Investing in Agriculture - October Agcapita

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Agcapita is Canada's only RRSP and TFSA eligible farmland fund and is part of a family of funds with almost $100 million in assets under management. Agcapita believes farmland is a safe investment, …

Agcapita is Canada's only RRSP and TFSA eligible farmland fund and is part of a family of funds with almost $100 million in assets under management. Agcapita believes farmland is a safe investment, that supply is shrinking and that unprecedented demand for "food, feed and fuel" will continue to move crop prices higher over the long-term. Agcapita created the Farmland Investment Partnership to allow investors to add professionally managed farmland to their portfolios.

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  • 1. Agcapita Agriculture Update October 2009 1
  • 2. Summary There has been considerable discussion recently about the “paradox” of bonds and stocks and commodities going up together - that the bond market is predicting a continuing recession via low interest rates and the stock market is predicting a recovery via high equity prices. Why is the bond market behaving so strangely in the face of a huge recovery stocks and commodities – surely one of these indicators must be wrong? Maybe, but perhaps there is an alternative interpretation that fits the facts. Markets always appear to act strangely to profit maximisers when non-profit maximisers are involved. I actually feel that the behavior of the sovereign debt market makes sense. Virtually every asset class is exhibiting the short-term effects of a massive monetary expansion. Once again assets that are liquid and traded - including LT sovereign debt – are rapidly “increasing” in price in nominal terms. Monetary authorities have expanded the global money supply aggressively allowing speculative activities to re-ignite via Contents investment and commercial banking intermediaries and at the same 2 1 in 6 People Malnourished time they are busy monetizing the rapidly expanding government debts - hence low interest rates and rapidly recovering equity prices. 2 Canadian Farmland Continues to Increase in When cross-correlations between assets classes are very high and Value positive we should always be asking ourselves whether we are in a 3 According to FAO Global period of liquidity/money printing induced euphoria. Food Production Must Increase 70% by 2050 Ultimately monetary authorities can control exchange rates or 3 Wheat Exports interest rates but not both. If they decide to sacrifice exchange rates for low interest rates then, in my opinion, inflation is sure to 4 Global Fertilizer Use follow. 4 Potash (K) Quick Facts 5 Curious Meat Consumption Kind Regards Facts Stephen Johnston - Partner 6 Food Prices Lagging Oil Prices 6 Inventories Remain in Consistent Downtrend 1
  • 3. Agriculture Update in 6 PeoPle Malnourished According to a new report by the United Nations, Those properties were first selected in 1985 and capital shortages created by the financial crises have have been appraised in January and July each year caused a sharp uptick in global hunger levels with over since 1990. The benchmark properties are zoned 1 billion people now undernourished. Farmers in the for agriculture and represent current land use, FCC developing world in particular are having more trouble says. Weighting is assigned to each property and to sourcing working capital and investment into critical each province, based on the improved farmland area agriculture infrastructure in these markets is being recorded by the 1996 Census of Agriculture. delayed or cancelled. According to the report virtually all the world’s undernourished live in developing FCC says the 2.9% increase recorded for the first countries. half of 2009 follows increases of 5.6% and 5.8% posted in the two previous reporting periods. New − 642 million in Asia and the Pacific. Brunswick showed the highest percentage increase − 265 million in sub-Saharan Africa. at 5.6% followed by a gain of 5.5% reported by − 95 million in Latin America, the Caribbean, the Manitoba. The gain in New Brunswick was the Near East and North Africa. second highest since 1999, when farmland values rose 11.6%. FCC said the province registered a rise The financial crisis serves to highlight the enormous of 6.3% during the six-month period ending Dec. 31, value of 1) first world agriculture infrastructure and 2) 2008. the much deeper pool of working capital financing available to western farmers. Farmers in the developed Manitoba’s 5.5% gain follows increases of 4.2% world have been much less affected by the financial and 6.2% in the two previous reporting periods. On crisis than their peers in the developing world. In average, Manitoba’s farmland values rose almost 1% western Canada in particular, the farming community per month over the 18-month period. It is the only has felt very little effect from the crisis with land values province to experience this trend, FCC states. continuing to rise throughout this period. Quebec reported a gain of 4.3% in the first half of 2009. This is the third consecutive semi-annual Canadian FarMland Continues to increase and follows increases of 5.9% and 5.5% inCrease in Value in the two previous reporting periods. Nova Scotia Farm Credit Canada (FCC), Canada’s largest reported an increase of 4.2% during the first six dedicated agricultural lender, says Canadian farmland months of 2009 -- also the third consecutive semi- values rose 2.9% during the first six months of 2009. annual increase. Increases of 4.3% and 5.2% were That estimate is based on the firm’s semi-annual noted in the two previous reporting periods. appraisal of its 245 benchmark farm properties. 2
  • 4. Agriculture Update (continued) Ontario reported a rise of 2.8% in the first half of increase the demand for agricultural commodities, 2009. This follows increases of 1.9% and 4.6% depending on energy prices and government policies.” reported in the two previous reporting periods. FAO’s Assistant Director-General Hafez Ghanem noted Alberta reported a rise of 1% in the first six months that “feeding everyone in the world by then will not be of 2009. This was also the third consecutive semi- automatic and several significant challenges have to annual increase, following increases of 2.2% and be met.” 6.7% in the two previous reporting periods. Wheat exPorts Saskatchewan farmland values increased 3.4% on average in the first half of 2009 or 7% on an Among the major exporters, only Australia and annualized basis. According to FCC “Saskatchewan Canada are forecast to export more wheat into world farmland remains attractive to investor groups markets, next year while shipments from Argentina, and out-of-province buyers who view prices as the European Union and the United States are likely reasonable when compared to other provinces. As to decline. well, local producers continue to expand their land bases.” Chart 1: Wheat exPorters aCCording to Fao global Food ProduCtion Must inCrease 70% by 2050 Argentina A recent Food Agriculture Organisation (FAO) Kazakhstan paper predicted` that global food production must Ukraine increase 70% by 2050. According to the FAO “world Russian population is expected to grow by over a third (or 2.3 Federation billion people) between 2009 and 2050” and that this Austrailia increase in population to 9.1 billion from the current 6.8 billion would require an overall 70 per cent increase EU in food production because of the effect of population Canada growth combined with rising incomes. The demand United for cereals for food and animal feed is projected to States reach some 3 billion tonnes by 2050. Annual cereal 0 5 10 15 20 25 30 production will have to grow by almost a billion tonnes Million tonnes from the current 2 billion tonnes and meat output by 2008/09 estimate 2009/10 forecast over 200 million tonnes, the FAO said. The FAO also Source: stated that “the production of biofuels could also 3
  • 5. Agriculture Update (continued) global Fertilizer use Global consumption of fertilizer has risen By contrast, the industrialized countries (with the spectacularly, increasing tenfold between 1950 and exception of the former Soviet Union) increased 1989. The pattern of global fertilizer consumption their fertilizer consumption only marginally after has changed markedly over the past 30 to 40 years. 1980; population growth was low, most people In 1960, the developing countries accounted for were adequately fed, and world agricultural exports just 12 percent of all consumption; today the figure had stagnated due to economic problems in many is nearly 60 percent. Fertilizer use in the developing importing countries. Asia is now the dominant world has been fuelled by rapid population growth player, accounting for 50 percent of world fertilizer and growing demand for food grains. This is consumption, and 86 percent of developing country especially true of Asia, where the scope for land consumption. expansion is limited. Fertilizer application rates vary widely among the major world regions and, perhaps surprisingly, are Chart 2: World Fertilizer ConsuMPtion not strongly correlated either with national income 1960 - 2001 or with need (as indicated by low soil fertility or food insecurity). Fertilizer use varies from a low of 10 kg/ 160 Russia/USSR hectare in sub-Saharan Africa to a high of about 216 140 Europe (excl. kg/hectare in East Asia (by nutrient weight). The world Russia/USSR) average application rate is about 83 kg/hectare; the Million of metric tonnes 120 Asia developing countries as a whole just exceed this 100 North America figure, and the developed countries as a whole fall Central America/ just short of it. 80 Caribbean 60 Middle East/ North Africa Potash (K) QuiCK FaCts 40 Oceania South America Potash is essential for plant growth and there are no 20 suitable substitutes for this mineral. Sub-Saharan 0 Africa − Total world Potash Consumption Growth 1961 1965 1970 1975 1980 1985 1990 1995 2000 Forecast @ 3% rate = 8 million tonnes KCl − Currently, only 12 countries produce potash Source: World Resources Institute Earthtrends Database − These 12 supply the consumption needs of over 150 countries 4
  • 6. Agriculture Update (continued) − Over 65% of the world’s potash supply Curious Meat ConsuMPtion FaCts is located in two regions: Saskatchewan, Canada with 37% of the world’s production According to a report by the UN Food and Agriculture and the Former Soviet Union (FSU) with 30% Organization, livestock generates 18% of greenhouse of the world’s production. gas emissions. This is expected to increase as developing countries increase their consumption of meat. Chart 3: Meat ConsuMPtion Chart 4: Co2 ProduCed Meat Production Food consumption in Pounds of CO2 per pound of product developing countries million tons % Milk 1 Meat 350 +200 Cheese 10.8 300 Developing Chicken 1.8 countries +150 Pork 4.9 250 Salmon 6 200 Developed +100 Milk Shrimp 12 150 countries Beef (only meat) 20 +50 Oat flakes .07 100 Flour, wheat .05 Cereal 0 50 Carrots .02 Projection Roots and tubers Tomatoes, greenhouse 2.7 ‘70 ‘85 ‘00 ‘15 ‘30 ‘50 ‘62 ‘70 ‘80 ‘90 ‘03 Source: “Livestock’s Long Shadow,” by the United Nations Source: “Livestock’s Long Shadow,” by the United Nations Food and Agriculture Organization, 2005; Lantmannen Food and Agriculture Organization, 2005; Lantmannen 5
  • 7. Agriculture Update (continued) Food PriCes lagging oil PriCes inVentories reMain in Consistent doWntrend The UN Food and Agriculture Organization (“FAO”) recently commented that while “nominal food prices Agricultural commodity inventories continue to trend doubled between 2002 and 2008, energy prices, led downwards and are at record lows in many sectors – by crude oil, began rising earlier in 1999, and have including wheat, rice, and coarse grains. trebled since 2002.” This trend should be of concern to us, as consumers and also as investors. Chart 5: long-terM Food and energy PriCe trends, real and noMinal Index (2000=1) Chart 6: ratio oF global stoCKs to use 4 Percentage 3 FAO food 50 Wheat price Index 40 Rice 2 FAO real food 30 Coarse price Index 1 20 grains Reuters-CRB Energy Index 10 Total, wheat 0 equivalent 72 74 76 78 80 82 84 86 88 90 94 96 98 00 02 04 06 08 0 62 64 66 68 70 72 74 76 78 80 84 86 88 90 92 94 96 98 00 02 04 06 08 Source: FAO Source: FAO Given the large energy inputs required to grow crops and the significantly more inelastic demand curve for food versus energy, crop prices must increase substantially to regain parity with energy prices. 6
  • 8. disClaiMer: The information, opinions, estimates, projections and other materials contained herein are provided as of the date hereof and are subject to change without notice. Some of the information, opinions, estimates, projections and other materials contained herein have been obtained from numerous sources and Agcapita Partners LP (“AGCAPITA”) and its affiliates make every effort to ensure that the contents hereof have been compiled or derived from sources believed to be reliable and to contain information and opinions which are accurate and complete. However, neither AGCAPITA nor its affiliates have independently verified or make any representation or warranty, express or implied, in respect thereof, take no responsibility for any errors and omissions which maybe contained herein or accept any liability whatsoever for any loss arising from any use of or reliance on the information, opinions, estimates, projections and other materials contained herein whether relied upon by the recipient or user or any other third party (including, without limitation, any customer of the recipient or user). Information may be available to AGCAPITA and/or its affiliates that is not reflected herein. The information, opinions, estimates, projections and other materials contained herein are not to be construed as an offer to sell, a solicitation for or an offer to buy, any products or services referenced herein (including, without limitation, any commodities, securities or other financial instruments), nor shall such information, opinions, estimates, projections and other materials be considered as investment advice or as a recommendation to enter into any transaction. Additional information is available by contacting AGCAPITA or its relevant affiliate directly. #400, 2424 4th street sW tel: +1.403.218.6506 www.agcapita.com Calgary, alberta t2s 2t4 Fax: +1.403.266.1541 Canada