 31, 2009)Contractual
      Obligations
                      
                      Total
                      
                      
                      2011
                      
                      
                      2012
                      
                      
                      2013
                      
                      
                      2014Long-term
      debt
                      
                      Ps.
                      371.9
                      
                      
                      
                      333.4
                      
                      
                      
                      19.0
                      
                      
                      
                      12.0
                      
                      
                      
                      7.5Operating
      leases
                      
                      Ps.
                      446.1
                      
                      
                      
                      131.0
                      
                      
                      
                      115.2
                      
                      
                      
                      101.5
                      
                      
                      
                      98.4




42




G.
            Safe
      Harbor




Not
applicable.





ITEM
      6.
            Directors,
      Senior Management and Employees




A.
            Directors
      and Senior Management




Directors




The Board
of Directors is responsible for the management of our business.  The
Board of Directors consists of an odd number of directors, never fewer than
five, and corresponding alternate directors, each of whom is elected for a term
of one year.




Before
September 2006, holders of Series B Shares elected directors and alternate
directors at a general ordinary stockholders’ meeting, while holders of Series L
Shares had the right to appoint or elect two directors and two alternate
directors to the Board of Directors.




Since
September 2006, we have only Series B Shares with full voting
rights.




Alternate
directors are authorized to serve on the Board of Directors in place of
directors who are unable to attend meetings or otherwise participate in the
activities of the Board of Directors.




The
following table identifies our directors, alternate directors, Honorary Chairman
of the board and Secretary of the board as of June 2010, their positions
and their years of service:




Name
              Position
              Years
      as a
                Member
      of the
                Board
      of DirectorsEnrique
      Robinson Bours Almada
              Honorary
      Chairman of the board
              56Mario
      Javier Robinson Bours Almada
              Life
      Honorary Shareholder Director
              56Francisco
      Javier R. Bours Castelo
              Chairman
      of the Board and Proprietary Shareholder Director
              28Eduardo
      Rojas Crespo
              Secretary
      of the Board
              2Jose
      Gerardo Robinson Bours Castelo
              Proprietary
      Shareholder Director
              2Juan
      Bautista Salvador Robinson Bours
              Proprietary
      Shareholder Director
              56Jesús
      Enrique Robinson Bours Muñoz
              Proprietary
      Shareholder Director
              16Jesús
      Rodolfo Robinson Bours Muñoz
              Proprietary
      Shareholder Director
              8Arturo
      Bours Griffith
              Proprietary
      Shareholder Director
              16Octavio
      Robinson Bours
              Proprietary
      Shareholder Director
              13Ricardo
      Aguirre Borboa
              Proprietary
      Shareholder Director
              16José
      Eduardo Robinson Bours Castelo
              Alternate
      Director
              16Juan
      Salvador Robinson Bours Martínez
              Alternate
      Director
              16José
      Francisco Bours Griffith
              Alternate
      Director
              16Guillermo
      Pineda Cruz
              Alternate
      Director
              16Avelino
      Fernández Salido
              Independent
      Director
              7Humberto
      Schwarzbeck Noriega
              Independent
      Director
              7


43




The
following table identifies the relationships among the Bours family
members:




Brothers and
Co-Founders
                  
                  Sons
                  
                  Nephews
                  
                  Son in LawEnrique
      Robinson Bours Almada
                  
                  ·  Jesús
      Enrique Robinson  Bours Muñoz
                    ·  Jesús
      Rodolfo Robinson Bours Muñoz
                  
                  ·  Arturo
      Bours Griffith
                  
                  Gillermo
      Pineda CruzMario
      Javier Robinson Bours Almada
                  
                  ·  Francisco
      Javier R. Bours
                    ·  José
      Gerardo Robinson Bours Castelo
                    ·  Jose
      Eduardo Robinson Bours Castelo
                  
                  ·  Jose
      Francisco Bours GriffithJuan
      Bautista Salvador Robinson Bours Almada
                  
                  Juan
      Salvador Robinson Bours Martínez
                  
                  ·  Octavio
      Robinson Bours
                  
                  Ricardo
      Aguirre Borboa




Ourbylaws provide for the
creation of an executive committee of the Board of Directors, which may exercise
certain of the Board’s powers in full, subject to certain
limitations.




Mr. Enrique
Robinson Bours Almada, Chairman of the board and co-founder of the Company
retired in April 2002.  Mr. Bours led the Company for 50
years.  The Board named as his successor Mr. Javier Robinson
Bours Castelo, Mr. Enrique Robinson Bours’s
nephew.  Mr. Bours Castelo has been at Bachoco for 28 years as a
member of the board and served as Vice-Chairman for ten years.




Mr. Mario
Javier Robinson Bours Almada, member of the Board of Directors retired in
April 2008, and was named as a Life Honorary Propriety Shareholder
Director.  On the same date, the Board named Mr. José Gerardo
Robinson Bours Castelo as a Proprietary Shareholder Director in the place of
Mr. Mario Javier Robinson Bours Almada.




In order
to fully comply with current Mexican Corporate and Securities Market Laws in
which Bachoco’s Shares are traded, we ratified our Board of Directors at our
stockholders’ meeting held on April 28, 2010.  As of
June 2010, our Board of Directors is composed of the following
members:




o
            Proprietary Shareholder
      Directors: Francisco Javier R. Bours Castelo (Chairman of the
      Board), Jose Gerardo Robinson Bours Castelo, Juan Bautista S. Robinson
      Bours Almada, Jesús Enrique Robinson Bours Muñoz, Jesús Rodolfo Robinson
      Bours Muñoz, Arturo Bours Griffith, Octavio Robinson Bours, Ricardo
      Aguirre Borboa.





o
            Alternate Directors:
      José Eduardo Robinson Bours Castelo, Juan Salvador Robinson Bours
      Martínez, José Francisco Bours Griffith, Guillermo Pineda
      Cruz.





o
            Independent Directors:
      Avelino Fernández Salido, Humberto Schwarzbeck
  Noriega.





o
            Life Honorary: Enrique
      Robinson Bours Almada and Mario Javier Robinson Bours
    Almada.





o
            Secretary of the Board of
      Directors: Eduardo Rojas
Crespo


44


Francisco Javier R. Bours
Castelo, Chairman of the Board of Directors, has been a member of the
board for 28 years, and has been Chairman since 2002.  Before that, he
was Vice-Chairman for several years.  Mr. Bours holds a degree in
Civil Engineering from the Instituto Tecnológico y de Estudios Superiores
Monterrey (ITESM).  He currently serves as Chairman of the Boards of
Directors of the following companies:  Megacable Holdings, S.A.B. de
C.V., Congeladora Hortícola, S.A. de C.V., Inmobiliaria of Trento S.A. de C.V.,
Agriexport S.A. de C.V., Acuícola Boca, S.A. de C.V., Industrias Boca, S.A. de
C.V., and Centro de Servicios Empresariales del Noreste, S.A. de
C.V.




José Gerardo Robinson Bours
Castelo, Proprietary Shareholder Director, is member of the board since
April 2008.  He previously served as Systems
Manager.  Mr. Bours, holds a degree in Computer Engineering from
the ITESM.  He currently serves as member of the following
companies:  Grupo Megacable, S.A. de C.V., Congeladora Hortícola, S.A.
de C.V., Acuícola Boca, S.A. de C.V., Industrias Boca, S.A. de C.V. and
Promotora Empresarial del Noroeste, S.A. de C.V.  He is also Chairman
of Fundación Mexicana para el Desarrollo Rural del Valle del Yaqui and the ITESM
in Obregón.




Juan Bautista S. Robinson Bours
Almada, Proprietary Shareholder Director, has been a member of the board
for 56 years and is a co-founder of Industrias Bachoco S.A.B. de
C.V.




Jesús Enrique Robinson Bours
Muñoz, Proprietary Shareholder Director, has been a member of the board
for 16 years, having previously served as Production Director and Divisional
Manager.  Mr. Robinson Bours holds a degree in Engineering from
the University of Arizona.  He is also a member of the Board of
Directors of San Luis Corporación S.A. de C.V., and Megacable S.A. de
C.V.




Jesús Rodolfo Robinson Bours
Muñoz, Proprietary Shareholder Director, has been a member of the board
for 8 years.  Mr. Robinson Bours previously served in the Company
as Production Manager in the Northwest and Bajio divisions, Commercial Manager
in Northwest Division and Purchasing Manager at the Bajio
Division.  Mr. Robinson Bours holds a degree in Agricultural
Engineering from the University of Arizona.  He has business
experience in agriculture and raising livestock with Agrícola Monte Cristo S.A.
de C.V., Agrícola Río Yaqui S.P.R. de R.L., Agrícola Nacapul S.P.R. de R.L. and
Ganadera Cocoreña S.P.R. de R.L.




Arturo Bours Griffith,
Proprietary Shareholder Director, has been a member of the board for 16
years.  Mr. Bours Griffith completed professional studies at the
University of Arizona.  He is also Chairman of the board of
Qualyplast, S.A. de C.V., and a member of the board of Megacable, S.A. de C.V.,
Promotora Empresarial del Noroeste, S.A. de C.V., and Taxis Aereos del Noroeste,
S.A. de C.V.




Octavio Robinson Bours,
Proprietary Shareholder Director, has been a member of the board for 13
years.  Mr. Robinson Bours holds a degree in Agricultural
Engineering from the ITESM.  He has experience in producing swine, and
is also a member of the board of Choya, S.A. de C.V., and Granos Santa Fe, S.A.
de C.V.




Ricardo Aguirre Borboa,
Proprietary Shareholder Director, was also an Independent Director until
April 2007.  Mr. Aguirre has been a member of the board for
16 years.  He is also a member of the Board of Directors of the
newspaper El Debate and he holds a degree in Agricultural Engineering from the
ITESM.  He has experience in agriculture and pork
production.  Mr. Aguirre Borboa is also member of the board of
Gasolinera Servicios del Valle del Fuerte S.A. de C.V., Periódico el Debate de
los Mochis, and Tepeyac Produce, Inc.




José Eduardo Robinson Bours
Castelo, Alternate Director, has been a member of the board for 16
years.  Mr. Robinson Bours holds a degree in Industrial
Engineering from the ITESM.  He was previously Commercial Director of
Industrias Bachoco, a Senator of the Mexican Congress and is currently governor
of the state of Sonora.




45




Juan Salvador Robinson Bours
Martínez, Alternate Director, has been a member of the board for 16
years, and has served Bachoco as Purchasing
Manager.  Mr. Robinson Bours holds a degree in Industrial
Engineering from the ITESM.  His other appointments include Chairman
of the board and CEO of Llantas y Accesorios, S.A. de C.V. and member of the
Board of Mega Cable Holdings, S.A.B. de C.V.




José Francisco Bours Griffith,
Alternate Director, has been a member of the board for 16 years.  He
holds a degree in Civil Engineering from the Universidad Autónoma de
Guadalajara.  Mr. Robinson Bours has worked at Bachoco as
Engineering Manager.  He is currently dedicated to agricultural
operations and has run an aquaculture farm for nine years.




Guillermo Pineda Cruz,
Alternate Director, has been a member of the board for 16 years.  He
is also a member of the Board of Directors of Banamex and was a regional member
of the Board of Directors of Grupo Financiero Serfín, Inverlat and
InverMexico.  Mr. Pineda holds a degree in Civil Engineering from
the ITESM and a master’s degree in Business Administration from the Instituto
Tecnológico de Sonora.  He co‐founded
Edificadora Pi‐Bo, S.A. de C.V.
in 1983 and is its President and CEO.




Avelino Fernández Salido,
Independent Director, is member of the board since 2003.  He is also a
member of the board of Banco Nacional de Mexico, BBVA Bancomer, and Banca
Serfín.  His business experience is in the marketing of
grains.




Humberto Schwarzbeck Noriega,
Independent Director, is member of the board since 2003.  He holds a
degree in economics from the ITESM.  He is currently CEO of Yeso
Industrial de Navojoa S.A. de C.V. and Chairman of the Board of Promotora de
Manufacturas S.A. de C.V.





Eduardo Rojas Crespo, was
named Secretary of the Board of Directors on April 23,
2008.  Mr. Rojas has worked for Bachoco since 2004 as our Chief
Legal Officer.  Before joining Bachoco, Mr. Rojas worked for 10
years as the Chief Legal Officer of Grupo Fimex.  He holds a law
degree from the Universidad Nacional Autónoma de Mexico (UNAM) and a
post-graduate diploma in Environmental Law and Due Diligence and a master’s
degree in Corporate Laws, both from the Anáhuac University.





Executive
Officers




Our
executive officers as of June 2010 are set forth in the table
below:




Name
                    
                    Position
                    
                    AgeCristóbal
      Mondragón Fragoso
                    
                    Chief
      Executive Officer
                    
                    64Daniel
      Salazar Ferrer
                    
                    Chief
      Financial Officer
                    
                    45David
      Gastélum Cazares
                    
                    Director
      of Sales
                    
                    58José
      Luis López Lepe
                    
                    Director
      of Personnel
                    
                    64Rodolfo
      Ramos Arvizu
                    
                    Technical
      Director
                    
                    52Ernesto
      Salmón Castelo
                    
                    Director
      of Operations
                    
                    47Andres
      Morales Astiazaran
                    
                    Director
      of Marketing and Value-added Products
                    
                    41Marco
      Antonio Esparza Serrano
                    
                    Comptroller
      Director
                    
                    54


46




Cristóbal
Mondragón Fragoso, Chief Executive Officer, joined us in 1982 and assumed
his current position in 2001.  Previously, Mr. Mondragón served
as Administration Manager, as Manager of Corporate Finance and as Chief
Financial Officer.  Before joining us, Mr. Mondragón worked as an
accountant for three years.  Later he joined La Hacienda, S.A. de
C.V., where he held the positions of Auditor, Accountant, Head of Processing
Systems, Audit Manager, Administration Manager and
Comptroller.  Mr. Mondragón holds an Accounting degree from the
UNAM.




Daniel Salazar
Ferrer, Chief Financial Officer,joined us in 2000 and
assumed his current position in January 2003.  Previously,
Mr. Salazar worked for four years as Chief Financial Officer at Grupo
Covarrubias and as Comptroller at Negromex, a company of Grupo
Desc.  Mr. Salazar holds an Accounting degree from Universidad Tecnológica de Mexicoand a master’s degree in Business Administration from theITESM.




David Gastélum
Cazares, Director of Sales, joining us in 1979 and assumed his current
position in 1992.  Previously, Mr. Gastélum served as a pullet
salesman in the states of Sonora and Sinaloa, National Sales Manager of Live
Animals and Eggs, Manager of the Northwest Division, Manager of the Mexico City
Division and National Sales Manager.  Before joining us,
Mr. Gastelúm worked at La Hacienda, S.A. de C.V. as Technical Advisor and
as Area Officer for the Southeast Division.  Mr. Gastélum holds a
degree in Veterinary Medicine from the school of Veterinary Medicine of the
UNAM.




José Luis López
Lepe,Director of Personnel
since 1993. Before joining us Mr. López worked as a teacher in several
institutions as well as with Grupo Condumex, where he was Director of
Personnel.  Mr. López holds a degree in Physics and Chemistry
from the Escuela Normal
Superior and a degree in Business Administration from Instituto Tecnológico Autónomo de
Mexico.




Rodolfo Ramos
Arvizu,Technical Director,
joined us in 1980 and assumed his current position in
1992.  Previously, Mr. Ramos held positions in the Egg Quality
Control Training Program and in Poultry Management as well as serving as
Supervisor of the Commercial Egg Production Training Program, Manager of Raw
Material Purchasing and as a Director of Production.  Mr. Ramos
holds a degree in Agricultural Engineering from the ITESM.




Ernesto Salmón
Castelo,Director of Operations,
joined us in 1991 and assumed his current position in
2000.  Previously, Mr. Salmón worked for Gamesa, S.A. de C.V. and
for us as Sales Manager in Sonora, Northwestern Distribution Manager, Manager of
the Processing Plant in Celaya, Southeastern Division Manager and Bajio Division
Manager.  Mr. Salmón holds a degree in Chemical Engineering from
Instituto Tecnológico de Sonora and a
master’s degree in Business Administrationfromthe ITESM.




Andrés Morales
Astiazaran,Director of Marketing
and Value-added Products since July 2006.  Before joining us,
Mr. Morales worked for 4 years as Sales and Marketing Vice President in
Smithfield Foods, a U.S. Company with offices in Sonora,
Mexico.  Previously Mr. Morales worked for Bachoco as Marketing
Manager, Manager of the Northeast division and then as National Manager of
Bachoco.  Mr. Morales holds an accounting degree from the ITESM
and attended marketing courses at Northwestern University, the University of
Chicago, the ITESM and the IPADE (D1).




Marco Antonio
Esparza Serrano,Comptroller Director since March 2009.  Before joining
Bachoco, Mr. Esparza worked for more than 25 years in the pharmaceutical
industry for three multinational companies, two American companies and one
German company.  During that time, Mr. Esparza managed and
directed every area within Finance and Administration as Accounting Manager, Tax
Manager Comptroller, Financial Planning Director and Finance
Director.  Mr. Esparza holds a degree in public accounting and
several post-graduate diplomas in Business Administration, Economics and
Direction of Enterprises from universities such as Instituto Politecnico
Nacional, University of California at Berkeley, the ITESM, University of Almeria
Spain and the IPADE.


47





Audit
Committee




The
mandate of the Audit Committee is to establish and monitor procedures and
controls in order to ensure that the financial information we distribute is
useful, appropriate and reliable and accurately reflects our financial
position.  In particular, pursuant to our bylaws and Mexican law,
among others, the Audit Committee must do the following:


(a)
            Submit
      an annual report to the Board of
Directors;




(b)
            Provide
      the Board of Directors with its opinion on the matters that pertain to the
      Auditing Committee, in accordance with the Securities Market
      Law;




(c)
            Inform
      the Board of Directors of the current condition of the internal controls
      and internal auditing system of the Company or of the entities it
      controls, including any irregularities
detected;




(d)
            Require
      the relevant directors and other employees of the Company, or of the
      entities it controls, to provide reports relative to the preparation of
      the financial information or any other kind of reports or information it
      deems appropriate to perform its
duties;




(e)
            Receive
      observations formulated by shareholders, Board members, relevant officers,
      employees and, in general, any third party with regard to the matters
      under the Audit Committee duties, as well as carry out the actions that,
      in its judgment, may be appropriate in connection with such
      observations;




(f)
            Inform
      the Board of Directors of any material irregularities detected as a result
      of the performance of its duties and, as applicable, inform the Board of
      Directors of the corrective actions taken, or otherwise propose the
      actions that should be taken;




(g)
            Call
      Shareholders Meetings and cause the items it deems pertinent to be
      inserted into the agendas of such Shareholders’ Meetings,
    and




(h)
            Assist
      the Board of Directors in selecting candidates for audit and reviewing the
      scope and terms of the auditor’s engagement, as well as evaluate the
      performance of the entity that provides the external auditing services and
      analyze the report, opinions, statements and other information prepared
      and signed by the external auditor.




There
were changes in the audit committee during the ordinary stockholder’s meeting
held on April 25, 2007; Mr. Francisco Javier R. Bours Castelo is no
longer a member of the audit committee and the audit committee is now comprised
of the following members: Avelino Fernández Salido (President), Humberto
Schwarzbeck Noriega, Ricardo Aguirre Borboa. Mr. Ricardo Aguirre Borboa
represents the controlling shareholders and has no voting rights in the audit
committee.




B.
            Compensation




For the
year ended December 31, 2009, we paid approximately Ps. 35.2 million in
aggregate compensation to our directors and executive officers, for services
they rendered in their respective capacities.




C.
            Board
      Practices




We do not
have any special agreements or contracts with any member of our board. All of
our board members are subject to the specific expiration dates of their current
terms of office.


48




D.
            Employees




As of
December 31, 2007 2008 and 2009 we had 23,088, 23,248 and 24,065 employees,
respectively.




In 2009,
approximately 49.5% of our employees were members of labor
unions.  Labor relations with our employees are governed by 58
separate collective labor agreements, each relating to a different group of
employees and negotiated on behalf of each such group by a different labor
union.  As is typical in Mexico, wages are renegotiated every year
while other terms and conditions of employment are renegotiated every two
years.  We seek to attract dependable and responsible employees to
train at each of our plants and facilities.  We offer our employees
attractive salary and benefit packages, including a pension and savings
plan.




We
believe that we have good relations with our employees.  We have not
experienced significant work stoppages as a result of labor
problems.




E.
            Share
      Ownership




To the
best of our knowledge, no individual director or manager holds Shares of the
Company.  At this time, we have not developed a share options plan for
our employees.




ITEM
      7.
            Major
      Stockholders and Related Party
Transactions




Before
September 2006, our Common Stock consisted of 450,000,000 Series B Shares
and 150,000,000 Series L Shares.  Holders of Series B Shares were
entitled to one vote at any general meeting of our stockholders for each Series
B Share held.  Holders of Series L Shares were entitled to one vote
for each Series L Share held, but only with respect to certain
matters.  We had UBL Units consisting of one Series B Share and one
Series L Share and B Units consisting in two Series B Shares.




During
the extraordinary meeting held on April 26, 2006 Shareholders approved the
Company’s plan to convert the Series L Shares into Series B Shares, with full
voting rights, as well as the dissolution of UBL and UBB Units into their
components Shares.




This
process was completed in September 2006, and included two
steps:  separating the UBL and UBB Units trading on the Mexican
Exchange into their component Shares and converting the Series L Shares into
Series B Shares, thereby creating a single share class, the Series B
Shares.  These Shares are trading on the Mexican stock
market.  The ADS which trade on the NYSE still consist of twelve
underlying Shares, but they are all Series B Shares, with full voting
rights.





A.
            Major
      Shareholders




Control
Trust




After the
conversion of L Shares to B Shares in 2006, the Control Trust  and the
Family Trust own the same number of Shares (496,500,000 Shares or 82.75% of
outstanding Shares).  However, these Shares are all now Series B
Shares.




In
November 2008, the Robinson Bours family created a third trust with
102,000,000 Shares, which were taken from one of the existing
trusts.  The purpose of this new trust is to serve as collateral for
the Company’s loan indebtedness.  The three trusts together accounted
for 496,500,000 Shares outstanding on December 31, 2008 and there has been
no change in the position of each holder.


49




In the
second half of 2009, the third trust was eliminated and the Shares returned to
the original trust.




Apart
from the ownership set forth above, at the end of April 2010, Fidelity
Management & Research Co. owned 4.6% of our Common Stock, equal to a total
of 2,300,000 ADS’s.




Repurchase
of Shares




In
November 1998, in accordance with rules established by the CNBV, we
established a reserve in the amount of Ps. 180.0 million in nominal pesos, for
the repurchase of Shares.  At the end of 2009, the Company had
repurchased zero Shares.




During
our stockholders’ meeting of April 28, 2010, we capped the share repurchase
program for 2010 at a maximum amount of Ps. 273 million.  During 2010,
we did not repurchase Shares.




The
following table sets forth the estimated percentages of the Shares held in
Mexico and other Countries as of April 30, 2010.




Year
              
              PercentageMexico
              
              85.24%Other
      Countries
              
              14.84.6%




As of
April 30, 2010, from the 100.0% of the total Shares of the Company, we accounted
for approximately 38 shareholders in the NYSE and 67 in the BMV.




B.
            Related
      Party Transactions




It is our
policy not to engage in any transaction with or for the benefit of any
stockholder or member of the Board of Directors, or any entity controlled by
such a person or in which such a person has a substantial economic interest,
unless (i) the transaction is related to our business and (ii) the
price and other terms are at least as favorable to us as those that could be
obtained on an arm’s-length basis from a third party.




We have
engaged in a variety of transactions with entities owned by members of the
Robinson Bours family, all of which we believe were consistent with this policy
and not material to our business and results of operations.  All of
these transactions are described below.  See Note 5 to the Audited
Consolidated Financial Statements.  We expect to engage in similar
transactions in the future.




We
regularly purchase vehicles and related equipment from distributors owned by
various members of the Robinson Bours family.  The total amount spent
on such purchases was Ps. 96 million, Ps. 157 million and Ps. 139 million for
the years ended December 31, 2007, 2008 and 2009,
respectively.  The distribution of vehicles and related equipment is a
highly competitive aspect of business in the areas in which we
operate.  We are not dependent on affiliated distributors and are able
to ensure that the pricing and service we obtain from affiliated distributors
are competitive with those available from other suppliers.




The
Robinson Bours Stockholders own Taxis Aéreos del Noroeste, S.A. de C.V., an air
transport company that provides transportation for members of the Board of
Directors to and from meetings at our headquarters in Celaya.  We paid
Ps. 3 million, Ps. 2 million and Ps. 10 million for the years ended
December 31, 2007, 2008 and 209, respectively, for such
transportation.


50




We
purchased feed and packaging materials from enterprises owned by Robinson Bours
Stockholders, the family of Enrique Robinson Bours and the family of Juan
Bautista Robinson Bours.  The cost of such purchases was Ps. 193
million, Ps. 428 million and Ps. 415 million for the years ended
December 31, 2007, 2008 and 2009, respectively.




Our
accounts payable to related parties totaled Ps. 50 million and Ps. 68 million as
of December 31, 2008 and 2009, respectively.  These transactions
took place among companies owned by the same set of stockholders.  See
Note 5 to the Audited Consolidated Financial Statements.




Neither
we nor our subsidiaries have loaned any money to any of our directors or
officers, controlling shareholders or entities controlled by these
parties.




C.
            Interests
      of Experts and Counsel




Not
applicable.




ITEM
      8.
            Financial
      Information




A.
            Consolidated
      Statements and Other Financial
Information





Our
Audited Consolidated Financial Statements are included in
Item 18.  The financial statements were audited by independent
registered public accounting firms and are accompanied by their audit
reports.




On
August 28, 2008, we announced that the Company’s Board of Directors, as per
the Audit Committee’s recommendation, approved the selection of KPMG Cárdenas
Dosal, S.C. as the Company’s independent auditor, effective as of
August 27, 2008.




The
Audited Consolidated Financial Statements have been prepared in accordance with
Mexican FRS, which differ in certain respects from U.S. GAAP.  Note 21
to the Audited Consolidated Financial Statements provides a description of the
principal differences between Mexican FRS and U.S. GAAP as they relate to us and
a reconciliation to U.S. GAAP of Consolidated stockholders’ equity, consolidated
net income, a consolidated statement of stockholders’ equity and a consolidated
cash flow statement under U.S. GAAP as of December 31, 2008 and 2009, and
for the years ended December 31, 2007, 2008 and 2009.




Legal
Proceedings




We are a
party to certain legal proceedings in the ordinary course of our
business.  We believe that none of these proceedings, individually or
in the aggregate, is likely to have a material adverse effect on the Company’s
Audited Consolidated Financial positions and consolidated results of
operations.




Dividends
Policy




Pursuant
to Mexican law and our bylaws, the declaration, amount and payment of annual
dividends are determined by a majority vote of the shareholders, generally but
not necessarily on the recommendation of the Board of Directors.




In 2007,
2008 and 2009, we declared and paid cash dividends at nominal values of Ps.
353.9, Ps. 353.94 and Ps. 250.0 million, respectively.


51


Although
there can be no assurance as to the amount or timing of future dividends, we
expect to pay an annual dividend pro rata to holders of outstanding Shares in an
amount of approximately 20.0% of the prior year’s net income.  The
declaration and payment of dividends will depend on our results of operations,
financial condition, cash requirements, future prospects and other factors
deemed relevant by the Board of Directors and the shareholders, including debt
instruments which may limit our ability to pay dividends.




Because
we are a holding company with no significant operations of our own, we will have
distributable profits and cash to pay dividends only to the extent that we
receive dividends from our subsidiaries, principally
BSACV.  Accordingly, there can be no assurance that we will pay
dividends or of the amount of any such dividends.  BSACV, our
principal operating subsidiary, could, in the future, enter into loan agreements
containing covenants whose terms limit its ability to pay dividends under
certain circumstances.




Mexican
law requires that 5.0% of our net income each year (after profit sharing and
other deductions required by Mexican law) be allocated to a legal reserve fund
until such fund reaches an amount equal to at least 20.0% of our capital
stock.  Mexican corporations may pay dividends only out of earnings
(including retained earnings after all losses have been absorbed or paid up) and
only after such allocation to the legal reserve fund.  The level of
earnings available for the payment of dividends is determined under Mexican
FRS.




B.
            Significant
      Changes




Significant
Changes in Accounting Practices




Recently
issued accounting standards




The CINIF
has issued the following Mexican FRS, applicable for years beginning on or after
January 1, 2010 or 2011, as indicated.




(a)
            Mexican FRS B-5 “Segment
      information”- Mexican FRS B-5 is effective as of January 1, 2011.
      Changes from superseded Bulletin B-5 “Segment Information” include the
      following:




•
            The
      information to be disclosed by operating segment is that which is
      regularly used by senior management.  The FRS does not require
      primary or secondary segment reporting, nor does it require segment
      reporting for products and services (economic segments), geographical
      areas or homogenous groups.  Disclosure of information on the
      consolidated entity’s products or services, geographical areas and
      principal clients and suppliers is
required.




•
            Mexican
      FRS B-5 does not require that the entity’s business areas be subject to
      different risks to qualify as operating
  segments.




•
            Mexican
      FRS B-5 allows business areas in pre-operating stages to be catalogued as
      operating segments.




•
            Mexican
      FRS B-5 requires disclosure by segment, revenue and interest expense as
      well all other components of comprehensive financial results (CFR). In
      specific cases, the FRS B-5 permits disclosure of net interest
      income.




•
            Mexican
      FRS B-5 requires disclosure of the liability amounts included in the usual
      operating segment information normally used by senior management in making
      the entity's operating decisions.




Management
is in the process of evaluating the effects of this new Mexican
FRS.


52




(b)
            Mexican FRS C-1 “Cash and cash
      equivalents”- Mexican FRS C-1 supersedes Bulletin C-1 “Cash” and is
      effective as of January 1, 2010. The principal changes from the former
      standard include the following:




•
            Mexican
      FRS C-1 requires the presentation of restricted cash and cash equivalents
      under the balance sheet caption “Cash and cash
    equivalents.”




•
            Mexican
      FRS C-1 replaces the term “demand temporary investments” with “available
      demand investments.”




•
            Mexican
      FRS C-1 provides that, to be identified as cash equivalents, the
      investments should be highly liquid, e.g. those with original maturities
      of three months or less when
purchased.




•
            Mexican
      FRS C-1 defines the following terms: acquisition cost, restricted cash and
      cash equivalents, highly liquid investments, net realizable value, nominal
      value and fair value.




Management
estimates that initially, Mexican FRS will have an effect on the presentation
of  primary investment securities with original maturities of more
than three months when purchased.




On
January 2009, the Mexican Banking and Securities Commission (Comisión Nacional
Bancaria y de Valores,“CNBV”) published certain amendments to the Rules for
Public Companies and other Participants in the Mexican Securities Market
(Disposiciones de Carácter General Aplicables a las Emisoras de Valores y a
otros Participantes del Mercado de Valores) that require public companies to
report financial information in accordance with the International Financial
Reporting Standards (“IFRS”) issued by the International Accounting Standards
Board (“IASB”), effective as of 2012. Early adoption is permitted.




We will
adopt IFRS in 2012 and we have delivered to the CNBV a schedule with detailed
activities.




ITEM
      9.
            The
      Offer and Listing




A.
            Offer
      and Listing Details





On
September 19, 1997, Bachoco commenced trading on the Mexican Stock
Exchange, and on the New York Stock Exchange through American Depositary Shares
(“ADSs,” each comprised of six Units).  The Bank of New York is our
Depositary Bank.




As of
April 30, 2010, there were 7,381,416 ADSs outstanding, representing 14.8%
of the total Shares outstanding, which were held by approximately 38
holders.




The
following tables set forth for each year from 2005 to 2009, for each quarter
from 2008 and 2009 and for each complete month from December 2009 to
May 2010, the high, low and close prices of the Shares on the Mexican Stock
as reported by the Mexican Stock Exchange and the high, low and close price of
the ADSs on the NYSE as reported by the New York Stock
Exchange.


53




Mexican Stock Exchange
                              (Nominal pesos per Share)
                            
                            
                            The New York Stock Exchange
                              (U.S.$
      per ADS)Year
                            
                            High
                            
                            
                            Low
                            
                            
                            Close
                            
                            
                            High
                            
                            
                            Low
                            
                            
                            Close2005
                            
                            
                            20.70
                            
                            
                            
                            12.22
                            
                            
                            
                            17.25
                            
                            
                            
                            23.02
                            
                            
                            
                            12.87
                            
                            
                            
                            19.502006
                            
                            
                            23.70
                            
                            
                            
                            15.70
                            
                            
                            
                            23.66
                            
                            
                            
                            29.00
                            
                            
                            
                            16.33
                            
                            
                            
                            29.002007
                            
                            
                            30.96
                            
                            
                            
                            20.00
                            
                            
                            
                            28.60
                            
                            
                            
                            35.11
                            
                            
                            
                            24.10
                            
                            
                            
                            31.812008
                            
                            
                            30.15
                            
                            
                            
                            14.21
                            
                            
                            
                            15.99
                            
                            
                            
                            33.34
                            
                            
                            
                            12.75
                            
                            
                            
                            14.502009
                            
                            
                            26.00
                            
                            
                            
                            11.85
                            
                            
                            
                            25.00
                            
                            
                            
                            23.16
                            
                            
                            
                            9.03
                            
                            
                            
                            23.00





Mexican Stock Exchange
                                (Nominal pesos per Share)
                              
                              
                              The New York Stock Exchange
                                (U.S.$ per ADS)Period
                              
                              High
                              
                              
                              Low
                              
                              
                              Close
                              
                              
                              High
                              
                              
                              Low
                              
                              
                              CloseFirst
      Quarter 2008
                              
                              
                              30.15
                              
                              
                              
                              25.00
                              
                              
                              
                              26.13
                              
                              
                              
                              33.34
                              
                              
                              
                              27.39
                              
                              
                              
                              29.12Second
      Quarter 2008
                              
                              
                              26.50
                              
                              
                              
                              23.99
                              
                              
                              
                              24.99
                              
                              
                              
                              31.24
                              
                              
                              
                              27.56
                              
                              
                              
                              29.60Third
      Quarter 2008
                              
                              
                              25.60
                              
                              
                              
                              22.76
                              
                              
                              
                              22.76
                              
                              
                              
                              31.00
                              
                              
                              
                              21.59
                              
                              
                              
                              24.38Fourth
      Quarter 2008
                              
                              
                              22.00
                              
                              
                              
                              14.21
                              
                              
                              
                              15.99
                              
                              
                              
                              24.60
                              
                              
                              
                              12.75
                              
                              
                              
                              14.50First
      Quarter 2009
                              
                              
                              18.00
                              
                              
                              
                              11.85
                              
                              
                              
                              13.80
                              
                              
                              
                              15.30
                              
                              
                              
                              9.03
                              
                              
                              
                              11.35Second
      Quarter 2009
                              
                              
                              25.00
                              
                              
                              
                              13.00
                              
                              
                              
                              23.84
                              
                              
                              
                              22.57
                              
                              
                              
                              11.60
                              
                              
                              
                              21.30Third
      Quarter 2009
                              
                              
                              24.92
                              
                              
                              
                              21.99
                              
                              
                              
                              22.90
                              
                              
                              
                              22.40
                              
                              
                              
                              20.00
                              
                              
                              
                              21.00Fourth
      Quarter 2009
                              
                              
                              26.00
                              
                              
                              
                              21.00
                              
                              
                              
                              25.00
                              
                              
                              
                              23.16
                              
                              
                              
                              18.90
                              
                              
                              
                              23.00





Mexican Stock Exchange
                          (Nominal pesos per Share)
                        
                        
                        The New York Stock Exchange
                          (U.S.$ per ADS)Period
                        
                        High
                        
                        
                        Low
                        
                        
                        Close
                        
                        
                        High
                        
                        
                        Low
                        
                        
                        CloseDecember 2009
                        
                        
                        25.05
                        
                        
                        
                        24.30
                        
                        
                        
                        25.00
                        
                        
                        
                        23.16
                        
                        
                        
                        22.44
                        
                        
                        
                        23.00January 20010
                        
                        
                        25.45
                        
                        
                        
                        24.00
                        
                        
                        
                        24.00
                        
                        
                        
                        23.99
                        
                        
                        
                        21.50
                        
                        
                        
                        21.50February 2010
                        
                        
                        23.30
                        
                        
                        
                        21.20
                        
                        
                        
                        22.99
                        
                        
                        
                        21.62
                        
                        
                        
                        19.70
                        
                        
                        
                        21.51March 2010
                        
                        
                        24.35
                        
                        
                        
                        21.00
                        
                        
                        
                        22.76
                        
                        
                        
                        22.60
                        
                        
                        
                        19.82
                        
                        
                        
                        22.15April 2010
                        
                        
                        22.60
                        
                        
                        
                        21.00
                        
                        
                        
                        22.60
                        
                        
                        
                        22.09
                        
                        
                        
                        20.41
                        
                        
                        
                        22.00May 2010
                        
                        
                        24.50
                        
                        
                        
                        20.93
                        
                        
                        
                        22.88
                        
                        
                        
                        22.74
                        
                        
                        
                        19.93
                        
                        
                        
                        21.10





B.
            Plan
      of Distribution




Not
applicable.




C.
            Markets




Trading
on the Mexican Stock Exchange




The
Mexican Stock Exchange (the “Exchange”), founded in 1894 and located in Mexico
City, is the only stock exchange in Mexico.  Since 2008, the Mexican
Stock Exchange has been a public company, The brokerage houses are currently the
only entities authorized to trade on the floor of the Mexican Stock
Exchange.




Trading
on the Mexican Stock Exchange takes place principally through an automated
inter-dealer quotation system known as SENTRA, which is open for trading between
the hours of 8:30 a.m. and 3:00 p.m., Mexico City time, each business
day.  Each trading day is divided into six trading sessions with
ten-minute periods separating each session.  Trades in securities
listed on the Mexican Stock Exchange can, subject to certain requirements, also
be realized off the Exchange.  Due primarily to Mexican tax
considerations, however, most transactions in listed securities are effected
through the Exchange.  The Mexican Stock Exchange operates a system of
automatic suspension of trading in Shares of a particular issuer as a means of
controlling excessive price volatility, but under current regulations, this
system does not apply to securities such as the Units that are directly or
indirectly (for example, through ADSs) quoted on a stock exchange outside
Mexico.


54




Settlement
is effected two business days after a share transaction on the Mexican Stock
Exchange.  Deferred settlement, even by mutual agreement, is not
permitted without the approval of the CNBV.  Most securities traded on
the Mexican Stock Exchange are on deposit with S.D. Indeval Institución para el
Depósito de Valores, S.A. de C.V.,(Central Securities Depository for the
Mexican Securities Market, or “Indeval”), a privately owned central securities
depositary that acts as a clearing house, depositary, custodian and registrar
for Mexican Stock Exchange transactions, eliminating the need for physical
transfer of securities.




Market
Regulation




The
predecessor of the CNBV was established in 1946 to regulate stock market
activity.  The Ley
del Mercado de Valores (“Securities Market Law”) of 1975, as amended,
regulates the securities markets and brokerage houses and sets standards for the
registration of brokers in the Intermediaries Section of the Registro Nacional de Valores e
Intermediarios (National Registry of Securities and Intermediaries, or
“RNVI”), such registration being a prerequisite to becoming a member of the
Mexican Stock Exchange.  Prior to registration in the RNVI, a
brokerage house must be authorized by the Ministry of Finance upon the
recommendation of the CNBV.  Legislative provisions under NAFTA allow
foreign securities firms in a NAFTA country to establish and control brokerage
firms in Mexico.  There are several foreign brokerage houses
authorized to operate in Mexico.  In addition, a number of other
foreign brokerage firms have submitted preliminary applications to be authorized
to operate on the Mexican Stock Exchange.  The Securities Market Law
also empowers the CNBV to regulate the public offering and trading of
securities.  The governing committee of the CNBV is composed of
representatives of the Ministry of Finance, the Central Bank, theComisión Nacional de Seguros y
Fianzas (“National Insurance and Bonding Commission”), the Comisión Nacional del Sistema de
Ahorro para el Retiro (“National Retirement Savings Fund Commission”) and
the CNBV.




Under the
Mexican Securities Market Law, the CNBV must be notified before stockholders of
a company listed on the Mexican Stock Exchange effect one or more simultaneous
or successive transactions resulting in the transfer of 10.0% or more of such
company’s capital stock.  The holders of the Shares being transferred
in the transactions are also obligated to inform the CNBV of the results of the
transactions within three days of completion of the last transaction, or that
the transactions have not been completed.  The CNBV will notify the
Mexican Stock Exchange of such transactions, without specifying the names of the
parties involved.




The CNBV
and the Mexican Stock Exchange must also be notified in the event of any of the
following contingencies:




·
            on
      the following day of operation if any stockholder of a company listed on
      the Mexican Stock Exchange effects one or more transactions resulting in
      the ownership of more than 10.0% and less of 30.0% of capital
      stock;




·
            on
      the following day of operation if any Related Person increases his
      ownership of the stock of a company;
and




·
            at
      least 15 days before the operation becomes effective if any stockholder of
      a company listed on the Mexican Stock Exchange undertakes in a Public
      Offering of one or more transactions resulting in the ownership of more
      than 30.0% but less than 50.0% of capital
stock.


55




In
June 2006, the “Securities Market Law” was updated. Our bylaws were also
updated accordingly, which are available in an English version, in our web page.
Some of the changes, among others, were:




·
            We
      had to change our name from “Industrias Bachoco S.A. de C.V.” to
      “Industrias Bachoco, S.A.B. de
C.V.”




·
            Defines
      more specifically the concept of  “Control” or
      “Controlled”




·
            Defines
      and assigns specific duties to the General Director or
  CEO.




·
            Defines
      more precisely and widely the duties of the Board of
      Directors.




·
            Assign
      more ample responsibilities to the audit
  committee.




·
            The
      Statutory Auditor no longer exists for Public Companies, his duties were
      assumed by the Audit Committee.




D.
            Selling
      Shareholders




Not
applicable.




E.
            Dilution




Not
applicable.




F.
            Expenses
      of the Issue




Not
applicable.




ITEM
      10.
            Additional
      Information




A.
            Share
      Capital




Not
applicable.




B.
            Memorandum
      and Articles of Association




Information
regarding the memorandum and articles of association was included in the Initial
Registration Form F-1, submitted in September 1997.  In
April 2002, we made changes to our bylaws, which were reported in our
annual report for year 2002.  In December 2003 and
January 2007 we made further changes, the most important are summarized
below.  An English translation of our bylaws was submitted with our
annual report for year 2006 and is incorporated by reference herein and is also
available on our web page www.bachoco.com.mx.  The
discussion set forth below contains information concerning our capital stock and
a brief summary of the material provisions of the bylaws and applicable Mexican
law.  This summary does not purport to be complete and is qualified in
its entirety by reference to the bylaws and the applicable provisions of Mexican
law.


56




General




The
Company was incorporated on April 17, 1980 as a variable capital
corporation (sociedad anónima
de capital variable) under the laws of Mexico.  To fully comply
with Mexican laws, the Company modified its name to Industrias Bachoco, S.A.B.
de C.V. (sociedad anónima
bursatil de capital variable) in April, 2007.




In 1995,
our stockholders authorized the issuance of up to 15,525,000 additional Series B
Shares and 15,525,000 additional Series L Shares, all constituting fixed
capital, to be issued in connection with the global offering of Shares that took
place on September 19, 1997 (the “Global Offering”).




On
April 21, 1997 we restructured our capital by (i) declaring a
four-to-one stock split of the 106,678,125 Series B Shares and 35,559,375 Series
L Shares outstanding, (ii) converting 7,762,500 Series L Shares (on a
post-split basis) into Series B Shares and (iii) combining all of the
434,475,000 Series B Shares and 134,475,000 Series L Shares outstanding (in each
case, on a post-split basis) into 134,475,000 Units and 150,000,000 B
Units.  Holders of Units were entitled to exercise all the rights of
holders of the Series B Shares and Series L Shares underlying their
Units.  Each B Unit consisted of two Series B Shares.  B
Units entitle the holders thereof to exercise all the rights of holders of the
Series B Shares underlying such B Units.  Immediately prior to the
Global Offering, our outstanding capital stock consisted of 434,475,000 Series B
Shares and 134,475,000 Series L Shares, all of which were duly authorized,
validly issued and are fully paid and non-assessable.




During
the annual shareholders meeting held on April 26, 2006, shareholders
approved to proceed with the anticipated conversion of the Series L Shares into
Series B Shares, which have full voting rights. This conversion was effective in
September 2006 and included two steps:  separating the UBL and
UBB Units currently trading on the Mexican Stock Exchange into their component
Shares, and converting  the Series L Shares into Series B Shares (on a
one-to-one basis), thereby created a single share class, the Series B Shares,
which represents all of our Common Stock.




The
Robinson Bours Stockholders have advised us that they intend to ensure that the
Control Trust will hold at least 51.0% of the Series B Shares at any time
outstanding.  See “—Foreign Investment Legislation” in this
Item.




Registration
and Transfer




Shares
are evidenced by certificates in registered form, which may have dividend
coupons attached.  We maintain a registry and, in accordance with
Mexican law, we recognize as stockholders only those holders listed in the stock
registry.  Stockholders may hold their Shares in the form of physical
certificates (which, together with notations made in our stock registry,
evidence ownership of the Shares) or through book entries with institutions that
have accounts with Indeval.




Indeval
is the holder of record in respect of Shares held through
it.  Accounts may be maintained at Indeval by brokerage houses, banks
and other entities approved by the CNBV.  Ownership of Shares
maintained at Indeval is evidenced through Indeval’s records and through lists
kept by Indeval participants.


57


In
accordance with Article 130 of the Ley General de Sociedades
Mercantiles(“Mexican Corporations Law”), the Board of Directors must
authorize any transfer of stock, or any securities based on such stock, when the
number of Shares sought to be transferred in one act or a succession of acts,
without limit of time or from one group of interrelated stockholders or
stockholders who act in concert, constitutes 10.0% or more of the voting stock
issued by the Company.  If the Board of Directors refuses to authorize
such a transfer, the Board must designate one or more purchasers of the stock,
who must pay the interested party the prevailing price on the Mexican Stock
Exchange.  The Board must issue its resolution within three months of
the date on which it receives the relevant request for authorization and in any
case, must consider:  (i) the criteria that are in the best
interests of the Company, the Company’s operations and the long-term vision of
the activities of the Company and its Subsidiaries; (ii) that no
shareholder of the Company is excluded, other than the person that intends to
acquire control of the financial benefits that may result from the application
of the terms of this clause; (iii) that the taking of the Control of the
Company is not restricted in an absolute manner; (iv) that the provisions
of the Securities Market Law, with respect to acquisition public offerings, are
not contravened; and (v) that the exercise of the patrimonial rights of the
acquirer are not rendered without effect.




If any
person participates in a transaction that would have resulted in the acquisition
of 10.0% or more voting stock of the Company without having obtained the board’s
prior approval, they must pay the Company a fine equal to the market value of
the Shares.




Any
person who participates in an act that violates the terms of Article 130
discussed in the preceding paragraph will be obligated to pay the Company a fine
in an amount equal to the value of the Shares owned directly or indirectly by
the stockholder, or the value of the Shares involved in the prohibited
transaction, if such person does not own Shares issued by the
Company.  In the case of a prohibited transaction that would have
resulted in the acquisition of 10.0% or more of the voting stock of the Company,
the fine will be equal to the market value of those Shares, provided that board
authorization was not obtained in advance.




According
to our bylaws, a majority of the members of the Board of Directors must
authorize in writing, by a resolution made at a Board of Directors’ meeting, any
change in the control of the Company.  Our Board of Directors has the
right to decide if a person or a group of persons is acting for the purpose of
acquiring control of the Company.




“Control”
or “Controlled” means (i) to directly or indirectly impose decisions at the
general meetings of shareholders, stockholders or equivalent bodies or to
appoint or remove the majority of the directors, managers or equivalent
officers; (ii) to hold title to the rights that directly or indirectly
allow the exercise of votes with respect to more than fifty percent of the
capital stock; or (iii) to directly or indirectly direct the management,
the strategy or the principal policies of the Company, whether through the
ownership of securities, by contract or otherwise.




Voting
Rights and Stockholders’ Meetings




Each
Share entitles the holder thereof to one vote at any general meeting of the
stockholders.  Holders are currently entitled to elect all members of
the Board of Directors.




Our
bylaws provide that the Board of Directors shall consist of at least five
members and no more than twenty one.  Our board was reformed during
our ordinary shareholders meeting held on April 23, 2007, and now consists
of eight proprietary shareholder Directors and two independent
Directors.  The stockholders also appointed four alternate
Shareholders Directors to the Board of Directors.




General
stockholders’ meetings may be ordinary or extraordinary
meetings.  Extraordinary general meetings are meetings called to
consider the matters specified in Article 182 of the Mexican Corporations
Law and the bylaws,including changes in
the fixed portion of the capital stock and other amendments to the bylaws,
liquidation, merger, transformation from one type of corporate form to another,
change in nationality and changes of corporate purposes.


58




General
meetings called to consider all other matters, including election of the
directors, are ordinary meetings.  An ordinary general meeting of the
Company must be held at least annually during the four months following the end
of the preceding fiscal year to consider certain matters specified in
Article 181 and 182 of the Mexican Corporations Law, including,
principally, the election of directors, the approval of the report of the Board
of Directors regarding their company’s performance, the Company’s financial
statements for the preceding fiscal year and the allocation of the profits and
losses of the preceding year, and to approve the transactions that the Company
or the entities that the Company controls intend to carry out, in terms of
article 47 of the Securities Market Law, in one fiscal year, when such
transactions represent 20.0% (twenty percent) or more of the consolidated assets
of the Company, based on the figures corresponding to the closing of the
immediately preceding quarter, independently of the manner in which such
transactions are carried out, whether simultaneously or successively, but which
due to their characteristics, may be considered as a single transaction. Holders
of Shares may vote at such Meetings.




Before
September 2006, any holder of Series L Shares representing 10.0% or more of
the outstanding capital stock had the right to appoint one member and one
alternate member of the Board of Directors during a Shareholders’
meeting.




Under our
bylaws, the quorum on first call for a general ordinary meeting is at least
50.0%.  If a quorum is not available on first call, a second meeting
may be called at which action may be taken by a majority of those present,
regardless of the number of Shares represented at the meeting.  On a
second call, Ordinary General Shareholders’ Meetings will be considered validly
held regardless of the number of common or ordinary Shares represented therein
and the resolutions of such Meetings will be valid when passed by majority vote
of the Common Stock therein.




The
quorum on first call for a general extraordinary meeting or a special meeting is
75.0% of the outstanding Shares with voting rights on the matters to be
addressed in that meeting.  If a quorum is not available on first
call, a second meeting may be called, provided that at least 50.0% of the
outstanding Shares with voting rights on the matters to be addressed in that
meeting are represented.




Our
bylawsrequire the
approval of holders of at least 95.0% of the outstanding Shares and the approval
of the CNBV for the amendment of the controlling stockholders’ obligation under
the bylawsto
repurchase Shares and certain other provisions in the event of
delisting.  See “—Other Provisions—Repurchase in the Event of
Delisting.” For more detail, see our bylaws on our webpage at www.bachoco.com.mx. Holders of ADRs are
entitled to instruct the Depositary as to the exercise of the voting
rights.




According
to our bylaws, stockholders with a right to vote may ask to postpone a vote on
any matters on which they believe they do not have enough information as defined
by Article 199 of the Mexican Corporation Law.  Stockholders with
a right to vote, including a limited right to vote, and who hold at least 20.0%
of the capital stock, may legally object to the decisions of a general
stockholders’ meeting, with respect to matters in which they have rights,
without the percentage established under article 201 of the General Law of
Business Entities being applicable in such case.




Moreover,
holders of Shares having voting rights, including limited or restricted voting
rights or holders of Shares without voting rights that jointly or individually
represent 5.0% (five percent) or more of the capital stock, may directly
exercise the action of liability against the members and secretary of the Board
of Directors, as well as against the relevant directors or executive
officers.  The exercise of such action will not be subject to the
compliance with the requirements set forth under articles 161 and 163 of
the General Law of Business Entities.


59


The Board
of Directors, or its President or Secretary or the judicial authority, as
applicable, must issue notices of calls of Shareholders’ Meetings.  In
addition, shareholders that jointly or separately represent at least 10.0% (ten
percent) of the capital of the Company may request the President of the Board of
Directors or the President of the Audit Committee to call a General
Shareholder’s Meeting, without the percentage indicated under article 184
of the General Law of Business Entities being applicable for such
purpose.  If the notice of meeting is not issued within fifteen days
after the date of the corresponding request, a Civil or District Judge of the
Company’s domicile will issue such notice at the request of the interested
parties that represent the requesting 10.0% (ten percent) of the capital, who
must present their stock certificates for such purpose.




At least
15 days prior to the meeting, notice of the meeting must be published in the
Diario Oficial de la
Federación (“Official Gazette”) or in a newspaper of general circulation
in Mexico City.  Stockholders’ meetings may be held without such
publication provided that 100.0% of the outstanding Shares with voting rights on
the matters to be addressed by such meeting are represented.




From the
moment that a call for a stockholders’ meeting is made public, all the
information related to the meeting must be available to the
stockholders.  In order to attend a stockholders’ meeting, a
stockholder must request and obtain an admission card by furnishing, at least 24
hours before the time set for holding the stockholders’ meeting, appropriate
evidence of ownership of Shares in us and depositing such Shares with our
corporate secretary or with an institution authorized to accept such
deposit.  If so entitled to attend the meeting, a stockholder may be
represented by proxy signed before two witnesses.  Additionally, the
stockholder may be represented at the stockholders’ meetings by a person named
by proxy, on a printed form that we issue, which, under Mexican law, must
identify our Company and indicate clearly the matters to be addressed in the
meeting, with enough space for the instructions that the stockholder
specifies.  We are obliged to make information on the upcoming meeting
available to the intermediaries in the stock market, for the time specified in
Article 173 of the Mexican Law, in order to give the intermediaries time to
send it to the stockholders they represent.  The Secretary of the
Board of Directors must verify that this requirement is met and report on this
matter at the stockholders’ meeting.  See “—Registration and
Transfer.”




Members
of the Board




Under the
Mexican Corporations Law, a Board of Directors must conform to the following
requirements:




(i)
              The
      Board of Directors will be integrated by a minimum of 5 (five) and a
      maximum of 21 (twenty-one) principal
members.




(ii)
              At
      least 25.0% (twenty-five percent) of the members of the Board of Directors
      must be independent, in accordance with the terms of article 24 of
      the Securities Market Law.




(iii)
              For
      each principal member, a substitute will be appointed, in the
      understanding that the substitutes of independent Board members must also
      be independent.




Besides
from satisfying all of the requirements mentioned above, failure to meet these
standards for any reason will not constitute grounds for judicial action
challenging any act, contract, or agreement undertaken by the board, an
intermediate committee or other delegated authority.  Furthermore,
such standards will not be mandatory for the validity or existence of such
acts.




The Board
of Directors must meet at least every three months at our address or any other
place in Mexico and on the dates that the board determines.  Meetings
previously scheduled in accordance with a schedule pre-approved by the board do
not need to be called.  Meetings must be called by at least 25.0% of
the members of the Board of Directors, the Chairman of the Board of Directors,
the Vice Chairman of the Board of Directors, the Secretary or the Alternate
Secretary of the Board or the President of the Audit
Committee.  Members of the board must be notified via e-mail or in
writing at least five calendar days in advance of a meeting.


60




Dividends
and Distributions




At the
annual ordinary general stockholders’ meeting, the Board of Directors submits
our financial statements for the previous fiscal year, together with a report
thereon by the board, to the holders of Shares for their
consideration.  The holders of Shares, once they have approved the
financial statements, determine the allocation of our net profits, if any, for
the preceding year.  As of December 31, 2009, our legal reserve
fund was equal to at least 20.0% of our paid-in capital
stock.  Amounts in excess of those allocated to the legal reserve fund
may be allocated to other reserve funds as the stockholders determine, including
a reserve for the repurchase of our Shares. The remaining balance of net
profits, if any, is available for distribution as dividends.  No
dividends may be paid, however, unless losses for prior fiscal years have been
paid or absorbed.




Holders
of Shares and, accordingly, holders of ADSs will have equal rights, on a per
Share basis, to dividends and other distributions, including any distributions
we make upon liquidation.  Partially paid Shares participate in any
distribution to the extent that such Shares have been paid at the time of the
distribution or, if not paid, only with respect to the proportion
paid.




Changes
in Capital Stock




An
increase of capital stock may generally be affected through the issuance of new
Shares for payment in cash or in kind, by capitalization of indebtedness or by
capitalization of certain items of stockholders’ equity.  An increase
of capital stock generally may not be realized until all previously issued and
subscribed Shares of capital stock have been fully paid.  Generally, a
reduction of capital stock may be effected to absorb losses, to redeem Shares,
or to release stockholders from payments not made.  A reduction of
capital stock to redeem Shares is effected by reimbursing holders of Shares pro
rata or by lot.  Stockholders may also approve the redemption of fully
paid Shares with retained earnings.  Such redemption would be affected
by a repurchase of Shares on the Mexican Stock Exchange (in the case of Shares
listed thereon).




Except
under limited circumstances, the bylawsrequire that any
capital increase affected pursuant to a capital contribution be represented
Shares.




The fixed
portion of our capital stock may only be increased or decreased by resolution of
a general extraordinary meeting and an amendment to the bylaws, whereas the
variable portion of our capital stock may be increased or decreased by
resolution of a general ordinary meeting.  See “Other Provisions—Fixed
and Variable Capital.”




No
resolution by the stockholders is required for decreases in capital stock
resulting from exercise of our right to withdraw variable Shares or from our
repurchase of our own Shares or for increases in capital stock resulting from
our sale of Shares we previously purchased.  See “Other
Provisions—Purchase by the Company of its Shares” and “Other
Provisions—Appraisal Rights.”




Preemptive
Rights




Except in
certain limited circumstances, in the event of a capital increase through the
issuance of new Shares for payment in cash or in kind, a holder of existing
Shares of a given Series at the time of the capital increase has a preferential
right to subscribe for a sufficient number of new Shares of the same Series to
maintain the holder’s existing proportionate holdings of Shares of that Series
or, in the event of a capital increase through the issuance of limited-voting or
non-voting stock only, to subscribe for a sufficient number of the Shares to be
issued to maintain the holder’s existing proportionate holdings of our capital
stock.  Preemptive rights must be exercised within 15 days following
the publication of notice of the capital increase in the Diario Oficial de la Federación(Official Gazette)or following the date
of the stockholders’ meeting at which the capital increase was approved if all
stockholders were represented at such meeting; otherwise, such rights will
lapse.  Under Mexican law, preemptive rights cannot be waived in
advance by a stockholder, except under limited circumstances, and cannot be
represented by an instrument that is negotiable separately from the
corresponding share.  The Robinson Bours Stockholders, including the
Selling Stockholders, have waived all preemptive rights with respect to the
Shares and the ADSs being offered in the Global Offering.  Holders of
ADRs that are U.S. citizens or are located in the United States may be
restricted in their ability to participate in the exercise of preemptive
rights.


61




Foreign
Investment Legislation




Ownership
by foreigners of Shares of Mexican companies is regulated by the Ley de Inversión Extranjera
(“Foreign Investment Law”) and by the Reglamento de la Ley para Promover
la Inversión Mexicana y Regular la Inversión Extranjera(“Foreign
Investment Regulations”).  The Ministry of Commerce and Industrial
Development and the Foreign Investment Commission are responsible for the
administration of the Foreign Investment Law.




The
Foreign Investment Law reserves certain economic activities exclusively for the
Mexican state and certain other activities exclusively for Mexican individuals
or Mexican corporations, and limits the participation of foreign investors to
certain percentages in regard to enterprises engaged in activities specified
therein.  Foreign investors may own up to 100.0% of the capital stock
of Mexican companies or entities, except for companies (i) engaged in
reserved activities as referred to above or (ii) with assets exceeding an
amount to be established annually by the Foreign Investment Commission, in which
case an approval from the Foreign Investment Commission will be necessary in
order for foreign investment to exceed 49.0% of the capital
stock.  Mexican and non-Mexican nationals will be entitled to hold and
to exercise the rights of holders.  The Robinson Bours Stockholders
have advised us that they intend to maintain a control
position.  Pursuant to our bylaws, foreigners may only own
Shares up to 49.0%.




Other
Provisions




Fixed and variable capital.As a sociedad anónima
de capital variable, we are permitted to issue Shares constituting fixed
capital and Shares constituting variable capital.  The issuance of
variable capital Shares, unlike the issuance of fixed capital Shares, does not
require an amendment of the bylaws, although it does require approval at a
general ordinary stockholders’ meeting.




In no
case may the capital of the Company be decreased to less than the minimum
required by law and any decrease in the shareholders’ equity must be registered
in the Equity Variations Book that the Company will keep for such
purpose.




Repurchase in the event of
delisting.In the event of cancellation of the registration of
the Company’s Shares in such Registry, whether at the request of the Company or
by a resolution of the National Securities and Banking Commission under
applicable law, the Company agrees to make a public offering for the acquisition
of the total number of the Shares registered prior to the
cancellation.  The Company must contribute to a trust for at least six
months, the necessary resources to purchase at the same price of the public
offering, the Shares of the investors that did not attend or did not accept such
offer, in case that after the public offering for purchase has been made and
prior to the cancellation of the registration of the Shares that represent the
capital stock of the Company or of other securities issued based on such Shares
in the National Securities Registry, the Company had been unable to acquire
100.0% of the paid in capital stock.


62


Forfeiture of
Shares.As required by Mexican law, our bylawsprovide that our
current and future foreign stockholders are formally bound to the Mexican Secretaría de Relaciones Exteriores(“Ministry of Foreign Relations”) to consider themselves as Mexican
nationals with respect to our Shares that they may acquire or of which they may
be owners, and with respect to the property, rights, concessions, participations
or interests that we may own or rights and obligations that are based on
contracts to which we are party with the Mexican authorities, and not to invoke
the protection of their government under penalty, should they do so, of
forfeiting to the Mexican State the corporate participation that they may have
acquired.  In the opinion of Galicia & Robles, S.C., our special
Mexican counsel, under this provision a non-Mexican stockholder (including a
non-Mexican holder of ADSs) is deemed to have agreed not to invoke the
protection of his own government by requesting such government to interpose a
diplomatic claim against the Mexican government with respect to the
stockholder’s rights as a stockholder, but is not deemed to have waived any
other rights it may have with respect to its investment in us, including any
rights under U.S. securities laws.  If the stockholder should invoke
such governmental protection in violation of this agreement, its Shares could be
forfeited to the Mexican State.  Mexican law requires that such a
provision be included in the bylawsof all Mexican
corporations unless such bylawsprohibit ownership of
capital stock by foreign investors.




Exclusive
Jurisdiction.Our bylawsprovide that legal
actions relating to any conflict between our stockholders and us, or among the
stockholders in connection with matters related to us, may be brought only in
courts in Mexico City.  Therefore, our stockholders are restricted to
the courts of Mexico City.




Duration.The
duration of our existence under our bylaws is indefinite.




Repurchase of our own
Shares.We may repurchase our Shares on the Mexican Stock
Exchange at any time at the then prevailing market price.  Any
repurchases will be charged to the Stockholders Equity as long as these Shares
belong to the same Company or to the Capital Stock in the event that we convert
these Shares to treasury stock, and in this last case no resolution of the
stockholders’ meeting is required.  At each annual ordinary
Stockholder’s Meeting, the maximum amount of resources that may be used to
repurchase Shares will be expressly defined.  The Board of Directors
will name the persons responsible for the operation of the repurchase
process.  The Shares that belong to the Treasury Stock or us can be
resold among the public stockholders; in the latter case, no resolution of a
stockholders’ meeting is necessary for an increase in capital.  The
economic and voting rights corresponding to such repurchased Shares may not be
exercised during the period in which such Shares are owned by us, and such
Shares are not deemed to be outstanding for purposes of calculating any quorum
or vote at any stockholders’ meeting during such period.




Non-Subscribed
Shares.With prior authorization of the CNBV, we may issue
non-subscribed Shares provided that such Shares will be held by a depositary
institution and that there is compliance with the conditions of Article 53
of the Ley del Mercado de
Valores(“Mexican Securities Law”).  In any extraordinary
stockholders’ meeting at which this issuance of non-subscribed Shares is
approved, the preference rights established by Article 132 of the Mexican
Corporations Law must be respected.  With a quorum at the meeting, the
approval of the issuance will take effect, even with respect to stockholders
that were not present at the meeting, such that we will be free to issue these
Shares with no prior publication.  When a minority of stockholders
representing at least 25.0% of the voting capital stock vote against the
issuance of these Shares, such issuance cannot be made.  Any
stockholder that votes against this issuance at the stockholders’ meeting will
have the right to request that we sell its Shares before issuing the new
non-subscribed Shares.  In such event, we will have the obligation to
sell first the Shares belonging to such stockholders, at the same price that the
non-subscribed Shares are to be offered to the public.




Stockholder Conflicts of
Interest.Under Mexican law, any stockholder that has a
conflict of interest with respect to any transaction must abstain from voting
thereon at the relevant stockholders’ meeting.  A stockholder that
votes on a business transaction in which its interest conflicts with that of
ours may be liable for damages if the transaction would not have been approved
without such stockholder’s vote.




Board Member Conflicts of
Interest.Under Mexican law, any member of the Board of
Directors who has a conflict of interest with us in any transaction must
disclose such fact to the other members of the Board of Directors and abstain
from voting.  Any member of the Board of Directors who violates such
provision may be liable for damages caused to us.  Additionally,
members of the Board of Directors and statutory auditors may not represent other
stockholders at any stockholders’ meeting.


63




Appraisal
Rights.Whenever the stockholders approve a change of
corporate purpose, a change in our nationality or transformation from one type
of corporation form to another, any stockholder entitled to vote on such change
or transformation who has voted against it has the right to withdraw from us and
receive the amount calculated as specified under Mexican law attributable to its
Shares, provided such stockholder exercises its right to withdraw within 15 days
following the adjournment of the meeting at which the change or transformation
was approved.  Under Mexican law, the amount that a withdrawing
stockholder is entitled to receive is equal to its proportionate interest in our
capital stock according to the most recent balance sheet that has been approved
by an ordinary general meeting of stockholders.




Actions against
Directors.Under Mexican law, holders of Shares having voting
rights, including limited or restricted voting rights or holders of Shares
without voting rights that jointly or individually represent 5.0% (five percent)
or more of the capital stock, may directly exercise the action of liability
against the members and secretary of the Board of Directors, as well as against
the relevant directors or executive officers.  The exercise of such
action, among others, will be subject to the compliance with the requirements
set forth under the Mexican Law.




Audit
Committee




Under our
bylaws, the Board of Directors is required to create an Audit Committee under
the terms and conditions outlined below:




The Audit
Committee will consist of members of the Board of Directors.  The
President of the audit committee and a majority of the audit committee members
must be independent, as independence is defined under the Mexican Securities
Market Law.




The
mandate of the audit committee is to establish and monitor procedures and
controls in order to ensure that the financial information we distribute is
useful, appropriate and reliable, and accurately reflects our financial
position.  In particular, pursuant to our bylaws and Mexican law,
among others, the Audit Committee must do the following:




·
            Submit
      an annual report to the Board of
Directors;




·
            Provide
      the Board of Directors with its opinion on the matters that pertain to the
      Auditing Committee, in accordance with the Securities Market
      Law;




·
            Inform
      the Board of Directors of the current condition of the internal controls
      and internal auditing system of the Company, or of the entities it
      controls, including any irregularities
detected;




·
            Require
      the relevant directors and other employees of the Company or of the
      entities it controls, to provide reports relative to the preparation of
      the financial information or any other kind of reports or information it
      deems appropriate to perform its
duties;




·
            Receive
      observations formulated by shareholders, Board members, relevant officers,
      employees and, in general, any third party with regard to the matters
      under his duties, as well as carry out the actions that, in its judgment,
      may be appropriate in connection with such
  observations;




·
            Inform
      the Board of Directors of any material irregularities detected as a result
      of the performance of its duties and, as applicable, inform the Board of
      Directors of the corrective actions taken or propose the actions that
      should be taken;




64




·
            Call
      Shareholders Meetings and cause the items it deems pertinent to be
      inserted into the agendas of such Shareholder’s Meetings,
    and




·
            Assist
      the Board of Directors in selecting candidates for audit and reviewing the
      scope and terms of the auditor’s engagement, as well as evaluate the
      performance of the entity that provides the external auditing services and
      analyze the report, opinions, statements and other information prepared
      and signed by the external auditor.




See
Article 35 of the Mexican Securities Market Law for more
detail.




Related
Party Transactions





See
“Related Party Transactions” included in Item 7 to this Annual
Report.




C.
            Material
      Contracts




None.




D.
            Exchange
      Controls




Ownership
by foreigners of Mexican companies is regulated by the Foreign Investment Law
and by the Foreign Investment Regulations.  The Ministry of Commerce
and Industrial Development and the Foreign Investment Commission are responsible
for the administration of the Foreign Investment Law.




The
Foreign Investment Law reserves certain economic activities exclusively for the
Mexican Government and certain other activities exclusively for Mexican
individuals or Mexican corporations and limits the participation of foreign
investors to certain percentages in regard to enterprises engaged in activities
specified therein.  Foreign investors may own 100.0% of the capital
stock of Mexican companies or entities, except for companies (i) engaged in
reserved activities as referred to above or (ii) with assets exceeding an
amount to be established annually by the Foreign Investment Commission in which
case an approval from the Foreign Investment Commission shall be necessary in
order for foreign investment to exceed 49.0% of the capital
stock.  Mexican and non-Mexican nationals will be entitled to hold and
to exercise the rights of holders.  The Robinson Bours Stockholders
have advised us that they intend to maintain a control position of his
Shares.  Pursuant to our bylaws, foreigners may only own Shares up to
49.0% of such Series.




E.
            Taxation




The
following is a general summary of the principal U.S. federal income tax
consequences and the principal Mexican federal tax consequences of the
acquisition, ownership and disposition of Shares or ADSs.  This
summary does not purport to address all material tax consequences that may be
relevant to holders of Shares or ADSs, and does not take into account the
specific circumstances of any particular investors, some of which (such as
tax-exempt entities, banks, insurance companies, broker-dealers, traders in
securities that elect to use a mark-to-market method of accounting for their
securities holdings, regulated investment companies, real estate investment
trusts, partnerships and other pass-through entities, investors liable for the
U.S. alternative minimum tax, investors that own or are treated as owning 10.0%
or more of our voting stock, investors that hold Shares or ADSs as part of a
straddle, hedge, conversion transaction or other integrated transaction and U.S.
Holders (as defined below) whose functional currency is not the U.S. dollar) may
be subject to special tax rules.  In addition, this summary is based
in part upon the representations of the Depositary and the assumption that each
obligation in the deposit agreement, and in any related agreement, will be
performed in accordance with its terms.


65




For
purposes of this discussion, a “U.S. Holder” is any beneficial owner of Shares
or ADSs that, for U.S. federal income tax purposes, is:




·
            an
      individual who is a citizen or resident of the United
    States;




·
            a
      corporation (or other entity taxable as a corporation for U.S. federal
      income tax purposes) organized in or under the laws of the United States,
      any state thereof, or the District of
Columbia;




·
            an
      estate, the income of which is subject to U.S. federal income tax without
      regard to its source; or




·
            a
      trust that is subject to the primary supervision of a U.S. court and the
      control of one or more U.S. persons, or that has a valid election in
      effect under applicable Treasury regulations to be treated as a U.S.
      person.




If a
partnership holds Shares or ADSs, the tax treatment of a partner will generally
depend upon the status of the partner and upon the activities of the
partnership.  A partner of a partnership considering the purchase of
Shares or ADSs should consult its own independent tax advisor regarding the U.S.
federal income tax consequences of investing in Shares or ADSs through a
partnership.




Except
where specifically described below, this discussion assumes that we are not a
passive foreign investment company, or PFIC, for U.S. federal income tax
purposes.  See “—Passive Foreign Investment Company
Rules.”  This summary is based on the federal income tax laws and
regulations of the United States and Mexico, judicial decisions, published
rulings and administrative pronouncements, all as in effect on the date hereof,
and all of which are subject to change (and some changes may have retroactive
effect) and different interpretations.  Further, this discussion does
not address U.S. federal estate and gift tax or the alternative minimum tax
consequences of holding Shares or ADSs or the indirect consequences to holders
or equity interests in partnerships (or any other entity treated as a
partnership for U.S. federal income tax purposes) that own Shares or
ADSs.  In addition, this discussion does not address the non-U.S.,
non-Mexican, state or local tax consequences of holding Shares or
ADSs.  Prospective purchasers of Shares or ADSs should consult their
own tax advisors as to the U.S., Mexican or other tax consequences of the
purchase, ownership and disposition of Shares or ADSs, including, in particular,
the effect of any non-U.S., non-Mexican, state or local tax laws.




A
Convention for the Avoidance of Double Taxation and the Prevention of Fiscal
Evasion with Respect to Taxes on Income, and a Protocol thereto, between the
United States and Mexico (the “Tax Treaty”) took effect on January 1,
1994.  The Tax Treaty was amended by a second Protocol signed
September 8, 1994.  The second Protocol entered into force on October
2, 2005.  The Tax Treaty was amended by a third Protocol signed
November 26, 2002, the provisions of which took effect in part on
September 1, 2003, and in part on January 1, 2004.  The
United States and Mexico have also entered into an agreement concerning the
exchange of information with respect to tax matters.




In
general, for U.S. federal income tax purposes, holders of ADRs evidencing ADSs
will be treated as the beneficial owners of the Shares represented by those
ADSs.




U.S.
Federal Income Taxation




U.S.
Holders




The
following discussion is a summary of the material U.S. federal income tax
consequences to holders of our Shares and of ADSs that are U.S. Holders and that
hold those Shares or ADSs as capital assets (generally, for investment
purposes).


66




Taxation
of Dividends




Cash
dividends paid with respect to the Shares or ADSs to the extent paid out of our
earnings and profits (as determined under U.S. federal income tax principles)
will be included in the gross income of a U.S. Holder as ordinary income on the
day on which the dividends are received by the U.S. Holder, in the case of
Shares, or the Depositary, in the case of provided the U.S. Holder elects to
deduct (rather than credit) all foreign income taxes for that year ADSs, and
will not be eligible for the dividends-received deduction allowed to
corporations under the Internal Revenue Code of 1986, as amended (the
“Code”).  We do not currently maintain calculations of our earnings
and profits under U.S. federal income tax principles.  Because these
calculations are not made, distributions should be presumed to be taxable
dividends for U.S. federal income tax purposes.




A U.S.
Holder will be entitled, subject to a number of complex limitations and
conditions, to claim a U.S. foreign tax credit in respect of any Mexican income
taxes withheld on dividends received on Shares or ADSs.  U.S. Holders
who do not elect to claim a credit for any foreign income taxes paid during the
taxable year may instead claim a deduction in respect of such Mexican income
taxes.  Dividends received with respect to Shares or ADSs will be
treated as foreign source income, subject to various classifications and other
limitations.  For purposes of the U.S. foreign tax credit limitation
dividends paid with respect to Shares or ADSs generally will constitute “passive
category income.”  The U.S. Treasury Department has expressed concerns
that parties to whom depositary shares such as the ADSs are released may be
taking actions that are inconsistent with the claiming of foreign tax credits by
U.S. Holders of such ADSs.  Accordingly, the analysis of the
creditability of Mexican income taxes described above could be affected by
future actions that may be taken by the U.S. Treasury Department.  The
rules relating to computing foreign tax credits or deducting foreign taxes are
extremely complex, and U.S. Holders are urged to consult their own independent
tax advisors regarding the availability of foreign tax credits with respect to
any Mexican income taxes withheld.




Dividends
paid in pesos will be included in the gross income of a U.S. Holder in a U.S.
dollar amount calculated by reference to the exchange rate in effect on the day
they are received by the U.S. Holder, in the case of Share, or the Depositary,
in the case of ADSs (regardless of whether such pesos are in fact converted into
U.S. dollars on such date).  If such dividends are converted into U.S.
dollars on the date of receipt by the U.S. Holder or the Depositary, as the case
may be, the U.S. Holder generally should not be required to recognize foreign
currency gain or loss in respect of the dividends.  U.S. Holders
should consult their own tax advisors regarding the treatment of foreign
currency gain or loss, if any, on any pesos received which are converted into
U.S. dollars on a date subsequent to receipt.




Subject
to certain exceptions for short-term and hedged positions, and provided that we
are not a passive foreign investment company (as discussed below), dividends
received by certain U.S. Holders (including individuals) prior to
January 1, 2011 with respect to the Shares or ADSs will be subject to U.S.
federal income taxation at a maximum rate of 15.0% if such dividends represent
“qualified dividend income.”  Dividends paid on the ADSs will be
treated as qualified dividend income if (i) the ADSs are readily tradable
on an established securities market in the United States and (ii) we were
not in the year prior to the year in which the dividend was paid, and are not in
the year in which the dividend is paid, a PFIC.  Under current
guidance recently issued by the Internal Revenue Service (“IRS”), the ADSs
should qualify as readily tradable on an established securities market in the
United States so long as they are listed on the New York Stock Exchange, but no
assurances can be given that the ADSs will be or remain readily tradable under
future guidance.


67




Based on
existing guidance, it is not entirely clear whether dividends received with
respect to Shares will be treated as qualified dividend income, because the
Shares are not themselves listed on a U.S. exchange.  In addition, the
U.S. Treasury Department has announced its intention to promulgate rules
pursuant to which shareholders (and intermediaries) will be permitted to rely on
certifications from issuers to establish that dividends qualify for the reduced
rate of U.S. federal income taxation.  Because such procedures have
not yet been issued, we are not certain that we will be able to comply with
them.  U.S. Holders of Shares or ADSs should consult their own tax
advisors regarding the availability of the reduced rate in the light of their
own particular circumstances.




Distributions
to U.S. Holders of additional Shares with respect to their Shares or ADSs that
are made as part of a pro rata distribution to all of our stockholders generally
will not be subject to U.S. federal income tax.  If holders of the
ADSs are restricted in their ability to participate in the exercise of
preemptive rights, the preemptive rights may give rise to a deemed distribution
to holders of the Shares under Section 305 of the Code.  Any
deemed distributions will be taxable as a dividend in accordance with the
general rules of the income tax treatment of dividends discussed
above.




Taxation
of Capital Gains




Gain or
loss recognized by a U.S. Holder on the sale or other taxable disposition of
Shares or ADSs generally will be subject to U.S. federal income taxation as
capital gain or loss in an amount equal to the difference between such U.S.
Holder’s adjusted tax basis in the Shares or ADSs and the amount realized on the
disposition.  A U.S. Holder generally will have an adjusted tax basis
in a Shares or an ADS equal to its U.S. dollar cost.  Gain or loss
recognized by a U.S. Holder on the sale or other disposition of Shares or ADSs
will generally be long-term gain or loss if, at the time of disposition, the
U.S. Holder has held the Shares or ADSs for more than one year.




Certain
U.S. Holders, including individuals, are eligible for preferential rates of U.S.
federal income tax in respect of long-term capital gains.  The
deduction of a capital loss is subject to limitations under the
Code.




Gain
realized by a U.S. Holder on a sale or other disposition of Shares or ADSs
generally will be treated as U.S. source income for U.S. foreign tax credit
purposes.  Consequently, if any Mexican withholding tax is imposed on
the sale or disposition of the Shares, a U.S. holder that does not receive
significant foreign source income from other sources may not be able to derive
effective U.S. foreign tax credit benefits in respect of these Mexican
taxes.  U.S. holders should consult their own tax advisors regarding
the application of the foreign tax credit rules to their investment in, and
disposition of, the Shares or ADSs.




Deposits
and withdrawals of Shares by U.S. Holders in exchange for ADSs will not result
in the realization of gain or loss for U.S. federal income tax
purposes.




Passive
Foreign Investment Company Rules




A
non-U.S. corporation generally will be classified as a passive foreign
investment company (a “PFIC”) for U.S. federal income tax purposes in any
taxable year in which, after applying look-through rules, either (1) at
least 75.0% of its gross income is passive income, or (2) on average at
least 50.0% of the gross value of its assets is attributable to assets that
produce passive income or are held for the production of passive
income.  Passive income for this purpose generally includes, among
other things, dividends, interest, royalties, rents and gains from commodities
and securities transactions.  The determination as to whether a
non-U.S. corporation is a PFIC is based on the application of complex U.S.
federal income tax rules, which are suffering from different
interpretations.  In addition, the PFIC determination is made annually
and generally is based on the value of a non-U.S. corporation’s assets
(including goodwill) and composition of its income.  In determining
whether we are a PFIC, a pro rata portion of the income and assets of each
subsidiary in which we own, directly or indirectly, at least a 25.0% interest by
value is taken into account.


68




Based on
current estimates of our income and assets, we do not believe that we were
classified for our most recently-ended taxable year, or will be classified for
our current taxable year, as a PFIC for U.S. federal income tax purposes, and we
intend to continue our operations in such a manner that we will not become a
PFIC in the future, although no assurances can be made regarding determination
of our PFIC status in the current or any future taxable year.  If we
are treated as a PFIC for any taxable year, a U.S. Holder would be subject to
special rules (and may be subject to increased tax liability) with respect
to (a) any gain realized on the sale or other disposition of ADSs, and
(b) any “excess distribution” made by us to the U.S. Holder (generally, any
distribution during a taxable year in which distributions to the U.S. Holder on
the ADSs exceed 125.0% of the average annual distributions the U.S. Holder
received on the ADSs during the preceding three taxable years or, if shorter,
the U.S. Holder’s holding period for the ADSs).  Under those rules,
(a) the gain or excess distribution would be allocated ratably over the
U.S. Holder’s holding period for the ADSs, (b) the amount allocated to the
taxable year in which the gain or excess distribution is realized and to taxable
years before the first day on which we became a PFIC would be taxable as
ordinary income, (c) the amount allocated to each prior year in which the
Issuer was a PFIC would be subject to U.S. federal income tax at the highest tax
rate in effect for that year and (d) the interest charge generally
applicable to underpayments of U.S. federal income tax would be imposed in
respect of the tax attributable to each prior year in which we were treated as a
PFIC.




In
addition, a U.S. Holder generally would be required to annually file IRS
Form 8621 to disclose ownership of an equity interest in a
PFIC.  U.S. Holders should also be aware that recently enacted
legislation may broaden the current IRS Form 8621 filing requirements or impose
an additional annual filing requirement for U.S. persons owning shares of a
PFIC.  The legislation does not describe what information would be
required to be included in either situation, but grants the Secretary of the
U.S. Treasury Department power to make this determination.  Moreover,
dividends that a U.S. Holder receives from us will not be eligible for the
reduced U.S. federal income tax rates described above if we are a PFIC either in
the taxable year of the distribution or the preceding taxable year (and instead
will be taxable at rates applicable to ordinary income).




Prospective
investors should consult their own tax advisors regarding the potential
application of the PFIC rules to Shares or ADSs and the application of recently
enacted legislation to their particular situation.




Non-U.S.
Holders




The
following discussion is a summary of the principal U.S. federal income tax
consequences to beneficial holders of Shares or ADSs that are neither U.S.
Holders nor partnerships for U.S. federal income tax purposes (“Non-U.S.
Holders”).




Subject
to the discussion below under “U.S. Backup Withholding and Information
Reporting,” a Non-U.S. Holder of Shares or ADSs will not be subject to U.S.
federal income or withholding tax on gain realized on the sale of Shares or
ADSs, unless (i) such gain is effectively connected with the conduct by
such Non-U.S. Holder of a trade or business in the United States (and, if an
applicable tax treaty requires, is attributable to a U.S. permanent
establishment or fixed base of such Non-U.S. Holder) or (ii) in the case of
gain realized by an individual Non-U.S. Holder, such holder is present in the
United States for 183 days or more in the taxable year of the sale and certain
other conditions are met.




U.S.
Backup Withholding and Information Reporting


In
general, dividends on Shares or ADSs, and payments of the proceeds of a sale or
other taxable disposition of Shares or ADSs, paid within the United States, by
the U.S. payor or through certain U.S.-related financial intermediaries to a
U.S. Holder are subject to information reporting and may be subject to backup
withholding at a current rate of 28.0%, (30.0% starting in 2010), unless the
holder (i) establishes that it is a corporation or other exempt recipient
or (ii) with respect to backup withholding, provides an accurate taxpayer
identification number and certifies that it is a U.S. person and that no loss of
exemption from backup withholding has occurred.  Payments made within
the United States, by a U.S. payor or through certain U.S.-related financial
intermediaries to a Non-U.S. Holder will not be subject to backup withholding
tax and information reporting requirements if an appropriate certification is
provided by the holder to the payor or intermediary and the payor or
intermediary does not have actual knowledge or a reason to know that the
certificate is incorrect.




69




Backup
withholding is not an additional tax.  The amount of any backup
withholding withheld from a payment to a U.S. Holder will be allowed as a credit
against the U.S. Holder’s U.S. federal income tax liability, provided that the
required information is timely furnished to the IRS.  A U.S. Holder
generally may obtain a refund of any amounts withheld under the backup
withholding rules that exceed its U.S. federal income tax liability by filing a
timely refund claim with the IRS.




In
addition, U.S. Holders should be aware that recently enacted legislation imposes
new reporting requirements with respect to the holding of foreign financial
assets, including stock of foreign issuers, if the aggregate value of all of
such assets exceeds $50,000.  U.S. Holders should consult their own
tax advisors regarding the application of the information reporting rules to our
common shares and the application of the recently enacted legislation to their
particular situation.




Mexican
Taxation




Taxation
of Dividends




Dividends,
either in cash or in any other form, paid with respect to the Shares
constituting the Shares or the ADSs will not be subject to Mexican withholding
tax.




Taxation
of Capital Gains




Gain on
the sale or other disposition of ADSs by holders who are not Mexican Residents
(as defined below) will not be subject to Mexican income
tax.  Deposits of Shares in exchange for ADSs and withdrawals of
Shares in exchange for ADSs will not give rise to Mexican income
tax.




Gain on
the sale of Shares by a holder who is not a Mexican Resident (as defined below)
will not be subject to Mexican tax if the transaction is carried out through the
Mexican Stock Exchange or other securities markets approved by the Mexican
Ministry of Finance, and provided certain requirements set forth by the Mexican
Income Tax Law are complied with.  Sales or other dispositions of
Shares made in other circumstances generally would be subject to Mexican tax,
except to the extent that a holder is eligible for benefits under an income tax
treaty to which Mexico is a party of.  Under the Tax Treaty, gain on
the sale or other disposition of Shares by a U.S. resident (if eligible for
benefits under the Tax Treaty) who is a holder of less than 25.0% of our capital
stock during the twelve-month period preceding such sale or disposition will not
be subject to Mexican tax, unless (i) 50.0% or more of the fair market
value of our assets consist of “immovable property” (as defined in the Tax
Treaty) situated in Mexico, or (ii) such gains are attributable to a
permanent establishment or fixed base of such U.S. resident in
Mexico.




For a
holder that is not a Mexican Resident and that does not meet the requirements
referred to above, gross income realized on the sale of Shares will be subject
to a 5.0.0% Mexican withholding tax if the transaction is carried out through
the Mexican Stock Exchange.  Alternatively, a holder that is not a
Mexican Resident can choose to be subject to a 20.0% withholding rate on the net
gain obtained, as calculated pursuant to Mexican Income Tax Law
provisions.




The
Mexican tax rules governing the taxation of gains of holders who are not Mexican
Residents on dispositions of their Shares or ADSs were amended during
2002.  Holders who are not Mexican Residents who disposed of their
Shares or ADSs during 2003 should consult their own Mexican tax advisors on the
Mexican tax treatment of such dispositions.


70




For
purposes of Mexican taxation (Ley del Impuesto sobre la
renta), an individual is a resident of Mexico (a “Mexican Resident”) if
he or she has established his or her home in Mexico, unless he or she has
resided in another country for more than 183 days, whether consecutive or not,
during a calendar year and can demonstrate that he or she has become a resident
of that country for tax purposes.  A legal entity is a Mexican
Resident if it has been incorporated under Mexican law.  A company is
also considered to be a Mexican Resident if its headquarters are located in
Mexico.  A Mexican citizen is presumed to be a resident of Mexico for
tax purposes unless such person can demonstrate otherwise.  If a
person is deemed to have a permanent establishment or fixed base in Mexico for
tax purposes, such permanent person shall be required to pay taxes in Mexico on
income attributable to such permanent establishment or fixed base, in accordance
with applicable tax laws.




Other
Mexican Taxes




There are
no Mexican inheritance, succession or similar taxes applicable to the ownership,
transfer or disposition of ADSs or Shares by holders that are not Mexican
Residents; provided, however, that gratuitous transfers of Shares may in certain
circumstances cause a Mexican federal tax to be imposed on the
recipient.  There is no Mexican stamp, issue, registration or similar
taxes or duties payable by holders of ADSs or Shares.  Brokerage fees
on securities transactions carried out through the Mexican Stock Exchange are
subject to a 15.0%, (16.0% for 2010), valued added tax.




F.
            Dividends
      and Paying Agents




Not
applicable.




G.
            Statement
      by Experts




Not
applicable.




H.
            Documents
      on Display




The
documents concerning us which are referred to in this document are available at
the our company headquarters, located at Ave. Tecnológico No.401, Ciudad
Industrial, Celaya, Guanajuato, 38010, Mexico, for any inspection
required.  Part of this information is available on our web page, at
www.bachoco.com.mx.




I.
            Subsidiary
      Information




Not
applicable.




ITEM
      11.
            Quantitative
      and Qualitative Disclosures about Market
Risk




In the
normal course of our business, we hold or issue various financial instruments
that expose us to financial risks involving fluctuations in currency exchange
rates and interest rates.  Also, we are exposed to commodity price
risk in connection with fluctuations in the prices for our feed
ingredients.




Currency
Fluctuation




Our
exposure to market risk associated with changes in foreign currency exchange
rates relates primarily to cost and expenses which are denominated in U.S.
dollars.  See Risk Factors under Item 3.




71




In 2007,
we experienced a small foreign exchange loss of Ps. 3 million because the peso
was very stable.




During
2008, we experienced a loss of Ps. 1.5 billion in our net interest position and
the impact on the valuation of our financial instruments, mainly due to negative
results in our exchange rate derivative instruments and grain hedge
positions.  This loss was partially offset by our foreign exchange
gain of Ps.160 million.




In 2009,
we had a foreign exchange loss of Ps. 38 million because of the slightly
decreased volatility of the Mexican peso. The net interest expense and the
valuation effects of our financial instrument totaled Ps. 95 million as of
December 31, 2009.




We manage
our exchange rate exposure primarily through management of our financial
structure, specifically by maintaining most of our debt through long-term debt
instruments.  As part of our normal operations, we purchase financial
derivative instruments in order to ensure greater certainty in our purchases of
U.S. dollars.  We plan over a six-month period into the future and,
depending on the expected uncertainty for that period, decide if it is
economically advisable to purchase or sell any hedging instrument.




The main
risk that the Company faces with the use of these derivative instruments is the
volatility in the exchange rate of the peso against the U.S.
dollar.




During
2007 and 2008, we have followed different strategies with respect to derivatives
which involved call and put options in U.S. dollars. In 2009, we did not have
debt denominated in U.S. dollars. For details, please see Note 10 to our Audited
Consolidated Financial Statements.




No
assurance can be given as to the future valuation of the Mexican peso and how
further movements in the peso could affect our future earnings.  In
order to mitigate our foreign exchange risk, we have established a Risk
Committee which meets at least once a month and approves the guidelines and
policies for entering into these operations.  We also works with
independent consultants whom make evaluations of our positions and provides us
with consulting services.  Said companies do not sell any financial
instruments to us.




Based on
our derivatives position in March 2010, we estimate that a hypothetical
5.0% devaluation of the Mexican peso against the U.S. dollar would result in
gains of Ps. 1.4 million, while a 5.0% appreciation would result in losses of
Ps. 74.6 million.


Interest
Rates




Our
earnings may also be affected by changes in interest rates due to the impact
those changes have on our variable rate debt instruments.  As of
March 2010, we had borrowings of approximately Ps. 863 million pursuant to
variable rate debt instruments, representing approximately 4.3% of our total
assets.




Based on
our position on December 31, 2009, we estimate that a hypothetical interest
rate variation of 0.5% on our Mexican peso denominated debt would result in
increased interest expenses of approximately Ps. 4.8 million per
annum.  Any such increase would likely be partially offset by an
increase in interest income due to our cash and cash equivalent
position.




Feed
Ingredients




The
largest single component of our cost of sales is the cost of ingredients used to
prepare feed, including principally, sorghum, soy meal, corn, fish meal, meat
meal and, for certain chicken products, marigold extract.  The price
of these ingredients is subject to significant volatility resulting, among other
factors, from weather, the size of harvests, transportation and storage costs,
governmental agricultural policies and currency exchange rates.  In
order to reduce the potential adverse effect of grain price fluctuations, we
vary the composition of our feed to take advantage of current market prices for
the various types of ingredients used.




72




The
percentage of grain purchased from domestic markets was 30.1%, 31.3%, 36.4% and
48.0 in 2005, 2006 and 2007 and 2008 respectively.  In 2009, we
purchased approximately 50.0% of our grain requirements from local sources.
During 2009, grain prices were more stable, especially in the second half of the
year.




Based on
results for 2009, we estimate that a hypothetical variation of 10.0% in the cost
of our feed ingredients would have an impact of 6.8% on total cost of
sales.





ITEM
      12.
            Description
      of Securities Other Than Equity
Securities




A.
            Debt
      Securities




Not
applicable.




B.
            Warrants
      and Rights




Not
applicable.




C.
            Other
      Securities




Not
applicable.





D.
            American
      Depository Receipts




Not
applicable.




PART
II




ITEM
      13.
            Default,
      Dividend Arrearages and
Delinquencies




None.


ITEM
      14.
            Material
      Modifications to the Rights of Security Holders and Use of
      Proceeds




None.




ITEM
      15.
            Controls
      and Procedures




Disclosure
controls and procedures




We
carried out an evaluation under the supervision and with the participation of
our management, including our Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of our disclosure
controls and procedures as of December 31, 2009.  There are
inherent limitations to the effectiveness of any system of disclosure controls
and procedures, including the possibility of human error and the circumvention
or overriding of the controls and procedures.  Accordingly, even
effective disclosure controls and procedures can only provide reasonable
assurance of achieving their control objectives.  Based upon and as of
the date of our evaluation, our Chief Executive Officer and Chief Financial
Officer concluded that the disclosure controls and procedures are effective to
provide reasonable assurance that information required to be disclosed in the
reports we file and submit under the Securities Exchange Act is recorded,
processed, summarized and reported as and when required.




73




Management’s
Annual Report on Internal Control over Financial Reporting




The
Company’s management is responsible for establishing and maintaining internal
control over financial reporting as defined in Rules 13a-15(f) under the
Securities Exchange Act of 1934.  The Company’s internal control over
financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with Mexican
FRS.




Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements.  Effective control over financial
reporting cannot, and does not, provide absolute assurance of achieving our
control objectives.  Also, any evaluation of effectiveness to future
periods are subject to the risk that controls may become inadequate because of
changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.




Management
assessed the effectiveness of the Company’s internal control over financial
reporting as of December 31, 2009.  In making this assessment,
management used the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) in Internal Control—Integrated
Framework.  Based on this assessment, management concluded that, as of
December 31, 2009, the Company’s internal control over financial reporting
is effective based on those criteria.




The
effectiveness of the Company’s internal control over financial reporting as of
December 31, 2009, has been audited by KPMG Cádenas Dosal S.C., an independent
registered public accounting firm, as stated in their report which appears
herein.




Changes
in Internal Controls




There has
been no change in our internal control over financial reporting in the period
covered by this annual report that has materially affected, or is reasonably
likely to materially affect, our internal control over financial
reporting.




Attestation
Report of the Independent Registered Public Accounting Firm




The
Board of Directors and Stockholders


Industrias
Bachoco, S. A. B. de C. V.:




We have
audited Industrias Bachoco, S.A.B. de C.V.’s internal control over financial
reporting as of December 31, 2009, based on criteria established in Internal
Control-Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission (COSO). Industrias Bachoco, S.A.B. de C.V.’s
management is responsible for maintaining effective internal control over
financial reporting, and for its assessment of the effectiveness of internal
control over financial reporting included in the accompanying Management’s
Report on Internal Control over Financial Reporting. Our responsibility is to
express an opinion on the Company’s internal control over financial reporting
based on our audit.




We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, and
testing and evaluating the design and operating effectiveness of internal
control based on the assessed risk. Our audit also included performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.




74




A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial
statements.




Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements.  Also, projections of any evaluation
of effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.




In our
opinion, Industrias Bachoco, S.A.B. de C.V. maintained, in all material
respects, effective internal control over financial reporting as of December 31,
2009, based on   criteria established in Internal
Control-Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission.




We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States) and with auditing standards generally accepted
in Mexico, the consolidated balance sheets of Industrias Bachoco, S.A.B. de C.V.
and subsidiaries as of December 31, 2008 and 2009, and the related consolidated
statements of operations, stockholders’ equity, and cash flows for the years
then ended and our report dated June 18, 2010 expressed an unqualified opinion
on those consolidated financial statements.




Queretaro,
Mexico, June 25, 2010.




Demetrio
      Villa MichelKPMG
      Cárdenas Dosal, S.C.


ITEM 16.
            [Reserved]




ITEM
16.A. Audit Committee Financial Expert




Currently,
no member of our audit committee possesses all the characteristics included in
the definition of an “audit committee financial expert” within the meaning of
this Item 16A.  We consider that the combined financial expertise
of the members of our audit committee meet much of this
requirement.  Our audit committee has the authority and appropriate
funding to obtain outside advice, as it deems necessary, to carry out its
duties.




75




ITEM
16.B.  Code of Ethics




We have
adopted a code of ethics, as defined in Item 16B of Form 20-F under
the Securities Exchange Act of 1934, as amended.  Our code of ethics
applies to our Chief Executive Officer, Chief Financial Officer, controllerand
persons performing similar functions, as well as to other officers and
employees.  Our code of ethics is available free of charge upon
request through our website www.bachoco.com.mx   If
we amend the provisions of our code of ethics that apply to our Chief Executive
Officer, Chief Financial Officer, controller and persons performing similar
functions, or if we grant any waiver of such provisions, we will disclose such
amendment or waiver on our website at the same address.




ITEM
16.C.  Principal Accountant Fees and Services




Audit
and Non-Audit Fees




The
following table sets forth the fees billed by our independent auditors, Mancera,
S.C., and KPMG Cárdenas Dosal, S.C. independent registered public accounting
firm and paid by us.  All the amounts are in nominal thousand pesos,
prior to taxes:




Mancera, S.C.
                  
                  
                  KPMG Cárdenas Dosal, S.C.Thousands of Mexican pesos, year ended December 31,2008
                  
                  
                  2009
                  
                  
                  2008
                  
                  
                  2009Audit
      fees
                  
                  Ps.
                  3,067
                  
                  
                  Ps.
                  488
                  
                  
                  Ps.
                  2,573
                  
                  
                  Ps.
                  4,308Tax
      fees
                  
                  
                  261
                  
                  
                  
                  50
                  
                  
                  
                  —
                  
                  
                  
                  —Audit
      Related fees
                  
                  
                  267
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —Total
      fees
                  
                  Ps.
                  3,595
                  
                  
                  Ps.
                  488
                  
                  
                  Ps.
                  2,573
                  
                  
                  Ps.
                  4,308




Audit
fees in the above table are the aggregate fees billed by Mancera, S.C., and KPMG
Cárdenas Dosal, S.C. and paid by us in connection with the audit of our annual
financial statements and statutory and regulatory audits for the years 2008 and
2009. The total 2009 and 2008 audit fees to be paid to KPMG Cárdenas Dosal, S.C.
is Ps. 4,678 thousand, and Ps. 5,285 thousand respectively.




Audit
related fees in the table above are fees related to services such as reviewing
Security and Exchange Commission requirements and other
services.


Audit
Committee Approval Policies and Procedures




Our audit
committee has not established pre-approval policies and procedures for the
engagement of our independent auditors for services.  Our audit
committee expressly approves on a case-by-case basis any engagement of our
independent auditors for audit and non-audit services provided to our
subsidiaries or to us.




ITEM
16.D.  Exemptions from the Listing Standards for Audit
Committees




According
to the New York Stock Exchange’s Listing Standards for Audit Committees of a
Foreign Private Issuer; Ricardo Aguirre, a member of our audit committee,
currently does not meet the independence standards set forth in Rule
10A-3b(1)(ii)(B) of the Exchange Act.  Therefore, with respect to Mr.
Aguirre, we rely on the exemption provided in Rule 10A-3(b)(1)(iv)(D) of the
Exchange Act because Mr. Aguirre (i) represents the Company's controlling
shareholders, (ii) only has observer status on, and is not a voting member or
the chair of, the Company's audit committee and (iii) is not an executive
officer of the Company.  Our reliance on such exemption does not
materially adversely affect the ability of our audit committee to act
independently and to satisfy the other requirements of Rule
10A-3(b).




76





ITEM
16.E.  Purchases of Equity Securities by the Issuer and Affiliated
Purchasers


The table
below sets forth information about the repurchase of our Shares on the Mexican
Stock Exchange:
  Month
      of 2009
              Total
      Number of Shares Purchased
              Average
      Price Paid
                per
      Share
              Total
      Number of Shares Purchased as Part of the Repurchase Plan
              Maximum
      Number of Shares that May Yet Be Purchased under the Plan(1)(2)On
      February 24th
              123,200
              Ps.
      13.52
              123,200
              23,064,430.25From
      March 10ththrough March 23th
              24,200
              Ps.
      11.87
              24,200
              26,248,328.80Total
              147,400
              Ps.
      13.25
              147,400
 1.
              The
      Share repurchase plan was initially approved in 1998 and is renewed
      annually at our annual general stockholders meeting.  The Shares
      repurchased as set forth above were repurchased pursuant to the repurchase
      plan approved during our annual general stockholders meeting held on April
      23, 2008.  The reserve approved for repurchases amounted to Ps.
      313,560,000.  The plan remained in effect until April 22,
      2009.
  2.
              The
      maximum number of Shares remaining for repurchase is an estimate
      calculated by dividing the amount remaining for repurchase, after such
      repurchase has been made, by the average price paid per
    Share.
  All
Shares repurchased by us as set forth in the chart above were resold during the
same fiscal year 2009. During fiscal year 2010, we have not made any repurchases
of Shares to date. For additional information, see note 15-d to the Audited
Consolidated Financial Statements.


ITEM
16.F.  Changes in Registrant’s Certifying Accountant




Not
applicable.


ITEM
16.G.  Corporate Governance




Comparison
of our Corporate Governance Rules and the Rules of the NYSE Applicable to U.S.
Registered Companies




On
November 4, 2003, the SEC approved final corporate governance standards for
companies listed on the NYSE (“NYSE Corporate Governance
Standards”).  According to such standards, foreign private issuers are
subject to a more limited set of requirements regarding corporate governance
than those imposed on U.S. domestic issuers.  As a foreign private
issuer, we must comply with four NYSE Corporate Governance
Standards:




·
            prior
      to July 31, 2005, we must comply with the requirements set forth by
      the SEC concerning audit
committees;




·
            we
      must submit an annual Written Affirmation to the NYSE and an Interim
      Written Annual Affirmation each time a change occurs in the Board of
      Directors or the Audit Committee;




·
            our
      CEO must promptly notify the NYSE in writing after any executive officer
      becomes aware of any material non-compliance with any of the applicable
      NYSE corporate governance rules;
and




·
            we
      must provide a brief description disclosing any significant ways in which
      our corporate governance practices differ from those followed by U.S.
      companies under NYSE listing
standards.




77





Pursuant
to Section 303A.11 of the NYSE Corporate Governance Standards, we are required
to disclose any significant ways in which our corporate governance practices
differ from those required to be followed by domestic companies under NYSE
listing standards.  A brief description disclosing the significant
ways in which our corporate governance practices differ from those followed by
U.S. companies under the NYSE listing standards is set forth below:




NYSE
      Corporate Governance Rules forDomestic Issuers
                  
                  Our
      Corporate Governance PracticesDirector
      Independence.  Majority of board of directors must be
      independent.  “Controlled companies,” which would include our
      company if it were a U.S. issuer, are exempt from this
      requirement.
                  
                  Pursuant
      to the Mexican Securities Market Law and our bylaws, our stockholders are
      required to appoint a board of directors of between five and 20 members,
      25% of whom must be independent.  Our board of directors is not
      required to make a determination as to the independence of our
      directors.A
      director is not independent if such director is:
                  
                  Under
      Article 14 Bis of the Mexican Securities Market Law, a director is
      not independent if such director is:(i)    a
      person who the board determines has a material direct or indirect
      relationship with the company, its parent or a consolidated
      subsidiary;
                  
                  (i) an
      employee or officer of the company (one-year cooling off
      period);(ii)   an
      employee, or an immediate family member of an executive officer, of the
      company, its parent or a consolidated subsidiary, other than employment as
      interim chairman or CEO;
                  
                  (ii) a
      stockholder that, without being an employee or officer of the company, has
      influence or authority over the company’s officers;(iii)  a
      person who receives, or whose immediate family member receives, more than
      $100,000 per year in direct compensation from the company, its parent or a
      consolidated subsidiary, other than director and committee fees or
      deferred compensation for prior services only (and other than compensation
      for service as interim chairman or CEO or received by an immediate family
      member for service as a non-executive employee);
                  
                  (iii) a
      consultant, or partner or employee of a consultant, to the company or its
      affiliates, where the income from the company represents 10% or more of
      the overall income of such consultant;(iv)  a
      person who is affiliated with or employed, or whose immediate family
      member is affiliated with or employed in a professional capacity, by a
      present or former internal or external auditor of the company, its parent
      or a consolidated subsidiary;
                  
                  (iv) an
      important client, supplier, debtor or creditor (or a partner, director or
      employee thereof).  A client and supplier is considered
      important where its sales to or purchases from the company represent more
      than 10% of the client’s or supplier’s total sales or
      purchases.  A debtor or creditor is considered important
      whenever its sales to or purchases from to the company represent more than
      15% of the debtor’s or creditor’s total sales or
  purchases;


78





NYSE
      Corporate Governance Rules forDomestic Issuers
                  
                  Our
      Corporate Governance Practices(v)   an
      executive officer, or an immediate family member of an executive officer,
      of another company whose compensation committee’s membership includes an
      executive officer of the listed company, its parent or a consolidated
      subsidiary; or
                  
                  (v)   an
      employee of a non-profit entity that receives contributions from the
      company that represent more than 15% of the total contributions
      received;(vi)  an
      executive officer or employee of a company, or an immediate family member
      of an executive officer of a company, that makes payments to, or receives
      payments from, the listed company, its parent or a consolidated subsidiary
      for property or services in an amount which, in any single fiscal year,
      exceeds the greater of $1 million or 2% of such other company’s
      consolidated gross revenues (charities are not included, but any such
      payments must be disclosed in the company’s proxy (or, if no proxy is
      prepared, its Form 10-K / Annual Report)).
                  
                  (vi)  a
      CEO or other high ranking officer of another company in which the issuer’s
      CEO or other high ranking officer is a member of the board of directors;
      or(vii) “Immediate
      family member” includes a person’s spouse, parents, children, siblings,
      mothers and fathers-in-law, sons and daughters-in-law and anyone (other
      than domestic employees) who shares the person’s
      home.  Individuals who are no longer immediate family members
      due to legal separation, divorce or death (or incapacity) are
      excluded.  §303A.02(b)
                  
                  (vii) a
      “family member” related to any of the persons mentioned above in (i)
      through (vi).  “Family member” includes a person’s spouse,
      concubine or other relative of up to three degrees of consanguinity and
      affinity, in the case of (i) and (ii) above, and a spouse, concubine or
      other relative of up to one degree of consanguinity or affinity in the
      case of (iii) through (vi) above.Executive
      Sessions.  Non-management directors must meet regularly
      in executive sessions without management.  Independent directors
      should meet alone in an executive session at least once a
      year.  §303A.03
                  
                  There
      is no similar requirement under our bylaws or applicable Mexican
      law.Audit
      committee.  Audit committee satisfying the independence
      and other requirements of Rule 10A-3 under the Exchange Act and the
      more stringent requirements under the NYSE standards is
      required.  §§303A.06, 303A.07
                  
                  The
      members of our audit committee are independent as independence is defined
      by Rule 10A-3.Our
      audit committee complies with the requirements of the Mexican Securities
      Market Law and has the following
attributes:


79





NYSE
      Corporate Governance Rules forDomestic Issuers
                
                Our
      Corporate Governance Practices·We have a three-member audit committee, which is composed of one
      proprietary director and two proprietary independent
      directors.
                  ·The president of the audit committee and one additional member are
      independent.  Under the Mexican Securities Market Law, the
      president and the majority of the members of the audit committee must be
      independent.·Our audit committee operates pursuant to a written charter adopted
      by our board of directors.  See Item 6 for a detailed
      description of the duties of our audit committee.·Pursuant to our bylaws and Mexican law, our audit committee submits
      an annual report regarding its activities to our board of
      directors.Nominating/corporate governance
      committee.Nominating/corporate governance committee of
      independent directors is required.  The committee must have a
      charter specifying the purpose, duties and evaluation procedures of the
      committee.  “Controlled companies,” which would include our
      company if it were a U.S. issuer, are exempt from these
      requirements.  §303A.04
                
                We
      are not required to have a nominating/corporate governance committee, and
      it is not expressly recommended by the Mexican Code of Best Corporate
      Practices.Compensation
      committee.  Compensation committee of independent
      directors is required, which must approve executive officer
      compensation.  The committee must have a charter specifying the
      purpose, duties and evaluation procedures of the
      committee.  “Controlled companies,” which would include our
      company if it were a U.S. issuer, are exempt from this
      requirement.  §303A.05
                
                We
      are not required to have a compensation committee.  As
      recommended by the Mexican Code of Best Corporate Practices, we have an
      evaluation mechanism for assisting the board of directors in approving
      executive officer compensation.Equity compensation
      plans.  Equity compensation plans require stockholder
      approval, subject to limited
    exemptions.  §303A.08
                
                Stockholder
      approval is not expressly required under Mexican law or our bylaws for the
      adoption and amendment of an equity-compensation plan.  However,
      regulations of the Mexican Banking and Securities Commission require
      stockholder approval under certain circumstances.  We currently
      do not have any equity-compensation plans in
  place.


80





NYSE
      Corporate Governance Rules forDomestic Issuers
              
              Our
      Corporate Governance PracticesCode of
      Ethics.Corporate governance guidelines and a code of
      business conduct and ethics is required, with disclosure of any waiver for
      directors or executive officers.  §303A.10
              
              We
      have adopted a code of ethics, which has been accepted by to our chief
      executive officer, chief financial officer, controller and persons
      performing similar functions, as well as to other officers and
      employees.  We are required by Item 16B of Form 20-F
      to disclose any waivers granted to our chief executive officer, chief
      financial officer, principal accounting officer and persons performing
      similar functions.  We have no such waivers in
      place.


81


PART
III




ITEM
      17.
            Financial
      Statements




Not
applicable.




ITEM
      18.
            Financial
      Statements




See the
Consolidated Audited Financial Statements including notes, incorporated herein
by reference.




ITEM
      19.
            Exhibits




Index
of Exhibits




Documents
filed as exhibits to this Annual Report:


Exhibit
                                      No.
                                    
                                    Description1.1
                                    
                                    
                                    An
      English translation of the Bylaws (estatutos sociales) of Industrias
      Bachoco, S.A. de C.V. dated June 29, 2007 (incorporated by reference
      to Exhibit 1.1 on Form 20-F filed with the U.S. Securities and
      Exchange Commission on June 29, 2007 (File No.
      333-07950)).2.1
                                    
                                    
                                    Form
      of Amended and Restated Deposit Agreement, among Industrias Bachoco, S.A.
      de C.V., the Depositary and each Owner and Beneficial Owner from time to
      time of American Depositary Receipts issued thereunder, including the form
      of American Depositary Receipt (incorporated by reference to
      Exhibit 1.1 on Form F-6 filed with the U.S. Securities and Exchange
      Commission on August 18, 2006 (File No.
  333-07480)).2.2
                                    
                                    
                                    Trust
      Agreement, dated April 1, 1995, among Banco Internacional, S.A.,
      Institución de Banca Múltiple, Grupo Financiero Prime Internacional, as
      trustee, and the stockholders of the Company named therein, together with
      an English translation, (incorporated by reference on our registration
      statement on Form F-1 filed with the U.S. Securities and Exchange
      Commission on August 22, 1997 (File No.
333-7472)).2.3
                                    
                                    
                                    Trust
      Agreement, dated August 20, 1997, among Banco Internacional, S.A.,
      Institución de Banca Múltiple, Grupo Financiero Bital, as trustee, and the
      stockholders of the Company named therein, together with an English
      translation, (incorporated by reference on our registration statement on
      Form F-1 filed with the U.S. Securities and Exchange Commission on
      August 22, 1997 (File No. 333-7472)).8.1
                                    
                                    
                                    Subsidiaries
      of Industrias Bachoco S.A. de C.V.12.1
                                    
                                    
                                    Certification
      of the Chief Executive Officer pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002.12.2
                                    
                                    
                                    Certification
      of the Chief Financial Officer pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002.13.1
                                    
                                    
                                    Certification
      pursuant to Section 906 of the Sarbanes-Oxley Act of
      2002.


82


SIGNATURE




The
registrant hereby certifies that it meets all of the requirements for filing on
Form 20-F and that it has duly caused and authorized the undersigned to
sign this annual report on its behalf.




INDUSTRIAS
      BACHOCO, S.A.B de C.V.By:
              /s/DANIEL
      SALAZAR FERRERDaniel
      Salazar FerrerChief
      Financial Officer


Date:  June 28,
2010


83


INDUSTRIAS BACHOCO, S.A.B. DE C.V.AND
SUBSIDIARIES
 
 Consolidated
Financial Statements
 
 At
December 31, 2008 and 2009 and for the years
 ended
December 31, 2007, 2008 and 2009
 
 (with
Independent Registered Public Accounting Firm)
 
 F-1
 
 INDUSTRIAS
BACHOCO, S.A.B. DE C.V.
 AND
SUBSIDIARIES
 
 Consolidated
Financial Statements
 
 As
of December 31, 2007, 2008 and 2009
 
 Content
 
 Reports
      of Independent Registered Public Accounting Firms
                F-3Consolidated
      Financial Statements:Balance
      Sheets
                F-6Statements
      of Operations
                F-7Statements
      of Changes in Stockholders’ Equity
                F-8Statements
      of Changes in Financial Position
                F-10Statements
      of Changes in Cash Flows
                F-9Notes
      to the Consolidated Financial Statements
                F-11
 
 F-2
 
 Report
of Independent Registered Public Accounting Firm
 
 The Board
of Directors and Stockholders
 Industrias
Bachoco, S. A. B. de C. V.:
 
 We have
audited the accompanying consolidated balance sheets of Industrias
Bachoco,       S. A. B. de C. V. and
subsidiaries (the Company) as of December 31, 2008 and 2009, and the related
consolidated statements of operations, stockholders’ equity, and cash flows for
the years then ended. These consolidated financial statements are the
responsibility of the Company’s management.  Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
 
 We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States) and with auditing standards generally
accepted in Mexico. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
 
 In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Industrias Bachoco, S. A. B.
de C. V. and subsidiaries as of December 31, 2008 and 2009, and the results of
their operations and their cash flows for the years then ended, in conformity
with Mexican Financial Reporting Standards.
 
 As
disclosed in note 2x to the consolidated financial statements, a new Mexican
Financial Reporting Standard was adopted on January 1, 2008.
 
 The
accompanying consolidated balance sheets as of December 31, 2009 and the related
consolidated statements of operations and cash flows have been translated into
United States dollars solely for the convenience of the reader. We have audited
the translation and, in our opinion, such consolidated financial statements
expressed in thousands of pesos, have been translated into thousands of United
States dollars on the basis set forth in note 2v to the consolidated financial
statements. Such translation should not be construed as a representation that
the peso amounts could have been or could be converted into United States
dollars at such rate.
 
 Mexican
Financial Reporting Standards vary in certain significant respects from
generally accepted accounting principles in the United States of America.
Information relating to the nature and effect of such differences is presented
in note 21 to the consolidated financial statements.
 
 F-3
 
 We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), Industrias Bachoco, S.A.B. de C.V.’s internal
control over financial reporting as of December 31, 2009, based on criteria
established in Internal Control – Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission (COSO), and our report
dated June 18, 2010 expressed an unqualified opinion on the effectiveness of the
Company’s internal control over financial reporting.
 
 KPMG
      CARDENAS DOSAL, S. C.Demetrio
      Villa Michel
 
 Queretaro,
Mexico
 June 25,
2010
 
 F-4
  To the
Stockholders of
  Industrias
Bachoco, S.A.B. de C.V.
  We have
audited the accompanying consolidated balance sheets of Industrias Bachoco,
S.A.B. de C.V. and subsidiaries as of December 31, 2007, and the related
consolidated statements of income, stockholders’ equity and changes in financial
position for the year ended December 31, 2007. These financial statements are
the responsibility of the Company’s management. Our responsibility is to express
an opinion on these financial statements based on our audit.
  We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States).  Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit  includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements.  An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provide a reasonable basis for our
opinion.
  In our
opinion, the financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Industrias Bachoco,
S.A.B. de C.V. and subsidiaries at December 31, 2007, and the consolidated
results of their operations, stockholders ́equity and changes in financial
position for the year ended December 31, 2007, in conformity with Mexican
Financial Reporting Standards which differ in certain respects from U.S.
generally accepted principles (see Note 21).
  We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), Industrias Bachoco, S.A.B. de C.V.'s internal
control over financial reporting as of December 31, 2007, based on criteria
established in Internal Control-Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission and our report dated June 27
2008 expressed an unqualified opinion thereon.
  Mexico,
D.F., June 27, 2008.
  Francisco
      José Sánchez González

                  Mancera,
      S.C., a member practice of Ernst & Young
  Global
 F-5
  INDUSTRIAS
BACHOCO, S.A.B. DE C. V. AND SUBSIDIARIES
  Consolidated
Balance Sheets
  December
31, 2008 and 2009
  (Thousands
of pesos)
  (Thousands ofU.S. dollars)(note 2v)2008
                                              
                                              
                                              2009
                                              
                                              
                                              2009AssetsCurrent
      assets:Cash
      and investments (note 3)
                                              
                                              $
                                              1,998,247
                                              
                                              
                                              
                                              2,550,968
                                              
                                              
                                              
                                              195,028Accounts
      receivable:Trade,
      net (note 4)
                                              
                                              
                                              892,207
                                              
                                              
                                              
                                              903,609
                                              
                                              
                                              
                                              69,083Value
      added and other recoverable taxes
                                              
                                              
                                              456,732
                                              
                                              
                                              
                                              482,469
                                              
                                              
                                              
                                              36,886Total
      accounts receivable
                                              
                                              
                                              1,348,939
                                              
                                              
                                              
                                              1,386,078
                                              
                                              
                                              
                                              105,969Inventories,
      net (note 6a)
                                              
                                              
                                              3,973,615
                                              
                                              
                                              
                                              3,613,212
                                              
                                              
                                              
                                              276,239Biological
      current assets (note 6b)
                                              
                                              
                                              139,844
                                              
                                              
                                              
                                              156,460
                                              
                                              
                                              
                                              11,962Derivative
      financial instruments (note 10a)
                                              
                                              
                                              126,164
                                              
                                              
                                              
                                              11,272
                                              
                                              
                                              
                                              862Prepaid
      expenses and other current assets
                                              
                                              
                                              154,285
                                              
                                              
                                              
                                              155,219
                                              
                                              
                                              
                                              11,867Property,
      plant and equipment available for sale
                                              
                                              
                                              22,771
                                              
                                              
                                              
                                              29,991
                                              
                                              
                                              
                                              2,293Total
      currents assets
                                              
                                              
                                              7,763,865
                                              
                                              
                                              
                                              7,903,200
                                              
                                              
                                              
                                              604,220Property,
      plant and equipment, net (note 7)
                                              
                                              
                                              10,689,235
                                              
                                              
                                              
                                              10,910,126
                                              
                                              
                                              
                                              834,107Biological
      non-current assets (note 6b)
                                              
                                              
                                              681,577
                                              
                                              
                                              
                                              743,609
                                              
                                              
                                              
                                              56,851Goodwill,
      net (note 8)
                                              
                                              
                                              300,848
                                              
                                              
                                              
                                              300,848
                                              
                                              
                                              
                                              23,001Other
      assets
                                              
                                              
                                              19,446
                                              
                                              
                                              
                                              20,096
                                              
                                              
                                              
                                              1,536Total
      assets
                                              
                                              $
                                              19,454,971
                                              
                                              
                                              
                                              19,877,879
                                              
                                              
                                              
                                              1,519,715Liabilities and stockholders' equityCurrent
      liabilities:Notes
      payable to banks (note 9a)
                                              
                                              $
                                              40,000
                                              
                                              
                                              
                                              234,296
                                              
                                              
                                              
                                              17,913Current
      installments of long-term debt (note 9b)
                                              
                                              
                                              194,235
                                              
                                              
                                              
                                              357,569
                                              
                                              
                                              
                                              27,337Accounts
      payable
                                              
                                              
                                              1,651,930
                                              
                                              
                                              
                                              1,653,988
                                              
                                              
                                              
                                              126,451Related
      parties (note 5)
                                              
                                              
                                              50,336
                                              
                                              
                                              
                                              67,613
                                              
                                              
                                              
                                              5,169Other
      taxes payable and other accruals (note 12)
                                              
                                              
                                              328,602
                                              
                                              
                                              
                                              437,770
                                              
                                              
                                              
                                              33,468Derivative
      financial instruments (note 10a)
                                              
                                              
                                              919,026
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -Total
      current liabilities
                                              
                                              
                                              3,184,129
                                              
                                              
                                              
                                              2,751,236
                                              
                                              
                                              
                                              210,338Long
      term liabilities:Long
      term debt, excluding current installments (note 9b)
                                              
                                              
                                              391,657
                                              
                                              
                                              
                                              371,970
                                              
                                              
                                              
                                              28,438Deferred
      income tax (note 16e)
                                              
                                              
                                              1,719,076
                                              
                                              
                                              
                                              2,021,581
                                              
                                              
                                              
                                              154,555Labor
      obligations (note 14)
                                              
                                              
                                              80,690
                                              
                                              
                                              
                                              94,629
                                              
                                              
                                              
                                              7,235Total
      liabilities
                                              
                                              
                                              5,375,552
                                              
                                              
                                              
                                              5,239,416
                                              
                                              
                                              
                                              400,566Commitments
      and contingencies (note 11)Stockholders'
      equity (note 15):Controlling
      interestCapital
      stock
                                              
                                              
                                              2,294,927
                                              
                                              
                                              
                                              2,294,927
                                              
                                              
                                              
                                              175,453Additional
      paid-in capital
                                              
                                              
                                              743,674
                                              
                                              
                                              
                                              744,753
                                              
                                              
                                              
                                              56,938Reserve
      for repurchase of shares
                                              
                                              
                                              159,455
                                              
                                              
                                              
                                              159,455
                                              
                                              
                                              
                                              12,191Retained
      earnings
                                              
                                              
                                              11,720,612
                                              
                                              
                                              
                                              10,591,519
                                              
                                              
                                              
                                              809,749Net
      controlling interest (loss) income of the year
                                              
                                              
                                              (879,048
                                              )
                                              
                                              
                                              797,600
                                              
                                              
                                              
                                              60,979Total
      contolling interest
                                              
                                              
                                              14,039,620
                                              
                                              
                                              
                                              14,588,254
                                              
                                              
                                              
                                              1,115,310Non-controlling
      interest
                                              
                                              
                                              39,799
                                              
                                              
                                              
                                              50,209
                                              
                                              
                                              
                                              3,839Total
      stockholders' equity
                                              
                                              
                                              14,079,419
                                              
                                              
                                              
                                              14,638,463
                                              
                                              
                                              
                                              1,119,149Total
      liabilities and stockholders' equity
                                              
                                              $
                                              19,454,971
                                              
                                              
                                              
                                              19,877,879
                                              
                                              
                                              
                                              1,519,715
 
 See accompanying notes to consolidated
financial statements.
  F-6
  INDUSTRIAS
BACHOCO, S.A.B. DE C.V. AND SUBSIDIARIES
  Consolidated
Statements of Operations
  Years
ended December 31, 2007, 2008 and 2009
  (Thousands
of pesos, except per share amount)
 
 (Thousands ofU.S. dollars)(note 2v)2007
                      
                      
                      2008
                      
                      
                      2009
                      
                      
                      2009Net
      revenues
                      
                      $
                      18,219,647
                      
                      
                      
                      20,125,321
                      
                      
                      
                      23,262,850
                      
                      
                      
                      1,778,505Cost
      of sales (note 5b)
                      
                      
                      (14,477,861
                      )
                      
                      
                      (17,482,468
                      )
                      
                      
                      (19,326,759
                      )
                      
                      
                      (1,477,580
                      )Gross
      profit
                      
                      
                      3,741,786
                      
                      
                      
                      2,642,853
                      
                      
                      
                      3,936,091
                      
                      
                      
                      300,925Selling,
      general and administrative expenses (note 5b)
                      
                      
                      2,245,522
                      
                      
                      
                      2,412,788
                      
                      
                      
                      2,522,291
                      
                      
                      
                      192,836Operating
      income
                      
                      
                      1,496,264
                      
                      
                      
                      230,065
                      
                      
                      
                      1,413,800
                      
                      
                      
                      108,089Other
      income (expense), net (note 17)
                      
                      
                      69,571
                      
                      
                      
                      (20,958
                      )
                      
                      
                      (65,189
                      )
                      
                      
                      (4,984
                      )Comprehensive
      financial results:Interest
      income
                      
                      
                      363,016
                      
                      
                      
                      173,694
                      
                      
                      
                      170,655
                      
                      
                      
                      13,047Valuation
      effects of financial instruments (note 10)
                      
                      
                      (44,137
                      )
                      
                      
                      (1,666,821
                      )
                      
                      
                      (174,603
                      )
                      
                      
                      (13,349
                      )Interest
      and financial expenses
                      
                      
                      (141,578
                      )
                      
                      
                      (36,202
                      )
                      
                      
                      (91,326
                      )
                      
                      
                      (6,982
                      )Net
      interest income (expense) and valuation effects of financial
      instruments
                      
                      
                      177,301
                      
                      
                      
                      (1,529,329
                      )
                      
                      
                      (95,274
                      )
                      
                      
                      (7,284
                      )Foreign
      exchange (loss) gain, net
                      
                      
                      (3,351
                      )
                      
                      
                      160,166
                      
                      
                      
                      (37,934
                      )
                      
                      
                      (2,900
                      )Monetary
      position loss
                      
                      
                      (154,814
                      )
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -Comprehensive
      financial results, net
                      
                      
                      19,136
                      
                      
                      
                      (1,369,163
                      )
                      
                      
                      (133,208
                      )
                      
                      
                      (10,184
                      )Income
      (loss) before income taxes, and non-controlling interest
                      
                      
                      1,584,971
                      
                      
                      
                      (1,160,056
                      )
                      
                      
                      1,215,403
                      
                      
                      
                      92,921Income
      tax expense (benefit) (note 16d)
                      
                      
                      312,745
                      
                      
                      
                      (274,019
                      )
                      
                      
                      406,358
                      
                      
                      
                      31,067Net
      consolidated income (loss)
                      
                      
                      1,272,226
                      
                      
                      
                      (886,037
                      )
                      
                      
                      809,045
                      
                      
                      
                      61,854Net
      controlling interest income (loss)
                      
                      
                      1,270,941
                      
                      
                      
                      (879,048
                      )
                      
                      
                      797,600
                      
                      
                      
                      60,979Non-controlling
      interest income (loss)
                      
                      
                      1,285
                      
                      
                      
                      (6,989
                      )
                      
                      
                      11,445
                      
                      
                      
                      875Consolidated
      net income (loss)
                      
                      $
                      1,272,226
                      
                      
                      
                      (886,037
                      )
                      
                      
                      809,045
                      
                      
                      
                      61,854Weighted
      average outstanding (shares in thousands)
                      
                      
                      600,000
                      
                      
                      
                      600,000
                      
                      
                      
                      600,000
                      
                      
                      
                      600,000Net
      controlling interest income (loss) per share
                      
                      $
                      2.12
                      
                      
                      
                      (1.46
                      )
                      
                      
                      1.33
                      
                      
                      
                      0.10
 
 See
accompanying notes to consolidated financial statements.
  F-7
  INDUSTRIAS
BACHOCO, S.A.B. DE C.V. AND SUBSIDIARIES
 
 Consolidated
Statements of Stockholders' Equity
 
 Years
ended December 31, 2007, 2008 and 2009
 
 (Thousand
of pesos, except per share amount)
 
 Number of
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    Net controlling
                    
                    
                    Minimun
                    
                    
                    Deficit fromshares of
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    interest
                    
                    
                    liability
                    
                    
                    restatement
                    
                    
                    Derivativecapital
                    
                    
                    
                    
                    
                    
                    
                    
                    Reserve for
                    
                    
                    
                    
                    
                    income
                    
                    
                    adjustment
                    
                    
                    of
                    
                    
                    financial ins-
                    
                    
                    Total
                    
                    
                    
                    
                    
                    Totalstock
                    
                    
                    Capital
                    
                    
                    Additional
                    
                    
                    repurchase of
                    
                    
                    Retained
                    
                    
                    (loss) of the
                    
                    
                    of labor
                    
                    
                    stockholders'
                    
                    
                    truments
                    
                    
                    controlling
                    
                    
                    Non-controlling
                    
                    
                    stockholders'(thousands)
                    
                    
                    stock
                    
                    
                    paid-in capital
                    
                    
                    shares
                    
                    
                    earnings
                    
                    
                    year
                    
                    
                    obligations
                    
                    
                    equity
                    
                    
                    effects
                    
                    
                    interest
                    
                    
                    interest
                    
                    
                    equityBalances
      as of December 31, 2006
                    
                    
                    600,000
                    
                    
                    $
                    2,294,927
                    
                    
                    
                    743,674
                    
                    
                    
                    159,455
                    
                    
                    
                    13,707,747
                    
                    
                    
                    906,186
                    
                    
                    
                    (916
                    )
                    
                    
                    (3,753,915
                    )
                    
                    
                    370
                    
                    
                    
                    14,057,528
                    
                    
                    
                    45,426
                    
                    
                    
                    14,102,954Transfer
      of prior year's net income based on stockholders' meeting held on April
      2007
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    906,186
                    
                    
                    
                    (906,186
                    )
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Cash
      dividends paid (note 15b)
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (363,708
                    )
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (363,708
                    )
                    
                    
                    -
                    
                    
                    
                    (363,708
                    )Comprehensive
      income, net of taxes (note 2o)
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    1,270,941
                    
                    
                    
                    (1,596
                    )
                    
                    
                    18,661
                    
                    
                    
                    98,552
                    
                    
                    
                    1,386,558
                    
                    
                    
                    1,362
                    
                    
                    
                    1,387,920Balances
      as of December 31, 2007
                    
                    
                    600,000
                    
                    
                    
                    2,294,927
                    
                    
                    
                    743,674
                    
                    
                    
                    159,455
                    
                    
                    
                    14,250,225
                    
                    
                    
                    1,270,941
                    
                    
                    
                    (2,512
                    )
                    
                    
                    (3,735,254
                    )
                    
                    
                    98,922
                    
                    
                    
                    15,080,378
                    
                    
                    
                    46,788
                    
                    
                    
                    15,127,166Transfer
      of prior year's net income based on stockholders' meeting held on April
      2008
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    1,270,941
                    
                    
                    
                    (1,270,941
                    )
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Cash
      dividends paid (note 15b)
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (353,880
                    )
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (353,880
                    )
                    
                    
                    -
                    
                    
                    
                    (353,880
                    )Write-off
      of additional deferred tax liability (note 16e)
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    288,580
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    288,580
                    
                    
                    
                    -
                    
                    
                    
                    288,580Reclasification
      of deficit from restatement of stockholders' equity (note
    2c)
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (3,735,254
                    )
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    3,735,254
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Comprehensive
      loss, net of taxes (note 2o)
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (879,048
                    )
                    
                    
                    2,512
                    
                    
                    
                    -
                    
                    
                    
                    (98,922
                    )
                    
                    
                    (975,458
                    )
                    
                    
                    (6,989
                    )
                    
                    
                    (982,447
                    )Balances
      as of December 31, 2008
                    
                    
                    600,000
                    
                    
                    
                    2,294,927
                    
                    
                    
                    743,674
                    
                    
                    
                    159,455
                    
                    
                    
                    11,720,612
                    
                    
                    
                    (879,048
                    )
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    14,039,620
                    
                    
                    
                    39,799
                    
                    
                    
                    14,079,419Transfer
      of prior year's net loss based on stockholders' meeting held on April
      2009
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (879,048
                    )
                    
                    
                    879,048
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Cash
      dividends paid (note 15b)
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (250,045
                    )
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (250,045
                    )
                    
                    
                    -
                    
                    
                    
                    (250,045
                    )Cash
      dividends paid to non-controlling interest
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (1,035
                    )
                    
                    
                    (1,035
                    )Repurchase
      of shares (note 15d)
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    1,079
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    1,079
                    
                    
                    
                    -
                    
                    
                    
                    1,079Comprehensive
      income, net of taxes (note 2o)
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    797,600
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    797,600
                    
                    
                    
                    11,445
                    
                    
                    
                    809,045Balances
      as of December 31, 2009
                    
                    
                    600,000
                    
                    
                    $
                    2,294,927
                    
                    
                    
                    744,753
                    
                    
                    
                    159,455
                    
                    
                    
                    10,591,519
                    
                    
                    
                    797,600
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    14,588,254
                    
                    
                    
                    50,209
                    
                    
                    
                    14,638,463
 
 See
accompanying notes to consolidated financial statements.
  F-8
  INDUSTRIAS
BACHOCO, S.A.B DE C.V. AND SUBSIDIARIES
 
 Consolidated
Statement of Cash Flows
 
 Year
ended December 31, 2008 and 2009
 
 (Thousand
of pesos)
 
 Thousands ofU.S. dollars(note 2v)2008
                    
                    
                    2009
                    
                    
                    2009Cash
      flows from operating activities:(Loss)
      income before income taxes and non-controlling interest
                    
                    $
                    (1,160,056
                    )
                    
                    
                    1,215,403
                    
                    
                    
                    92,921Items
      relating to investing activities:Depreciation
      and amortization
                    
                    
                    616,358
                    
                    
                    
                    662,630
                    
                    
                    
                    50,660Loss
      on sale of plant and equipment
                    
                    
                    49,485
                    
                    
                    
                    88,187
                    
                    
                    
                    6,742Interest
      income
                    
                    
                    (173,694
                    )
                    
                    
                    (170,655
                    )
                    
                    
                    (13,047
                    )Item
      relating to financing activities:Interest
      expense
                    
                    
                    36,202
                    
                    
                    
                    91,326
                    
                    
                    
                    6,982Subtotal
                    
                    
                    (631,705
                    )
                    
                    
                    1,886,891
                    
                    
                    
                    144,258Derivative
      financial instruments
                    
                    
                    919,026
                    
                    
                    
                    (804,134
                    )
                    
                    
                    (61,478
                    )Accounts
      receivable, net
                    
                    
                    (151,635
                    )
                    
                    
                    (11,402
                    )
                    
                    
                    (872
                    )Recoverable
      taxes and other assets
                    
                    
                    52,972
                    
                    
                    
                    (22,432
                    )
                    
                    
                    (1,715
                    )Inventories
      and biological assets
                    
                    
                    (784,442
                    )
                    
                    
                    281,755
                    
                    
                    
                    21,541Prepaid
      expenses and other current assets
                    
                    
                    (24,703
                    )
                    
                    
                    (934
                    )
                    
                    
                    (71
                    )Trade
      accounts payable, taxes payable and other accruals
                    
                    
                    596,229
                    
                    
                    
                    110,092
                    
                    
                    
                    8,417Income
      taxes paid
                    
                    
                    (147,426
                    )
                    
                    
                    (107,158
                    )
                    
                    
                    (8,193
                    )Accounts
      payable to related parties
                    
                    
                    23,517
                    
                    
                    
                    17,277
                    
                    
                    
                    1,321Labor
      obligations
                    
                    
                    15,170
                    
                    
                    
                    13,939
                    
                    
                    
                    1,066Derivative
      financial instruments in stockholders' equity
                    
                    
                    (122,126
                    )
                    
                    
                    -
                    
                    
                    
                    -Assets
      available for sale
                    
                    
                    2,159
                    
                    
                    
                    (7,220
                    )
                    
                    
                    (552
                    )Net
      cash (used in) provided by operating activities
                    
                    
                    (252,964
                    )
                    
                    
                    1,356,674
                    
                    
                    
                    103,722Cash
      flows from investing activities:Acquisition
      of property, plant and equipment
                    
                    
                    (1,156,168
                    )
                    
                    
                    (988,250
                    )
                    
                    
                    (75,554
                    )Proceeds
      from sale of plant and equipment
                    
                    
                    57,329
                    
                    
                    
                    16,542
                    
                    
                    
                    1,265Increase
      in other non-current assets
                    
                    
                    (1,113
                    )
                    
                    
                    (650
                    )
                    
                    
                    (50
                    )Interest
      collected
                    
                    
                    173,694
                    
                    
                    
                    170,655
                    
                    
                    
                    13,047Net
      cash used in investing activities
                    
                    
                    (926,258
                    )
                    
                    
                    (801,703
                    )
                    
                    
                    (61,292
                    )Cash
      to be (obtained from) applied in financing activities
                    
                    
                    (1,179,222
                    )
                    
                    
                    554,971
                    
                    
                    
                    42,430Cash
      flows from financing activities:Additional
      paid-in capital
                    
                    
                    -
                    
                    
                    
                    1,079
                    
                    
                    
                    82Dividends
      paid
                    
                    
                    (353,880
                    )
                    
                    
                    (250,045
                    )
                    
                    
                    (19,117
                    )Dividends
      paid to non-controlling interest
                    
                    
                    -
                    
                    
                    
                    (1,035
                    )
                    
                    
                    (79
                    )Proceeds
      from loans
                    
                    
                    535,100
                    
                    
                    
                    1,044,611
                    
                    
                    
                    79,864Interest
      paid
                    
                    
                    (33,339
                    )
                    
                    
                    (90,192
                    )
                    
                    
                    (6,895
                    )Asset
      tax recovery
                    
                    
                    8,521
                    
                    
                    
                    -
                    
                    
                    
                    -Principal
      payments on loans
                    
                    
                    (18,809
                    )
                    
                    
                    (706,668
                    )
                    
                    
                    (54,027
                    )Net
      cash provided by (used in) financing activities
                    
                    
                    137,593
                    
                    
                    
                    (2,250
                    )
                    
                    
                    (172
                    )Net
      (decrease) increase in cash and investments
                    
                    
                    (1,041,629
                    )
                    
                    
                    552,721
                    
                    
                    
                    42,258Cash
      and investments:At
      beginning of year
                    
                    
                    3,039,876
                    
                    
                    
                    1,998,247
                    
                    
                    
                    152,770At
      end of year (note 3)
                    
                    $
                    1,998,247
                    
                    
                    
                    2,550,968
                    
                    
                    
                    195,028
 
 See
accompanying notes to consolidated financial statements.
  F-9
  INDUSTRIAS
BACHOCO, S.A.B DE C.V. AND SUBSIDIARIES
 
 Consolidated
Statement of Changes in Financial Position
 
 (Thousands
of pesos)
 
 Years
ended December 31, 2007
 
 Operating
      activities:Net
      income
                      
                      $
                      1,272,226Add
      charges to operations not requiring funds:Depreciation
      and amortization
                      
                      
                      571,393Deferred
      income tax
                      
                      
                      169,716Labor
      obligations, net period cost
                      
                      
                      42,112Funds
      provided by operations
                      
                      
                      2,055,447Changes
      in operating assets and liabilities:Accounts
      receivable
                      
                      
                      (336,083
                      )Inventories
      and biological assets
                      
                      
                      (1,140,124
                      )Prepaid
      expenses and others current assets
                      
                      
                      (31,463
                      )Accounts
      payable
                      
                      
                      300,566Related
      parties
                      
                      
                      14,169Taxes
      payable and other accruals
                      
                      
                      (45,534
                      )Labor
      obligations, plan contributions
                      
                      
                      (32,617
                      )Derivative
      financial instruments
                      
                      
                      (35,769
                      )Funds
      provided by operating activities
                      
                      
                      748,592Financing
      activities:Proceeds
      from of long-term debt
                      
                      
                      40,000Proceeds
      from notes payable to banks
                      
                      
                      40,000Payment
      of long-term debt and notes payable to banks
                      
                      
                      (13,963
                      )Constant
      pesos effect on notes payable to banks
                      
                      
                      (1,638
                      )Cash
      dividends paid
                      
                      
                      (363,708
                      )Funds
      used in financing activities
                      
                      
                      (299,309
                      )Investing
      activities:Acquisition
      of property, plan and equipment, net
                      
                      
                      (991,737
                      )Investment
      in securities
                      
                      
                      (12,001
                      )Other
      assets
                      
                      
                      (1,561
                      )Funds
      used in investing activities
                      
                      
                      (1,005,299
                      )Net
      decrease in cash and equivalents
                      
                      
                      (556,016
                      )Cash
      and equivalents at beginning of year
                      
                      
                      3,189,887Cash
      and equivalents at end of year
                      
                      
                      2,633,871Investment
      in securities
                      
                      
                      406,005Cash
      and investment at end of year
                      
                      $
                      3,039,876
 
 See
accompanying notes to consolidated financial statements.
  F-10
  INDUSTRIAS BACHOCO, S.A.B. DE
C.V. AND
SUBSIDIARIES
 
 Notes
to the Consolidated Financial Statements
 
 Years
ended December 31, 2007, 2008 and 2009
 
 (Thousands of pesos,except per
share amounts)
 
 (1)
              Organization,
      business activity and significant
transactions-
 
 Organization
and business activity-
 
 Industrias
Bachoco, S.A.B. de C.V. and subsidiaries (collectively referred to as “Bachoco”
or the “Company”) was incorporated on February 8, 1980 and is engaged in
breeding, processing and marketing of poultry (chicken and eggs), swine and
other products (principally balanced animal feed). Bachoco is the controlling
company of a group of subsidiaries.
 
 On March
26, 2010, Bachoco’s Finance Director and Controller Director authorized the
issuance of the consolidated Mexican Financial Reporting Standards (Mexican FRS)
financial statements and notes at December 31, 2008 and 2009 and each of the two
years then ended. The accompanying consolidated financial statements consist of
those Mexican FRS consolidated financial statements and notes, as supplemented
by the accompanying US GAAP disclosures presented in Note 21. These final
consolidated financial statements were authorized for issuance herein by
Bachoco’s Financial Director and Controller Director on June 18, 2010 with
consideration of subsequent events through that date.
 
 Significant
transactions-
 
 In July
2009, Bachoco, S.A. de C.V. (subsidiary) acquired a poultry processing plant
located in the state of Nuevo Leon, with a production capacity of 9,000 chickens
per hour.  The transaction consisted of the acquisition of property,
plant and equipment for an amount of $321,984 and inventory in stock for an
amount of $142,537. In addition to reducing costs, the goal of this acquisition,
is to increase the production capacity and diversifying.
 
 In
September 2009, Campi Alimentos, S.A. de C.V. (subsidiary) acquired a poultry
feed processing plant also located in the state of Nuevo Leon, with a production
capacity of 12,000 tons per month.  The transaction consisted of the
acquisition of property, plant and equipment, for an amount of $114,904. As in
the aforementioned July 2009 acquisition, the Company expanded its animal
balanced feed production capacity for internal consumption.
 
 F-11
 
 (2)
              Accounting
      Policies and Practices-
 
 The
preparation of consolidated financial statements requires management to make a
number of estimates and assumptions that affect the reported amounts of assets
and liabilities and the disclosure of contingent assets and liabilities at the
date of the consolidated financial statements, and the reported amounts of
revenues and expenses during the reporting period.  Significant items
subject to such estimates and assumptions include, but are not limited to, the
carrying amount of property, plant and equipment, and goodwill; valuation
allowances for receivables, inventories and deferred income tax assets;
valuation of primary investment securities and financial instruments; and assets
and labor obligations related to employee benefits. Actual results could differ
from those estimates and assumptions. The current environment has increased the
degree of uncertainty inherent in those estimates and assumptions.
 
 For
disclosure purposes, “thousands pesos” or “$” means thousands of Mexican pesos,
and “thousands dollars” or “US dollars” means thousands of U.S.
dollars.
 
 The
Company’s consolidated financial statements are prepared in accordance with
Mexican Financial Reporting Standards (Mexican FRS) in effect as of the balance
sheet date. The significant accounting policies and practices followed by the
Company in the preparation of the accompanying consolidated financial statements
are described below:
 
 a)   Consolidation-
 
 The
consolidated financial statements include the financial statements of the
Company and all of its majority-owned and controlled subsidiaries.
 
 The
ownership interests of other stockholders in such subsidiaries are shown as
non-controlling interest.
 
 Intercompany
balances, investments and significant transactions between consolidated entities
have been eliminated in consolidation.
 
 The
results of operations of the subsidiaries were included in the Company’s
consolidated financial statements as at the acquisition or inception
month.
 
 The
consolidation was based on the audited financial statements of the issuing
companies as of December 31, 2007, 2008 and 2009, which have been prepared in
accordance with Mexican FRS.
 
 The
accompanying consolidated financial statements include the following
subsidiaries as of December 31, 2007, 2008 and 2009:
 
 F-12
 
 Percentage equity interest2007
                      
                      
                      2008
                      
                      
                      2009Acuícola
      Bachoco, S.A. de C.V. (1)
                      
                      
                      100
                      
                      
                      
                      100
                      
                      
                      
                      -Aviser,
      S.A. de C.V.
                      
                      
                      100
                      
                      
                      
                      100
                      
                      
                      
                      100Bachoco,
      S.A. de C.V. (“BSACV”)
                      
                      
                      100
                      
                      
                      
                      100
                      
                      
                      
                      100Bachoco
      Comercial, S.A. de C.V.
                      
                      
                      100
                      
                      
                      
                      100
                      
                      
                      
                      100Campi
      Alimentos, S.A. de C.V.  (1)
                      
                      
                      100
                      
                      
                      
                      100
                      
                      
                      
                      100Huevo
      y Derivados, S.A. de C.V.
                      
                      
                      97
                      
                      
                      
                      97
                      
                      
                      
                      97Operadora
      de Servicios de Personal, S.A. de C.V.
                      
                      
                      100
                      
                      
                      
                      100
                      
                      
                      
                      100Pecuarius
      Laboratorios, S.A. de C.V.
                      
                      
                      64
                      
                      
                      
                      64
                      
                      
                      
                      64Secba,
      S.A. de C.V.
                      
                      
                      100
                      
                      
                      
                      100
                      
                      
                      
                      100Sepetec,
      S.A de C.V.
                      
                      
                      100
                      
                      
                      
                      100
                      
                      
                      
                      100Servicios
      de Personal Administrativo, S.A. de C.V.
                      
                      
                      100
                      
                      
                      
                      100
                      
                      
                      
                      100Induba
      Pavos, S.A. de C.V.
                      
                      
                      100
                      
                      
                      
                      100
                      
                      
                      
                      100
 
 The main
subsidiaries of the group are as follows:
 
 -
Bachoco, S.A. de C.V. (“BSACV”) (includes four subsidiaries which are 50% owned,
and which BSACV has control). BSACV is engaged in breeding, processing and
marketing of poultry (chicken and eggs).
 
 - Campi
Alimentos, S.A. de C.V. (Campi)  (1)
 -
Acuícola Bachoco S.A. de C.V.  (Acuícola) (1)
 
 Campi and
Acuícola are engaged in producing and marketing of balanced animal
feed.
 
 F-13
 
 (1) At
the ordinary and extraordinary general stockholders’ meeting held on March 20,
2009, the shareholders agreed to the merger through incorporation of Acuícola
Bachoco, S.A. de C.V. (the acquiree entity) with Campi Alimentos, S.A. de C.V.
(the acquiror entity). The merger became effective as of March 31, 2009, so that
as of that date, Acuicola, as the acquired corporation, no longer
exists.  Pursuant to the Ley General de Sociedades
Mercantiles(General Corporation and Partnership Law) when the merger
became effective, total assets and liabilities, rights, obligations and
responsibilities of the merged corporation became part of the acquiring
corporation without reservation or limitation.
 
 - Aviser,
S.A. de C.V.
 -
Operadora de Servicios de Personal, S.A. de C.V.
 - Secba,
S.A. de C.V.
 -
Sepetec, S.A. de C.V.
 -
Servicios de Personal Administrativo, S.A. de C.V.
 
 These
companies are engaged in providing administrative and operative services to
their related parties.
 
 In July
2007, the subsidiary Bachoco Comercial, S.A. de C.V. was incorporated. It is
owned 100% by the Company. The entity is engaged in the turkey sales
operation.
 
 b) 
  Revenue recognition-
 
 Revenues
are recognized when each of the following criteria is met:
 
 - There
is evidence of an arrangement.
 -
Delivery of goods has occurred.
 - The
seller fixes or determines the prices with the buyer.
 -
Collectability is reasonably certain.
 
 The
Company’s products are sold to a large number of customers without significant
concentrations with any of them.
 
 Based on
management analysis and estimates, the Company provides for doubtful receivables
(reported under selling expenses).
 
 c)   
Recognition of the effects of inflation-
 
 The
accompanying consolidated financial statements have been prepared in accordance
with Mexican FRS in effect as of the balance sheet date and include the
recognition of the effects of inflation on financial information through
December 31, 2007, based on the Mexican National Consumer Price Index (NCPI)
published by Banco de México (central bank).
 
 F-14
 
 Cumulative
inflation percentages of the current and three preceding years and the indexes
used in recognizing inflation through such year are as follows:
 
 December 31
                      
                      NCPI
                      
                      
                      InflationYearly
                      
                      
                      Cumulative2009
                      
                      
                      138.541
                      
                      
                      
                      3.57
                      %
                      
                      
                      14.48
                      %2008
                      
                      
                      133.761
                      
                      
                      
                      6.52
                      %
                      
                      
                      15.01
                      %2007
                      
                      
                      125.564
                      
                      
                      
                      3.75
                      %
                      
                      
                      11.56
                      %2006
                      
                      
                      121.015
                      
                      
                      
                      4.05
                      %
                      
                      
                      7.51
                      %
 
 A summary
of the key inflation accounting concepts and procedures is as
follows:
 
 - Property, plant and
equipment
 
 Property,
plant and equipment were carried at replacement cost, determined annually by an
independent appraiser, through 1996. The fifth amendment to Bulletin B-10 “Accounting Recognition of the
Effects of Inflation on Financial Information” (as modified), which is
applicable to financial statements for periods beginning on or after January 1,
1997, disallows the use of appraisals on fixed assets. Based on such amendment,
the Company restated the appraised value at December 31, 1996, and the
acquisitions of property, plant and equipment since January 1, 1997, until
December 31, 2007, by applying factors derived from the NCPI.
 
 F-15
 
 - Stockholders’
equity
 
 Until
December 31, 2007, the date on which the economic environment turned to a
non-inflationary environment in conformity with FRS B-10 “Effects of Inflation”,
capital stock, additional paid-in capital, reserve for stock repurchase of
Company’s own shares, retained earnings and other capital accounts were restated
using adjustment factors derived from the NCPI. The amounts thus obtained in
this manner represented the constant value of the stockholders’
equity.
 
 - Net monetary position
loss
 
 Until
December 31, 2007, the net monetary position loss represented the impact of
inflation on monetary assets and liabilities at the beginning of each month
updated by inflation factors through year-end. The monetary position loss was
included in the statements of operations as a part of the comprehensive
financial results.
 
 - Deficit from restatement
of stockholders’ equity
 
 Until
December 31, 2007, the deficit from restatement of stockholders’ equity
comprises the accumulated monetary position loss at the time the provisions of
Bulletin B-10 were first applied and the subsequent gain or loss from holding
nonmonetary assets, mainly inventories. Deficit from restatement of
stockholders’ equity is originated when the replacement cost of these assets is
lower than the cost of these assets restated by the NCPI. In 2008, such amount
was reclassified to retained earnings.
 
 d) 
 Cash and cash equivalents-
 
 Cash and
cash equivalents consist primarily of bank deposits and checking accounts in
foreign currencies. At the date of the consolidated financial statements,
interest income and foreign exchange gains and losses are included in the
statements of operations, under comprehensive financial results.
 
 F-16
 
 e) 
 Primary investment securities-
 
 All
rights and obligations arising from primary investment securities are recognized
on the balance sheet and the Company classifies its investment securities
depending on the purpose for which the securities were acquired: (i)
held-to-maturity, (ii) trading or (iii) available for sale. Investments in these
instruments are included on the line-item “current primary investment
securities” within cash and investments (see note 3). In turn, the balance of
debt securities with due dates less than one year is reported under current
liabilities.
 
 Trading
securities are bought and held principally for the purpose of selling them in
the near term. Held-to-maturity debt securities are securities in which the
Company has the ability and intent to hold the security until maturity. All
securities not included in trading or held-to-maturity are classified as
available-for-sale.
 
 Trading
securities, except held-to-maturity securities, are recorded at fair value,
where peso-denominated debt securities are taken from the bank statements which
are based on the information of the local price vendors, while US-denominated
debt securities are based on diversified sources. Held-to-maturity securities
are recorded at amortized cost. Changes in the carrying amounts of trading
securities, including the related costs and yields are included under
comprehensive financial results. Gains or losses arising from changes in the
fair value of available-for-sale securities (less the corresponding yield) non
functional currency denominated and foreign exchange gain or loss, in the case
of equity securities, as well as the related monetary position gain or loss, as
applicable, are reported as a comprehensive income (loss) item within
stockholders’ equity.
 
 Furthermore,
where evidence exists that a financial asset held-to-maturity shall not be
recovered in full, the expected loss (impairment) is recognized in the statement
of operations.
 
 F-17
 
 f) 
  Allowance for doubtful accounts-
 
 The
Company’s policy is to record an allowance for doubtful accounts for balances
which are not likely to be recovered. In establishing the required allowance,
management considers historical losses, current market conditions, customers’
financial condition, the amount of receivables in dispute originated by price
differences and the current receivable aging and current payment
patterns.
 
 g)   Inventories,
agricultural products and biological assets-
 
 -
Inventories
 
 At
December 31, 2008 and 2009, inventories are stated at the lower of historical
cost determined by the average cost method, or market (replacement cost),
provided that replacement cost is not less than net realizable
value.
 
 -Agriculture
 
 The
financial statements recognize the requirements of Bulletin E-1, “Agriculture”, which
establishes the rules for recognizing, measuring, presenting and disclosing
biological assets and agricultural products.
 
 Bulletin
E-1 requires biological assets and agricultural products (the latter at the time
of harvesting) to be valued at their fair value, net of the estimated costs at
the point of sale. Bulletin E-1 also establishes that whenever the fair value
cannot be determined in a reliable, verifiable and objective manner, the assets
are to be valued at their production cost, less any impairment
loss.
 
 The
allowance for decline in the productivity of breeder chickens and pigs is
estimated based on their expected future life, under the straight-line
method.
 
 Agricultural
products are live chickens, processed chickens, commercial eggs and pigs
available for sale. The Company’s biological assets are comprised of poultry in
their different stages, incubatable eggs and breeder pigs.
 
 Broiler
chicks less than six and a half weeks old, incubatable eggs, breeder pigs and
laying hens are valued at production cost since it is not possible to determine
their fair value in a reliable, verifiable and objective manner.
 
 Broilers
more than six and a half weeks old through their date of sale are valued at fair
value less estimated point-of-sale costs, considering the price per kilogram of
processed chicken at the valuation date.
 
 F-18
 
 Processed
chicken and commercial eggs are valued at fair value lees estimated
point-of-sale costs, considering the price per kilogram of processed chicken and
commercial eggs at the time such items are considered as agricultural products.
From such date through the date of sale, the fair value is considered to be the
cost of processed chicken or commercial eggs, not in excess of net realizable
value.
 
 The
Company is exposed to financial risks due to changes in the price of chicken.
The Company estimates that the price of chicken will not fall significantly in
the future; consequently, the Company has not entered into any derivative
agreement or any other type of agreement to offset the risk of a drop in the
price of chicken.
 
 The
Company reviews periodically the price of chicken so as to evaluate the need for
a financial instrument to offset such risk.
 
 In
conformity with Bulletin E-1, biological assets and agricultural products were
classified as either current or non-current assets based on their availability
for sale and the business operating cycle.
 
 Cost of
sales represents the replacement cost of inventories at the time of sale,
increased, as applicable, for reductions in the replacement cost or net
realizable value of inventories during the year and, through 2007, is expressed
in thousands of constant pesos as of December 31, 2007.
 
 The
Company records the necessary allowances for inventory impairment arising from
damaged, obsolete or slow-moving inventories or any other reason indicating that
the carrying amount will exceed its market value.
 
 F-19
 
 h) 
 Property, plant and equipment-
 
 Property,
plant and equipment are initially recorded at acquisition cost and through
December 31, 2007, adjusted for inflation by using factors derived from the NCPI
(see note 2c).
 
 From
January 1, 2007, acquisitions of assets under construction or installation
include the related comprehensive financial results as part of the value of
assets. During 2007, 2008 and 2009, no comprehensive financing costs have been
capitalized, as a result of Mexican FRS D-6 criteria not being met.
 
 Depreciation
of property, plant and equipment is calculated on the straight-line method over
the estimated useful lives of the assets, determined by management (see note
7).
 
 Leasehold
improvements are amortized over the useful life of the improvement or the
related contract term, whichever is shorter.
 
 Minor
repairs and maintenance costs are expensed as incurred.
 
 i)
   Impairment of property, plant and equipment and
goodwill-
 
 The
Company periodically evaluates the values of long-lived assets of property,
plant and equipment and goodwill, to determine whether there is an indication of
potential impairment. Recoverability of assets to be held and used is measured
by comparison of the carrying amount of an asset against future cash flows
expected to be generated by the asset.  If the carrying amount of an
asset exceeds its estimated net revenues, an impairment charge is recognized in
the amount by which the carrying amount of the asset exceeds the fair value of
the asset. Assets to be disposed of, are reported in the balance sheets at the
lower of net carrying amount or realizable value. The assets and liabilities of
a group classified as available for sale are presented separately on the
consolidated balance sheet.
 
 F-20
 
 j) 
  Leases-
 
 Leased
property, plant and equipment arrangements are recognized as capital leases if:
a) the ownership of the leased asset is transferred to the lessee upon
termination of the lease; b) the agreement includes an option to purchase the
asset at a reduced price; c) the term of the lease is substantially the same as
the remaining useful life of the leased asset; or d) the present value of
minimum lease payments is substantially the same as the market value of the
leased asset, net of any benefit or scrap value.
 
 When the
risks and benefits inherent to the ownership of the leased asset remain mostly
with the lessor, such leases are classified as operating leases, and the lease
expense is charged to results of operations as incurred.
 
 The
Company classified its leases as operating leases at December 31, 2007, 2008 and
2009.
 
 k) 
 Goodwill-
 
 Goodwill
represents the difference between the purchase price and the fair value of the
identifiable assets acquired in a business combination at the purchase
date.
 
 Goodwill
is recorded initially at acquisition cost and through December 31, 2007, was
restated using adjustment factors derived from the NCPI. Goodwill is subject to
annual impairment testing.
 
 At
December 31, 2008 and 2009, there was no impairment loss in the value of
goodwill shown in the consolidated balance sheets.
 
 F-21
 
 l) 
  Liabilities, provisions, contingent liabilities and
commitments-
 
 Liability
provisions are recognized when the following three conditions are met: (i) the
Company has current obligations (legal or assumed) derived from past events,
(ii) it is probable that the liability will give rise to a future cash
disbursement for its settlement and (iii) the liability can be reasonably
estimated. When a reasonable estimation cannot be made, qualitative disclosure
is provided in the notes to the consolidated financial statements. Contingent
revenues, earnings or assets are not recognized until realization is
assured.
 
 If the
effect of the time value of money is material, provision amounts are determined
as the present value of the expected disbursements to settle the obligation. The
discount rate is determined on a pre-tax basis and reflects current market
conditions at the balance sheet date and, where appropriate, the risks specific
to the liability. Where discounting is used, the increase in the provision due
to the passage of time is recognized as an interest expense.
 
 m) 
Employee benefits-
 
 Bachoco
has a retirement plan in which all non-union workers participate. Pension
benefits are determined based on the salary of workers in their final three
years of service, the number of years worked in the Company and their age at
retirement. This plan includes:
 
 - Defined
contribution plan: This fund consists of employee and Company contributions. The
employee contribution percentage ranges from 1% to 5%. The Company contribution
ranges from 1% to 2% in the case of employees with less than 10 years’
seniority, and the same contribution percentage as the employee (up to 5%) when
the employee has more than 10 years’ seniority.
 
 - Defined
benefit plan: This fund consists solely of the Company’s contributions and
covers the Company's labor obligations with each employee.
 
 Seniority
premiums and severance payments are paid to workers as required by Mexican labor
law.
 
 Termination
benefits for reasons other than restructuring and retirement to which employees
are entitled are charged to operations for each year, based on actuarial
computations using the projected unit credit method and projected salaries. At
December 31, 2009 and for purposes of recognizing benefits upon retirement, the
remaining average service life of employees entitled to plan benefits
approximates 19.33 years (see note 14).
 
 F-22


In 2008,
as a result of the adoption of this Mexican FRS D-3, the intangible asset of
$28,341 reflected in the consolidated balance sheet and the labor obligation
minimum liability adjustment of $2,512 reflected in consolidated statements of
stockholders’ equity as of December 31, 2007, were eliminated against labor
obligations and the consolidated statement of operations, respectively.
Furthermore, for 2008, amortization of unamortized items resulted in an
approximate gain of $845.





The
actuarial profit or loss is recognized directly in the consolidated statements
of operations for the period as it is accrued (benefits due to termination) and
is amortized based on the remaining labor life of the employees that are
expected to receive benefits from the plan (retirement benefits).





n)
            Comprehensive
      financial results (CFR)-





The CFR
includes interest income and expense, foreign exchange gains and losses and
valuation of financial instruments, including derivatives, and through 2007,
monetary position gains and losses.





Transactions
in foreign currency are recorded at the exchange rate prevailing on the date of
execution or settlement.  Foreign currency assets and liabilities are
translated at the exchange rate in force at the consolidated balance sheet date.
Exchange differences arising from assets and liabilities denominated in foreign
currencies are reported in the consolidated statements of operations for the
year.


F-23


o)
            Comprehensive
      income (loss)-





Comprehensive
income (loss) consists of the net income or loss for the year, plus the results
from holding non-monetary assets, the tax effect of the items which are recorded
directly in stockholders’ equity, the effective portion of the unrealized gain
or loss on cash flow hedges, the minimum liability adjustment of labor
obligations and the minority interest as required by Bulleting B-4
“Comprehensive Income”.





p)
            Derivative
      financial instruments-





Irrespective
of their use and either issuance or holding purpose, the Company recognizes all
derivative instruments as either assets or liabilities on the balance sheet at
their respective fair values. Fair values are determined based on known market
prices such as Chicago Board of Trade (CBOT) and, when not listed in a market,
based on valuation techniques and inputs usually accepted in the financial
sector.





Changes
in the fair value of financial instruments not designated and/or not qualifying
under strict hedge accounting criteria are recognized within earnings for
the year in which such changes occur, as derivatives effects under
comprehensive financial results.





In the
case of operations with options on futures not designated and/or do not qualify
under strict hedge accounting criteria, premiums paid or received in connection
with options are initially recognized respectively as assets or liabilities
within derivative instruments; while subsequent changes in their fair value are
recognized within income of the year in which such changes occur under
comprehensive financial results.


F-24


q)
            Derivative
      financial Instruments, designated and qualified as hedging instruments for
      one or more risks-





The
Company uses selected financial derivative instruments to protect itself against
adverse price fluctuations in agriculture commodities, such as corn and sorghum.
Those agriculture commodities derivative instruments include futures and options
on futures which are listed on the CBOT, as well as options on futures accessed
through ASERCA (Farming Marketing Support and Services, a dependent entity
ascribed to Mexico’s Secretary of Farming and Agriculture), who functions as
counterparty and that is a dependent entity of Mexican Government’s unit that
belongs to the Secretary of Farming, Livestock, Rural Development, Fishing and
Food (SAGARPA, Secretaría de Agricultura, Ganaderia y Desarrollo Rural, Pesca y
Alimentación), through which, a commodities-related price hedging program (the
“Farming by Contract”) scheme is offered to both farmers and agro-business
entities such as the Company. The ASERCA program has two participating
modalities: (i) 0% of the payment of the option’s premium and 100% of the
benefit with a 60% discount on the amount of the initial premium, or (ii) 50% of
the payment of the option’s premium, and 100% of the benefit.





When the
derivatives are acquired to hedge risks, and accomplish with hedge accounting,
the hedging relationship is documented for each hedged price risk. This
documentation includes a description of the objective or hedge strategy, the
nature of the hedged item position, the risk(s) to be hedged, the designated
derivatives and how the initial effectiveness testing assessment will be
performed, as well as the subsequent measurement of its retrospective
effectiveness, which applies to each established hedge
relationship.





Formal
hedging derivatives designated into a hedging relationship, follow special hedge
accounting recognition, for fair value changes based on each corresponding
hedgeaccounting
model: (1) Fluctuations in fair value type of hedges, require that
both  the derivative and the hedged item are to be valued at fair
value and recognized in the statement of operations, adjusting the carrying
value of hedge item; (2) in the case of cash flow hedges, only the effective
portion of the derivative is temporarily recognized in comprehensive income
(equity) and recycled to operations when the effects of the hedged item affects
operations as cost of good sold, interest, etc., while the ineffective portion
is immediately recognized within operations.





The
Company discontinues hedge accounting in the following cases: when the
derivative has expired, has been sold, is cancelled or exercised, or when the
derivative does not achieve the required level of accumulated effectiveness as
to compensate for the changes in the fair value or cash flows of the hedged
item, when the hedged item is prepaid or when the Company decides to cancel the
hedge relationship on a discretionary basis.


F-25


Certain
financial derivative instruments are entered into to hedge on or more exposures
from the user’s  economic perspective, but are neither designated nor
qualify for hedge accounting purposes, hence  these derivatives are
treated accounting wise, as trading derivatives that is, with fluctuations in
the fair value of these derivatives recognized within comprehensive financial
result.





In the
case of hedges with options on futures or combinations of these options, which
are designated and qualifying under hedge accounting models, the premiums paid
and received through these derivative financial instruments are initially
recognized as assets within derivative financial instruments in the consolidated
balance sheet, with subsequent changes in their fair values recognized in the
comprehensive financial result in the case of fair value hedges, while under
cash flow hedge model, these changes are recognized within other comprehensive
income (OCI).





r)
              Income
      taxes (income tax (IT), flat rate business tax (IETU)), and employee
      statutory profit sharing
(ESPS)-





IT, IETU
and ESPS payable for the year are determined in conformity with the tax
provisions in effect.





Deferred
IT and, from January 1, 2008, deferred ESPS, are accounted for under the asset
and liability method. Deferred tax and ESPS assets and liabilities are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases, and in the case of IT, for tax loss and tax credit
carryforwards. Deferred tax and ESPS assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. The effect
on deferred tax and ESPS assets and liabilities of a change in tax rates is
recognized in income during the period that includes the enactment
date.





At
December 31, 2007, a deferred income tax liability was determined by treating
the stockholders’ equity as a single temporary item greater than the amount
determined by using the asset and liability method, and thus, the Company
recognized an additional deferred tax liability of $288,580 in 2007 to account
for this difference.





Effective
January 1, 2008, Mexican FRS D-4 “Tax on earnings” supersedes Bulletin D-4 and
Circular 54. Therefore, the Company wrote-off $288,580 against retained
earnings, which relates to the additional deferred tax liability previously
determined as at December 31, 2007 under the stockholders’ equity
method.





s)
            Net
      majority interest income (loss) per
share-





Net
majority interest income (loss) per share has been computed based on majority
interest net income (loss) and on the weighted average number of shares
outstanding, as established in Bulletin B-14 “Profit per
Share”.


F-26


t)
            Financial
      information by segments-





Bulletin
B-5, “Financial Information by
Segments”, establishes the rules for disclosing financial information by
segment.





Financial
information by segment is prepared based on a management’s approach, in
conformity with Bulleting B-5, considering a segment to be an operating
component that is subject to risks and benefits that are different from other
business segments.




The
financial information by segment is disclosed in note 18.





u)
            Reclassifications-





Certain
captions shown in the 2008 financial statements as originally issued have been
reclassified for uniformity of presentation with the 2009 financial statements.
The changes in these reclassifications were recognized retrospectively at
December 31, 2008, in conformity with Mexican FRS B-1.


F-27


v)
            Convenience
      translation-





United
States thousands dollars amounts as shown in the accompanying consolidated
balance sheet as of December 31, 2009, as well as in the consolidated statements
of operations and cash flows for the year ended December 31, 2009, have been
included solely for the convenience of the reader and are translated from pesos
to US dollars as a matter of arithmetic computation only, at an exchange rate of
$13.08 to one U.S. dollar, which was the exchange rate at December 31, 2009.
Such translation should not be construed as a representation that the peso
amounts could have been or could be converted into U.S. dollars at this
rate.





w)
            New
      accounting pronouncements-





The
Mexican Board of Research and Development of Financial Reporting Standards (Consejo Mexicano para la
Investigación y Desarrollo de Normas de Información Financiera or CINIF)
has issued the following Mexican FRS, effective for years beginning on and after
January 1, 2009, with the respective prospective or retrospective application
being specified in each case.





(a)
              Mexican FRS
      B-7 “Business combinations”– Mexican FRS
      supersedes Bulletin B-7 and establishes, among other things, general rules
      for the initial valuation and recognition at the acquisition date of net
      assets, regarding that all business combinations should be accounted for
      using the purchase method.  The provisions of this Mexican FRS
      became effective for acquisitions effected on or after January 1,
      2009.  Any accounting change resulting from this Mexican FRS is
      to be applied on a prospective
basis.





The
initial application of this standard did not have effects.





(b)
              Mexican FRS
      B-8 “Consolidated or combined financial statements”–MexicanFRS
      B-8 supersedes Bulletin B-8 “Consolidated and combined financial
      statements and valuation of investments in shares” and establishes general
      rules for the preparation and presentation of consolidated and combined
      financial statements, and related disclosures.  Amendments
      include:


F-28





(i.)
              Requires
      consolidation of special purpose entities (SPEs) when
      controlled.





(ii.)
              The
      possibility, under certain conditions, of presenting unconsolidated
      financial statements.





(iii.)
              Consideration
      is given to the existence of potential voting rights that might be
      exercised or converted in favor of the entity in its capacity as holding
      Company and that may change its involvement in decision-making at the time
      of assessing the existence of
control.





The
initial application of this standard did not cause effects in adoption or
retrospectively.





(c)
              Mexican
      FRS C-8 “Intangible assets”– Mexican FRS C-8 supersedes Bulletin
      C-8 “Intangible
      Assets” and establishes, among other things, primarily the
      following revisions:





(i)
            Redefinition
      of intangible assets, establishing that separability is not
      the    only condition for the intangible asset to be
      identifiable.





(ii)
            The
      acquisition cost must be considered for the initial valuation, identifying
      whether it is an individual acquisition, business combination or it is
      internally generated. Additionally, future financial benefits should be
      generated.





(iii)
            Subsequent
      outlays for research and developments in progress should be recorded as
      expenses if they are part of the research phase or recorded as an
      intangible asset if they meet the criteria to be recognized as
      such;





(iv)
            The
      presumption that the useful life of an intangible asset may not exceed
      twenty years was eliminated.





The
initial application of this standard did not cause effects in the adoption or
retrospectively.





x)
            MexicanFRS B-2
      “Statement
      of cash flows”- From January 1, 2008, Mexican FRS B-2 supersedes
      Bulletin B-12 "Statement
      of changes in financialposition"and paragraph
      33 of Bulletin B-16. The principal considerations established by this
      Mexican FRS are shown below:





(i)
            Instead
      of the statement of changes in financial position, the financial
      statements shall include the statements of cash flows for all the periods
      presented comparatively with those of the current year, except for
      financial statements of periods prior to
2008;


F-29


(ii)
            Cash
      inflows and cash outflows are reported in nominal currency units, thus not
      including the effects of inflation;





(iii)
            Two
      alternative preparation methods (direct and indirect) are established,
      without stating preference for either method. Furthermore, cash flows from
      operating activities are to be reported first, followed by cash flows from
      investing activities, and lastly by cash flows from financing
      activities;





(iv)
            Captions
      of principal items are to be reported gross, with certain exceptions and
      require disclosure of the composition of items considered cash
      equivalents.





Accordingly,
the Company presents its consolidated statement of changes in financial position
for 2007 as issued and the consolidated statements of cash flows for 2008 and
2009 under the indirect method.




(3)
              Cash
      and investments-





Consolidated
cash and investments as of December 31, 2008 and 2009 consist of:




2008
              
              
              2009Cash
      and bank accounts
              
              $
              228,589
              
              
              
              178,749Current
      primary investment securities (note 10 b)
              
              
              1,545,737
              
              
              
              2,363,949Unrestricted
      cash and investments
              
              
              1,774,326
              
              
              
              2,542,698Restricted
      cash
              
              
              223,921
              
              
              
              8,270Total
      cash and investments
              
              $
              1,998,247
              
              
              
              2,550,968




F-30


Restricted
cash corresponds to margin calls to cover future derivative commitments, due to
adverse market movements associated with the underlying prices for which the
Company had an open position as of December 31, 2008 and 2009.





(4)
              Trade
      receivables, net-





Trade
receivables at December 31, 2008 and 2009 amounting $892,207 and $903,609,
respectively, are shown net of an allowance of doubtful accounts for $28,320 and
$29,801, respectively.


F-31


(5)
            Related
      parties-





a)
            A
      summary of related party accounts payable as of December 31, is as
      follows:





2008
                  
                  
                  2009Vimifos,
      S.A. de C.V.
                  
                  $
                  39,496
                  
                  
                  $
                  43,749Frescopack,
      S.A. de C.V.
                  
                  
                  715
                  
                  
                  
                  8,767Maquinaria
      Agrícola, S.A. de C.V.
                  
                  
                  4,858
                  
                  
                  
                  5,570Llantas
      y Accesorios, S.A. de C.V.
                  
                  
                  3,953
                  
                  
                  
                  4,418Pulmex
      2000, S.A. de C.V.
                  
                  
                  905
                  
                  
                  
                  4,077Autos
      y Tractores de Culiacán, S.A. de C.V.
                  
                  
                  106
                  
                  
                  
                  855Camiones
      y Tractocamiones de Sonora, S.A. de C.V.
                  
                  
                  149
                  
                  
                  
                  108Autos
      y Accesorios, S.A. de C.V.
                  
                  
                  76
                  
                  
                  
                  53Distribuidora
      Automotriz de los Mochis, S.A. de C.V.
                  
                  
                  28
                  
                  
                  
                  16Alfonso
      R Bours, S.A. de C.V.
                  
                  
                  48
                  
                  
                  
                  -Qualyplast,
      S.A. de C.V.
                  
                  
                  2
                  
                  
                  
                  -$
                  50,336
                  
                  
                  $
                  67,613





At
December 31, 2008 and 2009, balances due to related parties correspond to
unsecured current accounts denominated in pesos that bear no interest and are
payable within 30 days.





F-32




b)   
 For the years ended December 31, 2007, 2008 and 2009, the Company had the
following transactions with related parties:





Purchases of feed, raw materials and packing
                              supplies
                            
                            2007
                            
                            
                            2008
                            
                            
                            2009Vimifos,
      S.A. de C.V.
                            
                            $
                            192,188
                            
                            
                            
                            283,912
                            
                            
                            
                            261,385Frescopack,
      S.A. de C.V.
                            
                            
                            -
                            
                            
                            
                            128,176
                            
                            
                            
                            136,609Pulmex
      2000, S.A. de C.V.
                            
                            
                            -
                            
                            
                            
                            15,619
                            
                            
                            
                            17,307Qualiplast,
      S.A. de C.V.
                            
                            
                            634
                            
                            
                            
                            22
                            
                            
                            
                            21Purchases of vehicles, tires and spare
      partsMaquinaria
      Agrícola, S.A. de C.V.
                            
                            
                            47,155
                            
                            
                            
                            54,502
                            
                            
                            
                            56,502Llantas
      y Accesorios, S.A. de C.V.
                            
                            
                            23,349
                            
                            
                            
                            22,426
                            
                            
                            
                            30,848Autos
      y Tractores de Culiacán, S.A. de C.V.
                            
                            
                            -
                            
                            
                            
                            26,665
                            
                            
                            
                            19,555Autos
      y Accesorios, S.A. de C.V.
                            
                            
                            14,985
                            
                            
                            
                            21,729
                            
                            
                            
                            11,849Distribuidora
      Automotriz de los Mochis, S.A. de C.V.
                            
                            
                            8,095
                            
                            
                            
                            13,687
                            
                            
                            
                            11,093Camiones
      y Tractocamiones de Sonora, S.A. de C.V.
                            
                            
                            -
                            
                            
                            
                            14,501
                            
                            
                            
                            8,391Alfonso
      R. Bours, S.A. de C.V.
                            
                            
                            2,171
                            
                            
                            
                            3,356
                            
                            
                            
                            847Airplane leasing expensesTaxis
      Aéreos del Noroeste, S.A. de C.V.
                            
                            
                            3,153
                            
                            
                            
                            2,106
                            
                            
                            
                            9,810





Purchases
transactions with related parties are made at market prices, which are similar
to those that would be used in arms-length transactions.




F-33





(6)
              Inventories
      and biological assets-





a)
            Inventories
      consist of the following:




2008
                  
                  
                  2009Raw
      materials and byproducts
                  
                  $
                  2,232,409
                  
                  
                  $
                  1,769,251Restricted
      raw material (sorghum) (note 9a)
                  
                  
                  -
                  
                  
                  
                  24,5842,232,409
                  
                  
                  
                  1,793,835Medicine,
      materials and spare parts
                  
                  
                  457,106
                  
                  
                  
                  480,459Finished
      feed
                  
                  
                  71,841
                  
                  
                  
                  57,6132,761,356
                  
                  
                  
                  2,331,907Agricultural
      products:Live
      chicken
                  
                  
                  921,061
                  
                  
                  
                  889,415Processed
      chicken
                  
                  
                  228,619
                  
                  
                  
                  339,965Commercial
      egg
                  
                  
                  24,383
                  
                  
                  
                  27,441Turkey
                  
                  
                  35,113
                  
                  
                  
                  21,567Beef
                  
                  
                  2,445
                  
                  
                  
                  1,493Others
                  
                  
                  638
                  
                  
                  
                  1,4241,212,259
                  
                  
                  
                  1,281,305Total
                  
                  $
                  3,973,615
                  
                  
                  $
                  3,613,212





b)
              Biological
      assets at December 31, 2008 and 2009 consist of the
    following:





2008
                  
                  
                  2009Current
      biological assets:Breeder
      pigs
                  
                  $
                  40,709
                  
                  
                  $
                  45,808Incubatable
      eggs
                  
                  
                  99,135
                  
                  
                  
                  110,652Total
      current biological assets
                  
                  $
                  139,844
                  
                  
                  $
                  156,460Non-current
      biological assets:Laying
      and breeder hens
                  
                  $
                  248,877
                  
                  
                  $
                  252,415Breeder
      pigs
                  
                  
                  28,040
                  
                  
                  
                  31,409Hens
      in production
                  
                  
                  681,114
                  
                  
                  
                  818,415Allowance
      for productivity declines
                  
                  
                  (276,454
                  )
                  
                  
                  (358,630
                  )Total
      non-current biological assets
                  
                  $
                  681,577
                  
                  
                  $
                  743,609





The
change in the historical value of biological assets and agricultural products
measured at their fair value presented increases of $10,882 in 2007 and $16,358
in 2008; in 2009, shows a decrease of $7,214.  Such effects were
included in the results of operations each year.


F-34





(7)
              Property,
      plant and equipment-





a)
              Property,
      plant and equipment at December 31consists of the
    following:





Useful lives
                        (years)
                      
                      
                      2008
                      
                      
                      2009Buildings,
      farm structures and equipment
                      
                      
                      7-27
                      
                      
                      $
                      14,914,390
                      
                      
                      $
                      15,823,099Office,
      furniture and equipment
                      
                      
                      3
                      
                      
                      
                      237,727
                      
                      
                      
                      238,607Transportation
      equipment
                      
                      
                      6
                      
                      
                      
                      1,207,229
                      
                      
                      
                      1,219,43716,359,346
                      
                      
                      
                      17,281,143Accumulated
      depreciation and amortization
                      
                      
                      
                      
                      
                      
                      (7,164,781
                      )
                      
                      
                      (7,700,155
                      )Net
                      
                      
                      
                      
                      
                      
                      9,194,565
                      
                      
                      
                      9,580,988Land
                      
                      
                      
                      
                      
                      
                      897,273
                      
                      
                      
                      937,478Construction
      in progress  and advance payments
                      
                      
                      
                      
                      
                      
                      597,397
                      
                      
                      
                      391,660Total
                      
                      
                      
                      
                      
                      $
                      10,689,235
                      
                      
                      $
                      10,910,126





b)
            Depreciation
      and amortization expense for the years ended December 31, 2007, 2008 and
      2009, amounted to $571,393, $616,358, and $662,630,
      respectively.





c)
            Certain
      property, plant and equipment guarantee part of the loans mentioned in
      note 9.





d)
            As
      of December 31, 2008, the construction in progress amount of $443,734, has
      been placed in service in 2009.





e)
            As
      of December 2009, the construction in progress amount of $347,516,
      corresponds mainly to investments in feeding plants which are expected to
      be placed in service in 2010.





(8)
              Goodwill-





In 1999,
goodwill was derived from the purchase of the shares of Campi Alimentos, S.A. de
C.V. in the amount of $359,564. At December 31, 2005 (the last year of
amortization), accumulated amortization aggregated to $58,716. In 2007, 2008 and
2009, goodwill was not amortized, but subject to impairment test on an annual
basis, as a result of the adoption of Mexican FRS B-7 “Business Acquisitions”(see
note 2k).





(9)
              Notes
      payable to banks and long-term
debt-





a)
            Short-term
      notes payable to banks consist of the
following:




2008
                        
                        
                        2009Unsecured notes payable to banks (i)
      (ii):Denominated
      in pesos, interest rate: TIIE(1) FIRA(2)  rate less 3
      points
                        
                        $
                        40,000
                        
                        
                        
                        40,000Denominated
      in pesos, interest rate: TIIE(1) FIRA(2)  rate plus .75
      points
                        
                        
                        -
                        
                        
                        
                        40,000Denominated
      in pesos, interest rate: TIIE(1) rate plus 2 points
                        
                        
                        -
                        
                        
                        
                        133,400Secured by sorghum deposit certificates (iii)
      (iv):Denominated
      in pesos, maturity on February 11, 2010, with appraisal 85% and interest
      rate of 9%.
                        
                        
                        -
                        
                        
                        
                        20,896Short-term
      notes payable total
                        
                        $
                        40,000
                        
                        
                        
                        234,296


F-35





(i)
            The
      weighted average interest rate on short-term unsecured notes payable at
      December 31, 2008 and 2009 was 5.73% and 6.03%,
    respectively.





(ii)
            Average
      interest rates on short-term unsecured notes for the years ended December
      31, 2008 and 2009 were 5.28% and 5.73%,
  respectively.





(iii)
            At
      December 31, 2009, unused sorghum deposit certificates lines of credit
      amounted to $179,174. In 2009, the Company was not required to pay any fee
      for unused lines of credit.





(iv)
            The
      book value of raw material securing obligation amounted to $24,584, as of
      December 31, 2009.





(1) TIIE
= Interbank Equilibrium Rate


(2) FIRA
= Fideicomiso Instituido en
Relación con la Agricultura





b)   Long-term
notes payable to banks, as of December 31, consist of the
following:





2008
                          
                          
                          2009Secured by equipment:Denominated
      in pesos, payable in monthly installments through December 2010, at CETES
      (3) rate plus 2 points.
                          
                          $
                          20,500
                          
                          
                          $
                          10,500Secured by shares of the Company, and the
      subsidiaries as collaterals:Denominated
      in pesos, payable in six quarterly installments beginning in August 2009
      and maturing in November 2010 at a rate of TIIE (1) plus 5 points
      (4).
                          
                          
                          500,000
                          
                          
                          
                          -Unsecured:Denominated
      in pesos, maturing in December 2010 at TIIE (1) FIRA (2) rate less 3.30
      points, with minimum rate of 2.90%.
                          
                          
                          4,112
                          
                          
                          
                          1,789Denominated
      in pesos, maturing in April 2012 and June 2013 at TIIE (1) FIRA (2) rate
      less 1.10 points and 0.875 points.
                          
                          
                          61,280
                          
                          
                          
                          46,000Denominated
      in pesos, maturity in June 2011 at TIIE (1) FIRA(2) rate plus 2
      points.
                          
                          
                          -
                          
                          
                          
                          137,500Denominated
      in pesos, maturity in 2014 at TIIE (1) rate plus 3.5
    points.
                          
                          
                          -
                          
                          
                          
                          33,750Denominated
      in pesos, with maturity in July 2011, at TIIE (1) rate plus 2
      points.
                          
                          
                          -
                          
                          
                          
                          500,000Total
                          
                          
                          585,892
                          
                          
                          
                          729,539Less
      current installments
                          
                          
                          (194,235
                          )
                          
                          
                          (357,569
                          )Long-term
      debt, excluding current installments
                          
                          $
                          391,657
                          
                          
                          $
                          371,970





(i)
            Weighted
      average interest rate on long-term debt at December 31, 2008 and 2009
      was  12.92% and 6.76%,
respectively.





(ii)
            The
      average interest rate of the Company’s total long-term debt for the years
      ended December 31, 2008 and 2009 was 8.45%, and 8.88%,
      respectively.


F-36





(1) TIIE
= Interbank Equilibrium Rate


(2) FIRA
= Fideicomiso Instituido en
Relación con la Agricultura


(3) CETE
= Treasury Bills


(4)
During 2009, the Company made an anticipated payment of the entire loan, with
funds obtained from a debt substitution with another bank.





(iii)
            The
      weighted average interest rate of the Company’s total debt at December 31,
      2008 and 2009 was 12.46% and 6.59%,
  respectively.





c)
              At
      December 31, 2008 and 2009, unused lines of credit amounted to $1,182,574
      and $823,320, respectively. In 2008 and 2009, the Company did not pay any
      fee for unused lines of
credit.





d)
              The
      book value of assets collateralizing long-term debt was $129,350 at
      December 31, 2008 and $120,844 at December 31,
  2009.





e)
              Maturities
      of long-term debt as of December 31, 2009, are as
  follows:





Year
                    
                    Amount2011
                    
                    $
                    333,4052012
                    
                    
                    19,0402013
                    
                    
                    12,0252014
                    
                    
                    7,500$
                    371,970





Interest
expense on loans for the years ended December 31, 2007, 2008 and 2009,
aggregated to $6,885, $16,040 and $66,989, respectively.





Bank
loans establish certain affirmative and negative covenants. As of December 31,
2009 and June 18, 2010, the Company was in compliance with all these
covenants.  The Company estimates that the covenants will be in
compliance during 2010.


F-37


(10-a)
              Financial
      Instruments and hedging activities as at December 31, 2008 and
      2009-





Derivatives
for trading purposes (neither designated nor qualified for hedges accounting
treatment)





The
Company maintains a portfolio of explicit Financial Derivative Instruments
(FDI), which were neither designated nor qualified as hedges under Bulletin C-10
and, therefore, their related changes in fair value were recognized as valuation
effects of financial instruments within Comprehensive Financial Results (CFR),
in the results of operations.The related
amount of the open balance as of December 31, 2008 and 2009, was $919,026 and
$(3,137), respectively, and arose from the derivative instruments, shown on the following
pages:


F-38


As at December 31,
2008:




OTC1foreign currency option
structures – finance counter-party in private
agreements:





Effects on the
                                                                                                              results of
                                                                                                              operationsCounter-party
                                                                                                            
                                                                                                            Instrument
                                                                                                            
                                                                                                            Underlying6
                                                                                                            
                                                                                                            Notional
                                                                                                            
                                                                                                            Maturity
                                                                                                            
                                                                                                            CFR/loss
                                                                                                              (gain)Merril
      Lynch5
                                                                                                            
                                                                                                            TARNs2
                                                                                                            
                                                                                                            Exchange
      rate
                                                                                                            
                                                                                                            5,500
                                                                                                            
                                                                                                            April-July
      2009
                                                                                                            
                                                                                                            $
                                                                                                            753,705Capital
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            MXP/USD
                                                                                                            
                                                                                                            US$Services
      Inc
                                                                                                              (OTC)KO
      FWD3
                                                                                                            
                                                                                                            Exchange
      rate
                                                                                                              MXP/USD
                                                                                                            
                                                                                                            2,000
                                                                                                              US$
                                                                                                            
                                                                                                            January-
      May 2009
                                                                                                            
                                                                                                            
                                                                                                            (19,478
                                                                                                            )Call
      Spread
                                                                                                            
                                                                                                            Exchange
      rate
                                                                                                            
                                                                                                            84,000
                                                                                                            
                                                                                                            January
      2009
                                                                                                            
                                                                                                            
                                                                                                            (30,639
                                                                                                            )MXP/USD
                                                                                                            
                                                                                                            US$European
      Call
                                                                                                            
                                                                                                            Exchange
      rate
                                                                                                            
                                                                                                            1,500
                                                                                                            
                                                                                                            March
      2009
                                                                                                            
                                                                                                            
                                                                                                            (34
                                                                                                            )MXP/USD
                                                                                                            
                                                                                                            US$Banamex
                                                                                                            
                                                                                                            European
      Call
                                                                                                            
                                                                                                            Exchange
      rate
                                                                                                            
                                                                                                            3,000
                                                                                                            
                                                                                                            January
      through March 2009
                                                                                                            
                                                                                                            
                                                                                                            (586
                                                                                                            )(OTC)
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            MXP/USD
                                                                                                            
                                                                                                            US$European
      Put
                                                                                                            
                                                                                                            Exchange
      rate
                                                                                                            
                                                                                                            2,000
                                                                                                            
                                                                                                            February
      through March 2009
                                                                                                            
                                                                                                            
                                                                                                            17MXP/USD
                                                                                                            
                                                                                                            US$Call
      Digital
                                                                                                            
                                                                                                            Exchange
      rate
                                                                                                            
                                                                                                            600
                                                                                                            
                                                                                                            January
      through March 2009
                                                                                                            
                                                                                                            
                                                                                                            584MXP/USD
                                                                                                            
                                                                                                            US$TARNs
                                                                                                            
                                                                                                            Exchange
      rate
                                                                                                            
                                                                                                            21,000
                                                                                                            
                                                                                                            January
      and April 2009
                                                                                                            
                                                                                                            
                                                                                                            59,480MXP/USD
                                                                                                            
                                                                                                            US$Barclays
                                                                                                            
                                                                                                            TARFs4
                                                                                                            
                                                                                                            Exchange
      rate
                                                                                                            
                                                                                                            2,000
                                                                                                            
                                                                                                            November
      2009
                                                                                                            
                                                                                                            
                                                                                                            96,235Capital
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            MXP/USD
                                                                                                            
                                                                                                            US$(OTC)
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            $
                                                                                                            859,284







1Over the Counter (OTC):
refers to privately agreed operations (outside of the standardized or organized
futures & options exchange markets such as CBOT) with other financial or
non-financial parties.


2 Target Redemption Notes:
Options structure on MXP/USD exchange rates that provide the Company with
limited earnings when the peso appreciates, and an unlimited loss when the U.S.
dollar appreciates before the Mexican peso.


3 Knock out Forward: this
refers to an exchange rate Forward which eliminates or
extinguishes both party's rights and obligations when it reaches an exchange
rate or barrier level, which was established in the terms of the agreement on
the instrument.


4Target Redemption Forward:
this is an option structure on MXP/USD exchange rates that provide the Company
with limited earnings when the Mexican peso appreciates, and unlimited losses
when the U.S. dollar appreciates before the peso.
 5See note
3, collaterals established by Bachoco’s broker.
 6MXP means
Thousands of Peso and USD means Thousands of U.S.
dollars.


F-39





Derivatives
on prices of farming goods (commodities):





Effects on
                              the results
                              of
                              operationsCounter-party
                            
                            Instrument
                            
                            Underlying
                            
                            Maturity
                            
                            CFR/loss
                              (gain)Cargill
                            
                            Swap
                            
                            Corn
                            
                            January
      2009
                            
                            $
                            16,862(OTC)Swap
                            
                            Soy
      bean
                            
                            January
      2009
                            
                            
                            3,285New
      Edge7
                            
                            Futures
                            
                            Corn
                            
                            March
      2009
                            
                            
                            12,001Futures
                            
                            Soy
      bean
                            
                            March
      2009
                            
                            
                            (13,151
                            )Call
                            
                            Corn
                            
                            March
      2009
                            
                            
                            (727
                            )Puts
                            
                            Corn
                            
                            March
      2009
                            
                            
                            41,472$
                            59,742








7New Edge
is the broker or the commission agents for the futures or options on the
futures, that the Company used to enter into these operation in this listed CBOT
market on corn and soybeans forwards. See note 3, collaterals established by the
broker for Bachoco.





As at December 31,
2009:





OTC1foreign currency option
structures – finance counter-party in private agreements:





Counter-
                                                                  party
                                                                
                                                                Instrument
                                                                
                                                                Underlaying7
                                                                
                                                                Notional
                                                                
                                                                Maturity
                                                                
                                                                Effects on
                                                                  the results of
                                                                  operations
                                                                  CFR/loss
                                                                  (gain)Morgan
      Stanley
                                                                
                                                                Collar2
                                                                
                                                                Exchange
      rate MXP/USD
                                                                
                                                                1,000
      US$
                                                                
                                                                May
      2010
                                                                
                                                                $
                                                                (2,537
                                                                )KO
      collars2
                                                                
                                                                Exchange
      rate MXP/USD
                                                                
                                                                1,000
      US$
                                                                
                                                                March
      2010
                                                                
                                                                
                                                                (185
                                                                )KO
      collars2
                                                                
                                                                Exchange
      rate MXP/USD
                                                                
                                                                2,000
      US$
                                                                
                                                                July
      2010
                                                                
                                                                
                                                                8KO
      put spread4
                                                                
                                                                Exchange
      rate MXP/USD
                                                                
                                                                1,000
      US$
                                                                
                                                                March
      2010
                                                                
                                                                
                                                                (256
                                                                )Call
      spread3
                                                                
                                                                Exchange
      rate MXP/USD
                                                                
                                                                1,000
      US$
                                                                
                                                                March
      2010
                                                                
                                                                
                                                                (902
                                                                )UBS
                                                                
                                                                Knock
      out-5knock in
                                                                
                                                                Exchange
      rate MXP/USD
                                                                
                                                                2,000
      US$
                                                                
                                                                January
      2010
                                                                
                                                                
                                                                (45
                                                                )Forward
                                                                
                                                                Exchange
      rate MXP/USD
                                                                
                                                                2,000
      US$
                                                                
                                                                July
      2010
                                                                
                                                                
                                                                1,026$
                                                                (2,891
                                                                )




F-40








1Over the Counter (OTC):
refers to privately agreed operations (outside of the standardized or organized
futures & options exchange markets such as CBOT) with other financial or
non-financial parties.


2Knock Out Collars: Option
combination in which the Company acquires at both, a minimum and a maximum
exchange rate. The maximum limit no longer applies if the referenced exchange
rate is equal or greater than the Knock Out upper level.


3Call Spread:A hedging
instrument against decreases in the exchange rate. It is compounded by a long
call with certain strike, and a short call with a greater strike.


4KO Put Spread: Option
combination that the Company entered into, at the same time as it took a long
position in a long Collar and a long position in a Call Spread. It hedges a
certain rank in the exchange rate value, generally low values.


5Knock out – knock in::Option combination that
hedges up to a certain level of the exchange rate, and from another level of the
exchange rate respectively.


6See note
3, collaterals established by Bachoco’s broker.


7MXP means
Thousands of Mexican Peso and USD means Thousands of U.S. dollars.





Derivatives
on prices of farming goods (Commodities):





Counter-party
                            
                            Instrument
                            
                            Underlaying
                            
                            Maturity 2010
                            
                            Effects on
                              the
                              results of
                              operations
                              CFR/
                              loss(gain)Cargill
                            
                            Swap
                            
                            Corn
                            
                            March
                            
                            $
                            (445
                            )(OTC)New
      Edge 7
                            
                            Futures
                            
                            Corn
                            
                            March
                            
                            
                            (409
                            )Futures
                            
                            Corn
                            
                            March
                            
                            
                            (361
                            )Futures
                            
                            Corn
                            
                            March
                            
                            
                            (1,360
                            )Futures
                            
                            Corn
                            
                            March
                            
                            
                            4,162Futures
                            
                            Corn
                            
                            March
                            
                            
                            (215
                            )Futures
                            
                            Corn
                            
                            March
                            
                            
                            (314
                            )Futures
                            
                            Corn
                            
                            March
                            
                            
                            (98
                            )Puts
      on futures
                            
                            Corn
                            
                            March
                            
                            
                            (159
                            )Puts
      on futures
                            
                            Corn
                            
                            March
                            
                            
                            (337
                            )Puts
      on futures
                            
                            Corn
                            
                            March
                            
                            
                            (311
                            )Puts
      on futures
                            
                            Corn
                            
                            March
                            
                            
                            104Puts
      on futures
                            
                            Corn
                            
                            March
                            
                            
                            (503
                            )$
                            (246
                            )







7New Edge is the broker or
the commission agents for the futures or options on the futures, that the
Company used to enter into these operation in this listed CBOT market on corn
and soybeans forwards. See note 3, collaterals established by the broker for
Bachoco.




F-41





Derivatives
that are designated and qualify for hedging purposes attributable to (i) one or
more risks included in identified hedged items which are already recognized on
the balance sheet or (ii) associated to risk exposures not yet recognized on the
balance sheet.





In regard
to the positions on FDI that the Company enters into and that were designated
and qualify for hedge accounting purposes on one or more financial risks, its
fair value amounted to a total of $126,164 and $8,135 at December 31, 2008 and
2009, respectively. Following are the details on the derivative instruments
found accessing special hedge accounting models, their notional dimension, risks
and effects, either on the balance sheets or in the statements of operations.
The derivatives mentioned below fundamentally offset the effects of the hedged
items within the statement of operations, as long as they continue to qualify
and be designated for hedge purposes as follows:





Fair value hedges
(FVH): The Company entered into several firm commitments that are
contractual agreements with domestic farmers, to purchase expected volumes of
grain crops at a USD-denominated fixed price including basis locks. These
agreements were carried to access hedging instruments under the “farming by
contract” program sponsored by ASERCA. These firm commitments are designated as
hedged items due to they create off-balance sheet grain price and foreign
exchange risk exposures as well. The ASERCA Put options offering, only hedge the
fair value risk of the grain fixed price, hence are designated as fair value
hedges under the Fair Value Hedge accounting model. These options are used to
hedge a downside risk, where both effective effects from the derivative (based
on intrinsic value changes only, excluding extrinsic value) and from the hedge
item for such hedged risk, are taken to earnings, where both compensate. The
effective changes in the fair value of these firm commitments attributable to
price risk, are allocated within the balance sheet as current assets or
liabilities until contractual volumes of grain are recognized as inventory, then
the same ASERCA put options in their correspondent volume, are re-designated as
to hedge the fair value of commodity inventories in accordance with the fair
value hedge accounting model, that is, adjusting the book value of such
inventory against earnings, up to when these inventories of grain (corn and
sorghum) impact earnings as cost of goods sold, then all pending derivative
effects allocated as current assets or liabilities coming from the firm
commitment period, are then recycled to cost of good sold, as to adjust this for
fair value hedging effects.


F-42


Options
listed on corn future, effective at December 31, 2008:





Effectiveoffsettingeffects oncomprehensivefinancialCounter-party
                                                      
                                                      Instrument
                                                      
                                                      Underlaying
                                                      
                                                      Maturity
                                                      
                                                      results/loss (gain)ASERCA
                                                      
                                                      Puts
                                                      
                                                      Corn
                                                      
                                                      March
      andMay
      2009
                                                      
                                                      $
                                                      (126,164
                                                      )





Options listed on corn
future, effective at December 31, 2009:





Counter-party
                                  
                                  Instrument
                                  
                                  Underlaying
                                  
                                  Maturity
                                  
                                  Effectiveoffsetting
                                    effects on
                                    comprehensive
                                    financial
                                    results/loss (gain)ASERCA
                                  
                                  Puts
                                  
                                  Corn
                                  
                                  March
      andMay 2010
                                  
                                  $
                                  (8,135
                                  )





Option
type of derivatives entered under the ASERCA program are under the 0% modality
for payment of the premium and a 100% benefit with a 60% discount over the
initial premium amount.





Hedging
effects on the price of grain associated with firm commitments and grain
inventories denominated in the Company’s non-functional currency (USD), that are
recognized at their fair value due to the price risk only, under the fair value
hedge accounting model.





Due to
the effects of the 2008 and 2009 grain price variations, the hedging effects
arising from the fair value changes linked to the corn & sorghum8prices,
according to the fair value hedge model, were recognized in the consolidated
balance sheet as a current liability or as an adjustment to the inventory, both
with correspondent offsetting effects against the option’s intrinsic value
changes within comprehensive financial result in the consolidated statement of
operations.







8
              Sorghum
      price is not listed in an agriculture exchange, but its price-as feeding
      substitute for corn (which is negotiated and listed in the CBOT) – has a
      high correlation with the futures prices of corn; therefore, corn prices
      are usually used as a sound proxy the hedge sorghum related price
      exposure.


F-43





At December 31,
2008:





Grain purchase firm
commitments subject to fair value hedge relationship9:





Description of the
                                  contract
                                
                                Re-designated derivatives and
                                  hedged items
                                
                                Changes in the fair value,
                                  recognized within the
                                  balance sheetSorghumPurchases
      agreements
                                
                                ASERCA
      Puts that hedge the fair value of these firm commitments, due to falling
      of grain prices.
                                
                                $
                                (38,578
                                )





Grain inventories adjusted
to fair value hedge:





Description of
                              the contract
                            
                            Designated derivative
                              and hedged risk
                            
                            Changes in the fair value,
                              recognized within the
                              balance sheetSorghum
      and corn inventories
                            
                            ASERCA
      Puts that were re-designated as to hedge the fair value of commodity grain
      inventories from losing fair value, attributable to lower grain
      prices.
                            
                            $
                            (87,586
                            )








9
              These
      represent contracts the Company enters into with an unrelated party that
      can be executed through legal means and specify the amount the Company
      expects to exchange, the fixed price, the currency and the transaction
      schedule, among other important
aspects.


F-44





At December 31,
2009:





Grain inventories adjusted
to fair value hedge10:





Description
                      
                      Risk covered and
                        secondary assigned
                      
                      Changes in the
                        fair value of the firm
                        commitment
                        recognized within the
                        balance sheetFirm
      commitments with a fix price and USD denominated to Sorghum and corn
      purchases agreements
                      
                      ASERCA
      Puts that were re-designated as to hedge the fair value of Commodity grain
      inventories from losing fair value, attributable to lower grain
      prices
                      
                      $
                      (8,135
                      )








10
              These represent contracts the
      Company enters into with an unrelated party that can be executed through
      legal means and specify the amount the Company expects to exchange, the
      fixed price, the currency and the transaction schedule, among other
      important aspects.


F-45




(10-b)
            Investment
      in primary financial securities at December 31, 2008 and
    2009-





The
Company keeps investments in primary financial debt instruments at December 31,
2008 and 2009, both in U.S. dollars and Mexican pesos, as follows:





2008
                  
                  
                  2009For
      trading
                  
                  Book
                    value
                  
                  
                  Fair
                    value
                  
                  
                  Interest11
                    rates
                  
                  
                  Book
                    value
                  
                  
                  Fair
                    value
                  
                  
                  Interest11
                    rateMexican
      peso denominated debt securities:Government
      issued
                  
                  $
                  564,055
                  
                  
                  
                  564,055
                  
                  
                  
                  8.30
                  %
                  
                  $
                  778,700
                  
                  
                  
                  778,700
                  
                  
                  
                  4.63
                  %Bank
      issued
                  
                  
                  669,884
                  
                  
                  
                  669,884
                  
                  
                  
                  8.95
                  %
                  
                  
                  1,259,987
                  
                  
                  
                  1,259,987
                  
                  
                  
                  4.79
                  %Commercial
      paper
                  
                  
                  109,330
                  
                  
                  
                  109,330
                  
                  
                  
                  9.28
                  %
                  
                  
                  81,899
                  
                  
                  
                  81,899
                  
                  
                  
                  8.34
                  %$
                  1,343,269
                  
                  
                  
                  1,343,269
                  
                  
                  
                  
                  
                  
                  $
                  2,120,586
                  
                  
                  
                  2,120,586U.S
      dollars denominated debt securities:Bank
      issued
                  
                  $
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  $
                  69,718
                  
                  
                  
                  69,718
                  
                  
                  
                  6.63
                  %Commercial
      paper
                  
                  
                  167,169
                  
                  
                  
                  167,169
                  
                  
                  
                  5.31
                  %
                  
                  
                  125,230
                  
                  
                  
                  125,230
                  
                  
                  
                  6.41
                  %$
                  167,169
                  
                  
                  
                  167,169
                  
                  
                  
                  
                  
                  
                  $
                  194,948
                  
                  
                  
                  194,948







11Average
interest rate in the category


2008Held
      to maturity
                    
                    Paid
      price
                      when
                      bought
                    
                    
                    Impairment
                    
                    
                    Expected
                      recovery
                      amount
                    
                    
                    Interest
                      ratePesos:Commercial
      paper
                    
                    $
                    48,415
                    
                    
                    
                    13,116
                    
                    
                    
                    35,299
                    
                    
                    
                    8.2
                    %


F-46




2009Held
      to maturity
                      
                      Paid
      price
                        when
                        bought
                      
                      
                      Impairment
                      
                      
                      Expected
                        recovery
                        amount
                      
                      
                      Interest
                        ratePesos:Commercial
      paper
                      
                      $
                      48,415
                      
                      
                      
                      -
                      
                      
                      
                      48,415
                      
                      
                      
                      8.2
                      %





Due to
the financial crisis experienced in most economies around the World at the end
of 2008, several securities were no longer traded actively in the financial
markets, hence the Company decided to access INIF 16 “Transfer of accounting category of
financial instruments carried for trading purposes”, hence Commercial
Paper was transferred to the Held To Maturity category starting October 1, 2008.
An impairment effect of $13,116 was immediately recognized considering that
these non guaranteed debt securities will not recover their initial
paid-in-value. Impairment was recognized in the Comprehensive financial results
within earnings.




F-47





(11)
            Commitments
      and contingencies-





(a)
              The
      Company has entered into operating leases for certain offices, production
      sites, and automotive and computer equipment. Most leases contain renewal
      options. These agreements have terms between one and five years. Rental
      expense under these leases was as
follows:





Year
      ended
                        December
      31,
                      
                      Amount2007
                      
                      $
                      153,1652008
                      
                      
                      167,8712009
                      
                      
                      177,292





(b)
              There
      is a contingent liability arising from the labor obligations mentioned in
      note 2m.





(c)
              The
      Company is involved in a number of lawsuits and claims arising in the
      normal course of business. In the opinion of management, it is expected
      that the final outcome of these matters will not have significant adverse
      effects on the Company’s  consolidated financial position and
      results of operations.





(d)
            In
      accordance with Mexican tax law, the tax authorities are entitled to
      examine transactions carried out during the five years prior to the most
      recent income tax return filed.





(e)
              The
      Company has agreed contracts to supply grain from third parties as part of
      the normal course of
operations.





(f)
            In
      accordance with the Income Tax Law, companies carrying out transactions
      with related parties are subject to certain requirements as to the
      determination of prices, which should be similar to those that would be
      used in arms-length transactions.





Should
the tax authorities examine the transactions and reject the related-party
prices, they could assess additional taxes plus the related inflation adjustment
and interest in addition to penalties of up to 100% of the omitted
taxes.




F-48




(12)
            Other
      taxes payable and other accruals-





An
analysis of other taxes payable and other accruals as follows:





2008
                        
                        
                        2009Other
      accounts payable
                        
                        $
                        99,037
                        
                        
                        $
                        158,535Expenses
      payable
                        
                        
                        76,787
                        
                        
                        
                        94,855Trade
      advances
                        
                        
                        33,422
                        
                        
                        
                        53,693Employee
      statutory profit sharing
                        
                        
                        34,355
                        
                        
                        
                        38,149IMSS
      (1)
                        
                        
                        30,234
                        
                        
                        
                        33,847INFONAVIT
      (3)
                        
                        
                        22,786
                        
                        
                        
                        28,724Payroll
      taxes
                        
                        
                        6,107
                        
                        
                        
                        13,035SAR
      (2)
                        
                        
                        6,721
                        
                        
                        
                        6,020Taxes
      payable
                        
                        
                        5,485
                        
                        
                        
                        5,465Salaries
      payable
                        
                        
                        10,804
                        
                        
                        
                        4,313Interests
      payable
                        
                        
                        2,864
                        
                        
                        
                        1,134Total
                        
                        $
                        328,602
                        
                        
                        $
                        437,770





(1) IMSS
(a Government health care institution): contributions are made by the Company
and by its employees in accordance with applicable regulations. The Company is
required to pay this contribution on a monthly basis.





(2) SAR
(a Government institution for employee retirement savings): Contributions are
made by the Company based on applicable regulations as a percentage of the
employees’ salary. The Company has a duty to pay these contributions to the
government every two months.





(3)
INFONAVIT (a Government institution that provides mortgages to employees): The
Company is required to make contributions to this entity based on approximately
5% of the employees’ salaries, subject to certain limits. The Company has a duty
to pay these contributions every two months.




F-49




(13)
            Foreign
      currency position-





a)
            A
      summary of the Company’s monetary assets and liabilities denominated in
      U.S. dollars (the only foreign currency) translated into reporting
      currency, as of December 31, 2008 and 2009, were as
    follows:





Pesos2008
                  
                  
                  2009Assets:Cash
      and investments
                  
                  $
                  451,957
                  
                  
                  $
                  203,756Other
      accounts
                  
                  
                  3,958
                  
                  
                  
                  3,753Advances
      to suppliers (included in inventories and property, plant and
      equipment)
                  
                  
                  433,333
                  
                  
                  
                  368,099889,248
                  
                  
                  
                  575,608Liabilities:Accounts
      payable
                  
                  
                  (923,866
                  )
                  
                  
                  (892,691
                  )Net
      liability
                  
                  $
                  (34,618
                  )
                  
                  $
                  (317,083
                  )





b)
            As
      of December 31, 2008 and 2009, the exchange rate was $13.81 and $13.08,
      per US dollar, respectively. At March 26, 2010, date of issuance of the
      consolidated financial statements the exchange rate was $12.50 per US
      dollar.





(14)
            Labor
      obligations-





(a)
            Labor
      obligations at December 31, 2008 and
2009





The
Company has a defined benefit pension plan covering the non unionized personnel.
The benefits are based on years of service and the employee’s compensation. The
Company makes annual contributions to the plan equal to the maximum amount that
can be deducted for income tax purposes based on the projected unit credit
method.




F-50


Cash
flows-





Plan
contributions and benefits paid were as follows:





Plan
      Contributions
                        
                        
                        Benefits
      paid2008
                        
                        
                        2009
                        
                        
                        
                        2008
                        *
                        
                        2009Termination
                        
                        $
                        -
                        
                        
                        
                        -
                        
                        
                        
                        21,489
                        
                        
                        
                        -Retirement
                        
                        
                        17,450
                        
                        
                        
                        17,436
                        
                        
                        
                        2,865
                        
                        
                        
                        2,382Total
                        
                        $
                        17,450
                        
                        
                        
                        17,436
                        
                        
                        
                        24,354
                        
                        
                        
                        2,382





* The
amount of payments reported in 2008 consider those charged to the net
liabilities and fund.





The cost,
obligations and other elements of the pension, seniority premium and severance
compensation plans for reasons other than restructuring, mentioned in note 2m,
have been determined based on computations prepared by independent actuaries at
December 31, 2008 and 2009. The components of the net periodic cost for the
years ended December 31, 2008 and 2009, were as follows:





BenefitsTermination
                  
                  
                  Retirement2008
                  
                  
                  2009
                  
                  
                  2008
                  
                  
                  2009Net
      periodic cost:Service
      cost
                  
                  $
                  13,122
                  
                  
                  
                  13,898
                  
                  
                  
                  18,539
                  
                  
                  
                  16,187Interest
      cost
                  
                  
                  5,324
                  
                  
                  
                  6,220
                  
                  
                  
                  19,880
                  
                  
                  
                  20,043Return
      on plan assets
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (18,683
                  )
                  
                  
                  (19,307
                  )Net
      actuarial loss (gain)
                  
                  
                  7,012
                  
                  
                  
                  7,171
                  
                  
                  
                  (380
                  )
                  
                  
                  (1,982
                  )Prior
      service cost:Amortization
      of prior service cost and plan modifications
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  1,885
                  
                  
                  
                  1,885Amortization
      of transition liability
                  
                  
                  4,828
                  
                  
                  
                  4,828
                  
                  
                  
                  5,448
                  
                  
                  
                  5,448Net
      periodic cost
                  
                  $
                  30,286
                  
                  
                  
                  32,117
                  
                  
                  
                  26,689
                  
                  
                  
                  22,274


F-51





The
present value of benefit obligations of the plans al December 31, 2008 and 2009,
is as follows:


BenefitsTermination
                  
                  
                  Retirement2008
                  
                  
                  2009
                  
                  
                  2008
                  
                  
                  2009Accumulated
      Benefit obligation (ABO)
                  
                  $
                  52,131
                  
                  
                  
                  64,328
                  
                  
                  
                  138,077
                  
                  
                  
                  151,796Projected
      benefit obligation (PBO)
                  
                  
                  70,915
                  
                  
                  
                  76,988
                  
                  
                  
                  210,319
                  
                  
                  
                  240,968Plan
      assets at fair value
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (188,815
                  )
                  
                  
                  (223,778
                  )Projected
      benefit obligation over plan assets
                  
                  
                  70,915
                  
                  
                  
                  76,988
                  
                  
                  
                  21,504
                  
                  
                  
                  17,190Unrecognized
      items:Transition
      liability
                  
                  
                  (18,370
                  )
                  
                  
                  (13,542
                  )
                  
                  
                  (21,793
                  )
                  
                  
                  (16,345
                  )Plan
      modifications
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (25,437
                  )
                  
                  
                  (23,552
                  )Actuarial
      gains
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  53,871
                  
                  
                  
                  53,890Projected
      liability, net
                  
                  $
                  52,545
                  
                  
                  
                  63,446
                  
                  
                  
                  28,145
                  
                  
                  
                  31,183





Benefits2008
                    
                    
                    2009Discount
      rate (net of inflation)
                    
                    
                    9.75
                    %
                    
                    
                    9.50
                    %Rate
      of compensation increase*
                    
                    
                    4.50
                    %
                    
                    
                    4.50
                    %Expected
      return on plan assets
                    
                    
                    9.75
                    %
                    
                    
                    9.75
                    %Amortization
      period of unrecognized items (applicable to retirement
      benefit)
                    
                    19.66
      years
                    
                    
                    19.33
      years




* Salary
increases, includingpast practice, trends in the market and compensation
scheme (average salary increase earned if performance is
satisfactory).




F-52




Below is
the determination of benefit obligations of the plan at December 31, 2008 and
2009:





Retirement benefits 2008Seniority
                    premium
                  
                  
                  Pension
                    plan
                  
                  
                  TotalDefined
      benefit obligations:Obligations
      of defined benefits at the beginning of year
                  
                  $
                  32,095
                  
                  
                  
                  199,333
                  
                  
                  
                  231,428Current
      labor cost
                  
                  
                  2,658
                  
                  
                  
                  15,880
                  
                  
                  
                  18,538Interest
      cost
                  
                  
                  2,743
                  
                  
                  
                  17,137
                  
                  
                  
                  19,880Actuarial
      gain and losses
                  
                  
                  (3,187
                  )
                  
                  
                  (51,298
                  )
                  
                  
                  (54,485
                  )Benefits
      paid
                  
                  
                  (1,329
                  )
                  
                  
                  (3,713
                  )
                  
                  
                  (5,042
                  )Defined
      benefit obligations at end of year
                  
                  $
                  32,980
                  
                  
                  
                  177,339
                  
                  
                  
                  210,319





Retirement
      benefits 2009Seniority
                    premium
                  
                  
                  Pension
                    plan
                  
                  
                  TotalDefined
      benefit obligations:Obligation
      of defined benefits at the beginning of year
                  
                  $
                  32,980
                  
                  
                  
                  177,339
                  
                  
                  
                  210,319Current
      labor cost
                  
                  
                  3,034
                  
                  
                  
                  13,153
                  
                  
                  
                  16,187Interest
      cost
                  
                  
                  3,130
                  
                  
                  
                  16,913
                  
                  
                  
                  20,043Actuarial
      gain and losses
                  
                  
                  1,439
                  
                  
                  
                  (2,836
                  )
                  
                  
                  (1,397
                  )Benefits
      paid
                  
                  
                  (1,801
                  )
                  
                  
                  (2,383
                  )
                  
                  
                  (4,184
                  )Defined
      benefit obligations at end of year
                  
                  $
                  38,782
                  
                  
                  
                  202,186
                  
                  
                  
                  240,968





Below is
the determination of plan assets at 31 December 2008 and 2009:





Retirement
      benefits 2008Seniority
                    premium
                  
                  
                  Pension
                    plan
                  
                  
                  TotalPlan
      assets:Plan
      asset at the beginning of year
                  
                  $
                  -
                  
                  
                  
                  182,017
                  
                  
                  
                  182,017Yield
      expected
                  
                  
                  -
                  
                  
                  
                  (8,475
                  )
                  
                  
                  (8,475
                  )Company
      contributions
                  
                  
                  -
                  
                  
                  
                  17,450
                  
                  
                  
                  17,450Benefits
      paid
                  
                  
                  -
                  
                  
                  
                  (2,177
                  )
                  
                  
                  (2,177
                  )Plan
      assets at and of year
                  
                  $
                  -
                  
                  
                  
                  188,815
                  
                  
                  
                  188,815




F-53


Retirement
      benefits 2009Seniority
                      premium
                    
                    
                    Pension
                      plan
                    
                    
                    TotalPlan
      assets:Plan
      asset at the beginning of year
                    
                    $
                    -
                    
                    
                    
                    188,815
                    
                    
                    
                    188,815Yield
      expected
                    
                    
                    
                    
                    
                    
                    19,307
                    
                    
                    
                    19,307Actuarial
      gains and losses
                    
                    
                    -
                    
                    
                    
                    602
                    
                    
                    
                    602Company
      contributions
                    
                    
                    -
                    
                    
                    
                    17,436
                    
                    
                    
                    17,436Benefits
      paid
                    
                    
                    -
                    
                    
                    
                    (2,382
                    )
                    
                    
                    (2,382
                    )Plan
      assets at and of year
                    
                    $
                    -
                    
                    
                    
                    223,778
                    
                    
                    
                    223,778





Following
is a detailed description of the current amounts and the amounts for the
previous four annual periods derived from the defined benefit obligations, the
reasonable value of the plan’s assets and the adjustments on the plan assets and
liabilities, based on experience:





Seniority
      premium*2005
                    
                    
                    2006
                    
                    
                    2007
                    
                    
                    2008
                    
                    
                    2009Defined
      benefit obligations
                    
                    $
                    46,546
                    
                    
                    
                    49,097
                    
                    
                    
                    56,601
                    
                    
                    
                    59,086
                    
                    
                    
                    66,711Plan
      assets
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Plan
      status
                    
                    $
                    46,546
                    
                    
                    
                    49,097
                    
                    
                    
                    56,601
                    
                    
                    
                    59,086
                    
                    
                    
                    66,711





*
            The
      results of seniority premium include retirement and termination, due to
      the fact that this division did not exist in prior years in accordance
      with the Bulletin D-3.





Pension
      plan2005
                    
                    
                    2006
                    
                    
                    2007
                    
                    
                    2008
                    
                    
                    2009Defined
      benefit obligations
                    
                    $
                    152,360
                    
                    
                    
                    189,355
                    
                    
                    
                    199,333
                    
                    
                    
                    177,339
                    
                    
                    
                    202,186Plan
      assets
                    
                    
                    (130,747
                    )
                    
                    
                    (160,421
                    )
                    
                    
                    (182,017
                    )
                    
                    
                    (188,815
                    )
                    
                    
                    (223,778
                    )Plan
      status
                    
                    $
                    21,613
                    
                    
                    
                    28,934
                    
                    
                    
                    17,316
                    
                    
                    
                    (11,476
                    )
                    
                    
                    (21,592
                    )


F-54


The
distribution of assets listed by category at the end of 2007, 2008 and 2009, are
as follows:





2007
                    
                    
                    2008
                    
                    
                    2009Fixed
      rate investment
                    
                    
                    77
                    %
                    
                    
                    77
                    %
                    
                    
                    75
                    %Variable
      rate investment
                    
                    
                    23
                    %
                    
                    
                    23
                    %
                    
                    
                    25
                    %Total
                    
                    
                    100
                    %
                    
                    
                    100
                    %
                    
                    
                    100
                    %





The
distribution of the assets reflects the strategy that was used to optimize the
return rate on the plan and the fund's results, within the framework of an
appropriate risk level.





b)
            Labor
      obligations at December 31, 2007-





An
analysis of the net period cost, reserve amounts and the assumptions considered
in the pension plan, the seniority premium and severance obligations at December
31, 2007 is as follows:





Pension
                    
                    
                    Seniorityplan
                    
                    
                    premium
                    
                    
                    SeveranceNet
      periodic cost:Labor
      cost
                    
                    $
                    15,429
                    
                    
                    
                    4,361
                    
                    
                    
                    9,191Return
      on plan assets
                    
                    
                    (10,090
                    )
                    
                    
                    -
                    
                    
                    
                    -Amortization
      of unrecognized prior past service cost
                    
                    
                    2,239
                    
                    
                    
                    1,215
                    
                    
                    
                    4,250Interest
      cost
                    
                    
                    8,890
                    
                    
                    
                    2,348
                    
                    
                    
                    1,765Net
      periodic cost
                    
                    
                    16,468
                    
                    
                    
                    7,924
                    
                    
                    
                    15,206Loss
      from early extinguishment of obligations
                    
                    $
                    -
                    
                    
                    
                    -
                    
                    
                    
                    2,514


F-55


(15)
            Stockholders’
      Equity-





a)
            As
      of December 31, 2007, 2008 and 2009, the Company’s capital stock is
      represented by 600,000,000 “B” shares with a par value of $1 peso each.
      All shares issued and outstanding have voting
  rights.




b)
            In
      2007, 2008 and 2009, the Company declared and paid cash dividends at
      nominal values of $353,880, $353,880 and $250,045, respectively ($363,708
      in constant pesos as at December 31, 2007), or $0.59, $0.59 and $0.42,
      respectively, per share in nominal
pesos.




c)
            The
      Mexican Corporation Law requires that at least 5% of each year’s net
      income be appropriated to increase the legal reserve until such reserve is
      equal to 20% of capital stock issued and outstanding. The balance of the
      legal reserve at December 31, 2007, 2008 and 2009, included in retained
      earnings, was $ 209,399.




d)
            The
      Company approved a stock repurchase plan in 1998, in conformity with the
      Mexican Securities Trading Act, providing a stock repurchase reserve for
      that purpose of $180,000 ($303,861 expressed in constant Mexican pesos at
      December 31, 2007) through the appropriation of retained earnings in 1998.
      During 2007 and 2008 no shares were repurchased or sold. In 2009, the
      Company repurchased and sold 147 thousand of shares. The repurchase value
      was for $1,880 and the sales value was for $2,959, resulting in a gain of
      $1,079 recorded as additional paid in
capital.




e)
            The
      Company is required to pay taxes on dividends distributed to stockholders
      only to the extent that the payment made exceeds the balance of the “net
      tax profit account” (CUFIN), which is used to control earnings on which
      income tax has already been paid. Income tax paid on dividends refers to a
      tax payable by corporate entities and not by
  individuals.




f)
            The
      Company obtains the majority of its revenues and net profit from Bachoco,
      S.A. de C.V. (“BSACV”). For the years 2007, 2008 and 2009, pretax income
      (loss) of BSACV, represented approximately 90%, 94% and 98%, respectively
      of Bachoco’s consolidated pretax income
(loss).




Dividends
on which BSACV has paid income tax will be credited to the Company’s “CUFIN”
account and, accordingly, no further income tax will be paid when such amounts
are distributed as dividends to the Company’s stockholders.




g)
            From
      1999 through 2001, under Mexican income tax law, corporate taxpayers were
      extended with the option of deferring payment of a portion of their annual
      corporate income tax, so that the tax rate will represent 30%. The
      earnings on which taxpayers opted to defer payment of a portion of
      corporate income tax had to be controlled in the so-called “net reinvested
      tax profit account” (CUFINRE).


F-56


Since the
Company opted for this tax deferral, earnings will be considered to be
distributed first from the CUFINRE and any excess will be paid from the “net tax
profit account” balance (“CUFIN”) so as to pay the 5% deferred tax. The option
to defer a portion of the annual corporate income tax was eliminated effective
January 1, 2002.





h)
            Stockholders
      contribution restated as provided for by the tax law, aggregating
      $2,070,958, may be refunded to stockholders tax-free, to the extent that
      such contribution equals or exceeds stockholders’
  equity.





(16)
            Income
      Tax (IT), Asset Tax (AT), and Flat Rate Business Tax
    (IETU)-





Under the
current tax legislation, companies must pay the greater of their IT or IETU. If
IETU is payable, the payment will be considered final i.e. not subject to
recovery in subsequent years.





a)
            Income
      tax (IT)-





The
Company and each of its subsidiaries file separate income tax returns. Bachoco,
S.A. de C.V. BSACV, the Company’s principal operating subsidiary, is subject to
corporate income tax under the provisions of the simplified regime, which is
applicable to companies engaged exclusively in agriculture, cattle-raising,
fishing, forestry and other activities. The income tax law establishes that such
regime is exclusive for companies that obtain no more than 10% of their total
revenues from the production of processed products; BSACV has complied with this
criteria.





In 2009,
a tax reform was authorized by which, beginning in 2010, the tax rate is
increased from 19% to 21% in the simplified regime and from 28% to 30% in the
general regime. The result of this change is recognized in 2009, as a charge of
$188,754, which is reflected in deferred taxes under the item “Adjustment to
deferred tax assets and liabilities for enacted changes in tax laws and
rates”.





The
simplified regime establishes that the taxable base for income tax is determined
on revenues collected net of deductions paid (cash basis). The tax rate for this
regime was 19% from 2007 to 2009 and 21% for 2010 and thereafter.





b)
            Flat
      Rate Business Tax (IETU)-





On
October 1, 2007, new laws were published and a number of tax laws were revised.
This Law came into effect on January 1, 2008.





The IETU
rate is 17.5% for 2010 and thereafter (16.5% for 2008 and 17% for 2009) based on
cash flows and certain deductions.





IETU
credits are derived mainly from the unamortized negative IETU base, and salaries
taxes for IT purposes and social security contributions, as well as credits
derived from the deduction of certain investments, such as inventories and fixed
assets.


F-57


The IETU
is required to be paid only when it is greater than the IT. To determine the
IETU payable, income tax paid in a given period shall first be subtracted from
the current IT of the same period and the difference shall be the IETU
payable.





If
negative IETU base is determined because deductions exceed income, there will be
no IETU payable. The amount of negative base multiplied by the IETU rate results
in a IETU credit, which may be applied against IT for the same year or, if
applicable, against IETU payable in the next ten years.





c)
            Asset
      tax (AT)-





In 2007,
a new law was enacted that resulted in the derogation of the AT Law beginning on
January 1, 2008. In 2007, the asset tax rate was payable at 1.25% and
liabilities were no longer deductible from the asset tax base. The asset
tax in 2007 amounted to $27,189, this amount was credited against IT
paid.


F-58


At
December 31, 2009, the Company had $4,654 in Asset Tax credits and such
recoverable AT will expire, as follows:





Asset
      tax
                      restated
      atDecember
      31,
                    
                    Year
      ofBase
      year
                    
                    2009
                    
                    expiration2005
                    
                    $
                    1,490
                    
                    20152006
                    
                    
                    3,164
                    
                    2016$
                    4,654





d)
            Income
      tax charged to operations-





For the
years ended December 31, 2007, 2008 and 2009, income tax charged (credited) to
results of operations was as follows:





2007
                  
                  
                  2008
                  
                  
                  2009Current
      income tax
                  
                  $
                  143,029
                  
                  
                  
                  78,559
                  
                  
                  
                  103,482Flat
      rate business tax
                  
                  
                  -
                  
                  
                  
                  108
                  
                  
                  
                  371Deferred
      income tax
                  
                  
                  169,716
                  
                  
                  
                  (352,686
                  )
                  
                  
                  302,505Total
      income tax expense (benefit)
                  
                  $
                  312,745
                  
                  
                  
                  (274,019
                  )
                  
                  
                  406,358


F-59





Income
tax and employee statutory profit sharing expense (benefit) attributable
to  income (loss) before income taxes differed from the amounts
computed by applying the Mexican statutory rates  of 19% IT and 10%
employee statutory profit sharing to  income (loss), as a result of
the items shown below:





2008
                  
                  
                  2009IT
                  
                  
                  ESPS
                  
                  
                  IT
                  
                  
                  ESPSComputed
      “expected” tax expense (benefit)
                  
                  $
                  (220,411
                  )
                  
                  
                  (116,006
                  )
                  
                  
                  230,927
                  
                  
                  
                  121,540Add
      ESPS expense
                  
                  
                  -
                  
                  
                  
                  3,298
                  
                  
                  
                  -
                  
                  
                  
                  3,300Increase
      (decrease) in income taxes resulting from:Effects
      of inflation, net
                  
                  
                  (69,435
                  )
                  
                  
                  -
                  
                  
                  
                  (50,596
                  )
                  
                  
                  -Non-deductible
      expenses
                  
                  
                  3,646
                  
                  
                  
                  251
                  
                  
                  
                  4,538
                  
                  
                  
                  183Adjustment
      to deferred tax assets and liabilities for enacted changes in tax laws and
      rates
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  188,754
                  
                  
                  
                  -Subsidiaries
      not subject to labor obligations
                  
                  
                  -
                  
                  
                  
                  147,174
                  
                  
                  
                  -
                  
                  
                  
                  (92,661
                  )Effect
      of companies outside simplified regime
                  
                  
                  (31,413
                  )
                  
                  
                  -
                  
                  
                  
                  38,163
                  
                  
                  
                  -Change
      in the valuation allowance for deferred tax assets
                  
                  
                  23,402
                  
                  
                  
                  -
                  
                  
                  
                  8,130
                  
                  
                  
                  -Other,
      net
                  
                  
                  20,192
                  
                  
                  
                  (1,736
                  )
                  
                  
                  (13,558
                  )
                  
                  
                  639IT
      and ESPS expense (benefit)
                  
                  $
                  (274,019
                  )
                  
                  
                  32,981
                  
                  
                  
                  406,358
                  
                  
                  
                  33,001





e)
            Deferred
      income tax-





Based on
the financial projections of taxable income, the Company estimated that it will
pay income tax (IT); therefore, deferred tax effects as of December 31, 2008 and
2009 have been recorded reflecting the IT basis.


F-60





The
components of the Company’s deferred income tax assets and liabilities are as
follows:





2008
                  
                  
                  2009Deferred
      tax assets:Accounts
      payable
                  
                  $
                  398,744
                  
                  
                  
                  438,174Labor
      obligations
                  
                  
                  17,598
                  
                  
                  
                  24,350ESPS
      payable
                  
                  
                  9,202
                  
                  
                  
                  11,349Effects
      on derivative financial instruments
                  
                  
                  150,644
                  
                  
                  
                  -Recoverable
      AT
                  
                  
                  4,494
                  
                  
                  
                  4,654Tax
      loss carryforwards
                  
                  
                  165,121
                  
                  
                  
                  89,698Total
      gross deferred tax assets
                  
                  
                  745,803
                  
                  
                  
                  568,225Less
      valuation allowance
                  
                  
                  28,015
                  
                  
                  
                  36,145Net
      deferred tax assets
                  
                  
                  717,788
                  
                  
                  
                  532,080Deferred
      tax liabilities:Inventories
                  
                  
                  836,458
                  
                  
                  
                  838,854Accounts
      receivable
                  
                  
                  186,104
                  
                  
                  
                  170,667Property,
      Plant and equipment, net
                  
                  
                  1,397,637
                  
                  
                  
                  1,525,593Other
      deductions
                  
                  
                  16,665
                  
                  
                  
                  16,261Effects
      on derivative financial instruments
                  
                  
                  -
                  
                  
                  
                  2,286Total
      gross deferred tax liabilities
                  
                  
                  2,436,864
                  
                  
                  
                  2,553,661Net
      deferred tax liability
                  
                  $
                  1,719,076
                  
                  
                  
                  2,021,581





Effective
January 1, 2008, Mexican FRS D-4 “Tax on earnings” supersedes Bulletin D-4 and
Circular 54. Therefore, the Company wrote-off $288,580 against retained
earnings, which relates to the additional deferred tax liability previously
determined as at December 31, 2007 under the stockholders’ equity
method.


F-61





The
valuation allowance for deferred tax assets as of January 1, 2008 and 2009
amounted to $4,613 and $28,015, respectively. The net change in the total
valuation allowance for the years ended December 31, 2008 and 2009, was an
increase of $23,402 and $8,130 respectively. In assessing the realizability of
deferred tax assets, management considers whether it is more likely than not
that some portion or all of the deferred tax assets will not be realized. The
ultimate realization of deferred tax assets is dependent upon the generation of
future taxable income during the periods in which those temporary differences
become deductible. Management considers the scheduled reversal of deferred tax
liabilities, projected future taxable income, and tax planning strategies in
making this assessment.





The
significant items that gave rise to the difference between the effective income
tax rate (current and deferred taxes) and the statutory income tax rate, are as
follows:




2007
                    
                    
                    2008
                    
                    
                    2009%
                    
                    
                    %
                    
                    
                    %Statutory
      income tax rate
                    
                    
                    19.00
                    
                    
                    
                    (19.00
                    )
                    
                    
                    19.00Effect
      of companies outside simplified regime
                    
                    
                    4.13
                    
                    
                    
                    2.33
                    
                    
                    
                    3.14Effect
      of non-taxable items and other
                    
                    
                    (3.40
                    )
                    
                    
                    (6.95
                    )
                    
                    
                    (4.24
                    )Effect
      due to change in IT rate from 19% to 21% starting
      in  2010
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    15.53Effective
      income tax rate
                    
                    
                    19.73
                    
                    
                    
                    (23.62
                    )
                    
                    
                    33.43


F-62





f)
            Tax
      loss carryforwards-





As of
December 31, 2009, the Company has tax loss carryforwards restated in accordance
with the current Mexican Tax Law, which can be used to offset future taxable
income in the next ten years, as follows:





Tax
      loss carryforwards as adjusted by inflation
                            through
      December 31, 2009Year
      of
                          
                          RestatedBase year
                          
                          expiration
                          
                          Amount2007
                          
                          2017
                          
                          $
                          5,9512008
                          
                          2018
                          
                          
                          376,5432009
                          
                          2019
                          
                          
                          17,538$
                          400,032





g)
            Equity
      tax value-





As of
December 31, 2008 and 2009, the tax value of the Company’s equity, which will
not be subject to taxation, comprised the following:





2008
                  
                  
                  2009Restated
      contribution capital (CUCA)
                  
                  $
                  1,999,574
                  
                  
                  
                  2,070,958Net
      tax profit account (CUFIN) and net reinvested tax profit account
      (CUFINRE)
                  
                  
                  2,535,424
                  
                  
                  
                  2,622,015Total
                  
                  $
                  4,534,998
                  
                  
                  
                  4,692,973


F-63


(17)
                Other
      income (expense), net-
 
 As of
December 31, 2007, 2008 and 2009, other income and expense net, were as
follows:
 
 2007
                      
                      
                      2008
                      
                      
                      2009Other
      income:Sales
      of waste animals, raw material, by-products and others
                      
                      $
                      276,094
                      
                      
                      
                      187,911
                      
                      
                      
                      139,555Tax
      incentives
                      
                      
                      73,054
                      
                      
                      
                      44,899
                      
                      
                      
                      5,496Others
                      
                      
                      -
                      
                      
                      
                      8,106
                      
                      
                      
                      -Total
      other income
                      
                      
                      349,148
                      
                      
                      
                      240,916
                      
                      
                      
                      145,051Other
      expense:Cost
      of waste animals, raw material, by- products and other
                      
                      
                      (261,703
                      )
                      
                      
                      (200,960
                      )
                      
                      
                      (162,957
                      )Employee
      statutory profit sharing
                      
                      
                      (4,828
                      )
                      
                      
                      (32,981
                      )
                      
                      
                      (33,001
                      )Others
                      
                      
                      (13,046
                      )
                      
                      
                      (27,933
                      )
                      
                      
                      (14,282
                      )Total
      other expense
                      
                      
                      (279,577
                      )
                      
                      
                      (261,874
                      )
                      
                      
                      (210,240
                      )Total
      other income (expense),  net
                      
                      $
                      69,571
                      
                      
                      
                      (20,958
                      )
                      
                      
                      (65,189
                      )
 
 Employee
statutory profit sharing
 
 The
Company and BSACV have no employees, but each of the subsidiaries of the Company
that has employees is required under Mexican law to pay employees, in addition
to their compensation and benefits, statutory profit sharing in an aggregate
amount equal to 10% of such subsidiary’s taxable income subject to certain
adjustments.
 
 (18)
                Segment
      financial information-
 
 The
segments to be reported are organized by product line. Inter-segment
transactions have been eliminated. Our Poultry segment is comprised of our
chicken and egg products due to their similarity in risks and benefits. The
information included under “Others” corresponds to pigs, balanced animal feed
and other non-significant sub-products. The segment information is as
follows:
 
 As of and for the year ended at December 31, 2007Poultry
                          
                          
                          Others
                          
                          
                          TotalNet
      revenues
                          
                          $
                          15,885,828
                          
                          
                          
                          2,333,819
                          
                          
                          
                          18,219,647Cost
      of sales
                          
                          
                          (12,353,458
                          )
                          
                          
                          (2,124,403
                          )
                          
                          
                          (14,477,861
                          )Gross
      profit
                          
                          
                          3,532,370
                          
                          
                          
                          209,416
                          
                          
                          
                          3,741,786Interest
      income
                          
                          
                          348,167
                          
                          
                          
                          14,849
                          
                          
                          
                          363,016Valuation
      effects of financial instruments
                          
                          
                          (44,137
                          )
                          
                          
                          -
                          
                          
                          
                          (44,137
                          )Interest
      and financial expenses
                          
                          
                          (133,913
                          )
                          
                          
                          (7,665
                          )
                          
                          
                          (141,578
                          )Monetary
      position loss
                          
                          
                          (151,035
                          )
                          
                          
                          (3,779
                          )
                          
                          
                          (154,814
                          )Income
      taxes
                          
                          
                          (280,792
                          )
                          
                          
                          (31,953
                          )
                          
                          
                          (312,745
                          )Net
      controlling interest income
                          
                          
                          1,203,149
                          
                          
                          
                          67,792
                          
                          
                          
                          1,270,941Property,
      plant and equipment, net
                          
                          
                          9,986,129
                          
                          
                          
                          270,110
                          
                          
                          
                          10,256,239Goodwill,
      net
                          
                          
                          212,833
                          
                          
                          
                          88,015
                          
                          
                          
                          300,848Total
      assets
                          
                          
                          18,264,882
                          
                          
                          
                          851,542
                          
                          
                          
                          19,116,424Total
      liabilities
                          
                          
                          3,798,656
                          
                          
                          
                          190,602
                          
                          
                          
                          3,989,258Capital
      expenditures
                          
                          
                          987,322
                          
                          
                          
                          4,415
                          
                          
                          
                          991,737Expenses
      not requiring cash disbursement:Depreciation
      and amortization
                          
                          
                          556,188
                          
                          
                          
                          15,205
                          
                          
                          
                          571,393
  F-64
 
 As of and for the year ended at December 31, 2008Poultry
                          
                          
                          Others
                          
                          
                          TotalNet
      revenues
                          
                          $
                          17,594,994
                          
                          
                          
                          2,530,327
                          
                          
                          
                          20,125,321Cost
      of sales
                          
                          
                          (15,171,145
                          )
                          
                          
                          (2,311,323
                          )
                          
                          
                          (17,482,468
                          )Gross
      profit
                          
                          
                          2,423,849
                          
                          
                          
                          219,004
                          
                          
                          
                          2,642,853Interest
      income
                          
                          
                          168,283
                          
                          
                          
                          5,411
                          
                          
                          
                          173,694Valuation
      effects of  financial instruments
                          
                          
                          (1,666,821
                          )
                          
                          
                          -
                          
                          
                          
                          (1,666,821
                          )Interest
      and financial expenses
                          
                          
                          (16,691
                          )
                          
                          
                          (19,511
                          )
                          
                          
                          (36,202
                          )Income
      taxes
                          
                          
                          292,563
                          
                          
                          
                          (18,544
                          )
                          
                          
                          274,019Net
      controlling interest (loss) income
                          
                          
                          (939,068
                          )
                          
                          
                          60,020
                          
                          
                          
                          (879,048
                          )Property,
      plant and equipment, net
                          
                          
                          10,422,423
                          
                          
                          
                          266,812
                          
                          
                          
                          10,689,235Goodwill,
      net
                          
                          
                          212,833
                          
                          
                          
                          88,015
                          
                          
                          
                          300,848Total
      assets
                          
                          
                          18,386,409
                          
                          
                          
                          1,068,562
                          
                          
                          
                          19,454,971Total
      liabilities
                          
                          
                          5,039,205
                          
                          
                          
                          336,347
                          
                          
                          
                          5,375,552Capital
      expenditures
                          
                          
                          1,140,843
                          
                          
                          
                          15,325
                          
                          
                          
                          1,156,168Expenses
      not requiring cash disbursement:Depreciation
      and amortization
                          
                          
                          594,704
                          
                          
                          
                          21,654
                          
                          
                          
                          616,358
 As
      of and for the year ended at December 31, 2009Poultry
                          
                          
                          Others
                          
                          
                          TotalNet
      revenues
                          
                          $
                          20,567,944
                          
                          
                          
                          2,694,906
                          
                          
                          
                          23,262,850Cost
      of sales
                          
                          
                          (16,900,540
                          )
                          
                          
                          (2,426,219
                          )
                          
                          
                          (19,326,759
                          )Gross
      profit
                          
                          
                          3,667,404
                          
                          
                          
                          268,687
                          
                          
                          
                          3,936,091Interest
      income
                          
                          
                          149,160
                          
                          
                          
                          21,495
                          
                          
                          
                          170,655Valuation
      effects of  financial instruments
                          
                          
                          (174,603
                          )
                          
                          
                          -
                          
                          
                          
                          (174,603
                          )Interest
      and financial expenses
                          
                          
                          (77,052
                          )
                          
                          
                          (14,274
                          )
                          
                          
                          (91,326
                          )Income
      taxes
                          
                          
                          (370,734
                          )
                          
                          
                          (35,624
                          )
                          
                          
                          (406,358
                          )Net
      controlling interest income
                          
                          
                          702,344
                          
                          
                          
                          95,256
                          
                          
                          
                          797,600Property,
      plant and equipment, net
                          
                          
                          10,497,525
                          
                          
                          
                          412,601
                          
                          
                          
                          10,910,126Goodwill
                          
                          
                          212,833
                          
                          
                          
                          88,015
                          
                          
                          
                          300,848Total
      assets
                          
                          
                          18,706,330
                          
                          
                          
                          1,171,549
                          
                          
                          
                          19,877,879Total
      liabilities
                          
                          
                          4,817,238
                          
                          
                          
                          422,178
                          
                          
                          
                          5,239,416Capital
      expenditures
                          
                          
                          857,772
                          
                          
                          
                          130,478
                          
                          
                          
                          988,250Expenses
      not requiring cash disbursement:Depreciation
      and amortization
                          
                          
                          621,324
                          
                          
                          
                          41,306
                          
                          
                          
                          662,630
  F-65
  Revenues
from our poultry segment are analyzed as follows:
 
 As of and for year ended at
                                    December 31, 2007Chicken
                                  
                                  
                                  Eggs
                                  
                                  
                                  TotalNet
      revenues
                                  
                                  $
                                  14,135,242
                                  
                                  
                                  
                                  1,750,586
                                  
                                  
                                  
                                  15,885,828As of and for year ended at
                                    December 31, 2008Chicken
                                  
                                  
                                  Eggs
                                  
                                  
                                  TotalNet
      revenues
                                  
                                  $
                                  15,486,614
                                  
                                  
                                  
                                  2,108,380
                                  
                                  
                                  
                                  17,594,994As of and for year ended at
                                    December 31, 2009Chicken
                                  
                                  
                                  Eggs
                                  
                                  
                                  TotalNet
      revenues
                                  
                                  $
                                  18,211,109
                                  
                                  
                                  
                                  2,356,835
                                  
                                  
                                  
                                  20,567,944
 
 (19)
              Recently
      issued accounting standards-
 
 The CINIF
has issued the following Mexican FRS, applicable for years beginning on or after
January 1, 2010 or 2011, as
indicated.
 
 (a)
              Mexican FRS B-5“Segment
      information”-Mexican FRS B-5 is
      effective as of January 1, 2011. Changes as compared to superseded
      Bulletin B-5 “Segment Information”include the
      following:
 
 ·
              The
      information to be disclosed by operating segment is that regularly used by
      senior management and it does not require the segmentation into primary
      and secondary information, nor is it to be referred to segments identified
      based on products or services (economic segments), geographical areas and
      homogeneous groups. Additionally, disclosure of information on the whole
      entity’s products or services geographical areas and principal clients and
      suppliers is required.
  F-66
  ·
              Mexican
      FRS B-5 does not require that the entity's business areas be subject to
      different risks to qualify as operating
  segments.
 ·
              Mexican
      FRS B-5 allows business areas in pre-operating stage to be catalogued as
      operating segments.
 
 ·
              Mexican
      FRS B-5 requires disclosure by segment and separately, revenue and
      interest expense as well as all other components of comprehensive
      financial results (CFR). In specific cases, the FRS B-5 permits disclosure
      of net interest income.
 
 ·
              Mexican
      FRS B-5 requires disclosure of the liability amounts included in the usual
      operating segment information normally used by senior management in making
      the entity's operating decisions.
 
 Management
is in process to evaluate the effects of this new Mexican FRS.
 
 (b)
              Mexican FRS C-1“Cash and
      cash equivalents”-Mexican FRS C-1 supersedes Bulletin C-1 “Cash” and is effective
      as of January 1, 2010. The principal changes with respect to the former
      standard include the following:
 
 ·
              Mexican
      FRS C-1 requires the presentation of cash and cash equivalents,
      restricted, within the balance sheet caption of "Cash and cash
      equivalents".
 
 ·
              The
      term “demand temporary investments” is replaced by “available demand
      investments”.
 
 ·
              To
      be identified as cash equivalents, the investments should be highly
      liquid, for example those with original maturities of three months or less
      when purchased.
 
 ·
              Mexican
      FRS C-1 includes the definition of the terms: acquisition cost, restricted
      cash and cash equivalents, highly liquid investments, net realizable
      value, nominal value and fair
value.
 
 Management
estimates that the initial effects of this new Mexican FRS will have an effect
in the presentation of the primary investment securities with original
maturities of more than three months when purchased.
  F-67
  (20)
                Reporting
      Requirement for Public Companies
-
 
 On
January 2009, the Mexican Banking and Securities Commission (Comisión Nacional
Bancaria y de Valores,“CNBV”) published certain amendments to the Rules for
Public Companies and other Participants in the Mexican Securities Market
(Disposiciones de Carácter General Aplicables a las Emisoras de Valores y a
otros Participantes del Mercado de Valores”) that require public companies to
report financial information in accordance with the International Financial
Reporting Standards (“IFRS”) issued by the International Accounting Standards
Board (“IASB”), effective as of 2012. Early adoption is permitted. The Company
will adopt IFRS in 2012.
  (21)
                Differences between Mexican
      Financial Reporting Standards and United States Generally Accepted
      Accounting Principles
 
 The
Company’s consolidated financial statements are prepared in accordance with
Mexican Financial Reporting Standards (“MexFRS”), which differ in certain
respects from accounting principles generally accepted in the United States
(“U.S. GAAP”).
 
 The
principal differences between MexFRS and U.S. GAAP, as they relate to us, are
described below with an explanation, where appropriate, of the method used to
determine the adjustments that affect income and stockholders’ equity, or
additional disclosures as applicable.
  F-68
  Effects
of inflation
 
 MexFRS
B-10 “Effects of inflation" (applicable for years beginning on or after January
1, 2008), supersedes Bulletin B-10 of MexFRS "Recognition of the effects of
inflation on the financial information", and its fifth amendment documents as
well as the related circulars and Mexican Interpretation of Financial Reporting
Standards 2. The main consideration established by this MexFRS is the
recognition of the effects of inflation when an entity operates in an
inflationary economic environment (defined as when cumulative inflation over the
immediately preceding 3-year period is equal to or greater than 26%) applicable
as from January 1, 2008. Therefore, the last restatement factor applied to
financial statements for the year ended December 2006 was 1.0376, which
corresponds to the annual rate of inflation from December 31, 2007 to December
31, 2007, based on the Mexican National Consumer Price Index (NCPI) published by
Banco de Mexico.
 
 The
reconciliation to U.S. GAAP does not include the reversal of the adjustments to
the financial statements for the effects related to the inflation required under
MexFRS because the application of MexFRS B-10 represents a comprehensive measure
of the effects of price level changes in the Mexican economy and, as such, it is
considered a more meaningful presentation than historical cost base over
financial reporting for both Mexican and U.S. accounting purposes as permitted
by the “Securities and Exchange Commission” (SEC).
  F-69
  Cash
flow information
 
 MexFRS
B-2 “Statement of cash flows”- Beginning January 1, 2008, MexFRS B-2 supersedes
Bulletin B-12 "Statement of changes in financial position" and paragraph 33 of
Bulletin B-16. The principal considerations established by this MexFRS follow:
(i)Instead of presenting the statement of changes in financial position, the
financial statements shall include the statements of cash flows for all periods
presented comparatively with those of the current year, except for financial
statements of periods prior to January 1, 2008; (ii) Cash inflows and cash
outflows are reported in nominal currency units, thus not including the effects
of inflation; (iii) Two alternative preparation methods (direct and indirect)
are established, without stating preference for either method. Furthermore, cash
flows from operating activities are to be reported first, followed by cash flows
from investing activities and lastly by cash flows from financing activities;
(iv) Captions of principal items are to be reported gross, with certain
exceptions and require disclosure of the composition of items considered cash
equivalents.
 
 For U.S.
GAAP purposes, FASB ASC Topic 230 “Statement of Cash Flows”
(SFAS 95, Statement of Cash
Flows), does not provide guidance with respect to inflation adjusted
financial statements.  As at December 31, 2007, in accordance with
MexFRS, changes in current and long-term debt due to re-expression in constant
pesos, including the effect of exchange differences, was presented in the
statement of changes in financial position within the financing activities
section.  Also, under U.S. GAAP, non-cash investing activities are not
reported in the Statement of Cash Flows, including the capitalization of debt;
whereas under MexFRS, up to December 31, 2007, non-cash transactions affecting
the financial structure of an entity, such as converting debt into equity, must
have been presented separately in the statement of changes in financial
position.  This difference between US GAAP and MexFRS does not have
any effect in the Company’s financial statements due to the absence of non-cash
transactions settled in any of the years presented in such financial
statements.
 
 As of the
date of this report, certain reclassifications were made to the U.S. GAAP cash
flow statement to the 2007 figures to conform to the 2008
presentations.
  F-70
  At
December 31, 2007, 2008 and 2009, investments in primary financial securities
disclosed in note 10b with a maturity of more than three months that amount to
$406,005, $468,003 and $151,841 respectively, and restricted cash amounting to
$0, $223,921 and $8,270, respectively, are being reclassified for U.S. GAAP
purposes from the line-item “cash and investments” to “investment securities”
and “restricted cash”, respectively, within investing activities, since such
investments and restricted cash do not meet the definition of cash equivalents
according to FASB ASC Topic 230 Statement of cash
flows  (SFAS 95 Statement of cash
flows).
 
 Consolidated
statements of cash flows derived from information prepared in accordance with
U.S. GAAP would be as presented in the following page:
  F-71
 
 Cash Flow Information
                  
                  Years ended December 31,2007
                  
                  
                  2008
                  
                  
                  2009OPERATING
      ACTIVITIES:Net
      income (loss) under U.S. GAAP
                  
                  $
                  1,263,168
                  
                  
                  $
                  (876,358
                  )
                  
                  $
                  798,440Adjustments
      to reconcile net income (loss) to net cash provided by (used in) operating
      activities:Depreciation
                  
                  
                  575,306
                  
                  
                  
                  620,041
                  
                  
                  
                  667,354Deferred
      income tax
                  
                  
                  168,405
                  
                  
                  
                  (341,925
                  )
                  
                  
                  291,459Impairment
      on investment securities
                  
                  
                  -
                  
                  
                  
                  13,116
                  
                  
                  
                  -Unrealized
      loss (gain) on derivative financial Instruments
                  
                  
                  -
                  
                  
                  
                  887,174
                  
                  
                  
                  (785,398
                  )Loss
      on net monetary position
                  
                  
                  154,765
                  
                  
                  
                  -
                  
                  
                  
                  -Loss
      on sale of plant and equipment
                  
                  
                  -
                  
                  
                  
                  49,485
                  
                  
                  
                  88,186Labor
      obligations, net period cost
                  
                  
                  44,619
                  
                  
                  
                  48,345
                  
                  
                  
                  46,6822,206,263
                  
                  
                  
                  399,878
                  
                  
                  
                  1,106,723Changes
      in assets and liabilities:Accounts
      receivable
                  
                  $
                  (375,590
                  )
                  
                  $
                  (165,763
                  )
                  
                  $
                  (44,359
                  )Inventories
      and biological assets
                  
                  
                  (1,419,495
                  )
                  
                  
                  (
      768,084
                  )
                  
                  
                  274,541Prepaid
      expenses and other accounts receivable
                  
                  
                  (74,556
                  )
                  
                  
                  (24,703
                  )
                  
                  
                  (934
                  )Accounts
      payable
                  
                  
                  338,084
                  
                  
                  
                  513,919
                  
                  
                  
                  2,058Related
      parties payable
                  
                  
                  14,944
                  
                  
                  
                  23,517
                  
                  
                  
                  17,277Other
      taxes payable and other accruals
                  
                  
                  (35,827
                  )
                  
                  
                  93,694
                  
                  
                  
                  109,168Labor
      obligations, net
                  
                  
                  (37,610
                  )
                  
                  
                  (41,805
                  )
                  
                  
                  (40,452
                  )Derivative
      financial instruments
                  
                  
                  (36,131
                  )
                  
                  
                  (122,126
                  )
                  
                  
                  -Cash
      flows provided by (used in) operating activities to next
    page
                  
                  $
                  580,082
                  
                  
                  $
                  (90,973
                  )
                  
                  $
                  1,424,022
  F-72
 
 Years ended December 31,2007
                      
                      
                      2008
                      
                      
                      2009Cash
      flows provided by (used in)operating
      activities from previous page
                      
                      $
                      580,082
                      
                      
                      $
                      (90,973
                      )
                      
                      $
                      1,424,022INVESTING
      ACTIVITIES:Acquisition
      of property, plant andEquipment
                      
                      $
                      (998,622
                      )
                      
                      $
                      (1,156,168
                      )
                      
                      $
                      (988,250
                      )Proceeds
      from sale of property, plant andEquipment
                      
                      
                      -
                      
                      
                      
                      57,329
                      
                      
                      
                      16,541Restricted
      cash
                      
                      
                      -
                      
                      
                      
                      (223,921
                      )
                      
                      
                      215,651Investment
      securities
                      
                      
                      (12,001
                      )
                      
                      
                      (61,998
                      )
                      
                      
                      316,162Other
      assets
                      
                      
                      (2,216
                      )
                      
                      
                      (1,112
                      )
                      
                      
                      (650
                      )Cash
      flows used in  investing activities
                      
                      $
                      (1,012,839
                      )
                      
                      $
                      (1,385,870
                      )
                      
                      $
                      (440,546
                      )FINANCING
      ACTIVITIES:Proceeds
      from issuance of notes payable to Banks
                      
                      $
                      80,000
                      
                      
                      $
                      535,100
                      
                      
                      $
                      1,044,611Repayment
      of long-term debt and notes payable
                      
                      
                      (12,529
                      )
                      
                      
                      (18,809
                      )
                      
                      
                      (706,668
                      )Cash
      dividends paid
                      
                      
                      (363,708
                      )
                      
                      
                      (353,880
                      )
                      
                      
                      (250,045
                      )Dividends
      paid to non-controlling interest
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (1,035
                      )Additional
      paid-in capital
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      1,079Cash
      flows (used in) provided by financing activities
                      
                      
                      (296,237
                      )
                      
                      
                      162,411
                      
                      
                      
                      87,942Effect
      of inflation accounting
                      
                      
                      172,978
                      
                      
                      
                      -
                      
                      
                      
                      -Net  (decrease)  increase
      in cash and Investments
                      
                      
                      (556,016
                      )
                      
                      
                      (1,314,432
                      )
                      
                      
                      1,071,418Cash
      and cash equivalents at beginning of year
                      
                      
                      3,189,887
                      
                      
                      
                      2,633,871
                      
                      
                      
                      1,319,439Cash
      and cash equivalents at end of year
                      
                      $
                      2,633,871
                      
                      
                      $
                      1,319,439
                      
                      
                      $
                      2,390,857
 
 Supplemental
disclosure of cash flows information:
 Years ended December 31,2007
                  
                  
                  2008
                  
                  
                  2009Interest
      paid during the year
                  
                  $
                  (140,850
                  )
                  
                  $
                  (33,339
                  )
                  
                  $
                  (90,192
                  )Payment
      of valuation effects of financial instruments
                  
                  
                  (44,137
                  )
                  
                  
                  (747,795
                  )
                  
                  
                  177,740Income
      taxes paid during the year
                  
                  $
                  (143,029
                  )
                  
                  $
                  (147,426
                  )
                  
                  $
                  (107,158
                  )
  F-73
  Agriculture:
 
 The
Company follows the requirements of the MexFRS bulletin E-1, Agriculture, which
establishes the rules for recognizing, valuing, presenting and disclosing
biological assets and agricultural products.
 
 This
bulletin establishes that biological assets and the agricultural products (the
latter at the time of their harvesting) are to be valued at their fair value,
net of estimated costs at point of sale. Also, the bulletin establishes that
whenever the fair value cannot be determined in a reliable, verifiable and
objective manner, the assets are to be valued at their production cost, net of
accumulated impairment, if any.
 
 In
accordance with U.S. GAAP, under FASB ASC 905 Topic “Agriculture”, sub-topic 330
Inventory (SOP 85-3 Accounting by Agricultural Producers
and Agricultural Cooperatives) biological assets and agricultural
products are to be valued at cost. Accordingly, the reconciliation between
MexFRS and U.S. GAAP income (loss) for 2007, 2008 and 2009 includes a reversal
of the unrealized gain on valuation of biological assets and agricultural
products at fair value, which shows a decrease of $(10,882), $(16,358) and an
increase of  $7,214, respectively.
 
 Capitalized
interest:
 
 Under
MexFRS D-6 starting January 1, 2007, capitalized interest is comprehensively
measured in order to include: (i) the interest expense, plus (ii) any foreign
exchange fluctuations, and less (iii) the related monetary position result,
which was applicable until December 31, 2007, because of the adoption of the new
MexFRS B-10 that came into effect on January 1, 2008. Although the Company
adopted the policy of capitalizing the comprehensive result of financing on
assets under construction, as a result of MexFRS D-6, during 2007, 2008 and
2009, there were no construction projects identified with interest expense
related to debt, as described in Note 2h.
 
 Under
U.S. GAAP, interest expense incurred during the qualifying construction period
must be considered as an additional cost of qualifying constructed assets to be
capitalized in property, plant and equipment and depreciated over the lives of
the related assets. The amount of the capitalized interest for U.S. GAAP
purposes was determined by applying the weighted average interest rate of
financing. During 2008 and 2009, there were no qualifying construction
projects.
  F-74
  Deferred
income tax and deferred employee statutory profit sharing:
 
 Under
MexFRS, the Company determines deferred income taxes in a manner similar to U.S.
GAAP, using the asset and liability method, by applying the enacted statutory
income tax rate. Deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases, and for operating loss and tax credit carryforwards. The
effect on deferred taxes of a change in tax rates is recognized in results of
operations in the period that includes the enactment date. For MexFRS
presentation purposes, deferred tax assets and liabilities are long-term items,
while under U.S. GAAP, deferred tax assets and liabilities should be classified
as short-term or long-term items depending on the nature of the caption that
gives rise to such deferred tax assets and liabilities.
 
 Under
U.S. GAAP, as of December 31, 2008 and 2009, the long term deferred tax
liability is $1,747,322 and $1,814,053 respectively. Short term deferred tax
liability is $262,010 and $486,738 as of December 31, 2008 and 2009,
respectively.
 
 The
deferred tax adjustment included in the net income (loss) and stockholders’
equity reconciliations includes the effect of deferred taxes on all U.S. GAAP
adjustments reflected in the reconciliation from MexFRS to U.S. GAAP. Under U.S.
GAAP, the Company recognizes a deferred tax liability associated with profits
originated during the simplified regime that have not paid income tax
previously, but would be subject to taxation upon future distributions under the
Mexican tax law. Due to the accounting change under MexFRS in 2008, this concept
generates a reconciling difference to U.S. GAAP. The deferred tax liability
under this concept amounted $284,226 and $274,953 as of December 31, 2008 and
2009, respectively.
  F-75
  The
Company is required to pay Employee Statutory Profit Sharing (ESPS) in
accordance with Mexican labor law. On January 1, 2008, the Company adopted
MexFRS D-3 “Employee Benefits” which supersedes Bulletin D-3 “Labor
Obligations”, the sections applicable to ESPS of Bulletin D-4 and Mexican
Interpretation of Financial Reporting Standards 4. In accordance with this
MexFRS, deferred ESPS is determined under the asset and liability method at the
statutory rate of 10%. This methodology is similar to the approach under FASB
ASC Topic 740 “Income
Taxes” (SFAS 109 Accounting for Income
Taxes).
 
 Under
MexFRS, as described in Note 2r), until December 31, 2007 the deferred ESPS
consequences were determined only on temporary non-recurring differences with a
known turnaround time.
 
 The
Company’s reconciliations between MexFRS and U.S. GAAP do not include deferred
ESPS since there is no amount to be booked.
 
 Under
MexFRS, beginning January 1, 2007, current ESPS is recorded within other
expenses, net. In prior years, such effects were presented as equivalents to
income tax. Under U.S. GAAP, ESPS is classified as selling, general and
administrative expenses.
 
 Severance
indemnities
 
 On
January 1, 2008, the Company adopted MexFRS D-3 “Labor Obligations”. This MexFRS
requires among other things, that employee benefits should be classified in four
main categories; direct short-term and long term, termination and
post-employment benefits. MexFRS D-3 establishes a maximum five-year period for
amortizing unrecognized/unamortized items while actuarial gains or losses may be
recognized as earned or incurred. Unlike termination benefits, post-employment
benefit actuarial gains or losses may be immediately recognized in results of
operations or amortized over the expected service life of the
employees.
  F-76
  Under
U.S. GAAP, FASB ASC Topic 712 “Compensation-Non retirement
Postemployment Benefits”(SFAS 112, Employers' Accounting for
Post-employment Benefits) required that a liability for certain
termination benefits provided under an ongoing benefit arrangement such as
statutorily mandated severance indemnities should be recognized in results of
operations when the employers’ obligations relates to rendered services, the
likelihood of future settlement is probable and the liability can be reasonably
estimated. Therefore, as of December 31, 2007, 2008 and 2009, the amounts of
past service cost amortized under MexFRS was $(2,507), $4,828 and $4,828,
respectively. Such amounts have been reversed for U.S. GAAP since these amounts
had been already recognized in the results of operations under U.S. GAAP. These
amounts were included in the U.S. GAAP reconciliation of income and
equity.
 
 FASB
ASC Topic 715“Compensation-Retirement Benefits” (SFAS 158 Employers’ Accounting for Defined
Benefit Pension and Other Postretirement Plans, an Amendment of
SFAS  No. 87, 88, 106 and 132 R):
 
 Due to
the revision of MexFRS D-3, effective January 1, 2008, companies must now
amortize transition obligations/benefits, over a maximum period of 5 years. This
change has resulted in an increase in net periodic pension cost under MexFRS
which is being reversed for US GAAP purposes.
 
 Effective
December 31, 2006, the Company adopted the recognition and disclosure provisions
of FASB ASC Topic 715 “Compensation-Retirement
Benefits”, (SFAS 158, mentioned above). Statement 158 requires companies
to recognize the funded status of defined benefit pension and other
postretirement plans as a net asset or liability and to recognize changes in
that funded or unfunded status in the year in which the changes occur through
accumulated other comprehensive income to the extent those changes are included
in the net periodic cost. The funded status reported on the balance sheet as of
December 31, 2007, 2008 and 2009 under FASB ASC Topic 715 “Compensation-Retirement
Benefits” was measured as the difference between the fair value of plan
assets and the projected benefit obligation on a plan-by-plan
basis.
  F-77
  The
components of the plan funded status that is reflected in the consolidated
statement of financial position as of December 31, 2008 and 2009 are as
follows:
  2008Pension
                      plan
                    
                    
                    Seniority
                      premium
                    
                    
                    Severance
                    
                    
                    TotalProjected
      benefit obligation
                    
                    $
                    177,339
                    
                    
                    
                    59,085
                    
                    
                    $
                    44,810
                    
                    
                    $
                    281,234Market
      value of plan assets
                    
                    
                    (188,814
                    )
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (188,814
                    )(Funded)
      unfunded defined benefit plan (asset) liability
                    
                    $
                    (11,475
                    )
                    
                    
                    59,085
                    
                    
                    $
                    44,810
                    
                    
                    $
                    92,420
 
 2009Pension
                      plan
                    
                    
                    Seniority
                      premium
                    
                    
                    Severance
                    
                    
                    TotalProjected
      benefit obligation
                    
                    $
                    202,186
                    
                    
                    
                    66,711
                    
                    
                    $
                    49,059
                    
                    
                    $
                    317,956Market
      value of plan assets
                    
                    
                    (223,778
                    )
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (223,778
                    )(Funded)
      unfunded defined benefit plan (asset) liability
                    
                    $
                    (21,592
                    )
                    
                    
                    66,711
                    
                    
                    $
                    49,059
                    
                    
                    $
                    94,178
 
 The asset
allocations of the Company’s pension benefits as of December 31, 2008 and 2009
measurement dates were as follows:
 
 Pension
      benefits (Level 2)2008
                                  
                                  
                                  2009Asset
      category:Debt
      securities
                                  
                                  $
                                  188,814
                                  
                                  
                                  $
                                  223,778Total
                                  
                                  $
                                  188,814
                                  
                                  
                                  $
                                  223,778
 
 Effects
of inflation accounting on U.S. GAAP adjustments:
 
 For the
2007 reconciliation of net income between MexFRS and U.S. GAAP purposes, the
Company recognized the effects of the inflation on adjustments described
throughout this Note. No inflations effects are recognized in the financial
statements since January 1, 2008 because of the new MexFRS B-10 “Efects of
inflation” mentioned above.
 
 Goodwill:
 
 Beginning
January 1, 2005, due to the adoption of MexFRS B-7, goodwill is no longer
amortized, but rather is subject to annual impairment test, and also in interim
periods when impairment indicators are noted.
  F-78
  For U.S.
GAAP purposes, goodwill is reviewed for impairment at least annually in
accordance with the provisions of FASB ASC Topic 350, “Intangibles –
Goodwill and Other” (SFAS  142, Goodwill and Other Intangible Assets). Up
to December 31, 2004, the Company recognized an accumulated effect (increase in
equity) of $58,716 due to the reversal of amortization of goodwill recognized
under MexFRS, restoring the goodwill amount in order to comply with U.S. GAAP.
The goodwill impairment test is a two-step test. Under the first step, the fair
value of the reporting unit is compared with its carrying value (including
goodwill). If the fair value of the reporting unit is less than its carrying
value, an indication of goodwill impairment exists for the reporting unit and
the enterprise must perform step two of the impairment test (measurement). Under
step two, an impairment loss is recognized for any excess of the carrying amount
of the reporting unit’s goodwill over the implied fair value of that goodwill.
The implied fair value of goodwill is determined by allocating the fair value of
the reporting unit in a manner similar to a purchase price allocation and the
residual fair value after this allocation is the implied fair value of the
reporting unit goodwill. Fair value of the reporting unit is determined using a
discounted cash flow analysis. If the fair value of the reporting unit exceeds
its carrying value, step two does not need to be performed.
  The
Company performs its annual impairment review of goodwill at December 31,
and when a triggering event occurs between annual impairment tests. In 2007,
2008 and 2009, no triggering events occurred and the annual impairment test did
not reflect any impairment concern.
  F-79
  Reporting
comprehensive income:
 
 For U.S.
GAAP reconciliation purposes, the Company has adopted the FASB ASC Topic 220
“Comprehensive Income”(SFAS 130, Reporting
Comprehensive Income), which establishes rules for reporting and
disclosure of comprehensive income and its components. Comprehensive income
consists of current year net income (loss) plus (less) the change in
stockholders’ equity resulting from transactions and other events and
circumstances from non-owner sources. For the 2007, 2008 and 2009 fiscal years
the components of comprehensive income are the net income (loss), the changes in
fair value of the effective portion of derivative financial instruments, and the
effect of labor obligation under  FASB ASC Topic 715 “Compensation-Retirement
Benefits” (SFAS 158).
 
 Impairment
of long-lived assets:
 
 Under US
GAAP, an impairment test on long-lived assets requires a two-step process to
determine the amount of any impairment loss to be recognized when events and
circumstances indicated that the carrying amount may not be recoverable. The
first step of this test requires the determination of whether the carrying
amount of the long-lived asset is recoverable through the sum of the
undiscounted cash flows expected to result from the use and eventual disposition
of the asset (asset group). The second step requires the determination of the
amount of impairment loss to be recognized by comparing the carrying amount of
the asset (asset group) to its fair value. Mexican FRS does not require a
two-step impairment evaluation process for long-lived assets but rather, a
direct comparison is made between the recoverable amount (higher of value in use
and fair value less cost to sale) and carrying value. No impairment losses on
long-lived assets have been recorded in 2007, 2008 and 2009.
  F-80
  Valuation and Qualifying accounts:
 
 Account
balances are charged off against the allowance after all means of collection
have been exhausted and the potential for recovery is considered remote.
Write-off’s for 2007, 2008 and 2009 were as follows:
  Balance at
                            beginning
                            of period
                          
                          
                          Charged to
                            cost and
                            expenses
                          
                          
                          Deductions
                          
                          
                          Balance
                            at end of
                            periodAllowance
      fordoubtful accounts
                          2009
                          
                          $
                          28,320
                          
                          
                          $
                          12,647
                          
                          
                          $
                          (11,166)
                          
                          
                          $
                          29,8012008
                          
                          $
                          36,154
                          
                          
                          $
                          7,637
                          
                          
                          $
                          (15,471)
                          
                          
                          $
                          28,3202007
                          
                          $
                          31,852
                          
                          
                          $
                          8,791
                          
                          
                          $
                          (4,489)
                          
                          
                          $
                          36,154
 
 The
Company does not have any off-balance-sheet credit exposure related to its
customers.
  Investment
Securities
 
 All
rights and obligations arising from primary investment securities are recognized
on the balance sheet and the company classifies its investment securities
depending on the purpose for which the securities were acquired: (i)
held-to-maturity, (ii) trading, or (iii) available for sale. Investments in
these instruments are reflected on the line-item “current primary investment
securities” within cash and investments, denominated in Mexican peso and US
dollar.
 
 Trading
securities, except held-to-maturity, are recorded at fair value, where
peso-denominated debt securities are taken from the bank statements which are
based on the information of the local price vendors, while US-denominated debt
securities are based on diversified sources. Held-to-maturity securities are
recorded at amortized cost. Changes in the carrying amounts of trading
securities, including the related costs and yields are included under
comprehensive financial results. Gains or losses arising from changes in the
fair value of available-for-sale securities (less the corresponding yield) non
functional currency denominated and foreign exchange gain or loss, in the case
of equity securities, as well as the related monetary position gain or loss, as
applicable, are reported as a comprehensive income (loss) item within
stockholders’ equity.
 
 Furthermore,
where evidence exists that a financial asset held-to-maturity shall not be
recovered in full, the expected loss (impairment) is recognized in the statement
of operations.
 
 At
December 31, 2007, 2008 and 2009, primary investments securities disclosed in
note 10b with a maturity of more than three months that amount to $406,005,
$468,003 and $151,841, respectively, and restricted cash amounting to $0,
$223,921 and $8,270 respectively are reclassified for U.S. GAAP purposes from
the line-item “cash and investments” to “investment securities” and “restricted
cash”, respectively, within investing activities, since such investments and
restricted cash do not meet the definition of cash equivalents according to FASB
ASC Topic 230 Statement of
Cash Flows(SFAS 95).
  F-81
  Investment
Securities:
 
 Investments
securities described in note 10b includes $468,003 and $151,841 in 2008 and
2009, respectively, with a maturity of more than 90 days which do not meet the
definition of cash equivalents according to SFAS 95, consequently such amounts
are presented within investing activities in the consolidated statement of cash
flows.
 
 Due to
the financial crisis experienced in most economies around the World, several
securities were no longer traded actively in the financial markets, hence the
Company, in accordance with FASB ASC Topic 320 “Investment-Debt and Equity
Securities”(SFAS 115 Accounting for certain investment in
debt and equity securities), transferred Commercial Paper classified as trading
securities to the Held-To-Maturity category starting October 1,
2008.
 
 The
portion of unrealized holding gain or loss at the date of the transfer, which
was already recognized in financial results, was not reversed. At December 31,
2008, an impairment effect of $13,116 was immediately recognized in the
Comprehensive Results within earnings considering that these non guaranteed debt
securities will not recover their initial paid-in value.
  F-82
  Derivative
Financial Instruments and Risk Hedging Activities
 
 The
Company accounts for derivatives and hedging activities in accordance withFASB ASC Topic 815,
“Derivatives and Hedging”  (SFAS 133 Accounting for Derivative
Instruments and Certain Hedging Activities, as amended), which requires
entities to recognize all derivative instruments as either assets or liabilities
in the balance sheet at their respective fair values. For derivatives designated
into qualified fair value hedging relationships, changes in the fair value are
either offset through earnings against the change in fair value of the hedged
item attributable to the risk being hedged or if a qualified cash flow hedging
relationship is designated, the effective portion changes on the fair value of
the derivatives are recognized in accumulated other comprehensive income.
Amounts are reclassified from accumulated other comprehensive income into
earnings when the hedged item is recognized in earnings affecting the same
revenue or expense item where the hedged item impacts.
 
 The
Company enters into hedge transactions denominated in foreign currencies, buying
and selling options. These derivatives are not designated as hedging instruments
for financial reporting purposes, thus the changes in their fair values are
recorded in earnings each period.
 
 Relative
to grain usage, the Company enters into derivative contracts designated
as  hedges of either forecasted transactions (cash flow hedges) or
firm commitments not recognized as assets or liabilities in the balance sheet
(fair value hedges). However, derivatives not designated under a hedging
relationship or those do not qualify under strict hedge accounting criteria, are
accounted for as trading instruments with changes in fair value recorded in
earnings each period.
 
 For all
qualifying hedging relationships, the Company formally documents the hedging
relationship, including its risk-management objective and strategy for
undertaking the hedge, the hedging instrument, the hedged item, the nature of
the risk being hedged, how the hedging instrument’s effectiveness in offsetting
the hedged risk will be assessed prospectively and retrospectively, and a
description of the method of measuring ineffectiveness.
  F-83




For
derivative instruments that are designated and qualify as part of a cash-flow
hedging relationship, the effective portion of the gain or loss on the
derivative is reported as a component of other comprehensive income and
reclassified into earnings in the same period or periods during which the hedged
items affects net income, in the case of grain prices, this is taken within cost
of good sold. Gains and losses on the derivative representing either hedge
ineffectiveness or hedge components excluded from the assessment of
effectiveness are recorded in earnings each period.





For
derivative instruments that are designated and qualify for a hedge relationship
under the fair value hedge accounting model, the Company recognizes the changes
in fair value of the derivative directly in earnings each period, as well as the
changes in fair value attributable to the hedged risk of the hedged item, that
is grain firm commitments (off-balance sheet executory contracts) which latter
become recognized assets (grain inventory).





The
Company discontinues hedge accounting prospectively when it determines that the
derivative is no longer effective in offsetting changes in fair value or in the
cash flows of the hedged risk, or if the derivative expires or is sold,
terminated, or exercised, or if the derivative is no longer designated as a
hedging instrument because it is no longer probable that a forecasted
transaction will occur, or if management determines that designation of the
derivative as a hedging instrument is no longer appropriate.





In all
situations in which hedge accounting is discontinued and the derivative
instrument  remains outstanding, the Company continues to carry the
derivative instrument at its fair value on the balance sheet and recognizes any
subsequent changes in its fair value within current earnings. When it is
probable that a forecasted transaction will not occur, the Company discontinues
hedge accounting and recognizes immediately in gains and losses that were
accumulated in other comprehensive income related to the hedging
relationship.





On
January 1, 2009, the Company adopted the provisions of SFAS 161, Disclosures about Derivative
Instruments and Hedging Activities (included in Topic 815-10: Derivatives and Hedging –
Overall), which amends the disclosure requirements for derivative
instruments and hedging activities. The amended disclosures require entities to
provide information to enable users of the financial statements to understand
how and why an entity uses derivative instruments, how derivative instruments
and related hedged items are accounted for under ASC Topic 815 “Derivatives and Hedging”, and
how derivative instruments and related hedged items affect an entity’s financial
position, financial performance, and cash flows.





The
Company has implemented fair value hedge relationships with firm commitments as
hedged item, using bought options on grain futures. Hedge accounting for these
relationships does require the recognition of either an asset (gain) or a
liability (loss) attributable to the hedged risk (intrinsic changes only) on the
balance sheet against current earnings where the changes in the fair value hedge
derivatives effects are also recognized and do compensate.


F-84


When the
same bought options on corn grain futures are redesigned as to hedge a portion
of corn/sorghum inventories, once these became recognized assets, the changes in
these inventory’s portion fair values (attributable to price decreases only)
adjust the carrying value of such grain inventories against current earnings,
where the changes in fair value of the designated derivatives offset in current
earnings these decreases in the inventories’ fair value, at those times when the
price of corn was lower against predefined strike prices. The cash flow
statement is affected when the derivatives’ cash flow from early exercises or
those that end up with intrinsic value are collected from ASERCA.




During
2009, the Company took long positions in 2,591 put option contracts on corn
futures listed in the CBOT (each conveys 5,000 bushels), which gave the right to
the Company for selling 840,552 metric tons at certain strike price, 3,709 of
these put option contracts reached their maturity during 2009 and provided to
the Company a realized gain at correspondent expirations of $5.5 millions of
dollars , which was recognized in current earnings into cost of goods
sold.




DerivativeFinancial
Instruments and Risk Hedging Activities:





As of
December 31, 2009 and 2008, the Company used commodity derivatives to manage its
exposure to commodity prices, and foreign exchange rate derivatives. The Company
does not enter into derivative instruments for any purpose other than hedging
its exposure to these commodity prices and foreign currency exchange rate
fluctuations, however, derivatives that did not qualify for hedge accounting
were accounted as trading instruments. By the end of 2008, the Company did
establish a Corporate Policy associated to the use of foreign exchange
derivatives, where instruments entered in the amount of up to 30 Million USD are
approved by the Risk Committee, while entering into an amount higher that this
amount does require Board’s approval.


F-85


By using
derivative financial instruments to hedge exposures to changes in commodity
prices and exchange rate fluctuations, the Company exposes itself to credit risk
and market risk. Credit risk is the failure of the counterparty to perform under
the terms of the derivative contract. When the fair value of a derivative
contract is positive, the counterparty owes the Company, which creates credit
risk for the Company. When the fair value of a derivative contract is negative,
the Company owes the counterparty and, therefore, the Company is not exposed to
the counterparty’s credit risk in those circumstances. Positive fair value
derivatives are carried as financial assets on the balance sheet, while negative
fair values are presented as current liabilities on the balance
sheet.





The
Company maintains a commodity-price-risk management strategy that uses
derivative instruments to minimize significant, unanticipated earnings
fluctuations caused by commodity-price volatility. The manufacturing of the
Company’s products requires a significant volume of grain. Price fluctuations in
grain cause market values of grain inventory to differ from its cost and cause
the actual purchase price of the grain to differ from the anticipated
price.





As of
December 31, 2009 and 2008, the Company has periodically entered into grain
futures and options on futures (F&O) contracts traded at the CBOT (Chicago
Board of Trade) through New Edge, a F&O broker on behalf of the Company, to
economically hedge a portion of its anticipated purchases of grains, against the
risk associated with fluctuations in market prices. These F&O contracts were
not designated as hedges; thus, changes in fair value were recognized directly
in earnings each period.





Also, the
Company has entered into options on futures of corn, as to hedge the downward
changes in the prices of grains, corn and sorghum, when the pricing of these are
fixed through firm commitments, based on a Mexican Government sponsored program
named “Agricultura por Contrato” managed by ASERCA (Apoyos y Servicios a la
Comercialización Agropecuaria), a governmental entity ascribed to Mexico’s
Secretary of Farming and Agriculture (SAGARPA, Secretaría de Agricultura,
Ganadería, Desarrollo Rural, Pesca y Alimentación). This program basically
represents a subsidy to the Company, through which, a commodities-related price
hedging program scheme is offered to both farmers and agro-business entities
such as the Company. The ASERCA program has two participating modalities: (i) 0%
of the payment of the option’s premium and 100% of the benefit with a 60%
discount on the amount of the initial premium, or (ii) 50% of the payment of the
option’s premium, and 100% of the benefit in the payment of the premium of the
bought options.


F-86


Also, in
this program ASERCA plays the role of the intermediary between the Company and
the CBOT, but stands as the counterparty. These are put options on futures
listed at the CBOT and are designated as fair value hedging relationships. The
changes in the fair value of these options and the fair value of the hedged item
(firm commitments) are recognized in earnings. Changes in the fair value of the
hedged item attributable to the hedged risk, that were recognized within the
consolidated balance sheet as either an asset or liability from the grain firm
commitment’s valuation or as an adjustment to the carrying value of the
inventory when the edged item is the grain inventory during the hedging
relationship, where the firm commitment’s fair value effects are
subsequently  reclassified as hedge adjustments to cost of goods sold
when the related inventory layer affect earnings as cost of goods
sold.





As of
December 31, 2008 and 2009, the Company had entered into foreign currency
exchange rate derivatives, traded with the following financial institutions as
of December 31, 2008: Banco Nacional de Mexico, Merrill Lynch Capital Services
and Barclays Bank PIC; and as of December 31, 2009: UBS Group and Morgan
Stanley. These structured derivatives were not designated as hedges, hence
changes in the fair value for these instruments were recognized in earnings each
period. Likewise, the Company entered into over-the-counter (OTC) grain
derivatives with Cargill Incorporated and New Edge which were not designated as
hedges and consequently, the changes in their fair values were also recognized
in earnings each period.





As of
December 31, 2008 and 2009, the Company had not established any current hedging
relationship under the cash flow hedge model; hence there is no derivatives
effect in other comprehensive income as of this date.





Fair
Value Measurements and the Fair Value Option of Financial
Instruments:





The fair
value of a financial instrument is the amount that would be received to sell an
asset or paid to transfer a liability in an orderly transaction between market
participants at the measurement date.


F-87


When
feasible, the Company uses quoted market prices to determine fair values. Where
quoted market prices are not available, the fair value is internally derived
based upon valuation methodologies with respect to the amount and timing of
future cash flows and estimated discount rates adjusted for both counterparty
and entity’s own risk. However, considerable judgment is required in
interpreting market data to develop estimates of fair value, so the estimates
including both counterparty and entity’s own risk adjustment are not necessarily
indicative of the amounts that could be realized or would be paid in a current
market exchange, but those are proxy estimates. The effect of using different
market assumptions or estimation methodologies could be material to the
estimated fair values. Fair value information presented herein is based on
information available as of December 31, 2009 and 2008. Fair values vary from
period to period based on changes in a wide range of risk factors, including
interest rates, credit quality, and market perceptions of value and as existing
assets and liabilities run off and new transactions are entered
into.





The
following methods and assumptions were used to estimate the fair value of each
class of financial instruments:





Cash, trade accounts receivable,
other account receivables, other assets (nonderivatives), trade accounts
payable, due to affiliated company, and accrued expenses
(nonderivatives): The carrying amounts, at face value or cost plus
accrued interest, reported in the consolidated balance sheets equal or
approximate fair values, due to the short maturity of these
instruments.





Investment securities: The
Company classifies its investment securities depending on the purpose for which
the securities were acquired, its holding period objective and the Company’s
ability to hold them until maturity as either: (i) trading, (ii)
held-to-maturity or (iii) available for sale. Trading securities are recognized
at fair value, determined by using quoted market prices multiplied by the
quantity held when quoted market prices are available. Held-to-maturity
securities are reported at amortized cost.





Futures and Options on Futures of
Grains: Exchange listed futures and options on futures are valued using
the closing (settlement) price observed at the CBOT on the last business day of
the year.


F-88


Currency exchange rate
options: The fair value of these over-the-counter options is determined
using option pricing models that value the potential for the option to become
“in the money” through changes in currency exchange rate prices during the
remaining term of the derivative. Inputs to that option pricing model reflect
observable market data, including implied volatility determined by reference to
exchange traded options on futures.





Interest rate swaps and cross
currency swaps: The fair value of these derivatives is estimated
calculating the expected future cash flows at present value for both “legs”,
paying and receiving, to define the difference between them as the fair
value.





Note payables to banks, long and
short term debt: The fair value of the Company’s long-term debt is
measured using quoted offered-side prices when quoted market prices are
available. If quoted market prices are not available, the fair value is
determined by discounting the future cash flows of each instrument at rates that
reflect, among other things, market interest rates and the Company’s credit
standing. For long-term debt measurements, where there are not rates currently
observable in publicly traded debt markets of similar terms to companies with
comparable credit, the Company uses market interest rates and adjusts that rate
for all necessary risks, including its own credit risk. In determining an
appropriate spread to reflect its credit standing, the Company considers credit
default swap spreads, bond yields of other long-term debt offered by the
Company, and interest rates currently offered to the Company for similar debt
instruments of comparable maturities by the Company’s bankers as well as other
banks that regularly compete to provide financing to the Company.





In
accordance to FASB ASC Topic 825 “Financial Instrumetns” (SFAS
107 Disclosures about Fair
Value of Financial Instruments), the following table presents both the
carrying and estimated fair value of assets and liabilities considered financial
instruments under this Statement. Others items like short and long term debt not
carried and recognized originally at fair value are also presented in the table
at their fair value. The disclosure excludes leases, pension and benefit
obligations, as well as insurance policy reserve. Also as required, the
disclosures excludes the effect of taxes, any premium or discount that could
result from offering for sale at one time the entire holdings of a particular
instrument, excess fair value associated with deposit with no fixed maturity and
other expenses that would be incurred in a market transaction.





According
to the FASB ASC Topic 825 (FASB 107), certain items are excluded from this
table, such as receivables and payables that arises from the ordinary course of
business.




F-89




2008
                                                            
                                                            
                                                            2009Carrying
                                                              Amount
                                                            
                                                            
                                                            Fair
                                                              value
                                                            
                                                            
                                                            Carrying
                                                              amount
                                                            
                                                            
                                                            Fair valueCash
                                                            
                                                            $
                                                            228,589
                                                            
                                                            
                                                            $
                                                            228,589
                                                            
                                                            
                                                            $
                                                            178,749
                                                            
                                                            
                                                            $
                                                            178,749Investment
      Securities
                                                            
                                                            
                                                            1,510,438
                                                            
                                                            
                                                            
                                                            1,510,438
                                                            
                                                            
                                                            
                                                            2,315,534
                                                            
                                                            
                                                            
                                                            2,315,534Short
      term debt
                                                            
                                                            
                                                            (234,235
                                                            )
                                                            
                                                            
                                                            (279,262
                                                            )
                                                            
                                                            
                                                            (591,865
                                                            )
                                                            
                                                            
                                                            (662,392
                                                            )Long
      term debt
                                                            
                                                            
                                                            (391,657
                                                            )
                                                            
                                                            
                                                            (345,474
                                                            )
                                                            
                                                            
                                                            (371,970
                                                            )
                                                            
                                                            
                                                            (345,128
                                                            )





Fair
Value Hierarchy:





FASB ASC
Topic 820 “Fair Value
Measurements and Disclosures” (FASB157) defines fair value
as the price that would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants at the
measurement date. FASB ASC Topic 820 (FASB 157) also establishes a framework for
measuring fair value and expands disclosures about fair value
measurements.





The
Company adopted FASB ASC Topic 820 (SFAS 157) on January 1, 2008 for fair
value measurements of financial assets and financial liabilities and for fair
value measurements of nonfinancial items that are recognized or disclosed at
fair value in the financial statements on a recurring basis. On January 1,
2009, the Company adopted the provisions of FASB ASC Topic 820 (SFAS 157) for
fair value measurements of nonfinancial assets and nonfinancial liabilities that
are recognized or disclosed at fair value in the financial statements on a
nonrecurring basis. FASB ASC Topic 820 (SFAS 157) establishes a fair value
hierarchy that prioritizes the inputs to valuation techniques used to measure
fair value. The hierarchy gives the highest priority to unadjusted quoted prices
in active markets for identical assets or liabilities (Level 1 measurements) and
the lowest priority to measurements involving significant unobservable inputs
(Level 3 measurements). The three levels of the fair value hierarchy are as
follows:


F-90


·
            Level
      1 inputs are quoted prices (unadjusted) in active markets for identical
      assets or liabilities that the Company has the ability to access at the
      measurement date. Since valuations are based on quoted prices that are
      readily and regularly available in an active market, valuation of these
      products does not entail a significant degree of
  judgement.





·
            Level
      2 inputs are inputs other than quoted prices included within Level 1 that
      are observable for the asset or liability, either directly or indirectly.
      Assets and liabilities utilizing Level 2 inputs include investment
      securities that are not actively traded and derivative
      contracts.




·
            Level
      3 inputs for the asset or liability are unobservable and significant to
      the overall fair value measurement.





The level
in the fair value hierarchy within which a fair measurement in its entirety
falls is based on the lowest level input that is significant to the fair value
measurement in its entirety.





The
hierarchy requires the use of observable market data when available. In the case
of investment securities, the instruments are classified in Level 2. The CBOT
derivatives (counterparties New Edge and ASERCA) are classified in Level 1.
Currency options and OTC grain derivatives (Cargill) are classified in Level
2.





The
following fair value hierarchy table presents assets and liabilities that are
measured at fair value on a recurring basis at December 31, 2008 and 2009
(including only items that are required to be measured at fair value, items for
which the fair value option has be elected, are not presented due that the
Company did not elect the Fair Value Option):


F-91





At December 31, 2008
                              
                              Total asset/
                                liabilities at
                                Fair Value
                              
                              
                              Quoted prices
                                in active
                                markets for
                                identical
                                assets
                                (Level 1)
                              
                              
                              Significant
                                other
                                observable
                                inputs
                                (Level 2)
                              
                              
                              Significant
                                Unobservable
                                Inputs
                                (Level 3)Assets:Primary
      investment Securities
                              
                              $
                              1,510,438
                              
                              
                              
                              -
                              
                              
                              
                              1,510,438
                              
                              
                              
                              -Derivative
      instruments
                              
                              
                              125,261
                              
                              
                              
                              125,261
                              
                              
                              
                              -
                              
                              
                              
                              -Total
                              
                              $
                              1,635,699
                              
                              
                              
                              125,261
                              
                              
                              
                              1,510,438
                              
                              
                              
                              -Liabilities:Derivative
      instruments
                              
                              
                              (886,272
                              )
                              
                              
                              (39,595
                              )
                              
                              
                              (846,677
                              )
                              
                              
                              -Total
                              
                              $
                              (886,272
                              )
                              
                              
                              (39,595
                              )
                              
                              
                              (846,677
                              )
                              
                              
                              -





At December 31, 2009
                      
                      Total asset/
                        liabilities at
                        Fair Value
                      
                      
                      Quoted prices
                        in active
                        markets for
                        identical assets
                        (Level 1)
                      
                      
                      Significant
                        other
                        observable
                        inputs
                        (Level 2)
                      
                      
                      Significant
                        Unobservable
                        Inputs
                        (Level 3)Assets:Trading  securities
                      
                      $
                      2,315,662
                      
                      
                      
                      -
                      
                      
                      
                      2,315,662
                      
                      
                      
                      -Derivative
      instruments
                      
                      
                      11,272
                      
                      
                      
                      8,381
                      
                      
                      
                      2,891
                      
                      
                      
                      -Total
                      
                      $
                      2,326,934
                      
                      
                      
                      8,381
                      
                      
                      
                      2,318,553
                      
                      
                      
                      -





At
December 31, 2009, fair value measurements of held to maturity securities that
are measured at fair value on a nonrecurring basis amounted to
$48,415.


F-92


Fair
Value Option





FASB ASC
Topic 825-10 (Statement 159) provides entities with an option to measure many
financial instruments and certain other items at fair value. Under ASC Topic
825-10 (SFAS 159), unrealized gains and losses on items for which the fair value
option has been elected are reported in earnings at each reporting
period.  This fair value option must be applied on an
instrument-by-instrument basis with changes in fair value reported in earnings.
After initial adoption, the election can be made at the acquisition of an
eligible financial asset, financial liability, or firm commitment or when
certain specified reconsideration events occur. The fair value election may not
be revoked once an election is made. The adoption of Statement 159 did not have
an impact to the Company’s financial position and results of operations, as the
Company did not elect the fair value option for eligible items.





Income
taxes





a)
            Tax
      rate reconciliation:





All
income (loss) before income tax and related income tax expense (benefit) are
from Mexican sources.





Income
tax (IT) expense (benefit) attributable to income (loss) before income taxes
differed from the amounts computed by applying the Mexican statutory rate of 19%
to income (loss), as a result of the items shown below:


F-93





2008
                
                
                2009IT
                
                
                ITComputed
      “expected” tax expense (benefit)
                
                $
                (216,527
                )
                
                
                226,813Increase
      (decrease) in income taxes resulting from:Effects
      of inflation, net
                
                
                (69,435
                )
                
                
                (50,596
                )Non-deductible
      expenses
                
                
                3,646
                
                
                
                4,538Adjustment
      to deferred tax assets and liabilities for enacted changes in tax laws and
      rates
                
                
                -
                
                
                
                192,614Effect
      of companies outside simplified regime
                
                
                (31,413
                )
                
                
                38,163Change  in
      the valuation allowance of deferred tax assets
                
                
                23,402
                
                
                
                8,130Reversal
      of deferred tax liability related to simplified regime
                
                
                (4,354
                )
                
                
                (9,273
                )Other,
      net
                
                
                31,424
                
                
                
                (15,078
                )IT
      expense (benefit)
                
                $
                (263,257
                )
                
                
                395,311


F-94





b)
            Deferred
      income tax-





Based on
the financial projections of taxable income, the Company estimated that it will
pay income tax (IT) in future years; therefore, deferred income tax effects as
of December 31, 2008 and 2009 have been accounted for reflecting the IT
basis.





The tax
effects of temporary differences that give rise to significant portions
of  deferred tax assets and liabilities at December 31, 2008 and 2009,
are presented below:





2008
                    
                    
                    2009Deferred
      tax assets:Accounts
      payable
                    
                    $
                    398,744
                    
                    
                    
                    438,174Labor
      obligations
                    
                    
                    20,883
                    
                    
                    
                    24,224ESPS
      payable
                    
                    
                    9,202
                    
                    
                    
                    11,349Effects
      on derivative financial instruments
                    
                    
                    144,592
                    
                    
                    
                    -Recoverable
      AT
                    
                    
                    4,494
                    
                    
                    
                    4,654Tax
      loss carryforwards
                    
                    
                    165,121
                    
                    
                    
                    89,698Total
      gross deferred tax assets
                    
                    
                    743,036
                    
                    
                    
                    568,099Less
      valuation allowance
                    
                    
                    28,015
                    
                    
                    
                    36,145Net
      deferred tax assets
                    
                    
                    715,021
                    
                    
                    
                    531,954Deferred
      tax liabilities:Inventories
                    
                    
                    815,227
                    
                    
                    
                    816,903Accounts
      receivable
                    
                    
                    186,104
                    
                    
                    
                    170,667Property,
      plant and equipment, net
                    
                    
                    1,422,131
                    
                    
                    
                    1,551,675Other
      deductions
                    
                    
                    16,665
                    
                    
                    
                    16,261Effects
      on derivative financial instruments
                    
                    
                    -
                    
                    
                    
                    2,286Additional
      deferred income tax liability related to simplified regime
                    
                    
                    284,226
                    
                    
                    
                    274,953Total
      deferred tax liabilities
                    
                    
                    2,724,353
                    
                    
                    
                    2,832,745Net
      deferred tax liability
                    
                    $
                    2,009,332
                    
                    
                    
                    2,300,791


F-95





The
valuation allowance for deferred tax assets as of January 1, 2008 and 2009
amounted to $4,613 and $28,015, respectively. The net change in the total
valuation allowance for the years ended December 31, 2008 and 2009, was an
increase of $23,402 and $8,130 respectively. In assessing the realizability of
deferred tax assets, management considers whether it is more likely than not
that some portion or all of the deferred tax assets will not be realized. The
valuation allowance at December 31, 2009 was primarily related to state tax loss
carryforwards and labor obligations that, in the judgment of management, are not
more likely that not to be realized. The ultimate realization of deferred tax
assets is dependent upon the generation of future taxable income during the
periods in which those temporary differences become deductible. Management
considers the scheduled reversal of deferred tax liabilities, projected future
taxable income, and tax planning strategies in making this
assessment.





Taxable
income of the Company for the year ended December 31, 2009 was $1,182,307.
Based upon the level of historical taxable income and projections for future
taxable income over the periods in which the deferred tax assets are deductible,
management believes it is more likely than not that the Company will realize the
benefits of these deductible differences, net of the existing valuation
allowance at December 31, 2009. The amount of the deferred tax asset
considered realizable, however, could be reduced in the near future if estimates
of future taxable income during the carryforward period are
reduced.


F-96


Accounting
for uncertainty in income taxes:





In July
2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation
No. 48 “Accounting for
Uncertainty in Income Taxes, an interpretation of Statement of Financial
Accounting Standards No.109”(included in FASB ASC Topic 740Income taxes – Overall)(FIN
48).On January 1,
2007, the Company adopted FIN 48, which clarifies the accounting for uncertain
tax positions.  This interpretation requires that an entity recognizes
in the consolidated financial statements the effect of income tax positions,
only if that positions are more likely than not of being sustained upon
examination, based on the technical merits of the position. Recognized income
tax positions are measured at the largest amount that is greater than 50% likely
of being realized. Changes in recognition or measurement are reflected in the
period in which the change in judgment occurs.  The adoption of FIN 48
on January 1, 2007 did not have any effect on the Company’s consolidated
financial statements. The Company’s accounting policy is to accrue interest and
penalties related to unrecognized tax benefits, if and when required, as a
component of other income (expense), in the consolidated statements of
operations.





As of
January 1, 2007 and for the years ended December 31, 2007, 2008 and 2009, the
Company did not have any unrecognized tax benefits and thus no interest and
penalties related to unrecognized tax benefits were recorded. In addition, the
Company does not expect that the amount of unrecognized tax benefits will change
significantly within the next 12 months. The income tax returns of the Company
and its Mexican subsidiaries remain subject to examination by the Mexican tax
authorities for the tax years beginning in 2005.


F-97


Recently
Issued Accounting Standards:





The FASB
issued ASU 2009-16, Transfers and Servicing (Topic 860): Accounting for
Transfers of Financial Assets (FASB Statement No. 166, Accounting for Transfers
of Financial Assets—an amendment of FASB Statement No. 140) in December 2009.
ASU 2009-16 removes the concept of a qualifying special-purpose entity (“QSPE”)
from ASC Topic 860, Transfers and Servicing, and the exception from applying ASC
810-10 to QSPEs, thereby requiring transferors of financial assets to evaluate
whether to consolidate transferees that previously were considered QSPEs.
Transferor-imposed constraints on transferees whose sole purpose is to engage in
securitization or asset-backed financing activities are evaluated in the same
manner under the provisions of the ASU as transferor-imposed constraints on
QSPEs were evaluated under the provisions of Topic 860 prior to the effective
date of the ASU when determining whether a transfer of financial assets
qualifies for sale accounting. The ASU also clarifies the Topic 860
sale-accounting criteria pertaining to legal isolation and effective control and
creates more stringent conditions for reporting a transfer of a portion of a
financial asset as a sale. The ASU is effective for periods beginning after
December 15, 2009, and may not be early adopted. The Company expects that the
adoption of ASU 2009-16 will not have a material impact on its consolidated
financial statements.





The FASB
issued ASU 2009-17, Consolidations (Topic 810): Improvements to Financial
Reporting by Enterprises Involved with Variable Interest Entities (FASB
Statement No. 167, Amendments to FASB Interpretation No. 46(R)) in December
2009. ASU 2009-17, which amends the Variable Interest Entity ("VIE") Subsections
of ASC Topic 810-10, Consolidation – Overall, revises the test for determining
the primary beneficiary of a VIE from a primarily quantitative risks and rewards
calculation based on the VIE’s expected losses and expected residual returns to
a primarily qualitative analysis based on identifying the party or related-party
group (if any) with (a) the power to direct the activities that most
significantly impact the VIE’s economic performance and (b) the obligation to
absorb losses of, or the right to receive benefits from, the VIE that could
potentially be significant to the VIE. The ASU requires kick-out rights and
participating rights to be ignored in evaluating whether a variable interest
holder meets the power criterion unless those rights are unilaterally
exercisable by a single party or related party group. The ASU also revises the
criteria for determining whether fees paid by an entity to a decision maker or
another service provider are a variable interest in the entity and revises the
Topic 810 scope characteristic that identifies an entity as a VIE if the
equity-at-risk investors as a group do not have the right to control the entity
through their equity interests to address the impact of kick-out rights and
participating rights on the analysis.





Finally,
the ASU adds a new requirement to reconsider whether an entity is a VIE if the
holders of the equity investment at risk as a group lose the power, through the
rights of those interests, to direct the activities that most significantly
impact the VIE’s economic performance, and requires a company to reassess on an
ongoing basis whether it is deemed to be the primary beneficiary of a VIE. ASU
2009-17 is effective for periods beginning after December 15, 2009 and may not
be early adopted. The Company expects that the adoption of ASU 2009-17 will not
have a material impact on its consolidated financial
statements.


F-98


Business
and credit concentrations:





The
Company’s products are sold to a large number of customers without significant
concentration with any of them; likewise, there is no significant supplier
concentration.


F-99


Summary
of adjustments to reconcile MexFRS and U.S. GAAP:





The
following is a summary of net income (loss) adjusted to take into account
certain material differences between MexFRS and U.S. GAAP:





Years ended December 31,2007
                
                
                2008
                
                
                2009Net
      income (loss) as reported under MexFRS
                
                $
                1,272,226
                
                
                $
                (886,037
                )
                
                $
                809,045Adjustments
      to reconcile net income (loss) to U.S. GAAP:Biological
      assets and agricultural products valuation at fair value
                
                
                (10,882
                )
                
                
                (16,358
                )
                
                
                7,214Interest
      cost capitalized
                
                
                6,885
                
                
                
                -
                
                
                
                -Depreciation
      of capitalized interest
                
                
                (3,913
                )
                
                
                (3,683
                )
                
                
                (4,724
                )Severance
      cost
                
                
                (2,507
                )
                
                
                4,828
                
                
                
                4,828Pensions
      and labor liabilities
                
                
                -
                
                
                
                3,802
                
                
                
                2,882Deferred
      income tax on US GAAP adjustments
                
                
                1,310
                
                
                
                (15,116
                )
                
                
                1,774Effect
      of inflation accounting on U.S. GAAP adjustments
                
                
                49
                
                
                
                -
                
                
                
                -Fair
      value credit valuation adjustment effect
                
                
                -
                
                
                
                31,852
                
                
                
                (31,852
                )Additional
      deferred income tax liability related to simplified regime
                
                
                -
                
                
                
                4,354
                
                
                
                9,273Less:
      non-controlling interest income (loss)
                
                
                (1,285
                )
                
                
                6,989
                
                
                
                (11,445
                )Net
      controlling interest income (loss) under U.S. GAAP
                
                $
                1,261,883
                
                
                $
                (869,369
                )
                
                $
                786,995Other
      comprehensive income, net of tax
                
                
                120,335
                
                
                
                (61,836
                )
                
                
                4,469Comprehensive
      income (loss)
                
                
                1,382,218
                
                
                
                (931,205
                )
                
                
                791,464Weighted
      average number of shares outstanding (thousands)
                
                
                600,000
                
                
                
                600,000
                
                
                
                600,000Net
      income (loss) per basic and diluted share
                
                $
                2.10
                
                
                $
                (1.45
                )
                
                $
                1.31


F-100





Classification
differences:





There are
certain other classification differences between MexFRS and U.S. GAAP, which are
as follows:





-
            Employee
      statutory profit sharing expenses are classified as other expenses under
      MexFRS and as selling, general and administrative expenses under U.S.
      GAAP.





-
            Tax
      incentives are presented as other income under MexFRS and as a reduction
      of selling, general and administrative expenses under U.S.
      GAAP.





The
reconciliation of the controlling interest between MexFRS and U.S. GAAP is as
follows:





Years ended December 312008
                                      
                                      
                                      2009Controlling
      interest' equity as reported under MexFRS
                                      
                                      $
                                      14,039,620
                                      
                                      
                                      $
                                      14,588,254Adjustments
      to reconcile controlling interest’ equity to U.S. GAAP:Biological
      assets and agricultural products valuation at fair value
                                      
                                      
                                      (111,742
                                      )
                                      
                                      
                                      (104,528
                                      )Accumulated
      differences between the financing cost capitalized for MexFRS and U.S.
      GAAP purposes
                                      
                                      
                                      94,481
                                      
                                      
                                      
                                      94,481Accumulated
      depreciation on capitalized interest
                                      
                                      
                                      (24,278
                                      )
                                      
                                      
                                      (29,002
                                      )Severance
      cost
                                      
                                      
                                      (18,370
                                      )
                                      
                                      
                                      (13,542
                                      )Pensions
      and labor liabilities
                                      
                                      
                                      6,641
                                      
                                      
                                      
                                      13,992Reversal
      of accumulated amortization of goodwill
                                      
                                      
                                      58,716
                                      
                                      
                                      
                                      58,716Deferred
      income taxes on U.S. GAAP adjustments
                                      
                                      
                                      ( 6,030
                                      )
                                      
                                      
                                      (4,256
                                      )Additional
      deferred income tax liability related to simplified regime
                                      
                                      
                                      ( 284,226
                                      )
                                      
                                      
                                      (274,953
                                      )Fair
      value credit valuation adjustment effect
                                      
                                      
                                      31,852
                                      
                                      
                                      
                                      -Controlling
      interest’ equity as reported under U.S. GAAP
                                      
                                      $
                                      13,786,664
                                      
                                      
                                      $
                                      14,329,162





The
effects of the above adjustments do not have any impact on non-controlling
interest.


F-101


The
consolidated statements of stockholders’ equity in accordance with U.S. GAAP is
as follows:




Capital
                                        stock
                                      
                                      
                                      Additional
                                        Paidin-
                                        capital
                                      
                                      
                                      Reservefor
                                        repurchase
                                        of
                                        shares
                                      
                                      
                                      Retained
                                        Earnings
                                      
                                      
                                      Accumulated
                                        Other
                                        comprehensive
                                        income
                                      
                                      
                                      Comprehensive
                                        income
                                      
                                      
                                      Total
                                        controlling
                                        interest’
                                        equity
                                      
                                      
                                      Non–
                                        controlling
                                        interest
                                      
                                      
                                      Total
                                        stockholders’
                                        equityBalance
      at December 31, 2006
                                      
                                      $
                                      2,294,927
                                      
                                      
                                      $
                                      743,674
                                      
                                      
                                      $
                                      159,455
                                      
                                      
                                      $
                                      14,646,098
                                      
                                      
                                      $
                                      (3,790,915
                                      )
                                      
                                      $
                                      
                                      
                                      
                                      $
                                      14,053,239
                                      
                                      
                                      $
                                      45,426
                                      
                                      
                                      $
                                      14,098,665Cash
      dividends paid
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      (363,708
                                      )
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      (363,708
                                      )
                                      
                                      
                                      -
                                      
                                      
                                      
                                      (363,708
                                      )Comprehensive
      income:Net
      income for the year
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      1,261,883
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      1,261,883
                                      
                                      
                                      
                                      1,261,883
                                      
                                      
                                      
                                      1,362
                                      
                                      
                                      
                                      1,263,168Components
      of other comprehensive income:Deficit
      from restatement of stockholders’ equity
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      18,661
                                      
                                      
                                      
                                      18,661
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      18,661Derivative
      financial instruments
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      98,552
                                      
                                      
                                      
                                      98,552
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      98,552Other
      comprehensive income SFAS 158 effect
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      3,122
                                      
                                      
                                      
                                      3,122
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      3,122Other
      comprehensive income, net of taxes
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      120,335
                                      
                                      
                                      
                                      120,335
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      -Comprehensive
      income
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      $
                                      1,382,218Balance
      at December 31, 2007
                                      
                                      $
                                      2,294,927
                                      
                                      
                                      $
                                      743,674
                                      
                                      
                                      $
                                      159,455
                                      
                                      
                                      $
                                      15,544,273
                                      
                                      
                                      $
                                      (3,670,580
                                      )
                                      
                                      
                                      
                                      
                                      
                                      $
                                      15,071,749
                                      
                                      
                                      $
                                      46,788
                                      
                                      
                                      $
                                      15,118,537Cash
      dividends paid
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      (353,880
                                      )
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      (353,880
                                      )
                                      
                                      
                                      -
                                      
                                      
                                      
                                      (353,880
                                      )Comprehensive
      income (loss):Net
      loss for the year
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      (869,369
                                      )
                                      
                                      
                                      -
                                      
                                      
                                      
                                      (869,369
                                      )
                                      
                                      
                                      (869,369
                                      )
                                      
                                      
                                      (6,989
                                      )
                                      
                                      
                                      (876,358
                                      )Components
      of other comprehensive income:Deficit
      from holding of non monetary assets
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      (3,735,254
                                      )
                                      
                                      
                                      3,735,254
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -Derivative
      financial instruments (net of deferred income tax effect of
      $23,204)
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      (98,922
                                      )
                                      
                                      
                                      (98,922
                                      )
                                      
                                      
                                      -
                                      
                                      
                                      
                                      (98,922
                                      )Other
      comprehensive income SFAS 158 effect
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      37,086
                                      
                                      
                                      
                                      37,086
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      37,086Other
      comprehensive loss, net of taxes
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      (61,836
                                      )
                                      
                                      
                                      (61,836
                                      )
                                      
                                      
                                      
                                      
                                      
                                      
                                      -Comprehensive
      loss
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      $
                                      (931,205
                                      )Balance
      at December 31, 2008
                                      
                                      $
                                      2,294,927
                                      
                                      
                                      $
                                      743,674
                                      
                                      
                                      $
                                      159,455
                                      
                                      
                                      $
                                      10,585,770
                                      
                                      
                                      $
                                      2,838
                                      
                                      
                                      
                                      
                                      
                                      
                                      $
                                      13,786,664
                                      
                                      
                                      $
                                      39,799
                                      
                                      
                                      $
                                      13,826,463Cash
      dividends paid
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      (250,045
                                      )
                                      
                                      
                                      -
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      (250,045
                                      )
                                      
                                      
                                      -
                                      
                                      
                                      
                                      (250,045
                                      )Cash
      dividends paid to non-controlling interest
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      (1,035
                                      )
                                      
                                      
                                      (1,035
                                      )Comprehensive
      income:Net
      income for the year
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      786,995
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      786,995
                                      
                                      
                                      
                                      786,995
                                      
                                      
                                      
                                      11,445
                                      
                                      
                                      
                                      798,440Components
      of other comprehensive income:Other
      comprehensive income SFAS 158 effect
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      4,469Other
      comprehensive loss, net of taxes
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      4,469
                                      
                                      
                                      
                                      4,469
                                      
                                      
                                      
                                      4,469
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      4,469Gain
      on sale of repurchased shares
                                      
                                      
                                      -
                                      
                                      
                                      
                                      1,079
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      1,079
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      1,079Comprehensive
      income
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      $
                                      791,464Balance
      at December 31, 2009
                                      
                                      $
                                      2,294,927
                                      
                                      
                                      $
                                      744,753
                                      
                                      
                                      $
                                      159,455
                                      
                                      
                                      $
                                      11,122,720
                                      
                                      
                                      $
                                      7,307
                                      
                                      
                                      
                                      
                                      
                                      
                                      $
                                      14,329,162
                                      
                                      
                                      $
                                      50,209
                                      
                                      
                                      $
                                      14,379,371


F-102





INDUSTRIAS
BACHOCO, S.A.B. DE C.V. AND SUBSIDIARIES





Notes
to the Consolidated Financial Statements





Years
ended December 31, 2007, 2008 and 2009





(Thousands
of pesos,


except
per share amounts)


F-103