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Equicapita Briefing - Oil Prices versus Food Prices

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Equicapita is a Calgary-based nano-gap private equity fund focusing on acquiring Canadian SMEs that can generate strong, sustainable cash flow from their operations in niche markets. Equicapita generally seeks to acquire businesses: at what it believes are reasonable prices; with a demonstrated history of free cash flow greater than $1 million per annum; with a durable competitive advantage; that operate in industries that Equicapita believes have sound long-term macro prospects; with ongoing participation of senior personnel; with the ability to maintain the cash flow without disproportionate amounts of new capital; where Equicapita can partner with management and align their interest with Equicapita through tools such as earn-outs, vendor take backs and management incentive plans; to be held for the long term; where there is some potential to grow sustainable free cash flow, but where that growth is not essential to generate suitable returns.

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Equicapita Briefing - Oil Prices versus Food Prices

  1. 1. Equicapita Update October 1, 2012
  2. 2. 1 Let me propose a thought experiment. Are we in a global environment where food prices can drive energy prices rather than the more typical relationship where energy prices tend to drive food prices? Key oil producing and/or middle eastern countries spend disproportionate amounts of household income on food. SHARE OF HOUSEHOLD SPENDING ON FOOD % United States 6.6 United Kingdom 9.7 Canada 9.8 Germany 11.0 Bahrain 14.3 Kuwait 14.5 United Arab Emirates 14.5 Japan 14.8 Turkey 21.4 China 22.3 Mexico 22.7 Iran 23.4 Saudi Arabia 23.7 India 27.7 Venezuela 28.9 Russia 29.0 Egypt 38.0 Nigeria 39.8 Jordan 40.6 Georgia 41.3 Pakistan 41.9 Belarus 42.1 Algeria 43.7 Azerbaijan 45.3 Source: FAO, USDA, CIA Factbook - 2010 Equicapita Update
  3. 3. 2 Equicapita Update (continued) Consequently, residents in such places are heavily exposed to price increases in basic food-stuffs. Does this matter? More specifically, does this create a higher risk of civil unrest? Apparently the answer is yes and it happens predictictably once prices move beyond a certain level. According to research by Marco Lagi, Karla Z. Bertrand and Yaneer Bar-Yam (The Food Crises and Political Instability in North Africa and the Middle East, New England Complex Systems Institute) - “the timing of violent protests in North Africa and the Middle East in 2011 as well as earlier riots in 2008 coincides with large peaks in global food prices. We identify a specific food price threshold above which protests become likely. These observations are consistent with a hypothesis that high global food prices are a precipitating condition for social unrest. ...More specifically, food riots occur above a threshold of the FAO price index of 210.” 260 240 220 200 180 160 140 120 FOOD PRICE INDEX 2004 2006 2008 2010 2012 240 220 200 180 160 140 120 100 80 1990 1995 2000 2005 2010 Brundi (1) Haiti (5), Egypt (3), Cote d’Ivoire (1) Sudan (3) Cameroon (40) Yemen (12) Mozambique (6) Mauritania (2) India (4) Somalia (5) Algeria (4), Saudia Arabia (1) India (1), Sudan (1) Mozambique (13) Mauritania (1), Sudan (1), Yemen (300+) Somalia (5) Tunisia (1) Syria (900+) Uganda (5) Egypt (800+) Libya (10000+) Tunisia (300+) Oman (2), Morocco (5) Iraq (29), Bahrain (31)
  4. 4. 3 Equicapita Update (continued) Where is the FAO index now? 213. It would appear that unrest in the middle east is set to continue... ... and if it continues and/or grows, does this mean higher oil prices are ahead as investors are forced to price in even higher risk premiums and importing nations deal with potential and perhaps real supply dislocations? 260 210 170 130 90 50 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 FAO FOOD PRICE INDEX 2002-2004=100 Nominal Real* * The real price index is the nominal price index deflated by the World Bank Manufacturers Unit Value Index (MUV)
  5. 5. 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 Equicapita 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 Equicapita 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 Equicapita 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 Equicapita or its relevant affiliate directly.

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