H a n c o c k A g r i c u l t u ra l I n v e s t m e n t G r o u p

Farmland InvestorFarmland InvestorFarmland Investor Volume 22, Number 1

Spring/Summer 2014

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HAIG and FMS Join Forces to Offer Full Service Institutional Farmland Investment Management HAIG is pleased to announce the acquisition of its long-time property management partner, Farmland Management Services (FMS). The transaction, completed in March, formalizes a relationship of more than 25 years, bringing together farm-level operational expertise and institutional investment management in a single organization. FMS, based in Turlock, California, will continue to provide best-in-class farm management for more than 280,000 acres of HAIG client properties throughout the U.S. In addition, through the enhanced alignment of the groups, the combined team will further develop robust acquisition, risk management and stewardship programs.

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Walnut orchard

HAIG Farmland Returns 22.1% in 2013; Nut Profitability Continues to Grow

Amid a backdrop that included public equity resurgence and solid real asset performance, farmland continued to contribute strong returns to investors in 2013. While commodity prices dropped from the previous year’s record levels, the U.S. farm sector achieved the second highest net cash income on record and foreign purchases hit a new high water mark. HAIG farmland again outperformed the NCREIF Farmland Index, delivering our clients an overall 22.1% total return. Strong income coupled with sizeable appreciation on California nut orchards drove permanent crop returns, while leased row crops continued their steady performance.

HAIG and FMS Join Forces.…...1-2

HAIG 2013 Performance..…......1-5

Australia Macadamia Pricing Strengthens.…….…………....…....6

Cranberries Yield Abundant Harvest….…….…….….………...…7

Employee News…….………..…….7

Contents

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HAIG and FMS Join Forces to Offer Full Service Institutional Farmland Investment

Management (Continued from page 1)

HAIG Farmland Investments Return 22.1% in 2013 (Continued from page 1)

Global growth accelerated in 2013, marked by the U.S. housing recovery and increased spending across consumers and businesses. U.S. corporate profits reached record highs, and financial markets responded with a shift to higher risk investments. The S&P 500 gained 32.4%, while small stocks registered even loftier returns. Bond markets retreated, with long-term corporate bonds falling -7.0%. Government bonds fared worse, returning -11.4% for the year as investors anticipated a tapering of the Fed’s quantitative easing program. Despite a comparatively modest performance relative to equities in the recent year, longer periods reveal farmland’s steady, strong performance. Over periods of ten years and longer, farmland returns outpace stocks and bonds, in some cases by a sizeable margin. Farmland even bests traditionally “high risk, high return” small cap stocks over the long haul: over the past 20 years, HAIG farmland has produced a 12.8% (after fees) annualized return versus 12.0% for the small cap stock index.

The transaction was completed by HAIG’s parent company, the Hancock Natural Resource Group. FMS will retain its name and operate as a subsidiary of HNRG. HAIG welcomes 112 full-time agricultural professionals of FMS, including a seasoned senior management lineup and experienced regional farm operators located throughout the U.S. “HAIG and FMS have been close, and very successful, partners for more than 25 years,” said HAIG President Oliver Williams. “This transaction formalizes our alliance and creates new opportunities by bringing the best in class farmland property manager together with the best in class farmland investment manager.” Carl Evers will continue as the company’s president and

join HAIG’s senior management team. He will report to Mr. Williams. “Over the past two and a half decades, HAIG and FMS have built an industry leading farmland investment management franchise,” Mr. Evers said. “As a single integrated company, we are able to better utilize our existing personnel across the organization, deepen our local connections, as well as create a more robust acquisition presence and an even more efficient asset management operation. “We are a best-in-class farmland investment business, with a clear line of sight from the farm gate to the investor.”

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Figure 1: Annualized Total Returns of HAIG Farmland and Major Asset Classes for periods ended December 31, 2013

Source: HAIG, Morningstar. For indices used, please refer to table on bottom of page 5

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HAIG Returns 22.1%; Nut Profitability Continues to Grow (Continued from page 2)

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Typically considered an “alternative asset,” as opposed to traditional stocks and bonds, farmland is more aptly compared to other less liquid, longer-horizon investments with tangible underlying assets such as real estate, infrastructure and natural resources. Generally, real asset investments benefited from the improving economic outlook in 2013. HAIG farmland led the pack, followed by global infrastructure investments, which returned 15.0%. With business spending up and consumer confidence strengthening, commercial real estate also registered double-digit returns for the year. Timberland investment returned 9.7% as demand stepped up in conjunction with the U.S. housing market recovery. Consistent with the broader macroeconomics optimism, investors fled safe haven precious metal investments. Over longer periods, HAIG farmland continues to outperform other real asset counterparts. Please note, HAIG farmland performance is presented net of all fees whereas the other asset class indices cited do not reflect the deduction of fees. For HAIG, 2013 brought excellent results. HAIG farmland investments produced 8.3% income (after fees) and 12.0% appreciation for a total return of 22.1%, as illustrated in Figure 3. These results marked the fourth consecutive year-on-year improvement in annual returns. Set against the historical performance of HAIG farmland investments, 2013 returns remain noteworthy yet represent only the fourth highest year in terms of total return. As with the early-to-mid 2000s, similar fundamental factors are currently at play with a weak U.S. dollar and strong foreign demand for U.S. farm products driving results. Exceptional absolute performance does not preclude strong relative performance: HAIG outperformed its benchmark, the NCREIF Farmland Index, by 124 basis points (after HAIG fees) in 2013. The NCREIF Farmland Index returned 20.9% for the year, of which income contributed 8.7%. HAIG lags NCREIF over 3- and 5-year periods but continues to outperform over periods of 10-years and longer. This can be attributed to recent years’ development projects achieving “mature” production status. A significant amount of orchard developments in 2009-10 are achieving commercial production, but are yet to produce full-sized crops. The backfilled returns on the young orchard have a dilutive effect on HAIG’s historical return series. On an income basis, HAIG fell slightly short on an after fee basis, returning 8.3% to the Index’s 8.7%. This shortfall is overcome in the 3-year period, and HAIG outperforms by an increasing margin over progressively longer horizons. The NCREIF farmland index is reported by third party managers for institutional investments. The Index is calculated at the property level before investment management fees.

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HAIG Farmland (after fees)Commercial Real EstateTimberlandPrecious Metals

Figure 2: Annualized Income Returns of HAIG Farmland versus other Real Asset Indices for periods ended December 31, 2013

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Figure 3. HAIG Farmland Annual Return Performance (after fees): 1999-2013

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Figure 4. Annualized Total Returns of HAIG Farmland and NCREIF Farmland Index for periods ended December 31, 2013

Source: HAIG

Source: HAIG, Morningstar. For indices used, please refer to table on bottom of page 5

Source: HAIG, NCREIF

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HAIG Returns 22.1%; Nut Profitability Continues to Grow (Continued from page 3)

HAIG row crop investments produced a total return of 15.3% in 2013, in line with 2012 results of 15.4%. Income returns were 3.4%, down 3.7% year-on-year but in line with the five-year average. Appreciation edged up 20 basis points to 11.5% over 2012. On a regional basis, the Mountain states of Idaho and Colorado were top performers, with a regional total return of 24.3% for the year. After 20%+ gains in 2012, the pace of change moderated in the Corn Belt and Delta, where returns were 15.3% and 16.0% respectively. Income yields continue to compress as farmland prices remain strong. While crop prices tumbled from the previous year’s peak, farmers still managed register the second highest year for crop cash receipts on record. Row cropland, which consists entirely of leased properties that grow annual crops, constitutes approximately 53% of the HAIG’s U.S. portfolio of fully developed farmland investments. Driven by stellar nut performance, HAIG permanent crops returned 14.5% income and 14.9% appreciation for a total return of 30.7%, after fees. Permanent crop investments are defined by residual biological assets like trees and vines, which remain after the annual harvest occurs. The vast majority of HAIG’s permanent crops investments are directly operated, with the investor receiving income via crop sales from the property. Property-level return data for select commodities are summarized in Figure 8. Walnuts were HAIG’s top performing permanent crop in 2013, with a total return of 60.2%. Income accounted for 23.2% of the total return, with the balance from appreciation. The substantial gains reflect, in part, a lag in appraisals recognizing recent years’ profitability. In 2012, walnut properties saw only 4.2% in aggregate appreciation. Meanwhile, the industry continues to see demand outpace supply. California walnut growers harvested 495,000 tons in 2013, slightly below 2012’s record crop. Both domestic and export shipments increased due primarily to sales growth in Europe and the Middle East. In addition, India approved walnut imports in July 2013, and is expected to grow to a top-ten walnut destination in the coming decade. HAIG pistachios posted another exceptional year, producing 18.2% income and 29.0% appreciation for a total return of 49.9%. After initial estimates of 550 million pounds in-shell, the U.S. pistachio crop came in smaller than expected at approximately 475 million pounds. Despite ample nut set, a large percentage of blanks reduced production. Growers speculate poor weather during pollination or reduced irrigation may be to blame. Lower yields per acre offset recent years’ considerable increase in planted acres.

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Figure 5: Annualized Income Returns of HAIG Farmland and NCREIF Farmland Index for periods ended December 31, 2013

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Figure 6: HAIG Row Crop Income and Appreciation Returns (after fees): 2004-2013

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Figure 7: HAIG Permanent Crop Income and Appreciation Returns (after fees): 2004-2013

Source: HAIG, NCREIF

Source: HAIG

Source: HAIG

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HAIG Returns 22.1%; Nut Profitability Continues to Grow (Continued from page 4)

Rounding out California nut crops, HAIG almonds returned 32.4% in 2013. Almond income increased almost 500 basis points to 18.7% over 2012, while appreciation accelerated to 12.2% from 1.8%. The 2013 U.S. crop came in at 2.0 billion pounds, and demand remains strong. While China shipments fell 12%, the shortfall was more than offset by a 27% gain in Western European shipments coupled with strong domestic sales. U.S. purchases, which represent 32% of overall almond sales, rose 8% to a new record level and continues to rise year-on-year through the first half of 2014. North America is the almond industry’s largest market and continues to grow. Carryover dropped 5% and is anticipated to fall another 17% in 2014 as demand continues to outpace supply. After a phenomenal year in 2012, apple returns moderated in 2013. Eastern U.S. orchards returned to regular production following the previous year’s severe freeze, which decimated production. HAIG’s Washington state apples, however, experienced near-ideal conditions and achieved high productivity, thus benefiting handsomely from the overall industry shortfall. Despite rebounding supply, inventories remained somewhat tight through 2013, with pricing varying by varietal and quality. Overall, the HAIG apple portfolio produced 14.7% income and 6.2% appreciation for a total return of 21.5% for the year. HAIG cranberry investments returned 13.0% income and -3.0% appreciation, for a total return of 9.9% in 2013. An estimated record 2013 crop exacerbated the ongoing

oversupply situation for North American cranberries. With over one year’s supply in inventory, the concentrate juice business continues to slump; prices softened across all cranberry pricing pools. Despite near term weakness, HAIG remains optimistic about the long-term prospects for the industry. The sweetened dried cranberry (SDC) market continues to grow, and the industry continues to innovate with new cran-juice beverages, snack products and expansion into growing global markets. HAIG vineyard investments returned 9.7% in 2013, marking a second year of solid returns. The retraction in consumer spending after the global financial crisis impacted wine consumption and, consequently, vineyard profitability substantially. While per capita consumption remained relatively unchanged, consumers traded down price levels and retailers faced substantial pressure to discount prices. With the recovery in consumer confidence, so wine grape markets have improved with a consequent steady increase in demand for long-term planting contracts and a boost in pricing. As North America heads into summer, the 2014 crops are maturing well across the HAIG portfolio. Property managers continue to monitor the ongoing drought throughout the Western U.S. At this time, the impact is expected to be limited, primarily taking the form of increased pumping costs and additional repair and maintenance on irrigation systems. If the drought persists, it will likely have some impact that will need to be assessed and managed. More broadly, the momentum of recent U.S. farm sector growth is expected to moderate in 2014. As of the latest report in February, the USDA forecasts a decrease in net farm income of 26.6%, predominantly due to a reduction in crop receipts and government payments. Despite stepping back from record income levels, balance sheet ratios are expected to remain at or near record strength due to limited sector debt. In addition, the U.S. dollar is expected to remain steady relative to major trading partners, and agricultural exports are projected to achieve a new record of $149.5 billion in 2014 as of the May. Low U.S. energy prices will further enhance the U.S. advantage relative to foreign producers. Demand from top-three trading partners China, Canada and Mexico is expected to grow, and recently established free trade treaties should further solidify the U.S.’s position as premier global food provider.

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Figure 8: Select HAIG Permanent Crop Commodities: Property-level Returns (after fees) for year ended December 31, 2013

Footnotes All references to “HAIG farmland” refer to Hancock Agricultural Investment Group U.S. directly-held, investment grade properties only. Pre-productive permanent crop properties are excluded. This composite is valued at $1.6 billion as of December 31, 2013. All returns are calculated at the property level and include a 1.0 percent deduction to reflect investment management fees. Since all return components are calculated separately, the sum of income and appreciation may not equal total return. Past performance is not guarantee of future results. Potential for profit as well as loss exists. Fees and Performance Addendum Performance figures are net of fees charged to customers. For each strategy shown, the performance has been reduced by the amount of the highest fee charged to any HAIG customer employing that particular strategy during the period under consideration. Actual fees may vary depending upon, among other things, the applicable fee schedule and portfolio size. HAIG’s fees are available upon request and also may be found in Part II of the Hancock Natural Resource Group Form ADV.

Large Cap Stocks Ibbotson SBBI S&P 500 Total Return Small Cap Stocks Ibbotson SBBI Small Stock Total Return LT Corporate Bonds Ibbotson SBBI US LT Corp Total Return LT Government Bonds Ibbotson SBBI US LT Govt Total Return Commercial Real Estate NCREIF Property Index Total Return Timberland NCREIF Timberland Index Total Return Infrastructure S&P Global Infrastructure Total Return Precious Metals S&P GSCI Precious Metals Total Return

Indices Referenced

Source: HAIG, NCREIF

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Macadamia harvest is underway at Hancock properties throughout Queensland and New South Wales. Harvest of the native Aussie tree nut begins in February/March and continues through the end of August. The industry expects to produce 40,000 tonnes in-shell for the current year—in line with 2012 output. Wet weather and cyclonic activity impacted yields in 2013, reducing production by 10-15% industry-wide. Thus far, 2014 weather has proven conducive to good crop health. Demand for macadamias continues to grow, with Chinese purchase accounting for approximately 15% of total 2013 in-shell production. The macadamia nut contributes 3% of world nut consumption with Australia leading world production of macadamias, and approximately 70% of the Australian crop is exported. Growth in demand has come not only from Asian nations like China, Taiwan and South Korea, but also developed markets like Europe, where purchases have increased 20% year-on-year. Last year’s short crop, coupled with strong buying, has translated into favorable pricing. From a low of A$1.50 per kilo in 2007, Australian macadamia prices have steadily strengthened to $3.50 per kilo nut in-shell. Pricing varies by property based on quality and kernel recovery rate.

Australia Macadamia Pricing Strengthens

What’s Up Down Under?

Macadamia orchard

Macadamia nuts

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Canada Cranberries Yield Abundant Harvest

HAIG’s Canadian cranberry bogs had another strong year in 2013. The growing season and pollination period were delayed due to cold temperatures, resulting in a production season beginning later than in previous years. Even with variations in the weather patterns, production on mature cranberry bogs came in 42 percent higher than budget at over 300 barrels per acre. Similar to the U.S., the Canadian cranberry industry continues to struggle with an oversupply in the market due to record crop years, which has resulted in declining prices per barrel. Since 2009, 130 new acres of bogs have been planted on the property, of which 33 acres have already reached maturity and begun producing a commercial crop. In 2014, an additional 19 acres are expected to reach maturity. The newly expanded cleaning line at the property’s cleaning facility was installed and operational in time for the 2013 harvest. In the future, this line will be able to clean all the fruit grown on the bogs managed by Canneberges Bécancour Management, as well as additional fruit from other regional growers. HAIG forecasts another successful year for 2014 due in part to the continued efforts and knowledge of HAIG’s Canadian partner, Canneberges Bécancour Management LLC.

HAIG Employee News

HAIG is pleased to announce Brett MacNeil has joined as HAIG Vice President and Director of Acquisitions. Brett will be responsible for leading HAIG’s farmland acquisition program, including sourcing, due diligence and strategic partnership opportunities. In this capacity, Mr. MacNeil will report to Oliver Williams and work closely with HAIG regional acquisitions managers, FMS and HNRG Chief Acquisition Officer Mike Rivard. Mr. MacNeil brings a wealth of agricultural experience with over 30 years in the agribusiness industry. Prior to joining HAIG, Brett was President of Scythe & Spade Company, a professional services firm focused exclusively on the agribusiness industry. He holds a BS in General Agriculture from the University of Arizona and an MBA from the Keller Graduate School of Management.

Brett MacNeil Vice President, Director of Acquisitions

Cranberry harvest

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Farmland Investor is published by the Hancock Agricultural Investment Group, a division of Hancock Natural Resource Group, Inc. headquartered in Boston, Massachusetts. Hancock Natural Resource Group, Inc. is a registered investment adviser and wholly-owned,

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Agricultural Investment Group’s control, may affect performance and results, and could cause the actual performance and results of investments to materially differ from any future performance or results that may be expressed or implied by any forward-looking statement.

Disclaimers and Note on Forward Looking Statements

Almond orchard