Food security

Hunger Not a choice!

April 2010

Nikhil Vora
(Dir) +91-22-6622 2567 Email: nikhilvora@idfcsski.com

Land frenzy the in thing?

Daewoo vying to lease 1.3m ha of farmland half the size of Belgium from the Madagascar government for 99 years to support the South Korean needs

Karuturi Global (an Indian company) has acquired 300,000 ha of farmland in Ethiopia

In 2008, a Dubai-based investment firm acquired 800,000 acres in Pakistan

In 2009, Saudi Arabia signed a deal for 1.2m acres of farmland in Tanzania

Today, China cultivates 2.47m acres in Indonesia

Catching the eye of financial investors?

Schroders planning to launch a Global Land Fund, to devote 25% of its capital to farmland acquisitions

Morgan Stanley has bought 40,000ha of farmland in Brazil

Landkom (a UK-based investment group) has leased 100,000ha of farmland in Ukraine. Targeting 350,000ha by FY11

In 2008, IFC invested US$1.4bn in the agri business supply chain

In 2008, Goldman Sachs invested US$300m to acquire 10 poultry farms in China

Committed investments of over US$60bn towards farmlands!

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LAND...heading the OIL way?

What makes oil black gold?

Production: 15.8% Consumption: 27.4% Production: 21.7% Consumption: 24.3% Production: 9.7% Consumption: 30.1%

MIDDLE EAST

Production: 31.9% Consumption: 7.8%

Production: 8.5% Consumption: 6.9% Production: 12.4% Consumption: 3.4%

* Percentage indicates contribution to the world Source: BP Statistical review of World Energy

Middle East 32% of world supply and only 7.8% of world demand Asia Pacific 30% of world demand but only 9.7% of world supply
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Food the oil of tomorrow?

1
Future deficit
Current oil and land reserves insufficient to support the needs of the world 20 years hence Incrementally, both these resources are depleting at a faster rate than they can be generated

Supply-demand mismatch

Concentrated origination point while demand regions are globally spread Thus, a global need but supply restricted within geographies rich in underlying resources

Prices on an uptrend

Oil and food prices hit an all-time high in 2008 Rising prices are a precursor to the crisis of shortage

There is never enough of anything for all those who want it

- Thomas Peacock

Are we prepared to face the future deficit?

Estimated oil demand
(m barrels/day)

OIL
24.8 14.1 4.5

A gap of ~25m barrels/day by 2030E based on the current capacity USD750bn of investments required to plug the deficit

81.8

Current Source: IEA Estimates

2010E

2020E

2030E

Precious acres - arable land per capita worldwide

(acre)

FOOD Arable land per person to shrink from 1.1 acres in 1960 to 0.6 acres by 2030 assuming the current status of arable land sustains

1.25 1.1 1.00 0.75 0.50 0.25 0.00 1960 1980 2000 2030E
Source: Food & Agricultural Organization of United Nations

0.6

The gap between have and want

2008 Consumption 27.4% 6.9% 24.3% 7.8% 3.4% 30.1% Production 15.8% 8.5% 21.7% 31.9% 12.4% 9.7%

OIL
Oversupply in the Middle East Undersupply in Asia Pacific

North America S. & Cent. America Europe & Eurasia Middle East Africa Asia Pacific

('000 tonnes) Wheat USA China Corn USA Japan Rice Thailand China

Production

Consumption

Surplus/Deficit

63,590 87,000

33,203 104,500

92% -17% 25% -75% 75% -13%

FOOD
Production and consumption points widely distributed across all food products

259,273 4,000

207,020 16,000

17,800 118,000

10,200 135,000

rising prices alarm bells are ringing!

Oil prices
160
(USD/ bbl)

120

Oil prices have quadrupled in the past decade

80

40

0 Jan-00
Source: Bloomberg

Jan-01

Jan-02

Jan-03

Jan-04

Jan-05

Jan-06

Jan-07

Jan-08

Corn and wheat prices

(US$/bu) 1,200 900 600 300 0 Corn Wheat

Rice and sugar price

Rice (US$/cw t) 30 Sugar (US$/pound)

Three fold increase in prices over the last decade

24 18 12 6

Rice the key staple food - has seen the sharpest increase
(

Jan-00

Jan-01

Jan-02

Jan-03

Jan-04

Jan-05

Jan-06

Jan-07

Jan-08

Jul-00

Jul-01

Jul-02

Jul-03

Jul-04

Jul-05

Jul-06

Jul-07

Jan-00

Jan-01

Jan-02

Jan-03

Jan-04

Jan-05

Jan-06

Jan-07

Source: Bloomberg

Source: Bloomberg

Jan-08

Jul-08

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Food potentially a bigger issue than oil!

OIL: there are alternatives!
Alternative sources of energy - biofuels, wind power, solar energy, etc IEA expects ethanol to comprise up to 10% of the worlds usable gasoline by 2025, and up to 30% by 2050 from 2% currently

But can food find a replacement

OIL: demand can be potentially controlled

Recent innovations on clean technology could potentially reduce oil demand over the next 20 years Research indicates that a 1% reduction in global oil demand reduces oil prices by 1.6% to 1.8% over a 10 year timeframe and by 1.2% to 1.3% over a 20-year timeframe (Source: European Federation for Transport and Environment)

and is hunger a choice?

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Food Security Are we headed towards a crisis?

12

History is evidence
Area harvested has grown by 20%
Area harvested (Index: 1970=100)
120

yields have improved by 10-20%...

Improvement in yields
Yields Corn Increase (over last 10 yrs) 13% 8% 4% 10% 20%

110

100

+
1975 1980 1985 1990 1995 2000 2005

Oats Wheat Rice

90 1970 Source: USDA

Soybeans
Source: USDA

Total demand of world grain & oilseeds

But it has not been enough to meet the demand world grain and oilseeds demand up 3x over three decades

(Million MT) 2,500

2,000

1,500

1,000 1970

1975

1980

1985

1990

1995

2000

2005

Source: USDA PS&D Database

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and the future seems far from good

Arable land as a % of total area

Source: CIA Factbook 2008

AFRICA The waste of plenty is the resource of plenty! Less than 5% of arable land in cultivation Only 7% arable land irrigated (against 40% in Asia and 20% globally) Per capita income 1/7th of the world average Average 10m tonnes of annual food deficit 14% of world population but 1/4th the worlds hungriest people

Where land is availablethe means to produce are limited

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Arable land is shrinking

1/3rd of world arable land lost over the past 40 years due to soil erosion Research on erosion rates indicates that soil loss is far faster than it can be replenished by natural processes Erosion removes ~75bn tonnes of topsoil a year and destroys ~20m acres of farmland (source: Cornell University Research)

Erosion/ Spoilage

Biofuel
Increasing demand for biofuel to reduce land available for food production Grain consumption for biofuel alone has increased from 20m tonnes in 2005 to 50m tonnes currently In 2008, 1/3rd of the US maize produce was used for biofuel production

In USA, one acre of land lost due to urbanization and highway construction for every one person World population likely to grow by 2.5bn people by 2050. Housing and infrastructure needed to support them to eat into a significant portion of arable land

Industrialization

Arable land in developed countries to fall by 50m ha by 2050E: FAO

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While arable land is depleting food consumption is increasing

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Population growth + affordabilityhigher food demand

World population

37% growth in population over last 30 years

China (1.34bn) 20% Others (4.34bn) 63%

73% growth in population over last 30 years

India (1.18bn) 17%

Largest population base growing the fastest

Source: Bloomberg (Numbers in brackets denotes actual population)

Also, the highest propensity to spend

Per capita income growth over last 14 years

194%
Source: Bloomberg

200%

73%

Highest per capita income growth

17

In 1985, the average Chinese consumer ate 44 pounds of meat annually. Today, the same is at 110 pounds

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The future looks hungry!

Current grain prices remain above their 20-year average while food stocks around the world are still near 40-year lows
World food stock
Ending stocks (m MT LHS)
800

Stocks/use (% - RHS)
40

600

30

400

20

Reduction in food stocks indicates fragility of future support

200

10

0 1970 1975 1980 1985 1990 1995 2000 2005

Source: USDA PS&D Database

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The future looks hungry!

Ending stocks for wheat
(m bushels) 1,000

Ending stocks for soyabean

(000 tonnes) 500

850

Down by 40%

400

Shrunk by 1/4th

700

300

550

200

400 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010E 2011E

100 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010E 2011E

Ending stocks for oats

(m bushels) 80

Ending stocks for corn

(m bushels ) 2,000

Shrunk by 1/3rd
70 1,500

Inventory has been halved

60

1,000

50

500

40 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010E 2011E

0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010E 2011E

Source: USDA PS&D Database

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In the last decade, grain consumption has exceeded production 7x. In 2008, after seven years of drawing down stocks, world grain carryover stocks made a record low at 55 days of world consumption

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Survival of the saviour - ???

USA, the worlds largest food exporter, earns US$40bn through food exports

POPULATION USA adding 3m people per year

URBAN SPRAWLS One acre land lost due to urbanization and highway construction for every one person

EROSION Annually, more than 2m acres of prime cropland is lost to erosion and water logging

WATER Groundwater providing 31% of the water used in agriculture is depleting 160% faster than the recharge rate

USA to cease to be a food exporter by 2025E

22

Food Crisis A reality

Food Security The next BIG play?

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Themes to play
Ownership of underlying assets
With scarcity of arable land, owners of the source, such as farmland, to be the key beneficiaries Land ownership comes with underground water hence, land a proxy to water security However, India has imposed a ceiling on land holding (80% of farmers have less than 2 ha of land). Hence, Indian corporates that have acquired large patches of land overseas are the potential winners

Improve productivity
With arable land limited as also depleting, productivity enhancement emerges as a strong tool for food security Efficient irrigation practices not only conserve water but also improve productivity Further, advanced techniques such as hybrid seeds and proficient fertilization would enable better yields

Efficient price discovery

With production concentrated and demand points spread, price discovery is an important aspect While historically exchanges in USA and Europe have dominated commodity trading, new age commodity exchanges in the Asian geographies offer strong potential

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India the country of landlords

Ceiling on land holding
Limit on holdings (in acres) Andhra Pradesh Assam Bihar Gujarat Haryana Himachal Pradesh Karnataka Kerala Madhya Pradesh Maharashtra Orissa Punjab Rajasthan Tamil Nadu Uttar Pradesh West Bengal Irrigated land with two crops 10-18 17 15-18 10-18 18 10 10-20 12-15 18 18 10 17 18 12 18 12 Irrigated land with one crop 15-27 17 25 15-27 27 15 25-30 12-15 27 27 15 27 27 30 27 12

80% of farmers in India have land holdings smaller than five acres

Land ownership a far reality!

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Overseas farmland acquisitionsthe right call?

Indian corporates have invested ~USD2.5bn in buying huge plantations in Ethiopia, Kenya, Madagascar, Senegal and Mozambique to grow grains for the domestic market

Acquired 300,000 acres of farmland in Ethiopia

Acquired 120,000 acres of palm plantations in Indonesia

Acquired palm plantations in Malaysia

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Farmland acquisition: An investment that creates value!

Price performance of ADM
ARCHER-DANIELS 300 S&P 500 INDEX

250

200

Archer Daniels has seen strong rerating of its stock post the acquisition of farmland

150

100

50

0 Jan-98

Jan-99

Jan-00

Jan-01

Jan-02

Jan-03

Jan-04

Jan-05

Jan-06

Jan-07

Jan-08

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Asset ownership: The best shield against food security

Rice great grains!
Prices of rice, the staple food for ~3bn worldwide, has increased by 4x over the last 10 years Asian farmers produce ~90% of the total with two countries, China and India, growing more than half the total crop World rice stocks have decreased by 3% per year. Thus, paddy growers / processors will emerge as strong bets Key players include Kohinoor Foods, REI Agro and KRBL

Harvested acreage
(m acres) 3.6 Rice

Prices
(US$/cwt) 30 24 18

3.4

3.2 12 3.0 6 0 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08

2.8

Acreage on a downtrend

making rice expensive

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Asset ownership: The best shield against food security

Palm oil
Most important edible oil when ranked by global production and consumption Accounts for >35% of the worlds global production of edible oils Palm oil stocks at all time low. Stocks of soyabean oil, the closest replacement, also at their lowest levels Key players owning palm plantations include Ruchi Soya, KS Oils and Godrej Industries Distribution of world production
Nigeria Colombia 2% Thailand 3% 2% Other 7% Indonesia 44%

World production of palm oil

45,000 40,000 35,000 30,000 25,000 20,000 15,000 10,000 World production of palm oil: 1995-2008 (000 tonnes)

Malaysia 42%

5,000 1996 1997 1999 2005 1995 1998 2002 2003 2000 2001 2004 2006 2007 0

Malaysia and Indonesia account for 86% of world production

Production has been rising rapidly

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backed by superior returns

Paddy production
Annual Opex 800 800 800 800

Outflow
(US$/ha)

One time capex 2,000

Year 1

Year 2

Year 3

Year 4

Year 5

Inflow
(US$/ha)

Yield (per ha) 4 tonnes Realization (per tonne) US$ 400

= 1,600

1,600

1,600

1,600

Net proceeds

(2,000)

(1,200)

(400)

400

1,200

Break-even in Year 4

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backed by superior returns

Oil palm production
Annual Opex 1,000 1,000 1,000 1,000

Outflow
(US$/ha)

One time capex 5,000

Year 1-4

Year 5

Year 6

Year 7

Year 8

Inflow
(US$/ha)

Yield (per ha) 4 tonnes Realization (per tonne) US$ 600

= 2,400

2,400

2,400

2,400

Net proceeds

(5,000)

(3,600)

(2,200)

(800)

600

Break-even in Year 8

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India has the second largest arable land in the world after USA but on arable land per capita, India is 104th!

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Efficiency play make more out of less!

Drip irrigation the benefits

With depleting arable land, productivity enhancement a vital aspect for food security >50% of arable land in India depends on rain water. Of the remaining 69m ha under irrigation, only 3m ha covered under MIS. Thus, implementation of MIS can reduce water usage considerably as also improve yields Further, techniques such as hybrid seeds and fertilization improve yield by 10-15% Key players include Jain Irrigation, Advanta Seeds, Kaveri Seeds and Monsanto
Drip irrigation a generic model

Water saving over FMI (%) Vegetables Sweet potato Onion Radish Tomato Chilly Fruit crops Papaya Banana Grapes Lemon Watermelon Sweet lemon 68 45 48 81 0 61 45 60 25 77 79 62

Yield increase over FMI (%)

40 31 20 46 45

77 52 23 32 199 50 98

1 acre

+ +

Water

= =

Food

Pomegranate Other crops

1x
1 acre

x
Water

1.5x
Food

Sugarcane Cotton Coconut Groundnut

56 65 60 40

33 23 12 67

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Improved Seeds Key to increasing crop yields

FAO estimates that we need to produce as much grain from now to 2050 as we did in previous 10,000 years Agriculture already consumes 70% of worlds fresh water and ~50% of habitable land, increased production can come only through higher yields with limited resource consumption Seeds are the most efficient vehicle for delivering higher yields as reflected in increasing agri-input spaces R&D tilt to seeds Global seed giant Monsanto is aiming to double the yields of corn, soya and cotton by 2030 while using 30% lesser inputs Among Indian players, Advanta India is investing heavily in R&D to develop seeds with innovative traits
Nitrogen use efficient seeds Will consume less urea Drought resistant seeds Can grow with less water Healthy sunflower oil Trans fat free for frying High yielding hybrid seeds for rice, mustard, vegetables etc.

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Exchanges: Enabling price discovery

With the geographic gap between demand and supply evident, there remains limited assurance of correct and transparent pricing in the country of origin Exchanges emerge as a vital platform for global participation and thereby facilitate price discovery With agriculture poised to pick up in under-developed nations, trading in the same will also become essential and hence exchanges would play a key role
India - price volatility reduced
Commodity Time period PreExchanges Time period PostExchange

Chana

Feb,01 - June,04

12.01% 1.51% 5.82% 2.80%

June, 04 - Nov 07

11.62% 1.09% 0.90% 1.80%

Indian exchanges, for instance, indicate the reduced price volatility Likewise, exchanges in under-penetrated regions (Africa, etc) promise immense potential

Rubber

Feb,99 - Dec,03

Jan, 04 - Nov,07

Potato

Nov, 04 - Mar,06

Mar, 06 - Dec, 07

Urad

Jan, 01 - Jun, 04

Jun, 04 - Jan, 07

Key players include Commodity exchanges like MCX, NCDEX, NMCE and ICEX

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Themes to play
Price discovery MCX (Fin Tech) NCDEX (NSE)

Efficiency improvement Aggregators Processors Rice processors (Kohinoor Foods, REI Agro, KRBL) Sugar processors (Balrampur Chini, Shree Renuka Sugars, Bajaj Hindustan) ITC DCM - Shriram Asset ownership Karuturi Global Ruchi Soya KS Oils Godrej Industries Advanta Seeds Jain Irrigation Kaveri Seeds Monsanto

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Disclaimer
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Thank you

Nikhil Vora / Bhushan Gajaria / Swati Nangalia / Shweta Dewan

(Dir) +91-22-6638 3308 / 3367 / 3260 / 3290 Email: nikhilvora@idfcsski.com / bhushangajaria@idfcsski.com / swati@idfcsski.com / shweta.dewan@idfcsski.com

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