Philippe de Lapérouse Managing Director HighQuest Partners LLC · Total global agriculture market...
Transcript of Philippe de Lapérouse Managing Director HighQuest Partners LLC · Total global agriculture market...
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Les Perspectives 2014Le 8 avril 2014Boucherville, Québec
Key Fundamentals Driving Investor Interest in Global Agriculture
Philippe de LapérouseManaging DirectorHighQuest Partners LLC
Proprietary information – not for distribution. Copyright © 2014 by HighQuest Partners LLC. All rights reserved.
1. HighQuest Partners + Soyatech
2. Size of global ag market
3. Fundamental drivers
4. Expected range of returns
5. Summary
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HighQuest + Soyatech + Global AgInvestingHighQuest + Soyatech + Global AgInvesting
Strategic advisor in global food, agribusiness and biofuels
Media and conferences forthe agricultural industry
The world's leading resource for events, research, and insight into the global agricultural investment sector
Proprietary information – not for distribution. Copyright © 2014 by HighQuest Partners LLC. All rights reserved.
Proprietary information – not for distribution. Copyright © 2014 by HighQuest Partners LLC. All rights reserved.
HighQuest supports informed decision‐making for strategic and financial investors across global agriculture
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Upcoming eventsUpcoming events
Global AgInvesting 2014April 28‐30 | New York
Global AgInvesting Asia 2013September 23‐25 | Singapore
Global AgInvesting Europe 2014Fdecember 1‐3 | London
Global AgInvesting Middle East 2015February | TBC
www.globalaginvesting.com
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February 9‐10, 2015 / Barcelona, Spain
Oilseed & Grain Trade SummitOctober 7‐9, 2014 / New Orleans
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1. HighQuest Partners + Soyatech
2. Size of global ag market
3. Fundamental drivers
4. Expected range of returns
5. Summary
Global agriculture is broad and large(3rd largest after currency and energy markets) and experiencing steady growth(4 ‐ 5%)Global agriculture is broad and large(3rd largest after currency and energy markets) and experiencing steady growth(4 ‐ 5%)
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Total global agriculture market value is estimated at more than $6.4 trillion (including the food & beverage sector), representing over 8.5% of the world’s economic activity in 2010.
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Note: Illustrative• 1980‐1999 uses 2000 pricing• 2011‐2020 uses 2010 pricing
Agricultural commodities trade is forecast to exceed 520 million metric tons in next ten years due to rising demand in China, India,Southeast Asia and Middle East.
Wheat
Corn
Soybeans
Soybean Meal
SugarPalm Oil
RapeseedSoybean Oil
Rapeseed MealRapeseed Oil
0
100 000
200 000
300 000
400 000
500 000
600 000
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
2018
2020
(1000MT)
Global Trade Volume by Crop, 1980‐2020F
Wheat
Corn
Soybeans
Soybean Meal
Sugar
Soybean Oil
Rapeseed Oil
Rapeseed Meal
‐
50 000 000
100 000 000
150 000 000
200 000 000
250 000 000
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
2018
2020
(000 USD
)
Total Export Value, 1980‐2020F
RapeseedPalm Oil
Source: USDA statistics and baseline projection, CME
Global agricultural trade volume projected to increase 2.7% (CAGR) through 2020Global agricultural trade volume projected to increase 2.7% (CAGR) through 2020
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Input
• Seed;• Fertilizer;• Pesticide; • Herbicide• Farm
equipment• Energy
Production
• Growers; • Cooperatives
Storage Handling/Trading
Storage Handling/Trading
• Grain elevators;
• Brokers and traders
Transportation& Logistics
• Ocean;• Barge;• Rail;• Truck
Processing
• Primary processing;
• Food and feed ingredients
End users
• Food• Feed• Biofuels• Industrial
A complex market structure which requires appreciation for how margins are shared amongst players at different points along the supply chain.
Agriculture value chain – “conceptually simple and yet challenging for efficient execution”Agriculture value chain – “conceptually simple and yet challenging for efficient execution”
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Range of investment opportunities in the ag sectorRange of investment opportunities in the ag sector
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Real Assets • Farmland• Infrastructure
Private Equity • Upstream
• inputs(seed, chemicals, fertilizer, technology services, capital goods)• Downstream
• storage and logistics• value added processing of ingredients• food/feed/industrial processing
Venture Capital • Biotech• Enabling technologies (precision ag) Water theme investments Liquid Assets
• Public equities• Commodity index funds
Seed
Ag chemicals & fertilizer
Ag machinery
Ag production
Food& beverage
Animal feed
Meat & aquaculture
Biofuels
2010 market value (est.) 2015 market value (est.) Estimated CAGR 2010‐2015
Ag investment
Ag insurance
$37 billion
$134 billion
$56.1 billion
$ 1.3 trillion
$3.84 trillion
$263 billion
$672 billion
$56.4 billion
$20 billion
$23 billion
$47 billion
$196 billion
$80.5 billion
$1.46 trillion
$4.6 trillion
$313 billion
$815 billion
$80 billion
$40 billion
$66.6 billion
3.5%
6.5%
7.5%
2.4%
3.7%
3.5%
3.9%
7.2%
15%
20%
Examples of broad range of activities in the global agricultural sector Examples of broad range of activities in the global agricultural sector
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$0
$2,000
$4,000
$6,000
$8,000
$10,000
$12,000
$0
$10,000
$20,000
$30,000
$40,000
$50,000
$60,000
$70,000
$80,000
$90,000
$100,000
Machinery an
d Equipment (M
illion USD
)
Inputs (M
illion USD
)
Farm Expenditures1990‐2011
Farm Origin Inputs Manufactured Inputs Machinery and Equipment
Source: USDA ERS
Farm Origin Inputs include seed, feed, and livestock and poultry purchased.
Manufactured Inputs include energy, fertilizers, and pesticides.
US farm expenditures have been trending upward since 1990
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1. HighQuest Partners + Soyatech
2. Size of global ag market
3. Fundamental drivers
4. Expected range of returns
5. Summary
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Key issues driving farmland valuesKey issues driving farmland values
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Population growth and increase in GDP• World population 9 billion in 2050 • Increased demand in developing markets, particularly Asia, SE Asia and
North Africa• Shift in diets from grain to animal protein (Bennett’s law)
Increasing urbanization • Pressure on available arable land for crop production• Increasing reliance on processed foods
Constraints on supply• Access to water• Climate change• Linkage to energy markets(biofuel mandates) • Slowdown in yield increases
Human capital• Generational transfer in both developed and developing markets• Lack of capacity building in developing markets
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Demographic trend a major driver
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Urbanization trend increasing demand for food commodities
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Dramactic shift in developing country populations from rural to urbanhas major implications for increased trade in commodities
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0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2000
2002
2004
2006
2008
2010
2012
2014
2016
2018
2020
2022
2024
2026
2028
2030
2032
2034
2036
2038
2040
2042
2044
2046
2048
2050
Global Middle Class Consumption2000‐2025
Others
India
China
Japan
US
EU
Source: OECD
Middle class consumption in China and India continues to fuel growing demand for commodities
Commodity boom driven by shift of poor into the middle classCommodity boom driven by shift of poor into the middle class
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0
500
1 000
1 500
2 000
2 500
3 000
Cubic KM
Projected Change in Water Withdrawals
2000
2050
Source: OECD
‐14%
+127%
+63%
+406%+144%
Agriculture will have to compete for access to water
Renewables are here to stay but at what levels? Renewables are here to stay but at what levels?
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Fuel Annual Growth Rates (2000‐2035)Liquids 0.9%
Natural gas 1.3%
Coal 1.4%
Nuclear 1.6%
Renewables 2.0%
Overall 1.3%
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It would appear that climate change is realIt would appear that climate change is real
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‐8
‐6
‐4
‐2
0
2
4
6
1900
1903
1906
1909
1912
1915
1918
1921
1924
1927
1930
1933
1936
1939
1942
1945
1948
1951
1954
1957
1960
1963
1966
1969
1972
1975
1978
1981
1984
1987
1990
1993
1996
1999
2002
2005
2008
2011
U.S. Annual Palmer Drought Severity Index1900‐2013
Source: NOAA
Wet Sp
ell
Dry Sp
ell
While frequency of severe droughts is not new, the stakes now are much higher
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Potential agricultural yield decreases due to climate change by 2050Potential agricultural yield decreases due to climate change by 2050
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Source: C. Muller (2010) „Climate Change Impacts on Agricultural Yields‟, background note to the “World Development Report 2010.”
Impact of climate change on food export prices in 2030 Impact of climate change on food export prices in 2030
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Source: D. Willenbockel – “Exploring Food Price Scenarios Towards 2030 with a Global Multi‐Region Model,” Oxfam research report (2011).
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Rising demand as per capita acreage declines Rising demand as per capita acreage declines
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Declining yield gains in major crops – can trend be reversed? Declining yield gains in major crops – can trend be reversed?
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0
0,01
0,02
0,03
0,04
0,05Soybeans
-1%
1%
3%
5% Corn
-1%
1%
3%
5%Rice
0%
1%
2%
3%
4%
5%
1971
1974
1977
1980
1983
1986
1989
1992
1995
1998
2001
2004
2007
2010
Wheat
0,0
1,0
2,0
3,0
4,0
5,0
6,0
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
2018
2020
Global Yields for 4 Major CropsHistorical and Projected
(MT / ha) Corn
Rice
Wheat
Soy
Source: USDA; HighQuest Analysis
Trailing 10-Year Yield Improvement
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New pricing dynamic created by biofuels mandatesNew pricing dynamic created by biofuels mandates
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Pricing ‐ cornPricing ‐ corn
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Prices – soybeans and cornPrices – soybeans and corn
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Demand for commodities driven by rapid GDP/capita growth in developing and emerging markets Demand for commodities driven by rapid GDP/capita growth in developing and emerging markets
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Animal protein consumption highly correlated with per capita GDPAnimal protein consumption highly correlated with per capita GDP
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Animal Protein Consumption(kg) Per Capita vs. GDP Per Capita(PPP basis) ‐ 2010
R² = 0,6709
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20
40
60
80
100
120
140
- 10 000 20 000 30 000 40 000 50 000 60 000
Consumption per capita (kg)
GDP per capita(PPP)
Australia
USA
Japan
UAE
S. Korea Norway
New Zealand
China
China – meal demand forecast to increase 60%China – meal demand forecast to increase 60%
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Over the past 15 years, meal consumption in China has had a 99% correlation with GDP per capita. Based on this correlation and OECD projections for future GDP growth in China, HighQuest projects that Chinese meal consumption will increase by 60% over the next decade (50 to 80 million MT).
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Impact of exports to China and ethanol production on US farmland use Impact of exports to China and ethanol production on US farmland use
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Projected global demand by 2020Projected global demand by 2020
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-
500 000
1 000 000
1 500 000
2 000 000
2 500 000
3 000 000
3 500 000
Sunflowerseed
Cotton
Peanut
Sorghum
Rapeseed
Barley
Soy
Rice
Wheat
Corn
Source: USDA; HighQuest Analysis
Global Production of 10 Major Crops (Historical1980‐2010; Projected 2011‐2020; 000 MTs)
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Farmland required to supply projected demandFarmland required to supply projected demand
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Conservatively, 65‐85 million net incremental hectares will be required.
Availability and location of available global land reservesAvailability and location of available global land reserves
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WHILE LAND IS AVAILABLE FOR PLANTING, MUCH OF IT IS NOT EASILY ACCESSIBLE
Net Reserves
547 18%
Forest804 26%
Protected 204 Urban
58 2%
Current Arable141147%
Potential Rainfed Cropland (3,024 million hectares)
Africa256 47%
Latin America
152 28%
Asia87
16%
North America
30 5%
Oceana18 3%
2
Net Reserves By Region(547 million hectares)
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Brazil – a key playerBrazil – a key player
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22,5
12,8
11,8
8,1
9,4
64,6
SouthAmerica
FSU‐12 SubSaharanAfrica
South Asia Row Total
New Cropland By Region – Last Decade(2000‐2010 – Harvested Ha for 10 major crops)
Historical shift of price equilibrium in Brazil Historical shift of price equilibrium in Brazil
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1960s
1980s
2000s
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2,24%
1,53%
2,60%
2,42%
1,78%
3,37%
1,96%
1,43%
0,0% 0,5% 1,0% 1,5% 2,0% 2,5% 3,0% 3,5% 4,0%
Russian Federation
Southeast Asia
China
Brazil
Latin America
Sub‐Saharan Africa
Developing Countries
Developed Countries
Total Factor Productivity Growth of AgricultureAverage Change in Growth Rates (1961‐2009)
Source: OECD, FAO
Opportunities for increasing productivity also located in emerging markets
5 key risk factors5 key risk factors
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Step‐change improvement in yields Launch of drought resistance varieties
China SE Asia North Africa/Middle East
On the horizon biofuels; protein meal; fat
Double‐edged sword Inverts the supply curve
Food security Export bans / trade embargoes GMO acceptance Renewable Fuels
1. Seed Technology
2. Slower Growth
3. Algae or Microorganisms
4. Infrastructure/Food Wastage
5. Government and Trade Policy
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Proprietary information – not for distribution. Copyright © 20143 by HighQuest Partners LLC. All rights reserved.
1. HighQuest Partners + Soyatech
2. Size of global ag market
3. Fundamental drivers
4. Expected range of returns
5. Summary
US farmland returns vs. other major originsUS farmland returns vs. other major origins
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*This comparison is based on results from the different harvest periods in North and South America.
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Historical returns – 100‐year Illinois farmland appreciationHistorical returns – 100‐year Illinois farmland appreciation
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Thesis for farmland investment Thesis for farmland investment
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1. Fundamentals a) Supply < Demand
Increase in supply slower than increase in demand b) Demand Rationing
High & volatile pricesPrice signal for capacity expansionNew demand creation – biofuels and industrial uses
c) Higher Land Values......and potentially attractive economics throughout the sector resulting from application of technology and efficient agronomic practices which will generate higher cash rents per unit of land which will be capitalized into the value of the land.
2. Inflation & currency protection
3. Uncorrelated returns
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Returns on U.S. farmland compared to other assetsReturns on U.S. farmland compared to other assets
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Historical correlation vs. inflation and other asset classesHistorical correlation vs. inflation and other asset classes
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1NCREIF Farmland Index is a quarterly time series composite return measure of investment performance of a large pool of agricultural properties acquired in the private market for investment purposes only.
2R measures the correlation between the price movements of two asset classes.
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Farmland values low relative to capitalized valueFarmland values low relative to capitalized value
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Proprietary information – not for distribution. Copyright © 20143 by HighQuest Partners LLC. All rights reserved.
1. HighQuest Partners + Soyatech
2. Size of global ag market
3. Fundamental drivers
4. Expected range of returns
5. Summary
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Expectations of returns for farmland investment by regionExpectations of returns for farmland investment by region
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North AmericaRisk: Low
Return: LowVolatility: Low
Return Expectations:
8‐12%
South AmericaRisk: Medium
Return: MediumVolatility: Medium
Return Expectations:
12‐20%
Western EuropeRisk: Low
Return: LowVolatility: Low
Return Expectations:
8‐12%
AfricaRisk: High
Return: HighVolatility: High
Return Expectations:
20‐30%
Eastern EuropeRisk: Medium
Return: MediumVolatility: Medium
Return Expectations:
12‐14%
Former Soviet Union
Risk: HighReturn: HighVolatility: High
Return Expectations:
15‐25%
Former Soviet Union
Risk: HighReturn: HighVolatility: High
Return Expectations:
15‐25%
Australia & New ZealandRisk: Low
Return: LowVolatility: Low
Return Expectations:
9‐16%
Australia & New ZealandRisk: Low
Return: LowVolatility: Low
Return Expectations:
9‐16%
Major issues by regionMajor issues by region
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Region Land Control
Scale Fragmentation Ownership Structure
Business Model
US & Canada free title medium medium fund, corporate or
direct
cash leases or direct operating
Australia & New Zealand
free title large low fund or corporate
integrated ‐crops/grazing
WesternEurope
free title small high direct direct operating
South America
free title large low fund or direct direct operating
EasternEurope
free title medium medium fund or direct direct operating
FSU evolving to free title
large low fund direct operating
Africa long‐term land concessions
large low corporate direct operating
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Returns and secular trendsReturns and secular trends
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1. Historical 8% ‐12% real returns (US) likely scenario for the next decade Farmland prices in US currently experiencing stabilization Higher in less mature markets(12 – 30% ‐ private equity returns)
2. Supply response which historically had lagged demand has been picking up
3. New pricing paradigm for crops higher(compared to historical mean + more volatile) though prices have retrenched from recent highs Long run: price signal will be required to add capacity
4. Farmland is ultimately the limiting factor economic rents are capitalized into the value of farmland
Example of sub‐allocation framework for an ag portfolio Example of sub‐allocation framework for an ag portfolio
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Geography
Operational / Development
Type of Asset
• Australia• South America• Eastern Europe• Russia• Asia• Africa
• Land ownership (free title) • Risk‐ sharing lease structures• Farm management• Land development /conversion• Upstream or downstream value chain investment • Permanent crops
• Dairy• Land‐based animal protein production• Aquaculture
Core8-12%
• North America• Row crop Land• Cash lease
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Informed decision making for global agricultural investing
Philippe de Lapérouse
Managing DirectorHighQuest Partners, LLC
314‐994‐3282
1005 North Warson Road, Suite 226 – St. Louis, Missouri 63124 – USA
(314) 994‐3282 | www.highquestpartners.com