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Case Studies of Private Sector Funds Investing in Farmland and Agricultural Infrastructure

by Philippe de Lapérouse, Managing Director

Presented to the Annual World Bank Conference on Land and Poverty Washington, DC April 26, 2012

Project background and methodology

Ø HighQuest Partners prepared a series of case studies on how funds acquiring/leasing and managing farmland following completion and presentation of the report Private Institutional Investment in Farmland and Agricultural Infrastructure(March 2010) commissioned by the OECD. The case studies focus on:

• geographic regions where individual funds are investing/operating; • operational approaches and development strategies; • level of the returns they are realizing and • the links they have developed with and impact they have had on the regions and

communities where they operate. Ø HighQuest contacted 20 funds to solicit participation in the project. Ø Significant number of funds contacted opted not to participate in the case studies due to the

fact that they are currently engaged in fund raising activities. Ø Six case studies undertaken:

• 3 in South America(Argentina, Brazil, Uruguay, Paraguay and Colombia); • 2 in Africa(Angola, Mozambique, Sierra Leone, Tanzania, Zambia and Zimbabwe) and • 1 in Europe(Czech Republic, Slovakia and Romania).

Institutional Farmland Investment Today:

Ø~50-60 managers Ø ~$15-$18 Billion

Farmland asset class today

~ 75 Million additional hectares required

Motivations of end-investor interest in asset class

Ø Three main drivers – Inflation Hedging: effective hedge against inflation, with returns in the U.S. highly correlated to the

Consumer Price Index. – Low/Negative Correlation to Other Assets: low correlation between returns on farmland

investments and the broader markets. – Food Security/Agricultural Fundamentals: growing world population, rising incomes in the

developing world and increased use of biomass for biofuels and for industrial applications driving increased demand for agricultural crops over the next decade despite improvements in yields (improved genetics and agronomic practices).

Ø Survey respondents ranked inflation hedging as primary driver for committed investment, followed closely by low correlation to other assets.

0

2

4

6

8

10

12

Primary Driver Secondary Driver Tertiary Driver

Table 13. Driving Factors forEnd Investor Interest

Inflation Hedging

Low Correlation

Food Security

Geography

Operational / Development

Type of Asset

• Australia • S. America • E. Europe • Russia • Africa

• Land Ownership (Free Title) • Risk- Sharing Lease Structures • Farm Management • Land Development / Conversion • Value Chain Investment

• Permanent Crops • Dairy • Animal Protein Production

Core 8%-10%

• North America • Row Crop Land • Cash Lease

Example of sub-allocation framework for an ag portfolio

Case studies Illustrate six different approaches to investing in farmland

South America

Ø Calyx Agro • Head office: Buenos Aires, AR • Assets Under Management : US $140 million • Land Under Management : 103,000 ha • Countries: Argentina, Uruguay and Brazil • Investors: Louis Dreyfus, AIG Brazilia, private investors and family offices • Legal Structure: privately-held limited liability corporation Ø NFD Agro Ltda. • Head office: Buenos Aires, AR • Assets Under Management : US $90 million($75 million in equity and $15 million in debt) • Land Under Management : 34,300 ha • Countries: Paraguay • Investors: world-class institutional investors(including IFC) and weathly family offices • Legal Structure: privately-held limited liability corporation

Ø Cazanave y Associados • Head office: Buenos Aires, AR • Assets Under Management : US $120 million • Land Under Management : 220,000 ha • Countries: Argentina, Brazil, Colombia and Angloa • Investors: world-class institutional investors, Glencore, Dow AgroSciences, Sojitz Corporation, hedge

funds, FAID 2015 and weathly family offices • Legal Structure: partnership of the primary principals of the firm

Six Different Approaches to Investing in Farmland

Africa

Ø Quifel Natural Resources • Head Office: Lisbon, Portugal • Assets Under Management: N.A. • Land Under Management: 50,000 ha • Countries: Brazil, Mozambique, Zambia and Sierra Leone • Investors: private investors, including managers of the fund • Legal Structure: privately-held limited liability corporation

Ø Agrica Limited • Head Office: London, UK • Assets Under Management: US $ 31.5 million raised(all equity to date) • Land Under Management: ~5,185 ha • Countries: Tanzania • Investors: Norfund, Capricorn Investment Group and African Agricultural Capital • Legal Structure: privately-held limited liability corporation

Six Different Approaches to Investing in Farmland

Europe

Ø Jantzen Development • Head Office: Aarhus, Denmark • Assets Under Management: EUR 140 million • Land Under Management: ~17,000 ha • Countries: Czech Republic, Slovakia and Romania • Investors: high net worth individuals and family • Legal Structure: privately-held limited liability corporation (manages both active and passive investments

in farmland which are incorporated into a fund structure or separate company)

Calyx Agro

La Milagrosa (2,859 ha)

El Charabon(4,630 ha)

La Esmeralda(1,089 ha)

Mansavillagra(1,496 ha)

Santana(8,758 ha)

Novo Mexico(10,854 ha)

Boa Vista(7,786 ha)

Dona Tomasa(1,218 ha)

Los Nietos(538 ha)

Aguape(1,010 ha)

El Altillo(611 ha)

La Cordillera(1,213 ha)

San Fransisco(925 ha)

Mato Grosso*(33,954 ha)

Ø Business model is based on two activities requiring different management skills and generating different risk/return profiles:

• Land investment • Farming operations

Ø Land investment part of the company owns 43,000

hectares currently valued at ca. $180 million(as of April 2010 represented a 46% increase in value over original acquisition costs). Only 59% of the land owned, 25,000 ha, currently in operation, with the balance being developed.

Ø Acquires cattle land or completely undeveloped land to transform by investing in the land, logistics and infrastructure and to then sell a portion of the land portfolio in each year to lock-in value and generate cash to invest in new land

Ø Operational teams constantly identify and assess potential targets. Country teams conduct on-site vists to undertake rigorous analysis of the quality of the asset supported by a desk based investment analysis. A business plan is then undertaken to determine how to transform and develop the asset.

Calyx Agro

Value creation strategy based on: Ø Land appreciation

• Based on historical performance/macro trends, land portfolio should appreciate in value without further investment in improved productivity of the land due to scarcity of high-quality productive farmland.

• Active land management and operational enhancements expected to deliver significant increase in farming margins

• Integration of synergies from Louis Dreyfus’ investment in contiguous logistics and processing assets.

Ø Land transformation • Identify and source acquisition targets where there is potential for high returns based on

transformation, typically from undeveloped, distressed, or cattle land into arable land. • Acquire land at a discount to market price before engaging in 1 to 4 year investment program to

upgrade land to realize its full potential and maximize production (yield) and revenues. • Use specialized legal team to restructure, clean-up, and formalize situations in which discounts

in the price of land may be justified by unclear documentation. Ø Land Rotation

• Monetize acquired and transformed land (ca. 15% of developed land investments per year) in order to lock-in increase in prices and secure value creation.

• Deploy proceeds from land rotation proceeds into new farmland investments. Ø Farming Operations

• Achieve improved productivity on the land Calyx Agro operates.

Calyx Agro

Effects of Business Model on Local Communities Ø Increased access for small stakeholders by building roads to improve transport links. Ø Employ 95 fulltime employees(55 in field operations and 40 in general management and administration) Ø Outsourcing planting, application of fertilizer and crop chemicals and harvesting of crops with 100-150 contractors each of which employees on average 3-4 employees(providing seasonal employment for up to 1000 technical workers across its operations) which represented USD $20 million for labor and other professional services it outsourced in 2010,or 30% of the company’s total costs. Ø Provides regular technical development training courses in the field for outside contractors and their employees focusing on the application of new technologies, safety practices and best management practices. Ø Purchases at least 50% of crop inputs (seed, fertilizer and crop chemicals) from local distributors in order to support local businesses and develop good relationships with local community. Ø Invested over USD $ 6 million in infrastructure projects and equipment. Ø Leverages precision ag practices (no-till farming, crop rotation and efficient fertilization) to increase productivity and sustainable crop output in the regions in which the fund operates. Ø Set standards of performance for other farm operations in its countries of operation(transparency on land acquisitions, tax compliance and adherence to strict code of conduct). “We introduce professionalism and formality in situations where informality has been the norm”.

NFD Agro, Ltda.

• NFD (through its local Subsidiary DAP – Desarrollo Agrícola del Paraguay) has successfully developed and positioned a unique model for sustainable development in rural areas, applying a triple-bottom-line approach: wconomic-social- environmental. • Principals of NFD Agro believe that they have developed a business model with proven capacity to “unlock value” by solving social problems in poor and under-developed regions of South America; social development eliminates potential risks in socially conflictive rural areas and acts as a “value enabler”. • Operations have also incorporated international benchmarks in the environmental approach and practices, leveraging world-class management and capital with a unique local approach.

1. TRUST DEVELOPMENT AND COMMUNITY

ASSISTANCE (2006-07)

2. INCLUSIVE PRODUCTION (2008-10)

3. SOCIAL COLLABORATIVE SYSTEM

(2011)

• Infrastructure improvement

• Productive initiatives

• Collaborative enabler; micro-finance

• Access to international market

• Quality control systems

NFD Agro Initiatives

• Initial openness and high attendance rate

• Improvement in crop mix and nutrition

• In progressFeedback

and Results

• Rejection

• Protests

• Demand for the expansion of the inclusive production system

• Demand for professionalization

InitialStatus

• Technical assistance

• Financing production

• Yield improvement and crop diversification

• Technologic adoption

• Productive requests

NFD Agro, Ltda.

• NFD Agro’s management believes that the company's relationship with its rural neighbors transcends mere philan- thropy and isolated actions and represents a fundamental foundation of its development strategy. • Therefore, responding to the expectations of the social sectors with which NFD korks is an integral part of the process of development and the company's long-term sustainability. • As a result, neighboring communities have evolved into strategic allies. NFD Agro is one of the few large farm operators that has not experienced incursions by land squatters intending to occupy farms. • NFD Agro’s social programs are growing and multiplying with the support of international organizations such as the IFC, USAID and Solidaridad (Netherlands).

NationalInitiatives

InternationalNetwork and

Initiatives

Community development

Strict compliance of environmental laws

Fair commerce andorganic production

Training scholarships

International networkto establish sustainability

criteria oriented to certification

Rural microcredit

Training for production,alimentary security, and

commercialization

UNIAPAC

Strategic AlliancesLocal Network

Social & Environmental Management

Global Compact

IFC

USAID

NFD Agro, Ltda.

0

10.000

20.000

30.000

40.000

50.000

2005/06 2006/07 2007/08 2008/09 2009/10

Hect

ares

Productive Area

Sunflower

Corn

Soybean

Cazanave y Associados

• Starting with production of 400 hectares of sunflower on leased farmland in the province of Buenos Aires Province in 1969, the number of hectares Cazenave manages has grown to a cumulative total of more than 800,000 hectares over the last 15 years and has produced about 2.15 million MT of different commodities and specialty crops. • Cazenave was the first company in Argentina to create listed trusts in the Buenos Aires Stock Exchange in 1994 and has listed 10 trusts for a cumulative amount raised of USD 239 million.

Cazanave Timeline


• Cazenave has a track-record of being an early adopter of new technology o first company to adopt no-till farming in Argentina in 1976(reduced production costs and increased soil preservation; o early adopter of transgenic soybeans(provided advantage in crop yields) and o one of the first operators to introduce storage silo bags to South-America in 2001, which enabled producers to control the timing of their crop sales.

•Cazenave has also maintained long-standing relationships with technology companies such as Monsanto and Syngenta in order to keep up-to-date in technology and specialized knowledge.

2.00

3.00

4.00

5.00

6.00

7.00

8.00

9.00

10.00

98/99 99/00 00/01 01/02 02/03 03/04 04/05 05/06 06/07 07/08 08/09

Tons

per

Hec

tare

Corn - Historical Yield

Cazenave Argentina Comparables

Historical Avg Comparables Historical Avg Cazenave Historical Avg Argentina

Source:Argentine Ministry of Agriculture and Cazenave.


• Cazanave’s management processes are standardized and audited internally. • Detailed operation manuals define the latest best-practices of the industry and ensure that staff is trained to work in a standardized manner with a culture of real-time communication and transparency that makes efficient management of their large-scale operation possible. • In-house ERP software solution tracks all of the activities of each property under management. • ISO-9001 certification for its operation processes with regards to the properties it manages for listed trusts.

Commercialization

LeasingCrop

Implantation & Protection

Harvest & Control

Logistics& Delivery

Purchases –Inputs Suppliers

IT Technical Management

INVE

STO

R

EXPO

RTE

R

Personnel Management

StrategicPlanning

Operation

Suppliers

Inputs Adm.

Freights Sales Adm.

Leasing Adm.

Principal Process

Technical Support ProcessesAdministrative Support Processes

Own’s Seed Production

Cazenave’sStandardized Processes

Quifel Natural Resources

Strategic focus Ø Greenfield operations

conducted using world best practices approach with no legacy operations.

Ø “Proven lands” in order to advantage of historical data and agricultural characteris- tics (soil, weather, some infrastructure).

Ø Diversification: allocating risk across operation in three different countries and more than one type of crop in each country.

Location of Concessions in Mozambique Location of Concessions in Sierra Leone

• Concession A

Concessions B and C

Success of Quifel’s business model is based on undertaking two activities that require different management skills and generate different risk/return profiles:

Pre-deployment and Deployment

Pre-deployment • Mitigate risk - focus on old commercial plantations which had been active in the

past since these areas present proven land quality and weather conditions. • Dedicated agronomist team conducts research in loco for suitable lands in each

country for commercial farming • Lease agreement process differs from one country to another - primarily in terms

of the maturity of the lease agreement, and requires a good relationship with central and local authorities as well as with local communities

• Final approval on leases as well as the investment project approvals rests with central authorities with the support from local authorities taking into consideration the expected impact in each region.

• Lease agreements are temporary for the first couple of years and subject cancellation based on the authorities’ evaluation of the agricultural operator’s level of execution.

Deployment Five key factors:

Ø increasing productivity; Ø improving the local infrastructure; Ø developing input markets by creating local demand; Ø adopting a market approach and Ø ensuring risk mitigation.

Jantzen Development

Focused on two separate but interrelated business models Ø Acquiring land and investing in and assuring management of farming operations in the Eastern EU using its own

financial and management resources. The company employs a total of 270 people to manage and operate its assets.

Ø Consolidating and developing farmland with a focus on expanding crop production. The land acquired and

managed is predominantly held as a passive investment by investors together with institutional investors. The company employees 25 individuals who are engaged in this activity.

Jantzen Development

Investment opportunities in the agricultural sector in the Eastern EU particularly attractive Ø Region is undergoing considerable and positive developments following accession of these

countries to the EU and the opening up of markets. Ø Adaption of legislation in the region to EU standards which facilitates the entry and exit of

foreign capital. Ø Modernization and restructuring of the local infrastructure. Ø Opportunity to invest in the agricultural production sector at an early stage and benefit from

implementation of best practices in operations. Ø Comparatively high soil quality with lower land prices than in Western EU. Ø Strong tradition of livestock production and mixed farming supported by developed

distribution channels and transportation logistics. Ø Well-educated and capable work force which can be hired at a significantly lower cost than

their counterparts in Western EU. Ø Expectation that land values will converge over the long-term with those in Western EU

which lends support to appreciation in land values.

Jantzen Development

Competitive edge in the market place as being based on knowledge, relationships and action which they refer to as “Know-how”, “Know-now” and “Know-who”.

Most challenging issues it confronts include legal issues over land titles and a highly fragmented ownership structure as fund’s objective is to achieve scalability on both the land company operates itself as well as land where operations are outsourced in order to secure economies of scale. The company is committed to employing the latest technology available throughout its operations. Best practices are being implemented in all operations which are benchmarked to local operations as well as best-in-class operators in the western EU.

Czech Republic Dan-Moravia Agrar - Greenfield farm project established in 1998. Included more than 1,200 hectares of land as part of an integrated poultry operation which produced 2 million broilers a year. When Erik Jantzen sold his 40% share of the operation in 2005, a total of EUR 12 had been invested in the project. Slovakia Dan-Slovakia Agrar, former communist state farm established in 1949, renovated to bring the farm up to Western EU Specializes in hog(75,000 head slaughtered per year – largest producer in Slovakia), dairy( 15 million liters of milk per year) and crop plant production(on 3,700 ha of land) employing a local staff of 170. Romania Agro Cocora is he most recent farm project Jantzen Development has completed in Romania (2008-2010). Located in South Eastern Romania, it is comprised of 6,000 ha focused on the production of wheat, rapeseed, sunflower seed and corn. Total investment was EUR 52 million. Project sold to a group of 75 investors. Jantzen Development operates the farm under a 5-year administration and management agreement.

For additional information, please contact us:

Philippe de Lapérouse Managing Director

HighQuest Partners, LLC (314) 994 3282

[email protected] www.highquestpartners.com

Boston • St. Louis • Southeast Harbor, ME

HighQuest and Soyatech - Growing Opportunities for our Clients

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