Industrial Potato Growing & Issues in Turkey

1. FRITO LAY – TURKEY
24th ANNUAL CONFERENCE ON
US – TURKISH RELATIONS
June 5 – 7, 2005
FAHHAN OZCELIK

2. Major Growth in All FMCG Categories following 2001 Crisis
FMCG Growth (Value) Macro snacks Growth (Value)
$ BIO
+%50 $ MM
+%42 692,5
10 8,4
750
578,1
8 6,6
600 488,4
5,6
6 450
4 300
2 150
0 0
2002 H1 2003 H1 2004 H1 2002 H1 2003 H1 2004 H1
Source: Household Panel January - June Source: AC Nielsen Macrosnack Report January - June
Salty Snacks Growth (Value) Salty Snacks Growth (Volume)
TONS
$ MM 96,2 13.341
+%110 15.000 +%80
100
74,1 12.500 9.415
75 10.000 7.451
45,9
50 7.500
5.000
25
2.500
0 0
2002 H1 2003 H1 2004 H1 2002 H1 2003 H1 2004 H1
Source: AC Nielsen Macrosnack Report January - June Source: AC Nielsen Macrosnack Report January - June

3. Political & Economical Stability:
Accelerated Growth leading to Investments
35.000
30.385
30.000
%103
25.000
22.343
20.000
16.911
15.128 14.933 14.716
15.000
11.029 10.731 10.927
10.454 10.556
10.076
10.000 8.856
8.030 8.378
5.000 4.041
3.225
2.197 2.432 1.788
1.519
398
0
94 95 96 97 98 99 "00 "01 "02 "03 "04
Volume
Capital Investments

4. Though Traditional Snacking is high the new habits are developing
Turks likes snackingmacrosnackers...
Turks are heavy !
Packaged (Processed) Snacking Consumption is rather low
3
2,5 2,5 2,5 Past 24H Snacks Consumption Occassion
2,3 2,2 P24Hr Makro Snack Consumption %
2 1,9 1,9
1,8 1,8 1,8 1,7 1,7 1,6 1,6
1,5 1,4 55
1,3
0,7
20
23 15 14 14 13 12 10 10 8 7 6
1
Australia
USA
Colombia
Argentina
WEBU
Belgium
China
India
Spain
Poland
P Rico
Brazil
Portugal
UK
Chile
Turkey
Mexico
Peru
Netherlands
Greece
Nuts
Simit
Bakery (Acna, Pogaca)
Gum
Chocolates
Cookies
Salty Snacks
Snack Cakes
Candies
Fruit
Ice Cream
Popcorn
Pastries (Borek)
Crackers
Kaynak: 5Ws Çalismasi 2003
However the trend is growing in Packaged Snacks
500.000
Sales Value) 448.958
450.000 414.720
400.000 376.498
400.347 320.898
350.000 315.336
300.000
250.000 Source: 5Ws Study 2003
1999 2000 2001 2002 2003 2004
Kaynak : Internal projection based on SS share in MS fcast

5. Frito Lay 2000 – 2004 Agricultural Product Purchases
90.000.000
82.785.000
80.000.000
70.000.000
60.716.094
60.000.000
Corn Meal
50.000.000
38.724870 41.156.614 Corn
40.000.000 Potato
27.468.597 28.763.509
30.000.000
20.000.000
10.000.000
0
2000 2001 2002 2003 2004 2005 (PLAN)
Corn Meal 3.073.052 3.103.175 3.336.600 8.204.257 6.126.370 8.000.000
Corn 6.170.625 4.342.266 5.555.820 7.052.357 10.046.048 16.000.000
Potato 29.481.193 20.023.156 19.871.089 25.900.000 44.453.676 58.785.000

6. Industrial Potato Issues in Turkey

7. Potato
Consumption (ton) : 44.454
Unit Cost (USD/ton) : 282.-
Total Purchase(USD): 12.5 Million

8. Corn
Consumption (ton) : 10,046
Unit Cost (USD/ton) : 365.-
Total Purchase (USD): 3.7 Million

9. Corn Meal
Consumption (ton) : 6.212
Unit Cost (USD/ton) : 493.-
Total Purchase (USD): 3.0 Million

10. Potato & Corn Procurement through Contracted Farming
Direct Procurement Indirect Procurement
Contract Contract
Big Farmers Suppliers (4)
(12)
Sub-Contract (85)
Farmer Own
Production
Farmer Farmer

11. Typical Potato Production Cycle 26 months
March ‘03 Seed Order
March ’04 Elite Seed Import
Apr-May ‘04 Elite Seed 100 ton
Planting
1000 ton
Sep. ‘04 Certified Seed
Harvest
Jan – Apr ’05 Certf. Seed
Planting
May – Oct ’05 Chipstock
Potato Harvest
7500 ton

12. Industrial Variety Approval Process
AGRO PC Production Consumer
• Field Trials • Productivity & Efficiency • Appearance
•Observations • Defects and Yield • Taste
•Supplier Preferences • Crispiness, mouth feel

13. Industrial Chips Potato Varieties
FL Approved Concession Required
Agria Atlantic
Aster Bolesta
Diamant Columbus
Ernestolz Courage
Fresco Desiree
Hermes Eersteling
Hertha (stored) Agria
Karilera Maris Piper
Lady Rosetta Lady Claire
Mila
Panda
Pepo
Record
Saturna

14. Potato Farming Areas
Suadiye
Yenisehir
Eskisehir
Altinova
Sivas
Manisa Afyon
Nevsehir
Kayseri
Odemis
Konya Tufanbeyli
Nigde
Karaman
Adana

15. Supplier Development Capacity & Investments
Potato Stores: Corn Silos & Facilities:
3 Nos 11 Nos
Total Capacity: 32.000 ton Total Capacity: 24.000 ton
Investment: USD 3,5 Million Investments: USD 2,2 Million
Equipment Inv.: $1,4 Million Equipment Inv.: $ 1.0 Million
Corn Meal Production Facilities:
Total Development
2 Nos
Investment:
Total Capacity: 14.000 ton
USD 12.3 Million
Investment: USD 4,2 Million

16. Labor Intensive Production
Potato Field Labor Cost: 67.736 wages
Potato Storage Labor Cost: 7,131 wages
Technician Cost (12x22x24) 6,336 wages
Appx. Total Labor Cost (’04): USD 950,000.-
Appx. Transport. Cost (04): USD 3.0 Million
(5250 trips)

17. FLT Technical Support
•Train the Trainer of Supplier
•Certification
•In the Field Training &Support
•Vendor Assurance Programs

18. Forecasting & Planning is the Key with the given
constraints on the Importation of Seeds & Potatos
The production cycle of 26 mos from elite seed planting to chipstock
harvesting requires a very comprehensive planning in spite of market
dynamics.
The natural growth of business is blocked by the difficulties of seed and
potato importation
70 70%
60%
60
50%
50
% Change
40%
Ton
40
30%
30
20%
20 10%
10 0%
2002 2003 2004 2005
Plan 20,6 19,7 24 48,5
Actual/Frcst 19,7 25,9 39 69
% Variance 0% 31% 63% 42%

19. Potato Quality
Turkey Potato Defects % 8<45
100% 20
80%
15
r - pi ot
PeOts r
60%
10
40%
5
20%
0% 0
P1 P2 P3 P4 P5 P6 P7 P8 P9 P10 P11 P12 P13
>15% 10,8 16,1 26,1 33,6 44,1 1 0 1,5 2,4 0 16,5 2 2,4
8-15% 41,5 67,8 50,7 58 54,1 27,1 16,8 41,8 56,8 8,3 54 68,8 75,2
5-8% 43,6 14,2 20,1 7,5 1,8 47 56,1 40,3 33 22,9 24,2 24 20,7
<5% 4 1,9 3 0,9 0 25 27,1 16,5 7,8 68,8 5,3 5,2 1,7
In Bag Defects 4,7 5,1 5,7 5,8 6,2 3,6 3,2 3,6 3,8 2,5 4,1 4,1 4,3
Volumes (MT) 3284 3453 2974 1581 1229 2808 2214 3060 2852 2876 2081 3052 3565
EU Defects Average %8<84
100% 20
80%
15
Pre-Optisort
60%
10
40%
" 5
20%
0% 0
P1'04 P2'04 P3'04 P4'04 P5'04 P6'04 P7'04 P8'04 P9'04 P10'04 P11'04 P12'04 P13'04
% Ref. Capable YAG 49,7 50,1 48,8 48,6 47,3 63,7 78 94 93 94 88 78 75
>15% 4 4 2 3 5 3 2 1 2 3 4 5 4
8-15% 24 19 16 17 16 11 10 5 5 6 6 17 22
5-8% 32 28 28 29 28 24 20 6 9 11 14 26 32
<5% 40 50 54 51 50 63 69 87 84 80 76 53 42
Pre-Optisort 6,7 6 5,7 6 6,2 5 4,3 2,6 2,8 3,3 3,9 5,7 6,7
Volumes (MT) 55959 58402 65319 61952 67301 66475 67843 63306 61524 63255 63951 65919 65779

20. Industrial potato shares
Million ton
21,8 7,7 7,1 6,5 12,1 5,3
100%
0,13
80% 2,86
4,08 4,05
13,52 7,02
60%
5,17
40%
3,64
3,62 3,05 5,08
20% 8,28
0%
USA Netherlands UK France Germany Turkey
Kitchen Potato Industrial Potato

21. Contracted Potato Farming Comparison
Million ton
100%
3,3
90% 1,8
80%
70%
60%
21.8 7.7 4,8 5.3
50%
18,5
40% 5,9
30%
20%
10%
0,5
0%
USA Netherlands Turkey
Contracted Not-contrated

22. Frito Lay Potato Unit Cost Index
Cost Index
100
100
94
91
90 88
80
80
72
69
70
62
60
55
50 50 49 49
50 48
42
40
30
20
g
y
s
l
el
n
nd
us
m
ey
e
t
UK
A
a
ga
yp
ar
Av
nd
ai
ec
ric
KS
ra
iu
rk
la
pr
Sp
ng
rtu
Eg
la
lg
Is
re
Af
Po
EU
Tu
Cy
er
Be
Hu
Po
G
S.
th
Ne

23. Frito Lay Quality Reference Production (%)
100 96
93
91 91
90
84
80
73
70
60
54
50
45
40
30
20
UK Netherlands Spain Portugal Poland Belgium Turkey EU Avg

24. Poland Success Story
160
140
Poland Turkey
120
112
110
100 100 100
100 97
89
84
36
80
69
27 61
60
42
40
20
Cost '95 Cost '99 Defect '95 Defect '99 Efficiency '95 Efficiency '99

25. Poland Success Story – Cost Efficiency &
Quality Improvement
Fields are big and not scattered
Contracted Farming with Cost + Profit & incentive to
Quality Improvement – Minimized Price Fluctuations
Conscious Input (Seed, fertilizer & chemicals),
minimum 3 years Crop Rotation (integration w/animal
breeding) & continuous technical support
Potato handling, packing, storage and transportation
standards are high – minimized losses
Seasonal Potato importation is allowed and easy
Customs and quarantine regulations are fast
Incentives for infra-structure, foreign investments and
exports

26. Outcome
The supply of Industrial potato not meeting the
demand
The cost and quality of Turkish potato market is not
competitive at all with foreign markets
Unlike Government partners with the Industry for the
development of Potato Agriculture, Turkey will
end up importing potato with World Trade & EU
regulations change!

27. What Frito Lay Turkey can offer as Market
Leader in Salty Snacks Industry
• Assured Quality Elite Seed importation for our produce
• Specialist Support & Training for quality Certified Seed production
• Technical Support to farmers to increase field productivity
• Technical & Financial support to Develop Model Industrial Potato production
• At Contracted Farming, guarantee for purchase and incentive for quality
• Exports of quality Potato Chips and Competitive Industrial Variety Potato
• Pioneering to develop Modern Warehousing and Handling Equipment &
handover to suppliers within a period
• Cooperation with Public Sector to provide training abroad at Frito Lay best
practice farming implementation techniques
• Cooperation with Universities to develop agricultural protection and
quarantine labs
• Scholarships to talented Agricultural Faculty students abroad

28. What Frito Lay Turkey expects from Government
• Elite Seed importation and quarantine requirements
should be according to EU regulations
• All Quotas on Elite Seed importation should be
removed
• At Seed approval and certification EU regulations
should be taken
• The barriers on seasonal potato importation should be
removed
• The Government should give incentives for industrial
potato producers and exporters

29. Introduction
Frito Lay Turkey, Part of Pepsico Intl. within MEA Region
under EMED Business Unit. 1988 JV, ’93 100%
Revenue:
– ’04 Net Revenue: $168MM, ’02 $71MM 137% Growth in 2yrs
# of employees
– 2,165 employees (incl. contractual/dist.), 61% Sales, 28% Plant & 11%
HO
Macro Snacks share, Salty Snacks Share, brands, distribution etc.
– April ’05 Salty Snacks 14.6% in Macro (’04 size $1,700MM)
– FLT 79.2% in Salty Snacks (’04 size $230MM)
– FLT company share in Macro YTD ’05 13% #3
– Global Brands in top 10 Macro shares
» #1 Doritos 4.2%
» #2 Cheetos 2.6%
» #5 Lay’s 2.0%
» #6 Ruffles 2.0%
– Numeric Distribution 76.9% & Weighted D. 96.2%

30. Last 3 yrs Growth & Outlook
Economic & Political Stability
Remarkable economic achievements during AKP period with ’04
GNP growth of 9.9% & Consumer Price Inflation 9.4%, High
Central Bank reserves $37 billion
Capacity utilization rate reached 80.3% in March
FMCG & Macrosnack & Salty Snacks Growth
Significant growth in all categories during last 2 years;
FMCG 50%, Macrosnacks 42% & Salty Snacks 110%
Frito Lay Growth
137% growth in revenue during the same period
Growth Expectation
’05 growth forecast is 22%
Capital Investment Progression
Plans to have $65MM capital investment over 3 yrs.

31. Why we are optimistic for the future ?
EU accession road
Road to October 3rd is still bumpy
Referendums in France & Holland changed the agenda within EU
German elections likely to bring a new concept privileged state rather than full membership
Turkey still needs to sign the protocol for Customs Union including Cyprus as a member state
Outlook for 05
’05 outlook is + with growth of 5% & 8.0% CPI
Further a steady 5% annual growth can be maintained
Further economic growth
No more ups & downs with stability established in politics and economy
The risk of economic and political collapse is low. We have a lot of optimism.
There is now a real chance of sustainability
Still hurdles to over come!!!
Unemployment is high 11.5%
The current account deficit is $3.8 billion in 1st 2 mos of 2005 was mainly financed by portfolio
investments
Intellectual property rights is an issue
Unbalanced income distribution
Unfair competition because of “Kayit Disi” sizable grey economy that reduces the fiscal base,
weakens public budget performance and disrespect for the rule of law
Still bureaucracy, needs a cultural transformation in public administration

32. However we still have issues to be sorted out in our sector
Potato Story
Industrial Potato
– Annual Potato production in Turkey is 5.3 million tons, only 120 thousand tons are
industrial potato varieties (FLT ’05 usage : 60 thousand tons). 2% compared to 62%
in USA, 57% in UK, 53% in Holland & 58% in Germany
Certified Seed
– Certified Seeds are required to protect the soil from diseases, improve field
productivity, and deliver high yield from the potato. In 2005 Turkey needed 62
thousand tons of elite seed for seed multiplication to have certified seeds, but
Ministry of Agriculture’s quota was 10 thousand tons only (FLT for the first time
awarded with 1500 tons that secures our 06-07 season potato needs)
Contracted Farming
– Contracted potato farming practice secures the farmers. However, only 9% of potato
farming in Turkey is contracted compared to 85% in USA and 77% in Holland.
Conscious Agriculture requires to have
– Soil Analysis to prevent disease and identify required fertilizer usage
– Seed/Fertilizer/Chemicals balanced and controlled use
– Crop Rotation to protect the fields from disease and improve
productivity….unfortunately due to lack of resources of ministry and education of
farmers the control is very poor…resulted in Synchitrium Endobioticum (potato
cancer) disease in well known potato farming areas of Derinkuyu and Kaymakli.
Unfortunately is now spreading out due to weakness of quarantine measures.
Temp. & Humidity Controlled Storage Capacity
– Fresh chipstock is available from June to October then it is the storage period when
temp & humidity controlled storage required to protect the quality and yield of the
potatos. In Nevsehir area there are primitive cave stores used for this purpose. FLT &
suppliers have build and renovated 35 thousand tons of modern storage area &
continue to build as required. ./..

33. However we still have issues to be sorted out in our sector
Barriers on Seasonal Importation
– The end of the storage season April-May is critical for the stored potato
quality and yield performance in industrial production. Current industrial
varieties have low performance. During this period we need to have
imported potato. Though by law potato importation is not banned.
Ministry applies all bureaucratic barriers not to give importation permit.
The recent application resulted in having permission on May 12th
Thursday valid till May 15th Sunday ! Is this a joke? Still we can import
finished packed potato chips from our sister companies in Europe. This
year we imported 1,000 tons of finished products from Spain.
Customs & Quarantine regulations not in line w/EU
– Unfortunately we have not adopted yet EU regulations in our Customs
and Quarantine procedures both for elite seeds and theoretical potato
imports
Government Incentives for Industrial Potato Agro
– Though Ministry is talking about Government incentives for Industrial
potato farming still not walking the talk!
Subsidization will be removed on the road to EU
Price & Quality Competitiveness for Turkish Potato
– Unfortunately both price and quality references are way below compared
to European and Middle Eastern standards in industrial potato. (Detailed
comparison can be provided for the interested parties)

34. Conclusion
We offer
Assured Quality Elite Seed importation to be planted for certified seed
multiplication
Specialist support & training for quality Certified Seed production
Technical support to farmers for conscious agricultural practices
Technical & financial support to develop model industrial potato
farming
At Contracted farming, guarantee for purchase and incentives for
quality improvements
Exports of quality potato chips and competitive industrial variety
potato
Pioneering to develop modern warehousing and handling equipment
and handover to suppliers within timeframe
Cooperation with public sector to provide training abroad at Frito Lay
best practice farming implementation techniques
Cooperation with Universities to develop agricultural protection and
quarantine labs
Scholarships to talented Agricultural Faculty students abroad ./..

35. Conclusion
We expect
Elite seed importation and quarantine requirements in
compliance with EU regulations
Removal of all quotas on Elite seed importation
EU regulations at seed approval and certification procedures
Removal of barriers on seasonal industrial potato importation
Government incentives for industrial potato farmers and
exporters
“Walk the Talk” link the vision, legislation to
execution. Focus on Cultural Transformation at state
departments