Global Ag Investing Trends and Implications for Australia · Demand drivers + 9 billion people by...

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Global Ag Investing Trends and Implications for Australia Philippe de Lapérouse Managing Director August 1, 2012 Melbourne, Australia


• HighQuest Partners + Soyatech

• Size of global ag market

• Fundamental drivers

• Expected range of returns

• Implications for investment in Australia

• Summary


HighQuest + Soyatech

Strategic advisor in global food, agribusiness and biofuels

Media and & conferences for global agriculture


Representative clients

HighQuest works globally for strategic and financial investors operating across the sector

mailto:[email protected]


Upcoming Events

Global AgInvesting Asia 2012

September 25-27 | Singapore

Global AgInvesting Europe 2012

December 3-5 | London

Global AgInvesting Middle East 2013

February 25-27 | Abu Dhabi

Global AgInvesting 2013

April 29-May 1 | New York City

www.globalaginvesting.com

http://www.globalaginvesting.com/


New York conference attendees

End Investors:

26.7%

Investment Managers:

42.0%

Industry and Other:

31.3%


New York conference attendees

Assets Under

Management

Additional AUM

in Three Years

Ag-Focused Investment Managers $16.2 billion $17.3 billion

Diversified Investment Managers $3.6 billion $3.4 billion

End Investors $1.2 trillion $8.2 billion


New investment- strategy


New investment - geography


Example of sub-allocation framework for an ag portfolio

Geography

Operational / Development

Type of Asset

• Australia

• S. America

• E. Europe

• Russia

• Africa

• Land Ownership (Free Title)

• Risk- Sharing Lease Structures

• Farm Management

• Land Development / Conversion

• Value Chain Investment

• Permanent Crops

• Dairy

• Animal Protein Production

Core

8-10%

• North America

• Row Crop Land

• Cash Lease


Total global agriculture market value is estimated at more than $6.4 trillion (including the food & beverage sector), representing over 8.5% of the world’s economic activity in 2010.

Global agricultural has been experiencing steady growth of 4 - 5% in recent years


Note: Illustrative

• 1980-1999 uses 2000 pricing

• 2011-2020 uses 2010 pricing (which is not a bad mean going forward

Agricultural commodities trade is forecast to exceed 520 million metric tons in next ten

years due to rising demand in China, India,Southeast Asia and Middle East.

Global agricultural trade volume to increase 2.7% (CAGR) over 10 years

Wheat

Corn

Soybeans

Soybean Meal

Sugar

Palm Oil

Rapeseed

Soybean Oil

Rapeseed Meal

Rapeseed Oil

0

100,000

200,000

300,000

400,000

500,000

600,000

(1000M

T)

Global Trade Volume by Crop, 1980-2020F

Wheat

Corn

Soybeans

Soybean Meal

Sugar

Soybean Oil

Rapeseed Oil

Rapeseed Meal

-

50,000,000

100,000,000

150,000,000

200,000,000

250,000,000

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

2014

2016

2018

2020

(000 U

SD

)

Total Export Value, 1980-2020F

Rapeseed

Palm Oil

Source: USDA statistics and baseline projection, CME

11


Input

• Seed;

• Fertilizer;

• Pesticide;

• Herbicide

• Farm

equipment

• Energy

Production

• Growers; • Cooperatives

Storage Handling/

Trading

Storage Handling/

Trading • Grain

elevators;

• Brokers and

traders

Transportation& Logistics

• Ocean;

• Barge;

• Rail;

• Truck

Processing

• Primary

processing;

• Food and

feed

ingredients

End users

• Food

• Feed

• Biofuels

• Industrial

Agriculture value chain

A complex market structure which requires appreciation for how margins are shared amongst players at different points along the supply chain.


Global agricultural market outlook

Seed

Ag chemicals & fertilizer

Ag machinery

Ag production

Food& beverage

Animal feed

Meat & aquaculture

Biofuels

2010 market value (est.) 2015 market value (est.) Estimated CAGR 2010-2015

Ag investment

Ag insurance

$37 billion

$134 billion

$56.1 billion

$ 1.3 trillion

$3.84 trillion

$263 billion

$672 billion

$56.4 billion

$20 billion

$23 billion

$47 billion

$196 billion

$80.5 billion

$1.46 trillion

$4.6 trillion

$313 billion

$815 billion

$80 billion

$40 billion

$66.6 billion

3.5%

6.5%

7.5%

2.4%

3.7%

3.5%

3.9%

7.2%

15%

20% 13


Key issues driving farmland values

Population growth and increase in GDP • Increased demand in developing markets, particularly Asia, SE Asia and North

Africa • Shift in diets from grain to animal protein

Increasing urbanization • Pressure on available arable land for crop production • Increasing reliance on processed foods

Constraints on supply • Access to water • Climate change • Linkage to energy markets • Slowdown in yield increases

Human capital • Generational transfer in both developed and developing markets • Lack of capacity building in developing markets


Historical global harvested acreage(ha) on a per capita basis (1964 – 2012 proj.)

0.12

0.15

0.18

0.21

0.24

Note: The crops include barley, corn, millet, oats, rye, sorghum, wheat, mixed grain, rice and oilseeds (copra , palm kernel, cottonseed, peanut, rapeseed, soybean, sunflower seed).

• Global harvested acreage has increased by 41% to estimated 916 million hectares in 2012 from 648 million hectares in 1964.

• Global harvested acreage on a per capita basis has dropped 35% to estimated 0.13 ha/person in 2012 from 0.2 ha/person in 1964.

Shrinking contribution to the global food supply


Historical world per capita demand for corn, wheat and soybean (kg) (1964 – 2012 proj.)

0

30

60

90

120

150

Per capita corn demand Per capita soybean demand Per capita wheat demand

• Global consumption of corn, soybean and wheat has increased 305%, 772% and 187% respectively to 863 million MT 261 million MT and 673 million MT.

• Per capita soybean consumption has been growing significantly (by 311% to over 37 kg/ person since 1964) thanks to increasing demands from industrial sector and animal feed sector, while per capita corn and wheat consumption will reach 122.4 kg/ person (growth of 87%) and 95.5 kg/person (growth of 33%) respectively in 2012.

Per capita demand for major crops increasing


Historical global per capita feed grain and oilseed ending stocks(MT) (1964 – 2012 proj.)

0.00

0.03

0.05

0.08

0.10

Per capita feed grains ending stock Per capita oilseeds ending stock

• Global feed grains ending stock has grown by 108% to estimated 354.7 million MT in 2012 from 170 million MT in 1964 while it has decreased by 4% to 0.05 MT/ person in 2012 on a per capita basis.

• Global oilseeds ending stock has grown over 42 times to estimated 73.9 million MT in 2012 while on a per capita basis, it has grown by less than 20 times to estimated 0.01 MT/ person in 2012.

Market volatility driven by uncertainty of available supply


0

0.01

0.02

0.03

0.04

0.05 Soybeans

.

0%

1%

2%

3%

4%

5% Corn

0%

1%

2%

3%

4%

5% Rice

0%

1%

2%

3%

4%

5%

19

71

19

74

19

77

19

80

19

83

19

86

19

89

19

92

19

95

19

98

20

01

20

04

20

07

20

10

Wheat

Trailing 10-Year Yield Improvement

0.0

1.0

2.0

3.0

4.0

5.0

6.0

19

80

19

82

19

84

19

86

19

88

19

90

19

92

19

94

19

96

19

98

20

00

20

02

20

04

20

06

20

08

20

10

20

12

20

14

20

16

20

18

20

20

Global Yields for 4 Major Crops Historical and Projected

(MT / ha) Corn

Rice

Wheat

Soy

Source: USDA; HighQuest Analysis

Declining productivity gains

18


0

20

40

60

80

100

120

140

160

0

10

20

30

40

50

60

70

Nov-00 Nov-01 Nov-02 Nov-03 Nov-04 Nov-05 Nov-06 Nov-07 Nov-08 Nov-09 Nov-10 Nov-11

Cru

de P

etr

ole

um

So

yb

ean

Oil

Soybean Oil and Crude Petroleum November 2000- July 2012

Soybean Oil Crude Petroleum

Nov ‘00-Dec ‘06

R2 = 0.19

Jan ‘10-Jul ‘12

R2 = 0.62

Jan ‘07-Dec ‘09

R2 = 0.86

New pricing dynamic created by biofuels mandates

Source: The Jacobsen, US EIA


-$1.00

-$0.50

$0.00

$0.50

$1.00

$1.50

$2.00

$2.50

$3.00

$3.50

8/8/05 8/8/06 8/8/07 8/8/08 8/8/09 8/8/10 8/8/11

Ethanol, Corn and Price Spread $/Gallon Ethanol

Spread Ethanol Corn Per Gallon Ethanol

R² = 0.8717

0

1

2

3

4

5

6

7

8

9

0 1 2 3 4

Co

rn $

/BU

Ethanol $/gal

Corn vs. Ethanol Sep '07-Jul '12

The Jacobsen, CBOT

Aug ’05-Aug ’07: R2 = 0.12

Sep ’07-Jul ’12: R2 = 0.87

Corn- Ethanol Pricing Relationship

Source: The Jacobsen, CBOT


Relationship - ending stocks (inventories) and prices

$-

$1.00

$2.00

$3.00

$4.00

$5.00

$6.00

0%

10%

20%

30%

40%

50%

60%

70%

19

61

19

63

19

65

19

67

19

69

19

71

19

73

19

75

19

77

19

79

19

81

19

83

19

85

19

87

19

89

19

91

19

93

19

95

19

97

19

99

20

01

20

03

20

05

20

07

20

09

US

$/B

u

US Corn Stocks-to-Use Ratio vs. Corn Price

Stocks-to-Use

Price


Demand drivers

+ 9 billion people by 2050 Increasing urbanization Growth concentrated in developing markets

1. Population

Shift in diets from grains to animal protein Increased demand for oilseeds and feed grains Engel’s Law / Bennett’s law

2. Rising Incomes

Potentially limitless Key pricing driver

3. Biofuels and

Industrial Uses


Demand for commodities driven by rapid GDP/capita growth in developing


Demand drivers - rising incomes

Animal Protein Consumption(kg) Per Capita vs. GDP Per Capita(PPP basis) - 2010

R² = 0.6709

-

20

40

60

80

100

120

140

- 10,000 20,000 30,000 40,000 50,000 60,000

Co

nsu

mp

tio

n p

er

cap

ita

(kg)

GDP per capita(PPP)

Australia

USA

Japan

UAE

S. Korea Norway

New Zealand

China


Demand drivers - rising incomes

R² = 0.96

0

5

10

15

20

25

30

35

40

0 2,000 4,000 6,000 8,000

Co

ns

um

pti

on

pe

r c

ap

ita

(k

g)

GDP per capita (PPP) Source: USDA; IMF; HighQuest Analysis

Chinese Vegetable Meal Consumption Per Capita vs. GDP Per Capita (1994-2009)


R² = 0.93

0

20

40

60

80

100

120

0 10000 20000 30000 40000 50000

Oils

eed M

eal Consum

ption/C

apita

GDP/Capita (PPP-basis)

2009 Oilseed Protein Meal Consumption/Capita vs. GDP/Capita (PPP-basis)

US

Canada

EU

Argentina

Middle EastFSU-12SE Asia

N. AfricaSSA

IndiaS. Asia

Soybean meal consumption increases due to higher animal protein consumption


China - meal demand

Over the past 15 years, meal consumption in China has had a 99% correlation with GDP per capita. Based on this correlation and OECD projections for future GDP growth in China, HighQuest projects that Chinese meal consumption will increase by 60% over the next decade (50 to 80 million MT).


Projected global demand - 2020

-

500,000

1,000,000

1,500,000

2,000,000

2,500,000

3,000,000

3,500,000

Sunflowerseed

Cotton

Peanut

Sorghum

Rapeseed

Barley

Soy

Rice

Wheat

Corn

Source: USDA; HighQuest Analysis

Global Production of 10 Major Crops (Historical1980-2010; Projected 2011-2020; 000 MTs)


Farmland required to supply projected demand

Conservatively, 65-85 million net incremental hectares will be required.

0

10

20

30

40

50

60

70

80

90

Net Additional Farmland Required by Crop (2010-2020; million hectares)


Other estimates for farmland to meet demand

68,000

48,000

27,000

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

HQP USDA FAPRI

Comparison of Projections of Additional Farmland for 10 Major Crops to Meet Demand / 2010 -

2020(000 ha)


Brazil - a key player

22.5

12.8

11.8

8.1

9.4

64.6

South America

FSU-12 Sub Saharan

Africa

South Asia Row Total

New Cropland By Region – Last Decade (2000-2010 – Harvested Ha for 10 major crops)


Supply - available global land reserves

WHILE LAND IS AVAILABLE FOR PLANTING, MUCH OF IT IS NOT ECONOMIC TO FARM

Sources: FAO; HighQuest Analysis

Net Reserves

547 18%

Forest804

26%

Protected

204 Urban

58

2%

Current Arable

141147%

Potential Rainfed Cropland (3,024 million hectares)

Africa256

47%

Latin America

152 28%

Asia87

16%

North America

30 5%

Oceana18

3%2

Net Reserves By Region(547 million hectares)


Source: World Bank(2011)

Geographic options for increasing farmland production


New long run price equilibrium

1960s

1980s

1990s


Thesis for farmland investment

1. Fundamentals a) Supply < Demand

Increase in supply slower than increase in demand b) Demand Rationing

High & volatile prices Price signal for capacity expansion New demand creation – biofuels and industrial uses

c) Higher Land Values... ...and potentially attractive economics throughout the sector resulting from application of technology and efficient agronomic practices which will generate higher cash rents per unit of land which will be capitalized into the value of the land.

2. Inflation & currency protection 3. Uncorrelated returns


5 Key risk factors

Step-change improvement in yields Launch of drought resistance varieties

1. Seed Technology

China SE Asia North Africa/Middle East

2. Slower Growth

On the distant horizon biofuels; protein meal; fat

3. Algae or Microorganisms

Double-edged sword Inverts the supply curve

Food security Export bans / trade embargoes GMO acceptance

4. Infrastructure/ Food Wastage

1. Seed Technology

5. Trade Policy


US farmland returns vs. major origins outside the US


Comparative production economics

Key origins offer significant differences in both price and cost structures.


Historical returns - 100-year US farmland appreciation


Returns on US farmland compared to other assets

US Cropland

(USDA) Timber (NCREIF)

US Cropland

(NCREIF)

Russell 2000

S&P 500

Comm'l RE (NCREIF)

LT Corp Bonds

10-yr Treasuries

Gold

GSCI

0.00

2.00

4.00

6.00

8.00

10.00

12.00

0.00 5.00 10.00 15.00 20.00 25.00 30.00

Mean

Real

Retu

rns

Standard Deviation of Returns

Mean Real Return vs. Standard Deviation (1991-2009)


Historical correlation vs. inflation and other asset classes


Australian agricultural land use

Source: World Bank

48%

50%

52%

54%

56%

58%

60%

62%

64%

66%

360

380

400

420

440

460

480

500

Millio

n h

ecta

res

Australia Land Use

Ag Land as a % of Total Agricultural Land

Arable Land

11.53%

Permanent Cropland

0.09%

Pasture and

Other 88.38%

Australia Agricultural Land Use


Australian agricultural production and exports

27,891

8,145

2,382 2,068 1,141

350.7

18,639

4,625

1,453.5 553.5

127.2 30.9

66.8%

56.8%

61.0%

26.8%

11.1% 8.8%

0%

13%

26%

39%

52%

65%

78%

0

5,000

10,000

15,000

20,000

25,000

30,000

Wheat Barley Canola Sorghum Oats Corn

1,0

00 m

etr

ic t

on

s

Australian major crops' production and exports, 2010-11

Production Exports export/production(%)

Source: Australian Government/ Department of Agriculture, Fisheries and Forestry (ABARES)


Australian wheat

Source: Australian Government/ Department of Agriculture, Fisheries and Forestry (ABARES), USDA/FAS

Wheat 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12

AU /World exports 13% 14% 8% 6% 10% 11% 14% 17%

10,400

11,050

11,700

12,350

13,000

13,650

14,300

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12

1,0

00 h

ecta

res

1,0

00 m

etr

ic t

on

s

Australian wheat production, export and acreage

Production (kt) Exports (kt) Area (000 ha)


Australian barley

0

800

1,600

2,400

3,200

4,000

4,800

5,600

0

1,500

3,000

4,500

6,000

7,500

9,000

10,500

2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12

1,0

00 h

ecta

res

1,0

00 m

etr

ic t

on

s

Australian barley production, export and acreage


Wheat 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12

AU /World exports 28.2% 28.8% 12.0% 21.9% 16.1% 22.8% 29.2% 23.2%



Australian canola

0

350

700

1,050

1,400

1,750

2,100

2,450

0

500

1,000

1,500

2,000

2,500

3,000

3,500

2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12

1,0

00 h

ecta

res

1,0

00 m

etr

ic t

on

s

Australian canola production, export and acreage


Wheat 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12

AU /World exports 18.3% 11.8% 3.4% 5.8% 9.1% 11.3% 14.9% 18.6%



Australian Farmland Value

Source: Knight Frank; Citi Private Bank 2011 report

Location Description Averageprice/haEngland Averagealllandtypes $22,000Romania Pricedependentonsizeofholding $1,560-$3,250Poland Pricedependentonsizeofholding $4,550-$8,125

Ukraine 5-10yearsleaserights $150-$350

RussiaPricedependentonsizeofholdingandprogressoffreeholdapplication $300-$1,000

Zambia Longleasehold $1,000-$1,500

BrazilDrylanddouble-croppinginMatoGrosso $7,000

Brazil TopsugarcanelandinSaoPaulo $12,000Argentina Northernprovinces $1,200-$2,500

Argentina Centralprovinces $5,000-$10,000Canada Saskatchewanprovince $1,300Australia Drylandarablewithreliablerainfall $1,600-$1,700U.S. Qualitydrylandincornbeltstates $16,000

Price per HA Change

08’/09’

• Australian farmland prices dropped in 2009 and 2010 due to a severe drought. Prices

for farmland have since more than recovered due to demand for agricultural

commodities.

• Compared to 1984, the proportion of agricultural land, wholly or part-owned by overseas

entities almost doubled to 11 % by the end of 2010. South Australia saw the highest

jump in foreign ownership, increasing by almost 12%.


Summary

1. Historical 8% -10% real returns likely better in the next decade

Higher in less mature markets(15 – 22%)

2. There will be a supply response but it will lag demand

3. New pricing paradigm higher + more volatile

Short run: reservation price of the marginal consumer(biofuels)

Long run: price signal required for additional capacity

4. Farmland is the limiting factor economic rents capitalize into the land value


Example of sub-allocation framework for an ag portfolio

Geography

Operational / Development

Type of Asset

• Australia

• S. America

• E. Europe

• Russia

• Africa

• Land Ownership (Free Title)

• Risk- Sharing Lease Structures

• Farm Management

• Land Development / Conversion

• Value Chain Investment

• Permanent Crops

• Dairy

• Animal Protein Production

Core

8-10%

• North America

• Row Crop Land

• Cash Lease

1005 North Warson Road, Suite 226 – St. Louis, Missouri 63124 – USA

(314) 994-3282 | www.highquestpartners.com

Philippe de Lapérouse

Managing Director HighQuest Partners, LLC

314-994-3282 [email protected]

www.highquestpartners.com

mailto:[email protected]

http://www.highquestpartners.com/

Global Ag Investing Trends and Implications for Australia · Demand drivers + 9 billion people by...

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