introduction to investing in agriculture – framing opportunities … de... · 2017. 7. 11. ·...

2017 IFAMA World ConferenceMiami June 21

Introduction to Investing in Agriculture – Framing Opportunities Across the Value Chain and Around the Globe

Philippe de LapérouseManaging DirectorHighQuest Partners LLC

http://www.novusint.com/

HighQuest Group - advisory services, media and industry events

Strategic advisor in global food, agribusiness and biofuels

The world's leading resource for events, research, and insight into the global agricultural investment sector

2Proprietary information – not for distribution. Copyright © 2017 by HighQuest Partners LLC. All rights reserved.

3

Supporting informed decision-making for strategic and financial investors across the global agricultural value chain

Proprietary information – not for distribution. Copyright © 2017 by HighQuest Partners LLC. All rights reserved.

http://www.dowagro.com/

http://www.syngenta.com/global/corporate/en

http://www.monsanto.com/

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HighQuest Consulting


Why food and agriculture – investment thesis?

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Supply & Demand Imbalances

Inflation Hedge & Wealth Preservation

Low Correlation to Other Asset Classes

Under-Owned by Institutional Investors

Demand for land & soft commodities is being driven

by several strong macro trends

Historically a tested store of value in inflationary

environments

Outperformed traditional asset classes long-term

Farmland is an underinvested asset class because access and execution are difficult


Input

• Seed;• Fertilizer;• Pesticide; • Herbicide;• Farm

equipment;• Energy

Production

• Growers; • Cooperatives

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 requires appreciation for how margins are shared amongst players at different points along the supply chain.

Socialinfluences

Technicalinfluences

Economicinfluences

Politicalinfluences

Bargaining power of buyers

Threat of substitutesThreat of new entrants

Rivalry of industry competitors

Bargaining power of suppliers

Products

Information and Money

Agriculture value chain - “conceptually simple and yet challenging for efficient execution”


Where to invest in food/agriculture?

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• There are many ways to invest in most stages of the agricultural value chain via equities, corporate bonds, futures, options and ETF’s.

• However the farming/production sector is not as easily investable, as it traditionally has been a fragmented industry with tightly held family run enterprises. This is slowly changing due to increased consolidation, driven by the demographics of the farming community and pressures to achieve economies of scale in production.

Processing, Trading:

Cargill, ADM, Bunge

Food Distribution:Tesco, Walmart

Further Processing & Marketing:Kraft, Nestlé

Fertiliser, Seeds, Pesticides:

BASF, Syngenta, Yara

Farm Investments:TIAA-Cref, Hancock,

Macquarie, RaboFarms

RetailConsumer ProductsProcessingFarmingInputs

Direct Investments Closed-End Funds Tailor-Made Structures

Institutional Investment In Agribusiness


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, biologicals and big data) Water theme investments Liquid Assets

• Public equities• Commodity index funds

Range of investment opportunities in the ag sector


Agriculture – an emerging asset class?

• Institutional investment in farmland represents less than 0.5*% of the total – most land around the world is privately owned.

• However institutional investment in farmland has been growing at 8-10*% p.a. ; currently +/- $45* billion.• While historically most investment has been concentrated in North and South America, there is new

institutional appetite for agricultural investment in Australia and the Eastern Europe. • While farmland is an immature asset class in comparison to timber, the investable universe for farmland is over

3*x size – many traditional institutional timber investors are either now investing or looking to invest in farmland.

Farmland

USD $ billion

Timber

USD $ billion

Total land value 8,300* 425*

Investable universe 1,000* 300*

Institutional ownership 45* 60*

*EstimatesProprietary information – not for distribution. Copyright © 2017 by HighQuest Partners LLC. All rights reserved.

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Key issues driving farmland values

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• Water access • Climate change • Linkage to energy markets(biofuel mandates) • Deceleration of yield increases • Environmental regulations on production

Human capital• Generational transfer in both developed and developing markets• Lack of capacity building in developing markets


Source: World Bank

Proprietary information – not for distribution. Copyright © 2017 by HighQuest Partners LLC. All rights reserved. 11

End of the commodity super cycle?

$0$1,000$2,000$3,000$4,000$5,000$6,000$7,000$8,000$9,000

$0

$20

$40

$60

$80

$100

$120

$140

1960

1964

1968

1972

1976

1980

1984

1988

1992

1996

2000

2004

2008

2012

2016

Copp

er (U

SD/m

t)

Oil

(USD

/bbl

) and

coal

(USD

/mt)

Hard commodity prices 1960-2016Real 2010 USD

Crude Oil Coal Copper

$0

$500

$1,000

$1,500

$2,000

1960

1964

1968

1972

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1980

1984

1988

1992

1996

2000

2004

2008

2012

2016

USD

/mt

Soft commodity prices 1960-2016Real 2010 USD

Soybeans Corn Wheat Sugar

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2000

2002

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2050

Global Middle Class Consumption2000-2025

Others

India

China

Japan

US

EU

Source: OECD

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Middle class consumption in China and India continues to fuel growing demand for commodities


Protein demand increases a global phenomenon

Substantial increases in protein consumption between 2000 and 2010

7.5%

29.0%

32.2%

70.2%

41.4%47.7%

23.7%

48.7%

23.3%

Source: Baumé, FAPRI 13Proprietary information – not for distribution. Copyright © 2017 by HighQuest Partners LLC. All rights reserved.

U.S. agricultural exports to China have grown more than 200% in the past decade, reaching over $20.2 billion in 2015

Source: USDA FAS


China has driven demand for U.S. exports over past decade

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

0

5

10

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25

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35

40

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Expo

rts (

MM

T)

U.S. Soybean Exports to China

U.S. soy exports to China Percent of total U.S. soy exports

Impact of climate change in Iowa


Potential agricultural yield decreases by 2050 due to climate change

Source: C. Muller (2010) “Climate Change Impacts on Agricultural Yields,” background note to the “World Development Report 2010.”


Have yield improvements hit an inflection point?

Trailing 10-Year Yield Improvement

Source: USDA, HighQuest analysis


0

1

2

3

4

5

6

7

1980

1983

1986

1989

1992

1995

1998

2001

2004

2007

2010

2013

2016

2019

2022

2025

MT/

ha

Global Yields for 4 Major CropsHistorical and Projected

Corn

Rice

Wheat

Soybeans

0%

5%

Corn

0%

5%

Rice

0%

5%

Wheat

0%

5%19

7119

7419

7719

8019

8319

8619

8919

9219

9519

9820

0120

0420

0720

1020

1320

16

Soybeans

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

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Opportunities for increasing productivity in emerging markets


Source: NCREIF, Federal Reserve Board 19Proprietary information – not for distribution. Copyright © 2017 by HighQuest Partners LLC. All rights reserved.

U.S. farmland returns have exceeded DOW and S&P over the last 10 years

0%

2%

4%

6%

8%

10%

12%

14%

3-year 10-year

U.S. Farmland Returns vs. Dow and S&P

Dow S&P Farmland


Annual and permanent cropland returns compared to other assets

-20%

-10%

0%

10%

20%

30%

40%

50%19

9219

9319

9419

9519

9619

9719

9819

9920

0020

0120

0220

0320

0420

0520

0620

0720

0820

0920

1020

1120

1220

1320

1420

1520

16

Asset Returns in the U.S.1992-2016

Annual Cropland Return Permanent Cropland Return

Timberland Return Commercial Real Estate Return

10-year Treasury Yield Moody's Aaa Yield

Farmland values low relative to capitalized value

Source: USDA NASS, University of Illinois 21Proprietary information – not for distribution. Copyright © 2017 by HighQuest Partners LLC. All rights reserved.

$0

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

$14,00019

7019

7219

7419

7619

7819

8019

8219

8419

8619

8819

9019

9219

9419

9619

9820

0020

0220

0420

0620

0820

1020

1220

1420

16

USD

/acr

e

Illinois Cropland - Nominal and Capitalized Values1970-2016

Nominal value Capitalized value


Farmland returns have been higher than CPI (inflation rate) – can mitigate impact of market volatility on returns

-5%

0%

5%

10%

15%

20%

25%

30%

35%

40%

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

Farmland Correlation to CPI

Farmland

CPI

Farmland to CPI = 0.37

Returns on US farmland compared to other assets


0%

2%

4%

6%

8%

10%

12%

14%

0% 5% 10% 15% 20%

Mea

n Re

al R

etur

ns

Standard Deviation of Returns

Mean Return vs. Standard Deviation1991-2016

NCREIF Farmland

S&P 500

10-yr TreasuriesGold

Moody's Aaa

NCREIF Property

NCREIF Timber

Russell 2000

Source: Company Websites Proprietary information – not for distribution. Copyright © 2017 by HighQuest Partners LLC. All rights reserved.

August 2015 - TIAA closes its largest agriculture investment fund to datewith $3 billion in commitments. TIAA Global Asset Management - $639 billion AUM($130 billion in alternatives.)*

Farmland Investment History• Investing in agriculture since 2007 • Manages $8 billion in farmland assets • TCGA I- $2 billion in commitments (2012)• TCGA II- $3 billion in commitments (2015)

Farmland Investment Strategy • Invest in high-quality farmland, both permanent and row crops • Geographic focus - North America, South America and Australia • Investment strategy developed with majority-owned subsidiary Westchester Group, a farmland

asset manager

Notable Investors• AP2 • British Columbia Investment Management Corporation • Caisse de dépôt et placement du Québec• Greater Manchester Pension Fund • New Mexico State Investment Council • New York State Common Retirement Fund • Saudi Aramco

*2015 values24

TIAA farmland funds attract institutional investors across the globe

Source: Company websites Proprietary information – not for distribution. Copyright © 2017 by HighQuest Partners LLC. All rights reserved.

Early 2015 - Paine & Partners closes fourth fund - $893 million in commitments. Fund is focused on the investment in global food and agribusiness companies –has acquired three portfolio companies.

Company Profile • P&P and predecessor firm has managed over $3.6 billion in assets• Deployed over $1 billion in capital in agribusiness sector over the last decade

Agriculture investment strategy • Focus on upstream investment, particularly ag input companies to reduce cyclical and seasonal risks experienced by

investing in underlying commodities • Invest in agricultural technology and sustainability-focused companies to drive efficiency in food production

Representative Portfolio Companies • Suba Seeds- Producer, packer, and distributor of specialty vegetable seeds• AgBiTech- Australian producer of biological pest controls • Spearhead Int.- Farming group with diversified crop and geographic exposure throughout Europe • Verdesian Life Sciences - Investment platform focused on plant health and nutrition• ScanBio- Norwegian producer of fish protein concentrate, meal, and oil from fish by-products

Notable Investors (Fund IV) • Maine Public Employees’ Retirement System • Minnesota State Board of Investment • New Mexico Public Employees’ Retirement Association • University of Texas Investment Management Company

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Paine Schwartz Partners closes fourth PE agribusiness investment fund

Source: Company websites, Preqin Proprietary information – not for distribution. Copyright © 2017 by HighQuest Partners LLC. All rights reserved.

Second Swedish National Pension Fund (AP2)

Fund type: Pension fund Country: Sweden AUM (Dec. 2015): SEK 300 bn(US$35.7 bn)Investment breakdown: • 44% Equities • 31% Fixed-income securities• 25% Alternative investments

Agriculture Investment Strategy: • Agriculture represents 3.4% of AUM,

approximately $1.3 billion USD • Crop breakdown - 60% row crop, 30%

permanent crops and 10% dairy • Geographic breakdown - 66% U.S., 23% Brazil

and 11% Australia• Investment strategies carried out largely in

collaboration with TIAA

Canada Pension Plan Investment Board

Fund type: Pension fund Country: Canada AUM: CAD 278 bn (US$217 bn)Investment breakdown: • 52% Equities • 27% Fixed-income securities• 21% Alternative investments

Agriculture Investment Strategy: • Directly invests/acquires farmland portfolios• Launched agricultural investment program in

2012 with geographic focus on U.S., Canada, Australia, New Zealand and Brazil

• Purchase of 40% of commodity trader Glencore for $2.5 billion USD (2016)

• Acquired Assiniboia Farmland LP’s Saskatchewan farmland fund

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Long-term fundamentals in food and agriculture are attracting investments from pension funds in Europe and Canada

Source: Company websites, Preqin Proprietary information – not for distribution. Copyright © 2017 by HighQuest Partners LLC. All rights reserved.

Washington State Investment Board

Fund type: Pension fund Country: United States AUM (Dec. 2015): $106.9 bn. Investment breakdown: • 36% Equities• 34% Fixed income• 30% Alternative investments

Agriculture Investment Strategy: • $50 million investment in ACM Permanent Crops LLC,

a permanent crop fund• Investment Laguna Bay Agricultural Fund I (A$250

million), focused on agriculture in Australia and NZ• $300 million investment in Teays River, a US

agricultural holding company operating in organic dairy, seed production, table grapes and row crops

• $100 million investment in UBS AgriVest, a US permanent and vegetable crop fund

• $250 million investment in Wood Creek Capital for the investment in US midstream ag assets

University of Texas Investment Management Co.

Fund type: Endowment/OperatingCountry: United States AUM: $35.9 bn. Investment breakdown: • 56% Equities • 24% Fixed income • 20% Alternative Investments

Agriculture Investment Strategy: • Most active endowment fund in agriculture

investment • Investment in Mandala Agribusiness Fund, a PE fund

with a focus on the Indian market • Investment in Aqua Capital, a PE firm focused on

midstream ag. investment in South America • $100 million Investment in Paine & Partners Fund IV, a

US PE firm focused on upstream and midstream ag• Investment in Black River, previously a Cargill

subsidiary focused on the food sector, now independently-operated and known as Proterra

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U.S.- based pensions and endowments actively allocating capital to agricultural investments

Fund Sectoral Focus Geography Arlon Private Equity North and South America

AMERRA Capital PE + Financing Global

Agriculture Capital Management Farmland + Midstream U.S.

Aqua Capital PE - food and ag South America

Blue Road PE - supply chain North and South America

Homestead Farmland U.S. Hancock Agricultural Investment Group Farmland Global

International Farming Corporation Farmland + AgTech U.S.

Macquarie Infrastructure and Real Assets Farmland Australia, Brazil and the U.S.

Proterra Investment Partners Farmland + PE Global

Rabo Equity PE India

Tillridge Global Agribusiness PE - midstream North and South America

Examples of funds which have recently completely capital raises


Improved productivity will be achieved by combining new “hardware” (seeds) and “software” (management practices)


Digitization and miniaturization is accelerating change in agriculture

Camelina

Pongamia

Soybeans

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Alternative oilseeds and insects are becoming increasingly competitive protein sources in traditional plant protein markets

Crickets

2014 • $2.36 billion raised• 264 deals• 271 unique investors

2015• $4.6 billion raised• 572 deals • 672 unique investors

2016• $3.23 billion • 508 deals

Sectors attracting investments• Inputs/biologicals• Precision ag• Big data applications(“smart farms”)• Novel feed/food ingredients• Genetic prospecting(nexus of pharma/ag/food)

Source: Ag Funder’s AgTech Investing Report – 1st Half 2016.


Historic acceleration in early stage food and ag tech investments

• Farm-2-Consumer

• Alternative Proteins

• Animal Nutrition and Health

• Food Safety & Traceability

• Smart Equipment & Hardware

• Decision Support Technology

• Food Commerce

• Food Tech

• Ubiquitous connectivity and sensors

• Autonomous robotics

• Gene sequencing and rapid phenotyping

• Data capture, aggregation, analytics andprescriptions

• Novel materials

• Innovative business models


Key areas to track: impact of generic industry disruptors on subsectors of ag tech

• Increasing tendency for large institutions such as pension funds to bring sectoral expertise in-houseto pursue direct investments as opposed to investing in funds.

• Permanent crops and situations involving mix of real assets with exposure to operating risks attractinginvestments as investors seek higher returns.

• Sustainability and consumer concerns regarding quality become drivers for the adoption of new technologies and business models (ex. – indoor farming of leafy vegetables adjacent to large consumption markets).

• Frontier markets in Africa attracting capital.

• Argentina back in the game.

• Distressed assets in Brazil.

• Ag tech continues to attract capital.


Trends in agricultural investing as it emerges as an asset class

Example of sub-allocation framework for an ag portfolio

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

Core6-10%

• North America• Row crop Land• Cash lease


Informed decision making for global agricultural investing

Philippe de Lapérouse

Managing DirectorHighQuest Partners, LLC

[email protected]

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introduction to investing in agriculture – framing opportunities … de... · 2017. 7. 11. ·...

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