Agri Presentation 7 Oct 2009[1]

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Agri Presentation 7 Oct 2009[1]

  1. 1. ‘ Food – what does the global shortage of protein mean for Australia and what are the opportunities for Financiers and Investors?’ Presentation of 7 October 2009
  2. 2. Investors View <ul><li>‘ Australia has become the focus for global agricultural investment. We have considered opportunities in Canada, the US and New Zealand. Eastern Europe, the Sudan and South America are not options due to asset risks. However Australia sits really well in comparisons due to the price of land, its political stability, an apparently sound economy, its moderate climate, access to good farm management and strong title to assets. Quite compelling! ’ </li></ul><ul><li>European Fund Manager September 2009 </li></ul>
  3. 3. Overview <ul><li>A growing world population suggests demand for food will increase and with this we see a fantastic opportunity for Australia as the food bowl of Asia. </li></ul><ul><li>Australia has a diverse agricultural sector spanning the continent. A moderate climate allows year round cropping and livestock enterprises in the south. Opportunities are being progressed in the north if farming techniques can be adapted to the higher rainfall of the tropics. </li></ul><ul><li>We sense there will a significant transition of ownership of Australian farming land due to succession issues and investors may take up supply. </li></ul><ul><li>Global investors believe our farmland is well priced due to: </li></ul><ul><ul><li>A stable political environment and a sound economy. </li></ul></ul><ul><ul><li>A clean and green farming environment on world standards. </li></ul></ul><ul><ul><li>A pool of capable farm management often undervalued. </li></ul></ul><ul><ul><li>An ability to substitute seasonal crops noting better use of irrigation. </li></ul></ul><ul><ul><li>Strong security of title to assets and good infrastructure and services. </li></ul></ul><ul><li>Australia’s proximity to Asia presents a market for our food with Asian consumers having increased income and supplementing historical cereal and plant based consumption with more animal based food such as beef, poultry, pork, seafood and dairy products. </li></ul>
  4. 4. <ul><li>141,704 businesses operate in the Australian agricultural sector </li></ul><ul><li>Area farmed is 417 million Hectares of an available 769 million Hectares </li></ul><ul><li>Total value of agricultural commodities is AUD 43,270 million including: </li></ul><ul><ul><li>AUD 23 billion from crops incl. cereal, cotton, fruit and veg </li></ul></ul><ul><ul><li>AUD12 billion from livestock incl. cattle, sheep, pork & chicken </li></ul></ul><ul><ul><li>AUD 7 billion from other products incl. wool, milk, eggs </li></ul></ul><ul><li>Irrigated cropping accounts 1.8 million Hectares using in 2008 6.284 million megalitres of water (down from 10.7 million megs in last census of 2006) for an average of 3.4 megs per Hectare. </li></ul><ul><li>Livestock numbers at 30 June 2008 include </li></ul><ul><ul><li>24.7 million beef cattle </li></ul></ul><ul><ul><li>2.5 million dairy cattle </li></ul></ul><ul><ul><li>76.9 million sheep </li></ul></ul><ul><ul><li>2.4 million pigs </li></ul></ul><ul><ul><li>73.8 million chickens for meat and </li></ul></ul><ul><ul><li>14.7 million chickens or eggs </li></ul></ul><ul><ul><li>Source: Australian Bureau of Statistics – Australian Farming in Brief 2009 </li></ul></ul>Snapshot of Australian Farming
  5. 5. Australian Agribusiness Market <ul><li>Demand is driven by consumption and consumer income </li></ul><ul><li>Low barriers to entry to farming with the ease of access to land, labour, machinery and inputs </li></ul><ul><li>Adverse climatic conditions can cause poor yields from farming which reduces supply and drives up price. </li></ul><ul><li>Consumers can react to higher prices by substitution between food types but demand will still remain for food. </li></ul><ul><li>Food commodity demand can be driven by exchange rates and any weakening of the dollar can makes our farming outputs attractive globally </li></ul><ul><li>Farmers are price takers with prices set at a global level and the prevailing exchange rate can impact returns </li></ul><ul><li>Production cost control impacts profits and larger operators have better negotiating power to minimise input costs. </li></ul><ul><li>Brand recognition, quality and reputation can enhance demand in a market with significant substitution threats. </li></ul><ul><li>Quality and reliability of product generates price premiums </li></ul><ul><li>Source: IBISWORLD – Agribusiness in Australia 2009 </li></ul>
  6. 6. <ul><li>Sensitivities </li></ul><ul><li>Industry participation requires a net return on farm assets </li></ul><ul><li>Weather conditions impact crop yields </li></ul><ul><li>Population growth will assist demand for food and prices paid to farmers </li></ul><ul><li>Success Factors </li></ul><ul><li>Availability of latest technology and farming techniques </li></ul><ul><li>Economies of scale impact farming cost structures and profitability </li></ul><ul><li>Production of goods in demand by market </li></ul><ul><li>Appropriate climatic conditions and availability of water </li></ul><ul><li>Outlook </li></ul><ul><li>Increased demand from South Korea, Japan, China, India and the US </li></ul><ul><li>Higher commodity prices, increased GM yields & efficiency will assist </li></ul><ul><li>Increased foreign investment will be lured by increased food demand </li></ul><ul><li>IBISWorld forecasts revenue growth of 1.8% per annum to 2013 </li></ul><ul><li>Source: IBISWORLD – Agribusiness in Australia 2009 </li></ul>Key Sensitivities, Success Factors & Outlook.
  7. 7. Demand for Protein <ul><li>The United Nation’s Food and Agriculture Organisation (‘FAO’) analysis details that from 1960 to 2000 meat consumption in developing countries rose 150% and consumption of milk and dairy products by 60% </li></ul><ul><li>The FAO projects that by 2030 consumption of livestock products could grow by a further 44%, with significant growth in poultry. Expected deficits can be filled by developed countries exports. </li></ul><ul><li>Opportunities for Australia to satisfy such food demand are seen by: </li></ul><ul><ul><li>Improving intensive livestock production systems doubling conventional growth rates, </li></ul></ul><ul><ul><li>Satisfying demand for animal protein from India and China focusing on chicken, pork and aquaculture </li></ul></ul><ul><ul><li>Filling demand for feed grain with growth of intensive livestock systems and biofuel production. </li></ul></ul><ul><ul><li>Use of technology and genetic modification to support above. </li></ul></ul><ul><li>Target markets include China, Japan, South Korea and Malaysia due to projected increasing consumer wealth and domestic production deficits </li></ul><ul><ul><li>Source – Australian Farm institute 2008 </li></ul></ul>
  8. 8. Opportunities for Australian Agriculture <ul><li>To partner capable existing clients with quality farming assets to produce food to satisfy the much anticipated demand for protein. </li></ul><ul><li>The scale of projected demand by Asia for animal protein would require: </li></ul><ul><ul><li>50% of our dairy production (1.8kg of feed per litre of milk) </li></ul></ul><ul><ul><li>86% of our beef production (6kg of feed per kg live weight of beef) </li></ul></ul><ul><ul><li>260% of our pork production (1.4kg of feed per kg liveweight) </li></ul></ul><ul><ul><li>140% of our chicken meat production (1.8kg per kg liveweight) </li></ul></ul><ul><li>It is estimated to satisfy the above demand for animal protein would require an additional 225 million tons of feed. For comparison in 2008 Australia produced 27 million tons of grain (excluding grass feed) </li></ul><ul><li>Above suggests significant opportunities for Australia with: </li></ul><ul><ul><li>Livestock production plus dairy </li></ul></ul><ul><ul><li>Reliable irrigated cropping including tapping northern rainfall </li></ul></ul><ul><ul><li>Development of livestock fodder industries </li></ul></ul><ul><ul><li>Research for improved oilseed, maize and grain varieties </li></ul></ul><ul><li>Source – Australian Farm Institute 2008 </li></ul>
  9. 9. Factors Influencing Investors <ul><li>From a portfolio risk viewpoint Australia is a good fit into an investment model with a bonus of the diversification across the continent. </li></ul><ul><li>The global economy is recognising the value of access to food and that commodity prices will be influenced by population growth </li></ul><ul><li>Genuine wealth is seeking out opportunities and real property assets are seen as relatively safe and need to be considered in a balanced portfolio. </li></ul><ul><li>Investment methodology considers property risk equates to lower volatility / less likely loss. Alternatively a volatile general financial market presents the potential to lose a larger part or all of an investment. </li></ul><ul><li>Alternatively you can touch and feel land but share script or unsecured debt paper is a little different. </li></ul>
  10. 10. Investors <ul><li>Initially local investors were approached but genuine interest was limited. </li></ul><ul><li>Sixty global investors have been canvassed over the last three years and of these only a handful genuinely understand the sector, appreciate the risks and are realistic on expected returns. </li></ul><ul><li>Investors fall roughly into three general categories: </li></ul><ul><ul><li>Short term investors / vulture type funds (2 year horizon) requiring returns of 20% plus which are not generally achievable in the time frame / in agriculture, </li></ul></ul><ul><ul><li>Medium term commodity orientated investors (5 year horizon) seeking returns of 10% plus </li></ul></ul><ul><ul><li>Long term fund type investors with food commodity experience seeking risk free money market rates plus a margin and opportunity for capital gains. </li></ul></ul>
  11. 11. The Way Forward <ul><li>Australian agricultural assets are attractive on a comparative basis and are seen to be devoid of the risks associated with volatile global financial markets. </li></ul><ul><li>Whilst the expected boom in food commodities has not occurred there is strong interest from a number of specialist investors with an appetite for global agricultural assets. </li></ul><ul><li>Australian assets are seen as reasonable value globally and are being priced against Canada, USA and NZ. </li></ul><ul><li>Key requirements include quality farm management and strong financial and operational reporting systems. </li></ul><ul><li>A driver for a number of investors in Australian assets is the ability to tap into the knowledge of local farm management and associated expertise for off shore opportunities. </li></ul>
  12. 12. <ul><li>Specialised skills, dedicated expertise and extensive experience mean we understand the issues and deliver effective solutions to the rural and agribusiness sector </li></ul>
  13. 13. Agricultural Investment Opportunities September 2009 ‘ The current extreme volatility of the general global financial markets makes the opportunity to invest in Australian agricultural property rather compelling!’ European Fund Manager February 2009
  14. 14. <ul><li>In 2006 amidst ongoing drought, high debt loads and a lack of local motivated capital our work moved into the informal restructuring of larger scale farm enterprises. In concert with Blake Dawson Lawyers we acted as an intermediary for the introduction of suitable debt and equity. </li></ul><ul><li>Our broad skill set, attention to detail and ability to deal with the minutia on transactions made us quite adept. </li></ul><ul><li>In 2008 Australian Farm Investments was established as an originator working between financiers, investors and agricultural opportunities. </li></ul>Introduction.
  15. 15. The Opportunity <ul><li>To introduce long term investment capital, with an appreciation for agriculture, to Australian assets. </li></ul><ul><li>Investors see Australia as a safe platform in global terms due to: </li></ul><ul><ul><li>A stable political environment. </li></ul></ul><ul><ul><li>A sound economy. </li></ul></ul><ul><ul><li>A pool of capable farm management. </li></ul></ul><ul><ul><li>Strong security of title to assets. </li></ul></ul><ul><ul><li>Good infrastructure and services. </li></ul></ul><ul><ul><li>A moderate climate </li></ul></ul><ul><li>From a portfolio risk viewpoint Australia is a good fit into an investment model with a bonus of the various opportunities for diversification across the continent. </li></ul>
  16. 16. Influencing Factors <ul><li>The global economy is under extreme pressure with further volatility expected. The next stage of the financial storm is expected to flow from a lack of liquidity. Those with a high debt load will be most vulnerable. </li></ul><ul><li>Genuine wealth is seeking opportunities and farm land is attractive based on anticipated global food demand. Also such assets offer a diversification opportunity for balanced portfolios. You can touch and feel land but share script or unsecured debt paper is a little different. </li></ul><ul><li>Investment methodology considers property risk equates to lower volatility / less likely loss. Alternatively a volatile general financial market presents the potential to lose a larger part or all of an investment. </li></ul>
  17. 17. <ul><li>In July 2006 an opportunity was identified to restructure and recapitalise high quality but financially impaired large scale irrigated farm enterprises. These assets were suffering due to drought and lacked capital to fund full operations if seasonal conditions improved. </li></ul><ul><li>Due diligence was undertaken on 16 enterprises and call options were taken to buy three of the more attractive assets. AUD 135 million was raised in debt and equity to acquire two of the enterprises. </li></ul><ul><li>Business systems and a capable CEO were put in place for investors and the financier. In June 2008 we completed our work. </li></ul>Our Experience.
  18. 18. Why PPB is involved in such a venture? <ul><li>Since forming PPB Rural & Agribusiness Services in 1997 over one hundred formal and informal agricultural assignments have been undertaken. </li></ul><ul><li>Identifying and recapitalising suitable large scale rural assets was a natural progression for PPB from our restructuring and insolvency foundation. Also Partners and staff were looking for progressive opportunities to satisfy professional goals. </li></ul><ul><li>The creation of pre-packaged investment vehicles such as EAA was seen as the best opportunity to attract investors to such assets. </li></ul><ul><li>The creation of AFI and fund vehicles is a progression of this thinking. </li></ul>
  19. 19. Project’s Objective <ul><li>Our objective is to create investment opportunities via the identification, acquisition, and management of portfolios of large scale Australian irrigated based farm operations. </li></ul><ul><li>Irrigation farm enterprises are attractive as water licenses are a relatively risk free and appreciating commodity. Large scale farming based on irrigation gives a greater exposure to upward movements in the soft commodity market and irrigation removes the risk of reliance on rainfall during farming programs. </li></ul><ul><li>The consolidation of large scale irrigated assets provides economies of scale in operations including greater returns from the sale of larger volumes of commodities, enhanced buying power for inputs, justification in investing in best business systems and scale attractive to the markets to assist exit strategies for investors. </li></ul><ul><li>Future opportunities will consider diversification into Northern Cattle and the Pacific region including aquaculture, livestock, plantations and cropping. </li></ul>
  20. 20. <ul><li>Specialised skills, dedicated expertise and extensive experience mean we understand the issues and deliver effective solutions to the rural and agribusiness sector </li></ul>

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