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1. Agcapita Agriculture Update
October 2009
1

2. Summary
There has been considerable discussion recently about the
“paradox” of bonds and stocks and commodities going up together
- that the bond market is predicting a continuing recession via low
interest rates and the stock market is predicting a recovery via high
equity prices. Why is the bond market behaving so strangely in the
face of a huge recovery stocks and commodities – surely one of
these indicators must be wrong? Maybe, but perhaps there is an
alternative interpretation that fits the facts.
Markets always appear to act strangely to profit maximisers when
non-profit maximisers are involved. I actually feel that the behavior
of the sovereign debt market makes sense. Virtually every asset
class is exhibiting the short-term effects of a massive monetary
expansion. Once again assets that are liquid and traded - including
LT sovereign debt – are rapidly “increasing” in price in nominal
terms. Monetary authorities have expanded the global money
supply aggressively allowing speculative activities to re-ignite via Contents
investment and commercial banking intermediaries and at the same 2 1 in 6 People Malnourished
time they are busy monetizing the rapidly expanding government
debts - hence low interest rates and rapidly recovering equity prices. 2 Canadian Farmland
Continues to Increase in
When cross-correlations between assets classes are very high and Value
positive we should always be asking ourselves whether we are in a 3 According to FAO Global
period of liquidity/money printing induced euphoria. Food Production Must
Increase 70% by 2050
Ultimately monetary authorities can control exchange rates or 3 Wheat Exports
interest rates but not both. If they decide to sacrifice exchange
rates for low interest rates then, in my opinion, inflation is sure to 4 Global Fertilizer Use
follow. 4 Potash (K) Quick Facts
5 Curious Meat Consumption
Kind Regards Facts
Stephen Johnston - Partner 6 Food Prices Lagging Oil
Prices
6 Inventories Remain in
Consistent Downtrend
1

3. Agriculture Update
in 6 PeoPle Malnourished
According to a new report by the United Nations, Those properties were first selected in 1985 and
capital shortages created by the financial crises have have been appraised in January and July each year
caused a sharp uptick in global hunger levels with over since 1990. The benchmark properties are zoned
1 billion people now undernourished. Farmers in the for agriculture and represent current land use, FCC
developing world in particular are having more trouble says. Weighting is assigned to each property and to
sourcing working capital and investment into critical each province, based on the improved farmland area
agriculture infrastructure in these markets is being recorded by the 1996 Census of Agriculture.
delayed or cancelled. According to the report virtually
all the world’s undernourished live in developing FCC says the 2.9% increase recorded for the first
countries. half of 2009 follows increases of 5.6% and 5.8%
posted in the two previous reporting periods. New
− 642 million in Asia and the Pacific. Brunswick showed the highest percentage increase
− 265 million in sub-Saharan Africa. at 5.6% followed by a gain of 5.5% reported by
− 95 million in Latin America, the Caribbean, the Manitoba. The gain in New Brunswick was the
Near East and North Africa. second highest since 1999, when farmland values
rose 11.6%. FCC said the province registered a rise
The financial crisis serves to highlight the enormous of 6.3% during the six-month period ending Dec. 31,
value of 1) first world agriculture infrastructure and 2) 2008.
the much deeper pool of working capital financing
available to western farmers. Farmers in the developed Manitoba’s 5.5% gain follows increases of 4.2%
world have been much less affected by the financial and 6.2% in the two previous reporting periods. On
crisis than their peers in the developing world. In average, Manitoba’s farmland values rose almost 1%
western Canada in particular, the farming community per month over the 18-month period. It is the only
has felt very little effect from the crisis with land values province to experience this trend, FCC states.
continuing to rise throughout this period.
Quebec reported a gain of 4.3% in the first half of
2009. This is the third consecutive semi-annual
Canadian FarMland Continues to
increase and follows increases of 5.9% and 5.5%
inCrease in Value
in the two previous reporting periods. Nova Scotia
Farm Credit Canada (FCC), Canada’s largest reported an increase of 4.2% during the first six
dedicated agricultural lender, says Canadian farmland months of 2009 -- also the third consecutive semi-
values rose 2.9% during the first six months of 2009. annual increase. Increases of 4.3% and 5.2% were
That estimate is based on the firm’s semi-annual noted in the two previous reporting periods.
appraisal of its 245 benchmark farm properties.
2

4. Agriculture Update (continued)
Ontario reported a rise of 2.8% in the first half of increase the demand for agricultural commodities,
2009. This follows increases of 1.9% and 4.6% depending on energy prices and government policies.”
reported in the two previous reporting periods. FAO’s Assistant Director-General Hafez Ghanem noted
Alberta reported a rise of 1% in the first six months that “feeding everyone in the world by then will not be
of 2009. This was also the third consecutive semi- automatic and several significant challenges have to
annual increase, following increases of 2.2% and be met.”
6.7% in the two previous reporting periods.
Wheat exPorts
Saskatchewan farmland values increased 3.4%
on average in the first half of 2009 or 7% on an Among the major exporters, only Australia and
annualized basis. According to FCC “Saskatchewan Canada are forecast to export more wheat into world
farmland remains attractive to investor groups markets, next year while shipments from Argentina,
and out-of-province buyers who view prices as the European Union and the United States are likely
reasonable when compared to other provinces. As to decline.
well, local producers continue to expand their land
bases.”
Chart 1: Wheat exPorters
aCCording to Fao global Food
ProduCtion Must inCrease 70% by 2050
Argentina
A recent Food Agriculture Organisation (FAO) Kazakhstan
paper predicted` that global food production must Ukraine
increase 70% by 2050. According to the FAO “world
Russian
population is expected to grow by over a third (or 2.3 Federation
billion people) between 2009 and 2050” and that this
Austrailia
increase in population to 9.1 billion from the current
6.8 billion would require an overall 70 per cent increase EU
in food production because of the effect of population Canada
growth combined with rising incomes. The demand United
for cereals for food and animal feed is projected to States
reach some 3 billion tonnes by 2050. Annual cereal 0 5 10 15 20 25 30
production will have to grow by almost a billion tonnes Million tonnes
from the current 2 billion tonnes and meat output by 2008/09 estimate 2009/10 forecast
over 200 million tonnes, the FAO said. The FAO also Source:
stated that “the production of biofuels could also
3

5. Agriculture Update (continued)
global Fertilizer use
Global consumption of fertilizer has risen By contrast, the industrialized countries (with the
spectacularly, increasing tenfold between 1950 and exception of the former Soviet Union) increased
1989. The pattern of global fertilizer consumption their fertilizer consumption only marginally after
has changed markedly over the past 30 to 40 years. 1980; population growth was low, most people
In 1960, the developing countries accounted for were adequately fed, and world agricultural exports
just 12 percent of all consumption; today the figure had stagnated due to economic problems in many
is nearly 60 percent. Fertilizer use in the developing importing countries. Asia is now the dominant
world has been fuelled by rapid population growth player, accounting for 50 percent of world fertilizer
and growing demand for food grains. This is consumption, and 86 percent of developing country
especially true of Asia, where the scope for land consumption.
expansion is limited.
Fertilizer application rates vary widely among the
major world regions and, perhaps surprisingly, are
Chart 2: World Fertilizer ConsuMPtion not strongly correlated either with national income
1960 - 2001 or with need (as indicated by low soil fertility or food
insecurity). Fertilizer use varies from a low of 10 kg/
160
Russia/USSR hectare in sub-Saharan Africa to a high of about 216
140 Europe (excl. kg/hectare in East Asia (by nutrient weight). The world
Russia/USSR) average application rate is about 83 kg/hectare; the
Million of metric tonnes
120
Asia developing countries as a whole just exceed this
100 North America figure, and the developed countries as a whole fall
Central America/ just short of it.
80 Caribbean
60 Middle East/
North Africa Potash (K) QuiCK FaCts
40 Oceania
South America
Potash is essential for plant growth and there are no
20
suitable substitutes for this mineral.
Sub-Saharan
0 Africa − Total world Potash Consumption Growth
1961
1965
1970
1975
1980
1985
1990
1995
2000
Forecast @ 3% rate = 8 million tonnes KCl
− Currently, only 12 countries produce potash
Source: World Resources Institute Earthtrends Database − These 12 supply the consumption needs of
over 150 countries
4

6. Agriculture Update (continued)
− Over 65% of the world’s potash supply Curious Meat ConsuMPtion FaCts
is located in two regions: Saskatchewan,
Canada with 37% of the world’s production According to a report by the UN Food and Agriculture
and the Former Soviet Union (FSU) with 30% Organization, livestock generates 18% of greenhouse
of the world’s production. gas emissions. This is expected to increase as
developing countries increase their consumption of
meat.
Chart 3: Meat ConsuMPtion Chart 4: Co2 ProduCed
Meat Production Food consumption in Pounds of CO2 per pound of product
developing countries
million tons % Milk 1
Meat
350 +200 Cheese 10.8
300
Developing Chicken 1.8
countries +150 Pork 4.9
250 Salmon 6
200
Developed
+100
Milk Shrimp 12
150
countries Beef (only meat) 20
+50 Oat flakes .07
100 Flour, wheat .05
Cereal
0
50 Carrots .02
Projection Roots and tubers Tomatoes, greenhouse 2.7
‘70 ‘85 ‘00 ‘15 ‘30 ‘50 ‘62 ‘70 ‘80 ‘90 ‘03
Source: “Livestock’s Long Shadow,” by the United Nations
Source: “Livestock’s Long Shadow,” by the United Nations Food and Agriculture Organization, 2005; Lantmannen
Food and Agriculture Organization, 2005; Lantmannen
5

7. Agriculture Update (continued)
Food PriCes lagging oil PriCes inVentories reMain in Consistent
doWntrend
The UN Food and Agriculture Organization (“FAO”)
recently commented that while “nominal food prices Agricultural commodity inventories continue to trend
doubled between 2002 and 2008, energy prices, led downwards and are at record lows in many sectors –
by crude oil, began rising earlier in 1999, and have including wheat, rice, and coarse grains.
trebled since 2002.”
This trend should be of concern to us, as consumers
and also as investors.
Chart 5: long-terM Food and energy
PriCe trends, real and noMinal
Index (2000=1) Chart 6: ratio oF global stoCKs to use
4
Percentage
3 FAO food 50 Wheat
price Index 40 Rice
2 FAO real food 30 Coarse
price Index
1 20 grains
Reuters-CRB
Energy Index 10 Total, wheat
0 equivalent
72 74 76 78 80 82 84 86 88 90 94 96 98 00 02 04 06 08 0
62 64 66 68 70 72 74 76 78 80 84 86 88 90 92 94 96 98 00 02 04 06 08
Source: FAO
Source: FAO
Given the large energy inputs required to grow crops
and the significantly more inelastic demand curve
for food versus energy, crop prices must increase
substantially to regain parity with energy prices.
6

8. disClaiMer:
The information, opinions, estimates, projections and other materials
contained herein are provided as of the date hereof and are subject to
change without notice. Some of the information, opinions, estimates,
projections and other materials contained herein have been obtained from
numerous sources and Agcapita Partners LP (“AGCAPITA”) and its affiliates
make every effort to ensure that the contents hereof have been compiled or
derived from sources believed to be reliable and to contain information and
opinions which are accurate and complete. However, neither AGCAPITA
nor its affiliates have independently verified or make any representation or
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any errors and omissions which maybe contained herein or accept any
liability whatsoever for any loss arising from any use of or reliance on the
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herein whether relied upon by the recipient or user or any other third
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reflected herein. The information, opinions, estimates, projections and other
materials contained herein are not to be construed as an offer to sell, a
solicitation for or an offer to buy, any products or services referenced herein
(including, without limitation, any commodities, securities or other financial
instruments), nor shall such information, opinions, estimates, projections and
other materials be considered as investment advice or as a recommendation
to enter into any transaction. Additional information is available by contacting
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