INVESTMENT STRATEGY GROUPMICHAEL HALLORAN, CFAStrategy AnalystJanney Montgomery Scott LLCMARK LUSCHINIChief Investment StrategistJanney Montgomery Scott LLC
INVESTMENT STRATEGY GROUPINVESTMENT STRATEGY GROUP 1As part of our Outlook 2013, we are highlighting several themes that are impacting the U.S. and global economy: Global Infrastructure;The U.S. Energy Renaissance; and Feed the World. These themes have major investment implications and should play a key role infuture market returns. In this piece, we are focusing on Feed the World.The global economy faces a major challenge in order to feed the world over the coming decades. The global population is expected toincrease to over 9 billion people by 2050, representing 2.3 billion more people to feed. In addition, economic development in theemerging markets could produce 3 billion more middle-class consumers in the next 20 years, compared with 1.8 billion today. Theseconsumers have better diets and consume more calories and meat, which requires more land per calorie to produce. Compoundingthe challenge, global growth in crop yields has been slowing since the 1970s and is now weaker than population growth.Agriculture is the largest user of water globally, accounting for 75% of water usage. A serious discussion of agriculture necessarilyinvolves a discussion of global water resources, where it is likely to be costly and difficult to increase supply.This agricultural challenge will require tremendous strides in productivity that can only be obtained by innovative technology, advancedmachinery and communication equipment, supply chain optimization, and implementation of agricultural best practices around theworld. Required capital investment estimates range from $870 – $990 billion per year, up from today’s $560 billion per year.Many companies highlighted in this report are global leaders at improving agricultural productivity, and will play critical roles over thecoming decades in order to safely and adequately feed the world. They should represent solid investments for investors with long-termtime horizons.We hope you find this report useful and informative for your investment needs.
INVESTMENT STRATEGY GROUP 20204060801001980 1990 2000 2010 2020 2030010002000300040001980 1990 2000 2010 2020 2030020004000600080001980 1990 2000 2010 2020 2030Real GDP $ trillion• According to the United Nations, food production must increase 70% by 2050 to feedthe expected global population of more than 9 billion people. This amounts to anestimated 2.3 billion more people to feed. To put this in perspective, we will need toproduce the same amount of food over the next four decades than we produced overthe past 8,000 years.• The demand for food is expected to grow as a result of both population growth andrising incomes. In the last 10 years alone, global population has increased 13% andglobal incomes have grown by 29%. During this same period, global crop areaharvested has grown only 8%.• The growth of India and China is historically unprecedented and is happening atabout 10 times the speed at which the United Kingdom improved average incomesduring the Industrial Revolution—and on roughly 200 times the scale. In India,estimates show calorie intake per person could rise by 20% over the next 20 years,and China’s per capita meat consumption could increase by 40% to 75 kilograms(165 pounds) a year (and still be well below U.S. consumption levels).• Worldwide, more than one in six people are malnourished. The World Bankestimates that increases in food prices in the second half of 2010 pushed 44 millionpeople into poverty. In addition, about 884 million people lack access to safe water.• Increasing water supply is likely to be costly and difficult. Sources of freshwater arealready under stress. Lakes are drying up in many parts of the world, and rivers oftendry up before they reach the ocean because of overconsumption of their water.Water pollution has also rendered a portion of surface water unusable. For example,21% of available surface water in China is unfit for agriculture.Food (Cereals only) Million tonnesWater Cubic Kilometers
INVESTMENT STRATEGY GROUP 3• Assuming current yield improvements, the supply of croplandover the next 20 years may need to increase by as much as250% relative to the past 20 years. This is due to demand forfood and feed, a declining rate of growth in yields, and the useof biofuels increasing incremental land demand.• Land degradation, climate change, and the loss of arable landdue to the expansion of the world’s cities could removesignificant additional cropland from production over the next 20years.• The two main drivers of higher water demand are historicunderinvestment in supply and accelerated growth in waterwithdrawals. Water withdrawals are likely to increase by morethan 40% between now and 2030.• Increased agricultural output would account for 65% ofincremental water demand, growth in water-intensiveindustries an additional 25%, and municipal demand theremaining 10%.Additional supply of water and land required wouldhave to accelerate over next 20 years, assumingtoday’s productivity levels.Incremental &ReplacementSupply(1990 – 2010)Incremental &ReplacementSupply(2010 – 2030)PercentageIncreaseWater (cubickilometers)900 2,150 139%Land (million croplandhectares)63 220 249%Numbers represent incremental supply plus replacement rate and do not tie to total demand.Analysis assumes that agricultural yields per hectare improve at 1% per annum and thatagricultural water productivity (i.e., crop-per-drop) increases at 0.8% per annum.Source: Janney ISG; FAO; McKinsey Global Institute
INVESTMENT STRATEGY GROUP 4• Large scale farms account for an estimated 70% of globalland under cultivation. Increasing their yields couldaccount for 65% of the potential improvement in theyields on cropland as a whole over the next 20 years.Additional benefits can be obtained by increasing theyields on smallholder farms.• Improving best technology adoption in both developingand developed countries’ large-scale farms would greatlyenhance productivity. Improved mechanization ,as well asoptimizing genetic variety and farming practices, cansignificantly boost yields.• Investing in farming practices (such as machinery tosupport precision farming) and in the basic infrastructurefor getting goods from farms to market is critical forimproving productivity, and requires better access tocapital.• Reducing food waste in the value chain could deliversignificant productivity gains. Optimizing processing,packaging, distribution, storage, and transportation aremajor opportunities.Productivity improvements could more than offset the expectedincrease in land demand, and offset 60% of expected water demand.Base case demand assumes that yields per hectare improve at 1% per annum and that agricultural water productivity(i.e., crop-per-drop) increases at 0.8% per annum (in line with recent historical trends).Source: Janney ISG, McKinsey45006350510012502010 2030 BaseCase2030WATER(Cubic Kilometers)Demand Productivity Improvement1535 126012604702010 2030 BaseCase2030LAND(million cropland hectares)Demand Productivity Improvement
INVESTMENT STRATEGY GROUP 5• Reducing land degradation and restoring degraded land offersthe potential to reduce yield loss.– Technology and machinery play a major role.• Improved irrigation techniques represent the second-largestopportunity to reduce the global consumption of water afterimproving crop yields. Advanced irrigation techniques canimprove yields by 15–30%, while reducing the water requiredby 20–60%.– Machinery and fertilizers play a key role in enabling advancedirrigation techniques.• More than 80% of available, arable land is in countries withinfrastructure issues.– Improving global infrastructure is critical for productivity.• Historical rates of land and water productivity have laggedother sectors of the economy.– Technologies like the digital revolution that has acceleratedproductivity growth across the wider economy could have a similarimpact on land and water.Significant capital investments required to Feed the World:Average annual capital expenditure requirement, 2010–2030($ billion, constant 2010 dollars).2010 CapitalExpenditureSupplyExpansionScenarioImprovedProductivityScenarioWater 270 615 470Land 310 375 400Source: Janney ISG; McKinsey
INVESTMENT STRATEGY GROUPINVESTMENT STRATEGY GROUP220.127.116.11.18.104.22.168.11.7 1.50123456789101860 1880 1900 1920 1940 1960 1980 2000 2020E 2040EGlobal Arable Acres per capitaSource: United NationsWithaccess to wateran increasingly importantconstraint onincrementalagricultural production,maximizing productivityonexistingacreage hasbecome a keyfocusin the farming industry.The upshot? Makersof technologiesthatenable farmerstomaximize yieldshouldsee strongdemandgrowth.
INVESTMENT STRATEGY GROUPINVESTMENT STRATEGY GROUPGrowth in Productivity of the U.S. Farm Sector-0.520.02-0.080.690.111.63-1-0.500.511.52Labor Capital Land Materials TotalInputsOutputAnnual Growth Rates Between 1948-2009(in %)Farm InputsSource: USDA0204060801001201401601802001901 1916 1931 1946 1961 1976 1991 2006U.S. CornYield(bushels per acre)Source: USDAAG All U.S.1.7% 3.2%Share due to:Non-Labor Inputs 11.8% 54.1%Labor Hours -34.2% 23.7%Labor Quality 5.6% 8.8%Growth in TFP 116.8% 13.4%Avg. Annual OutputGrowth:The tremendous growth in the output of the U.S. farm sector is well-documented, but less attention is typically paid to the factors driving the significant yield improvements. According to astudy by the USDA, total factor productivity (technological advancements and farming best practices) was the main driver of increased U.S. agricultural production between 1960 and 2004.
INVESTMENT STRATEGY GROUPINVESTMENT STRATEGY GROUPGenetically-enhanced seeds experienced tremendous growth the past 10 years as the penetration rate of precision ag is not far behind it. With farmers in emerging markets yet to fullyembrace these advancements, and U.S. farmers in the early innings of technology utilization, adoption of technology in the agriculture industry remains a compelling growth driver.Precision Agriculture Adoption and Seed Usage0%10%20%30%40%50%60%70%80%90%100%2000 2005 2010PrecisionAgricultureAdoption(% of corn acres using technology)Some Technology UsedYield Monitor UsedYield Map CreatedSource: USDA0.0%10.0%20.0%30.0%40.0%50.0%60.0%70.0%80.0%90.0%2000 2005 2010Use of Insecticide & Herbicide Resistant SeedsGMO Herbicide Resistant BT Insecticide ResistantSource: USDA
INVESTMENT STRATEGY GROUP 9Company Name TickerForwardP/EEarningsGrowthDividendYield Credit Rating Notes CoverageStaples - 12.0% of S&P 500These staple companies operate all along the agricultural value chain, from fertilizers and farm fields to the grocery isle and dinner table.ARCHER-DANIELS-MIDLAND CO ADM 13.61 10.00 - A Major global manufacturer and processor of agricultural commodities. S&PBUNGE LTD BG 9.51 9.33 1.55 BBB- Major global agribusiness and food company with integrated operations. S&PCHIQUITA BRANDS INTL CQB 16.35 4.00 - B Leading international distributor of high-quality fresh and value-added produce. JCALAVO GROWERS INC CVGW 20.37 11.50 2.18 - Global leader in avocado industry and a provider of value-added fresh food. JDOLE FOOD CO INC DOLE 21.48 6.50 - B World’s leading producer of fresh fruit and vegetables, including value-added products. JFRESH DEL MONTE PRODUCE INC FDP 15.70 5.00 1.58 NR Vertically integrated producer and marketer of fresh and packaged fresh-cut produce. JTYSON FOODS INC-CL A TSN 12.08 8.50 1.15 BBB One of worlds largest meat protein firms, products include beef, chicken and pork. S&P / CSEnergy - 10.8% of S&P 500Energy fuels the entire supply chain for agriculture and water. Exploration & Production companies are responsible for finding oil & gas for the future.EOG RESOURCES INC EOG 19.37 10.97 0.53 A- Large independent E&P company with Bakken Shale oil growth exposure. S&P / CSCONOCOPHILLIPS COP 11.30 5.55 - A One of the largest independent E&P companies in the world. S&P / CSSPDR S&P OIL & GAS EXP & PR XOP - - - - Equal-weighted basket of 71 E&P companies.VANGUARD ENERGY ETF VDE - - - - Cap-weighted basket of 169 companies across entire Energy sector.Industrials - 10.0% of S&P 500Machinery firms play a critical role in improving the productivity of agriculture and water usage.AGCO CORP AGCO 9.94 9.67 0.18 BBB- Global manufacturer of a wide range of agricultural equipment. J / S&P / CSCATERPILLAR INC CAT 12.60 10.33 2.34 A Enables much of the heavy infrastructure lifting across the globe. S&P / CSDEERE & CO DE 10.33 9.25 2.15 A Among the world’s largest providers of agricultural equipment J / S&P / CSLINDSAY CORP LNN 15.52 13.33 0.53 - Leading global manufacturer of advanced irrigation systems. JVALMONT INDUSTRIES VMI 14.39 17.35 0.58 BBB Leading global manufacturer of advanced irrigation systems. J / CSINDUSTRIAL SELECT SECT SPDR XLI - - - - Broad exposure to 62 U.S. based industrials. GE is largest holding.
INVESTMENT STRATEGY GROUP 10Materials - 3.5% of S&P 500Advanced seed technology and fertilizers are critical for improving farm land yields.AGRIUM INC AGU 9.74 13.00 1.61 BBB Global provider of advanced fertilizer and crop protection products. CSDU PONT (E.I.) DE NEMOURS DD 14.52 7.70 3.04 A Global leader in seed technology, crop protection, and food packaging. S&P / CSMONSANTO CO MON 22.15 14.36 1.33 A+ MONs seeds, biotechnology products, and herbicides improve farm productivity. S&P / CSMOSAIC CO/THE MOS 14.95 8.00 1.43 BBB Major global producer of phosphate and potash based crop nutrients. S&P / CSPOTASH CORP OF SASKATCHEWAN POT 14.40 7.50 1.99 A- Integrated fertilizer and related industrial and feed products company. S&P / CSInformation Technology - 18.2% of S&P 500Technology firms are enabling advanced infrastructure development and playing a key role in improving agriculture and water productivity. They are also developing the advanced wireless and wireline communicationsnetworks that will help optimize the global food chain.ITRON INC ITRI 14.97 3.83 - BB Provides energy and water management solutions for nearly 8,000 utilities worldwide. J / S&P / CSTRIMBLE NAVIGATION LTD TRMB 18.73 14.00 - - Turning farm into factory thru high-tech positioning and communication devices. J / S&PISHARES S&P NA TEC-MUL N IF IGN - - - - Broad exposure to telecom equipment, data networking and wireless equipment stocks.Telecom - 2.9% of S&P 500Advanced communication infrastructure systems are required to optimize the global food chain.AMERICAN TOWER CORP AMT 37.43 21.34 1.21 BB+ Largest independent N.A. tower operator, also in South America and India. S&PVODAFONE GROUP PLC-SP ADR VOD 11.31 3.29 - A- Leading global provider of international wireless telecommunications services. S&P / CSISHARES S&P GLBL TELECOMM SE IXP - - - - Broad exposure to global telecom with a solid dividend yield.Utilities - 3.2% of S&P 500Utilities play a key infrastructure role in the agriculture and water supply chain and will be critical for improving productivity.AMERICAN WATER WORKS CO INC AWK 18.33 7.27 1.85 A- Largest investor owned water utility provides service to 5% of U.S. population. J / CSAES CORP AES 9.69 9.50 0.65 BB- Worlds largest independent power producer operates in 27 countries. S&PCONSOLIDATED WATER CO-ORD SH CWCO 20.63 13.00 2.78 - Global developer of seawater desalination plants and water distribution systems. JISHARES S&P GLOBAL UTILITIES JXI - - - - Broad exposure to global utilities.Definitions:Forward P/E - Current stock price divided by EPS consensus estimate for the next four quarters.Earnings Growth Estimate - Mean broker estimate of the compounded annual growth rate of the operating eps over the companys next full business cycle (typically 3-5 years).Dividend Yield - Trailing 12 month dividend per share divided by share priceCredit Rating - Rating assigned by Standard & Poors to the long term obligations of the issuer if repaid in the local currency of the issuer.
INVESTMENT STRATEGY GROUP 11Fund Symbol DescriptioniShares MSCIGlobal AgricultureProducers ETFVEGIHolds 132 companies that provide exposure to the global agriculture industry and tracks the MSCIACWI Select Agricultural Producers Investable Market Index. The index looks to track companies thatderive a majority of total revenue from early-phase agricultural production. Roughly 40% of VEGI’sassets are U.S. holdings. Monsanto (MON), Potash (POT), Deere (DE), and Archer Daniels Midland(ADM) are major holdings. VEGI has a favorable 0.39% expense ratio.Market VectorsAgribusiness ETFMOOOffers global exposure to the agriculture industry by investing in 53 companies that sell agriculturalequipment, chemicals, and seeds, such as Monsanto MON, Potash POT, and Deere DE. Tracks theMarket Vectors Global Agribusiness Index. Large and liquid product with a fee of 0.55% annually.
INVESTMENT STRATEGY GROUPINVESTMENT STRATEGY GROUPThe Janney Outlook is being provided solely for informational and illustrative purposes, is not an offer to sell or a solicitation of an offer to buy the securities highlightedherein, and does not constitute investment advice by Janney Montgomery Scott LLC or its affiliates. Decisions to buy or sell a stock should be based on an investor’sinvestment objectives and risk tolerance and this material should not be relied upon in substitution of independent judgment. This material does not take into accountindividual client circumstances, objectives or needs and is not intended as recommendations of particular securities, financial instruments or strategies to particular clients.The information provided in the list has been obtained or derived from sources believed by Janney Montgomery Scott LLC to be reliable. Janney Montgomery Scott LLC,however, does not represent that this information is accurate or complete. Any opinions or estimates contained in this report represent the judgment of the InvestmentStrategy Group of Janney Montgomery Scott LLC at this time and are subject to change without notice. The opinions and estimates do not necessarily represent theviewpoint of Janney Montgomery Scott LLC, its Research Department or any other group or employee associated with Janney Montgomery Scott LLC or its affiliates, andmay differ from opinions or estimates of Janney Montgomery Scott LLC, including its Research Department, and its affiliates. Janney Montgomery Scott LLC or its affiliatesmay have issued, and may in the future issue, other communications that are inconsistent with, and reach different conclusions from, the information presented in thismaterial. Janney Montgomery Scott LLC, its officers, directors, employees, or members of their families may have positions in the securities mentioned and may makepurchases or sales of such securities from time to time in the open market or otherwise and may sell to or buy from customers such securities on a principal basis. This listincludes only companies that receive research analyst coverage from either Janney Montgomery Scott LLC’s Research Department or a research provider whose researchis available to Janney Montgomery Scott LLC Financial Advisors and that also currently pay a dividend to shareholders. Thus, the universe of potential companies thatcould be included in this representative list is narrower than the total universe of public companies.Dividend information is as of 5/31/2013. ―P/E Forward‖ refers to the stock price as of 5/31/2013 divided by the earnings per share consensus estimate for the next fourquarters. ―Growth Rate %‖ is an estimate of the compounded annual growth rate of the operating earnings per share over the company’s next full business cycle (typically 3to 5 years). ―Dividend Yield‖ refers to the trailing 12-month dividend per share divided by share price.Past performance is no guarantee of future performance, and future returns are not guaranteed. There are risks associated with investing in stocks such as a loss oforiginal capital or a decrease in the value of your investment. A company may also decide to decrease or cancel a dividend payment at any time without notice. Foradditional information or questions, please consult with your Financial Advisor.12