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

2
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!

3
LAND...heading the OIL way?

4
What makes oil ‘black gold’?
Production: 21.7%
Production: 15.8% Production: 9.7%
Consumption: 24.3%
Consumption: 27.4% 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?

9 Current oil and land reserves insufficient to support the needs of the

1 Future deficit
world 20 years hence
9 Incrementally, both these resources are depleting at a faster rate than
they can be generated

9 Concentrated origination point while demand regions are globally spread

Supply-demand
2 mismatch 9 Thus, a ‘global need’ but supply restricted within geographies rich in
underlying resources

Prices on an 9 Oil and food prices hit an all-time high in 2008

3 uptrend
9 Rising prices are a precursor to the crisis of shortage

6
“There is never enough of anything for all those
who want it”
- Thomas Peacock

7
Are we prepared to face the future deficit?
Estimated oil demand
(m barrels/day)

OIL
24.8 9 A gap of ~25m barrels/day
14.1
by 2030E based on the
4.5
current capacity
81.8 9 USD750bn of investments
required to plug the deficit
Current 2010E 2020E 2030E

Source: IEA Estimates

Precious acres - arable land per capita worldwide

(acre)
1.25
FOOD
1.1
9 Arable land per person to 1.00

shrink from 1.1 acres in 1960 0.75

to 0.6 acres by 2030… 0.50

0.6

9 …assuming the current status

0.25
of arable land sustains
0.00
1960 1980 2000 2030E
Source: Food & Agricultural Organization of United Nations

8
The gap between ‘have’ and ‘want’…
2008 Consumption Production

OIL North America 27.4% 15.8%

S. & Cent. America 6.9% 8.5%

9 Oversupply in the
Middle East Europe & Eurasia 24.3% 21.7%

Middle East 7.8% 31.9%

9 Undersupply in Asia
Pacific Africa 3.4% 12.4%

Asia Pacific 30.1% 9.7%

('000 tonnes) Production Consumption Surplus/Deficit

Wheat

USA 63,590 33,203 92% FOOD

China 87,000 104,500 -17%
9 Production and
Corn
consumption points
USA 259,273 207,020 25% widely distributed
Japan 4,000 16,000 -75% across all food
products
Rice

Thailand 17,800 10,200 75%

China 118,000 135,000 -13%

9
…rising prices – alarm bells are ringing!
Oil prices

160 (USD/ bbl)

Oil prices have

120 quadrupled in the past
decade

80

40

0
Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08

Source: Bloomberg

Corn and wheat prices Rice and sugar price

(US$/bu) Corn Wheat Rice (US$/cw t) Sugar (US$/pound)
1,200 30

Three fold increase in Rice – the key staple

24
900
prices over the last food - has seen the
decade sharpest increase
18
600
12 (
300
6

0 0
Jan-00

Jan-01

Jan-02

Jan-03

Jan-04

Jan-05

Jan-06

Jan-07

Jan-08

Jan-00
Jul-00
Jan-01
Jul-01
Jan-02
Jul-02
Jan-03
Jul-03
Jan-04
Jul-04
Jan-05
Jul-05
Jan-06
Jul-06
Jan-07
Jul-07
Jan-08
Jul-08
Source: Bloomberg Source: Bloomberg

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Food – potentially a bigger issue than oil!

OIL: there are alternatives!

9 Alternative sources of energy - biofuels, wind power, solar energy, etc
9 IEA expects ethanol to comprise up to 10% of the world’s 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

9 Recent innovations on clean technology could potentially reduce oil demand
over the next 20 years
9 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?

11
Food Security – Are we headed towards a crisis?

12
History is evidence…
Area harvested has grown by 20%… …yields have improved by 10-20%...

Area harvested (Index: 1970=100) Improvement in yields

120 Yields Increase (over last 10 yrs)

Corn 13%
110
Oats 8%

100 + Wheat 4%

Rice 10%
90
Soybeans 20%
1970 1975 1980 1985 1990 1995 2000 2005
Source: USDA
Source: USDA

Total demand of world grain & oilseeds

(Million
MT)
2,500
But it has not been enough to
meet the demand 2,000

…world grain and oilseeds

demand up 3x over three 1,500

decades
1,000
1970 1975 1980 1985 1990 1995 2000 2005

Source: USDA PS&D Database

13
…and the future seems far from good
Arable land as a % of total area

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%
Source: CIA Factbook 2008 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 world’s hungriest people

Where land is available…the means to produce are limited

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Arable land is shrinking
Erosion/ Spoilage
9 1/3rd of world arable land lost over the past 40 years due to soil erosion
9 Research on erosion rates indicates that soil loss is far faster than it can
be replenished by natural processes
9 Erosion removes ~75bn tonnes of topsoil a year and destroys ~20m acres
of farmland (source: Cornell University Research)

Biofuel

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

Industrialization
9 In USA, one acre of land lost due to urbanization and highway
construction for every one person
9 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

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

15
While arable land is depleting…

…food consumption is increasing

16
Population growth + affordability…higher food demand
World population

37% growth in population

over last 30 years China (1.34bn)
20% Largest population
Others (4.34bn)
63% base growing the
73% growth in population
India (1.18bn)
17%
fastest
over last 30 years

+
Source: Bloomberg (Numbers in brackets denotes actual population)

Also, the highest propensity to spend

Per capita income growth over last 14 years

Highest per capita

income growth
194% 200% 73%

Source: Bloomberg

17
In 1985, the average Chinese consumer ate 44
pounds of meat annually….

…Today, the same is at 110 pounds

18
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) Stocks/use (% - RHS)

800 40

600 30

Reduction in food
400 20 stocks indicates
fragility of future
support
200 10

0 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 Ending stocks for soyabean
(m bushels) (‘000 tonnes)
1,000 500

850
Down by 40% 400
Shrunk by 1/4th

700 300

550 200

400 100
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010E 2011E 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010E 2011E

Ending stocks for oats Ending stocks for corn

(m bushels) (m bushels )

80 2,000

Shrunk by 1/3rd Inventory has been halved

70 1,500

60 1,000

50 500

40 0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010E 2011E 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

21
Survival of the ‘saviour’ - ???

USA, the world’s largest food exporter, earns US$40bn through food exports

WATER
EROSION
URBAN SPRAWLS Groundwater
Annually, more than
POPULATION One acre land lost due providing 31% of the
USA adding 3m people
per year
+ to urbanization and
highway construction
+ 2m acres of prime
cropland is lost to
erosion and water
+ water used in
agriculture is
for every one person depleting 160% faster
logging
than the recharge rate

USA to cease to be a food exporter by 2025E

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Food Crisis – A reality…

…Food Security – The next BIG play?

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Themes to play
Ownership of underlying assets

9 With scarcity of arable land, owners of the ‘source’, such as farmland, to be the key beneficiaries
9 Land ownership comes with underground water – hence, land a proxy to ‘water security’
9 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

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

Efficient price discovery

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

24
India – the country of ‘landlords’
Ceiling on land holding
Limit on holdings Irrigated land with Irrigated land with
(in acres) two crops one crop
Andhra Pradesh 10-18 15-27
Assam 17 17
Bihar 15-18 25
Gujarat 10-18 15-27
Haryana 18 27
Himachal Pradesh 10 15
Karnataka 10-20 25-30
80% of farmers in India
Kerala 12-15 12-15 have land holdings smaller
Madhya Pradesh 18 27 than five acres
Maharashtra 18 27
Orissa 10 15
Punjab 17 27
Rajasthan 18 27
Tamil Nadu 12 30
Uttar Pradesh 18 27
West Bengal 12 12

Land ‘ownership’ a far reality!

25
Overseas farmland acquisitions…the 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

26
Farmland acquisition: An investment that creates ‘value’!
Price performance of ADM

ARCHER-DANIELS S&P 500 INDEX

300

250
Archer Daniels has seen strong re-
rating of its stock post the
200
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!
9 Prices of rice, the staple food for ~3bn worldwide, has increased by 4x over the last 10 years
9 Asian farmers produce ~90% of the total with two countries, China and India, growing more than half the
total crop
9 World rice stocks have decreased by 3% per year. Thus, paddy growers / processors will emerge as strong
bets
9 Key players include Kohinoor Foods, REI Agro and KRBL

Harvested acreage Prices

(m acres) (US$/cwt)
Rice
3.6 30

24
3.4

18
3.2
12

3.0
6

2.8 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

Acreage on a downtrend… …making rice expensive

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Asset ownership: The best shield against food security
Palm oil
9 Most important edible oil when ranked by global production and consumption
9 Accounts for >35% of the world’s global production of edible oils
9 Palm oil stocks at all time low. Stocks of soyabean oil, the closest replacement, also at their lowest levels
9 Key players owning palm plantations include Ruchi Soya, KS Oils and Godrej Industries

Distribution of world production World production of palm oil

Nigeria World production of palm oil: 1995-2008 (‘000 tonnes)

Other 45,000
2%
Colombia 7% 40,000

2% Indonesia 35,000
Thailand 44% 30,000
3% 25,000

20,000
15,000

10,000
5,000
Malaysia
0
42%

1996

1997

1999

2005

2007
1995

1998

2006
2002

2003

2004
2000

2001
Malaysia and Indonesia account
Production has been rising rapidly
for 86% of world production

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…backed by superior returns
Paddy production

One time capex Annual Opex

Outflow
(US$/ha)
2,000 800 800 800 800

Year 1 Year 2 Year 3 Year 4 Year 5

Yield (per ha)

Inflow 4 tonnes
(US$/ha) = 1,600 1,600 1,600 1,600
Realization (per tonne)
US$ 400

Net
(2,000) (1,200) (400) 400 1,200
proceeds

Break-even in Year 4

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…backed by superior returns
Oil palm production

One time capex Annual Opex

Outflow
(US$/ha)
5,000 1,000 1,000 1,000 1,000

Year 1-4 Year 5 Year 6 Year 7 Year 8

Yield (per ha)

Inflow 4 tonnes
(US$/ha) = 2,400 2,400 2,400 2,400
Realization (per tonne)
US$ 600

Net
(5,000) (3,600) (2,200) (800) 600
proceeds

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
Water saving Yield increase
9 With depleting arable land, productivity over FMI (%) over FMI (%)
enhancement a vital aspect for food security
Vegetables
9 >50% of arable land in India depends on rain Sweet potato 60 40
water. Of the remaining 69m ha under Onion 25 31
irrigation, only 3m ha covered under MIS. Thus, Radish 77 20
implementation of MIS can reduce water usage Tomato 79 46
considerably as also improve yields Chilly 62 45

9 Further, techniques such as hybrid seeds and Fruit crops

fertilization improve yield by 10-15% Papaya 68 77

Banana 45 52
9 Key players include Jain Irrigation, Advanta
Grapes 48 23
Seeds, Kaveri Seeds and Monsanto
Lemon 81 32
Watermelon 0 199
Drip irrigation – a generic model
Sweet lemon 61 50

1 acre + Water = Food Pomegranate

Other crops
45 98

Sugarcane 56 33
1x ½x 1.5x
Cotton 65 23

1 acre + Water = Food

Coconut
Groundnut
60
40
12
67

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Improved Seeds – Key to increasing crop yields

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

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Exchanges: Enabling price discovery
9 With the geographic gap between demand and supply evident, there remains limited assurance of
correct and transparent pricing in the country of origin

9 Exchanges emerge as a vital platform for global participation and thereby facilitate price
discovery

9 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

Pre- Post-
Commodity Time period Exchanges Time period Exchange 9 Indian exchanges, for
instance, indicate the
Chana Feb,01 - June,04 12.01% June, 04 - Nov 07 11.62% reduced price volatility

9 Likewise, exchanges in
Rubber Feb,99 - Dec,03 1.51% Jan, 04 - Nov,07 1.09% under-penetrated
regions (Africa, etc)
Potato Nov, 04 - Mar,06 5.82% Mar, 06 - Dec, 07 0.90% promise immense
potential
Urad Jan, 01 - Jun, 04 2.80% Jun, 04 - Jan, 07 1.80%

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

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Themes to play
Price
discovery

9MCX (Fin Tech)

Efficiency
improvement
9NCDEX (NSE)

Aggregators 9Advanta Seeds

9Jain Irrigation
Processors 9ITC 9Kaveri Seeds
9DCM - Shriram 9Monsanto
9Rice processors
Asset (Kohinoor Foods,
ownership REI Agro, KRBL)

9Karuturi Global 9Sugar processors

(Balrampur Chini,
9Ruchi Soya
Shree Renuka
9KS Oils Sugars, Bajaj
9Godrej Hindustan)
Industries

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37
 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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