SEASONOLITY OF PRODUCTS. USE OF CHEMICAL PRODUCTS IN AGRICOLTURE.
Eclettica Agricolture Fund
2
CF ECLECTICA AGRICULTURE FUND MONTHLY REPORT Current NAV as at 31 July 2007 €¢150.64 £p101.53, AUM £15.6m July was a fairly quiet period for soft commodity prices, the main move being a 6% increase in the wheat price as expectations for the European harvest were slashed due to heavy rainfall in the north and west and drought in the south and east. The other noteworthy move was the sharp rise in pork prices in China owing to an outbreak of blue-ear pig disease. Outside the EU, China is the largest per capita consumer of pork. A shortage there will have serious ramifications for the world market, and speculation that China will need to import pork meat from the US drove prices up by 20% in the month. However, equity markets were anything but quiet. Having been up 2.3% on July 13th, the market closed the month down 2.6%. Given that the market fall was precipitated by concerns over financial assets, namely sub-prime debt, financial shares were naturally hit hardest, but the sell-off spread across all sectors. The fund outperformed slightly, losing 2.2%. The main contributors to this performance were Global Bio- Chem, beneficiaries of the recent underperformance of corn relative to soy meal through their lysine business, German agricultural conglomerate Baywa, and Nihon Nohyaku, an unloved Japanese agrochemical manufacturer whose strong results surprised a sceptical market. Theme: Agricultural Infrastructure Infrastructure assets have been a fashionable sector in recent years. Multiples afforded to natural monopolies such as airports, ports and motorways have expanded dramatically. However, agricultural infrastructure has been neglected, and with good reason: constantly falling real crop prices offer little opportunity for suppliers to increase prices. However, the lack of pricing power enjoyed by this industry has a more deep- rooted cause. The ownership of infrastructure assets was often combined with management of pool services. A pool or crop board or single desk was set up to organise centralised collection and marketing of the harvest in a certain area. These companies were owned by the farmers; their primary raison d’etre was to maximise returns to the grower, not to earn a reasonable return on the capital invested in silos and export terminals. However, an inflection point is fast approaching. Agricultural infrastructure companies are breaking free of the shackles of co -operative ownership and entering the world of public ownership. Their new owners will not tolerate sub-optimal profitability. The first step is to cut out the inefficiencies inherent in a not-for-profit organisation. The second, and more fundamental, step will be to raise prices. Initially this will seem impossible; farmers accustomed to scrapping over every cent will fight tooth and nail to resist any price increase. However, as grain prices rise and the growers become more confident in the new-found profitability of their business, the infrastructure companies will gradually be able to assert their position as a monopolist supplier. And as this pricing power begins to show, perhaps the stock market will come to accept that cash flows earned by a grain export terminal are just as valuable as those generated by a shipping port. Stock Insight: ABB Grain ABB Grain is the result of a merger between the Australian Barley Board and AusBulk, a former co-operative established to operate agricultural infrastructure throughout South Australia. The business is now run in three main divisions. In National Supply Chain, they own 111 grain silos across the state and 7 grain export terminals in Adelaide. This infrastructure handles 90% of all grain produced in the state and 100% of exports. Their marketing business, which comprises their former monopoly over the barley single desk in South Australia and Victoria along with other grain trading businesses, markets over 30% of the world barley export market. The final division is Joe White Maltings, which has a 10% market share in the global malt industry. Although they have been a publicly traded company since 2002, ABB Grain was hindered by a dual share class structure whereby the growers were able to dictate company strategy at the expense of the poor ‘B’ shareholders, due to owning A shares which have more votes. The government’s decision to terminate their monopoly over the South Australia barley single desk has removed the final argument for maintaining such a structure: facing a competitive market, the company must be able to respond effectively. The growers have finally agreed to give up their ‘A’ shares, leaving ABB Grain with a single share class and ready to exploit the opportunities presented by a liberalised market. The replacement value of their infrastructure in South Australia is $1.5bn. Assuming a normal harvest, this division makes EBITDA of $75m, a woeful 5% return on the replacement cost of their assets. It costs the farmer about 6% of the crop price to use ABB Grain’s facilities; in a world of rising crop prices, it seems reasonable that a monopoly such as ABB should at least maintain its share of industry revenue. It is conceivable that in an agricultural bull market, this business could make EBITDA of $150m, and, having demonstrated revenue growth and margin expansion, reach the heady heights of a 15x EBITDA multiple and be valued at over $2.2bn. Add in the marketing business on 0.5x sales, a discount to the Singapore trading house Olam which trades on 0.8x, and Joe White Maltings on 1x sales for its 10% margins, and ABB Grain could be worth $2.8bn, a substantial premium to the current enterprise value of $1.7bn.
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Transcript of Eclettica Agricolture Fund
CF ECLECTICA AGRICULTURE FUNDMONTHLY REPORT
Current NAV as at 31 July 2007 €¢150.64 £p101.53, AUM £15.6m
July was a fairly quiet period for soft commodity prices, themain move being a 6% increase in the wheat price asexpectations for the European harvest were slashed due toheavy rainfall in the north and west and drought in the southand east. The other noteworthy move was the sharp rise inpork prices in China owing to an outbreak of blue-ear pigdisease. Outside the EU, China is the largest per capitaconsumer of pork. A shortage there will have seriousramifications for the world market, and speculation that Chinawill need to import pork meat from the US drove prices up by20% in the month.
However, equity markets were anything but quiet. Having beenup 2.3% on July 13th, the market closed the month down2.6%. Given that the market fall was precipitated by concernsover financial assets, namely sub-prime debt, financial shareswere naturally hit hardest, but the sell-off spread across allsectors. The fund outperformed slightly, losing 2.2%.
The main contributors to this performance were Global Bio-Chem, beneficiaries of the recent underperformance of cornrelative to soy meal through their lysine business, Germanagricultural conglomerate Baywa, and Nihon Nohyaku, anunloved Japanese agrochemical manufacturer whose strongresults surprised a sceptical market.
Theme: Agricultural Infrastructure
Infrastructure assets have been a fashionable sector in recentyears. Multiples afforded to natural monopolies such asairports, ports and motorways have expanded dramatically.However, agricultural infrastructure has been neglected, andwith good reason: constantly falling real crop prices offer littleopportunity for suppliers to increase prices. However, the lackof pricing power enjoyed by this industry has a more deep-rooted cause. The ownership of infrastructure assets was oftencombined with management of pool services. A pool or cropboard or single desk was set up to organise centralisedcollection and marketing of the harvest in a certain area. Thesecompanies were owned by the farmers; their primary raisond’etre was to maximise returns to the grower, not to earn areasonable return on the capital invested in silos and exportterminals.
However, an inflection point is fast approaching. Agriculturalinfrastructure companies are breaking free of the shackles of co-operative ownership and entering the world of publicownership. Their new owners will not tolerate sub-optimalprofitability. The first step is to cut out the inefficiencies inherentin a not-for-profit organisation. The second, and morefundamental, step will be to raise prices. Initially this will seemimpossible; farmers accustomed to scrapping over every centwill fight tooth and nail to resist any price increase. However, asgrain prices rise and the growers become more confident in thenew-found profitability of their business, the infrastructure
companies will gradually be able to assert their position as amonopolist supplier. And as this pricing power begins to show,perhaps the stock market will come to accept that cash flowsearned by a grain export terminal are just as valuable as thosegenerated by a shipping port.
Stock Insight: ABB Grain
ABB Grain is the result of a merger between the AustralianBarley Board and AusBulk, a former co-operative established tooperate agricultural infrastructure throughout South Australia.The business is now run in three main divisions. In NationalSupply Chain, they own 111 grain silos across the state and 7grain export terminals in Adelaide. This infrastructure handles90% of all grain produced in the state and 100% of exports.Their marketing business, which comprises their formermonopoly over the barley single desk in South Australia andVictoria along with other grain trading businesses, markets over30% of the world barley export market. The final division is JoeWhite Maltings, which has a 10% market share in the globalmalt industry.
Although they have been a publicly traded company since2002, ABB Grain was hindered by a dual share class structurewhereby the growers were able to dictate company strategy atthe expense of the poor ‘B’ shareholders, due to owning Ashares which have more votes. The government’s decision toterminate their monopoly over the South Australia barley singledesk has removed the final argument for maintaining such astructure: facing a competitive market, the company must beable to respond effectively. The growers have finally agreed togive up their ‘A’ shares, leaving ABB Grain with a single shareclass and ready to exploit the opportunities presented by aliberalised market.
The replacement value of their infrastructure in South Australiais $1.5bn. Assuming a normal harvest, this division makesEBITDA of $75m, a woeful 5% return on the replacement costof their assets. It costs the farmer about 6% of the crop price touse ABB Grain’s facilities; in a world of rising crop prices, itseems reasonable that a monopoly such as ABB should atleast maintain its share of industry revenue. It is conceivablethat in an agricultural bull market, this business could makeEBITDA of $150m, and, having demonstrated revenue growthand margin expansion, reach the heady heights of a 15xEBITDA multiple and be valued at over $2.2bn. Add in themarketing business on 0.5x sales, a discount to the Singaporetrading house Olam which trades on 0.8x, and Joe WhiteMaltings on 1x sales for its 10% margins, and ABB Grain couldbe worth $2.8bn, a substantial premium to the currententerprise value of $1.7bn.
CF ECLECTICA AGRICULTURE FUNDMONTHLY REPORT
ASSET ALLOCATIONBond +0.0Cash +7.5Equities +92.5Option +0.0Total +100.0
TOTAL POSITIONSTotal Positions 84
PERFORMANCE SUMMARY% Fund Value Relative Index ValueMonth to date -2.2 +0.4 -2.6Since launch +1.5 +4.8 -3.2C.A.R. since inception +11.0 +31.3 -20.2
FUND PERFORMANCE
RELATIVE PERFORMANCE
TOP EQUITY HOLDINGS1 SASKATCHEWAN WHEAT POOL (CT*) Long +4.42 SINOFERT HOLDINGS LTD (HK*) Long +3.93 BAYWA-BAYERISCHE WARENVERMIT
(GY*)Long +3.0
4 TAIWAN FERTILIZER CO LTD (TT*) Long +3.05 ABB GRAIN LIMITED (AU) Long +2.76 CNH GLOBAL N.V. (UN*) Long +2.67 GRAINCORP LIMITED (AU) Long +2.68 NUFARM LIMITED (AU) Long +2.59 AWB LTD (AU) Long +2.110 GLOBAL BIO-CHEM TECHNOLOGY
(HK*)Long +2.1
SECTOR BREAKDOWN
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