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Risk Management

The following is a list of the main risks that the Group believes can have an impact on the business results and financial condition of the J-Oil Mills Group. All future-oriented statements in the following discussion constitute judgments of the J-Oil Mills Group based on information available as of March 31, 2014.

1. Risks Related to Procurement of Ingredients for Pressing Oils

In the edible-oil operations of the J-Oil Mills Group, which constitute the core business of the Group, all soybeans, canola and other ingredients are sourced overseas. Currently the environment for procurement of these ingredients is a challenging one, as cereal prices are at historically high levels. Factors in this development include increased demand for plant oils due to economic development and growing populations in many of the developing countries where these ingredients are sourced, notably including China and India; demand for plant oils as feedstocks for biofuels; and changes in investment flows due to the low-interest environment prevailing worldwide. If the demand for cereal inputs continues to grow, risk to the Group’s ability to deliver products consistently may increase.

2. Effects of Fluctuations in Raw-material Prices and Exchange Rates

Because the Group sources its soybeans, canola and other main ingredients overseas, raw-material costs are influenced by market prices for cereals overseas. Cereal prices can fluctuate greatly due to changes in weather and the balance between supply and demand, among other factors. The sourcing of inputs overseas also exposes the Group to impact from currency-rate fluctuations. Marine freight rates vary with global economic conditions and the price of petroleum. A fall in meal prices can lead to a rise in the cost of edible oils. If the Group is unable to pass on increased costs from currency fluctuations, rising cereal and meal prices and marine freight rates, the Group may be forced to absorb them, depressing earnings. Finally, when petroleum prices are high, the rising cost of petroleum-based feedstocks and fuels can impact the Group’s business results.

3. Import Duties

The raw soybean oil and canola oil the Group imports to Japan as its main inputs are assessed an import duty of ¥10.9 per kilogram. This import duty may be reduced in the near future, depending on progress in negotiations on the Trans-Pacific Partnership (TPP) with Pacific Rim states, various Economic Partnership Agreements (EPAs), Free Trade Agreements (FTAs) and World Trade Organization (WTO). If these import duties are decreased, the acceptance of lower-priced goods from overseas may reduce prices at the cash register and accelerate the recent increasing trend in sales of imports, engendering a risk of thinner sales volumes for domestically produced goods.

4. China Risk

The purchase of large volumes of cereal from edible-oil producers in China is resulting in higher prices paid on cereal markets and expensive marine freight rates. The possibility also exists that the import of large volumes of cheap, surplus meal into Japan from China may grow. For domestic edible-oil producers such as the J-Oil Mills Group, China’s ability to procure and produce large quantities of oil is a constant potential threat.

5. Natural Disasters

If a major earthquake or other natural disaster strikes, the Group may face the loss of productive equipment or an interruption of business activities. Such an event could impact the Group’s business results and financial condition.

6. Spread of Infectious Diseases

If an outbreak of a new strain of influenza or some other infectious disease triggers a worldwide pandemic, the J-Oil Mills Group may be obliged to suspend operations. Such an eventuality could impact the Group’s business results and financial condition.

7. Food Safety

The J-Oil Mills Group maintains a robust framework for the assurance of food safety. When sourcing ingredients, the Group obtains written warranties vouchsafing that the materials are in full compliance with applicable laws and regulations of Japan, including the Food Sanitation Act and the Act for Standardization and Proper Labeling of Agricultural and Forestry Products (JAS Act). The Group also ensures full traceability of imported ingredients.

Nonetheless, the possibility always exists that some unforeseen safety problem may occur that affects society generally. Such an event could impact the Group’s business results and financial condition.

8. Factors That Could Reduce Demand for Meal Products

Depending on the progress of negotiations in trade agreements such as the TPP, import duties on animal and dairy products could be lowered. If this occurs, an influx of low-priced goods from overseas could deal a grievous blow to the domestic stock-raising and dairy-farming industries, reducing sales of soybean and canola meal used in feed mixes.

Distillers’ dried grains with solubles (DDGS) are dregs or meal used in the United States to distill ethanol. These compete with corn and soybean meal for use as feed mixes and their import into Japan is currently on a rising trend. In the future, large quantities of DDGS may be imported into Japan.

Animal diseases such as foot-and-mouth disease and avian influenza can affect herd sizes at major purchasers of feed mixes, creating risk of reduced sales volumes of soybean and canola meal.

9. Japan’s Declining Birthrate and Aging Demographic Profile

According to confirmed figures from the national census, published in 2010 by Japan’s Ministry of Internal Affairs and Communications (MIC), Japan’s birthrate is declining even as its demographic profile is aging. The rate of population growth in Japan has hovered around zero from 2005 onward, reaching its lowest levels since the census began, while the share of the population aged 65 years and over is rising. If this declining birthrate and aging demographic profile continues, the risk exists that the market will shrink, causing sales of the J-Oil Mills Group’s products to falter. Determined to minimize the impact from this trend, the Group is working on a number of countermeasures. Among these is the development of products catering to health-oriented demand from Japan’s expanding elderly cohort.

10. Legal and Regulatory Environment

The J-Oil Mills Group is bound by a host of laws and regulations, including the Food Sanitation Act, the JAS Act, laws and regulations related to the environment and recycling, and the Act on Prohibition of Private Monopolization and Maintenance of Fair Trade (Anti-Monopoly Act). Committed in its management policy to the pursuit of CSR management, the Group operates in strict compliance with all relevant laws and regulations. Nonetheless, unforeseen additions to and changes in the laws and regulations that bind the J-Oil Mills Group can increase the Group’s costs at any time, thereby possibly impacting the Group’s business results.

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