Ben Funk Liongate Capital Management

1
The Case forAgricultural Investments
2
The Case for Agricultural Investments
A rising population The base case for investing
in food and agriculture is an obvious one. The
world population is projected to grow by two
billion people over the next 35 years and these
people must too eat. with greater income At the
same, average incomes in developing countries are
rising quickly and there is a large emerging
middle class with more discretionary money to
spend. and changing diet As people grow richer
they shift from a subsistence diet of basic
staples to one with more meat, dairy, fruit and
vegetables, beer and wine, processed foods and
restaurant prepared meals. is disrupting the
food chain. While every 1kg increase in beef
consumption requires 7kg of grain and 7kg of
water to produce it, biofuels are drawing on
crops once produced for human consumption. As
much as 25 of US grain crops, for example, are
used to produce ethanol for cars.1
Land restrictions and erosion Farmland is giving
way to to towns and cities as urban growth
outpaces rural living. Every year the planet
loses almost 25 tons of topsoil. Over the past 20
years the world has lost enough soil to cover the
entire cropland of the United States.2 with
water shortages and climate change Water, an
increasingly scarce resource in many parts of the
world, is threatened by the competition of human
consumption and agricultural production.
Agriculture already accounts for 70 of all
freshwater drawn from rivers, lakes and
aquifers3. Extreme weather conditions, creating
both droughts and floods, continue to impact key
crop areas. are leading to scarcity Growing
demand for meat, particularly beef and dairy
products, require disproportionate quantities of
water to produce. By 2050, climate change has
been estimated to hamper food and agriculture
production by as as much as 30 percent.1
A diverse range of investment opportunities Stron
g supply and and demand trends driving food and
agricultural production have created
opportunities across a range of sectors
(upstream, midstream and downstream), from field
to fork. These include land and farm inputs,
equipment, producers, traders, processors, food
companies and retailers. with compelling
returns Returns have been high while providing
unique portfolio diversification, with a general
tendency to be uncorrelated to traditional stock
and bond assets, resistant to inflation and less
sensitive to economic shocks and interest rate
hikes. Offering both yield and capital
appreciated, it has been dubbed gold with a
coupon.4 overlooked by investors And yet there
are only limited agriculture-focused funds
managing a mere 15bn of AUM in the space, a
trifle compared to the 144 funds focused on
infrastructure 89bn) and 473 targeting real
estate (163bn).5
3
The Population is Growing Fast and a Large Middle
Class is Emerging

• Demand drivers of agriculture and food

Regional Change 2015 50 forecast

• The world population is rising dramatically -
  from just over seven billion today to almost 10
  billion by 20501 - and people must eat.
• Most of this growth is in the developing world.
  And at the same time, average incomes in emerging
  markets are growing very quickly from low levels,
  far outpacing developed countries
• 3 billion more people are projected to enter the
  global middle class by 2030, and they will
  certainly demand more resource-intensive foods
  such as meats and vegetable oils.
• In the next 40 years farmers will need to grow
  more food than in the prior 10,000 years put
  together.2

Annual Growth Rate Per Capita Income

• Rising economic growth and expanding urban
  populations are leading to increased consumer
  demand for a greater quantity and wider variety
  of foodstuffs.
• Consumers in developing countries spent
  12trillion in 2012 this figure is expected to
  reach 30 trillion by 2025.3
• Population and demand growth is already impacting
  food availability and some developing countries
  are unable to meet their populations basic food
  requirements.
• Total world grain production has fallen short of
  global demands in seven of the last eight years

4
As People Grow Richer They Eat More Meat

• Increase meat demand results in exponential
  growth in demand for grain, water and land

has a multiplier effect on grain demand
Increased meat consumption

• The rising middle class is shifting away from
  traditional plant-based staples towards a more
  varied diet. With more money to spend, hundreds
  of millions of people in China and India are
  departing from a subsistence diet to and adopting
  more complex one.
• As people get wealthier they eat more meat and
  demonstrate greater demand for fresh fruit and
  vegetables, dairy, spices, processed foods, and
  restaurant prepared meals. Additionally, improved
  and more widespread refrigeration at food
  distributors allows the easy sale of dairy and
  beef products.
• More than a quarter of all the meat produced
  worldwide is now eaten in China. In the 1970s,
  Chinas meat consumption was only one third of
  that of U.S. consumption. By the 1990s, China had
  overtaken the U.S. as the worlds leading meat
  consumer. Today Chinas annual meat consumption
  is more than double that of the U.S. and is
  expected to grow as their middle class emrges.1
• This change in diet effects the entire food chain
  as more meat requires more grains to feed cattle
  and hogs. Every 1 ton increase in pork
  consumption requires 4 tonnes of grain to produce
  it, while every 1 ton of beef requires 7 tonnes
  of feed grain and 7 tonnes of water.

5
Biofuel Production Competes with Food for Scarce
Water, Land and Grain

• Demand drivers of agriculture and food

Global Biofuel Production Forecast

• Many large oil consuming nations, including the
  US, EU, Canada, Japan, China, India and Brazil,
  have developed frameworks for biofuel production
  mandated by legislation and supported by
  government subsidies. Biofuels, it is argued,
  bolster energy security, while reducing
  dependence on fossil fuels with significant
  environmental benefits.
• World production of bioethanol from sugar cane,
  maize and sugar beet increased from less than 39
  billion litres in 2006 to over 85 billion litres
  (bnl) in 20121 and today bioethanol and biodiesel
  have become established commodities traded widely
  in all continents2.
• The market, initially focused on supplying fuel
  for cars and trucks, has expanded considerably to
  aviation, maritime transport, electricity
  generation and household cooking.
• Crops previously raised for human consumption are
  now being diverted towards fuel production. As a
  result, large agricultural regions in the US,
  Brazil and the EU, have seen significant areas of
  land converted to the production of energy
  crops to supply national consumption mandates.
  The state of Iowa (the largest corn producer in
  the US), for example, is now a net importer of
  corn to meet the demand of its biofuel processing
  facilities.
• This diversion of grain toward bio-fuel
  production is having a significant impact on the
  price and availability of food and creating
  significant distortions in the food supply
  mechanism. Its impact on demand is likely to
  remain or grow, as governments continue to draft
  legislation pertaining to its production and
  usage.

Ratio of Global Grain Crop Yield Required for
Target Biofuel Production
6
Arable Land per Person is Falling

• The rate of loss in supply of fertile farm land
  has outpaced the advancement in yield per acre

Urbanisation Growth Map
Soil Degradation

• Vast tracts of potential agricultural land are
  destroyed through erosion, salinisation,
  desertification, is lost to urbanization,
  industrial use or utilized for biofuel
  production.
• On average, the planet has about three feet of
  topsoil spread over its surface, replacement is
  slow - it grows back perhaps an inch or two over
  hundreds of years.
• As a result, agriculture is increasingly shifting
  onto marginal lands with poorer soils and weak
  infrastructure. Constraints on land have meant a
  high focus on improved yields per acre.

• Due to advances in agricultural science, we dont
  need 2.8 acres of land per person. However, yield
  per acre must still be improved to ensure food
  security for a growing global population with
  limited land.
• High yields rely on a combination of factors
  including fertile soil, sufficient water
  availability, skilled labour, favourable climatic
  conditions and continuing advancement in research
  and development.2
• Over the past 40 years, yields per acre have
  increased by 2.1 per year, but the pace of those
  gains is slowing. Since 2000, the average
  increase in yields per acre has been less than 1
  per year.3
• Erosion and degradation of soil quality is
  negatively impacting existing agricultural land.
  In Africa, it is estimated that soil erosion has
  depressed land yields between 2 and 40, leading
  to a continent wide fall of 8.2 in crop yields
  per acre.

Arable Land per Person
In 1960 there was 2.8 acres of farmland per
person globally by 2030 it is estimated that the
average arable land per person will have fallen
to only 0.8 acres.1
7
Climate Change Can Reduce the Yields of Crops
Around the World

• Supply drivers of agriculture and food

Global Warming
Climate Change

• Changing weather patterns are causing disruption
  to the food production process, and many
  researchers argue that they are set to get worse
  in the future.
• Extreme weather events and changes in the
  frequency and severity of droughts and floods can
  cause widespread damage to crops and livestock,
  impacting the practices of farmers and Ranchers.
• Studies on the impact of climate change on
  long-term agricultural production have varying
  results, but work assuming a doubling of
  atmospheric CO2 result in a reduction in global
  cereal yields by as much as 34.2
• Todays poor countries are likely to be the
  biggest losers, due to the substantial share of
  agriculture in their gross domestic product,
  their location in the hotter, drier climates, and
  limited ability to adjust their farming practices
  and locations.3
• By 2050 it is estimated, as a result of the
  temperature change, that 200 million people may
  be permanently displaced climate migrants, a
  tenfold increase over the current documented
  total of refugee and internally displaced people.
  Consequently unmitigated climate change and
  environmental degradation may cause social
  instability, generate mass movements of human
  population, which will only further pressure on
  resources
• Ironically, according to the World Bank,
  Agriculture is also a major part of the climate
  problem. It currently generates 1929 of total
  GHG emissions. Without action, that percentage
  could rise substantially as other sectors reduce
  their emissions.

• It is hard to estimate the impact of climate
  change, but the above is just one of the possible
  scenarios. In the graph above, large negative
  yield impacts are shown in red across much of the
  world.4
• Climate changes negative impacts are already
  being felt in the form of reduced yields. While
  there is significant variation across crops,
  regions and adaptation scenarios, the majority of
  models predict a yield reduction of more than 5
  with around 10 of projections expecting yield
  losses of more than 25.5