1. Overview of Business Operation and Policy

1.  Business Objectives

Khon Kaen Sugar Industry Public Company Limited has the policy to
operate its business ethically and responsibly towards its stakeholders,
society, and the environment. It place emphasis on conducting
transparent operations, respecting human rights standards, and
safeguarding the interests of all stakeholders through the following
vision, mission, and quality policy:

Vision

To become the leader in the sugar and related renewable energy
industries and to develop a strong business with a sustainable future

Mission

1.  Create income for farmers through efficient processes and high
    quality agricultural yields.

2.  Continuous improvement on technology and R&D to efficiently increase
    agricultural yields.

3.  Create an environment that mutually benefits our partners of
    success.

4.  Develop down-stream businesses to maximize the usage of raw
    materials, byproducts, and other resources.

Quality Policy

To produce high quality sugar, achieve efficient operation, make on-time
delivery, ensure customer’s satisfaction and consumer’s safety.

Long term goal of the company is to be one of the leaders in sugar,
by-product, and value added productions which can be shown in company’s
sugar policy: “production of quality sugar with high efficiency, prompt
delivery, winning customers’ trust, consumption safety”. This policy has
encouraged company’s 5 sugar factories to be widely accepted as one of
the highest efficiency and highest quality sugar production groups in
Thailand. In addition, with the goal of being one of leading companies
in by-product and value added production and with the vision on the
potential growth in related – sugar businesses, such as ethanol
business, power business, and organic fertilizer business, the company
has made continuous investments in these sectors which to date has been
successful and highly satisfactory.

The company’s short term goal is to be one of the leaders in the
industry who excels in cost management and productivity. The goal can be
achieved by applying modern technology to the corporate production and
management systems. Furthermore, the company is aware that its primary
risk is the amount of cane it is able to procure for crushing. The sugar
factories and other integrated businesses cannot sustain without
adequate cane crushed. The company, hence, aims to reduce the farmers’
cane cultivation cost as well as to improve their productivity yields
and efficiency. Its objective is to help the farmers sustain their
living and receive higher return on their investment as well as to
remain productive suppliers to our businesses.

1.  Important Changes and Developments During the Past 3 Years

The company has received permission to relocate and expand two of its
sugar factory as well as a permission to build two further ethanol
production facilities. In 2008, the company decided to invest in the
BoPlay Renewable Energy Project which has 4 sub-projects as follows: 1)
Relocation and production capacity expansion (up to 36,000 tons/day) of
Tamaka Sugar Industry Co., Ltd from Karnjanaburi to BoPloy, Khon Kaen;
2) Build new ethanol production facility that can produce up to 200,000
liters/day; 3) Build electricity power plant with capacity of 90 MW; 4)
Build new biofertilizer plant. The BoPloy Renewable Energy Project has
started generating revenue for the company since 2011.

In 2011, the company decided to start the Loei Project that consisted of
building 1 sugar factory with capacity to crush 16,000 tons of cane/day
and building 1 electricity power plant that can generate 40 MW of
electricity. The sugar factory started its test runs during the
production season 2012/2013.

In 2012, after performing feasibility study and other required
assessments, the company decided to make further investment to expand
its electricity power plant and sugar factory in Nampong district of
Khon Kaen province. Electricity power plant production capacity will be
65 MW, up from 30 MW and sugar crushing capacity will increased by 8,000
tons of cane sugar/ day, totaling to 35,000 tons of cane sugar/ day. The
company expects this expansion project to be completed by the end of
2014.

2.  Company Overview

Khon Kaen Sugar Industry Public Company and its subsidiaries, under KSL,
are Thailand 4^(th) largest sugar producer group. The company has 5
sugar factories in the group, located in three different regions, as
follows:

1.  Northeastern Region: Khon Kaen Sugar Industry Public Company
    Limited; Nampong branch in Khon Kaen province and Wansapung branch
    in Loei province.

2.  Western Region: New Krung Thai Sugar Factory Co.,Ltd and Tamaka
    Sugar Industry Co.,Ltd in Kanchanaburi province

3.  Eastern Region: New Kwang Soon Lee Sugar Factory Co.,Ltd in Cholburi
    province

The core products which the company produces are sugar which can be
categorized to be 4 types: (a) raw sugar (b) high pol sugar (c) white
sugar and (d) refined sugar. The company also has other products related
to sugar production process, such as molasses, bagasses and filter cake.
According to these kinds of products, the company has a plan to invest
in value added projects, as followings: (shown on Figure 1.1)

(1) Ethanol plant: Ethanol is mixed with gasoline, and the mixture is
    used as fuel for vehicles. Raw materials used in the Group’s ethanol
    production include molasses and sugarcane juice

(2) The biogas plant uses waste water from ethanol production process as
    a raw material. Biogas produced through fermentation of the raw
    material is used as a supplementary fuel for the corporate power
    plant.

(3) The organic fertilizer plant uses waste from the sugar production
    process (filter cake) and wastewater from biogas and ethanol
    production as raw materials.

(4) The power plant uses waste from the sugar production process
    (bagasse) and biogas from the biogas plant as fuel sources for
    producing electricity and steam sold to plants in the Group and the
    EGAT.

Figure 1.1 : The Relationship between KSL’s Existing Sugar Production
and KSL’s Value Added Project

[]

As of October 31, 2014, Khon Kaen Sugar Industry Public Company Limited
and its subsidiaries have the investment in subsidiaries and
affliliates, as followings:

+---------------------------+--------+----------+---------------------+
| Business Unit/Company     | Paid - | Pr       | Nature of Main      |
| Name                      | Up     | oportion | Business            |
|                           | C      |          |                     |
|                           | apital | Of       |                     |
|                           |        |          |                     |
|                           | (THB   | In       |                     |
|                           | Mi     | vestment |                     |
|                           | llion) |          |                     |
+---------------------------+--------+----------+---------------------+
| Sugar Business            |        |          |                     |
+---------------------------+--------+----------+---------------------+
| Tamaka Sugar Industry     | 600.00 | 90.21%   | Produce and         |
| Co.,Ltd.                  |        |          | distribute sugar    |
+---------------------------+--------+----------+---------------------+
| New Krung Thai Sugar      | 1      | 95.78%   | Produce and         |
| Factory Co.,Ltd.          | 000.00 |          | distribute sugar    |
+---------------------------+--------+----------+---------------------+
| New Kwang Soon Lee Sugar  | 500.00 | 98.61%   | Produce and         |
| Factory Co.,Ltd           |        |          | distribute sugar    |
+---------------------------+--------+----------+---------------------+
| Savannakhet Sugar         | 684.76 | 98.49%   | Sugar cane          |
| Corporation               |        |          | Plantation and      |
|                           |        |          | Sugar Factory in    |
|                           |        |          | Laos                |
+---------------------------+--------+----------+---------------------+
| Koh Kong Plantation       | 936.98 | 80.00%   | Sugar cane          |
| Co.,Ltd*                  |        |          | Plantation in       |
|                           |        |          | Cambodia            |
+---------------------------+--------+----------+---------------------+
| Koh Kong Sugar Industry   | 1      | 80.00%   | Sugar Factory in    |
| Co.,Ltd                   | 167.66 |          | Cambodia            |
+---------------------------+--------+----------+---------------------+
| Supporting Business       |        |          |                     |
+---------------------------+--------+----------+---------------------+
| Thai Sugar Terminal       | 145.20 | 23.82%   | Terminal,           |
| Public Company Limited**  |        |          | Warehouses, Real    |
|                           |        |          | estate, produce and |
|                           |        |          | distribute wheat    |
|                           |        |          | flour and palm oil  |
+---------------------------+--------+----------+---------------------+
| KSL Export Trading        | 20.00  | 79.55%   | Sugar and Related   |
| Co.,Ltd.                  |        |          | products Exporting  |
|                           |        |          | Activities          |
+---------------------------+--------+----------+---------------------+
| KSL Agro and Trading Co., | 300.00 | 100.00%  | Trading domestic    |
| Ltd.                      |        |          | sugar and operating |
|                           |        |          | agricultural        |
|                           |        |          | businesses          |
+---------------------------+--------+----------+---------------------+
| Wynn In Trading Co., Ltd  | 4      | 100.00%  | International       |
|                           | 87.497 |          | trading and         |
|                           |        |          | consulting          |
+---------------------------+--------+----------+---------------------+
| Energy and Chemical       |        |          |                     |
| Business                  |        |          |                     |
+---------------------------+--------+----------+---------------------+
| Khon Kaen Alcohol Co.,Ltd | 610.00 | 100.00%  | Producing and       |
|                           |        |          | distributing        |
|                           |        |          | ethanol or          |
|                           |        |          | agri-fuel and       |
|                           |        |          | bio-fertilizer or   |
|                           |        |          | organic fertilizer  |
+---------------------------+--------+----------+---------------------+
| Khon Kaen Sugar Power     | 800.00 | 100.00%  | Power Plant (SPP)   |
| Plant Co.,Ltd             |        |          |                     |
+---------------------------+--------+----------+---------------------+
| KSL Material Supply       | 10.00  | 100.00%  | Raw Material        |
| Co.,Ltd.***               |        |          | Sourcing            |
+---------------------------+--------+----------+---------------------+
| Other Business            |        |          |                     |
+---------------------------+--------+----------+---------------------+
| KSL Real Estate Co.,Ltd   | 840.00 | 91.02%   | Real Estate         |
|                           |        |          | Development and     |
|                           |        |          | Training Center     |
+---------------------------+--------+----------+---------------------+
| Champion Fermentation     | 200.00 | 32.50%   | Joint Venture with  |
| Co.,Ltd                   |        |          | the business        |
|                           |        |          | partner to invest   |
|                           |        |          | 60% in Chantaburi   |
|                           |        |          | Starch Co.,Ltd. -   |
|                           |        |          | Starch Factory by   |
|                           |        |          | using cassava as    |
|                           |        |          | raw material        |
+---------------------------+--------+----------+---------------------+

Note:

Proportion of investment shown above includes both direct and indirect
shareholdings

* Previously named KSL Chemical Co., Ltd

** Indirect shareholding through Wynn In Trading Co., Ltd.

*** Thai Sugar Terminal Public Company Limited, a KSL subsidiary listed
in the Stock Exchange of Thailand as TSTE, has 5 subsidiaries:

TSG Assets Company Limited operates real estate rentals. TSTE holds
23.11% shares.

TS Oil Industry Company Limited (formerly known as TSG Property Company
Limited) trades, leases, develop real estate, and operate a palm oil
refinery plant. TSTE holds 28.48% shares.

TS Flour Mill Company Public Company Limited rents out real estate and
manufactures wheat flour. TSTE holds 16.59% shares and itself was listed
in the Stock Exchange of Thailand as TMILL.

TS Warehouse Company Limited stores and transfers goods. TSTE holds
19.30% shares.

TS Transport and Logistics Company Limited provides transport and
security services. It also manufactures plastic sacks. TSTE holds 30.58%
shares directly and indirectly.

For further details, refer to Listed Company Information on Thai Sugar
Terminal Public Company Limited (TSTE) and TS Flour Mill Company Public
Company Limited (TMILL).

tion of KSL Group on October 31, 2014 shown on the following chart:

[]

The details of Khon Kaen Su gar Industry Public Company Limited,
subsidiaries and affiliates are as follows:

Sugar Business

Khon Kaen Sugar Industry Public Company Limited

The nature of business is to produce and distribute sugar and other
by-products. The first branch is located in Nampong district, Khon Kaen
province with the maximum crushing capacity of 27,000 ton cane per day
(under-construction to enhance maximum crushing capacity to 35,000 ton
cane per day) and the second branch is located in Wangsapung district,
Loei province with the maximum crushing capacity of 16,000 ton cane per
day. Both of them have the capability to produce raw sugar, high pol
sugar, white sugar and refined sugar. The company’ headquarter is
located at KSL Tower, Sriayudhya Road, Rajathevi, Bangkok.

Tamaka Sugar Industry Co.,Ltd

The nature of business is to produce and distribute sugar and other
by-products. The factory is located in Tamaka district, Kanchanaburi
province with the maximum crushing capacity of 35,000 ton cane per day
and the capability to produce raw sugar, white sugar and refined sugar.

New Krung Thai Sugar Factory Co.,Ltd

The company produces and distributes sugar and other by-products. The
factory, which was originally located in Tamaka district, Kanchanaburi
province, was relocated to Bo Ploy district, Kanchanaburi province. The
production capacity was expanded to the maximum crushing capacity of
36,000 tons of cane per day. Construction has already completed, the
factory is capable of producing raw sugar, white sugar, and refined
sugar.

New Kwang Soon Lee Sugar Factory Co.,Ltd

The enterprise produces and distributes sugar and other by-products. The
factory located in Panutnikom district, Chonburi province, has the
maximum crushing capacity of 3,000 tons of cane per day. The cane
crushing capacity decreased due to the fact that some of the machines
had been moved to Laos and Cambodia. The factory is capable of producing
raw sugar, high pol sugar, white sugar, and refined sugar.

Savannakhet Sugar Corporation

The company received sugarcane plantation concession that covers
approximately 10,000 hectares (62,500 rai) from the Lao government.
Sugarcane cultivation is undertaken by the company itself. The sugar
factory in Savannakhet has the maximum crushing capacity of 3,000 tons
of cane per day. Its output includes raw sugar and other byproducts.

Koh Kong Plantation and Koh Kong Sugar Industry

The company received sugarcane plantation concession that covers
approximately 20,000 hectares (125,000 rai) from the Cambodian
government. Sugarcane cultivation is undertaken by the company itself.
The sugar factory in Koh Kong has the maximum crushing capacity of 6,000
tons of cane per day. Its output includes raw sugar and other
byproducts.

Energy and Chemical Business

Khon Kaen Alcohol Co.,Ltd

Established in early 2004, the company runs the business of producing
alcohol (Ethanol) from molasses, sugarcane and others with the licenses
of 150,000 liters per day granted by Ministry of Industry for the
purpose of producing alcohol for blending with gasoline, so-called
“gasohol”, using as fuel in vehicles. In addition, the company produces
fertilizers as a downstream project to the alcohol plant, which uses
waste water generated from alcohol plant and filter cake, waste products
from sugar processing. The company has a second branch of ethanol
production facility as part of the Boploy Renewable Energy Project. It
has already operated commercially in 2012 which increase the production
capacity from 150,000 liters per day to 350,000 liters per day.

Khon Kaen Sugar Power Plant Co.,Ltd.

Established late in 2003, the company operates renewable power plants
that can produce electricity and steam by using bagasses as raw
material. The power produced at the plants cam supply the factories
within the group and any additional power generated are then sold to
EGAT (Grid). Currently, the company operates 3 power plants all locating
nearby its sugar factories. The first branch is closed to Khon Kaen
Sugar Factory in Nampong district of Khon Kaen province. The second
branch is closed to New Krung Thai Factory in Karnjanaburi province
(part of the Boploy Renewable Energy Project). The third branch is
located next to Khon Kaen Sugar Factory in Wangsapong district of Loei
province (The Loei Project). Currently, the total capacity of all three
branches can produce up to 160 MW of electricity. The total capacity of
the three branches will reach 195 MW of electricity once the plant
expansion project in Loei is completed.

KSL Material Supply Co.,Ltd 

Previously named KSL Chemical Co.Ltd, KSL Material Supply Co.Ltd now
operate business relating to sourcing and selling raw materials and
materials related to agriculture such as biofertilizers and related
services.

Supporting Business

KSL Export Trading Co.,Ltd

Established in 1992, the company performs as a licensed exporting
company, according to cane and sugar act 1984, which provides services
of exporting activities to the sugar companies in KSL Group and also
other sugar factories.

Thai Sugar Terminal Public Company Limited (TSTE)

The company is a listed company in the Stock Exchange of Thailand. Its
businesses involve warehouse leasing, loading and discharging sea
freight, port operations, and freight forwarding. The terminal and
warehouse are located in Prapadang, Samutprakarn, on the Chopraya River
bank. Customers are primarily sugar companies in the KSL Group, other
sugar factories owned by strategic partners, and general customers. In
addition, Thai Sugar Terminal Public Company Limited (TSTE) is the
mother company of 5 subsidiaries, which mainly deal with real estate
trading and leasing, wheat flour production, plastic sack manufacturing,
and palm oil refinery plant operations. (For details, refer to listed
company profiles section: Thai Sugar Terminal Public Company Limited
(TSTE)).

KSL Agro and Trading Co., Ltd.

The company, formerly known as KSL Agro Co., Ltd., was established in
2006. It deals with sugar cane cultivation on corporate land and
promotes cane cultivation among farmers. Currently this company trades
domestic sugar and operates agricultural businesses.

Wynn In Trading Co., Ltd

The nature of business is international trading and international
investment consulting. Khon Kaen Sugar Industry Public Company held
100.00% share of Wynn In Trading Co., Ltd.

Other Businesses

KSL Real Estate Co.,Ltd

The company is involved in the business of property rental and resort
ownership in Kanchanaburi, near the River Kwai, under the name of “River
Kwai Park and Resort” This company provides the accommodation and
facilities for holiday vacation and training center for employees of the
KSL group and other general customers. Additionally, the company has
acquired a commercial rental property, The Liberty Square Building that
is located in the heart of Silom Road that is one of the busiest
business area of Bangkok with approximately 19,151 sqm of rental space
consisting of 22 floors and 6 levels of underground parking.

Champion Fermentation Co.,Ltd

The company is a joint venture business between Khon Kaen Sugar Industry
Public Company and business partners with 32.5% of share hold by Khon
Kaen Sugar Industry. The joint venture company has the investment about
60% of share in Chantaburi Starch Co.,Ltd which operate a starch
producing factory in Chantaburi province (Eastern of Thailand), using
cassava as raw material.

Regarding the policy to regulate and monitor the operation of
subsidiaries and affiliates, Khon Kaen Sugar Industry has categorized
its subsidiaries and affiliates which have the similar nature of
business to be a group together under the same team of management. 4
sugar companies are under the same board of executive directors. For
supporting business, energy and chemical business and other business,
Khon Kaen Sugar Industry will assign its own representatives to join as
a position of company directors for policy making or as a position of
top management for operation directing, which will make consistency in
policies from parent company, subsidiaries and affiliates.

2. Description of Each Business Operation

1.  Revenue Structure

+----------------------+---------+-------+---+------+---+-------+---+
| Company              | % of    | 2012  | % | 2013 | % | 2014  | % |
|                      | Share   |       |   |      |   |       |   |
|                      | holding | Re    |   | Rev  |   | Re    |   |
|                      | in 2014 | venue |   | enue |   | venue |   |
|                      |         | (Mi   |   | (Mil |   | (Mi   |   |
|                      |         | llion |   | lion |   | llion |   |
|                      |         | THB)  |   | THB  |   | THB   |   |
+----------------------+---------+-------+---+------+---+-------+---+
| 1. Khon Kaen Sugar   | Mother  | 7,5   | 2 | 6,02 | 2 | 8,6   | 3 |
| Industry Public      | Company | 29.47 | 6 | 2.13 | 3 | 68.09 | 1 |
| Company              |         |       | % |      | % |       | % |
+----------------------+---------+-------+---+------+---+-------+---+
| 2. Tamaka Sugar      | 90.21%  | 4,0   | 1 | 3,02 | 1 | 3,1   | 1 |
| Industry Co.,Ltd     |         | 04.90 | 4 | 1.98 | 1 | 96.84 | 1 |
|                      |         |       | % |      | % |       | % |
+----------------------+---------+-------+---+------+---+-------+---+
| 3. New Krung Thai    | 95.78%  | 4,7   | 1 | 4,54 | 1 | 4,5   | 1 |
| Sugar Factory        |         | 17.00 | 6 | 8.89 | 7 | 40.44 | 6 |
| Co.,Ltd              |         |       | % |      | % |       | % |
+----------------------+---------+-------+---+------+---+-------+---+
| 4. New Kwang Soon    | 98.61%  | 1,0   | 4 | 73   | 3 | 7     | 3 |
| Lee Sugar Factory    |         | 83.23 | % | 3.42 | % | 44.15 | % |
+----------------------+---------+-------+---+------+---+-------+---+
| 5. Thai Sugar        | 23.82%  | 3,2   | 1 | 2,47 | 9 | 1,5   | 6 |
| Terminal Public      |         | 01.89 | 1 | 1.65 | % | 38.84 | % |
| Company              |         |       | % |      |   |       |   |
+----------------------+---------+-------+---+------+---+-------+---+
| 6. KSL Export        | 79.55%  | 19.29 | 0 | 1    | 0 | 13.15 | 0 |
| Trading Co.,Ltd      |         |       | % | 5.00 | % |       | % |
+----------------------+---------+-------+---+------+---+-------+---+
| 7. Khon Kaen Alcohol | 100.00% | 1,8   | 6 | 2,43 | 9 | 2,4   | 9 |
| Co.,Ltd              |         | 72.56 | % | 7.42 | % | 72.01 | % |
+----------------------+---------+-------+---+------+---+-------+---+
| 8. Khon Kaen Sugar   | 100.00% | 1,8   | 6 | 2,15 | 8 | 2,4   | 9 |
| Power Plant Co.,Ltd  |         | 54.11 | % | 1.97 | % | 93.81 | % |
+----------------------+---------+-------+---+------+---+-------+---+
| 9. KSL Material      | 100.00% | 16.01 | 0 | 2.95 | 0 | 20.56 | 0 |
| Supplies Co.,Ltd*    |         |       | % |      | % |       | % |
+----------------------+---------+-------+---+------+---+-------+---+
| 10. Savannakhet      | 98.49%  | 2     | 1 | 24   | 1 | 2     | 1 |
| Sugar Corporation    |         | 72.71 | % | 6.94 | % | 11.21 | % |
+----------------------+---------+-------+---+------+---+-------+---+
| 11. Koh Kong         | 80.00%  | 2     | 1 | 13   | 1 | 1     | 0 |
| Plantation Co.,Ltd** |         | 45.66 | % | 6.21 | % | 28.73 | % |
+----------------------+---------+-------+---+------+---+-------+---+
| 12. Koh Kong Sugar   | 80.00%  | 3     | 1 | 66   | 3 | 89.36 | 0 |
| Co.,Ltd              |         | 64.29 | % | 7.43 | % |       | % |
+----------------------+---------+-------+---+------+---+-------+---+
| 13. KSL Agro and     | 100.00% | 4,0   | 1 | 384  | 1 | 3,6   | 1 |
| Trading Co., Ltd.    |         | 92.25 | 4 | 3.20 | 5 | 05.85 | 3 |
|                      |         |       | % |      | % |       | % |
+----------------------+---------+-------+---+------+---+-------+---+
| 14. KSL Real Estate  | 91.02%  | 9.48  | 0 | 10   | 0 | 1     | 1 |
| Co.,Ltd              |         |       | % | 2.17 | % | 50.34 | % |
+----------------------+---------+-------+---+------+---+-------+---+
| 15. Wynn In Trading  | 100.00% | -     | - | -    | - | -     | - |
| Co.,Ltd              |         |       |   |      |   |       |   |
+----------------------+---------+-------+---+------+---+-------+---+
| Total                |         | 29,2  | 1 | 2    | 1 | 27,8  | 1 |
|                      |         | 82.84 | 0 | 6,40 | 0 | 73.38 | 0 |
|                      |         |       | 0 | 1.38 | 0 |       | 0 |
|                      |         |       | % |      | % |       | % |
+----------------------+---------+-------+---+------+---+-------+---+
| Minus Interrelated   |         | -7,0  |   | -    |   | -8,6  |   |
| items                |         | 70.54 |   | 7,46 |   | 88.53 |   |
|                      |         |       |   | 0.22 |   |       |   |
+----------------------+---------+-------+---+------+---+-------+---+
| Total Revenues       |         | 22,2  |   | 1    |   | 19,1  |   |
|                      |         | 12.30 |   | 8,94 |   | 84.84 |   |
|                      |         |       |   | 1.16 |   |       |   |
+----------------------+---------+-------+---+------+---+-------+---+

* Formerly name KSL Chemical Co.,Ltd

** Indirect shareholding through Wynn In Trading Co., Ltd.

2.  Description of each products

Sugar: Production and Characteristics

The company is a group of sugar manufacturers whose quality management
system is certified by SQF 2000, ISO 9001: 2000, and Hazardous Analysis
and Critical Control Point (HACCP) accreditations. Sugar produced by the
KSL group can be divided into four categories according to their types
and levels of purity as follows:

Raw sugar – Raw sugar has a color index higher than 1,500 ICUMSA. It is
dark brown, and has a high dirt index and a low purity index. Transfer
is done in bulk without the use of sacks. This type of sugar cannot be
consumed until it is refined or purified, turning into white sugar or
refined sugar.

High pol sugar - High pol sugar has a color index between 1,000 - 1,500
ICUMSA. It can be consumed without any further process needed.
Generally, the sugar is put in sacks before being transported. It is
priced lower than white sugar and refined sugar.

White sugar - White sugar has a color index between 46 – 200 ICUMSA with
a degree of polarization not lower than 99.50. It is widely consumed
among households and used as a raw material in food industries where
moderate purity is required.

Refined sugar – Refined sugar has a color index that does not exceed 45
ICUMSA. It is especially high in purity. The sugar is used in certain
industries where highly pure sugar is needed, such as pharmaceutical
industry, carbonated beverage industry, and energy drink industry.

After sugar manufacturing there is a residue called “molasses” that its
sugar content is so low that any further sugar extracting is
uneconomical. Molasses is a valuable by-product obtained from sugar
production. It contains 20% water, 30% sucrose, 32% invert sugar, 12%
non-sugar organic substance, and 6% ash. From one ton of sugarcane, the
corporate sugar factories have capacity to manufacture between 45-50
kilograms of molasses. An amount of molasses produced in a year depends
on a quantity of sugarcane crushed in the year. Molasses can be widely
used in such biochemistry industries as alcohol and distilling industry,
yeast industry, monosodium glutamate industry, animal food industry
(where molasses is mixed with cassavas and bagasse), vinegar industry,
and soy sauce and seasoning sauce brewing industry.

Other residues from sugar manufacturing process that are also useful
include bagasse and filter cake. Bagasse is the fibrous material
remaining after the last extraction of juice from sugarcane. Now the
company uses burned bagasse as a source of energy for electricity and
steam generation used in sugar manufacturing process. Part of the
electricity generated is sold to the EGAT. Filter cake is a residue from
vacuum filtration. It can be used as a raw material for general-purpose
fertilizer. In the past, the company gives away filter cake to sugarcane
farmers to promote sugarcane plantation in nearby areas.

After the company’s subsidiary has continuously operated alcohol and
chemical production, wastewater from the factory can be mixed with
filter cake and bio-decomposed to produce organic fertilizer that is
suitable for sugarcane plantation. This completes the corporate
value-added product ranges.

Sugar: Market and Competition

International Market and Industry Overview

The world sugar market: In 2013/14 approximately 181.4 million tons of
raw sugar was produced worldwide, representing a decrease of 3 million
tons or 2% from the previous year. The world's total consumption demand
rose to 175.2 million tons, a 3 million tons increase or about 2% growth
compared to that of 2012/13. However, the ending stock increases from
72.6 million tons in 2012/13 to 77.3 million tons in 2013/14. The stock
represented 44% of the total demand, or an equivalent of 5 months sugar
consumption.

Chart 2.1: World Sugar Balance (Millions Tons, centrifugal sugar, raw
value, OCT/SEP)

[]

Note: 2014/15 is forecasted number

Source: F.O.Lichit, updated 30-10-2014

According to F.O. Licht‘s forecast on October 30, 2014, the 2014/15
output will decrease by 1%, from 181.4 million tons to 178.7 million
tons. Consumption will increase by 1% from 175.2 million tons to 176.8
million tons. Consequently, ending stock will decrease from 77.3 million
tons to 76.7 million tons. In Asia, it is forecasted that demand for
sugar within the region will overtake supply, causing a shortage of 16
million tons. However, this figure is subject to changed in demand,
supply, and many other external factors.

The world price of sugar is affected by the quantity of sugar produced
each year, the demand, the existing stock, and uncontrollable changes in
climates and government regulations. Climate uncertainties such as
flooding, drought, or severe cold in countries where sugar is produced
can have a significant impact on the quantity of sugar priced and
consequently on the price of sugar sold. Similarly, government
regulations regarding sugar export license and sugar import quotas can
exert pressure on the price of sugar sold.

For a trend in sugar price can also depends on output quantities from
Europe and from major producer countries, such as Brazil, Australia and
Thailand. As the largest sugar and ethanol producer in the world,
Brazil’s production level and sugar-ethanol parity can have a
significant impact on world sugar price. When Brazilian producers can
gain more profit from selling ethanol, they will convert more cane into
ethanol production and less for sugar production and vice versa.
Nonetheless, the capability for Brazilian producers to switch production
between sugar and ethanol is limited between 40-60% as their factories
are not designed to run 100% for either product. Other factors that
affect world sugar price can be from changes in oil price, exchange
rate, global economic outlook, and from investment funds whose
activities may include shifting investing strategies from commodity to
other assets.

Chart 2.2: World Sugar Price (NYBOT#11) During Last 10 Years

[]

Furthermore, export channels of Thai sugar manufacturers are divided
into:

1.  Thai sugar manufacturers sell their sugar through major traders such
    as Cargill, Tate & Lyle, Kerry, etc. The traders then sell the sugar
    to other overseas buyers. Risk of failure to collect payments and
    complications in export management are minimized. Thai sugar
    manufacturers’ only responsibility is to transport their sugar to
    ports of exports, such as FOB ports of Bangkok and Lamchabang.

2.  Thai sugar manufacturers export their products to neighboring
    countries, such as Laos and Cambodia, through borders. A small
    amount of sugar is sold to vendors at borders.

3.  Thai sugar manufacturers sell to manufacturers who use sugar in
    production of their exports. When domestic sugar prices are higher
    than those in international markets, the export manufacturers who
    use sugar as a production material lose their competitiveness in the
    world market. To promote investment in the food industry and
    competitiveness, the government allows those who manufacture exports
    to buy sugar at the world’ market prices conditionally.

Domestic Marketing and Industry Overview

Domestic sugarcane and sugar industries are governed by Thai Sugarcane
and Sugar Industry Act B.E. 2527. Office of the Cane and Sugar Board is
in charge of ensuring adequacy of sugar for the domestic demand. Every
year the board estimates the domestic sugar consumption amount and
determines quotas for sugar factories according to their capacity.
Domestic sugar prices are controlled by Goods and Services Act B.E.
2542. Current domestic sugar price are mandated that:

(1) Prices of regular white sugar purchased at sugar factories do not
exceed Baht 1,900 per 100-kilogram sack.

(2) Prices of refined white sugar purchased at sugar factories do not
exceed Baht 2,000 per 100-kilogram sack.

(3) Wholesale prices of regular white sugar at all domestic wholesale
businesses do not exceed Baht 1,965 per 100-kilogram sack, and those of
refined white sugar do not exceed Baht 2,065 per 100-kilogram sack.

(4) Retail prices of regular white sugar at retail businesses in
Bangkok, Nonthaburi, Pahumthani, Samutprakarn, and Samutsakorn do not
exceed Baht 21.50 per kilogram; and those of refined white sugar do not
exceed Baht 22.50 per kilogram. (included VAT)

The price control does not apply to sugar cubes in boxes or packets that
do not weigh over 10 grams.

Competition

In 2014, there are 50 operating sugar factories (exclude non-operating
and new license sugar factories which is not yet constructed) in
Thailand with sugarcane crushing capacity of 103 million tons/year and
sugar manufacturing capacity of 11.3 million tons/year (depending on
yearly sugarcane

amounts in the crushing process and sugarcane quality). The crushing
process lasts about 4 - 6 months each year due to small amounts of
sugarcanes entering the process. It begins in November and ends in April
or May. The numbers of sugar factories are under government control.
Licenses from Office of the Cane and Sugar Board and Department of
Industrial Works, Ministry of Industry, are required for sugar factories
in increasing capacity, moving factories, or operating new sugar
factories.

In 2014, all 50 sugar factories are opened for operation. Most of these
factories are part of the five major groups of sugar manufacturers and
only a handfall of small manufacturers operate independently. The KSL
Group is the 4^(th) largest sugar producer in Thailand, with 8 % market
share. It has 5 factories (In 2012, KSL operates 4 factories since the
new one just finish construction) located in three regions: the
Northeast (2 factories), Central Thailand (2 factories), and the East (1
factory). Table 2.3 shows sales of different types of sugar in the past
3 years as well as ratios of sales in export markets to domestic
markets.

Table 2.3: Sales of Different Types of Sugar and Ratio of Domestic Sugar
to Total Sugar Sales in the Past 3 Years

[]

Sugar: Product and Service Provision

Raw Material Provision Policy

Providing raw materials for manufacturing is a vital process for sugar
producers. As the total capacity of the Thai sugar industry exceeds
domestic sugarcane produce, all the sugar factories need to ensure that
the maximum amount of cane is provided for their production in order to
reduce their fixed cost per unit. The main solution employed by most
sugar manufacturers is providing financial support to farmers, which is
known as the “Geaw” system. Agreements of the sugar producers’ advance
purchase of sugarcanes from the supported farmers are made, allowing the
farmers to apply for loans from the sugar manufacturers. The loans are
used for sugarcane cultivation. Harvested sugarcanes, then, are
delivered to the factories and the sugarcane costs are deducted from the
loans.

The company’s strategy is giving long-term benefits as incentives to the
sugarcane farmers providing their crops to the corporate factories. This
promotes both the growth of the farmers’ incomes and the company. The
main policy “Prosperity of farmers is prosperity of the factory”,
especially employed in the northeast, emphasizes creating and promoting
a sustainable way to make a living for sugarcane farmers, as well as
eliminating middlemen known as “Quota Heads”. This effort allows the
company to learn about problems experienced by the farmers and provide
them suitable assistance. Also, the company provides the farmers
equipment, knowledge and production support, such as providing loans for
purchasing trucks; giving them filter cakes for making fertilizers free
of charge; and providing experts in sugarcane cultivation, and
prevention and elimination of crop pests. The support enhances good
relationships between the farmers and the company, as well as systematic
growth.

Production policy

The company focuses on maximizing the volume of white sugar and refined
white sugar manufactured, as the two products have the highest selling
prices with the highest profit. It also focuses on the improvement of
production efficiency. Production efficiency that is higher than the
average of the industry will help reduce unit cost. As a result, the
company will be more competitive.

Marketing policy

Due to the fact that sugar prices in domestic consumer markets are
controlled by the Government, the company emphasizes direct sale to
industries with product quality and on-time delivery promises. Most of
the customers are businesses in beverage and confectionary industries.

The company, moreover, emphasizes the sale of its sugar products to food
product re-exporters, as it allows the sale of C quota sugar which
yields better profit than regular exports while requires lower transport
cost.

Environmental effects

The sugar manufacturing process causes wastewater and dust from ash in
the steamer’s burning process. The company is well aware of such effects
and has employed appropriate measures to prevent environmental problems,
in compliance with standards issued by Ministry of Industry.

Sugar: Works Not Submitted

- None –

Ethanol : Product Characteristics

Khon Kaen Alcohol Co., Ltd., a subsidiary of Khon Kaen Sugar Industry
Public Company Limited, produces and sells ethanol to oil companies. The
ethanol is combined with gasoline at 10, 20 and 85 % to produce the
final product commonly called gasohol.

Ethanol : Marketing and Competition

Domestic Marketing and Industry Overview

Domestic demand for ethanol depends on the amount of domestic
consumption of gasohol that is a mixture of gasoline and ethanol.
Gasohol was first introduced for public use in 2006. The blend contains
10 % of ethanol (E 10). In 2008, oil prices exceeded 100 USD per barrel
which prompted the Thai government to support the use of gasohol as car
fuels through providing tax relief and contributing fund. These factors
made the gasohol prices lower than gasoline, as shown in Table 2.4. The
promotion of the use of gasohol as an alternative energy source allowed
continuous growth for the ethanol market. Currently, average 3.3 million
liters of ethanol per day is mixed in gasoline. The amounts of ethanol
used to mix with gasoline for gasohol production is shown in Table 2.5.

Table 2.4: Selling Price Structure of Gasohol

[]

Source: Energy Policy and Planning Office, Ministry of Energy

Chart 2.5: Quantity of Ethanol Used to Mix with Gasoline as Gasohol

[]

Source: Department of Energy Business, Ministry of Energy

International Marketing and Industry Overview

Brazil is the world’s major ethanol producer and exporter. Primarily,
ethanol is produced from sugarcane. It can be used as fuel for car by
mixing with gasoline at the ratio of 20 – 25 % or purely 100 % with
specially designed cars. The Brazilian government has a policy to
promote the use and manufacture of cars that run with ethanol 100 %.
There is a control over the production and demand for ethanol through
changing the amount of ethanol content in gasoline.

Competition

In 2014, domestic consumption of ethanol rose dramatically as the
government ban the sale of normal gasoline (91 Octane). Most petrol
station installed gasohol in their premises, which helps smooth this
transition. Although many factories has the capacity to produce ethanol
to satisfy demand, they are

prevented from running their production to full capacity as the sale
price of ethanol do not correlates with the price of its raw material.
As a result, in 2014, the demand and supply of ethanol is somewhat
stagnated. However, for the company, we gain competitive advantage over
other ethanol producers as our raw material for ethanol is a by-product
that is sourced from our sugar factory. Table 2.6 shows the sales volume
and average selling price of ethanol.

Table 2.6: Sales Volume and Average Selling Price of Ethanol in the Past
3 Years

[]

Ethanol: Product and Service Provision

Raw material provision policy

The company’s ethanol plants purchase the raw material, molasses, from
sugar factories of KSL (the holding company) at the market price. A
one-year agreement is made in advance. If the KSL factories do not have
enough molasses, the raw material is purchased from nearby sugar
factories. For more flexible raw material management the company
invested in facilities that allow the production of ethanol from cassava
flour and other cassava-related products. This is to ensure that there
is sufficient raw material and that production cost is manageable. If
the world’s sugar prices drop, sugarcane juice from the KSL group’s
sugar factories can be used as raw material in ethanol production.

Production policy

The company minimizes its costs by ensuring economies of scale,
flexibility in using cheap raw materials and cost reduction. Expenses
are minimized, such as using wastewater in producing organic fertilizer.
Corporate resources are shared, such as personnel of sugar factory, or
the Group purchasing energy from its own power plant. Leasing molasses
storage tanks reduces the cost of investing them. Purchasing molasses at
the factories helps save transport costs.

Being able to produce the raw material, molasses, within the group
allows the consistency of the quality of the material and more
production effectiveness. Contaminants are reduced. Molasses storage
tanks are appropriately temperature controlled, allowing highly
effective production.

Marketing policy

Ethanol is an industrial product. It is used as a material in producing
gasohol. Consistency in quality, standard, and availability are very
important. The company ensures that its production meets those
requirements by exercising quality assurance. Part of the ethanol
produced is stored in tanks for sale during the period when the
operation is ceased for annual machinery repair and maintenance.

Environmental effects

The production of ethanol generates wastewater. The company uses the
wastewater from ethanol production process to mix with filter cake from
the group’s sugar factories to make organic fertilizer. The fertilizer
is then sold to farmers. Hence, the company is able to minimize its
negative impact on the environment.

Ethanol: Works Not Submitted

- None –

Electricity and Steam Product Characteristic

The project has been undertaken by Khon Kaen Sugar Power Plant Co., Ltd
who sells electricity and steam to factories within the group. Any
excess electricity produced is sold to Electricity Generating Authority
of Thailand (EGAT). Currently, the group operates 3 power plant, all of
which located near to its sugar factories. The first power plant is
located near to Khon Kaen Sugar Factory in Nampong district of Khon Kaen
province. It can produce up to 30 MW, 20 MW of which is sold to EGAT.
The second power plant is located near to New Krungthai Sugar Factory in
BoPloy, Karnjanaburi. It can produce up to 90 MW, 30 MW of which is sold
to EGAT. The third power plant is located near to Khon Kaen Sugar
Factory in Wangsapong, Loei province. It has the capacity to produce 40
MW and is under expansion.

Electricity and Steam Market and Competition

The electricity and steam generated is first sold to the KSL Group’s
plants so that it can be used to produce sugar and ethanol. The excess
electritcity produced is then sold to to Electricity Generating
Authority of Thailand (EGAT) through contract in advance and therefore
has limited number of competitor and reliable customer. A 100% of
electricity and steam produce is sold domestically.

Table 2.7 Sales Volume and Average Selling Price of Electricity in the
Past 3 Years

[]

Electricity and Steam: Product and Service Provision

Raw material provision policy

Raw material procurement is crucial in operating the electricity
generating business. The corporate power plant is mainly fueled by
bagasse. Each year, the Group crushed sugarcane fluctuates. A limited
amount of crushed sugarcane may affect the fuel amount available for the
power plant’s electricity generating. Thus, Khon Kaen Sugar Power Plant
has prepared purchasing biomass fuel sources, such as bagasse,
eucalyptus bark and scrap wood, from nearby plants.

Production policy

(1) Cost Management

The Khon Kaen Sugar Power Plant committed to minimize its production
cost. Costs of electricity generating and steam energy production
include fuel and depreciation. Fuel efficiency is, hence, crucial. The
company also ensures economies of scale to reduce its unit cost.

(2) Improving and Developing Production Effectiveness

The quality of fuel is effectively controlled, as the company uses its
own bagasse. Fuel efficiency is ensured by controlling moisture in
bagasse using such methods as bagasse dryer system and setting up roofs
to protect the material from the rain.

Marketing policy

The long-term agreement between the company and EGAT allows the
electricity produced to be priced based on natural gas prices and
exchange rates. The sale unit price increases at the time when EGAT’s
demand for electricity is high. Electricity sold to the companies in the
KSL Group is priced at the same rate as that sold to EGAT.

Environmental effects

Extensive Environmental Impact Assessment (EIA) has been carried out.
The facilities in Khon Kaen has been registered with CDM Executive Board
as a CDM project (under the Kyoto Protocol). The company has the right
to sell its carbon credits if and when the UNFCCC officially count and
certify the amount of carbon it help reduced.

Electricity & Steam: Works Not Submitted

- None -

3. RISK FACTORS

Significant risk factors in the operation of the sugar business of the
company, which may have affect on the return on investment by the
shareholders, can be summarized as follows.

1.  Risk factors in Raw Material Sourcing – Sugarcane

The company’s business is to run factories to produce sugar which use
sugarcane as raw material. The company has also invested in other
related projects, which use by products and wastes generated from the
sugar manufacturing process, to create added value. Therefore, the
quantity of sugarcane available for crushing is the most important
factor affecting the operations of the company.

There are two main reasons that cause fluctuations in the quantity of
sugarcane, viz. (1) changes in the acreage under sugarcane plantation
which may depend on the price agreed for the cane and whether it is
worthwhile for the farmers to grow sugarcane compared to other
agricultural crops as well as the promotional policies of the Government
and (2) changes in the yield of sugarcane (ton(s) of cane per rai) which
may occur due to climate change conditions, such as drought and flood,
caused by global warming.

When the quantity of sugarcane crushed reduces, the effect on the
company is that the quantity of sugar produced goes down, the unit cost,
especially the fixed cost per unit, goes up, the profit per unit reduces
and the company’s overall profit is reduced. In addition, in those years
when the sugarcane crushed is low, there is increased competition among
sugar factories to purchase the sugar cane locating in the neighborhood
area. Therefore, in order to protect their crushing quantities, sugar
factories have to vie by paying more than the price, established by
revenue sharing system. This increases the overall raw material cost for
the company.

Thailand is one of the world’s leading sugar exporters and is the
leading sugar supplier to the Asian region. Decreased amounts of cane
crushed in Thailand result in lower sugar quantities available for
exportation. Export prices, consequently, increase. Such increase
relieves the impact of decreased quantities of cane crushed and burden
of increased costs. The company, furthermore, values stability of
sugarcane supplies. To ensure the sustained supplies, the company offers
assistance to sugarcane farmers, such as loans for planting sugarcane
crop, support in procuring inputs for farming, providing irrigation
systems, introducing technology to increase yields and efficiency in
cultivation, and reducing the influence of middle men in sugarcane sales
and purchase deals. All the assistance is provided for the farmers in an
attempt to help them improve their lives.

2.  Risk from Sugar Price Fluctuation in the World Market

While considering sugar trade in the world markets, it can be said that
sugar has high price fluctuations when compared with other agricultural
products. The world sugar prices depend on several factors, such as
demand and supply of countries that are producers, consumers, exporters
and

importers. Traders’ speculations are in relation to climatic conditions
facilitating cultivation in each of the respective countries. Government
policies on promoting, interfering, exporting and importing sugar,
particularly in developed countries also determine pricing in the
industry. At present, sugar prices are also interrelated to oil prices.
Both sugarcane and molasses can be used to produce a type of alcohol
called ethanol. Ethanol can be blended with gasoline to produce fuel.
All the above factors cause high fluctuations in the world sugar prices.

Generally, sugar companies in Thailand are bound to meet the domestic
demand first. The balance sugar can be exported. Every year, the Office
of the Cane and Sugar Board estimates the quantity of domestic demand
for sugar, called Quota A, and allocates this Quota to all the sugar
factories based on their respective sugar production. The ratio of
domestic sales to exports of all sugar factories is therefore quite
similar, usually in the range of 30:70 to 40:60 depending on the
sugarcane available for crushing all over the country. The sales of the
sugar industry fluctuate according to world sugar prices in the 65 – 75%
range. However, regarding on the cost of production, the cane price is
the major cost, calculated by the formula based on the revenue sharing
system 70:30. This means that when the sugar price has decreased 100%,
the farmer should get the 70% impact in term of lower sugar cane price
and the sugar factory should get 30% impact.

During the past few years, the world sugar price was very volatile. It
can be seen from the average future price around 15 cents/lb surged to
be around 32 cents/lb and it used to be trade at 25 cent/lb, 20 cent/lb
and then 15 cent/lb now. With severe price fluctuations, if the company
were not able to establish a selling price that was higher than the
price level for setting cane prices, the corporate operating results
would have been severely affected. To prevent the risk posed by sugar
price volatility in the world market, the company entered into a sugar
futures contract with a financial institution. The risk hedging
procedure would allow the company to minimize the dependency of its
profitability on the risk posed by sugar price volatility. However, this
could affect profit and loss account recording, and there was a risk
that the amount hedged through the sugar futures contract could exceed
the actual volume of sugar exported. This oversold condition could
result in a loss. For details, refer to topic 6. Other Related
Information: Risk Hedging Procedure Against Sugar Price Volatility in
the World Market.

Previously, the fluctuations in the world sugar price had a strong
influence in the company’s operations and profitability as it focused
its businesses mainly on sugar and molasses. Since the company invested
in other related industries such as ethanol, bio-fertilizer, and power
plant, the risks it faced from sugar price fluctuations is drastically
reduced and allow the company to operate in businesses that are more
profitable and less dependent on world market price.

3.  Risk from Government Policy

The sugarcane and sugar industry in Thailand is under the supervision
and control of the Office of the Cane and Sugar Board under the Cane and
Sugar Act 1984. The Board regulates the amount of sugar produced by a
quota system (Quota A for domestic sales, Quota B and C for sugar
exports), controls the domestic price, regulates on the ratio of
distribution of revenue from the sugar business between the farmers and
sugar factories, with the revenues sharing in the ratio of 70:30,
controls on the entry of new players in the sugar business etc. It is
evident that the rules and regulations enacted by the Cane and Sugar
Board have an impact on the production costs and the operations of the
company. For example, the revenues sharing system 70:30 ratio determines
the sugar cane price which the sugar factories must pay to the farmers.
In case, changes in the domestic sugar prices or changes in regulation
of entire sugar industry, it will have a definite impact on the
operations of the company.

Other overall Government policies also have an impact on the company’s
business. For example, the decision to promote the renewable energy,
such as ethanol, has secured the domestic sale volume. The policy to
promote the planting of oil palm trees or price guarantees for cassava
have negative impact on the company since the area under sugar cane
plantation will reduce and farmers will switch to growing alternative
crops with better returns.

The Company realizes the importance of government policies in shaping
directions of cane and sugar industry. Hence, it has collaborated with
three sugar factories associations and associations of sugarcane farmers
to enhance the government understanding of cane and sugar industry and
its significance. The industry is a precursor of the food and processed
food industries. Ethanol derived from sugar production can be used as
fuel energy. Ethanol is a pure alcohol that can also be used as a
starting point for production of other chemicals. Exporting sugar brings
in foreign income and almost does not require import costs and expenses.
This differentiates the sugar industry from other industries.

Sugarcane is Thailand’s important economic crop in which every part of
it can be utilized. Communication, explanation and understanding between
the government and the sugar industry can reduce the risk potentially
posed by government policies affecting directions of sugarcane and sugar
industries.

4.  Risk of Bad Debts Arising from Credit Given to Farmers (Advance
    Credit)

In the running of a sugar factory, the factories extend loans or other
kinds of financial support to sugarcane farmers as working capital to
plant sugarcane crop, or what is called “sugarcane credit”, thereby
reserving the sugarcane for crushing. After the sugarcane crop is ready
for harvesting and the sugar factories are ready to start crushing the
cane, the farmers harvest the cane and send it to the sugar factories
and receive payment for the value of the cane supplied after the loans
advanced and other financial support given is deducted. The risks that
are generated from such sugarcane credit can come from reduced
production in any year due to drought conditions, losses from crop
disease and pestilence, farmers refusing to send the cane to the sugar
factories etc. Such liabilities, arising from sugarcane credit, can
adversely affect the company’s operations requiring higher amounts of
provisioning for bad debts.

However, by track record, level of bad debt is low because the company
not only concerns the above risk factors but also improves in the
sugarcane credit system. The company has bought a satellite monitoring
system (Global Positioning System – GPS) to survey the sugarcane
plantation areas, which helps in reducing the problems of ownership of
sugarcane fields. The system is also used to plan for sourcing more
sugarcane. The company also encourages farmers to deposit assets as
collateral for the loans advanced. All this has resulted in the company
having a low bad debt situation at present and the major debts are
adequately covered with the pledged assets.

5.  Risks of Investing in Corporate Ventures

The company has undertaken 2 projects during the past 3 years which are
investment in sugar factory and power plant in Loei province and
investment in power plant capacity expansion and crushing efficiency
enhancement of sugar factory in Khon Kaen province.

There are risks involving in the projects, as some of them are in
progress of construction and pre-construction. At this point, it is
still difficult to determine whether the projects will be successful or
not. The risks are explained as follows:

Investment in Sugar Factory and Power Plant in Loei province

  This project is approved by cabinet to split some idle capacity of
  Khon Kaen Sugar Industry PCL to invest in the new sugar factory and
  also expand into capacity of 24,000 tons cane / day in Loei province.
  The Board of Directors meeting on May 9, 2010 has approved to invest
  in sugar factory and power plant in Loei province. The total
  investment value is approximately THB 3,800 million. The project
  consists of one sugar factory with capacity of 16,000 tons cane / day
  and one power plant with capacity of 40 Megawatt. The project was
  under a test run for the production season 2012/2013 and is expected
  to operate fully for the production season 2013/2014. Since the test
  run was successful, it reduces mechanical risks involved in setting up
  the new sugar factory. However, the company is still facing some risks
  of sourcing sufficient quantity of cane to support the increase of
  production capacity. The company had foreseen this risk, and tries to
  mitigate it by supporting local farmers to grow more cane even before
  the start of the expansion project.

  Investment in Power Plant Capacity Expansion and Crushing Efficiency
  Enhancement of Sugar Factory in Khon Kaen province

  The Board of Directors meeting on November 9, 2012, has approved the
  Company to make an investment in power plant capacity expansion by
  investing in 35 Megawatt capacity from its existing 30 Megawatt
  capacity; which is 65 Megawatt in total and efficiency enhancement of
  sugar factory by enhancing 8,000 tons cane / day capacity from its
  existing 27,000 Tons cane / day capacity. The total investment value
  is approximately THB 3,360 million which is expected to be finish in
  2014. The project costs a lot of investment budget and still has some
  funding concern. However the company has partially solved funding
  concern by using internal cash flow and retained earnings of Khon Kaen
  Sugar Industry PCL to fund the project. The other risks that may arise
  are construction risk and pre-construction risk since the project is
  in process of environmental impact assessment (EIA).

6.  Exchange Rate Risk

The company exports about 60-70% of the sugar produced and hence, it is
exposed to the risk of fluctuating foreign exchange rates. However, the
company operates under the 70:30 revenue sharing scheme, which hedges
the risk from exchange rate variations since, lower revenues due to
lower exchange rates cause the sugarcane price to be lower under this
scheme. This means that sales revenues and major raw material cost of
the company are directly linked to the exchange rate (Natural Hedge).

7.  Risk of having major shareholders controlling the votes of at the
    Shareholders’ meeting

The Chinthammit and his company hold more than 60% of total paid up
share capital of the company. Therefore, the Chinthammit Group and his
company can control all the proceedings of the shareholders meetings
whether it is the appointment of Directors or whether it is to seek
approvals on other matters that require majority votes, except for
special agendas which, by law or by the articles of association of the
company, require 75% vote in shareholders’ meetings. Therefore, it is
difficult for other shareholders to collect enough votes to investigate
or counterbalance the issues raised by the majority shareholders.

However, for the company's transparency and power balancing, the company
has appointed 7 independent committee members for checking the
operations of the company. Thus, power balancing for operation in the
company is reasonable. In addition, the company also has also set up an
independent internal control team which reports directly to the audit
committee.

8.  Risk from the World's Economic and Financial Situations

The EU financial crises and Oil price collapse caused a lot of problem
to Oil producers and hold back world economy. As the mentioned issues
have been affecting economies worldwide, there is no guarantee that
these issues and similar circumstances in the future will not affect our
businesses, the world's sugar prices and/or ethanol price. The lack of
liquidity among financial institutions may also affect the Group's
sources of loans and financing costs.

KSL has implemented its financial policies well. Its D/E has been at an
appropriate level. The company has maintained good relationships with
all the banks that are long-term corporate business partners. All the
corporate businesses will be handled carefully in order to minimize the
future probable effect of the world's financial and economic conditions
on the company.

9.  Risk from Laos & Cambodia Projects

The projects in both countries are part of the first offshore sugar
business in which the company is granted the concession area for cane
plantation from the government and permitted to construct sugar
factories. But land condition in concession area has low quality, lack
of technology for huge plantation, lack of infrastructure and human
resources therefore the projects take longer time for develop than the
first plan. Consequently the productions still not reach break-even
point and in 2014 both projects had loss. However the company has
witnessed and solved various problems throughout the years. The company
hired consultants to develop not only planting technology but also
management system to control budget. Moreover the company provides loan
to local farmers and suppliers to expand more plantation. After
continuously developing infrastructures and land condition in the past,
the projects show improvement and potential for good return on
investment in the future. Additionally, there are risks associated with
doing projects abroad which extend beyond agricultural risks relating to
cane growing and sugar production and include risks from political
turmoil and instability, local community dispute, and different law and
regulations that often changed and are somewhat ambiguous. The company
is aware of these risks and is trying to manage it most efficiently.

4. Operating Assets

1.  Core Operating Assets of the company and its subsidiaries

As of 31 October 2013, the company and its subsidiaries have core
operating assets, as followings:

  --------------------------- ------------ ----------- ----------- -----------------
  Items                       Area         Ownership   Net Book    Encumbrance
                              (estimated               Value (THB  
                              number)                  Million)    

  1. Land & Land Development                                        
  (Rai)                                                            

  Land for factory location.                                        

  - Khon Kaen Sugar Industry  1,739.13     owner       656.06       

  - Tamaka Sugar Industry     239.19       owner       518.56       

  - New Krung Thai Sugar      798.22       owner       400.31       
  Factory                                                          

  - New Kwang Soon Lee Sugar  231.62       owner       78.13        

  - Khon Kaen Alcohol         696.00       owner       186.10       

  - Khon Kaen Sugar Power     212.00       owner       88.91        
  Plant Co., Ltd.                                                  

  Cane Plantation Area        5,179.60     owner       505.89       

  Other Lands                              owner       1,479.32    Some in Loan
                                                                   Collateral

  Total                                                3,913.28     

  2. Factory Building and                  Owner       4,733.51    Some in Loan
  Construction                                                     Collateral

  3. Machinery and Equipment               Owner       12,523.00   Some in Loan
                                                                   Collateral

  4. Motor Vehicle and Labors              Owner       886.07       
  saving device                                                    

  5. Furniture and Office                  Owner       76.28        
  Equipment                                                        

  6. Assets in Construction                Owner       4,955.41     

  Total                                                27,087.55    
  --------------------------- ------------ ----------- ----------- -----------------

2.  Intangible Assets

Trademarks

Key trademarks of Khon Kaen Sugar Industry Public Company and
subsidiaries are registered at The Department of Intellectual Property,
as followings:

  ----------------------------------- -----------------------------------
  []                                  []

  ----------------------------------- -----------------------------------

BOI Certificates

On 31 October 2013, Three domestic subsidiary companies received 8
investment promotion certificates from the Board of Investment of
Thailand (BOI) under the Investment Promotion Act B.E. 2520. The
benefits includes the exception of income tax for profit for the year
derived from operation of promoted businesses for the period of 8 years
commencing from the first date of income received from the promoted
business. The details are as follows:-

+-------+-------------+--------+-------------------+--------+---+-------+
| C     | Sections    | Date   | Promoted activity | Com    | E |       |
| ertif |             |        | types             | menced | x |       |
| icate |             |        |                   | date   | p |       |
| No.   |             |        |                   |        | i |       |
|       |             |        |                   |        | r |       |
|       |             |        |                   |        | e |       |
|       |             |        |                   |        | d |       |
|       |             |        |                   |        | a |       |
|       |             |        |                   |        | t |       |
|       |             |        |                   |        | e |       |
+=======+=============+========+===================+========+===+=======+
|       | Privilege   |        |                   | of     |   |       |
|       |             |        |                   | re     |   |       |
|       |             |        |                   | venues |   |       |
|       |             |        |                   | gen    |   |       |
|       |             |        |                   | erated |   |       |
+-------+-------------+--------+-------------------+--------+---+-------+
| 19    | 25, 26, 28, | No     | - Production of   | J      | J |       |
| 29(2) | 31, 34,     | vember | pure alcohol or   | anuary | a |       |
| /2547 | 35(3),      | 2,     | fuel from         | 8,     | n |       |
|       | 36(1),      | 2004   | agricultural      | 2006   | u |       |
|       |             |        | products,         |        | a |       |
|       | and 36(2)   |        | including scraps, |        | r |       |
|       |             |        | garbage or waste  |        | y |       |
|       |             |        |                   |        | 7 |       |
|       |             |        |                   |        | , |       |
|       |             |        |                   |        | 2 |       |
|       |             |        |                   |        | 0 |       |
|       |             |        |                   |        | 1 |       |
|       |             |        |                   |        | 4 |       |
+-------+-------------+--------+-------------------+--------+---+-------+
|       |             |        | - Production of   | March  | J |       |
|       |             |        | biological        | 30,    | a |       |
|       |             |        | fertilizers or    | 2006   | n |       |
|       |             |        | organic           |        | u |       |
|       |             |        | fertilizers       |        | a |       |
|       |             |        |                   |        | r |       |
|       |             |        |                   |        | y |       |
|       |             |        |                   |        | 7 |       |
|       |             |        |                   |        | , |       |
|       |             |        |                   |        | 2 |       |
|       |             |        |                   |        | 0 |       |
|       |             |        |                   |        | 1 |       |
|       |             |        |                   |        | 4 |       |
+-------+-------------+--------+-------------------+--------+---+-------+
| 10    | 25, 26, 28, | J      | - Production of   | Income |   |       |
| 62(2) | 31, 34,     | anuary | pure alcohol or   | not    |   |       |
| /2552 | 35(3),      | 30,    | fuel from         | yet    |   |       |
|       | 36(1),      | 2009   | agricultural      | d      |   |       |
|       |             |        | products,         | erived |   |       |
|       | and 36(2)   |        | including scraps, |        |   |       |
|       |             |        | garbage or waste  |        |   |       |
+-------+-------------+--------+-------------------+--------+---+-------+
|       |             |        | - Production of   | Income |   |       |
|       |             |        | biological        | not    |   |       |
|       |             |        | fertilizers or    | yet    |   |       |
|       |             |        | organic           | d      |   |       |
|       |             |        | fertilizers       | erived |   |       |
+-------+-------------+--------+-------------------+--------+---+-------+
| 10    | 25, 26, 28, | J      | - Production of   | De     |   | Dec   |
| 63(2) | 31, 34,     | anuary | pure alcohol or   | cember |   | ember |
| /2552 | 35(3),      | 30,    | fuel from         | 6,     |   | 31,   |
|       | 36(1),      | 2009   | agricultural      | 2011   |   | .2019 |
|       |             |        | products,         |        |   |       |
|       | and 36(2)   |        | including scraps, |        |   |       |
|       |             |        | garbage or waste  |        |   |       |
+-------+-------------+--------+-------------------+--------+---+-------+
|       |             |        | - Production of   | De     |   | Dec   |
|       |             |        | biological        | cember |   | ember |
|       |             |        | fertilizers or    | 30,    |   | 31,   |
|       |             |        | organic           | 2011   |   | .2019 |
|       |             |        | fertilizers       |        |   |       |
+-------+-------------+--------+-------------------+--------+---+-------+
|       |             |        | - Production of   | Fe     |   | Dec   |
|       |             |        | biological        | bruary |   | ember |
|       |             |        |                   | 29,    |   | 31,   |
|       |             |        |                   | 2012   |   | .2019 |
+-------+-------------+--------+-------------------+--------+---+-------+
| 23    | 25, 26, 28, | Sep    | - Production of   | Fe     |   | Feb   |
| 64(1) | 31, 34,     | tember | biological        | bruary |   | ruary |
| /2554 | 35(1),      | 20,    |                   | 28,    |   | 28,   |
|       | 35(2),      | 2011   |                   | 2013   |   | 2021  |
|       |             |        |                   |        |   |       |
|       | and 35(3)   |        |                   |        |   |       |
+-------+-------------+--------+-------------------+--------+---+-------+
| 12    | 25, 26, 28, | March  | - Production of   | De     |   | Dec   |
| 58(2) | 31(3),      | 29,    | electricity power | cember |   | ember |
| /2548 | 31(4), 34,  | 2005   | and steams        | 22,    |   | 21,   |
|       |             |        |                   | 2006   |   | 2014  |
|       | and 35(3)   |        |                   |        |   |       |
+-------+-------------+--------+-------------------+--------+---+-------+
| 14    | 25, 26, 28, | June   | - Production of   | No     |   | Nov   |
| 32(2) | 31(1),      | 24,    | electricity,      | vember |   | ember |
| /2552 | 31(2),      | 2009   | power steams and  | 30,    |   | 29,   |
|       | 31(3),      |        | water for         | 2010   |   | 2018  |
|       | 31(4), 34,  |        | manufacture       |        |   |       |
|       | 35(1),      |        |                   |        |   |       |
|       | 35(2) and   |        |                   |        |   |       |
|       | 35(3)       |        |                   |        |   |       |
+-------+-------------+--------+-------------------+--------+---+-------+
| 13    | 25 26 28    | Mach   | - Production of   | J      |   | Ja    |
| 49(2) | 31(1) 31(2) | 15,    | electricity,      | anuary |   | nuary |
| /2556 | 31(3) 31(4) | 2013   | power steams and  | 21,    |   | 20,   |
|       | 34 35(1)    |        | water for         | 2014   |   | 2022  |
|       | 35(2) and   |        | manufacture       |        |   |       |
|       | 35(3)       |        |                   |        |   |       |
+-------+-------------+--------+-------------------+--------+---+-------+
| 16    | 25, 26, 28, | August | - Production of   | June   |   | June  |
| 57(2) | 31(1),      | 25,    | pure vegetable    | 5,     |   | 4,    |
| /2552 | 31(3),      | 2009   | oil and /or       | 2010   |   | 2018  |
|       | 31(4)       |        | semi-pure         |        |   |       |
|       | and 34      |        | vegetable oil     |        |   |       |
+-------+-------------+--------+-------------------+--------+---+-------+

  Furthermore, in accordance with the Promotion Certificate
  No.1063(2)/2552, 1432(2)/2552, and 1349(2)2556, the subsidiary
  receives the privilege in 50% income tax reduction of the regular rate
  for the period of 5 years commencing from the expiration date of
  income tax exemption and under the Promotion Certificate No.
  1657(2)/2552, the subsidiary is granted privilege for exemption of
  import duties for approved machinery and exemption from income tax on
  dividend on profit from promoted businesses during the period in which
  the Company is granted exemption from corporate income tax.

  Three foreign subsidiaries are granted by foreign investment
  certificate and tax privilege from Lao People’s Democratic Republic
  (the 1^(st) Certificate) and from Kingdom of Cambodia (the 2^(nd)-
  4^(th) Certificates) which the details are as follows:

1)  Foreign Investment Certificate No. 017-06/ Khor Lor Tor includes tax
    privilege for exemption from income tax for 5 years from the date of
    first receiving revenue from sales of sugar, thereafter, the
    subsidiary shall pay income tax at the rate of 20%. The revenue is
    first derived on July 21, 2010 and will expire on July 20, 2015.

2)  Foreign Investment Certificate No. 4420/06 Ghor. Wor. Ghor. dated
    December 15, 2006 and No. 4342/07 Ghor. Wor. Ghor. dated November
    20, 2007 issued by the Council for the Development of Cambodia, the
    subsidiary is granted by tax privilege for exemption from import the
    duties for machinery for manufacturing and construction materials.

3)  Foreign Investment Certificate No. 1641/09 Ghor. Wor. Ghor. and No.
    1642/09 Ghor. Wor. Ghor. dated July 28, 2009 issued by the Council
    for the Development of Cambodia, the subsidiary is granted tax
    privilege for exemption from income tax for the period of 8 years,
    including priority period commencing from the period when subsidiary
    is operated (year 2006).

4)  Tax Exemption Certificate for agriculture-industrial (sugar cane)
    No. 4511 dated July 29, 2009 issued by the Ministry of Economy and
    Finance, Cambodia, grants the privilege to charge value-added tax at
    0% for sales of sugar cane to manufacture sugar for export. This
    certificate is valid for the period of 1 year from July 29, 2010 to
    July 31, 2011. The subsidiary is currently waiting for the renewed
    certificate covering the period from last expiration date to current
    fiscal year which it has submitted for.

    2.  Investment and Management Policy for subsidiaries and affiliates

As of October 31, 2014, the company invests in both direct and indirect
19 subsidiaries and 1 affiliate, as followings:

Subsidiaries (The company holds the shares directly)

  1) Tamaka Sugar Industry Co.,Ltd

2) New Krung Thai Sugar Factory Co.,Ltd

3) New Kwang Soon Lee Sugar Factory co.,Ltd

4) KSL Real Estate Co.,Ltd

5) KSL Export Trading Co.,Ltd

6) Khon Kaen Sugar Power Plant Co.,Ltd

7) Khon Kaen Alcohol Co.,Ltd

8) KSL Material Supplys Co., Ltd. (formerly KSL Chemicals Co., Ltd.)

9) Thai Sugar Terminal Public Company Limited

10) KSL Agro and Trading Co., Ltd.

11) Savannakhet Sugar Co.,Ltd

  12) Koh Kong Sugar Industry Co.,Ltd

  13) Wynn In Trading Co.,Ltd

Subsidiaries (The company holds shares directly and indirectly through
Thai Sugar Terminal Public Company Limited.)

  14) T S G ASSET CO., LTD.

  15) T S OIL INDUSTRY CO., LTD.

16) T S FLOUR MILL PUBLIC CO., LTD

17) TS WAREHOUSE CO., LTD.

18) T S TRANSPORT AND LOGISTIC CO., LTD.

Subsidiaries (The company holds the shares indirectly through Wynn In
Trading Co., Ltd.

  19) Koh Kong Plantation Co., Ltd.

Affiliate 1) Champion Fermentation Co.,Ltd

For the subsidiaries that the company holds its shares directly, the
company has controlling power through holding more than 50 % of shares
except Thai Sugar Terminal Public Company Limited and 5 subsidiaries
which the company holds directly and indirectly 23.82% of the share but
has controlling power in according with the definition of subsidiaries
specified in account standard.

The company has the policy to invest in the business related to sugar
business, sweetener business or other business that gives the benefit
and reasonable return to core business. The criteria for the investment
will be based on competitive advantage, reasonable return, the amount of
money to invest. In addition, considering the proportionate of
investment will be depended on many factors, such as, how significant
the expertise of business is. If the business needs special experiences
significantly and the company has no or less experience, the company
will let other strategic partners holding the share in higher
proportion. However; if the company has the investment in high
proportion, the company will assign its own representatives to
participate in a position of company directors or a position of top
management. In addition all of company investment must be approved by
the board of director and there should not be the conflict of interest
with the parent company in the future.

5. Legal Dispute

- none -

6. General Information and Other Information

1.  General Information

Company Name : Khon Kaen Sugar Industry Public Company Limited

Type of business : Manufacturer of Sugar & Sugar-related products

Registered & Head Office : 503 KSL TOWER 9^(th) Floor, Sriayudhya Road,
Rajathevi,

  Bangkok, 10400 Thailand.

Company Registration Number : 0107547000214

Registration Phone number

Tel. : +662-642-6230

Fax : +662-642-6228

Website : http://www.kslsugar.com

2.  Risk Hedging Procedure Against Sugar Price Volatility in the World
    Market

Thailand has the capability to produce sugar more than domestic
consumptions, some of remaining sugar were exported. Ratios of domestic
consumption to exportation vary each year by year --approximately from
20:80 to 40:60--depending on yearly amounts of sugar cane crushed. Then,
Thailand becomes the second largest sugar exporter after Brazil. Revenue
of sugar producers in Thailand is partially based on the world market
sugar prices and fixed domestic sugar prices, regulated by government.

In terms of world sugar price, the policies supporting and protecting
benefits of farmers, and food security policies regulate importing
countries to issue measures for regulating and restricting sugar
importation. These policies, issued by international government sectors,
affect sugar demand in the world market. Factors related to climate
uncertainty such as flooding, droughts, or severe cold in countries
where sugar is produced and consumed, limited number of exporting
countries, and any other events affecting the world market sugar supply
also affect the world sugar prices. Furthermore, in the past 2 – 3
years, significant increase in investment by foreign funds has
heightened fluctuation of sugar prices in the world market; prices are
much higher or lower than fundamental factors. Sugar prices are
especially volatile in years when consumption demand is close to or
greater than the amount of sugar produced. Chart 6.1: World Sugar Prices
in the Past 10 Years demonstrates volatility of sugar prices.

Chart 6.1: World Sugar Prices in the Past 10 Years

[]

[]

Due to the fact that revenue of sugar producers in Thailand is partially
based on the world sugar prices, which fluctuate significantly, the
company's operating results will be affected when sugar prices in the
world market drop drastically. To prevent the risk posed by sugar price
volatility in the world market, the risk hedging procedure has been
established with the use of risk management mechanisms and tools in the
forms of futures contracts. Prices are based on those at futures markets
in New York (NYBOT#11 – Raw Sugar) and London (LD#5 – Refined Sugar).
Details are as follows:

Case 1: Normal business transactions in trading export sugar (without
risk hedging)

A buyer and seller agree on a sugar price based on the market price.
Once reaching an agreement, the changed world market price does not
affect the agreed price and accounting recorded value. The seller
records the price as agreed with the buyer, for instance:

In case of sugar price increase in futures market

Day 1: Sugar futures price is at 600 USD / ton :

The buyer and seller agree on a transaction of sugar at the market price
of 600 USD + premium 100 USD

Day 2: Sugar futures price increases to 800 USD / ton :

The seller delivers the sugar. The buyer pays 600 USD + 100 USD premium
= 700 USD

Accounting Record: The company income generated from sugar sale is 700
USD.

Note: Premiums of sugar are based on types of sugar, delivery sites,
delivery time, delivery terms, etc.

In case of sugar price decrease in futures market

Day 1: Sugar futures price is at 600 USD / ton :

The buyer and seller agree on a transaction of sugar at the market price
of 600 USD + premium 100 USD.

Day 2: Sugar futures price decreases to 400 USD / ton :

The seller delivers the sugar. The buyer pays 600 USD + 100 USD premium
= 700 USD.

Accounting Record: The company's income generated from sugar sale is 700
USD.

It can be seen that prices that buyers receive depend on the time that
buyers and sellers agree to make transactions. This becomes problematic
when the world sugar prices are high. Sellers are interested in selling,
while buyers are not willing to buy due to high prices. When the world
sugar prices are low, buyers are willing to buy. Sellers, however,
consider the prices too low and are not so willing to sell. Sellers and
buyers are unable to agree on prices. This method would only work if
sugar prices in the world market were not volatile. High volatility of
sugar price causes the sellers and/or buyers losing the opportunities to
trade at their own satisfied prices.

Case 2: Adopting risk hedging procedure for sugar price in form of sugar
future contracts

During a period when the world sugar prices are highly volatile, to
prevent losing opportunities to sell at satisfied prices, sugar
producers adopt risk hedging procedure in form of "sugar futures
contracts" which their price are based on world sugar price. With this
futures contracts, contracts are not settled by sugar delivery, but by
cash settlement which paying the difference between the sugar price
fixed on the day the contracts are made and the sugar price on the day
the contracts are settled (unwinded). The risk hedging procedure may be
carried out directly at sugar futures market through a broker or
alternatively, through a financial institution as a counterparty.
Examples are as follows:

In case of sugar price decrease in futures market

Day 1: Sugar futures price is at 600 USD / ton :

The seller is satisfied with the price at this level, but no interest
from any buyer. Buyers expect the price to decrease. The seller entered
into a contract with a financial institution fixing the sugar futures
price at 600 USD.

Day 2: Sugar futures price decreases to 400 USD / ton :

A buyer is interested in buying. The seller sells sugar at the agreed
market price of 400 USD + 100 USD premium = 500 USD. At the same time,
the seller closes or unwinds the futures contract by buying back the
contract at the market price of 400 USD/ton (sold at 600 USD while
bought back at 400 USD), resulting in 200 USD gain.

From this example, the seller's actual income from the sugar sale is 500
USD + 200 USD gain from entering into the sugar futures contract = 700
USD. The amount equals the guaranteed price of 600 USD + 100 USD premium
= 700 USD.

Accounting Record: The company generates income from sugar sale at 500
USD (which is lower than the guaranteed price of 700 USD). The 200 USD
gain from entering into the sugar futures contract is recorded as other
income.

In case of sugar price increase in futures market

Day 1: Sugar futures price is at 600 USD/ton :

The seller is satisfied with the price at this level, but receives no
interest from any buyer. Buyers expect the price to decrease. The seller
enters into a contract with a financial institution fixing the sugar
futures price at 600 USD.

Day 2: Sugar futures price increases to 800 USD/ton :

A buyer needs sugar for use, resulting in buying at a high price. The
seller sells sugar at the agreed market price of 800 USD + 100 USD
premium = 900 USD. At the same time, the seller closes or unwinds the
futures contract by buying back the contract at the market price of 800
USD/ton, resulting in 200 USD loss (sold at 600 USD while bought back at
800 USD).

In this example, the seller's actual income from the sugar sale is 900
USD + -200 USD loss from entering into the sugar futures contract = 700
USD. The amount equals the guaranteed price of 600 USD + 100 USD premium
= 700 USD.

Accounting Record: The company generates income from sugar sale at 900
USD (which is higher than the guaranteed price of 700 USD). The -200 USD
from entering into the sugar futures contract is recorded as a loss.

In all the cases, the company has the net income of 700 USD (excluding a
commission paid to the financial institution). Methods of producing
accounting records are, however, different. For the regular transaction,
(no risk management involved), the company records 700 USD as income
from sale. The concerns with this type of transaction is that at the
time there may not be any buyer willing to buy, or the seller may not be
willing to sell. Adopting a risk hedging tool of sugar futures
contracts, if the market is in a downturn, the company will record
income from the sugar sale at 500 USD, and 200 USD gain from entering
into the sugar futures contract will be recorded as other income.
However, during an upturn in the market, the company will record 900 USD
as income from sale and -200 USD loss from entering into the sugar
futures contract.

In conclusion, entering into sugar futures contracts enable (1) buyers
and sellers to trade at prices considered satisfactory by both parties
without the need to wait for prices to reach the levels that buyers and
sellers can agree on; and (2) the net revenue will be equal to fixed
prices. If the market is experiencing a down turn, actual income from
sugar sales will be low, but will be offset by gain from entering into
sugar futures contracts. During an upturn, however, actual income from
sugar sale will be high, while there is loss from entering into sugar
futures contracts.

Important Concerns

1. The times of recording actual sales may be different from those of
recording gain/loss from entering into sugar futures contracts.
Accounting policies of some companies, for example, record income from
actual sales when sugar is delivered to customers. Gain/loss from
entering into sugar futures contracts is recorded upon contract closure
or unwinded. It is possible that companies will realize gain/loss from
entering into sugar futures contracts before recording sales, resulting
in a discrepancy between the two records produced at different periods.
This outcome will be experienced significantly by companies that report
their operating results in quarterly basis.

2. Adopting a risk hedging procedure for sugar price volatility in form
of sugar futures contracts can insure the company against the sugar
price risk on existing sugar volume and also sugar volume estimated to
be produced in the future. Amounts hedged under sugar future contracts
vary according to sugar production estimated to be produced in the
future. However, amounts of sugar produced depend on quantities of cane
crushed largely affected by climate, vast cultivation areas, and a lot
of farmers. As a result, inaccuracy of estimation of sugar cane crops
may be rather high.

When estimation of sugar cane crops are too high, sugar futures
contracts have been made according to the estimates and later the actual
outputs do not match up with the estimates, the contracts become
oversold. If the sugar future price is in an upturn, there will be
actual loss from sugar futures contracts made. This is due to the fact
that there is no actual sale at a high price to offset. In contrast,
when the sugar market price is experiencing a downturn, there will be
actual gain from sugar futures contracts.