Rabobank Yuen - Financing Innovative Small Holder Business Models For Food Security

INVESTING IN FOOD SECURITY
FINANCING INNOVATIVE SMALLHOLDER BUSINESS MODELS
8 July 2010
Veiverne Yuen
Rabobank International
Contents
1 Rabobank International
2 Trends in Food & Agribusiness
3 Agriculture as an Asset Class
4 Developing a Platform for Engagement
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2 Investment Forum for Food Security in Asia and the Pacific, 7‐9 July 2010, Manila, Philippines Food & Agribusiness Research and Advisory
1 RABOBANK INTERNATIONAL
• Present in 48 countries worldwide with 1,633 offices
• Over 59,000 staff serving over 9.5 million clients
• Ranked 6th safest bank in the world
Global Finance, October 2009
• AAA / Aaa / AA+ rated
Standard & Poor’s, Moody’s, since 1981
Dominion Bond Rating Service, since 2001
• Best Developed Markets Bank in the Netherlands

Global Finance, February 2010
• Total assets of EUR 607.7 billion
Rabobank, December 2009
• Net profit of EUR 2.3 billion
Rabobank, December 2009
4 Food & Agribusiness Research and Advisory
F&A Banking for Over a Century
Subsidiaries service their own client base and
customers of Rabobank under their own labels
Wholesale and
Retail Banking
Asset &
Investment
management
Real estate
financing &
development
Leasing
Mortgage
brokerage
Insurance
Rabobank is 39% shareholder
Products and Services
Corporate Lending Leveraged Finance
Corporate Finance
• Senior Term Debt • Acquisition Finance
• Private Placements • Revolving Credit Facilities • LBO/MBO Finance
• Structured Finance • Working Capital Lines
• Trust Preferred Securities
• Securitization
Treasury Products
• Derivative Products
Advisory & Research • Investment Products
• Mergers & Acquisitions
• F&A Research
• Strategic Advisory
Global Products
• Asset Securitization
• Debt/ Equity Underwriting
• Asset Management
Structured Commodity
& Trade Finance
• Export/ Import
• Foreign Receivables Leasing Syndication
• Inventory Finance
• Cross‐Border Leases • Debt Underwriting &
• Inventory Price Risk
• Tax‐oriented Leases • Syndication
Management
FAR: Global Network of Agribusiness Specialists
Animal Beverages Clean Tech Dairy Farm Inputs Food Fruit, Veg & Grains & Non‐food Soft
Protein Flowers Oilseeds Commodity
Food & Agribusiness Research and Advisory
FAR in Asia
FAR in Asia
Over 20 professionals
covering 10 offices
covering 10 offices
covering 10 offices
Specialists in all key F&A
sectors
sectors
Providing primary
Providing primary
Providing primary
research and analysis
Servicing broad network
of F&A companies
of F&A companies
of F&A companies
Linked to a global team
of 80+ analysts
of 80+ analysts
of 80+ analysts
Food
2 TRENDS IN FOOD & AGRIBUSINESS
The Long‐Term Demand & Supply Imbalance
While population growth is expected to slow, urbanisation and land degradation
Trends in Food & Agribusiness
will mean that less land is available to feed a larger number of people.
Global Population & Available land Per Capita
10 Today 0.5
8 0.4
Population ( billions)
hectare/capita
6 0.3
4 0.2
2 0.1
0 0
1965 1980 1995 2010 2025
Population hectare/capita
The need for continued yield enhancement
A growing population and limited available arable land is pressuring agricultural
resources...
The ‘Yield Gap’
1.6
1.5 Demand set to increase

faster than yield
1.4 Historically, yield increases
increases have
1.3 kept pace with
consumption
Index
1.2
Downside in yield due to
1.1 confluence of weather mishaps
globally
1.0
Increased arable land availability limited
0.9
1990 1993 1996 1999 2002 2005 2008 2011 2014
Food Consum ption Yield Arable Land
Agribusiness Sector Fragmentation
Number of Participants Asian Fresh Produce Value Chain
Farm Trading Aggregation / Market Systems Logistics Distribution Retail
Large‐ Direct Export Food Service Luxury
Participants
Scale Contract Farming
Numerous Mid‐Range
Profit levels Retailers
Large Wholesale Markets Sorting,
Collection /
Packaging,
Transport
Handling,
Small‐ Etc
Scale Low‐
Regional Wet Markets Income
Markets
Many
Other
Several
Becoming
Several
integrated
Fewer
downstream
However, up and mid‐stream
Retail
Aggregator
Logistics
Farm
Trader
segments remain fairly disorganized
Small‐Scale Value Chains
The Old Model – Numerous Participants along any Supply Chain
Farmers Collection Points Collection Centres Distribution centres Retail
Reduced value, caused by long and fragmented value chains:
• Higher cost of food ‐ Increased shipping time and shipping cost
• Lower perceived value of food ‐ Lack of traceability and transparency in handling and storage
• Lower realized value & profit ‐ Perishable goods see high freight cost, undesirable spoilage rates, reduced shelf time
• Capital pooling in the mid‐stream reduces stable cash flows ‐ Volatility in goods prices especially in the mid‐stream
• Loss of revenue ‐ Risk to distributors, processors and producers of profit loss due to food safety failures
4 AGRICULTURE AS AN ASSET CLASS
Ways to Invest in Agriculture
There are three primary instruments providing exposure to Food & Agribusiness...
Agriculture as an Asset Class
each have their +’s and –’s!
1.Direct investment in Commodities
• through futures, etf’s or traditional commodity index products
2.Investing in Equities
• Through a basket of companies with exposure to Agriculture
• There are also a number of agricultural equity indices
3.Primary investment in Agriculture
• A number of managed Agricultural land funds have been initiated – these are looking to
capture the capital appreciation of agricultural/farming assets
• Direct investment in agriculture through ownership of either farming or downstream supply
chain assets
Indexed Commodity Prices
Softs have performed well over the last 18 mths, but the complex has been highly
dependent on sugar.
Index of Various Commodity Indices
200
180
160
140
Index
120
100
80
60
Jan 09 Mar 09 May 09 Jul 09 Sep 09 Nov 09 Jan 10 Mar 10 May 10
S&P GS Agri Index S&P GS Sof ts S&P GSGrains RJ/CRB Commodity Index
Commodities Have Outperformed
Index Comparing Agri Commodities vs. Other Assets
250
200
150
Index
100
50
0
Jun 05 Dec 05 Jun 06 Dec 06 Jun 07 Dec 07 Jun 08 Dec 08 Jun 09 Dec 09
S&P GS Agri Index Dow Jones Ind. Avg.

US Generic Govt 10 Bond S&P GS Commodity Index
But Commodities are Volatile
Volatility in agri markets has receded but is highly dependent on stock levels ‐
periods of low supply have tended to result in extreme price shocks and a strong
rebound in production.
1200
Monthly CBOT Wheat Prices
1000
Monthly CBOT Corn Prices
800
US¢/bu
600
400
200
100
80
60
40
Million tonnes
20
0
‐20
‐40
‐60
‐80 Grain Market Surplus/Deficit
‐100
Direct investment in commodity markets
Positives
• Relatively inelastic demand makes agricultural commodities less reliant on global
economic conditions.
• Price dynamics tend to be more supply driven. Variations in supply are
predominantly subject to weather and as such have no direct relationship to other
asset classes
• This has lead to the argument of counter cyclicality
• Increases in commodity prices have a relatively good correlation with inflation
Negatives
• High volatility relative to alternative asset classes
• Correlation with other assets has been high in recent years
• The carry nature of forwards curves in Agricultural commodities has negative yield roll
implications
• Scope for forecasting supply & demand imbalance limited due to weather impacts
Investing in agricultural equities
The performance of agri equities relative to other benchmark indices has been
extremely impressive.
700
600
500
400
Axis Title
300
200
100
0
Jan 02 Jan 03 Jan 04 Jan 05 Jan 06 Jan 07 Jan 08 Jan 09 Jan 10
MSCI Global Equity Index S-Net ITG Agri Equity Index DJ Industrial Index
Although strongly influenced by commodities!
The relatively strong correlation between agri commodities and a basket of
agricultural equities can ‘commoditise’ an equity portfolio.
7000 550
500
6000
450
5000
400
4000 350
Index
Index
3000 300
250
2000
200
1000
150
0 100
Jun 05 Mar 06 Dec 06 Sep 07 Jun 08 Mar 09 Dec 09
S-Net Global Agri Equity Index S&P GS Agri Commodity Index
Yet equities outperform underlying commodities
There is value attached to human capital and intellectual capital involved in value
addition
400
350
300
250
Index
200
150
100
50
0
Jun 05 Mar 06 Dec 06 Sep 07 Jun 08 Mar 09 Dec 09
S-Net Global Agri Equity Index S&P GS Agri Commodity Index
Direct investment in Agricultural land
Recent trends:
1.Governments
• Increased concern surrounding food security
• Net food importers have become increasingly concerned about their exposure to
international markets & ‘government intervention’ in markets
• This has seen increased interest in Agricultural land from sovereign entities –
particularly in Asian and the Middle East looking to ensure food security
2.Private Investors
• The long‐term supportive drivers for Agriculture have also attracted the interest of
investors seeking a more accessible way to invest directly in Agriculture
• This gap has been increasingly filled by banks and investment firms offering
managed land funds that focus on either enterprise return or rental return as well as
the major focus the capital appreciation of the underlying agricultural asset.
Investors chasing real assets in Agriculture
The Agricultural funds management space is growing extremely strongly...
Rabo FARM
Pharos Miro Agriculture Fund
And its not too hard to see why!
Capital appreciation for agricultural land has been astonishing...
800
% Change
700 +658%
600
Index 1998 = 100
500
+181%
400
300 126%
200 117%
100
87%
0
Iowa (cropland) NSW (broadcare) NZ (dairy)

São Paulo (pastureland) Argentina (soy/corn regions)
4 DEVELOPING A PLATFORM FOR ENGAGEMENT
A Structural Look at the Food & Ag Value Chain
Number of Participants
A Platform for Engagement
Farm Retail / End User
Participants
Long Run Price Volatility
Margins
UPSTREAM MIDSTREAM DOWNSTREAM

• Highly fragmented smallholders • Numerous participants involved in • Evolution of modern retail and food service
• Poorly financed all manner of logistics and handling • Elevated awareness of food safety and
• Limited land availability and scope for • Excess logistics capacity with lack of supply chain integrity
productivity growth traceability and transparency • Imposition of tighter specifications and
• Increasing requirement for pre • Thin margins with significant credit terms on suppliers
financing, and provided by off‐takers volatility lead to severe mispricing • Brands and private labels become more
and non‐delivery prominent
• Although farm gate prices are expected
to improve, small farm size limits • Room for consolidation and • Increasing market power can lead to
viability systems integration stronger supply chain control
Organizing the Value Chain
The New Model – Organized Market & Value‐Added Platforms in Cold Chain Hubs, integrated into Managed End‐to‐End Networks
Producer Organized Marketing Platform Retailing
Groups and Value‐Addition Centre Groups
Reorganizing primary production capabilities and distribution channels to achieve greater efficiencies and scale,
increasing access to competitive markets through yield management and short value chains:
•Increased revenue stream ‐ Maximum shelf time for perishables, by minimizing time in spent in transit
•Lower cash flow volatility ‐ A reduction in wastage and spoilage during handling and transport
•Lower cost of food ‐ A reduction in transport and shipping fees
•More profit transferred to smallholder ‐ Purchases direct from producer groups to reduce intermediation fees
•Greater buy‐in from all downstream participants ‐ Mitigate reputational risk to brand owners and retail distributors
by maximizing transparency and traceability along the value chain and allowing independent checks
New Pricing Models Driving Growth
Payment and System Ownership Models
Producer Exporter Shipping Importer Retailer
CNF
FOB
• Disintermediation creates value through:
• lower cost
• reduced spoilage
• shorter transport times
• longer shelf‐life
• Disintermediation requires ownership over the supply chain for:
• Streamlining
• Introduction of controls (transparency and traceability)
• Appropriate payment terms can align of reputational stake in the final product with ownership over the supply
chain
• CNF = producer ownership
• FOB = retailer ownership
What If We Did It All Over Again?
Hierarchy of Agribusiness Development Needs
Financing Issues
•Large operators access to traditional
debt and equity capital markets
•SME and rural enterprise players are
disadvantaged
•Significant initial investment size
•Often seen as public goods
•Not all jurisdictions can utilize REITs
•Microfinance not widely available
•Rural lending schemes rely heavily on
relationship capital
•Not all borrowers see need to repay
•Ultra‐long term investment horizon
•Often viewed in the same category as
infrastructure, but with scale issues
•Lack of liquidity for investor
East Coast Economic Region, Malaysia
Designed flagship poultry clusters in the ECER
Primary research:
• Site visits
• Meetings with brown‐field stakeholder companies
• On‐the‐ground analysis of production & processing capability
• Comparisons with overseas companies in Thailand, Brazil
Develop strategic blueprint:
• Flagship projects to demonstrate competitive advantage
• Build relationships along the value chain
• Identify high‐value export markets
Integrate potential players and existing stakeholders:
• Access global network of Agricultural companies
• Bring in global expertise
• Develop an implementation plan & investor strategy
• Align stakeholder interests and strategies
Northern Corridor Economic Region, Malaysia
• A designed agribusiness development roadmap identified
cornerstone projects by sector.
• Identification of local partners key to easing of transition into
Malaysia by a foreign investor.
• Opportunity analysis:
• Aquaculture
• Animal Husbandry
• Fruits and Vegetables
• Specialty Crops
• Paddy
• Comprehensive business plan:
• Identify local comparative advantage
• Develop a framework for an aggregation and distribution
• Identify downstream value‐add industries
• Integrate potential players and existing stakeholders:
• Access global network of Agricultural companies
• Bring in global expertise
• Develop an implementation plan
• Align stakeholder interests and strategies
Cause for Optimism: The Greenery, Netherlands
1,500 members Aggregation Hubs Trading Hubs
• Primary production • Further packaging • Marketing

• On‐farm cleaning & • Aggregation • Procurement
packaging facilities • Sorting • Perishables handling
• Own brand products • Quality control • Trading
• Negotiated bulk • Bulk branding • Export certification
purchase of farm • Each hub specializes
inputs through in different export
supporting co‐op markets
Food Zones: The Public‐Private Nexus
China Jilin Food Zone
• Product verticals based
on agronomic strengths
• Fruit & vegetables a
large component; NE
China is home to largest
fresh produce wholesale
markets in Asia
• Identified current
constraints and
proposed solutions to
improve productivity
• Market‐driven business
models to drive long‐
term growth
• Similar models will have
a huge impact on fresh
produce markets across
South East Asia
Veiverne Yuen
Deputy Manager, South East Asia
Rabobank International, Singapore Branch
T: +65 6230 6755
M: +65 9736 8370
E: Veiverne.Yuen@Rabobank.com
Food & Agribusiness Research and Advisory Asia

Rabobank Yuen - Financing Innovative Small Holder Business Models For Food Security

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INVESTING IN FOOD SECURITY

• Best Developed Markets Bank in the Netherlands

1.5 Demand set to increase

Food Consum ption Yield Arable Land

S&P GS Agri Index Dow Jones Ind. Avg.

S-Net Global Agri Equity Index S&P GS Agri Commodity Index

S-Net Global Agri Equity Index S&P GS Agri Commodity Index

Pharos Miro Agriculture Fund

Iowa (cropland) NSW (broadcare) NZ (dairy)

UPSTREAM MIDSTREAM DOWNSTREAM

• Primary production • Further packaging • Marketing

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