1

Ottawa CFA Luncheon 2011 Agriculture Commodities,

Biofuels & Fertilizer OutlookSam Kanes, CFA, CA

Managing Director, Scotia Capital

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Agenda

• Agriculture Outlook

• Food-Based Fuels

• Non-Food-Based Fuels

• Fertilizer Stocks

• Conclusions

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Agriculture Outlook

Income Growth

Biofuels

Improved Diets = More Grains

Limited Arable Land

Urgent Need for Increased Yields

Solution = Increased & Balanced Use of Fertilizer and

Population Growth

• 2005-2008: 33% of incremental global demand

• 99% food-based

• U.S. 2022 targets:•40% food based (15B gal/yr)•60% non-food based (21B gal/yr)

Source: ICL

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June 30 USDA reports sparks rally in grain prices

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12/31/09 2/14/10 3/31/10 5/15/10 6/29/10 8/13/10 9/27/10 11/11/10

June 30 USDA reports sparks rally in grain prices:Corn +64% since

Since June 30, 2010:

Corn +64%

Wheat +47%

Soybeans +32%

Front Month U.S. Corn, Soybeans and Wheat Prices Indexed at January 1, 2010

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Will food-based fuels decline?

• Dedicated energy crops could be:

• Algae

• Switchgrass

• Miscanthus

• Jatropha

• MSW

• Other

Source: Hydrocarbon Processing

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How are public biofuels investments doing?

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Jan-09 Mar-09 May-09 Jul-09 Sep-09 Nov-09 Jan-10 Mar-10 May-10 Jul-10 Sep-10

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)

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Biofuels Digest Index

S&P 500

Source: Biofuels Digest

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2009 World Ethanol Production

• 9% of U.S. gasoline, 52% of world

• Canada #6 in ethanol, 3% of world

• Currently importing from the U.S.

• Mostly corn, some wheat/barley

• 5% of Canadian gasoline

Country Millions of Gallons

USA 10171.2Brazil 6577.9European Union 1039.5China 541.6Thailand 435.2Canada 290.6Other 247.3India 91.7Colombia 83.2Australia 56.8Total 19,535.00

Source: Renewable Fuels Association

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What countries are active in biofuels?

• China - has capped new food-based biofuel

• Others to follow?

• United States by 2012

• India in 2010 (cooking oil only)

Brazil $3,454 millionU.S. $2,010 millionPapua New Guinea $800 millionCanada $589 millionIndia $438 millionRwanda $250 millionPhilippines $197 millionSouth Africa $190 millionEthiopia $84 millionAustralia $75 millionSweden $73 millionKenya $46 millionArgentina $37 millionSouth Korea $18 millionPeru $12 millionMosambique $10 millionPoland $4 million

Total $8,287 million2009 InvestmentsSource: Biofuels Digest

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U.S. Corn Use for Ethanol

• Spectacular growth in U.S. corn-based ethanol since 2005 (MTBE related)

• Flattening out post 2012 (5B+ corn bushels or 33% of the future U.S. corn crop)

Source: USDA

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2010 U.S. Corn Prices and Ethanol Margins

• Ethanol at $2.14/gal with $5.25/bu corn price is still profitable

• Record DDG exports to China

• Record U.S. ethanol exports to Canada

• Tightest U.S. ethanol supply- demand since 2005

Source: Price Perceptions

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Return over Variable Cost ($/gal ethanol)

• High level of interest from fertilizer companies (Mosaic chart)

• U.S. politics let 2005 ethanol price spike to $5/gal, doubled ethanol cap to 15B gallons per year

• Sent fertilizer stocks soaring, led to multiple U.S. ethanol company IPO’s

Source: Mosaic

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Bioethanol Production Processes

• Non-food based N.A. biofuel capacity rising by 2014 to 3B gal/yr

• Slow 2008-9 and YTD/10 due to credit crisis, commercialization challenges

• Novozymes world enzyme leader

Source: Novozymes

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Cellulosic Ethanol Leaders

1. DuPont-Poet is leader in corn crop residues

2. Canada’s Iogen could be leader in wheat crop residues

3. Catchlight (switchgrass), Algenol (macroalgae) in cellulosic energy crops

4. Canada’s Enerkem is leader in Municipal Solid Waste to ethanol

5. Canada’s Ensyn (fast pyrolysis oil) and Lignol could be leaders in forest/mill waste to ethanol

Source: General Motors; Coskata

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U.S. Biodiesel: Production as a % of Operating Capacity

• Wide variation in consumption due to EU anti-dumping, loss of $1.01/gal tax credit

• 10% the size of U.S. ethanol market

• High 2010 bankruptcy rate, only 10% of U.S. capacity utilized (90% soybean- based)

Source: EIA, Scotia Capital

0%5%

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2009-201039%

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1 2 32008 2009 2010 YTD

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Biodiesel Feedstock Costs

• Food-based feedstock cost rising again

• Mid-08 spike to $0.40/litre was downfall for U.S. biodiesel

• $1.01/gal U.S. tax credit gone in 2010, gone forever?

Biodiesel Input Costs (per litre)

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USD

/litr

eCanola Oil*Soybean Oil*Tallow*Palm Oil*

*Assumes a 7.2 lbs/gallon conversion ratio

Source: Bloomberg, Scotia Capital

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U.S. Biodiesel 100 Price

• Industry cannot survive on sub-$4/gal prices without subsidies

• President Obama – DOE head Chu – 2007 Energy Bill extension

• 40% of U.S. biodiesel capacity in 2011 is now under refinery blending mandate

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Source: Bloomberg.

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Future Outlook for Biodiesel Feedstock (3rd Gen)

• By 2020, multiple new sources

• Algae and jatropha early leaders re: potential

Source: New Biofuels Production, DeSmet Presentation.

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Algae Biofuel Process Flow Diagram

• Complex economics due to multiple by-products with bio-oil lowest value

• Scalability unproven (Sapphire, Solazyme, Algenol, PetroAlgae to watch, U.S.)

• Canada: • Pond Biofuels potential algae leader in raw cement flue gas use (St Mary’s, Ontario)

• Carbon2Algae potential gas infusion leader in CO2 , NOX , SOX separation from flue gas at a molecular level vs. microbubbles into water

Source: South Australian Research and Development Institute

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Carbon2Algae: CO2 Flue Gas Solutions

0200400600800

1000120014001600

CO CO2 H2 N2

Carbon DioxideCarbon MonoxideHydrogenNitrogen

Source: Carbon2Algae

• 7,000x more surface area to water

• Less than 1 psi required for CO2 gas infusion

• 400%+ algae cell growth (NRC)

• 95%+ CO2 extraction from simulated flue gas (NRC)

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Pond Biofuels: Production Validation Facility

• St. Mary’s Cement Plant (2,500 CO2

tonnes/year)

• 150,000 CO2

tonnes/year demonstration next

Source: Pond Biofuels

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Sapphire Energy – New Mexico Demonstration

• 2011 DOE-approved New Mexico algae project – 400 acres, $100M, 100 bbls/day

• Will consume 56 tons of CO2/day to grow algae

Source: Sapphire Energy

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PetroAlgae Market CapitalizationPetroAlgae (PALG)

Market Cap = $1.2B (November 15, 2010)

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Dec 22/08: PALG's parent company PetroTech Holdings Corp. acquired Dover Glen Inc. and transferred its entire ownership interest into PALG. Company name changed to PetroAlgae Inc.

Dec 24/08: PALG raised $10M by selling 3.2M common shares to two existing investors.

March 2009: Sign license agreement with GTB Power for 10 algae facilities in China.PALG's licensing fees during construction are near $100M and annual royalties thereafter are more than $10M.

June 4/09: PALG hires 9 senior international sales executives as the company approaches commercialization.

June 29/09: Dow & Algenol partner to build pilot algae-based integrated biorefinery.

Oct 27/09: PALG's technology passed tests by Indonesian Ministry of Agriculture concluding PALG's protein is suitable for use as a raw material in animal feed in Indonesia. Licenses are expected to follow.

Summer 2009: PALG in news as being the algae company with the potential to be first to commercialize algae production.

July 14/09: ExxonMobil announces $600M investment in algae biofuels with Synthetics Genomics.

April 14/10: PALG signed an MOU with Asesorias e Inversiones Quilicura to license PALG's technology for the development of green fuels in Chile.

Aug 11/10: PALG files $200M IPO.

Source: Bloomberg, Scotia Capital

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Strong Correlation Between Fertilizer Stocks & Grains

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10/11/1990 10/10/1992 10/10/1994 10/9/1996 10/9/1998 10/8/2000 10/8/2002 10/7/2004 10/7/2006 10/6/2008 10/6/20100

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Correlation Between POT and U.S. Corn Prices

R-squared:Trailing 20 yrs = 0.67Trailing 10 yrs = 0.86Trailing 5 yrs = 0.81

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North American Fertilizer Stock Performance Since the Start of Recent Grain Price Rally

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CF = +96%

AGU = +63%

MOS = +75%

POT = +59%

Sparked by Bullish June 30 USDA WASDE Report

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North American Fertilizer Stock Performance Since BHP-POT Bid Announcement

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8/16/2010 8/29/2010 9/11/2010 9/24/2010 10/7/2010 10/20/2010 11/2/2010 11/15/2010

CF = +43%

AGU = +29%

MOS = +39%

POT = +27%

Subsequent Day Trading:POT +28%MOS +9%AGU +5%CF +5%

S&P 500 Materials Index +3%

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AGU & POT Target Price P/E Multiple Breakdown

2011E / 2012E % P/E P/E % % P/E P/E %

Potash 85% 16.0 13.6 12% 14.0 1.7 Phosphate 6% 13.0 0.8 5% 13.0 0.7 Nitrogen 9% 11.0 1.0 25% 11.0 2.8

Retail 0% 16.0 - 55% 16.0 8.8 Specialty 0% 15.0 - 3% 15.0 0.5

100% 15.4 100% 14.4 Actual 15.5 14.5

AgriumPotash Corp

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AGU Forward P/E Multiple

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AGU Forward P/E = 12.2x5yr Avg = 11.5xMin = 2.3xMax = 18.8x

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POT Forward P/E Multiple

2468

1012141618202224262830

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POT Forward P/E = 17.0x5yr Avg = 16.4xMin = 3.2xMax = 29.9x

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Conclusions

• Global Agriculture Market firm

• Biofuels not going away but:

• Second generation cellulosic ethanol coming

• Third generation biodiesel coming

• Fertilizer stocks still appealing, prefer Agrium over Potash Corp

Thank You