AG-The Modernization of The BRICs

Keith Carpenter, MBA, CFA 416.869.7325 keith.carpenter@canaccordadams.com Neal Gilmer, MBA 416.869.7294 neal.gilmer@canaccordadams.
com
Agriculture
The Modernization of the BRICs

Feeding and fuelling the New Industrial Age
We believe that Brazil, Russia, India, and China (BRIC) are entering into an industrialized age that is likely to have a profound impact on the planet, ranging from a dramatic shift in global demographics, to an awakened demand for more expensive goods, services and infrastructure. As the BRIC countries continue to industrialize, the developed world is readying a supply response, largely driven by macro-economic variables that have already impacted underlying commodity prices. We do not believe this is a short-term cyclical bull market in commodities; rather we see a sustained and secular demand trend. We favour companies with exposure to these underlying macroeconomic trends that also possess an experienced management team and sound financial models. This report has three broad sections. The first aims to provide a macro overview wherein we highlight significant global trends that are likely to lead to higher sustained commodity prices and drive demand for more expensive goods, services and infrastructure. For instance, the rapid industrialization of the BRIC countries has led to higher disposable per-capita incomes in those countries and, consequently, higher rates of consumption. The second section of this report discusses the agriculture sub-sectors, such as grains and feed, fuel, fertilizers and water and their impact on agriculture and commodity markets globally. Finally, with this report we hereby initiate coverage on the following: Agrium (AGU : TSX : C$99.22 | BUY, C$160.00) Athabasca Potash Inc. (API : TSX : C$7.57 | HOLD, C$9.50) MagIndustries Corp. (MAA : TSX-V : C$3.15 | BUY, C$8.50) PhosCan Chemical Corp. (FOS : TSX-V : C$1.75 | BUY, C$3.20) Potash Corporation of Saskatchewan Inc. (POT : TSX : C$211.25 | BUY, Target C$425.00) Potash One Inc. (KCL : TSX : C$4.29 | SPECULATIVE BUY, Target C$7.75) The Mosaic Company (MOS : NYSE : US$129.43 | BUY, Target US$210.00)
Inside
Global Macro Overview Political Overview Industrialization of the BRIC Countries Wealth Arable Land Global Weather Patterns Agriculture Sub-sectors Final Thoughts Companies Comparables 3 8 20 34 36 47 61 132 133 227
Canaccord Adams is the global capital markets group of Canaccord Capital Inc. (CCI : TSX|AIM) The recommendations and opinions expressed in this Investment Research accurately reflect the Investment Analysts personal, independent and objective views about any and all the Designated Investments and Relevant Issuers discussed herein. For important information, please see the Important Disclosures section in the appendix of this document or visit http://www.canaccordadams.com/research/Disclosure.htm. 9 July 2008 2008-071
Table of Contents
Global Macro Overview ...........................................................................................................3 Political Overview ....................................................................................................................8 Industrialization of the BRIC Countries................................................................................20 Wealth....................................................................................................................................34 Arable Land ...........................................................................................................................36 Global Weather Patterns ......................................................................................................47 Agriculture Sub-sectors.........................................................................................................61 Feed ..................................................................................................................................61 Fuel ...................................................................................................................................77 Equipment ........................................................................................................................88 Infrastructure....................................................................................................................95 Bio Engineering ............................................................................................................. 103 Fertilizers ....................................................................................................................... 109 Agriculture Technology.................................................................................................. 125 Final Thoughts.................................................................................................................... 132 Potash Corporation of Saskatchewan Inc............................................................................... 133 The Mosaic Company......................................................................................................... 146 Agrium................................................................................................................................. 159 MagIndustries Corp............................................................................................................ 172 PhosCan Chemical Corp. ................................................................................................... 189 Potash One Inc. .................................................................................................................. 203 Athabasca Potash Inc. ....................................................................................................... 216 Comparables. ..................................................................................................................... 227
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GLOBAL MACRO OVERVIEW

While the shortages of energy and oil have dominated the headlines in recent months, the impact of agricultural shortfalls is proving to be of equal, if not greater significance. After years of stability, food prices are experiencing high volatility. For instance, wheat in the U.S. (hard red spring) was priced at about US$5 per bushel in May 2007, but by February 2008 had jumped to a high of US$16, until falling back to the US$10-15 range where it currently trades. In addition, several global trends may also affect dietary patterns, such as urbanization and the aging of the global populace, of which higher food prices are a consequence. Recently, government attention has been focused on recapitalizing the banking and financial services sector after the sub-prime crisis resulted in significant losses. The Blackstone Group recently received US$3 billion from Chinas sovereign fund. Morgan Stanley and Citibank have also received capital. The agricultural sector globally is also capital intensive and, given the significant increase in the prices of agricultural commodities, sovereign funds have already begun to invest in agriculture to counter the supply shortfall in agricultural commodities.
POPULATION
The technological advancements of the previous century greatly improved agricultural productivity and, along with further developments in medicine, helped to propel population growth at an incredible rate of 1.7% annually, from 2.6 billion people worldwide in 1950 to 6.6 billion in 2007. The US Census Bureau forecasts that by 2050 our numbers will total 9.2 billion, representing an annual growth of 0.8%. In 2007, the working population (15 to 65 years of age) made up 65% of the total population; however, that number is expected to decline to 62% by 2050. This is primarily due to improvements in life expectancy, and while people older than 65 years comprised 7.5% of the world population in 2007, by 2050 that number is expected to increase significantly to 16.8%. The world is getting older, quite literally, while its workforce in comparison is beginning to shrink. People older than 65 years of age comprise 7.5% of the world population today, which is expected to increase to 16.8% by 2050. Figure 1: Age structure, world population, for the years 2007 and 2050
2007 80+ 70-74 Age group 60-64 50-54 40-44 30-34 20-24 '10-14 0-4 400 200 0 In million 200 400 Male Female
Age group 80+ 70-74 60-64 50-54 40-44 30-34 20-24 '10-14 0-4 400 200 0 In million 200 400 Male Female 2050
Source: United States Census Bureau
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It is also helpful to examine world population in terms of developed and developing countries. Currently, the developed world represents about 19% of the total population, and is expected to grow at 0.1% annually until 2050. On the other hand, population in the so-called developing countries is expected to grow annually at a significantly-higher rate of 0.9%, with Africa on trend to post an incredible 1.8%. Resources are already considerably constrained in the developing world. Population growth is expected to further strain economic development as it increases the ratio of dependent children to working adults and compels families to spend more on essentials such as food, clothing and housing, and less on education, infrastructure and other similar investments required to enhance economic growth. In addition to further constraining the food and water supply, larger populations more severely impact natural resources, such as forest land for housing and agricultural requirements, which leads to increases in land erosion, and ultimately to climate change and global warming. In Figure 2, we compare the age structure of an African country (Nigeria), a BRIC country (China), and a developed country (the United States). The U.S. has the highest proportion of people older than 65 years of age, followed by China and then Nigeria. China has the lowest proportion of people who are younger than 15 years of age, driven by the Chinese governments one-child (planned birth) policy, which was introduced in 1979. Now cycling through its first generation of enforcement, the effects of the governments one-child policy have been exaggerated by Chinas cultural proclivity to favor male children; the result of which has produced an atypical male-to-female ratio in China. Currently, the nations sex ratio is 943 females per 1,000 males as compared to 986 for the world and 1,034 for the U.S. This gender imbalance is now proving a source of concern for policy makers in China. The most striking observation about Nigeria is that 42% of the population is younger than 15 years of age. Figure 2: Age structure, 2007
C hina
N ige ria
80+ 70- 74
US
80+ 70- 74
80+ 70- 74
M ale
Female
M ale
60- 64
Female
Age group
M ale
60- 64 50- 54 40- 44 30- 34 20- 24 10- 14 0- 4
Female
60- 64 50- 54 40- 44 30- 34 20- 24 10- 14 0- 4
50- 54 40- 44 30- 34 20- 24 10- 14 0- 4 15 10 5 0 In million 5 10 15
80
60
40
20
20
40
60
80
16
12
0 In million
12
16
In million
Source: United States Census Bureau
Aging and urbanization

Activity levels decline with age, which results in lower food demand per capita as compared to a population boasting a younger demographic mix. Studies have also shown
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that the types of foods consumed also shift with age, with elderly people typically consuming less animal products (protein rich) and more fruits and vegetables than their younger counterparts. Consequently, it follows then that the composition of a populations relative age will affect the demand of foodstuffs significantly; and as the number of people older than 65 years of age increases from 7.5% currently to a forecasted 16.8% of the world population by 2050, the planet could experience a dramatic shift in the demand for agricultural products as well. In addition, an aging society may find it more difficult to adjust to the demands placed on its food supply, especially in non-urban geographies that typically rely on smaller, localized farming cooperatives to maintain agricultural supply. Older farmers tend to shift to crops that are less labour-intensive or stop farming altogether. Such farmers may find it difficult to adjust to technological changes and may be less willing to adopt new methods of production, which can also lead to a decline in agricultural production. Over the last five decades the planet has experienced rapid urbanization, and approximately half the worlds population now lives in an urban environment. This figure is up from about 29% in 1950, and is expected to increase to 70% by 2050. The primary reason for this dramatic change is the unprecedented urbanization of the less-developed regions of the world. The urban population in less-developed regions was 0.31 billion in 1950. The corresponding figure in 2007 was 2.38 billion, representing annualized growth of 4.1%. It is projected that those living in an urban environment will increase from 3.3 billion in 2007 to 6.4 billion in 2050 and, as stated, a majority of this growth will come from lessdeveloped regions.1 Asia will be the major contributor, adding 1.8 billion people to urban regions, followed by Africa (0.9 billion) and Latin America and the Caribbean (0.2 billion). Figure 3: Urban world population, 1950-2050 7
6 Population (in billions) 5 4 3 2 1 0 1950 1975
Urban
2007
Rural
2025
2050
Source: United Nations Department of Economics and Social Affairs/Population Division
The developed regions stated here include North America, Europe, Australia, New Zealand and Japan. The rest of the world is considered less developed. (Source: United Nations World Urbanization Prospects Report, 2007).
1
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Figure 4: Urban population for more developed and less developed regions, 1950-2050
6 5 Population (in billions) 4 3 2 1 0 1950 1975 2007 2025 2050
More developed region, Urban population Less developed region, Urban population More developed region, Rural population Less developed region, Rural population
70% of the world population is expected to live in urban areas by 2050.
Source: United Nations Department of Economics and Social Affairs/Population Division
At the same time, the rural population is expected to plateau at 3.5 billion in the next 10 years and to decline to 2.8 billion by 2050. In more developed countries, rural population accounted for 47% of the total population in 1950 and has been in decline ever since.
The impact of urbanization on agriculture

Urbanization can lead to the replacement of rural staple crops (grown locally) with marketed staple cereals and processed foods. Urbanites typically spend most of their waking hours away from the home in, for example, an office or factory setting, or in commute to and from work. Urban life increases the opportunity cost of time for activities such as the preparation of meals; people living in an urban environment, as a consequence, tend to consume more convenient off-the-shelf processed foods. A significant proportion of the calorie intake of an urban consumer is derived from fats and sweeteners, which can ultimately lead to the consumption of more calories than justified by their energy needs.
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Figure 5: Changes in dietary consumption with urbanization in 180 countries
Source: FAOSTAT
In terms of our dietary habits, the most significant impact of urbanization is the increase in the consumption of meat products, which acts as a catalyst for the industrialization of livestock production. Such large-scale production often leads to the degradation of arable lands with the increased risk of soil and water contamination. Additionally, urban expansion also reduces the availability of local arable land, placing further strain on the supply of locally-grown agricultural products. It also draws labour away from agricultural activity to other sectors of the economy, thereby reducing the resources available to farm production.
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POLITICAL OVERVIEW
In this section, we intend to provide an overview of the political and economic environment of the so-called BRIC countries.
CHINA
The Communist Party of China (CPC) has been in power since the establishment of the Peoples Republic of China in 1949. Under the early years of communist rule, the country was all but closed to external investments and private participation until 1978, when the country opened its doors to the outside world and began to commit itself to additional economic reforms. The country is still in the midst of this transitional phase, and continues to move from a system of public ownership toward the large-scale privatization of unprofitable state-owned enterprises. In 2006, the private sector contributed 65% to the GDP and employed over 500 million people. Figure 6: Foreign direct investment, China
80
72 61 54 18%
69
75
40%
FDI inflows (in US$ billion)
60
20% 9% 10% 0% -4% -10%
40 13% 20 0.05% 0 2003 2004 2005 2006 2007
Source: UNCTAD, World Investment Report 2007
China has the highest foreign exchange reserves globally, at US$1,528 billion.
Real GDP growth in 2007 was 11.4%, which compares to the global average of 5.2%. However, The Economist Intelligence Unit (EIU) expects this figure to begin to fall to 9.8% in 2008 and to moderate further to 9.0% in 2009, primarily due to slowing export growth. However, its significant trade surplus is expected to keep Chinas current-account balance in a healthy position. With the highest foreign reserves in the world, estimated at US$1,528 billion, and external debt of US$363 billion (as of 2007), China has the highest positive current-account balance of over US$1,000 billion among all countries globally. Additionally, with the 2008 Olympic Games at hand, the government expects to showcase its recent achievements to the world and, in doing so, perhaps provide the country an impetus to its service exports. The Games are also expected to further drive an inflow of foreign investments, which totaled US$75 billion in 2007. Owing to its large population and rapid economic growth, Chinas current infrastructure is under tremendous strain. In response, the government has significantly increased its transport development spending. For the 2006-2010 period, the Chinese government has allocated US$200 billion for the development of rail infrastructure alone. The total length of toll expressway, which stood at 53,600 kilometres in 2007, is expected to increase to 70,000 kilometres by 2020.
Annualized FDI growth

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In 2007, the industrial sector contributed 49.2% to GDP and represents the largest share of Chinas economy; this is followed by the service sector and the agriculture sector, which contributed 39.1% and 11.7%, respectively. Historically, agriculture has been an important part of the National Program and, to enhance its competitiveness within the international market, large scale investments have been made to modernize its agricultural infrastructure. In 2008, the central budget allocated approximately US$84 billion for farmers, agriculture and development of rural areas, representing a 36% increase from the previous year. To provide further assistance, in 2006 the government abolished the Agriculture Tax, which had been in place in China for centuries and, at the time of its expiration, was estimated to be US$4.7 billion in direct taxation and over US$9 billion in other fees. Figure 7: Chinas GDP growth
8,000 Nominal GDP (USD billion) 6,000 4,000 2,000 0 2002 2003 2004 2005 2006 2007 2012E
1,937 2,303 2,774
11.4% 10.1% 10.4% 11.1%
7,736 CAGR 9.0%
50% 40% 30% Real GDP Growth
3,242
20% 10% 0%
1,454
1,648
10.0%
Source: The Economist Intelligence Unit (EIU)
In its endeavor to encourage farmers and foster growth within the agriculture sector, the government introduced subsidies to help meet the increasing costs of agricultural supplies. In 2007, comprehensive direct subsidies to farmers stood at US$5.6 billion as compared to US$3.2 billion in 2006. Additional measures to increase internal crop production include funding for research to develop crop and livestock varieties with improved quality and yields; providing subsidies on the purchase of high-quality seeds and agricultural machinery; limiting the increase in fertilizer prices paid by farmers; and providing preferential loans for the construction of water-saving irrigation and water control projects, field irrigation, drainage works, and rural drinking water projects. The government is also enforcing strict rules regarding the conversion and sale of arable land for non-agricultural use. Double-digit economic growth has also increased the demand for energy in China. China is the second largest consumer of oil after the U.S. and the third largest importer of oil after the U.S. and Japan. It is also the largest producer and consumer of coal, although many of its coal reserves are yet to be developed. However, Chinas growing demand for energy has forced the government to look for alternatives to coal and oil. In 2007, Chinese energy officials agreed to purchase five nuclear reactors from Western companies. The Three Gorges Dam hydroelectric facility, deemed to be the worlds largest hydroelectric project by total capacity (22,500 MW), is also expected to become fully operational by 2011. China is also actively developing its biofuel production capability, and is targeting an annual production capacity of 2 million tons of ethanol by 2010 and 10 million tons by 2020. During 2006, 1.3 tons of fuel was produced by four, mainly corn-based, ethanol
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projects. Nearly 4 million hectares of land in different regions are being used to raise oilbearing seeds with an expected fruit output of 4 million tons which can be used as raw material for biofuel. However, cognizant of the increasing domestic demand for food, China has banned the use of grains for the production of biofuel. The government is planning to cultivate biofuel forests in the uninhabited mountain areas to save existing farm land and provide the local people in these regions with additional employment and income opportunities.
INDIA
India is a parliamentary democracy, with institutions similar to the democratic systems in the UK. The last general elections in 2004 resulted in a fractured mandate and led to a coalition between the Congress and the Left parties to form the government. The government is now focused on the next general elections scheduled in 2009, and its 2008 budget included several populist measures such as loan waivers for farmers of approximately US$15 billion, lower income tax rates and higher spending on the social sector. This is expected to adversely affect the fiscal deficit in 2009. The Central Bank remains focused on controlling inflation, especially the prices of essential agricultural commodities. Figure 8: Indias GDP growth
3,000 2,644 CAGR 7.6% 2,000 1,147 1,000 507 0 594 3.8% 2002
Source: EIU
50% 40% 30% Real GDP Growth
India has been growing at a high rate of over 8% since 2003.
Nominal GDP (USD billion)
698 8.4%
809
927 8.7%
20% 10% 0%
8.3%
9.2%
9.7%
2003
2004
2005
2006
2007
2012E
Indias GDP exhibited growth of 9.4% in 2006-2007 making it the second-fastest growing economy worldwide and the EIU forecasts that GDP growth is expected to decline marginally to 7-8% over the next four years. The country currently has foreign currency reserves of US$294 billion and external debt of US$138 billion. A debt servicing ratio of 7.3% makes India a moderately-indebted country. In 2006, the services sector contributed 55% of the GDP, followed by industry at 28% and agriculture at 18%. An interesting observation here is that in spite of the modest contribution by the agriculture sector (at 18% of GDP), agriculture provides for the livelihood of almost 60% of Indias workforce; per capita income in this sector is low and a significant section of the farming community struggles to earn a decent living. In comparison, the Indian Information Technology (IT) industry generated revenues of US$50 billion in 2006 or 5.4% of the GDP and has been growing annually at 30% over the last 10 years. One aspect that is hurting Indian exports currently is the fact that the Indian rupee appreciated by 11% against the US dollar in 2007, eroding the margins of export-oriented industries such as IT, the offshoring and outsourcing services industry (or BPO), textiles, and gems and jewelry.
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In recent years the government has announced several initiatives intended to assist farmers, such as providing a minimum support price for essential food crops including wheat, rice and sugar cane irrespective of market conditions. The government also maintains sufficient stocks of these food crops to meet demand-supply gaps. Another recent initiative is a nationwide subsidized public distribution system for essential commodities, primarily for the economically weaker sections of society. However, this public distribution system has been receiving negative coverage of late, including charges of inefficiencies and corrupt practices, and now even at the federal level there is an understanding that an overhaul of the system is most likely unavoidable. Apart from these measures, the government also regularly announces initiatives for financial support and easy credit to the farming community for technological and equipment upgrades, irrigation, pest management systems, fertilizers, and cold storage. In terms of biofuels, 5% ethanol-blended automobile fuel has been introduced by the government on a pilot basis. This ethanol is produced from molasses, a waste product of sugar processing. Similarly, biodiesel is being used on a pilot basis, and the current policy envisages that biodiesel will meet 20% of the nations diesel requirement by 2012. India imported US$52 billion of petroleum and oil products from April 2006 to February 2007, which was 32% of its total merchandise imports. While Indias dependence on foreign oil is increasing the demand and economic feasibility of biofuels, India is constrained by a lack of available arable land. However, the Jathorpa or Physic nut plant, on which biodiesel production is based in India, can be grown in wastelands and has a low water and fertilizer requirement. This should mitigate the impact of biodiesel production on existing land currently in use for essential food crops; however, the actual impact remains to be seen. Owing to the rapid pace of development, significant investments are being made in the infrastructure and energy sectors. Several initiatives have been taken by the Indian government to attract private and foreign direct investment in core sectors such as power generation and distribution, oil and gas exploration and refining, roads and highways, mass transit systems, airports, sea ports and harbors. It is estimated that investments in the infrastructure sector should grow by 15% annually over the next five years and should total US$190 billion in this period. Similarly, the construction industry is expected to attract US$125 billion over the next five years. In 2005, India consumed 572 million tons oil equivalent of energy (Mtoe) with a per capita consumption of 531 kilo tons oil equivalent (Ktoe). This is significantly lower than the global per capita consumption of 1,767 Ktoe and accordingly, it is estimated that the Indian energy sector needs investments in the range of US$120-150 billion over the next five years. The International Energy Agency estimates that of the total power generated, 38.7% was coal-based; 23.9% oil-based; 5.4% gas-based; nuclear 0.8%; and hydroelectricity 1.6%, with the remainder primarily taken up by combustible renewables and waste. Currently, the price of electricity, automobile fuels, cooking gas, thermal coal, and natural gas are all regulated and controlled by the government.
US$190 billion is expected to be invested in Indian infrastructure over the next five years.
RUSSIA
Russia is a presidential form of democracy. Dmitry Medvedev won the federal elections in 2008 with a landslide 70% of the total votes cast. He was first deputy prime minister and chairman of Gazprom (a state-run gas monopoly) under the Putin presidency and is known as an economic liberal. He is expected to continue with the economic policies of Putin. Economic policies are expected to increase government control on strategic resources (oil,
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gas, aluminum) and offer limited liberalization in other sectors (private agriculture land holding). The budget surplus has declined and is expected to become non-existent by 2009 due to increased spending. Figure 9: Russias GDP growth
3,000 Nominal GDP (USD billion) CAGR 5.6% 2,000 1,290 1,000 345 0 765 988 8.1% 6.4% 7.4% 2007 2012E 20.0% 10.0% 0.0% 2,548 50.0% 40.0% 30.0% Real GDP Growth
592 432 7.3% 7.2% 4.7% 2003 2004
2002
Source: EIU
2005
2006
Russias current foreign currency reserves and external debts stood at US$490 billion and US$430 billion, respectively in 2007, while GDP exhibited growth of 8.1%. The EIU forecasts GDP growth to decline to 7% in 2008 and to 6% in 2009 primarily due to declining global growth rates and the resultant reduction in demand for energy. The services sector has the biggest share of GDP, 56.3% in 2007, followed by the industrial sector and the agriculture sector at 39.1% and 4.6%, respectively (though some economists estimate that the services sectors GDP share is inflated due to certain tax avoiding transfer pricing norms followed by the oil exploration companies). The energy sector is estimated to have a 20% share of GDP with the metal industry at 8%. Figure 10: Export trends
350 300 Exports (USD billion) 250 200 150 100 50 0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
The energy sector contributed 20% to Russias GDP in 2007, followed by metals at 8%
Total Exports Manufactured goods

Source: UNCTAD
Fuels Ores and metal
Although the Russian Ruble has appreciated significantly, around 11% against the US dollar in 2007, buoyant commodity prices have ensured robust exports, estimated at US$350 billion. Raw material exports account for 80% of the total exports while the energy
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sector accounts for 55%. Russian imports, which stood at US$221 billion in 2007, primarily include machines, medicines, consumer goods and meat. The legacy of the Communist Era, characterized by mechanized collective farming and small marginal household farmers, has greatly impacted Russias agricultural industry. The government provides farm input credits in the form of seeds and fertilizer, and then barters with the farmers for the final produce. The interest on the farm credit disbursed by private banks is subsidized up to 67% and the principal is guaranteed by the regional administrations. Ensuring food security and managing local unemployment is of prime consideration for the regional administrations. It is expected that by 2010, private land owners will be able to use their land as collateral for loans. In 2006, the Russian parliament, or Duma, enacted a law for state investments in the agriculture sector. These two steps are expected to spur new investment in agriculture. Russia imposes tariff-rate quotas on meat imports to protect its domestic industry. Russia is also making significant investments in infrastructure development and is expected to invest US$185 billion in the infrastructure sector over the next three years. In 2005, Russia enacted a new law to enable private participation in infrastructure construction projects. Two pilot projects (the Moscow-St Petersburg Highway and the Western High Speed Diameter) have already been initiated, while new pipeline and port infrastructure projects are being given high priority to facilitate the increase in energy exports. Considering its large energy reserves, 60% of fixed investments are in the mining and exploration industry, though it provides employment to only 2-3% of the population. It is estimated that the Russian oil sector requires investments of approximately US$77-100 billion while the gas sector requires US$80-84 billion in the 2006-2015 period. In 2005, Russia consumed 646 Mtoe (million tons oil equivalent) of energy with a per capita consumption of 4.5 toe. This is much higher than the global per capita consumption of 1.7 toe. Energy is heavily subsidized for domestic consumption which is leading to inefficiencies in energy utilization and wastages. The International Energy Association (IEA) estimates that gas supplied 53.9%, oil 20.6%, coal 16.0%, nuclear 6.1%, hydro 2.3% of the energy demand.
BRAZIL
In the federal elections of 2006, Luiz Inacio Lula da Silva, or Lula as the sixty-two year old politician is simply known, was reelected to his second consecutive four-year term. A member of the left-leaning Partido dos Trabalhadores (PT) party, he is expected to continue his current policy of attracting domestic and international investments in the agriculture, agro-processing, and mining and minerals sectors. His government has focused on improving the export of soybean, sugar cane, ethanol and iron ore.
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Figure 11: Brazils GDP growth

2,000 Nominal GDP (USD billion) 1,618 1,287 1,072 1,000 506 552 664 5.7% 1.2% 2004 3.1% 2005 3.7% 0.0% 2007 2012E 5.2% 5.0% 882 CAGR 4.0% 10.0% Real GDP Growth 1,500 15.0% 20.0%
500
2.7% 0 2002
2003
2006
Source: EIU
The Brazilian economy exhibited growth of 4.7% in 2007 and The EIU forecasts its GDP to grow at 4.4% from 2008 to 2012. Current foreign currency reserves of US$173 billion and external debt of US$207 billion make Brazil a moderately-indebted country, with a debt serving ratio of 19.8%. The services sector accounted for the majority of GDP and contributed 64% to the economy in 2007. This was followed by the industrial sector, which accounted for 30.8%, while agriculture had the smallest share, contributing 5.1% to the GDP. Figure 12: Export trends
160 140 Exports (USD billion) 120 100 80 60 40 20 0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
Total Exports
Source: UNCTAD
Agriculture
Minerals
Fuels
The lower price of agricultural inputs, improved productivity and government support have led to rapid growth in agricultural exports in Brazil.
Although the Brazilian agriculture export surplus at US$27.5 billion is estimated to be the largest in the world, a significant appreciation in the Brazilian Real in 2007 (16% against the US dollar) has reduced the competitiveness of the Brazilian agro-products in the international market place. From 2002-2004, Brazil provided US$2.7 billion per year in agricultural aid, representing approximately 0.5% of the countrys GDP; this aid went to agricultural research, infrastructure development, education, and preferential financing. In order to attract
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further investment, the government has proposed a new public private partnership (PPP) policy. Under this policy, from 2007 to 2010 approximately US$235 billion is expected to be invested in the oil and gas, transportation and sanitation sectors. While the government is expected to provide 14-15% of the investment, the remainder is expected to come from the private sector. The government has also created a guarantee money pool of approximately US$2.2 billion to further stimulate additional private investments. According to the World Energy Outlook, Brazil would require investments in the energy sector of around US$470 billion during 2005-2030 to meet its energy requirements. In order to achieve this, the country has liberalized the sector and allowed foreign direct investment in petroleum exploration and power transmission. Of the total energy supply, oil supplied 42%; coal 7%; gas 8%; nuclear 2%; hydro 14%; and biomass 27%. In addition, the government has started promoting alternative energy by providing financing for the construction of renewable energy power plants, biodiesel plants, and has begun to offer tax incentives to improve energy efficiencies. Brazil promotes ethanol (a biofuel made from sugarcane) usage by allowing consumers to have flex fuel engines for vehicles that can run on 25% blended gasoline or ethanol. Castor seed-based biodiesel has also been promoted and a 5% blending target has been set for 2013.
NATO
The North Atlantic Treaty Organization (NATO) is an alliance of 26 countries, including the U.S. and Canada, Norway, Iceland, Turkey, and 21 countries from the European Union, sharing the common goal of safeguarding mutual interests, such as the promotion of democracy, individual liberty, the rule of law and the peaceful resolution of disputes. It was originally formed as a military alliance in 1949 to counter the perceived threat of the Soviet Union. The UK and nine other countries from Western Europe, as well as the U.S. and Canada are its founding members. With a GDP of over US$13 trillion in 2007, the United States is the largest economy in the world, accounting for about 21% of the gross world product. The GDP growth rate of the US declined in 2007 to 2.2% from 2.6% in 2006 and is expected to decline further in 2008. The economy is experiencing near recession like conditions due to the sub-prime crisis, decrease in residential fixed investments and a downturn in private inventory investments. However, the economy is expected to recover gradually and achieve a growth rate of 2.5% by 2012. In 2007, the service sector constituted the bulk of the US economy, contributing 78.5% of GDP followed by the industrial sector with 20.6%. Agriculture contributed less than 1% of GDP. Although agriculture has a small share of GDP, the US is the worlds leading producer of soybeans and corn. Corn has the largest share both in terms of value as well as volume of domestic agricultural production in the U.S. and accounted for approximately 42% of the global production in 2006. The U.S. is not only the top producer of corn, but also the top exporter, accounting for almost 68% of the global corn exports in 2006. As part of its continued support of agriculture, the 2007 Farm Bill, introduced by the Federal government and ratified by Congress, allocated US$288 billion for agricultural subsidies over a five-year period. The 2007 Farm Bill continues, in effect, the governments commitment to preserve natural resources and support the development of renewable energy. The Bill includes US$1.6 billion for the development of new renewable energy sources and cellulosic ethanol projects, of which US$500 million has been earmarked for bio-energy and bio-based product research initiatives.
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With imports worth US$1.9 trillion and exports of US$1.1 trillion in 2007, the US is the largest importer of goods and the third largest exporter after Germany and China. The leading export commodity was capital goods while industrial supplies led the list of imports. The estimated current account balance for the same period reflected a deficit of US$747 billion and external debts of US$12.3 trillion. Although the U.S. has a trade deficit, it has a surplus in agriculture with forecasted farm exports of US$78 billion in 2007, with a majority of the exports to Asian countries. The U.S. is one of the worlds largest producers of energy, the largest consumer and a net importer of energy. It is the third largest producer of oil with a production of 8,331 thousand barrels per day and a consumption of 20,687 thousand barrels per day in 2006. It is also the worlds largest consumer and second-largest producer of natural gas, consuming 21% and producing 18% of the global usage in 2005. It has the worlds largest coal reserves with 55% of coal production occurring in the western U.S. On an industrial scale, ethanol and biodiesel are the only biofuels produced. In 2005, 1.43 billion bushels of corn grain, representing 13% of the total corn crop, were used to produce most of the 4 billion gallons of ethanol compared to 3.4 billion gallons produced in 2004. Ethanol is extensively used in the United States with E10 (10% ethanol and 90% gasoline blend) available in a majority of the gas stations. The European Unions GDP, estimated at US$16.6 trillion in 2007, grew at a rate of 3% and accounted for approximately 31% of the global economic output. The services sector contributed to a majority of the EUs GDP in 2007. The EU was the largest exporter and second largest importer of goods in 2005. In 2006, the U.S. was the major trading partner of the EU, with 23% share in exports and 13.8% in imports; China came in next with 13.4% in imports. In 2007, the current account deficit was US$146.8 billion with an inflation rate of 2.2% of GDP. The European Union is pushing its infrastructure on cross border linkages within the EU to improve trade and mobility. A major component of this effort is the Trans-European Transport Networks (TEN-T) which includes projects like Channel Tunnel, LGV Est, the Frejus Rail Tunnel, and the Oresund Bridge. It is estimated that by 2010 this network will cover 75,200 kilometres of roads, 78,000 kilometres of railways, 330 airports, 270 maritime harbors, and 210 internal harbors. Currently, the EU is the leading importer of oil and gas. It buys 82% of its oil and 57% of its gas from other countries. Russia is a large supplier of energy to the EU and a series of clashes between Russia and the Ukraine have raised concerns in the EU regarding a sustained supply of gas. As a result, the EU is attempting to diversify its energy supply sources. Officials have set a target of 20% energy from renewable resources and 10% of vehicle fuel from biofuels to reduce its dependency on oil and gas by 2020. The new energy strategy also seeks to address climate change and emphasizes the use of renewable sources, such as wind and biofuels. Representing one of the oldest policies of the EU, The Common Agriculture Policy (CAP) is a system of subsidy payments and programs. The main objectives of the policy are to increase productivity, stabilize markets and ensure the availability of food at fair prices, while maintaining a reasonable standard of living for farmers. It also guarantees a minimum price to producers, imposes import tariffs and quotas on certain goods from outside the EU and provides a direct subsidy payment for cultivated land. In 2005, CAP represented 44% of the EUs budget, with cereals, beef/veal and dairy products accounting for a majority of the funding.
The Common Agricultural Policy (CAP) of the EU subsidizes farming and significantly impacts global agricultural trade.
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THE REST OF THE WORLD

The global agriculture trade is dominated by the European Union (48%), the Cairns Group (26%), and the United States of America (10%). Agriculture trade remains one of the most protected types of trade agreements under the WTO charter. EU nations give export subsidies to encourage exports, the U.S. provides budgetary support to its farmers while other countries prefer tariffs, tariff-restricted quotas and non-tariff measures like sanitary initiatives. In terms of the overall exports of the top ten agriculture-exporting nations, agriculture exports make up less than 15% of their total, and eight out of these ten nations are represented by developed economies. Although an important aspect of these economies, developed nations are typically more economically diversified and less dependent on agriculture exports than their developing counterparts. Additionally, much of their agriculture exports are processed, value-added commodities and not in raw form. Figure 13: Agricultural exports by regions
Agriculture Exports (USD billion) 900 235 600 140 300 14 0 222 86 56 16 144 266 84 60 19 321 21 93 68 367 24 98 74 395 25 103 85 197 163 433 212
116 98
2001 Asia
Source: UNCTAD
2002
2003
2004
2005
2006
America
Africa
Europe
Cairns Group
Figure 14: Top 10 agriculture export-dependent countries 2006 (exports> US$1 billion)
21.3 65% 59% 13.2 55% 54% 52% 45% 43% 46% 80% 60% 40% 3.5 1.2 0 New Zealand Cte d'Ivoire Uruguay Guatemala Argentina Paraguay Iceland Ghana Kenya Mali 1.6 2.6 1.8 1.9 1.6 1.6 20% 0% Agriculture Exports % Total Exports Agriculture Exports (USD billion) 84% 83%
Source: United Nations Conference on Trade and Development (UNCTAD)
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The importance of agriculture exports is high for so-called developing and underdeveloped economies, as they form the bulk of their exports. Moreover, these economies are typically dependent on a small basket or a single agricultural commodity, and often these exports are raw or semi-processed in form. As a consequence, these economies are extremely vulnerable to commodity-price fluctuations. For example, Ghana is one of the largest exporters of raw cocoa beans. Cocoa beans form a majority of that countrys agriculture exports and, in fact, constitute approximately 45% of its total exports. Another example includes Mali, which is heavily dependent on its cotton exports. Figure 15: Top 10 agriculture-exporting countries 2006 (excluding NATO and BRIC countries)
Agriculture Exports % Total Exports 22.2 Agriculture Exports (USD billion) 20 15 10 5 0 Indonesia Argentina Australia Thailand New Zealand Malaysia Vietnam Mexico Japan Chile 18% 17% 18% 10% 6% 1% 0% 21.6 21.3 18.2 46% 15.6 14.5 13.2 11.5 9.2 23%6.5 20% 40%
59%
60%
Excluding the NATO and BRIC countries, major agriculture exporters include Australia, Thailand, and Argentina.
21%
Source: United Nations Conference on Trade and Development (UNCTAD)
The Cairns Group

The Cairns Group is a coalition of 19 agriculture exporting countries and represents over 25% of the worlds agricultural exports. Key members of The Group include Australia, New Zealand, Brazil, Argentina, Canada, Malaysia and South Africa. Along with other developing countries, The Cairns Group promotes agriculture and agriculture trade reforms at multilateral trade negotiations within the WTO. The Group seeks a reduction in bound rate tariffs, a reduction in trade-distorting domestic support and export subsidies, and the elimination of certain amber box subsidies. At the same time, the Group seeks to promote improved market access, the continued support of developing members, and further harmonization in sanitary and phytosanitary measures. A vocal advocate for market reform, The Cairns Group recently expressed its disappointment at the decision by the United States Congress to approve a Farm Bill that they believe clearly contradicts the objectives and mandate of the WTO Doha Round of trade negotiations.
Australia
The Australian governments agriculture policy focuses on food safety, bio-security, farm productivity, and environmental and climate-change management. In addition, as a member of The Cairns Group, it seeks to promote international market access and fairness. At WTO trade negotiations, Australia, along with The Cairns Group, has been advocating the reduction and elimination of certain trade measures that it believes have a distorting affect upon the agricultural marketplace. It has signed a bilateral free trade agreement
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(FTA) with the U.S., Singapore and Thailand to get preferential market access for its agroexports. Scientific research institutions like CSIRO (Commonwealth Science and Industrial Research Organization) are funded by levies on producers and matching grants by the government. In 2006, an estimated US$1 billion was invested in agriculture and livestock research. To supplement its declining farm-labour resources, Australia boasts a fairly liberal foreign workers program in an effort to support its farming activities.
Argentina
Argentina is another major exporter of agricultural products, and its agro-exports contribute up to 46% of the countrys total exports. Major agro-exports include wheat, soybean, corn and beef. To promote its domestic agricultural efforts, the Argentinean government has eliminated all quantitative restrictions on imported agricultural inputs like fertilizers, farm machinery and pesticides, and has a cap of 15% on import duty. It has reduced all export taxes to make its agro-industry internationally competitive, privatized the grain trade and export by removing overly-bureaucratic government agencies, and has privatized grain silo, port and transport facilities. It also actively promotes the use of fertilizers and transgenic GM (genetically-modified) crops to boost farm-sector yields. More than 95% of the soybean crop is estimated to be of the biotech roundup variety. The internal waterways in the Pampas (agriculture zone) have also been improved to make way for larger ships, which has lead to lower transportation costs from the hinterland to the exporting ports.
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INDUSTRIALIZATION OF THE BRIC COUNTRIES

High economic growth and the industrialization of the BRIC countries are already having a significant impact on the global economy. China is now around 8% of worldwide GDP and the EIU estimates that Chinas GDP will surpass that of the United States by 2050. Figure 16: GDP growth forecast
Country Annual GDP Growth GDP (US$ billion) 2010E 17,545 3,949 1,465 1,498 1,463 % of US GDP 2010E 100.0% 22.5% 8.4% 8.5% 8.3% % of World GDP 2010E 34.5% 7.8% 2.9% 2.9% 2.9% GDP (US$ billion) 2050E 43,518 54,871 38,296 11,386 7,882 % of US GDP 2050E 100.0% 126.1% 88.0% 26.2% 18.1% % of World GDP 2050E 22.6% 28.4% 19.9% 5.9% 4.1%
US China India Brazil Russia Source: EIU
2.3% 6.8% 8.5% 5.2% 4.3%
China will surpass US GDP and will account for over 28% of world GDP by 2050.
Developed countries are typically characterized by moderate and stable economic growth, and their per-capita disposable income is much higher than the world average. Per-capita food consumption forms a relatively smaller share of their per-capita disposable income; however, in absolute terms, developed countries spend a lot more on food than other countries. The BRIC countries feature rapidly-growing economies fueled by continued industrialization. Their per-capita incomes are also growing at a brisk pace. In addition, industrialization has given rise to a growing middle class and further urban development within these countries and, as a result of the increase in disposable incomes, the BRIC countries have begun to witness a shift in their consumption patterns, from basic amenities to an increasing demand for luxury goods and services.
CONSUMPTION
Consumption in the BRIC countries is approaching levels that have been enjoyed by the developed world for some time. No less immune to socio-economic influences, the agricultural sector in these countries has also witnessed a number of developments. China, for instance, has begun to experience an organic farming boom. Although largely serving the export market, an estimated two million hectares of farmland are under organic cultivation and approximately 1,400 companies and farms have been certified organic. Chinese organic products are exported mostly to Europe where they dominate the supply of pumpkin, sunflower seeds, and kidney and black beans. The U.S. and Japan are also major buyers. However, with the growing affluence of the Chinese consumer, the average urban shopper is seeking out healthier food options as well. Companies such as China Organic Agriculture (CNOA : OTC : US$0.66 | Not rated) have begun to tap into this demand at home, and the companys products command a premium over non-organic offerings. CNOA approximates that it receives a 15% price differential for its organic rice brands, and a 10% premium for its green rice. Whereas the economic activity in undeveloped nations is primarily aimed at sustenance, growth in industrial activity has historically excited periods of large urban migrations, where its inhabitants inevitably adopt an industrialized way of life. As the country moves
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up the development cycle, its inhabitants look to consume more in terms of quality and quantity. Consequently, expenditures on food as a share of total expenditure initially increase after periods of rapid urbanization. As the economy grows, however, expenditure on food as a proportion of total consumption expenditure declines due to improvements in per-capita income and an increased demand for luxury items. Figure 17: Consumption 2010
Country US China Russia India Brazil Nigeria Source: EIU Consumption (US$ billion) $10,877 2,096 1,092 1,013 909 78
Figure 18: Per capita consumption of food, beverages and tobacco

Percentage spend on food 60% 40% 20% 0% 1990 Nigeria
Source: EIU
1995 Brazil
2000 China India
2005 Russia
2010E USA
As mentioned above, the developing nations consumption expenditure is dominated by food. As the economy grows, the proportion of food expenditure declines while demand for luxury items increases with improvements in income. Emerging economies, such as the BRIC nations, are witnessing a reduction in food expenditure and an increased demand for transport, communication and luxury goods as compared to less developed nations such as Nigeria, which will continue to spend a higher proportion of their income on food. Nigeria has steady economic growth and significant urbanization activity since 1990. As a consequence, the per capita food consumption as percentage of total per capita consumption has jumped from 40% to 60%. However, per capita consumption and disposable income in Nigeria have also begun to see marginal increases since 1990. Meanwhile, as implied in the figure above, the emerging economies of Brazil, Russia, India and China have exhibited steady growth rates as well as significant increases in per capita disposable income over the last two decades. This has greatly improved the ratio of food expenditures as a share of total expenditures in the BRIC nations.
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Figure 19: Urban population as a % of total population

100% Urban population 75% 50%
27% 75% 82% 87% 75% 73%73% 52% 45% 26% 30% 35%
25% 0% USA Brazil 1990 Russia China India 2010E Nigeria
Source: EIU
Concurrent with this growth, per-capita consumption has increased steadily, while percapita food consumption as a share of per capita consumption has shown a marginal decline. This trend is reflective of a stage of growth cycle wherein people are spending more to avail non-basic amenities. The consumption led growth in BRIC countries is also marked by greater expenditure on food products in absolute terms. At the other end of the spectrum, developed nations like the US practice a high-end mechanized form of agriculture, which involves little manual involvement and allows people to engage in other economic activities. High disposable income in such countries implies greater demand for high-end value-added products. Consequently, per capita food consumption as a share of total consumption is low; though in absolute terms the former is fairly high, when compared to the developing countries.
China
China has been witnessing high growth in its economy, largely do to strong growth in its industrial and service sectors. A key feature of Chinas growth is that it is increasingly capital intensive. Its industrial sector has been growing at an annual rate of about 12% since 1990 and has accounted for almost 50% of the countrys GDP. Industrialization in the country has primarily been led by an increase in the labour productivity as compared to increasing employment. Interestingly, disposable income and consumption in China are growing rapidly at about 16% annually, second only to Russia among the BRIC countries and significantly higher than developed nations such as the U.S. Figure 20: Chinas economic overview2
(in US dollars except ratios) Per capita income Per capita taxes Per capita disposable income Per capita consumption Consumption as a % of disposable income Per capita net savings and investment Source: EIU CAGR 17.0% 28.5% 15.9% 15.9% 15.3% 2002 579 33 546 494 90.6% 52 2007 1,177 117 1060 909 85.7% 151 2012E 2,789 409 2,380 2,166 91.0% 214
(1) Per capita disposable income and per capita consumption have been sourced directly from EIU (2) Per capita net savings and investment = (Per capita consumption Per capita disposable income). It represents per capita savings and investment net of borrowings (3) Per capita income = Gross personal income/ population (both these figures are sourced from EIU as well)
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However, agriculture is the most important economic sector in China, employing nearly half of the country's work force. The country continues to industrialize its farming efforts, with increasing levels of investment to enhance its international competitiveness. The country has the largest agricultural output of any country in the world, but only 15% of its total land area can be cultivated. Agricultural production has seen rapid growth in China following the major economic reforms launched 1978, which also included the dismantling of state-run farming communes that had hampered agricultural efforts throughout the preceding decades. Since then, the output of major agricultural crops has increased steadily, and the country has become almost self-sufficient in meeting domestic demand with the ratio of self-sufficiency to imports at 99.6%. However, as compared to industrial labour, the labour productivity in agriculture is low. Food will continue to account for a major portion of Chinas total consumption. Chinese consumers are expected to spend more on transport, communication, and healthcare with growing disposable income. Consumption trends are determined by various factors such as the population, urbanization, behavioral changes and per capita disposable income. A positive outlook for Chinas economy and an increase in Chinas disposable income are expected to lead to changing consumption patterns and a lower proportion of spending on basic necessities. Increased disposable income will likely act as a catalyst for the travel, entertainment, media, fashion, luxury goods, and consumer appliances sectors. Figure 21: Consumption pattern 2007
7% 19% 6% 11% USD 1202 5% 6% 28% Food, beverages & tobacco Health Housing & fuels 5% Household goods & services Hospitality Leisure & education Clothing Transport & communications Other goods and services Source: EIU
13%
According to The Economist Intelligence Unit, Chinas household consumption expenditure on food, beverages and tobacco will continue to increase, but at a diminishing rate due to an increase in spending power. Demand for non-basic products and services are expected to grow at a higher pace. Spending on transport and communications is expected to grow at 23% annually to account for 23% of the total consumption expenditure in 2012 as compared to 19% currently. With the urbanization of the economy, consumers are expected to spend more on leisure, education, housing and healthcare. Economic growth and urbanization has led to an increase in the consumption of meat over staple foods with per capita meat consumption expected to grow at 4.2% annually during 2007 to 20113. Additionally, the demand for convenience foods such as ready-to-eat meals is increasing owing to the changing lifestyles of urban China.
Chinese Food, Beverages and Tobacco Market Forecast Report
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Figure 22: Food, beverage and tobacco consumption

3,000 Consumption (USD billion) Food, beverages and tobacco will continue to account for the maximum 2,000 share of consumer expenditure 1,202 657 280 329 2,945
1,000 201 0
635
771 226 2004
1,005
2002
Source: EIU
2006
2007
2012 Total
Food, Beverage and Tobacco
Urbanization has been increasing rapidly in China since 1990 and currently accounts for 43% of Chinas total population; the urban population is expected to further increase to 47% by 2012 and 57% by 2015. Urbanization will affect the food industry in the country leading to an increased focus on commercial agriculture, modern food industry, infrastructure development and a changing food-consumption pattern. As the urban population increases, spending on non-basic items is expected to increase and demand for nutritious food and meat will also rise. Figure 23: Growth in urban population
Urban Pupulation (Million) 637 60% 50% 43% 38% 0 2002
Source: EIU
600 400
573 484
47% 40% 30%
200
2008E
2012E
Figure 24: Per capita disposable income

Disposable Income (USD) 3,000
CAGR 15.9% 2,380 1,760 1,280
2,000 1,000
546 900 682
0 2002 2004 2006 2008E 2010E 2012E
Source: EIU
Percentage of Population
800
70%
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Real disposable income for those living in urban environs grew at a higher rate than for their rural counterparts. Urban disposable income grew at 12.2% as compared to 9.5% for the rural population in 2006-2007 and at 10.4% as compared to 8.3% in 2005-2006, respectively. The government has laid emphasis on increasing the rural incomes in the 11th five-year plan, as currently urban disposable income is more than three times the disposable income of the rural population in China. The high growth of the Chinese economy has led to an increase in the savings and investment rate in the country. The household savings rate in China was 16% in 2006 as compared to Indias 22% for the same period. The high savings rate can be attributed to factors such as underdeveloped financial markets and the fear of large future expenditures due to economic insecurity and high inflation.
India
The Indian economy is experiencing high growth. With positive indicators such as a stable annual growth of over 8%, increasing foreign exchange reserves, a growing capital market and expanding FDI inflows, India has emerged as the second fastest growing economy in the world. The industrial and service sectors have been the major contributors of this growth. Figure 25: Indias economic overview4
(in US dollars except ratios) Per capita income Per capita taxes Per capita disposable income Per capita consumption Consumption as a % of disposable income Per capita net savings and investment Source: EIU CAGR 16.4% 24.5% 14.3% 13.4% 16.6% 2002 483 74 409 310 75.8% 99 2007 1,008 221 787 573 72.8% 214 2012E 2,212 662 1550 1,089 70.3% 461
Agriculture is an important sector of the Indian economy contributing about 18.5% towards national income and employing two-thirds of the work force. India has favourable climatic conditions and a rich natural resource base which combine to make it the world's largest producer across a range of commodities such as coconuts, mango, banana, cashew nuts, pulses, ginger, turmeric, and black pepper. It is also the worlds second-largest producer of wheat and rice after China. Exports of agricultural products have been increasing steadily. For example, India accounted for 12% of the cotton trade in 2006-2007 as compared to 8% in 2005-2006. Additionally, the government plans to increase India's share in the processed food trade from 1.6% in 2006-2007 to 3% by 2015.5
(1) Per capita disposable income and per capita consumption have been sourced directly from EIU (2) Per capita net savings and investment = (Per capita consumption Per capita disposable income). It represents per capita savings and investment net of borrowings (3) Per capita income = Gross personal income/ population (both these figures are sourced from EIU, as well) 5 IBEF (http://ibef.org/artdispview.aspx?in=1&art_id=18030&cat_id=128&page=2)
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Rural India is matching the urban spending pattern Figure 26: Consumption pattern comparison 2007
44% 32% 20% 1% 3% 8% 6% 7% 7% 10%
Rural
14%
Rural 56%
Urban 44%
4% 3% 7% 5% 7%
Urban
13% 9%
Source: McKinsey report, The Bird of Gold: The Rise of India's Consumer Market
As the Indian economy continues to grow, consumption expenditures are also increasing along side an increase in the countrys per-capita income. Spending on food and beverages as a percent of total consumption has decreased from 48% in 2000-2001 to 42% in 20062007. This is primarily because of increasing urban population and the subsequent changing consumption patterns. Figure 27: Food, beverage and tobacco consumption
Spend as a percent of total consumption 100% Consumption Expenditure 33% 75% 50% 25% 0% 1995 Urban Consumption Source: EIU 2007 2025E Rural Consumption 67% 64% 36% 49% 58% 39% 24%
51%
Consumption is expected to grow dramatically at an annual rate of over 7% until 2025; the highest growth segments are expected to be healthcare, transportation and communications. Food is the largest consumption segment accounting for over 40% of expenditures. The Indian food industry is at an early stage of development. Millions of households in the rural areas still depend on subsistence farming or local village produce for meeting their food requirements. In the long run, the rural populations consumption trend is expected to change with increasing urbanization.
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Figure 28: Growth in urban population

600 Urban Pupulation (Million) 500 400 288 200 213 28% 25% 0 1992 2002 2017 20% 38% 30% 40% 50% Percentage of Population
7.2% 5.3% 2007-08
Source: McKinsey report, The Bird of Gold: The Rise of India's Consumer Market
Indias urban population is a major contributor towards the countrys overall economic growth. Less than one-third of Indias population lives in cities and towns, but generates over two-thirds of the countrys GDP and accounts for almost 90% of government revenues. Increasing urbanization in India will lead to changing consumption trends and an increase in per capita and disposable income, which should further drive demand of luxury products and services. In India, the urban population is expected to grow at a CAGR of 2.5% until 2017 and will account for almost 38% of the Indian population. Per Capita Income India's per capita income has increased at a rapid pace, and is expected to reach US$1,021 in 2007-2008. Though consumption is expected to grow alongside the increase in per capita income, savings are expected to increase at a higher pace as compared to consumption. Per capita consumption will be driven by factors such as the growing economy, increasing literacy levels and urbanization. The consumption pattern of the rural population is more focused towards the basic necessities of food, clothing and shelter; however, their urban counterparts are driving demand for high-end products and services. Figure 29: Per capita income growth
1 0% 8% 6.8% 6.6% 7.6% 8.1 %
Growth Rate
Indias per capita income is expected to reach US$1,021 in 2007-2008.
6% 4% 2% 1% .1 0% 2002-03 2003-04 2004-05 2.2%
7.0% 5.6% 4.2% 3.6%
2005-06
2006-07
Per Capita Income Growth Per Capita Consumption Growth

Source: Indian Economic Review
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Figure 30: Per capita disposable income growth

1,750 Per Capita GDP (USD) 1,500 1,250 1,000 750 500 250 2002 2003 2004 2005
Source: EIU
1,550 CAGR 14.5%
CAGR 13.9% 508 582 654 787
410
469
2006 2007
2012
There are a number of factors that are beginning to influence spending patterns in India, and these include growing income levels resulting in more personal disposable income, changing attitudes towards consumption, changes in prices, the introduction of new products, the improving availability of credit such as loans, mortgages and credit cards, increasing aspiration levels, increased literacy, growing brand consciousness and rapid urbanization. Indias per capita disposable income in 2002 was US$410 (at current prices) and was expected to almost double to US$787 by 2007. Needless to say, this high growth in disposable income has led to changes in the consumption, savings, and investment patterns of the population. In terms of annual growth, disposable income has grown at almost 14% annually and is expected to follow a similar trend until 2012. Consumption should follow a similar trend and is expected to grow at a CAGR of over 13% until 2012. Savings, on the other hand, will grow at over 19% annually. This disparity is due to the increasing consumer awareness toward savings and investments. Growth in the Indian economy has lead to an increase in the level of savings and investment. While the gross savings rate as a proportion of GDP has increased from 25.5% in 2001-02 to 31.6% in 2006-2007, the investment rate, reflected as the gross capital formation as a proportion of GDP, has increased from 16.7% in 2001-02 to 27% in 20062007. 6
Brazil
Interestingly, per capita consumption in Brazil is higher than per capita disposable income. Both income and consumption levels in Brazil are expected to grow more rapidly than developed economies, such as the U.S., where the corresponding CAGR for income and consumption is about 4%.
India Budget 2007-2008.
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Figure 31: Brazils economic overview7

(in US dollars except ratios) Per capita income Per capita taxes Per capita disposable income Per capita consumption Consumption as a % of disposable income Per capita net savings and investment Source: EIU CAGR 9.7% 19.2% 7.1% 10.8% 2002 1,688 234 1,454 1,770 121.7% -316 2007 3,881 1,011 2,870 4,170 145.3% -1,300 2012E 4,244 1,354 2,890 4,940 170.9% -2,050
Brazil is now the sixth-largest economy in the world based on purchasing power parity.
The Brazilian economy is growing at approximately 5% annually. Brazil has emerged as the sixth largest economy in the world (based on purchasing power parity) due to positive factors such as a growing economy, moderate inflation and the lowering of fiscal and foreign exchange deficits. Brazil has a growing industrial and service sector with a contribution of over 90% to the GDP while the agricultural sector contributed around 8%. Agriculture is an important sector of the Brazilian economy with a contribution of about 8% towards national income and employing about 37% of the work force in 2005. Brazils agro-food trade surplus is the largest in the world and it is a leading exporter of soybeans, soymeal, sugar, poultry, beef, coffee, tobacco, frozen concentrated orange juice, soy oil, and ethanol.8 Exports of agriculture and allied products have been increasing steadily. For example, between 2000 and 2005 corn exports grew by 48% and ethanol by 79%. Food will continue to account for a major portion of consumption spending. Figure 32: Consumption patter -- 2007
Food, beverages & tobacco 13% 22% Health Housing & fuels 18% 3% 10% 3%5% 22% Household goods & services 4% Hospitality Leisure & education Clothing Transport & communications Other goods and services
Source: EIU
Consumption patterns in Brazil have witnessed a shift from food, beverages, and tobacco to non-basic and luxury items such as housing, leisure, and transportation and communications.
(1) Per capita disposable income and per capita consumption have been sourced directly from EIU (2) Per capita net savings and investment = (Per capita consumption Per capita disposable income). It represents per capita savings and investment net of borrowings (3) Per capita income = Gross personal income/ population (both these figures are sourced from EIU, as well) 8 USDA, http://www.ers.usda.gov/AmberWaves/November06/Features/Brazil.htm
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Figure 33: Food, beverage and tobacco consumption

1,200 999 Consumption (USD bn) 800 397 88 2004 142 170 197 789 647 312 70 0 2002
Source: EIU
400
2006
2007
2012E Total
Consumption is expected to grow rapidly due to increasing per capita income. Increasing income, coupled with decreasing interest rates, are leading to an increased level of per capita disposable income. This has lead to increased spending and improvement in the standard of living. Going forward, consumer expenditures will be dominated by food and basic amenities. However, as income levels increase, there will be a shift from cereals to livestock. Additionally, increasing urbanization and changing consumer lifestyles will lead to increased spending on automobiles, electrical appliances, and property. Figure 34: Growth in urban population
200 Urban Pupulation (Million) 164 150 100 60% 50 0 2002
Source: EIU
145 82%
86%
87%
80%
40% 2008E 2012E
Brazil has a significantly high urban population with about 86% of the people living in urban areas (2008 forecast). Increases in the urban population will lead to increasing industrialization and changing consumption patter ns as consumer spending power increases.
Percentage of Population
177
100%
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Figure 35: Per capita disposable income growth

4,000
CAGR 0.7%
3,500 3,000 2,500 2,1 91 2,000 1 ,500 1 ,000 2002 2003 2004 2005 2006 2007 201 2 1 ,454 1 ,588 1 ,803
CAGR 14.6%
2,470
2,870
2,890
Source: EIU
Increasing employment rates, falling inflation, readily available credit and falling interest rates have all contributed to an increase in disposable income. High growth in disposable income has also led to changes in the consumption and savings and investment patterns. Savings and investments have increased from 20% in 2000 to 22% (of Brazils GDP) in 2005 while investment rate has declined from 22% in 2000 to 18% (of GDP) in 2005.
Russia
The Russian economy has traditionally been driven by the oil and gas sector and, in view of very high crude oil prices, the sector is expected to continue to contribute to a significant portion of the economy. However, the governments policies are directed at simultaneously developing the manufacturing industry and the consumer sector. The consequent growth in consumption is expected to propel growth of 27% in the food sector during 2006-2010. Over the same period, the textile industry is expected to grow by 43% and mechanical engineering by 20-30%9. Figure 36: Russias economic overview
(in US dollars except ratios) Per capita disposable income Per capita consumption Consumption as a % of disposable income Per capita net savings and investment Source: EIU CAGR 24.2% 24.2% 24.1% 2002 1,384 1,215 87.8% 169 2007 5,050 4,390 86.9% 660 2012E 12,050 10,580 87.8% 1,470
Russias per capita disposable income and per capita consumption are expected to grow more rapidly than all other BRIC countries.
Consequently, both per capita disposable income and per capita consumption for Russia are projected to grow at about 24% annually through 2012, which is significantly higher than all other BRIC countries. The corresponding figure for China, which ranks second in terms of annual growth of disposable income, is 16%. In absolute terms, Russia is expected to see over eight-fold growth in its per capita disposable income and consumption during 2002-12. The proportionate increases in disposable income and consumption imply a similar growth rate for net savings and investments in Russia.
Source: The Organization of Asia Pacific News Agencies http://web5.bernama.com/oana/news.open.php?nid=359388&open=1
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Figure 37: Consumption pattern comparison 2007

4% 15% 34% 10% 11% 2% 7% 12% Food, beverages & tobacco Health Housing & fuels Household goods & services Hospitality Leisure & education 5% Clothing Transport & communications Other goods and services
Source: EIU
The consumption pattern in Russia reflects the dominance of food and beverages with over one-third of the total expenditures being spent on food. However, going forward, growth in food and beverage consumption is expected to be slower than overall consumption growth. Meanwhile, in absolute terms, the former is still expected to exhibit strong growth of 14.8% annually during 2007-2012. The growth in food consumption is expected to be mainly driven by increased demand for higher-value food products. The steady growth in disposable income is also expected to facilitate increased spending on communication, housing and transportation. Figure 38: Food, beverage and tobacco consumption
1,600 Consumption (USD bn) 1,200 800 479 400 0 2002
Source: EIU
1,482
625 297 177 111 168 75 2004 2006 420 211
2007
2012 Total
Meanwhile, Russia is expected to see a marginal decline in its urban population through 2012. This can primarily be attributed to a declining overall population, a growing interest in agriculture and absorption of more land into cultivation-related activities. Large tracts of arable land are expected to be brought under cultivation in order to increase agricultural output. The agriculture sector continues to adjust to a market-oriented system following the breakup of the Soviet Union in 1991, though significant progress has been made with land privatization and improved efficiencies.
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Figure 39: Decline in urban population

120 Urban Pupulation (Million) 106 100 73% 80 73% 72% 60% 103 101 80% 100% Percentage of Population
60 2002 2008F 2012F
40%
Source: EIU
The growth in Russian economy and industry is expected to be fueled by the growing per capita income and domestic consumption. It is believed that government polices aimed at encouraging the market for domestically produced goods as opposed to imported goods will drive manufacturing growth. Figure 40: Per capita disposable income growth
13,000 Per Capita GDP (USD) CAGR 19% 9,000 CAGR 9.5% 5,000 1,384 1,817 1,000 2002 2003 2004 2005 2006 2007
Source: EIU
12,050
5,050 3,890
2,418
3,094
2012
However, wages are growing faster than labour productivity, which is expected to lead to accelerated inflation and a distortion in the employment market. The Russian markets are further marred by a high degree of monopolization and a tendency towards cartelization. Also contributing to an inflationary outlook is the excessive inflow of revenues from energy exports. The consequent dampening of consumption growth and shortage of skilled labour could become an obstacle in rapid industrial development. However, improvements in the countrys infrastructure, particularly transportation, should stimulate industrial growth.
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WEALTH
This section overviews global capital markets and sovereign funds in an attempt to better understand how these sources can be employed to generate capital required for investments in infrastructure and agriculture technology.
CAPITAL MARKET
The rapid growth of stock market capitalization (at 23% annually) has resulted in an increase in its share of the global capital market from 15% in 2002 to 27% in 2006. The debt markets remain stable with a contribution of 36% in 2006 as compared to 29% in 2002. However, the contribution of bank assets declined from 57% in 2002 to 37% in 2006 primarily due to the deceleration in North American bank assets which declined at the rate of 16% annually. The rise in the global capital market from 2002 to 2006 was mainly driven by the emerging market countries which grew at 18% annually compared to EU and North America which increased at an annual growth rate of 8% and 2%, respectively. Additionally, the share of emerging market countries in the global capital market also increased from 10% in 2002 to 15% in 2006, primarily due to the significant growth of equity market capitalization, which grew at 60% annually. Figure 41: Global capital market, 2002-2006 (in trillions of US dollars)
CAGR Stock Market Capitalization 23% Total Debt Securities 12% Bank Assets -4% Total 6% Source: Global financial stability report ,IMF 2002 22.0 43.4 85.0 150.4 2003 31.2 51.9 40.6 123.7 2004 37.2 57.9 49.6 144.7 2005 37.2 58.9 55.7 151.8 2006 50.8 68.7 70.9 190.4
SOVEREIGN FUNDS
Sovereign funds, investment funds owned by national governments, are generally created when governments have budgetary surpluses with little or no international debts. They are used to reduce the volatility of government revenues, counter the boom-bust cycles adverse affect on government spending and the national economy, or to build up savings for future generations. Sovereign funds have been in existence since the 1950s, but their sizes have grown significantly over the last 10-15 years. From a total estimated value of US$500 billion in 1990, sovereign funds reached a value of around US$2-3 trillion in 2007 and, based on the current account surplus of different countries, is estimated to achieve US$10 trillion by 2012. This growth can be attributed to the rapid growth of Russia and China as well as the sharp rise in oil prices, which has given oil-rich countries an extra financial premium. In fact, more than half of the assets are held by countries which export significant amounts of oil and gas. UAE has the highest sovereign fund assets globally, at 28% of the global assets. In 2007, more than 20 countries held sovereign funds. However, around 80% of the total assets were concentrated in the worlds eight biggest funds, dominated by oil-producing nations and emerging economies including the UAE, Saudi Arabia, Kuwait, China, and Russia.
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Figure 42: Current account surplus, 2007 (est.)

Rank Country Name 1 China 2 Japan 3 Germany 4 Saudi Arabia 5 Russia 6 Switzerland 7 Netherlands 8 Norway 9 Kuwait 10 Singapore Source: CIA World Factbook Billions(USD ) 363.3 195.9 185.1 88.9 74.0 67.9 59.3 55.8 51.5 41.4
Figure 43: Sovereign wealth funds by size, 2007

Others Singapore 17% Temasek 5% China - Hong Kong 5% China 6% Kuwait Saudi Arabia 8% 9% UAE - Abu Dhabi 28% Total Assets US$ 3,204 billions Norway 12% Singapore GIC 10%
Source: Sovereign wealth fund institute
The majority of sovereign funds do not publish information about their assets, liabilities or investment strategies. Only Norway, out of all the big funds, provides some kind of transparency by disclosing its investment portfolio and returns at the end of each year. As such, it is difficult to understand the interests of these funds. Of late, sovereign funds have focused on the recapitalization of the banking and financial services sectors, where cash is needed to re-establish stability after the massive losses following the subprime meltdown. U.S. and European banks have been aggressive in seeking help from these funds. In June 2007, China invested US$3 billion from its sovereign fund in Wall Street investment bank Blackstone Group LP. Some of the biggest beneficiaries of the sovereign funds included UBS AG, Merrill Lynch & Co, Morgan Stanley, and Citigroup Inc.
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ARABLE LAND
When understanding and analyzing agriculture and related businesses, one needs to understand the trends in arable land. We believe total arable land has stayed relatively flat over the last 10 years, however, industrialization, mineral exploration and urbanization are putting pressure on this inventory just as the worlds population requires growth in arable land. Of the worlds 13.4 billion hectares land reserves, around 5 billion hectares is agricultural land, of which cultivated area accounts for 1.5 billion hectares. Total cultivated land represents 10.4% of total global land area and 2.95% of the entire planet. The cultivated area includes arable land and plantations. Of the worlds 13.4 billion hectares (ha) of land reserves, around 5 billion hectares is agricultural land, of which cultivated area accounts for 1.5 billion hectares. Agricultural land may be defined as land that is suitable for use in farming and includes cultivated land (that is under permanent crops currently), arable land (land that is suitable for cultivation but includes noncultivated land), as well as pastures used for cattle grazing and forest areas. Since the beginning of human civilization, arable land has been in steady decline. We have lost two billion hectares of arable land since agriculture was developed over 10,000 years ago. However over a much more recent timeframe, advancements in agricultural related technology facilitated an increase of 80 million hectares in arable land between 1961 and 1983, but urban growth and industrialization have impeded further additions to arable land. Since 1981, we have lost 6 to 7 million hectares of soil annually, due to degradation, as a result of industrialization and changes in climatic trends. Per capita arable land has been on the decline from 1961 to 1981, it has declined from 0.45 hectares per capita to 0.31 hectares per capita. It expected to decline to 0.2 hectares per capita by 2010. The other concern for arable land inventory is desertification. A total of 4.7 billion hectares of our land area is subjected to arid land desertification, while 900 million hectares is subjected to anthropogenic desertification. The former desertification is caused by a range of factors including wind, water, or pasture erosion. Anthropogenic desertification as caused by industrial excavation and the processing of raw materials, renders large tracts of fertile land useless. Consequently, the total arable land has stagnated at 1.5 billion hectares. While cultivated land is being lost due to degradation and other reasons, newer technologies are helping to convert non-agricultural land to agricultural land. The share of agricultural land to the total land area was estimated to be increasing at 0.9% in 2000. The corresponding figure for developing countries was 1.6%, while Asia recorded a growth rate of 2.5%. The total irrigated land accounts for 17.8% of the total arable land. The highest share of irrigated land in the total arable land is found in South Asia, where 35% of the arable land is irrigated. The potential for new agricultural land additions appears to be the greatest in Russia and South America. This is likely to offset the large tracts that are being lost to industrial and residential development in Asia and Europe. Russia is developing substantial potentiallyarable land. The land, priced at US$500 per hectare in Russia, is much cheaper than in the rest of Europe. With economic reforms, and better opportunities in the agricultural sector, Russia is expected to see a lot of developmental activity in this sector. Additionally, sufficient water availability will ensure that Russia remains largely unaffected by potential food shortages. At present, only 4.6 million hectares (or 4%) of arable land in Russia is irrigated.
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Russia has large tracts of unused arable land, primarily due to the inability of local farmers to raise sufficient funds for agricultural activity and related development activities. Over 400,000 hectares of highly fertile arable land is lying idle in the Penza region. However, this land is now being brought into use in view of the land reforms initiated by the government, including provisions for the acquisition of agricultural land on 49-year leases and the establishment of private farms. Several companies have started buying leases for land in these regions and sub letting lands at prices as low as one tenth the average rent in the country. Improving technology, seed quality and access to better machinery will ensure that a lot of marginal land is also brought under cultivation. Similarly, Brazil offers significant opportunities for arable land expansion, with only 24% of its arable land presently under cultivation. The country has 250 million hectares of arable land, whereas 60 million hectares of this is presently cultivated. However, tight monetary credit conditions and environmental concerns constrain expansion of arable land. Additionally, large scale diversion of arable land towards biofuel production also limits the land brought under livestock and crop production. Still, Brazil is expected to record one of the highest growth rates in terms of arable land under food production, which is expected to increase at 4.5% annually. Conversely, China, with 20% of worlds population, has only 7% of the worlds arable land. China has lost eight million hectares over the last decade, with over 2 million hectares of land lost to new construction over the past five years alone. It has 121.8 million hectares of arable land at present with per capita land as low as 0.1 ha. The extent of irrigated land in China is 55 million hectares (or 45% of total arable land). Chinese authorities have mandated that total arable land should not fall below a threshold of 120 million hectares. A significant portion of land lost to construction in Eastern China was high quality agricultural land. Of the remaining arable land, 28% is high yielding arable land; while 32% is low yielding land. The remaining 40% of land suffers from soil erosion and degradation; about 15% of this land is polluted by metals. Weather patterns are further affecting agricultural production. 22.9 million hectares of Chinas land was severely affected by drought and snow during the winter of 2007-08. The drought affected 11.1 million hectares of land in North China. Freezing temperatures and heavy snow and sleet have impacted 11.8 million hectares of land in South and East China. About 1.89 million heads of livestock were affected and 2.43 million people were left without potable water. Water shortages in North China were caused by a decline of over 70% in the regions rain and snow. China also suffers from a highly uneven distribution of resources and arable land. 81% of its water resources are concentrated in southern China, while 64% of arable land is found in northern China. Per capita arable land in 20% of the Chinas counties is less than 0.053 hectares, the minimum limit recommended by the Food and Agricultural Organization (FAO). Meanwhile, India has bountiful arable land, but it is marred by inadequate utilization of resources and a poor state of infrastructure. The entire south Asian region is known for having a very high share of arable and permanent crop land in total agricultural land. India has 162 million hectares of arable land (93.3% of total agricultural land), which is 54% of the countrys total land area (the largest in the world). This compares very favorably against China, where only 13% of the total area is arable; in absolute terms, India has 34% more arable land than China. Around 55 million hectares of the arable land in India is irrigated (or 34% of the arable land), a figure comparable to China. However,
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only 1.6% of the total arable land uses efficient irrigation systems, as compared to 100% in Germany and Israel. Additionally, Indian land resources are getting strained because of low efficiencies, use of outdated technology and the lack of land reforms.
MAJOR CROP GROWTH REGIONS AND DEMAND-SUPPLY TRENDS

The global food demand and supply trends are largely influenced by various geophysical, geopolitical and economic factors. The geophysical factors, including availability of resources like arable land and water, influence the food supply. The geopolitical factors like international trade relations, government policies and regional nutrition habits affect the demand supply scenario. The economic factors like food prices, purchasing power and inflation directly influence the demand, which in turn determines the supply through market forces. The demand for cereals has grown sharply since the 1960s, essentially, because of growing populations and rising income levels. The huge demand was met by efforts at technological development by several countries like India to attain self sufficiency. Simultaneously, regions with surplus production including North America, Europe, Australia and Argentina responded by flooding the international markets with exports. Consequently, the volumes of cereals traded in the international markets more than doubled in a period of 30 years to 250 million tons. This rise in production and exports was partly facilitated by a slew of government subsidies to farmers in North America and Western Europe. These subsidies were partly withdrawn in the 1990s, leading to a slowdown in production of cereals. However, a sharp rise in salary levels in the developing world since early 2000 have again led to unprecedented increases in demand and the commodity prices, making it highly lucrative to produce cereals. A consequent increase in livestock consumption has further enhanced the demand for cereals required as feed for livestock or as an alternative food product for coarse grains which are being diverted to livestock industry.
Wheat
Wheat is, primarily, grown in Asia, Africa, Europe and America. The total worldwide wheat acreage fluctuates between 205 and 230 million hectares, depending upon the global climate scenario from year to year. The most significant wheat growing countries include China, India, France and Russia. In terms of land under cultivation, India accounts for the maximum land (13% of total global wheat acreage) under wheat cultivation; it is followed by the EU, Russia, China, the USA, Australia, Canada, and Kazakhstan. Figure 44: World wheat supply-demand balance (million metric tons)
Country Harvested Area (Million Hectares) Production Consumption Ending Stock Source: OECD 2001 215.5 587.7 601.1 238.1 2002 216.3 572.1 608.0 204.7 2003 210.4 560.1 598.9 165.8 2004 218.3 628.3 615.5 181.8 2005 219.6 624.6 620.4 184.9 2006 213.5 596.0 621.4 161.2
Central Asia is emerging as a significant wheat exporting region of the world. Of the 400.7 million hectares of land in this region, 307.4 million hectares are arable. Of this, 262.9 million are used for mowing or as pasture land and 43.3 million are used for agricultural purposes. However, only 7.7 million of this is irrigated land.
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Figure 45: Wheat production and consumption 2007-2008

Others 32% EU-27 20% EU-27 19%
Others 42%
China 18% Russia 8% US 9% Source: USDA
China 16%
India 13%
Russia 5%
US 6%
India 12%
Production (2007-2008)
Consumption (2007-2008)
The global wheat production in 2007-08 is projected to be 605 million tons while the global wheat supplies in 2007 are estimated to be 619.6 million tons. This marks a marginal increase over the previous year on account of increased harvest in Argentina and Former Soviet Union (FSU-12) countries. The maximum wheat production comes from the European Union, followed by China, India and the United States. Around 18% of wheat produced globally is traded in international markets. According to estimates, 108.1 million tons of wheat will be traded in the international market in 2007-08.The major exporters of wheat include the USA, Australia, Canada, the European Union, and Argentina. Wheat exports are expected to rise sharply in Canada, the European Union, Australia, Russia, Ukraine and Kazakhstan in 2008-09, while the USA and Argentina are projected to see a decline in exports. China and India, owing to their huge internal needs, consume almost their entire production. Major wheat importing countries include China, Egypt, Japan, Brazil, the European Union, India, Mexico, Indonesia, Algeria, the Philippines, and Iraq. The global wheat demand is estimated to rise to 775 million ton by 2020. Two thirds of this demand will come from developing countries, which are expected to double there wheat imports by then. The major regions expected to import wheat in 2008-09 are Latin America, the Caribbean, Asia Pacific, the Middle East, and the USA. As a result of this booming demand, world wheat ending stocks have plummeted to a 30year low of 109.7 million tons. US wheat-ending stocks have been pegged at a 60-year low of 242 million bushels. The decline in ending stocks has been accentuated by the lowered ending stocks in the USA, Saudi Arabia, Canada and FSU-12, though partially offset by higher ending stocks in Australia, Argentina, Brazil, EU-27, and India. The US, Australia, and Canada are major wheat exporters. Short-term estimates suggest that global wheat production will increase as more seeded area is brought under wheat cultivation. Consequently, the global wheat production is projected to rise to 638.6 million tons in 2008-2009. The new seeded area will include 0.5 million hectares of land in the USA, 1.7 million hectares in the European Union and 1.95 million hectares in Russia, Ukraine, and Kazakhstan.
Rice
Rice is essentially grown in developing countries (particularly in humid tropical regions), which account for 96% of global rice production. Asia, alone, accounts for 90% of global rice production and consumption. The most significant rice growing countries include
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China, India, Thailand, Indonesia, Bangladesh, Vietnam, Myanmar, the Philippines, Japan, South Korea, the United States and Australia. Rice is also grown in Southern Europe and parts of South America. Farmers in most of the Asian countries grow rice for personal sustenance and consumption; and sell only the surplus produce. Consequently, most of the produce is consumed locally. Figure 46: World rice supply/demand balance (million metric tons)
Country Harvested Area (Million Hectares) Production Consumption Ending Stock Source: OECD 2001 152.1 402.9 416.0 142.6 2002 148.3 383.3 414.9 113.2 2003 149.9 396.4 417.8 94.4 2004 151.9 408.9 419.1 86.2 2005 156.2 426.2 423.4 89.7 2006 155.0 424.8 426.8 87.1
The international trade for rice, valued at USD 8.6 billion, is as low as 6.1% of the total production. 29.6 million tons of rice is projected to be traded in the global markets in 2007-08. 74% of this trade is on account of developing countries, with Africa and West Asia alone accounting for 35%. Major rice importing countries in South Asia are Indonesia, Bangladesh, the Philippines, Malaysia, Japan, and Singapore. Besides, the Middle East, Southern Africa, Oceania, and Latin America are other major regions which import significant quantities of rice. Figure 47: Rice Production and Consumption 2007-2008
Others 27%
China 31%
Others 29%
China 30%
Bangladesh 5% Vietnam 7% Indonesia 8% India 22%

Pr Production (2007-08) Source: USDA
Bangladesh 4% Vietnam 7% Indonesia 9%
India 21%
In the near future, Iraq, Bangladesh, Australia, Afghanistan, Cuba, China, and the Philippines are expected to significantly increase their imports. However, weaker imports by Iran, Indonesia, Malaysia, Turkey, and Haiti will partially offset the increased demand. The major exporters of rice are Thailand, Vietnam, India, the United States, China, Pakistan, Australia, Italy, Uruguay, Argentina, Egypt, and Spain, Uruguay, and Guyana. Thailand alone accounts for 30% of rice exports. India, China, Vietnam and the USA, together export 45% of total internationally traded rice. These countries are believed to have even more unutilized capacity for rice production, and are expected to expand upon these in the future. Global rice exports are expected to increase by 3% in 2007-08 over the previous year. This is primarily on account of increased rice exports by Thailand, Vietnam, China, Uruguay, Egypt, and the United States. However, India, Australia, and Guyana are projected to
Thailand, Vietnam and India are major rice exporters.
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reduce their exports; particularly Australia. Australian exports in 2007-08 will be at their the lowest since 1962. Both the production and demand for rice are largely dependent on the economic status of a society, particularly on that societys per-capita income. In countries marked by a low standard of living, where basic sustenance is a challenge, rice is considered to be a luxury. Consequently, demand in these countries is low. However, rapid economic growth is typically followed by a transition in dietary habits from root crop-based diets to diets based on rice. West Asia and Sub Saharan Africa, for instance, are expected to experience this trend in the near future, and, in fact, are now beginning to witness a strong growth in the demand for rice. Global rice production in 2007-2008 is projected to be 422.9 million tons, with China, Indonesia, Vietnam, Brazil, Thailand, Japan, Argentina, the U.S., and Uruguay expected to harvest larger crops on account of enhanced plantation areas. However, India, Australia, North Korea, South Korea, and Turkey are likely to witness a decline in rice production. The global rice supplies are estimated to be 498.4 million tons, which is 9% below the record levels of 546.6 million tons achieved in 2001-2002. Of these supplies, 422.5 million tons of rice is projected to be consumed in 2007-2008, with China, India, Indonesia, the Philippines, and Bangladesh accounting for most of the increase in consumption. As a result of increased consumption, and inadequate increases in production, the global ending-stocks have touched the lowest levels in recent history. The global inventory has declined by 4% over the previous year to touch 75.2 million tons, the lowest since 1983-1984. This also marks a 50% decline over the peak value of 147.3 million tons achieved in 2000-2001.
Corn/Maize
Corn is one of the most versatile and enduring crops, grown in more countries (75 countries) across the world than any other crop. Of the top 25 maize-growing countries, eight are industrialized and 17 are developing countries, including nine from Africa, five from Asia and three from Latin America. Each of the corn-growing countries cultivates at least 100,000 hectares of maize crop. Globally, 157 million hectares of land are under maize cultivation, producing 770 million metric tons of maize annually. Two thirds of the maize-growing area is located in the developing countries. There are around 200 million maize farmers worldwide, 98% of them in developing countries. Around 150 million farmers grow maize in Asia; 105 million in China alone. Figure 48: World corn supply-demand balance (million metric tons)
Country Production Consumption Trade Ending Stock Harvested Area (Million Hectares) Source: USDA 2003-04 627.3 648.9 79.1 104.6 142.0 2004-05 714.8 688.0 76.0 131.4 145.0 2005-06 696.3 704.0 82.6 123.7 145.6 2006-07 704.3 721.8 90.9 106.2 148.1 2007-08 (March) 770.2 772.3 95.1 104.0 157.1
Since 1980, the use of better technology and agricultural practices has resulted in a 54% increase in maize yield. Consequently, maize production has risen by 78% despite only a 15% increase in land under maize cultivation.
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Figure 49: Corn production and consumption 2007-2008

Others 22% Others 29% US 34%
Mexico 3% EU-27 6% Brazil 7% China 19%
US 43% Mexico 4% EU-27 8%
Brazil 6%
China 19%
Production (2007-2008) Source: USDA
The major corn producers include the U.S., China, Brazil, the European Union, Mexico, France, Argentina and India. The United States accounts for 43% of global corn production 13.1 billion bushels, 20% of which is exported. The U.S. presently uses 20-30% of its corn production for biofuels. The world maize stocks for 2007-08 are estimated to be 104 million tons, an increase of 14% over the previous year. The world stocks-to-use ratio is The US produces 43% of all corn worldwide. Japan is the largest importer. pegged at 13.5%, two percentage points10 above the figure in the previous year. The huge demand for maize is reflected by the fact that the stocks-to-disappearance ratio for major exporters stands at 14%, up from 13% in 2006-2007 and from the low of 8% recorded in the mid 1990s. 12.4% of the corn produced is traded in the international market. The global maize trade is likely to be 95.1 million tons in 2007-2008 with the major exporters of corn being the U.S., Argentina, China, Brazil, Ukraine, South Africa, and Paraguay. The U.S. alone accounts for 68% of total export volumes. The major corn importers are Japan, Mexico, Taiwan, Canada, Egypt, and Colombia. Besides, the European Union, South Asia and East Asia are expected to see enhanced demand for maize in view of the growing use of maize in the livestock industry as the supply of other feed grains, such as wheat and barley, tightens. Maize supplies are likely to come under further strain as use of maize-based ethanol is becoming more prevalent. The USA alone is projected to consume 81.3 million tons of maize for ethanol production in 2007-2008 as compared to 54 million tons used in 2006-2007. Global demand for maize is expected to grow to 850 million metric tons by 2020, primarily on account of greater demand for meat by a more affluent global society. Maize is, therefore, expected to outstrip rice and wheat in terms of global demand as a result of the multitude of its uses in food, feed stocks and biofuel production. 80% of the new demand for maize is expected to come from the developing countries.
10
The Stocks to Use Ratio is a convenient measure of supply and demand interrelationships of commodities. The stocks to use ratio indicates the level of carryover stock for any given commodity as a percentage of the total demand or use. It is calculated as: ((Beginning Stock + Total Production -Consumption) / (Consumption))
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Soybean
Soybeans represent the most versatile and commonly-used oilseed crop, accounting for almost 60% of global oilseed production. Due to the ratio of their oil and high-quality protein content, typically 18-22% oil and 40-42% protein, soybeans remain a highly-valued legume. They find a multitude of uses in the food processing, livestock and biofuel industries. The soybeans use in the food industry include the manufacturing of oil, flour, milk, vegetable cheese, cookies and many other processed food products. Global soybean production is expected to see a decline from 238 million tons in 2006-2007 to 224 million tons in 2007-2008, though this trend can be attributed to the periodical switch in the U.S. from soybeans to corn. The global soybean output has quadrupled over the past 30 years, spurred by the unprecedented demand for high-value processed foods and livestock products, particularly from China. China is expected to further double its demand to 80 million (source China National Grain and Oil Information Center) metric tons by 2015. The major producers as well as consumers of soybeans include the U.S., Brazil, Argentina and China, producing 200 million tons and accounting for 90% of global soybean production. Brazil and Argentina are exhibiting robust growth rates of 14% and 27%, respectively, with Brazil becoming the second largest producer of soybeans, accounting for 23% of the global soybean crop. Meanwhile, Argentina has seen its production rise by 216% between 1995 and 2005. Subsequently, its share of global production has risen from 10.4% in 1995 to 17.8% in 2005. The U.S. has seen its share of global soybean output decline over the same period, primarily because of increased production capacities in other countries. With the exception of China, these nations export a significant portion of their produce. In addition, Indonesia, Korea and Japan also produce substantial amounts of soybeans, but their quantities only feed local consumption. Brazil is the largest exporter of soybeans and is projected to increase it exports by another 27 million tons over the next 10 years. Meanwhile, the U.S., and Argentina are expected to be restrained by limited capacity for expansion in future. Figure 50: Global soybean production
Others 13% China 9% Argentin a 10% US 50%
China is expected to double its soybean consumption by 2015 to 80 million tons.
China 8%
Others 13% US 38%
Argenti na 18% Brazil 23%
Brazil 18% 1991-1992 Source: Asia Food Journal
2003-2004
The major importers include China, the European Union, Japan, and Mexico. Despite producing significant amounts of soybean internally, China has seen its soybean imports rise by an incredible 27 times between 1995 and 2005. This is mainly attributed to the use of soybeans as a highly-productive livestock feed, coupled with stagnating production in
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Northern China likely caused by a falling water table. In 2005, China imported 74% of its total soybean consumption. Although the country has produced soybeans for the past 5,000 years, recently China has seen a decline in its share of world soybean production, from 9% in 1995 to 8% in 2005. The high-commodity-price scenario in the world markets has led to rapid integration of soybean crops into higher-value ingredients and products, involving heavy investments in soy foods, bio-products, and soy protein products. These pricing pressures have also encouraged large-scale construction of soybean processing and crushing facilities outside the U.S., particularly in South America and China. Figure 51: Global soybean crushing capacity
Others 20% US 38% China 16% Arg'tina 8% Brazil 16% EU 14%
1991-1992 Source: Asia Food Journal
Others 18%
US 24%
China 4%
EU 10%
Arg'tina 15%
2003-2004
Brazil 17%
Soybeans are a highly-preferred crop among farmers because they provide flexibility and versatility. They can be grown both as a spring as well as winter crop and have a shortduration growing season. They are fairly successful in rain-fed as wells irrigated areas. Soybeans consume a lot of water, but being a leguminous plant, they have the ability to replenish the quality of soil. They are, therefore, generally alternated with crops such as rice, wheat, corn, sorghum, cotton, or sugarcane.
Livestock
The livestock industry provides livelihoods to about 1.3 billion people worldwide and contributes about 40% to global agriculture output. It is also a major source of organic fertilizer for the crops of developing countries where poor farmers cannot afford to buy chemical fertilizers. The growing trends in population, income levels and urbanization have also led to a sharp rise in the demand for animal-sourced food. Consequently, global meat production has more than tripled since 1960, while milk production has nearly doubled and egg production has increased nearly four fold. Global meat production is projected to reach 465 million tons by 2050.
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Figure 52: Major meat exporting countries, 2006
Beef,Pork and Broiler Meat

China 5% Australia 8% Canada 9% Others 16% Brazil 27%
Total Export 18.8 million tons US 23%
EU 12%
Source: USDA
In 2006, global meat production (beef, pork and poultry) stood at 213 million metric tons. Pork is the major meat produced and has a 45% share of the global meat output, followed by beef and poultry contributing 25% and 30%, respectively. The major meat producing countries in 2006 were China, the U.S. and Brazil, supplying about 60% of global production, with the Global export market reaching close to 20 million tons. Global consumption was 209 million metric tons with China consuming the largest share at 33% followed by the EU (18%) and the U.S. (17%). The major importing nations were Russia, Japan, the U.S., the EU, and Mexico, importing 72% of the global imports. As stated above, the world produces and consumes more pork than any other meat. Total production of pork in 2006 was 98.5 million tons, with China producing about half of that. Other major producers were the EU, the U.S., and Brazil. China also consumes more pork than any other nation. The domestic demand is so high that, even after producing nearly 53% of the global pork, China only exported a tiny portion (about 1%) in 2006. The global production in 2008 is expected to decline to 93 million tons primarily because of the major contraction in the output of China, which has been affected by the outbreak of the PRRS virus (PRRSV). However, export growth is expected to remain flat due to the growth in the U.S. and Brazil. Total pork export in 2006 was 5.3 million tons with the U.S., the EU and Canada accounting for 70% of the exports. In 2006, total beef production was 53.7 million tons with the largest producers, the U.S., Brazil, the EU, and China, producing about 53% of the total global beef output. Global beef output in 2008 is forecast to be 54.6 million tons with Brazil and China expected to witness an increase in their production. Beef production in Brazil is also expected to go up as producers benefit from elevated domestic prices and expanding export market opportunities. Chinas production is expected to expand by approximately 3%, surpassing the EU to become the third largest producer of beef. This expansion is primarily due to the disease outbreak in the Chinese pork sector which led to a demand for substitute protein, such as beef. Beef exports are expected to reach a record 8 million tons by 2008 due to the continued economic growth in major beef importing countries. Brazil is the leading exporter selling 23% of its production abroad. Australia is the second largest exporter contributing 20% to the global exports in 2006. Although the US is the largest producer of beef, it is unable to
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meet its domestic demand and is therefore a major importer, accounting for 26% of global beef imports. Other major importing countries include Russia, the EU and Japan. Total production of poultry was 60.5 million tons in 2006. Major poultry producing regions were the U.S., China, Brazil, and the EU, constituting about 70% of the global poultry output. The U.S. and China alone consumed around 40% of total production. Brazil and the U.S. are the leading poultry exporters with a share of 76% in the global export market, which is 6.4 million tons. Despite the recurrence of avian influenza, the demand for poultry is expected to grow. The global production in 2008 is expected to rise by 3% from 62.3 million tons in 2007. Growth is expected in all regions of production except in North America. This is likely due to the economic impact of ethanol in livestock, which has increased the production cost of poultry by two or more times over the last decade. The export forecast is also favorable for poultry as there is strong import demand from countries in the Far East, the EU, Venezuela, and Middle East countries, such as Saudi Arabia and Kuwait.
Environmental Risks to Livestock

The rapid growth of the livestock industry has also taken a toll on the environment. The livestock sector accounts for 9% of CO2 derived from human-related activities, while the manure generates 65% of human-related nitrous oxide, which has 296 times the global warming potential of CO2. The digestive systems of ruminants produce 37% of humaninduced methane and 64% of ammonia, which are the major contributors to acid rain. Livestock production uses 30% of earths surface of which the majority is permanent pastures, but it also includes 33% of the earths entire arable land for feedstock. Moreover, the clearing of forests for new pastures is driving deforestation, especially in Latin America, where about 70% of the former forest area in the Amazon has been converted to grazing pastures. The livestock business is also affecting the planets water resources. Animal wastes, antibiotics and hormones, chemicals from tanneries, fertilizers and the pesticides used to spray feed crops are major water pollutants. The water cycle also gets disturbed by overgrazing as it reduces the replenishment of over ground as well as underground water resources.
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GLOBAL WEATHER PATTERNS

The perceptible change in global weather patterns that we are experiencing as a result of intense agricultural and industrial activity over the past century is expected to leave an impact on our practice of agriculture. Global warming, due to the emission of anthropogenic green house gases, such as carbon dioxide, methane and nitrous oxide, is primarily responsible for changing weather conditions. Over 24 billion tons of carbon is emitted every year due to human activities. As a result, average world temperatures have increased by 0.74 degrees centigrade in the last century and are expected to further increase by 1 to 3 degrees centigrade over the next century. Erratic weather patterns leading to delayed or advanced monsoons have already started affecting agricultural production. Going forward, it is estimated that crop cultivation, particularly in Asia, will be severely affected by erratic rainfall. Gradual temperature increases and irregular rainfall will be compounded by sudden weather events such as flooding and hurricanes. On an annual basis, 11 million hectares of land face crop deterioration due to floods. Of this, 7 million hectares of land see complete destruction of cultivated crops. Extreme weather events such as droughts and floods are predicted to occur with greater frequency and severity in the coming years. The melting ice caps and rising sea levels could mean that in the future, category 2 and 3 storms could cause much more severe flooding and crop damage in low-lying coastal areas than otherwise anticipated. Additionally, fundamental changes in weather patterns along with rising temperatures are expected to shorten growing seasons and reduce crop productivity in certain areas. Besides global warming, crops are also likely to be affected by the depleting ozone layer as a consequence of CFC emissions. One CFC spawned chlorine atom can potentially catalyze the destruction of as many as 100,000 ozone molecules. The increasing ultraviolet radiation tends to break down the natural immunity of plants against crop diseases. Higher temperature and other changing conditions could provide favorable conditions for pests and other diseases to flourish. The occurrence of crop diseases, such as cassava mosaic disease, potato blight, rice blast, wheat stem rust, and whiteflies will become more common. The El Nio influence is another factor behind the changing weather patterns, particularly the occasional extreme condition. The earth has been witnessing unusually intense and frequent El Nio weather patterns since the mid-1970s. The El Nio phenomenon primarily involves the eastward drift of warmer waters in the western Pacific, when the easterly winds die down. This shift in warm Pacific water upsets the atmosphere's energy balance. The warm water provides energy and moisture for the build up of huge thunderstorms. The resultant storms take unusual paths and disrupt normal weather patterns. It is believed that even if these weather patterns become less frequent, they could increase in severity. Simultaneously, drier weather conditions could be experienced in much of western America. Vineyards in California are already facing huge losses due to the consequent warmer temperatures without irrigation. The best wheat-growing land in the wide arc of fertile area in south Asia extending from Pakistan through northern India and Nepal to Bangladesh is could be decimated by 2050 due to changing weather patterns. The region, better known as Indo-Gangetic Plains, produces 90 million tons of wheat annually, accounting for 15% of global production. The region could to become too hot and dry for the crop, risking the livelihood of 200 million people if current weather model from the United Nations prove accurate. The area could also see more severe and frequent flooding and a shorter growing season.
Gradual temperature increases and irregular rainfall, primarily due to global warming are expected to affect agriculture production significantly in the future.
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Climate change is increasingly depleting water resources in Northern China due to the rapid retreat of glaciers, which are retreating at a rate far above the world average. China has seen a severe drought as recently as the winter of 2007. The consequent desertification, soil alkalization, weathering, and soil erosion have rendered large tracts of land unsuitable for cultivation. China is also experiencing an increase in sea levels at a rate higher than the world average. Consequently, Southern China is seeing more frequent floods and hurricanes. Similarly cereals and corn production in Africa could be endangered. 500 million hectares of agricultural land in sub-Saharan Africa has already been degraded. The most vulnerable areas in this region are West African Sahel, the Rangelands, Great Lakes, coastal areas of Eastern Africa and drier zones of Southern Africa. Africa and Latin America, together, could see a 10% decline in maize productivity through 2055. Global warming could also cause erratic rainfall patterns. In this regard, sub Saharan Africa faces further threat since 95% of the cropland in this region is rain fed. The precipitation pattern in this region is largely influenced by intra-seasonal and inter-annual climate variability, including occasional El Nio events in the tropical Pacific. Rice crops in India and South East Asia face similar threats. As a rule of thumb, every one degree increase in temperature above the mid-30s, in the key growing season, causes a decline in yield of 10%. The wheat-growing Great Plains of the U.S. and Canada could also face severe production losses. The wheat belts will experience a northward shift. Climate change could cause the expansion of arable area in Canada, Russia and Europe. For instance, a band across the top of North America from Cape Harrison, about midway up the coast of Labrador, to Ketchikan, on the Alaskan panhandle, in the west could become suitable for wheat plantation. Similarly, warmer conditions will benefit maize cultivation in highland areas. Other extensive areas will see minor yield reductions, while, equatorial and tropical regions could see major declines in yields. The positive influence of carbon dioxide in stimulating crop growth is not materializing as expected. It hasnt as of yet facilitated definable increases in corn yields, while the improvement in wheat and rice yields is less than half of previous estimates. Overall climatic change can and likely will have a profound impact on agriculture, however our investment horizon precludes us from defining the impacts more closely, aside from highlighting and understanding the potential risk.
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WATER
Although oceans and water bodies cover more than 75% of the earths surface, fresh water (by volume) accounts for only 2.5% of total water, the majority of which is unavailable for direct consumption as it is locked in glaciers and ice caps. Only ground water and surface water are readily available for consumption.
Sources of water
Figure 53: Global water sources
Ground Water 1%
Other 3%
Salt Water 97%
Surface Water 0.0075% Glacier 2%
Source: Britannica Encyclopedia
Tropical regions such as South America, Africa, and Asia have 68% of the global fresh water availability.
On a global basis, total renewable fresh water is estimated to be 55,097 cubic kilometres per year, but distribution is highly skewed between regions and countries. Brazil leads the world with 15% share of global precipitation whereas the Persian Gulf and sub-Saharan nations receive a paltry 1% annually; and although India and China represent a third of global population, they enjoy only 8% of global precipitation annually. Figure 54: Global renewable fresh water supply 2006
Oceanic 3% North & Central America 14% Former Soviet Union 10% South America 31% Global 55, 097 cubic km/ year
Africa 10%
Europe 5%
Asia 27%
Source: Pacific Institute
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Figure 55: Global renewable fresh water supply , Top 10 countries 2006
Russia 8% B razil 1 5% Canada 6% USA 6% Indo nesia 5% China 5% Co lo mbia 4% P eru 3% India 3% Zaire 2% ROW 43%
Source: Pacific Institute
Demand and consumption

Figure 56: Global water consumption by region
EU 15 Argentina China 5% 1% 16% Brazil 2% 1,799 cubic Australia kilometer Africa 1% 11% EU 15 5%
India 20%
Argentina 1% Brazil 2% Australia 1%
China 16%
India 19%
US 10%
Africa 12%
2,081 cubic kilometer
US 9%
ROW 34%
ROW 35%
1995
Source: Global Water Outlook to 2025: Averting an Impending Crisis
2025
Global water consumption is expected to increase from 1,799 cubic kilometres in 1995 to 2,081 cubic kilometres in 2025 a CAGR of 0.5%. The current global share of all the major regions in water consumption is expected to remain more or less stable over this time frame.
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Figure 57: Global water consumption by activity 2025

235 290 63
Water consumed cubic km
1800
157 169 37
211 234 49
1200
600
1436
1436
1492
0 1995 2010E 2025E
Irrigation
Livestock
Domestic
Industry
Source: Global Water Outlook to 2025: Averting an Impending Crisis
According to the International Water Management Institute (IWMI), a region deemed to have physical water scarcity when water demand exceeds 75% of its availability; approaching physical water scarcity occurs when water demand exceeds 60% of its availability; economic water scarcity is defined as water withdrawal below 25% of the available amount due to human and economic capacity limitations; and little or no scarcity is defined as water demand below 25% of its availability. Figure 58: Global Water Scarcity Index
Source: International Water Management Institute
The water scarcity map explicitly indicates that the worlds key agriculture regions of the Southwestern U.S., Pakistan, Southern India, South Africa, Western Australia, and North Africa; which are all water stressed. It also indicates a large untapped hydrological potential for Central and Southern Africa, Central America and the Ganges basin in India.
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Desalination/Desalting
Figure 59: Desalination installed capacity by process in 2005
MSF 36% MED 3% VC 5% ED 5% RO 46% Source: GWI 2025 Others 5%
Due to water scarcity and the changing economic, demographic and climatic trends discussed above an understanding of methods for improving water supply is an important factor. Desalination is considered one of the most expensive and energy-intensive options for providing water to communities; however, it is employed in the Persian Gulf and island nations in the Caribbean where fresh water is not readily available. Its use is primarily reserved for urban consumption, remote holiday resorts and industrial purposes. The use of desalinated water for agricultural needs is generally limited to high-value crops. Traditionally, thermal techniques were relied upon for desalination, though a number of membrane-based techniques are becoming increasingly more cost effective. In 2005, approximately 44% of desalinated water was produced using thermal techniques, such as Multi Stage Flash (MSF), Multiple Effect Distillation (MED) and Vapor Compression Distillation (VC). Membrane-based techniques, such as Reverse Osmosis (RO) and Electro Dialysis & Electro Dialysis Reversal (ED), had 51% share, while the remaining share was divided between freezing, membrane distillation and Ion Exchange techniques.
Reverse osmosis, a membrane-based technique, accounts for 46% of the global desalination capacity.
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Figure 60: Trends in desalination plants 1945-2004

40 12000
30
9000
20
6000
10
3000
0 1945 1955 1965 1975 1985 1995 Cummulative Plants numbers (RHS) Average Capacity per plant (RHS) Cummulative Capacity in million m3/day (LHS) Source: GWI 2025
Figure 61: Installed capacity 2004

Installed Capacity in million m3/day 8 6 4 2.4 2 0 Saudi Arabia USA UAE Spain Kuwait 2
6.5
6 4.8
Source: Global Water Intelligence
It is estimated that half of the worlds desalination capacity is based in the energy-rich but water-deficient Persian Gulf countries, with Saudi Arabia and the UAE accounting for 18% and 13% of the global installed capacity, respectively. Most of this capacity is based on thermal techniques and uses sea water to extract fresh water. Membrane-based techniques are more prevalent in the U.S. and Spain where brackish water, river water and waste water is used as input. Desalination Technologies Electro dialysis and electro dialysis reversal uses electric current to separate salt from water. It is used for brackish water treatment and has found applications in industries, power plant cooling, fresh water fish farms and municipal waste treatment. The operating cost of the plants is directly related to the amount of salt removed from the water. It can
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treat water with higher suspended particles compared to the reverse osmosis technique and has higher fresh water produce ratios compared to thermal systems. The reverse osmosis technique is based on the transfer of fresh water across a semipermeable membrane when mechanical pressure is applied to the impure water. The cost of operation is directly related to the salt concentration in the water as higher pressure is required to remove a higher concentration of salts. It is most suitable for purifying brackish water and has found applications in municipal water treatment requirements. This technique suffers from membrane fouling if a pre-treatment of the water is not carried out. This technology has matured and large new plants like the Tuas in Singapore is based on this technique. Multi stage flash distillation is the most widely used thermal desalination technique. This technique can desalinate the most saline water (up to 60,000 to 70,000 ppm total dissolved salt). Here the salt water is boiled and the steam generated is condensed as pure water. This technique is used for municipal water usage. These desalination plants can also be colocated with thermal energy plants to use the steam generated for electricity generation. The MSF plant is more cost effective than the MED thermal plants and suffers less from scaling. Multiple effect distillation plants are based on a scientific principle, which states that liquid boils at lower temperature when the atmospheric pressure is reduced. The sea water is boiled multiple times in a series of chambers each at successive lower temperatures and pressures. The heat is applied only once in the first stage. It is most suitable for industrial applications and small cities. Vapor compression distillation is suitable for remote locations, hotels and resorts and small industries. Some of the other desalination techniques are yet to achieve large scale commercial success but have specific niche application areas. The freezing technique is based on the scientific principle that salts are insoluble in ice crystals. The waste water is frozen and the resulting ice is separated from the water solution left behind. This technique enjoys a lower energy requirement, suffers lower corrosion and less scaling compared to thermal methods but is not yet commercially viable on a large scale. The ion exchange method uses ionized resins to remove the salt from the water. It is cost effective for low salinity water and sometimes used as the final step in the water purification process.
Environmental impact
While people absolutely need fresh water to survive, marine desalination does come with an ecological price. As they draw in large amounts of sea water, desalination plants disturb marine ecology as the feeds also draw in marine plankton and small fish. In addition, the plants discharge salt water and water treatment chemicals, which affect the salinity of the local area and surrounding ecosystem. In fact, disposal of the concentrated salt water has been identified as one of the biggest challenges within the industry. It is estimated that the cost of energy for a desalination plant in the U.S. ranges from 33% to 60% of the total operating cost of the plant, and currently averages US$0.63-0.80 per cubic metre of water produced (for new plants). Due to the high energy requirement, the carbon footprint of a desalination plant is considered relatively high.
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CROP YIELDS AND PRODUCTION TRENDS

As discussed above, the agriculture industry faces numerous threats. As a whole, the industry will be required to respond to these threats by improving crop production efficiency, while at the same time reducing emissions, minimizing environmental pollution and reverting or helping to stall the unfavorable changes in weather patterns. The impact of these detrimental factors, particularly climate change, will vary over time and across boundaries depending upon varying agro ecologies, production conditions and farming systems. We identify the following eight trends affecting the production and practice of agriculture: The development of stress-tolerant crop varieties; The prudent management of crops; Water management; Soil management; The development of strong market incentives; The establishment of efficient institutions; The formulation of favourable policies; and, Measures to capture carbon and other greenhouse gases.
Technology needs to counter the various threats to agriculture production such as global warming and arable land degradation.
The development of stress-tolerant crop varieties involves extensive research activity and is increasingly drawing investment from the corporate sector as people realize the potential for returns on investment in the agricultural sector. The genetic properties of stress resistant crops and wild crop varieties are being studied and subsequently adopted into commercial crop varieties. Efforts are also being made to conserve the habitat of wild crops and preserve the samples of different varieties of endangered crops in gene banks. Considering the fact that scientists expect the growing season to shorten in the coming years, efforts are being directed at the development of early and extra-early maturing crops. As part of these efforts, 50 drought-tolerant varieties of maize have been developed. These have been sown on an experimental basis over one million hectares of land in eastern and southern Africa. The resultant crops have seen 20% improvement in yields. This compares very favorably against the 15% yield decline that previously existing-crop varietals face in the event of droughts. Similarly, drought resistant varieties of rice have been developed through hybridengineering of highly productive Asian varieties with stress tolerant African varietals. The resultant crops have early maturing characteristics, which allow them to escape the intermittent droughts. These rice crops have been planted over 200,000 hectares of land in Africa. A gene in some of these varieties seems to provide water proofing traits which allow the plants to survive complete submergence over a period of two weeks. These characteristics have made the new varieties of rice hugely popular and prevalent in Bangladesh. The growing prevalence of naturally hardy crops such as, barley, cassava millet and sorghum is another significant trend. These crops are being widely grown in drier regions. Barley is finding greater acceptance as a staple crop in Syria, the Middle East, and North
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Africa. Cassava is a tuber crop which is being grown on a large scale in East and West Africa. Millet and sorghum have genetic traits that allow them to delay the death of their leaves and enhance grain development. These genes are being studied and introduced into other crops. Sorghum is one crop that is expected to address the dilemma of the food-feed-fuel problem. Besides being a suitable material for biofuel production, it also produces grain and fodder. Sorghum is well adapted to drought prone conditions as it requires only one seventh the amount of water required by sugarcane. Pongamia and Jatropha trees are being similarly used for biofuel production. These are inexpensive to cultivate and have low water requirements. Jatropha has already been planted over 175,000 hectares of land in India and South Africa. Drought tolerant varieties of beans have been experimentally sown in Central America, Latin America and East Africa. These have yielded 600-750 kg of beans per hectare, which is double the maximum yield that was earlier obtained in Latin America under similar conditions using other commercial varieties. Similarly, drought-tolerant varieties of cowpea have been developed which have out yielded the existing varieties by 16 to 142% under experimental drought conditions. In order to promote better livestock yields, several stress resistant grasses and legume crops have been developed. For instance, cratylia, a leguminous forage shrub, is showing strong drought tolerance and improved livestock nutrition characteristics. Modern irrigation techniques, such as drip irrigation and water harvesting, are being adopted to promote better water management. India and other Asian countries are promoting an integrated approach to watershed management. These initiatives have doubled the incomes of small farmers, raised groundwater levels by five to six metres and facilitated expansion of green cover in each watershed by over 50%. Farmers are adopting better soil management practices, such as reduced tillage, enhanced fertilizer-use efficiency, and leaving crop residues in the soil. Zero tillage technology has been applied to more than 3.2 million hectares of land in India, Pakistan and South Asia with economic benefits of an estimated US$147 million. This practice involves a reduction in the mechanized tillage of soil, and retention of crop residues. It has facilitated conservation of soil and water, increased crop productivity, and reduced carbon emissions. The poorer farmers of Africa are adopting a technique called micro dosing for fertilizer application. This involves the application of inorganic fertilizers in the holes where the seed is sown. These fertilizers can also be mulched with crop residues and organic fertilizers and applied to soil mounds used for planting crops. These techniques allow for efficient and cost-effective use of fertilizers. At an administrative level, the developing community must realize the importance of providing their farmers with a viable marketplace. Strong rural institutions need to be developed in order to provide risk management, micro credit finance and weather/crop insurance facilities. Farmers should be encouraged to conduct energy audits at their farms in order to help cut energy use and adopt more environmentally-sustainable practices. At a policy level, the promotion of a carbon credit trade in agriculture could provide a necessary incentive for adopting environmentally-friendly agricultural practices or implementing pro-environment policies and projects. As part of the Clean Development Mechanism established by the Kyoto protocol, countries unable to meet agreed targets in emission reductions can buy carbon credits from other countries. Bio carbon funds cater
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exclusively to the agriculture and forestry sectors. However, limits on payments to such projects and the perceived complexity of procedures pose significant barriers to these trends. Another example of an environmentally-friendly practice, agro-forestry involves the integration of agricultural lands with working trees. These trees facilitate the capture of carbon, the maintenance of soil health through nitrogen fixation, and the use of cuttings as fertilizers and mulch. Agro-forestry has begun to catch on, particularly in Africa, and it is estimated that approximately 90,000 families have adopted agro-forestry in Zambia alone. The trend is also beginning to catch on in Malawi, Mozambique, Tanzania, and Zimbabwe. The use of agricultural waste in biofuels is seen as another environmentally-friendly measure. Biofuels made from agricultural wastes and residues should prove instrumental in decreasing greenhouse gas emissions. As a pioneer of biofuel use, Brazil has replaced 40% of its gasoline by ethanol. China and India are also looking to increasingly develop liquid biofuels. Several leguminous forage species with the capability to suppress methane emissions are being used in combination with trees and crop plants to provide silvopastoral systems. These forage grasses have high tannin content, which enables them to capture significant amounts of carbon from the atmosphere and retain in their deep root systems. We believe these factors are critical in developing and sustaining a growing agricultural sector. Crop yields and trends will need to continually improve if we are to effectively feed and grow our planet.
AGRICULTURAL COMMODITY FORECASTS

The global agricultural industry is entering a phase of long-term supply side constraints in our opinion. It is transitioning from a supply-driven market to a market driven by growing demand and a scarcity of supplies. This is reflected in the significant increase in the prices of the majority of the agricultural commodities since the beginning of 2006. Overall, the Food and Agricultural Organizations (FAO) Food Price Index (FPI) increased by approximately 9% in 2006 and 37% in 2007. This increase in prices has been led by food grains, primarily as a result of the global imbalance between demand and supply. The supply side crunch can be attributed to factors such as scarcity of water and arable land, changing weather patterns, significant increase in global population and a sluggish rate of adoption of economically prudent practices and policies. Additionally, supply is also constrained by factors such poor handling and transportation infrastructure in the developing nations with trade barriers and protection norms exacerbating the issues.
The FAO Food Price Index increased by 9% in 2006 and 37% in 2007.
Supply imbalance
Between 1960 and 1990, global food production grew at an annual rate of 2.8% while population increased by 2.1%. However, since the 1990s, population has been growing at 1.8% while production has been growing at 1.5% annually. Production expansion activities have been limited by structural changes such as climatic upheaval in major production centers and the enhanced use of major grains as feedstock for biofuel production. On a long term basis, global warming is expected to lead to a higher frequency of extreme weather conditions, loss of bio-diversity in fragile environments (e.g., tropical forests) and loss of fertile coastal lands due to rising sea levels, all affecting agricultural output and aggravating global commodity prices.
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Although global agricultural production is expected to expand steadily over the next decade, the growth is expected to be slower than the last decade. Given the growth rate of consumption the imbalance between supply and demand is likely to keep prices above the historical equilibrium over the next ten years in our opinion. While global inventories have been progressively declining over the last decade, very little additional area has been brought under cultivation. Figure 62: Major crops global acreages and inventories
19981999 Wheat Area (Hectares) Coarse Grains Area (Hectares) Rice Area (Hectares) TOTAL Area (Hectares) Ending Stocks (Metric Tons) Source: USDA 225.1 308.6 152.6 686.3 579.8 19992000 215.4 299.7 155.3 670.4 584.2 20002001 217.6 296.8 151.7 666.1 563.6 20012002 214.7 301.5 150.6 666.8 532.9 20022003 214.6 293.2 145.9 653.7 440.2 20032004 209.6 306.4 148.2 664.2 355.1 20042005 217.7 29.7 150.5 397.9 403.1 20052006 218.4 300.8 152.6 671.8 388.3 20062007 211.9 303.6 152.9 668.4 334.7
Inventories for each of the three crops (Wheat, Coarse Grain and Rice) have declined by over 40%. At a global level, the current total grain inventory of 315.2 cubic metric tons is estimated to be sufficient only for 50 days of human food requirements, which is a historic low. In 2000, the corresponding figure was 115 days. Growing demand coupled with a relatively lower growth in production has led to a steady decline in world food stocks over the last few years. The world stocks-to-use ratio has hit a historic low of 17%. Figure 63: Global stocks-to-use ratio, 1960-2007
40 Stock-to Use Ratio (%)
30
20
10
0 1960 Source: USDA 1965 1970 1975 1980 1985 1990 1995 2000 2005
Declining production growth and lower absolute inventory levels are driving commodity prices upwards. For example, global production of wheat grew by just 1% in 2007 over the previous year. Consequently, wheat futures prices have exhibited annualized growth of about 22% between 2003 and 2008. Along with the increase in prices, volatility has also increased, especially in cereals and oil seeds, as a result of the uncertainty and the tightening of supply of agricultural commodities. Policy changes by various nations to
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safeguard their domestic agricultural sector have also fuelled an increase in global commodity prices. For example, China, India and Russia have raised export duties and simultaneously lowered import duties on certain agricultural commodities to satisfy the demand of their expanding domestic economy. Figure 64: U.S. monthly average near-month historical futures prices 14
12 Price in USD/Bushel 10 8 6 4 2 0
Jan03 Jun03 Nov03 Apr04 Sep04 Feb05 Jul05 Dec- May05 06 Oct06 Mar- Aug07 07 Jan08
Wheat
Source: Economic Research Service, USDA
Corn
Soybean
Increased biofuel production

In light of rapidly increasing oil prices and growing global warming concerns, biofuels are perceived to be the most viable short- and medium-term solutions to reduce green-house gas emissions and our dependency on oil. This is leading to a competition among various agricultural products such as maize, rapeseed and wheat, which can be used as feedstock for the production of biofuels. In 2007-2008, 6.5% of global grain output was used to produce biofuels and this figure is expected to increase significantly in the future. The US Department of Agriculture (USDA) predicts that the rapid expansion in biofuels will change the price relationships among various agricultural commodities and increase demand for grain (especially corn). Consequently, the prices of protein feeds are expected to increase at a slower rate as compared to the price of feedstock products.
Consumption shift also driving the cost (and value) of commodities

Over the last few years, there has been a shift towards the consumption of higher-value commodities such as bovine, pig and poultry meat, especially in the developing economies. This heightened demand is reflected in the increase in the meat price index published by the FAO, which has increased from 112 in March 2006 to 123 in August 2007 (1998-2000 = 100). This price increase can be expected to continue into the foreseeable future.
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Figure 65: U.S. monthly average cattle farm price

105 100 Price in USD/Bushel 95 90 85 80 75
Jan03 Jun03 No v03 A pr04 Sep04 Feb05 Jul05 Dec05 M ay06 Oct06 M ar07 A ug07 Jan08
Source: Farmdoc Project, UIUC
The chart below shows the USDAs projected market price of beef/veal over the next nine years. In the initial few years, prices are expected to increase as a result of higher production costs. This rise in production costs can be mainly attributed to a significant increase in feed costs as higher amounts of animal feed (mainly corn) are directed towards the production of biofuels. Figure 66: Expected future farm price of beef/veal in the U.S.
100 98 96 94 92 90 88 86 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Source: USDA Agricultural Projections
Though the price of meat is expected to stay above long-term averages, factors such as disease outbreaks could also affect the demand for meat products as well. As seen in just this past decade, disease outbreaks in animals, such as Avian Influenza (bird flu) and Bovine Spongiform Encephalopathy (Mad Cow Disease), have affected the meat trade significantly and might continue to do so for the next ten years. The increasing demand for meat products also indirectly affects agricultural production. Industrialized livestock production generates significant quantities of waste, which not only affects public health but also degrades the water and air quality in the surrounding areas. The lack of regulations in developing countries makes this a more serious problem in these regions. Moreover the consumption of meat demands an even greater quantity of agricultural products that feed livestock. It is estimated that seven kilograms of wheat is required to produce one kilogram of beef and three kilograms of grain to produce one kilogram of pork. Since the rate of growth of meat production is expected to be higher in developing nations, it might have a long-term negative impact on agricultural produce and supply in these regions.
Price in USD/ctw
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AGRICULTURE SUB-SECTORS
This section seeks to highlight certain sub-sectors within the agriculture industry: Grains and Feed, Fuel, Fertilizers, Equipment and Agriculture Technology, and their impact on agriculture and commodity markets globally. The global food markets are currently seeing unprecedented commodity price pressure, fuelled by temporary factors such as drought-related short supply, crop damage due to erratic weather patterns, reduction of surpluses due to policy reforms, inflationary pressures and significant increases in demand from livestock and the biofuel industry. In the long term, commodity prices are expected to plateau at high levels, albeit below their present peak rates. The expected change in weather patterns and the strain on resources due to increased demand from livestock and energy sectors provide a basis for these high price forecasts over the long-term. Meanwhile, agricultural capacity additions and procedural optimization, development of alternative fuel technologies, policy reforms, trade liberalization, tariff rationalization and the interplay of market forces will help to create a marginal decline in commodity prices from current rates we believe. Policy reforms are primarily expected to be caused by the high level of international prices which have obviated the need for providing local price supports and the imposition of stiff tariff structures. We believe we are presently experiencing a feed-versus-fuel scenario for much of the agricultural sector, wherein the three industries raw food stuffs, livestock and energy, are competing for the same set of resources. More importantly, governments across the world are striving to ensure that their citizens have access to good quality food at reasonable prices. In view of high crude oil prices, biofuel products offer an attractive alternative, and are causing an unprecedented demand for cereals and coarse grains. Biofuel feedstock commands high prices, making it more profitable for farmers to sell their produce to the biofuel industry. The consequent scarcity for livestock feed inflates its prices, making livestock costlier.
FEED
This section discusses livestock and dairy products and also summarizes the production and consumption of important grains for human, livestock, and biofuel needs.
Livestock
We expect a significant increase in the level of production and consumption of livestock in developing countries and stable production and marginal consumption growth in the developed countries. Globally, the demand for meat is projected to rise at CAGR of 1.7% for many years, with 80% of the additional global demand expected to originate from developing countries, mainly in the Asia-Pacific region. The emerging economies, Brazil, China and India are expected to shore up their production capabilities in line with growing consumption trends. This trend, accentuated by the high responsiveness of food demand to income growth in developing countries, is likely to reduce the trade share of developed countries within the meat industry. Other fast growing economies like South Korea, Mexico, Saudi Arabia, and the Philippines will also contribute to the rise in demand in the market, because of the inadequacy of their domestic capabilities in
Consumption of livestock products in developing countries is growing rapidly.
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meeting the growth in demand. Additionally, the U.S., Japan, and Russia are expected to continue as major importers of livestock over the next 10 years. Figure 67: Trade- livestock (million tons)
Average 2001-2005 Product Beef Pork Poultry Source: OECD 5.96 4.00 7.56 2006 2007 2008 2009 2010 2011 2012 2016
6.42 4.30 7.48
6.97 4.70 8.06
7.17 4.93 8.35
7.58 5.06 8.54
7.85 5.13 8.78
8.06 5.28 9.08
8.32 5.44 9.48
9.34 5.90 10.59
Each of the beef, pork and poultry meat markets is expected to record a 50% growth in global trade over the next decade. Geographically, the strongest export growth is projected to occur in South America; Brazil, in particular, is expected to emerge as the largest meat exporter, with a 28% share of global meat trade by 2016. Brazils meat exports will be more than the combined exports of the other four largest exporters (U.S., Canada, Argentina, and Australia). The growing livestock markets are increasingly being served by fresh production capabilities established in developing countries as supplies in developed countries have been strained by poor weather, high feed costs and cyclical herd rebuilding. The emerging trend is one of a flourishing south-south trade, wherein the major consumers, situated in the southern parts procure livestock foods from the major producers in similar parts of the world. Figure 68: Consumption pattern comparison 2007
Mutton 4% Poultry 30% Beef 24%
Pork 42%
Source: USDA
Globally, pork is the most-consumed type of livestock accounting for over 40% of consumption. Despite inflationary pressures, pork is expected to maintain its leading market position.
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Figure 69: Beef production pattern 2007
Russia Others 10% 3% Australia 4% Mexico 4% India 5% Argentina 6%
USA 21%
Brazil 18%
European Union 14%
China 15%
Source: USDA FAS
Beef consumption and production is expected to grow significantly in China.
The top five beef-producing countries include the U.S., Brazil, China, the European Union and Argentina. The major growth in beef consumption and production is expected to emanate from China. This growth will largely be offset by a decline in production from the European Union, due to the adoption of dairy quotas and surplus reduction policies in this region. France and Spain are the only countries in the EU, which are expected to increase beef production. Consequently, global production levels will see limited growth. Since most of Chinas production adds are expected to be consumed by China itself, global trade will also experience limited growth, though Argentina and Brazil are expected to increase their production, particularly eyeing the opportunity to replace the EU as the primary exporter in key Russian markets. This should begin a recovery in the international markets, which had experienced a supply crunch as Argentina had temporarily banned beef exports in order to lower domestic beef prices and control inflation. Figure 70: Production-consumption beef (million tons)
Average 2001-2005 Production Consumption Ending Stocks Source: OECD 61.6 61.2 0.4 2006 65.6 64.9 0.7 2007 66.7 66.1 0.6 2008 67.7 67.1 0.6 2009 68.5 68.0 0.5 2010 69.7 69.1 0.6 2011 70.8 70.2 0.6 2012 71.8 71.2 0.6 2016 76.4 75.2 1.2
Although Argentina in fact accounts for the largest per capita beef consumption in the world, the grain fed beef products from the U.S. are increasingly finding an attractive market in high income East Asian markets. Meanwhile, the U.S. is expected to import grass-fed lean beef from Australia and New Zealand in order to support its ground beef and processed products industry. The U.S. is also expected to recover from the current decline in its beef market, with its beef trade, particularly with Canada, Japan, and South Korea, set to rise. This recovery, however, is likely to be limited by herd rebuilding activity, reduced grain feeding, and poor pasture conditions. The higher production costs
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and higher costs of feedlot gains have led to a trend, wherein cattle are allowed to stay on pasture for a longer period of time to ensure heavy slaughter weights before entering the feedlot. This will lead to lower inventories for short-term use; however, post 2010, the availability of higher slaughter weight stock should facilitate a moderate expansion in beef production. Figure 71: Production-consumption pork (million tons)
Average 2001-2005 Production Consumption Ending Stocks Source: OECD 97.0 96.6 0.4 2006 107.4 106.6 0.8 2007 110.8 110.6 0.2 2008 111.9 111.6 0.3 2009 113.9 113.6 0.3 2010 116.4 116.0 0.4 2011 117.3 116.9 0.4 2012 119.9 119.4 0.5 2016 129.3 128.7 0.6
Pork is the most-consumed livestock food worldwide, with Japan being the biggest consumer.
Pork is the most-consumed livestock food worldwide. Globally, over US$18.5 billion was spent on the purchase of pork in 2005. The major pork producers include the EU, the U.S., Canada, Brazil, China and Chile. The top pork consumers are China, Germany, Italy, the United Kingdom and the U.S. The demand for pork is increasing rapidly in Eastern Europe, Central Asia, and the Asia Pacific region. The increase in pork imports by East Asia is largely due to the restrictions on the domestic pork sector based on environmental concerns. Additionally, these countries presently prefer pork over beef due to BSE-related11 fears. Mexico is expected to emerge as the fastest growing pork market, buoyed by rapidly increasing income and population; it is projected to see a 38% increase in pork imports during 2008-2017. In absolute terms, Russia is expected to see the largest rise in pork imports as it is expected to import 200,000 tons of additional pork in 2017 compared to 2008. China is projected to increase its pork imports in the face of significant damage to domestic production following an outbreak of Porcine Reproduction and Respiratory Syndrome (PRRS). The European Union will see a decline in its global pork exports as policies stipulating intra-EU trade come into force. The EU pork exports are expected to decline 5% in 2008 (over the previous year) and by about 1% annually over the subsequent decade. Brazil is recovering from the decline in its pork exports as a result of a Foot and Mouth Disease (FMD) outbreak; however, its exports will be improved by renewed opportunities in Russia and Argentina, and new market opportunities in Eastern Europe over the next few years. As people become wealthier and more hygiene conscious, the U.S. is expected to benefit in terms of growing demand for its pork output, primarily because of the high quality standards that are associated with its pork industry. The attractiveness of the pork industry is increased further by the variety of high quality by-products that can be derived from its activity. However, compared to other livestock products, pork requires higher quality and volume of inputs in terms of feed grains, water, high protein food ingredients, vitamins and minerals. This makes the pork industry highly sensitive to commodity prices, which explains the expected slowdown in pork production over the short term. The high feed costs combined with high demand are expected to slow down per capita pork consumption through 2012. Thereafter, a rebound in consumption levels,
11
Bovine spongiform encephalopathy (BSE), commonly known as mad-cow disease, is a fatal, neurodegenerative disease in cattle, that causes a spongy degeneration in the brain and spinal cord
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supported by increased production, improved operational efficiencies and stable feed costs, is expected. In the meantime, countries with lower cost of production and less stringent environmental regulations, such as Brazil, are expected to increase production. Figure 72: Production-consumption poultry meat (million tons)
Average 2001-2005 Production Consumption Ending Stocks Source: OECD 77.4 77.2 0.2 2006 81.9 81.6 0.3 2007 83.3 83.0 0.3 2008 85.3 85.2 0.1 2009 87.3 87.2 0.1 2010 89.5 89.4 0.1 2011 91.1 90.9 0.2 2012 92.5 92.4 0.1 2016 98.5 98.6 -0.1
The poultry industry has shown relative resilience in its demand supply aspects compared to the pork and beef industries. This fact is primarily attributable to competitive poultry prices, good feed-to-conversion characteristics, consumer preference for white meat and increased use in general food preparations. The major poultry producers include the U.S., Canada, Argentina, Brazil, Thailand, China, Australia, Malaysia, Colombia, and India. The U.S. is expected to exhibit stagnation in its poultry industry because of higher operational expenses and feed costs. Argentina and Brazil are leveraging their favorable feed situation and competitive production capacities to expand their global production as well as export share; the latter is projected to emerge as the largest exporter of poultry products by 2017. The recovery of the global markets from Avian Influenza (AI) and the consequent growth in demand are expected to support a marginal increase in demand and supply of poultry products. However, the East Asian countries, earlier inflicted by AI, are primarily producing processed and cooked poultry products, which are in high demand in the high-income Middle East, Asian and European countries. The EU, in particular, has imposed an import quota on salted poultry and cooked chicken. Asia is expected to account for most of the import growth in the poultry sector. Consumers in East Asian countries, particularly, China, Vietnam, and Singapore have substituted a significant amount of their pork consumption with poultry since the outbreak of PRRS. However, stricter import requirements in Russia and East Asian countries will limit the market opportunities to countries capable of meeting these requirements. Besides, strong demand for poultry is also expected to originate from the European Union, Venezuela, and Middle East countries. Countries like Saudi Arabia and Egypt are likely to import more as they cut down on domestic production in response to concerns over the quality of produce following disease outbreaks. As the livestock sector adjusts to higher feed costs, consumer prices in the poultry industry, which have traditionally been lower than other livestock, are also expected to exceed the general inflation rate. The consequent adjustments are expected to provide strong economic incentives for investment and expansion in the sector, by providing higher returns in response to high global demand.
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Figure 73: Production-consumption mutton (million tons)

Average 2001-2005 Production Consumption Ending Stocks Source: OECD 11.3 11.3 0.0 2006 12.6 12.5 0.1 2007 12.3 12.4 -0.1 2008 12.6 12.7 -0.1 2009 12.8 12.9 -0.1 2010 13.1 13.2 -0.1 2011 13.4 13.4 0.0 2012 13.6 13.6 0.0 2016 14.4 14.5 -0.1
The mutton industry is small compared to other livestock industries; it constitutes only 4% of the net global livestock production. The major producers of mutton are China, Pakistan and Iran; all are expected to ramp up their production capacities in order to meet increasing local demand. Additionally, African countries like Sudan and South Africa are projected to increase their production in line with the increase in herd sizes. Over the short term, an increase in production in Latin America, particularly Argentina is forecast, essentially due to the increased slaughter rate of herds as a result of limited feedstock availability and poor pasture conditions. However, Australia and New Zealand are scheduled to carry out flock building activities over the next few years. Consequently, mutton production in these countries is expected to decline. The major importers of mutton include the U.S. and the European Union. These countries are expected to witness higher imports as a result of declining local production and increasing demand. The livestock industry has seen some reverses in the recent past as a result of the outbreak of animal diseases. The beef trade in North America saw a decline as a result of the outbreak of Bovine Spongiform Encephalopathy (BSE); the outbreak of the Foot and Mouth disease in Argentina and Brazil was followed by export restrictions; and the outbreak of Avian influenza in Asia and Europe led to widespread panic in the worldwide poultry markets. The consequent perturbations in the global supply demand patterns and the increase in market share of disease free countries have changed the dynamics of the global markets. The production trends and purchase decisions are being increasingly influenced by quality assurance and maintenance measures aimed at limiting the impact of potential epizootics. Supply-side trends include:
a. b. c.
Regionalization of export embargoes; Imposition of stringent animal health and inspection regulations; and Implementation of vaccination policies.
Demand-side measures include:

a. b. c.
Enforcement of strict packaging requirements; Improvement in processing and production standards; and Ensuring easy meat traceability.
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Figure 74: Prices of selected livestock U.S. (USD/100 kg dw)

Average 2001-2005 282.0 136.4 141.8 390.1 2006 303.6 145.0 140.9 330.0 2007 303.4 126.2 159.5 325.4 2008 299.0 154.4 164.8 333.8 2009 297.1 165.4 171.5 343.6 2010 288.5 165.4 179.3 351.9 2011 285.0 157.8 183.0 361.0 2012 279.5 160.8 182.1 370.0 2016 297.7 160.6 177.5 404.7
Beef Pork Poultry Mutton (NZD/ 100 kg dw) Source: OECD
These measures are expected to bring about a rationalization in global market prices, which have been inflated as a consequence of the premium attached with meat quality in the aftermath of the disease attacks. Beef prices are expected to decline in the future, though a moderate strengthening is projected over the long term, essentially fueled by rising feed prices. Pork prices are expected to increase in the short term, particularly because of increased demand in South East Asia. Additionally, the loss of over one million pig heads in China due to outbreak of PRRS is adding to inflationary pressures in the pork market. Poultry prices are projected to increase significantly as the markets recover and greater demand originates from North America, Latin America and Europe. The high feed cost trends have had a serious impact on operational costs, specifically for the factory-style feedlot-based production setups. Such feedlots account for 43% of global beef and over 50% of global pork and poultry production. Price and procedural control measures are expected to boost the operational capacities of these feedlots, with meat production projected to increase to 300 million tons by 2020. The rapid increase in livestock and related processed food consumption is causing a tremendous strain on agricultural production. This is primarily because the energy cost of livestock consumption is very high. Two to seven kilograms of feed is required to produce one kilogram of chicken, pork, or beef, respectively. At present requirements, we need to raise 5 billion hoofed and 16 billion winged animals for meat. It is estimated that, presently, livestock consumes 35% of all the grain and 90% of soybean produced at the global level. In the U.S., 50% of the grain production is directed feed to the livestock industry. The U.S. pork industry alone consumed 1.08 billion bushels of corn and 265 million bushels of soybean in 2004. Each hog produced in the U.S. consumes 12 bushels of corn and 130 pounds of soybean. Consequently, feed costs alone add up to US$62.00 per pig.
Present estimates suggest that livestock consumes 35% of all grain and 90% of all soybeans produced globally.
Dairy
Global dairy market trends are characterized by broad changes in consumption as well as a change in the rigid structure of the global dairy trade itself. The prices of highlyprocessed dairy products have seen a spike in recent years, though increases in production capacity are expected to moderate the price of dairy going forward, due to infrastructural investments, such as improvements in storage and processing facilities. Changing dietary trends (as a result of urbanization and higher income levels) have led to an increase in the consumption of butter, cheese and a variety of milk powders. This consumption growth has been fuelled by the development of dairy marketing and related retailing channels along with government programs encouraging the consumption of dairy products. Additionally, the dairy industry has been boosted by technological advances and widespread global investment. The major dairy producers include India, China, Pakistan, New Zealand, Australia, Argentina, Ukraine and the European Union.
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The latter four are expected to see a decline in their production levels primarily in response to poor weather and pasture conditions, higher feed prices and the transfer of pasture land for crop growth activities. India, Pakistan, and New Zealand will show continued development in the industry in response to growing domestic and international demands, while China is likely to witness double digit growth in the sector in coming years. Figure 75: Trade-dairy products (million tons)
Average 2001-2005 0.7 1.4 1.4 1.17 2006 0.71 1.46 1.58 1.20 2007 0.76 1.5 1.64 1.19 2008 0.8 1.55 1.66 1.18 2009 0.82 1.59 1.73 1.16 2010 0.83 1.62 1.82 1.17 2011 0.84 1.67 1.87 1.18 2012 0.85 1.71 1.95 1.18 2016 0.87 1.83 2.2 1.24
Butter Cheese Whole Milk Powder Skim Milk Powder Source: OECD
Australia and New Zealand are the major exporters of dairy products.
India and China consume a substantial portion of their production domestically. Australia, New Zealand and the EU are the major exporters. However, following the formulation of intra-EU restrictive export policies, the EUs global exports are likely to decline, while the intra-EU trade is projected to outpace the combined global trade. Australia and New Zealand are expected to continue to dominate the world dairy markets, though developing countries, such as Argentina, China and India are projected to experience an increased market share in butter and skimmed milk powder markets. Central and South American countries are formulating policies aimed at stimulating growth of dairy industry and ensuring domestic food security with respect to dairy products. While Argentina has imposed export taxes, Mexico has put in place import tariff quotas. Major importers of dairy products include Russia, Japan, and the U.S. Besides, significant demand for milk and reconstituted milk products is projected to originate from the Middle East, North Africa, Mexico, and Southeast Asia. The growing demand, high feed prices, and development of high value processed foods explain the inflationary trends in dairy markets. Additionally, dairy market reforms implemented by several countries specifically in the EU have checked subsidized exports and interventionist stock building activities. The checks on these distortion policies will allow prices to be influenced by market forces. Meanwhile, the weakening of the US dollar is expected to make the situation highly favourable for the U.S., with its supplies effectively priced at very competitive rates in the international markets. Figure 76: Prices dairy product U.S. (USD/100 kg )
Average 2001-2005 155.9 231.3 141.8 190.8 2006 186.5 272.8 140.9 229.4 2007 196.2 300.4 159.5 254.6 2008 193.0 310.9 164.8 262.7 2009 188.3 303.2 171.5 256.7 2010 188.3 300.0 179.3 248.2 2011 195.1 301.0 183.0 250.3 2012 200.9 300.5 182.1 249.0 2016 222.6 307.3 177.5 253.1
Butter Cheese Whole Milk Powder Skim Milk Powder Source: OECD
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The dairy industry is also affected by short-term concerns, similar to the ones affecting the livestock industry. Adverse weather-related events like droughts in Australia, poor pasture conditions in Argentina and Uruguay as a result of flooding and hot weather in the EU, and the sudden spike in feed prices have brought the industry under price pressures. Raw milk prices have risen by 40% in the US and the EU, while South America has seen the near doubling of dairy product prices. These trends have potentially made the dairy industry a lucrative investment option. Figure 77: Production consumption butter (million tons)
Average 2001-2005 8.1 8.0 156 2006 8.7 8.6 186 2007 9.0 9.0 196 2008 9.1 9.1 193 2009 9.3 9.4 188 2010 9.5 9.7 188 2011 9.8 9.9 195 2012 10.0 10.1 201 2016 10.9 11.0 223
Production Consumption Price (USD/ 100 kg) Source: OECD
The butter and cheese markets are primarily driven by increasing purchasing power and are expected to witness fast-paced growth. Although stringent tariff quotas in the U.S., Canada, the EU, and Japan might limit trade growth in these key markets, developing economies, most significantly Russia, could fuel growth in demand for butter and cheese. Figure 78: Production consumption cheese (million tons)
Average 2001-2005 17.6 17.6 231 2006 18.7 18.7 273 2007 18.9 19.0 300 2008 19.1 19.2 311 2009 19.4 19.5 303 2010 19.7 19.7 300 2011 19.9 19.9 301 2012 20.2 20.2 301 2016 21.3 21.3 302
Figure 79: Production consumption skim milk powder (million tons)

Average 2001-2005 3.5 3.5 186 2006 3.1 3.3 235 2007 3.3 3.3 259 2008 3.2 3.3 269 2009 3.2 3.3 266 2010 3.2 3.3 259 2011 3.3 3.4 254 2012 3.3 3.4 250 2016 3.5 3.6 252
The major producers of skimmed milk powder include the EU, the U.S., New Zealand, Australia, Argentina, and Ukraine. Major importers include China, the Philippines, Thailand and Saudi Arabia.
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Figure 80: Production consumption whole milk powder(million tons)

Average 2001-2005 3.6 3.4 191 2006 4.2 4.0 229 2007 4.3 4.1 255 2008 4.4 4.2 263 2009 4.5 4.4 257 2010 4.7 4.5 248 2011 4.8 4.6 250 2012 4.9 4.7 249 2016 5.4 5.2 253
The whole milk powder (WMP) market is the fastest growing dairy product market, due to roll in value-added products and for reconstituting or blending to make fluid milk drinks. New Zealand, the EU, Argentina and Australia are the major producers and exporters of WMP. Major import demand for WMP comes from the Middle East and South Asia, particularly China.
Grains
Feed stock and feed grains account for a very substantial portion of production expenses in livestock and dairy industries. The most critical case is that of pork production where 65% of total expenses go into feedstock procurement. The various grains used as feed stock include corn, barley, milo (grain sorghum), oats and wheat. Global grain shortages are a result of the increased demand for grain, due to livestock consumption and biofuel requirements. The U.S. witnessed a doubling of corn prices partially as a result of these developments in 2006; however, the consequent attractiveness of the corn saw a substantial increase in corn production, which partially offset these inflationary trends until recently. The U.S. alone witnessed a 19% increase in its corn acreage. Global agricultural production is set to rise in the short to medium term in response to the increased attractiveness of the sector as commodity prices and technological advancements offer more efficient and productive business opportunities in our opinion. However, over the long term, limited natural resources and high input costs will restrain further production growth. Consequently, the U.S., the EU, Argentina, Canada, and Australia are expected to maintain their dominant position in world grain trade; while countries such as Brazil, Russia, Ukraine and Kazakhstan are all set to ramp up their participation in global grain markets. Livestock and related feed industry dynamics have led to rapid expansion in the global soybean market which has resulted in soybean and soybean products surpassing wheat and coarse grains in terms of global trade volumes. The increased demand for vegetable oil and protein meal, accentuated by the growth in the biofuel and livestock sectors, is expected to keep soybean demand high over the next decade. In this scenario, it is believed that wheat, coarse grains and soybeans will continue to compete with each other for the planets limited resources, and market trends will be directed by the fluctuating demand and price scenario for these crops. More than two thirds of the growth in crop yields is expected to derive from increased crop yields. Simultaneously, aggressive expansion in agricultural land is expected to occur in regions with available land reserves, such as, Brazil, Argentina, and eastern European countries like the Ukraine and Russia.
The US witnessed a 19% increase in corn acreage in 2006 consequent to the high demand from the biofuel and livestock industries.
Wheat
Wheat is expected to be used more commonly in the feedstock industry, essentially due to the lower price of wheat as compared to corn. Europe is expected to generate the
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highest demand for wheat feedstock. In addition, limitations in production growth coupled with population pressures are expected to spur greater wheat imports from developing countries. Consequently, sub-Saharan Africa, North Africa and the Middle East regions are expected to contribute 45% of the 26 million tones of growth in the global wheat trade over the next decade. Egypt is expected to hold its position as the top wheat importer; while Brazil is expected to emerge as a major wheat importer, as its climate does not favour domestic wheat cultivation. Figure 81: Production consumption wheat (million tons)
Average 2001-2005 594.5 608.8 195.1 152 2006 596 621.4 161.2 204 2007 628.3 623.7 167.6 204.5 2008 640.3 633.8 175.8 197.5 2009 639.9 639.7 177.7 191.8 2010 646.1 647.1 178.3 186.1 2011 649.5 652 177.6 184.6 2012 655.5 656.6 178.1 184.5 2016 672.6 674 179.9 183.2
Production Consumption Ending Stocks Price (USD/ ton) Source: OECD
The top-five wheat exporting countries (the U.S., Australia, the EU, Argentina, and Canada) have seen their share of global trade decline from 89% in 1997-1998 to 70% in 2007-2008, primarily due to increased exports from the Black Sea region. The U.S. is projected to see its exports decline from 25% of global trade to 19% over the next decade. Canada is likely to experience a reduction in its wheat growing area and wheat production, due to the increased demand for vegetable oils, such as rapeseed oil for biofuel production and barley for livestock production. Meanwhile, Argentina, Australia, the EU, Russia, and Ukraine are projected to show continued growth in their respective wheat trades. The latter two along with Kazakhstan have come to capture almost 20% of global trade over the last two years. However, unpredictable weather and yield scenarios in these countries will also account for increased volatility in the wheat markets. Meanwhile, other major producers, like India and Turkey, are likely to see a decline in exporta as domestic demand outpaces production and stocks in inventory touch historic lows.
Coarse grains
The global coarse grains trade is essentially driven by growth in the livestock industry, especially in regions unable to meet their feed demands locally, such as China, Mexico, North Africa, the Middle East and Southeast Asia. However, two of the largest markets -Japan and South Korea -- are expected to stagnate due to the inherent maturity of these markets and demographic trends. The most dominant coarse grain in the international markets is corn, with 79% of market share, followed by barley at 15% and sorghum at 4%. The coarse grain marketplace has also been influenced by the growing commercialization of livestock feeds, particularly in the pork and poultry industries, where feedstock options are limited to corn and soybean meals unlike ruminant-related livestock production. The world coarse grain trade is projected to increase by 21 million tons from 2008 to 2017, with two thirds of this growth coming from tanimal feed demand. Additionally, use in higher value products, such as starch, ethanol and malt are expected to bring production as well as prices under greater strain. We believe the direct use of coarse grains as food in Latin America, Africa and Asia are likely to decline as growing incomes enable people to buy higher-value agricultural commodities. The steady growth in the
Corn is the most dominant coarse grain, with 79% of the international market share, followed by barley at 15) and sorghum at 4%.
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livestock industry in these regions along with the Middle East is projected to account for most of the growth in global coarse grain imports. Figure 82: Production consumption coarse grains (million tons)
Average 2001-2005 950.2 948.7 241.5 103.6 2006 980.5 1016 204.1 140.4 2007 1046 1049 194.5 158.9 2008 1082 1071 200.1 157.6 2009 1104 1091 207.3 147.1 2010 1112 1105 209.2 143.3 2011 1126 1119 210.5 144 2012 1141 1132 214 140.8 2016 1184 1175 225.8 138.2
The world coarse grain trade is dominated by the U.S., with its share of world corn trade accounting for 60% of total trade. However, the increasing diversion of corn for ethanol production in the U.S. is expected to mitigate growth in the US corn trade over the short term, though the exports will likely gain momentum in the long term as the ramp up in US ethanol production slows down in our opinion due to its inferior energy storage attributes. Several countries, including Argentina, the Ukraine and Brazil, are increasing corn production and exports due to sustained higher prices. China is one of the largest producers as well as consumers of corn; it exports very limited amounts of corn due to huge domestic demand spurred by its vibrant livestock and industrial sectors. Chinas exports are competitively priced in international markets, particularly in South East Asia, where transportation freight rates are much lower for China, compared to the U.S. These exports are projected to progressively decline as a result of policy formulations which have eliminated export subsidies and imposed export taxes.
Barley
Global barley trade is projected to grow 22% over the next decade, being driven by increased demand for malting and feed barley. The North African and Middle Eastern countries are the largest barley importers globally. However, increasing poultry production has led to corn overtaking barley as the principal coarse grain imported by these countries, though barley imports will also continue to grow steadily. Saudi Arabia is the worlds largest barley importer, accounting for over 35% of the global barley trade. The major importer of malting barley is China, which is experiencing rapid growth in its demand for barley due to a huge demand for beer and subsequent expansion in Chinas brewing capacity. The major exporters of barley include the EU, Australia, Canada, the Ukraine, and Russia. The EU and former Soviet Union together account for 65% of global barley exports. Russia and its neighbors barley exports are expected to surpass eight million tons by 2017. The Common Agricultural Policy (CAP) reforms along with the abolition of intervention for rye in the EU are expected to drive barley growth in this region. Sustained high barley prices will enable the EU to export barley to non-EU countries despite the withdrawal of export subsidies. Consequently EU trade to non EU countries is projected to grow by 50% over the next decade, reaching 4.7 million tons. The growing demand for biofuel feedstock is expected to lead to the transfer of large tracts of barley cultivation to canola cultivation, and the significant premium that malting barley commands is likely to influence planting decisions in Canada and Australia, resulting in a decrease in the production of feed barley in our opinion.
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Sorghum
Sorghum is used as an alternative to corn or soybean depending on global market demand. In the present scenario, high corn and soybean prices are expected to lead to a decline in sorghum production over the short term. However, over the long-term the stabilization of commodity prices will lead to a recovery in sorghum production. The major exporters of sorghum include the U.S. and Argentina, with the former accounting for over 80% of global trade. Brazil is also emerging as a significant exporter of sorghum; specifically, the central-west regions of Brazil are increasingly planting sorghum during the dry season (between their soybean and cotton crops). Meanwhile, Argentina is expected to see no growth in sorghum production as increased price and profitability of soybean and corn increase substitution. The major importers of sorghum include Mexico, the EU, Japan, and Chile. Mexico is expected to experience a decline in its sorghum imports, following the elimination of over rate quotas. However, Mexico will still account for 45% of global sorghum imports. The EU has started importing large amounts of sorghum, following the tightening in the supplies of non-genetically modified corn and the rise in corn prices. The EU is projected to increase its domestic production and reduce dependence on imports. Japans sorghum imports are primarily driven by the need to maintain diversity and stability in its feed grain supplies.
Oilseeds
The global oilseed industry has seen very rapid growth in recent years, being primarily driven by increased demand for protein meal for livestock production and vegetable oils for food consumption, not to mention biodiesel production. International trade in oilseeds is increasing while the trade of oilseed products has begun to decline as countries with limited oilseed production capacity establish large scale oil seed crushing facilities in an attempt to capitalize on the domestic demand for oilseed products. Consequently import demand for soybean and rapeseed is growing rapidly. Countries raising their oilseed crushing capacity include China and countries in North Africa, the Middle East and South Asia. China alone is projected to account for as much as 50% of global oilseed imports by 2016. The most commonly produced oilseeds are soybean and rapeseed. The EU plans to set aside large tracts of land for rapeseed cultivation in order to provide raw material for biodiesel production. Figure 83: Production consumption oilseeds (million tons)
Average 2001-2005 263.5 263 226.6 28 266 2006 302 301.8 262.9 38.1 289.8 2007 302.5 312 274.5 30.9 310.4 2008 313.5 320.4 283.4 26.5 311.7 2009 322.9 326.1 289.1 25.7 306.5 2010 330.5 333.2 295.9 25.3 300.8 2011 337.9 340.4 302.9 25.2 297.4 2012 344 346.7 309 24.9 297.7 2016 367.6 369.8 331.6 25.6 299.6
Production Consumption Crush Ending Stocks Price (USD/ ton) Source: OECD
Soybean
The world soybean trade is projected to grow by 35% over the next decade. A significant portion of this demand shall emanate from countries which increase their soybean crushing capacities in order to produce soybean oil and other products. Argentina, in its bid to operate its crushing facilities at full capacity, is projected to import 4 million tons
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of soybeans from Brazil, Paraguay, Uruguay, and Bolivia during 2008-2017. It is believed that as a policy decision China will choose to increase its corn production in lieu of its declining soybean production. Consequently, Chinas soybean imports will represent over 80% of the global soybean trade, which will serve to feed its huge crushing facilities and satisfy its protein meals and vegetable oil requirements. The EU was a leading importer of soybean until recently; its increased reliance on wheat and rapeseed meal to provide feed has replaced its soybean imports. Simultaneously, the EU prefers importing soybean meal rather than soybean. The major soybean exporters include the U.S., Brazil, and Argentina, and together they account for 90% of the global soybean trade. South American countries like Uruguay, Paraguay, and Bolivia are other emerging players in the global soybean markets, with their exports set to rise by 40% over the next ten years. Brazil is expected to maintain its position as the largest soybean exporter, despite the transfer of some land in southern Brazil from soybean to corn cultivation in response to attractive corn prices in global markets. The Argentine government has levied higher export taxes on soybeans than other soybean products, leading to a decline in its soybean export and large scale development of soybean crushing facilities in order to produce soybean products for export. Meanwhile, Russia and the Ukraine are also expected to significantly raise their soybean and rapeseed output in response to high international demand for oilseeds and their byproducts. The U.S.s soybean trade has been affected by high domestic crush demand and reduced soybean acreage as a result of increased substitution of soybeans for corn.
Soybean Meal
Figure 84: Production consumption oilseeds meals (million tons)
Average 2001-2005 163.7 161.2 7.4 201 2006 189.2 188.2 7.4 204.9 2007 197.6 196.8 7.1 215.2 2008 203.9 202.6 7.2 217 2009 207.8 206.4 7.4 212.8 2010 212.7 211.3 7.7 207.5 2011 217.7 216.4 7.8 204.6 2012 222.2 220.9 8 203.1 2016 238.6 237.2 8.8 200.8
The rapid growth in the livestock sector and limited avenues for expanding domestic oilseed production are driving the trade in soybean meal, particularly in middle-income developing countries. The global soybean meal trade is projected to grow by 30% during 2008-17. The growth trend is expected to be accentuated by the competitive pricing of soybean meals compared to soybeans and other grains. The EU is the largest soybean importer and is expected to maintain its lead despite the ramping up of its domestic feedstock producing capacity. This is primarily because the biofuel expansion in Europe will encourage production of rapeseed oil and meal, which is expected to provide scope for continued soybean meal import. In addition, the rising demand for livestock feed is expected to fuel the consumption of soybean meal in Southeast Asia, Latin America, North Africa, and the Middle East. Mexico is projected to see rapid growth in its soybean as well as soybean meal consumption, particularly in view of the lifting of its over quota tariff on soybean imports from the U.S. Argentina, Brazil and the U.S. are the major exporters of soybean meals as well. Argentina is expected to raise it share from 45% currently to 55% over the next decade.
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This is primarily because of tax incentivized soybean meal production in Argentina, which makes it profitable to import soybean beyond its domestic production, in order to feed its huge soybean crushing capacities. Brazil is projected to maintain its market share in the 20-25% range. Unlike Argentina, the differential export structure in Brazil favours exporting soybeans rather than its derivatives, thereby, dissuading expansion of soybean crushing facilities. Additionally, the growing demand in domestic consumption of soybean meals by the livestock sector will also limit growth in soybean meal exports.
Soybean Oil
Figure 85: Production consumption vegetable oils (million tons)
Average 2001-2005 85.3 31 82.6 7.9 520.6 2006 102.9 39.2 100.8 9.2 590.7 2007 106.9 40.4 105.1 8.8 618 2008 110.8 42.1 108.6 8.8 619.7 2009 113.5 43.2 111.3 8.9 622.9 2010 116.6 44.7 114.3 9 611.9 2011 119.5 45.8 117.3 9 610.8 2012 122.6 47.5 120.3 9.1 608.5 2016 134.6 54.1 132.3 9.3 613.9
Production Palm oil production Consumption Ending Stocks Price (USD/ ton) Source: OECD
China and India are the largest importers of soybean oil, for food consumption.
The increased food demand and increasing growth of the biofuel industry are driving the global soybean oil market. The two largest soybean oil importers include China and India; both the countries use soybean for food consumption uses. Indias limited domestic production capacity is marred by low yields, erratic weather conditions and low input use in production. Additionally, India imports soybean oil at import tariffs lower than that for other vegetable oils due to WTO commitments. This makes India a key player in global soybean oil markets. China is constrained by limited arable land availability, despite of the attractiveness that is associated with the soybean markets. Though China has established huge soybean crushing capacities, oil obtained from these crushing facilities still falls short of its huge demand. Consequently, China is compelled to import increasing quantities of soybean oil as well. The increasing purchasing power and population in North Africa, the Middle East and Latin America are also driving soybean oil consumption and imports, though high international prices are expected to temper the demand growth in a few relatively poorer nations. The EU is also projected to import large quantities of soybean oil in order to replace the rapeseed oil that is diverted from food use towards biodiesel consumption. Argentina and Brazil are the largest exporters of soybean oil with an 80% market share which is expected to rise to 85% by 2017. Argentine market share is driven by an export tax structure that favors the export of soybean derivatives over soybean; this policy has led to the development of large crushing capacities and a small domestic market for soybean oil. It is further expected to increase its soybean production by introducing double cropping, cultivating marginal lands in the north western parts of the country and bringing further adjustments to crop pasture rotations. Additionally, it is also projected to import huge amounts of soybean from South American countries. A significant portion of the additional soybeans is expected to be used for raising soybean oil production capacities. It is believed that expansion of soybean cultivation areas in Brazil will enable it to increase its soybean oil production and export capacities as well. The U.S. is projected to see a decline in its share in global trade, primarily because of the large scale use of soybean oil for domestic biofuel production. However, over the long term, the U.S.
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is expected to increase its exports by substantially increasing its soybean production to exceed its domestic demand. The EU is projected to witness a significant fall in its vegetable oil exports, essentially because of the diversion towards biodiesel production.
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FUEL
The pressure on global food supplies and prices can largely be attributed to the growing energy demands and the limited availability of cheap natural resources. The near-term threat is that processing capabilities will continue to fall short of demand. However, over the long term, the exhaustion of non-renewable resources poses a more severe threat to the world economic order. Presently, global crude oil prices are at historic highs due to a shortfall of supplies in the international market. It is expected that over the next few years, fresh crude oil supplies will help offset the increase in demand from Asia, though crude oil prices will likely continue to show an upward trend throughout the coming decades. Meanwhile strong economic growth particularly in Asia will underpin fuel demand. In this scenario, fresh oil discoveries, technological improvements, adoption of non-oil energy technologies and further development of renewable energy resources are the factors which are expected to mitigate inflationary pressures. As in the case of food, 80% of the fresh energy demand is expected to come from developing countries. As is the case with global food demand, almost 80% of fresh global energy demand is also expected to come from developing countries. It is believed that fossil fuels will continue to account for 80% of global energy supply in 2030, with oil and natural gas alone projected to provide for 55-60% of our energy needs. Petroleum prices are thereby expected to maintain an upward trend over the long term, since the crude oil, which accounts for two thirds of the cost, is projected to trade at high costs. Meanwhile, among fossil fuels, oil is expected to lose a part of its share to coal and natural gas; the former would be in demand due to its competitive price and the latter will gain prominence due to high efficiency and environmentally friendly features associated with its use. Figure 86: Projections for primary energy consumption by type of fuel
Others 9% Oil 36% Others 9% Oil 33%
Nuclear 6%
Nuclear 5%
Coal 25%
509.7 Quadrillian B tu
Coal 27%
721.6 Qua drillia n Bt u
Natural Gas 24%

2010 Source: IEA
Natural Gas 26%

2030
Global energy demand is projected to grow by 47%, from 283 quadrillion Btu in 2004 to 702 quadrillion Btu in 2030. According to OECD estimates, annual growth in the developed and mature OECD economies is expected to be limited to 0.8%, while the nonOECD countries are expected to see an increase in their energy demands at a CAGR of 2.6%. The energy requirements of non-OECD countries, which primarily include undeveloped and underdeveloped countries, are expected to surpass the requirements of the OECD countries by 2010; by 2030, the difference is estimated to be as high as 35%. Almost two thirds of the demand amongst the non-OECD nations is expected to originate from India and China, which are expected to see a combined demand growth of 3.2%.
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The non-OECD Asia region consumed 48% of the total global consumption, and is expected to raise its share of global consumption to 56% by 2030. Fossil fuels, particularly liquids, are expected to continue to provide for the largest share of world consumption; increasing crude prices and environmental concerns will help to spur a fall in the share of fossil fuel liquids from 38% in 2004 to 33% in 2030. It is expected that post-2015, alternative fuels will gain prominence over conventional fossil fuels. Figure 87: Primary energy demand-supply balance for top five consumers of energy, 2005
US Production (Quadrillion Btu) Consumption (Quadrillion Btu) 69.6 100.7 China 63.2 67.1 Russia 52.7 30.3 Japan 4.1 22.6 India 11.7 16.2
Source: Energy Information Administration (USA)
Presently, the top five energy consumers include the U.S., China, Russia, Japan, and India; among these, only Russia produces more than its consumption requirements. The demand for fuel is expected to increase at marginal rates. This is primarily because advanced technologies and materials will facilitate the achievement of greater efficiency, which in turn will offset the expected rise in demand due to high purchasing power and development. The U.S. is also expected to significantly raise its biofuel utilization by mandating an increased amount of ethanol in its liquid mix and investing heavily in cellulosic biofuels. With over 130.8 million automobiles, the U.S. is the largest consumer of transport fuel; its fuel requirements can be gauged by the fact that China has only 4.5 million automobiles. It consumes 54% of OECDs total energy spend on transportation. Furthermore, the U.S. is expected to maintain its position as the largest consumer of industrial, residential, and commercial energy in OECD through 2030. Figure 88: Global primary energy consumption projections
800 Quadrillion Btu 640 480 320 160 0 2010 2015 2020 2025 2030
India Japan Russia China US Rest of the World
Meanwhile, China and India are expected to show a large increase in energy demand among non-OECD nations. Chinas energy use in the transportation sector is estimated to grow at 4.9% through 2030; unlike the U.S., most of the growth in Chinas consumption is expected to be in the form of liquid fuel. China has, in fact, accounted for over 30% of global incremental consumption of liquid fuels. It is further expected to account for 28% of the increase in demand during the period 2004-2030, with is global demand share in
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2030 being 14%, nearly double of its share in 2004. Besides China, India is also expected to see rapid growth in its transportation fuel requirement, with an estimated CAGR of 3.3% during the period 2004-2030. The burgeoning demand for fuel in developing countries, particularly India and China, is attributed to rapid economic development, increasing income levels and large-scale development of infrastructure, particularly the transportation system. Figure 89: Oil consumption for top five consumers of energy 2006
US Proved Reserves (Billion Barrels) Total Oil Production (Thousand barrels/day) Crude Oil Production (Thousand barrels/day) Consumption (Thousand barrels/day) 21.8 8,330.5 5,102.1 20,687.4 China 18.3 3,780.8 3,608.6 6,720 Russia 60 9,513 9,043.1 2,757 Japan 0.1 128.5 6.6 5,305.1 India 5.4 834.6 664.7 2,438
Oil production in China and India is less than half their consumption.
Global oil demand in 2007 stood at 86 million barrels per day and is estimated to have risen to 87.5 million barrels per day in the first quarter of 2008. Long-term projections suggest an increase in daily consumption to 97 million barrels in 2015 and subsequently, 118 million barrels in 2030. China accounts for more than 25% of the growth in consumption. The U.S.s total petroleum consumption averaged at 20.7 million tons per day and is projected to rise to 21 million tons in 2008. Figure 90: Global oil consumption projections
120 Million Barrels per day 96 72 48 24 0 2010 2015 2020 2025 2030 India Japan Russia China US Rest of the World
Meanwhile, China and India are expected to show the maximum increase in energy demand among non-OECD nations. Chinas energy use in the transportation sector is estimated to grow at 4.9% through 2030; unlike the U.S., most of the growth in Chinas consumption is expected to be in the form of liquid fuel. China has, in fact, accounted for over 30% of global incremental consumption of liquid fuels. It is further expected to account for 28% of the increase in demand during the period 2004-2030, with is global demand share in 2030 being 14%, nearly double of its share in 2004. Besides China, India is also expected to see rapid growth in its transportation fuel requirement, with an estimated CAGR of 3.3% during the period 2004-2030. The burgeoning demand for fuel in developing countries, particularly India and China, is attributed to rapid economic
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development, increasing income levels and large-scale development of infrastructure, particularly the transportation system. Figure 91: Oil consumption for top five consumers of energy 2006
US Proved Reserves (Billion Barrels) Total Oil Production (Thousand barrels/day) Crude Oil Production (Thousand barrels/day) Consumption (Thousand barrels/day) 21.8 8,330.5 5,102.1 20,687.4 China 18.3 3,780.8 3,608.6 6,720 Russia 60 9,513 9,043.1 2,757 Japan 0.1 128.5 6.6 5,305.1 India 5.4 834.6 664.7 2,438
Global oil demand in 2007 stood at 86 million barrels per day and is estimated to have risen to 87.5 million barrels per day in the first quarter of 2008. Long-term projections suggest an increase in daily consumption to 97 million barrels in 2015 and subsequently, 118 million barrels in 2030. China accounts for more than 25% of the growth in consumption. The U.S.s total petroleum consumption averaged at 20.7 million tons per day and is projected to rise to 21 million tons in 2008. Figure 92: Global oil consumption projections
120 Million Barrels per day 96 72 48 24 0 2010 2015 2020 2025 2030 India Japan Russia China US Rest of the World
The strain put on resources due to high demand has been further aggravated by global geopolitical tensions and a decline in OPECs spare capacity to produce oil. Over the long term, global energy demands are projected to grow at a CAGR of 1.3% during 20052030, resulting in a 40% increase in demand by 2030 in absolute terms. Sector wise, the strongest growth in energy demand is projected to originate from the transportation sector which is set to grow at a CAGR of 1.7% and would account for two thirds of the additional crude demand. Meanwhile, the power generation sector is expected to account for 27% of the growth, increasing at 1.5% annually. Energy demands from the industrial and residential/commercial sector are projected to grow at 1.2% and 0.7%, respectively.
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Figure 93: Top five oil producers 2006

Saudi Arabia Proved Reserves (Billion Barrels) Total Oil Production (Thousand barrels/day) Crude Oil Production (Thousand barrels/day) Consumption (Thousand barrels/day) 266.8 10,664.7 9,152.3 2,139.4 Russia 60 9,513 9,043.1 2,757 US 21.8 8,330.5 5,102.1 20,687.4 Iran 132.4 4,148.1 4,027.8 1,685.8 China 18.3 3780.8 3,608.6 6,720
Over the last two decades, the oil sector has seen a declining share of the OPEC countries in the global markets. OPECs share has declined from 52% in 1973 to 41% in 2004. However, the forecast for the period 2004-2030 suggests that OPEC will account for 65% of growth in production during this period and consequently, its share in global supplies will rebound to reach 48% by 2030. Figure 94: Natural gas demand-supply balance for top five consumers of energy, 2006
US Proved Reserves (Billion Cubic Feet) Production (Billion Cubic Feet) Consumption (Billion Cubic Feet) 204,385 18,531 21,821 China 53,325 1,960 1,995.3 Russia 1,680,000 23,166.6 16,598.1 Japan 1,400 120.4 3,137.3 India 38,880 1,066.5 1,348.7
Rising crude oil prices have led to increased market viability for natural gas. Energy companies are shoring up their natural gas supplies in response to enhanced demand. Increasingly, natural gas is expected to replace the fossil fuel liquids in industrial and electric power sectors. Industries are expected to consume as much as 43% of natural gas produced by 2030. Figure 95: Global natural gas consumption projections The share of natural gas in global electricity generation is expected to increase from 31% in 2004, to 36% in 2030.
200 Trillion Cubic Feet 160 120 80 40 0 2010

Source: EIA
2015
2020
2025
2030
The fact that natural gas is a more efficient fuel and is also less carbon intensive, is expected to make it a more attractive fuel in global markets, considering the increase in environmental concerns. Consequently, its share in global electricity generation is
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projected to grow from 31% in 2004 to 36% in 2030. The global natural gas consumption is projected to increase at a CAGR of 1.9%, from 100 trillion cubic feet in 2004 to 163 trillion cubic feet in 2030. Figure 96: Coal demand-supply balance for top five consumers of energy, 2006
US Production (Million Short Tons) Consumption ( Million Short Tons ) 1,161.4 1,114.2 China 2,620.5 2,578 Russia 340.6 264.2 Japan 0 197.6 India 497.2 542.8
Amid the inflationary pressures in the energy market, coal is increasingly being seen as an attractive and cost-effective alternative to oil and natural gas. China and India have shown a sharp increase in coal consumption in the recent past and are expected to continue adopting coal in place of more expensive fuels. Both countries along with the U.S., are projected to account for 86% of the increase in coal consumption during 20042030. It is believed that coals share of world energy consumption will rise to 28% from the present 26% by 2030. Figure 97: Global coal consumption projections
11,000 Million Short Tons 8,800 6,600 4,400 2,200 0 2010 2015 2020 2025 2030
Meanwhile, countries with slowing growth in electricity demand, such as OECDEuropean countries and Japan are expected to experience a decline in coal consumption as they find additional nuclear power and natural gas facilities sufficient to fulfill their fresh electricity demands. Figure 98: Electricity demand-supply balance for top five consumers of energy, 2005
US Net Generation (Billion Kilowatt-hours) Net Consumption (Billion Kilowatt-hours) Installed Capacity (GWh) 4062 3,815.7 956.7 China 2,371.8 2,197.1 442.4 Russia 904.4 779.4 217.2 Japan 1,024.6 974.2 247.9 India 661.6 488.5 137.6
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The global electricity generation capacity is projected to nearly double from 16,424 billion kilowatt hours in 2004 to 30.364 billion kilowatt hours in 2030. Developing nations are expected to account for the most significant growth in power capacity; the estimated rate growth for relatively underdeveloped or undeveloped OECD countries being 3.5% annually. Meanwhile, relatively developed OECD countries with well developed infrastructure are expected to see 1.3% annual increase in electricity generation through 2030. Natural gas and coal are estimated to account for even greater share of global power capacity in 2030.The higher efficiency and environmental benefits associated with natural gas would lead to an increase in its share from 20% in 2004, to 24% in 2030. Figure 99: Global electricity consumption projections China, Russia, and India are expected to increase their nuclear capacity by 73 gigawatts by 2030.
32,000 Billiob Kilowatthours 25,600 19,200 12,800 6,400 0 2010 2015 2020 2025 2030 India Japan Russia China US Rest of the World
Meanwhile, considering high crude and gas prices, coal is expected to gain in prominence with its share in the global power sector expected to increase from 41% in 2004 to 45% in 2030. However, high fossil fuel price, global energy security concerns, and environmental consideration will press a case for increased nuclear power generation, with globally installed capacity projected to increase from 368 gigawatts in 2004 to 481 gigawatts in 2030. Nuclear power generation in 2030 is estimated to be 3,619 billion kilo watt-hours compared to 2619 billion kilo watt-hours in 2004. The European countries are expected to see a decline in their existing nuclear power capacity due to planned phase-out of existing reactors. However, developing nations are expected to witness a large build up in nuclear power capacity. China, Russia, and India are expected to increase their nuclear power capacity by 36 gigawatts, 20 gigawatts, and 17 gigawatts, respectively.
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Figure 100: Global renewable energy consumption projections

70 Quadrillion Btu 56 42 28 14 0 2010
Source: EIA
India Japan Russia China US Rest of the World 2015 2020 2025 2030
Renewable sources-based power generation capacities are expected to see a marginal increase in share from 7% in 2004 to 8% in 2030. The government policy support for renewable resources-based programs and high fossil fuel prices are expected to facilitate 1.9% annual increase in renewable power generation through 2030. Much of the growth in hydropower generation is expected to come from non-OECD Asia and Central and South America.
Biofuels
Biofuels have emerged as an economically-viable alternative to fossil-based fuels. The high prices of crude oil products have made it highly profitable to grow crops for biofuel production. Additionally, the present scenario allows producers of biofuels to charge premiums and still be competitively priced compared to crude. The main feed-stocks used in biofuel are corn and sugar for ethanol, and rapeseed and soybean oils for biodiesel. In addition, barley, wheat, rye, wine, and cassava are being used for ethanol production and a variety of other vegetable oils, recycled oils, and fats from the food industry for biodiesel. Significant effects of the increase in biofuel demand on the livestock sector are:
a.
Prices for corn, soybean, and soybean oil are expected to increase further as a result of high demand from the biofuel sector; high commodity prices will incentivise an increase in acreage for corn and soybean, which could spur a decline in cotton and wheat acreage; and, the use of crops for feed and food purposes would decline due to the diversion of produce to the biofuel industry. However, increasing soybean crush capacity for biodiesel would result in greater production of soybean meal as a co-product. Consequently, soybean meal is expected to gain prominence as the prevalent livestock product in the market.
b.
c.
The major factors that are expected to drive the growth of the biofuel industry over the long term are:
a.
Increasing concerns over future energy supplies in view of the limited availability of natural resources and increasing reliance on less reliable countries for oil imports;
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b. c.
the ability of biofuels to address pollution-related environmental concerns; and, the development of new and more attractive avenues of income for farmers.
Major biofuel consumers include the U.S., the EU, Brazil, Canada, and Argentina.
Consequently, ethanol production in the U.S. has witnessed rapid growth, with volumes rising from less than 3 billion gallons in 2003, to over 6 billion gallons in 2007. Ethanol production is further projected to grow to 12 billion gallons by 2010 and 14 billion gallons by 2017. Nevertheless, even at these volumes, ethanol would account for only 8.5% of the U.S.s annual gasoline use. These trends are expected to be accentuated by government policies, such as tax credits available to blenders of ethanol and reduced import tariffs on ethanol used as fuel. The expansion in ethanol production is expected to consume more than one third of the U.S.s annual corn production. In absolute terms, corn use for ethanol production is projected to double from 55 million tons in 2006 to 110 million tons in 2016. The consequent rise in corn demand is expected to put inflationary pressures not only on corn products, but also trigger supply-demand adjustments for other crops, as well. Biodiesel production is expected to witness limited growth in the U.S. due to high feedstock costs attached with soybean oil-based biofuels. Soybean oil use in biofuel production is expected to increase marginally from 2 million tons in 2007 to 2.3 million tons in 2011. Figure 101: Global ethanol production, 1980-2006
16 Ethanol Production (Billion Gallons) 14 12 10 8 6 4 2 0 1980 1984 1988 1992 1996 2000 2004
Source: OECD
The growing significance of biofuel as an alternative source of energy has mandated biofuel policy formulation on the part of governments around the world. The major biofuel producers and consumers besides the U.S. include the EU, Brazil, Canada, Argentina, China, India, Malaysia, Indonesia, and the former Soviet Union. The EU has set a mandate of sourcing 5.75% of its transportation fuel needs from biofuels by 2010, and to further increase the share for biofuel to 10% by 2020. The EU has provided a per acre subsidy on energy crops in order to facilitate this; additionally, individual member states are offering tax credits in biofuel production. It is projected that by 2010, biodiesel will account for two-thirds of the biofuel and ethanol will account for the rest in the EU. However, despite the 170% increase in biofuel production between 2006 and 2010, the 5.75% fuel share target is not expected to be met. Most of the biofuel-related acreage in the EU is expected to be dedicated to rapeseed cultivation; the region is expected to witness a sharp rise in rapeseed production and development of oilseed crushing facilities as well. Meanwhile, more than 18 million tons of wheat, 21 million tons of oilseed and 5.2 million tons of corn are projected to be consumed by the biofuel industry
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in the EU by 2016. As well, the EU is expected to import significant quantities of rapeseed oil from Russia and the Ukraine, palm oil from Southeast Asia, and biodiesel from the U.S. and Southeast Asia. Figure 102: Production consumption oilseed meals (million tons)
Average 2001-2005 0.89 13.9 2006 0.97 19.4 2007 0.92 21.5 2008 1.05 23.6 2009 1.13 25.7 2010 1.29 28.2 2011 1.46 30.8 2012 1.62 33.4 2016 2.24 43.8
The EU Brazil Source: OECD
Brazil is known for substituting a large share its petroleum-based fuels for biofuels, particularly ethanol. Large tracts of land have been shifted in southern Brazil from grain and oilseed production to sugarcane production in order to provide substantial raw material for ethanol production. Brazil presently uses nearly 50% of its sugarcane output for ethanol production; it is further projected to consume more than 60% for biofuel production by 2016. Consequently, ethanol production is projected to grow by 145% during 2006-2016 and reach 43.8 billion litres in 2016. Simultaneously, recent government policies aimed at stimulating biodiesel production in the soybeanproduction areas of Central Western Brazil are expected to provide a boost to the biodiesel industry, particularly in regions where transportation costs of petroleum-based diesel is prohibitively high. Canada has a relatively small biofuel production capacity. However, it has doubled its ethanol production in 2006, the same year it commenced biodiesel production. The Canadian government has mandated a 5% ethanol blend in gasoline by 2010 and a 2% biodiesel blend in on-road diesel and heating oil by 2012. The nation is projected to more than double its biodiesel production over the next decade, essentially by increasing the acreage and yield of rapeseed grown in its prairie provinces and by expanding its processing and crushing capacities. Canada is also projected to expand its ethanolproduction capacity by bringing a significant area under wheat and corn cultivation, in order to provide the requisite feedstock. Consequently Canadas ethanol production is slated to rise from 550 million litres in 2006 to 1.9 billion litres in 2009. Similarly, biodiesel production is expected to grow strongly from 70 million litres in 2006, to 600 million litres in 2012. More than half the growth in bio diesel production is expected to emanate from oilseeds and vegetable oil; yellow grease and tallow are expected to account for the remaining growth in production. Argentina has developed huge oilseed crushing facilities, which are fed not only by its substantial domestic feed stock output, but also by its large-scale soybean imports. The differential export taxes in Argentina have incentivized biofuel exports compared to vegetable oil or feedstock exports. Consequently, it is estimated that Argentina will double its biodiesel production capacity during 2008-2017. China is expected to focus on the development of non-grain feedstock-based biofuel production in line with its food security policy, which seeks to cut down on corn-based ethanol production to ensure ample corn supplies to satiate its food needs. Still, in view of its burgeoning fuel requirements, China presently uses 3.5 million tons of corn for fuel ethanol production and more than 17.5 million tons for ethanol is required for industrial and beverage uses.
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Most of the biofuel industry-induced growth in FSU, Malaysia, and Indonesia is expected to be driven by the growing demand in the international markets and the high premium attached with the biofuel products. Russia and the Ukraine are projected to more than triple their rapeseed production over the next decade, specifically eyeing the rapeseed and rapeseed oil markets in the EU. Meanwhile, Malaysia and Indonesia are expected to moderately raise their palm oil production in order to serve the biofuel requirements. In addition, India, despite its recent food security, land scarcity, and inflation-related problems, is coming up with a national biofuel policy which mandates meeting 10% of total transport fuel needs with biofuels by 2017. India is expected to bring 12 million hectares of forest wasteland under biofuel crop plantation. Unlike the U.S. and Southeast Asia (where corn and palm crops are diverted towards biofuel production) India plans to grow non-edible crops on agricultural wastelands. Already 600,000 hectares of land is under Jatropha cultivation which is expected to provide 300-500 million litres of biofuel annually.
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EQUIPMENT
With the development and use of agricultural equipment, manpower used on farming operations has reduced significantly. In the 1930s, the primary occupation of 24% of the American population was agriculturally-based compared to less than 2% today. However, with the help of a great variety of farming devices, the current manpower provides significantly more food than the nations consumption. Modern farm machinery allows farmers to produce and harvest more bushels in less time. Farming devices cover a wide range of complexities, from simple hand-held implements used since prehistoric times, to the complex harvesters of modern mechanized agriculture. This agricultural machinery is primarily used to improve the efficiency and effectiveness of various farm activities especially in crop growing, harvesting, and livestock raising. A majority of the demand for agriculture equipment comes from the operators of food-, livestock-, and grain-producing farms, and from independent contractors that provide services to such farms. The most significant factor that influences the demand for farm equipment is net farm income. Other influencing factors include general economic conditions, interest rates and the availability of financing. In actuality, there is a strong correlation between the net farm income and spending on equipment. Figure 103: Farming income versus agriculture equipment spending, U.S., 2006
100 Farm income (in USD billion) 105
80 90 60 75 40 Unit sales in '000
20 2001 2002 2003 2004 2005 2006 Net Farm Income

Source: USDA
60 Tractors/combines (40hp+)
Agricultural equipment spending has a high correlation with the level of farming income and the availability of sufficient equipment financing options.
Net farm income is primarily impacted by the volume of acreage planted; commodity and/or livestock prices and stock levels; demand for biofuel; crop yields; farm operating expenses, including fuel and fertilizer costs; fluctuations in currency exchange rates; and, government subsidies. Farmers tend to increase the purchase of equipment when the farm economy is prospering and postpone their purchases when economic conditions are depressed. Weather conditions significantly affect crop yields and consequently, also impact equipment buying decisions. In addition, the geographical variations in weather from season to season may result in one region witnessing a decline in income and another region is experiencing growth. Government policies also affect the demand for agricultural equipment. Policies regulate the acreage planted and provide direct and indirect subsidies affecting specific commodity prices. World organization initiatives, such as those of the WTO, also affect the market with demands for changes in
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governmental policies and practices regarding agricultural subsidies, tariffs, and the acceptance of genetically modified organisms (GMOs) such as seeds, feed, and animals. Different climatic regions and farming calendars cause a seasonal demand for farm equipment. For example, the demand for tractors and tillage is at its peak in March through June in the Northern Hemisphere and in September through December in the Southern Hemisphere. Higher farm incomes and sufficiently available equipment financing makes the acquisition of agriculture machinery affordable in developed regions especially in North America, Western Europe, and portions of the Pacific Rim. Conversely, in Africa, Asia, and Latin America, farm incomes are still low, capital is scarce, and equipment often consists of hand-held plows. According to the USDA, equipment represents 30% of total farming expenses in developed regions, whereas in developing regions, it is only 10% of total farming expenses. This is primarily because developing regions lack the infrastructure, know-how, farm size, sophistication, and money to employ substantive equipment and technology to complement their farming techniques. Additionally, in developing regions, labour is abundant and infrastructure, soil conditions and/or climate are not conducive to intensive agriculture12, and as a result, the demand is for durable machines with lower purchase and operating costs. Tractors are the primary agricultural equipment used in these regions and the work that cannot be performed by a tractor is carried out by hand. All the BRIC countries are below average in terms of equipment usage and of these countries, India has the least usage of equipment, with about 60% of its labour force still engaged in agriculture while only about 16% of its GDP is derived from this sector. The farm income in these countries is limited due to the practice of subsistence farming13, which curtails the purchase of even lower-end mechanized products. In the U.S. and Western Europe, subsidies given by government are a significant source of income for farmers raising certain commodity crops such as soybean, corn, and wheat. In years of natural disasters, the support level can reach 50% of the annual income. The cyclicality in the agriculture equipment industry is reduced with the existence of such a high level of subsidies. Consequently, the demand for farm equipment is significantly affected by the US Farm Bill, the Common Agricultural Policy (CAP) of the European Union, and WTO negotiations. Additionally, the Brazilian government also provides subsidies on financing of agricultural machinery, which also influences its sale in this region. The US Farm Bill 2007 was passed by the United States House of Representatives on July 27, 2007. In the U.S., the USDA administers agriculture programs for the government. In the 2009 budget proposal for the USDA, tabled by President Bush along with the US Farm Bill 2007 in July last year, certain reforms were suggested. These reforms, if enacted, may reduce subsidies to farmers, which in turn, can lead to a reduction in the demand for agricultural equipment. However, the sale of farm equipment in the U.S. and Canada is forecast to increase by 10% to 15% for the year 2008 primarily due to a substantial increase in farm cash receipts.
12
Intensive farming or intensive agriculture is an agricultural production system characterized by the high inputs of capital, fertilizers, labour, or labour-saving technologies such as pesticides relative to land area. 13 Subsistence agriculture is defined as self-sufficient farming in which farmers grow only enough food to feed the family, pay taxes, or feudal dues.
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Agricultural programs in the EU are governed by the Common Agricultural Policy (CAP). It aims to provide farmers with a reasonable standard of living, provide consumers with quality food at fair prices, and to preserve the EUs rural heritage. In June 2003, the Single Payment Scheme was introduced by the farm ministers from EU member nations. Under this new program, single-farm payments will go to farmers based on the size of their farms rather than their output. However, the old system would be allowed to continue in limited circumstances where there is a risk of farmers discarding the land, especially for cereal grains and beef. Reduction was carried in direct payments for bigger farms to fund the rural development policy on the expectation of the May 2004 enlargement of the EU and a 55% increase in farmers covered by the CAP. In January 2007, the number of farmers in the EU increased by 53% as a result of the EU increasing its membership to 27 countries. This increase caused further impetus for a regulatory review of the policy and a review of future financing of the CAP. In the Doha Round talks of the WTO, the EU has offered to enact a number of changes, including the elimination of export subsidies and a 50% reduction of the average tariff on agricultural imports. Other proposals include a scheme to limit subsidies to individual landowners and factory farms, and a reduction in capital distributed to the original EU members to fund payments to new member countries. Along with theses proposals, the EU needs to meet targets set for a reduction in greenhouse gases and to obtain 20% of energy needs from renewable sources. In December 2007, the EU also agreed to suspend import duties on many cereal grains. This step was taken to reduce pressure on the European grain market, as the EU, a traditional exporter of cereal crops, expects to be a net importer in the 2007-2008 marketing year. About 80% of the land area in the EU is farmland and changes and proposals like these can have a significant impact on farmers. If the impact on farmer income is negative, the demand for agricultural equipment may decline. In 2005, France accounted for 25% of the regional demand for machinery; Germany for 20%; Italy for 18%; and the UK for 7%. Industry sales for 2008 in Western Europe are forecast to be either stable or to increase marginally for the year with a higher increase expected in Eastern Europe and the CIS (Commonwealth of Independent States) countries, including Russia. The government of Brazil supports agriculture by providing subsidized long-term loan programs controlled by the development agency, Banco Nacional de Desenvolvimento Econmico e Social (BNDES). The most important agricultural program is the MODERFROTA Program (Programa de Modernizao da Frota de Tratores Agrcolas, Implementos Associados e Colheitadeiras) which provides capital for the purchase of tractors, combines, and farm machinery. The program provides subsidized funding to financial institutions to be loaned to farmers in accordance with the provisions of the program. In South America, Brazil accounted for 49% of the regional agricultural equipment purchases in 2005 while Argentina accounted for 27%. Interestingly, Brazil is the only country in this region which had a surplus in the foreign trade of farm machinery with a net export US$0.5 billion in 2005. The demand for farm equipment in 2008 in this region is forecast to increase by 10-15%. Although strong commodity prices in Brazil are expected to influence the demand for farm machinery positively, uncertainty in the future of government-backed financing programs may affect sales.
Tractors and combine harvesters are the two largest segments in the farm equipment industry, accounting for 46% of the market.
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Figure 104: Market segments in farm equipment industry, 2005

Farm tractors 20% 29% Farm Combine Harvesters Planting, seeding and fertilizing machinery Haying machinery Plowing and cultivating machinery 5% 6% 6% 17% Parts and attachments Other agricultural equipment
17%
Source: World Agricultural Equipment Study #2089, The Freedonia Group
Global farm conditions are positive on account of increasing economic prosperity, strong commodity prices, and an increase in demand for renewable fuels. Grain stocks worldwide are continuing to run at or near 30-year lows, especially wheat and corn. These conditions are favourable for the agricultural machinery industry. The agricultural machinery and equipment sector exhibited 6% growth annually between the year 2000 and 2005, which was much higher than agricultural output (2.6% annualized growth) and population growth (1.2% annualized growth). The corresponding figure for 2005 to 2010 is lower at 4.8%, primarily due to the weakening of the US economy, which exhibited strong growth from 2002 to 2005. Figure 105: Five largest farm equipment companies by revenue, 2007
Company Name Caterpillar Inc14 Deere & Co CNH Global AGCO Kubota Corp Source: World Agricultural Equipment Study, The Freedonia Group Revenues (in US$ billion) $41.7 $21.5 $9.9 $6.8 $6.3 % growth 8.0 8.0 26.9 25.9 8.6
However, in absolute terms, global demand for farm machinery has increased from US$ 52.7 billion in 2000 to US$70.2 billion in 2005 and is expected to reach levels of US$ 88.8 billion in 2010. In 2005, the largest producers of farm equipment were the U.S., China, Germany, and Italy, each with annual shipments in excess of US$4.5 billion followed by India, France, Brazil, Canada, South Korea, and the UK, each with shipments in excess of US$1.5 billion. Although manufacturers in developed regions have advantages such as a large, diversified domestic market; possessing technical, managerial and marketing expertise; and relatively better access to capital and labour; they are finding developing regions as more attractive investment options due to rapid growth in these regions and additionally, cheaper labour.
14
Revenue represents sales of construction, mining, and forestry machinery.
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Agricultural tractors
Farm tractors have multiple uses and can be utilized for pulling plows, rakes, mowers, planters, etc. Different specifications are available including the horsepower (hp) which varies from less than 40 hp to over 400 hp. Figure 106: Global farm tractor sales growth, 2000-2007
900
Unit sales in '000
800 700 600 500 2000

541
CAGR 6.0% 758 677
795
812
2004
2005
2006
2007
Source: CNH Globals 10-K filing
In North America, the under 40-horsepower tractor market segment exhibited the most rapid growth from 1992 to 2004, increasing from approximately 36,000 units sold in 1992 to approximately 141,000 units in 2004. However, since 2005, this industry segment has been declining and in 2007, the number of units sold was approximately 127,500, a decline of 4% over 2006 sales. On the contrary, sales of over 40-horsepower tractors have been increasing since 2001 and reached a peak of 115,000 units in 2007, an increase of 7% over 2006. The sales of over 100-horsepower tractors are more cyclical, and have ranged from 22,000 and 37,000 units in the recent past, depending largely upon the agricultural commodity price levels. On the strength of the high corn, soybean and wheat prices, sales of over 100-horsepower tractors were approximately 29,300 units in 2007, which was an increase of 22% over 2006. The demand for such tractors generally comes from production farmers, who have large-sized farms and grow large quantities of cash grain crops. Figure 107: Global farm tractor unit sales by region, 2007
Western North America 33% Total Units 812,200 (approx) Latin Rest of the World 42%
Europe 21%
America 4%
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In Western Europe, the annual sales of tractors have fluctuated within the narrow range of 160,000 to 170,000 units in the recent past. These fluctuations largely depend on the government subsidies and the CAP of the EU, animal diseases, and unusual weather patterns. In 2007, industry sales were 168,000 units, 3% higher than in 2006 sales. Additionally, the EU has set a target of obtaining 20% of its energy needs from renewable sources, including 10% of its transportation fuel supply from biofuels. However, the demand for farm tractors is not the same as compared to North America or Brazil. Moreover, in many Western European countries, there are restrictions on weight or dimensions of equipment such as road regulations and bridge or overpass height and width constraints, which may affect the demand for large machinery. Figure 108: Farm tractor industry unit sales for North America, Western Europe, and Latin America, 1990-2007
250
200
Unit sales in '000
150
100
50
0 1990 1994 North America under 40 HP North America over 40 HP Source: CNH Globals 10-K filing 1998 2002 Western Europe Latin America 2006
In South America, the demand for tractors has been increasing since 1996. However, a severe drought in Brazilian states in 2005 resulted in the decline of tractor sales by about 40% in that year. Another reason for the decline was low soybean prices. The revaluation of the Brazilian Real also acted as catalyst during this decline, as agriculture exports were denominated in US dollars. But in 2006, the Brazilian tractor market exhibited a 15% increase year-over-year primarily due to the strong demand in the sugar cane and citrus-market segments. During 2007, sale figures were approximately 31,000 units, an increase of 50% over 2006 levels. This was primarily fueled by the strong demand from sugar cane producers who are looking to modernize their operations and develop further efficiencies in the production of fuel ethanol from sugar cane and from the citrus market segments. In other world markets (excluding North America, Latin America, and Western Europe), tractor industry volumes have increased from 2001 to 2006. In 2006, the sales volume reached approximately 352,000 units. However, in 2007, the market declined by 3% below 2006, primarily due to depressed market conditions in China. Overall, the global demand for farm tractors have been growing since 2001 ending 2007 at levels that are 2% higher than in 2006 and 50% higher than in 2000.
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Agricultural combine harvesters

Agricultural combine harvesters are used to cut crops and threshers are used for removing the grain or seed. They are used in large-scale corporate farming operations. The worldwide sale of agricultural combine harvesters in the early 1990s ranged between 23,000 and 25,000 units. It increased to approximately 32,500 units in 1998. Since then, sales have been cyclical with a range between 23,500 to 29,400 units. In 2007, the industry sales increased by 21% compared to 2006 to approximately 28,100 units primarily due to a strong demand from all major markets, which were supported by higher agricultural commodity prices for corn, soybeans, and wheat. All these commodities require the usage of combines for harvesting. In 2007, sales in North America were 8,800 units as compared to 7,800 units in 2006. The corresponding figure for Western Europe in 2007 was 6,700 units, an increase of 3% compared to 2006. In Latin America, industry unit retail sales increased by 85% compared to 2006 to approximately 4,900 units, led by the strong market conditions in Brazil and Argentina. Figure 109: Farm combine industry unit sales for North America, Western Europe and Latin America, 1990-2007
14 12 10 Unit sales in '000 8 6 4 2 0 1990 1993 North America
1996
1999 Western Europe
2002
2005 Latin America
Other agricultural equipment such as planting, seeding and fertilizing machinery, haying machinery, plowing, and cultivating machinery also showed strong growth in 2007, particularly, in North America and Brazil.
Product technology
Although modern-day harvesters and planters perform their jobs efficiently, no major technological changes have taken place in this sector in the recent past and these machines still do the basic job of cutting, threshing, and separating grains. Innovation is now expected in the human interface with this machinery. New computer monitoring systems, GPS locators, and self-steer programs are expected to increase tractor efficiency and implements by making them more precise and less wasteful in the use of fuel, seeds or fertilizers. It is also expected that some agricultural machinery may be capable of driving themselves using GPS maps and electronic sensors.
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INFRASTRUCTURE
The product loss or wastage between the point of production and consumption depends on the efficiency and capacity of transportation and distribution networks. This is most significant with perishable goods, including unprocessed agri-products. An immature and inefficient transportation and handling infrastructure has wide-scale implications ranging from food spot shortages and regional disparities, to lower domestic income. When resources remain misallocated, realizing economies of scale also becomes a difficult task and may even hamper the economic growth of a country. Figure 110: Logistics cost as percentage of GDP
15 Logistics cost as % of GDP
12
6 Japan India UK Germany China Italy Canada Sinagpore Australia Mexico France Brazil US
Source: FICCI15
The logistics spending of a country as a percentage of its GDP is indicative of the existing infrastructure. For example, a relatively high percentage for India, as compared to the U.S., highlights the inherent inefficiencies in India that result in overheads and added expenditure. While developing countries need high spending to develop new and efficient infrastructure, developed countries such as the U.S. also need high spending to maintain existing infrastructure and its efficiency.
India
By 2012, India expects to raise its infrastructure investments to 9% of the GDP which is currently at 5%. In the 11th five-year plan (2007-2012), the Government has planned to invest US$384 billion in infrastructure developments. Such large investments are necessary because of the current situation of infrastructure in the country, particularly the transport sector which has not been able to keep pace with the growing economy. The post-harvest loss of fruits and vegetables in India is about 35-40% of the produce each year. This, in value terms, is about US$10 billion per year, which is equivalent to the annual consumption of the United Kingdom. These losses are primarily due to poor handling, insufficient storage capacities, and underdeveloped transportation infrastructure.
The high logistics cost in countries such as China and India highlights the inefficiencies in their infrastructure that result in overheads and added expenses.
15
Federation of Indian Chambers of Commerce and Industry (FICCI) is an association of business organizations in India. It is one of the main organizations to fund and support many governmental and non-governmental educational institutes.
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In 2007, there were around 1,300 cold storage facilities in India. However, they are under utilized or completely unused throughout the year. The operating costs of these cold storages are over US$60.00 per cubic metre which is far more as compared to US$30.00 in the developed countries. This difference is primarily due to the high cost of energy, which is about 28% of the total cost as compared to 10% in the developed region. Additionally, the refrigerated trucks, which are used as mobile cold storage facility, are small in size as compared to international standards. The Indian cold-chain industry is estimated to be worth US$2.3 billion and is expected to grow at 20-25% annually to cross US$9 billion by 2015. The government is planning to invest US$24 billion on cold or supply chain infrastructure over the next eight years. Roads and highways are the major modes of transportation in India. They carry about 65% of the cargo traffic on the three-million kilometre network. However, there is only about 58,000 kilometres of national highway, which carries half of the road traffic and is used far beyond there capacity. To add to this, the condition of these roads is also very poor, which further reduces the average speed of trucks to 20 mph, which is low in comparison to the average speed of 60 mph in developed countries. As an initiative to improve this situation, the government has launched the National Highway Development Program (NHDP), to expand the highway network by 50,000 kilometres. The government is also planning to invest US$48 billion to improve and add a new road network throughout the country. India currently has 12 major ports and 185 minor ports along its 9,600-kilometre coastline. The major ports handle almost 90% of freight traffic. In 2006, these ports handled 423 million tones of cargo, an increase of 10% over 2005. Vishakapatnam handled the largest amount of freight, about 56 million tones in 2006, which was 11% more than it handled in 2005. However, the Mumbai port exhibited the highest growth rate, growing 26% over 2005. The freight traffic at ports grew at 7% annually in the period 2000-2007 and is further expected to grow at a CAGR of 7.7% until 2013-2014. However, the inefficiencies and incapacities of theses ports have increased the costs of shipment coming in and going out of the country. As such, the government is planning to increase the capacity, as well as improve the condition of these ports. It has outlined an investment of US$12 billion over the next five years for this purpose and expects to double the capacity to 1.5 billion tons by the end of 11th five-year plan. The government has also allowed 100% foreign equity investment in port and harbour construction projects. Gujarat has already been successful in attracting private sector participation to develop four of its minor ports (Pipavav, Mundra, Hazira, and Jamnagar).
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Figure 111: Capacity and traffic at major ports, India 2005

400 120 300 100 200 80 percentages million tons
100
0 1992 1996 Capacity (mn tones-LHS) Source: FICCI 2001 2002 2003 Traffic (mn tones-LHS)
60 2004 2005 Capacity Utilizationc (%-RHS)
Indias railway network is the largest network in the world, with 63,000 kilometres of railway lines across the country. Rail cargo has witnessed a growth of 6.6% in the period 2000-2007, making Indias railways the fourth-largest carriers of freight, moving over one million tons of freight daily. To support the growing demand and release some pressure off the nations highways, the government is planning to build two freight rail corridors at an estimated investment of US$7.5 billion. One corridor is planned to connect New Delhi, the nations capital, to the financial centre, Mumbai, while the other will be from the prosperous north-western state of Punjab to Kolkata on the east coast. An estimated capital investment of US$66 billion will be invested by 2012 in the railway transport system in order to develop private container trains, increase capacity and to upgrade the stations. Indias airport infrastructure is also feeling the strain of the rapidly growing passenger demand, as well as air cargo demands. To cope with the increasing air traffic, the government is building new airports including an international airport at Hyderabad and Bangalore which will start operating by the end of 2008. They are also modernizing the existing airports in Delhi and Mumbai. The government has planned to invest US$9 billion in airport development and construction between 2007 and 2012.
China
The Asian Development Bank estimates that China requires an additional infrastructure expenditure of US$1.2 trillion between 2007-2011 to keep pace with its fast-growing economy. Accordingly, China is investing heavily in its infrastructure projects which include road and transportation infrastructure, building ports, oil utilities, and development of water infrastructure. Over the next three decades, the government is planning to invest US$500 billion on rail and road infrastructure alone. In China, about 30% of the annual agriculture produce is lost due to poor handling and inadequate infrastructure, which is significantly high, compared to a 2% loss in the U.S. The cold storage capacities in China are out of date and have a capacity to store only 25% of the total produce. Due to the underdeveloped cold chain logistics, only 15% of the perishable products are transported by refrigerated vehicles. Additionally, the cold
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storage facilities are generally located in major port cities, which are not always near to supply bases and therefore, are unable to receive timely treatment and processing. In 2007, China had 30,000 refrigerated trucks and 250 million cubic feet of cold storage, whereas the projected requirement for 2017 is 365,000 refrigerated trucks and 5 billion cubic feet of cold storage. The government is taking initiatives to improve the situation and is joining hands with foreign companies for this purpose. In October 2007, Icelandbased Eimskip Group, the worlds largest refrigerated logistics operator, along with Qingdao Port Group opened the biggest cold storage facility of the country in Qingdao. The company is also planning to open one more cold storage facility with the same capacity (60,000 tones) by the end of 2008. In 2006, the Sinotrans Shanghai Cold Chain Logistics Centre with a floor area of 66,667 square metres and three storage facilities operating at different temperatures was opened for business. It also includes a loading dock and refrigerated vehicles. The centre was built at a cost of US$29 million by the logistic arm of Sinotrans Group, a government-owned company. The group is also planning to add more cold chain logistics centers in major economic zones across the country. Figure 112: Freight traffic by mode of transportation, 2005
Watrwys 62%
China loses 30% of its annual agricultural produce due to poor handling and inadequate infrastructure.
A viatio n & Gas pipelines 1 % Ro ads and Highways 1% 1
Railways 1 4%
Ro ads and Highways 72%
Total 80,258.1 (100 million tons per km)

A viatio n & Gas pipelines 2%
Total 1,862,066 (10 000 tons)
Railways 26%
Watrwys 1 2%
Freight Turnover
Source: National Bureau of Statistics, China
Freight Traffic
In 2005, rail freight in China increased by 8% over the previous year to reach 2.7 billion tons and is further expected to grow to 3.3 billion tons by the end of 2008. To support this growth, the government has planned to invest US$213.7 billion during the 11th fiveyear plan (2006-2010), by increasing the railroad network by 19,800 kilometres. Additionally, it is also upgrading its trains from 60 to 70-ton trains, which will help increase the railway freight transportation capacity by 16%. To improve efficiency, the upgraded trains will also be equipped to carry higher loads and travel at a faster speed of 75 mph compared to current trains which run at a speed of 50 mph. The government is also planning to modernize the railway networks, and as a part of this program, it is building high-speed rail corridors connecting major urban cities, such as the high-speed magnetic levitation railway between Shanghai and Hangzhou, which is being constructed at an estimated cost of US$4.4 billion and is expected to commence operations in 2010. With the sixth large-scale speed-up, trains in many parts of China now run at more than 200 kilometres per hour. Such technological changes and increases in speed have made
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the rail freight industry more efficient. The railroads are now connected with 90 major cities and eight major ports across the country. The government has also taken initiatives to increase the number of direct lines for resource products such as coal, oil, iron, and corn; an example being the Hongshenxi Coal Railway. To cater to the growing freight transport industry, the Ministry of Railways, in its first major joint venture project, signed a contract with other investment partners like Rail Transport International, Zim Integrated Shipping Service Co., LTD, Deutsche Bahn AG etc, to set up a 50-year joint venture to build and operate railway container hubs in 18 cities. The Chinese government, along with four other countries, has also started a new freight railway service between Beijing and Hamburg, Germany. The freight train completed its first trial run in January 2008 and took 15 days to cover about 10,000 kilometres. The same journey via sea takes around 30 days. Figure 113: Freight traffic by port, 2005
Rank 1 2 3 4 5 6 7 8 9 10 Port Shanghai Singapore Rotterdam Ningbo Guangzhou Tianjin Hong Kong Qingdao Busan Nagoya Country China Singapore Netherlands China China China China China South Korea Japan Metric tons 537.0 448.5 378.4 309.7 302.8 257.6 238.2 224.2 217.9 208.0
Source: National Bureau of Statistics, China
Chinas ports are an important point of entry and exit to the country for trade. At the end of 2006, China had about 15,000 productive berths which included 1,257 deep water berths for 10,000-ton vessels. In 2006, the movement of cargo and containers exhibited an increase of 17% and 22%, respectively over 2005. The Shanghai port became the largest port by cargo volume globally for the first time in 2005 and retained that position in 2006, as well. Other major ports such as Ningbo, Guangzhou, Tianjin, Qingdao, Dalian, Shenzhen, Xiamen, and Yantian had freight-handling capacity of more than 150 million tons during 2006. The government is planning to increase the port handling capacity by 80% or more over the period 2006-2010. The target is to raise the annual handling capacity to 6.1 billion tons and the container handling capacity to 120-140 million TEUs16. Since the mid-1990s, there has also been a significant increase in the rate of construction of roads. Globally, China is now considered the fastest-growing country in terms of building out a road network. The planned national highway network of 70,000 kilometres is the same size as that of the U.S. interstate highway system. However, China plans to finish the project within 15 years, which is substantially lower than 40 years taken by the U.S. to build its network.
16
Twenty-foot Equivalent Unit (TEU) is based on the volume of 20-foot long shipping container (a standard-size metal box) and is used to describe capacity of container ships and container terminals.
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As in the case of rail and road transport, there has also been a rapid increase in air traffic in China. This has increased the burden on the existing 142 airports across the country and the government is now planning to add around 97 new airports by 2020. China is also building some of the largest infrastructure projects in the world such as the Three Gorges Dam, with an estimated investment of US$30 billion. Such spending is necessary to support its growing economy, to create employment, and to improve its competitiveness globally.
U.S.
According to the American Society of Civil Engineers (ASCE), the U.S. will have to invest US$1.6 trillion over the next five years to repair and replace its ageing infrastructure. Since the collapse of the 40-year old Minneapolis Interstate 35W bridge on August 2007, the spending on infrastructure has become more intense. Poor road conditions are costing motorists US$54 billion annually on repairs and operating costs alone. Most of the infrastructure in place is more than 50 years old and needs urgent repairs and upgrades. Figure 114: U.S. logistics percentage of GDP, 1985-2006 18 percentages 14 10 6 1981 1984 1987 1990 1993 1996 1999 2002 2005
The U.S. will need to invest US$1.6 trillion over the next five years to repair and replace ageing infrastructure.
Source: US Department of Transportation
Logistics costs in 2006 were US$1.3 trillion, an increase of US$130 billion over 2005. Despite the fact that the logistics expenditure of the U.S. is larger than the national GDP of all but 10 countries around the world including India, Russia, and Brazil, the spending as a percentage of its national GDP is low. Although the logistic costs have been growing at 4% annually since 1980, as a percentage of US GDP, it has significantly decreased primarily due to the increase in the efficiency of the logistics industry. Logistics costs as a percentage of GDP was lowest in 2003 and since that year, it has been increasing primarily due to the increase in crude prices, which have increased from US$30.00 per barrel in 2003 to more than US$125.00 per barrel in 2008.
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Figure 115: U.S. logistics costs by category, 2006

Carrying costs 34%
Logistic administration 4%
Shipper-related costs 1% Motor Carriers 48%
Other Carriers 13%
Source: CSCMPs17 18th Annual state of Logistics Report
In 2006, most of the cost categories experienced growth; the highest growth being transportation costs (motor carriers and other carriers), which increased by 9.4% over 2005 to US$809 billion, primarily due to higher crude prices. Doubling of interest rates in 2006 over the 2005 rates also resulted in an increase of 13.5% in carrying costs, which stood at US$446 billion in 2006. In addition, the warehousing costs also increased by 12% due to the higher rents. In 2006, the 20 largest cold storage companies in the U.S. had a capacity of 1.2 billion cubic feet. Rail transport is a very important part of the countrys freight transportation system. The freight rail industry continually reported loses in the 1980s before the Federal Government deregulated the railroad industry. Since then the railroads have increased their efficiency by taking several measures including cutting track mileage from 380,000 miles to 172,000 miles, cutting back on rolling stock and employees, and consolidating ownership into six Class I Railroads, and 551 short-line railroads. However, rail capacity has already become constrained and it is expected that by 2020 freight rail tonnage will increase by 50%. The freight rail industry is expected to require an investment of US$175-195 billion over the next 20 years to retain its current share of the freight transport market and to accommodate the growing demand. The six Class I Railroads alone require funding of approximately US$3.5 billion annually. The US highways have not kept pace with the growing usage, which has resulted in over capacity usage of many existing roads. The 75,000-kilometre interstate highway network will have to be expanded to 100,000 kilometres by 2035 to accommodate the growing demand. Such expansion will increase the existing capacity of 341,000 lane kilometres by an additional 278,000 lane kilometres. Large amounts of investments are required to maintain and to improve the present condition of the highways and bridges. An estimated US$78.8 billion annually (until 2024) is required just to maintain the present conditions and an additional annual investment of US$131 billion is needed to improve it.
17
The Council of Supply Chain Management Professionals (CSCMP) is a not-for-profit professional organization involved in supply chain management
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The countrys 360 commercial ports and approximately 3,200 cargo handling facilities stand testimony to the well established logistics industry. The U.S. port industry works with trucking companies, railroads and airports to provide the most proficient transportation system in the world, handling over 2.5 billion tons of cargo annually, which is expected to double within the next 15 years. To address the increasing demand, the public port industry invested US$2.1 billion in 2005. In addition, they will spend US$8.6 billion during the five year period of 2006 and 2010. Such a level of investment is necessary to modernize and expand the existing facilities so that they can become more efficient for Intermodal transportation. The aviation industry is also facing the pressure due to the growth in freight industry. In 2007, there were 510 US airports with commercial services and the Federal Aviation Administration estimates that it requires US$9 billion annually to meet increasing demand. Additionally, the aviation sector requires US$41.2 billion by 2011 to improve the condition of its ageing infrastructure. According to ASCE report, the U.S. economy will lose about US$170 billion between 2000 and 2012 due to airline delays which will occur primarily because of insufficient investment in airport infrastructure.
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BIO ENGINEERING
Genetic selection for a better breed of a plant or an animal has been practiced by mankind for centuries. Humans have cross-bred different animals and plants to get superior offspring (cows providing more milk, faster-growing rice) while rejecting the weaker ones. The resulting increase in livestock and farm productivity has helped meet the growing demand for these products from an increase in global population. For example, the introduction of the high-yielding seeds of Manila rice and the Mexican cross-bred wheat in the 1970s led to the green revolution in developing countries, making them self sufficient in their staple food requirements. As per UN estimates, the global population is expected to increase to 9.2 billion by 2050 and the current methods of agriculture are unlikely to be able to meet the demand for agricultural and forestry products. This estimation, coupled with decreasing arable land reserves, requires a new generation of high-yielding crop seeds to meet rapidly growing demand. Genetic engineering has emerged as a new technique to improve the yields and the characteristics of the plants and animals. Genetic engineering allows the isolation of specific genes in an organism (exhibiting a desired characteristic), extracting it, and inserting it into the genetic structure of the target organism (plant, animal, microbe, and human). This transfer of genes is done to transfer the desired characteristic to the target organism. The key difference between the traditional methods of breeding and genetic engineering are that in traditional methods of breeding, the hybrid varieties created are from genetically similar or closely related species (regular corn seed with a fast-growing wild corn) while in genetic engineering, using gene splicing and gene planting, genetic material is transferred between different species (from microbes to plant for Bt Cotton). Genetic engineering could result in species having characteristics that were earlier not associated with them. These revolutionary methods have the potential to change the face of agriculture, livestock, and pharmaceutical industries with a new generation of agriculture produce. As with any new technology, however, it carries significant environmental, social, food safety, health, and bio-diversity risks. The genetic engineering era began in 1953 with the discovery of the DNA structure. In 1980, the US Supreme Court permitted patents for genetically modified organisms (GMO) paving way for commercialization of GMOs. The first GMO patent was awarded to General Electric for a bacterium to assist in clearing oil spills. In 1998, the recombinant Chymosin for making cheese got FDA approval. The first transgenic crops of corn and wheat were developed in labs in 1992. 1994 saw the introduction of a slow ripening Flavr Savr tomato for the consumer market. GM crops were introduced for commercial production in the U.S. in 1996. Also in 1996, the first genetically cloned adult mammal Dolly the sheep was developed by English embryologist Dr. Ian Wilmut at The Roslin Institute in Scotland. In 2000, rice fortified with vitamin A named golden rice was developed. The new millennia saw the introduction and wide-scale commercialization of the Bollworm resistant Bt-cotton, herbicide-resistant canola, corn, and soybean crops. 2003 was a landmark year for genetic engineering when the genome (DNA structure of an organism) of the most complex species, humans, was mapped completely.
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Figure 116: Trends in biotech crop area by country

70 in million hectares 60 50 40 30 20 10 0 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 US
Source: ISAAA
Canada
Argentina
Brazil
ROW
The U.S. is the leader in adoption of biotech crop farming with nearly 60,000 hectares under biotech crop cultivation.
Commercialised GM crop cultivation began in 1996 in the U.S. (soybean, cotton, canola, and corn), Canada (canola, corn, and soybean) and Argentina (soybean and corn) and has now spread to Brazil (soybean), Uruguay (soybean and corn), Paraguay (soybean), Mexico (corn and cotton), Romania (soybean) , Spain (corn), South Africa (corn, soybean, and cotton), Australia (cotton), India (cotton), China (cotton) and Philippines (corn). GM cotton has been widely adopted in U.S., Australia, India, and China. GM Canola has been adopted by Canada and the U.S. The U.S. has been a leader in the adoption of the biotech crop farming with a majority share of the total crop area. India, China, and Australia have taken cautious steps by first testing non-food crop of Bt-Cotton before going for full fledged adoption of the GM crops while Paraguay and Uruguay have totally shifted to the GM food crops. As of 2007, 63 other countries were at various stages of lab trials, field trials, and limited-area plantation. European countries were initially totally opposed to the GM foods, but have changed their stance over a period of time and accepted GM technology in agriculture. Figure 117: Trends in biotech crop area by countries
GM crop as percentage of cropland 100 90 80 70 60 50 40 30 20 10 0 Canada China Paraguay USA Argentina Australia Uruguay South Africa Brazil
Soybeans
Source: ISAAA
Corn
Cotton
Canola
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Figure 118: Global biotech crop area by country 2006

GM Crop Area (in million hectare) 57.7 19.1 15 7 6.2 3.8 2.6 1.8 0.5 0.3 0.1 0.1 0.1 <0.1 <0.1 <0.1 <0.1 <0.1 <0.1 <0.1 <0.1 <0.1 <0.1 Total Arable Land (in million hectare) 174.5 28.5 59 45.6 159.6 143.3 4.2 14.7 13.7 5.7 49.4 13.7 25 2 1.9 18.5 1.1 3 1.3 11.9 1.4 9.3 12.1 GM Crop Area % 33% 67% 25% 15% 4% 3% 62% 12% 4% 5% 0% 1% 0%
Country USA Argentina Brazil Canada India China Paraguay South Africa Uruguay Philippines Australia Spain Mexico Colombia Chile France Honduras Czech Republic Portugal Germany Slovakia Romania Poland
GM Crops Soybean, corn, cotton, canola, squash, papaya, alfalfa Soybean, corn, cotton Soybean, cotton Canola, corn, soybean Cotton Cotton, tomato, poplar, petunia, papaya, sweet pepper Soybean Corn, soybean, cotton Soybean, corn Corn Cotton Corn Cotton, soybean Cotton, carnation Corn, soybean, canola Corn Corn Corn Corn Corn Corn Corn Corn
Source: Clive James, ISAAA, FAO
Monsanto, Dowagro, and Bayer Cropscience are significant companies developing GM seeds.
Monsanto (MON), Dowagro (DOW), Bayer Cropscience and Syngenta (SYN) are significant global players in the development of GM/enhanced seeds. These companies identify the beneficial genes and create master seeds possessing the desired characteristics. These master seeds are then commercialized by cross-breeding them with the local varieties of the seeds to obtain the seeds sold in different geographic markets. The master seeds are also licensed to private and government players for them to independently develop seeds for their markets. In 2007, Syngenta increased its seeds business by 16% to US$2.0 billion and has secured approval for the triple-stacked corn (Rootworm trait, corn borer trait, and herbicide glyphosate tolerance) for the U.S. market and the Bt11 corn (Bollworm trait) for the Brazilian market. The R&D pipeline of the company includes the MIR162 corn, which offers protection against Lepidoptera pests and has been submitted for approval in the U.S., Canada, Mexico, Japan, and Brazil. U.S. FDA has concluded the consultation process for feed and food safety of corn kernel bred amylase enzyme. This is essential for converting corn into bioethanol. Syngenta has also entered into an alliance with Rohn & Haas to develop and commercialize crop stress protection in field crops under InvinsaTM brand. Additionally, it has identified genes to regulate the water consumption of plants and plans to develop seeds that require lesser water to grow. For example, it has introduced a tropical (warm weather) sugar beet variety (currently undergoing field trials in India), which offers reduction in water consumption and a shorter harvest time compared to sugar cane.
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Figure 119: Monsanto revenue trends by crop

6 Revenue in USD billion 5 4 0.29 3 2 1 0 2005 Corn Soyabean Source: Monsanto Annual Report 2007 2006 2007 Cotton Vegetable & Fruit Other 0.89 1.49 0.23 0.34 0.28 0.57 0.38 0.96 1.79 0.33 0.61 0.32 0.9
2.81
Monsanto, the pioneer and current the global leader in GM seeds, saw its seeds and genomics business grow by 25% in 2007 to US$4.9 billion. It has been led by strong growth in corn sown in the U.S. for ethanol production. However, the company witnessed a drop in the sale of soybean seed, mirroring the diversion of soy crop land to corn. In September 2007, Monsanto entered into an agreement with Dowagro to develop an eight-gene stack corn (an industry first) by the end of the decade. This will involve mutual cross licensing of the intellectual properties of both the companies. Monsantos R&D pipeline is expected to introduce Roundup Ready 2 soybean (an improved version of the commercially successful Roundup Ready soy) and a high value corn with lysine enzyme. In the medium term (by 2010) the company is expected to introduce SmartStax (eight-gene corn), drought resistant corn, high oil soya and omega-3 soybeans. The company also has development plans for nitrogen-fixing corn, high oil corn, droughtresistant cotton, and high-stearate soya. These plans are expected to get commercialized by 2015.
Technological trends
GM crops are defined as first, second, and third generation based on the enhancement/ traits achieved in these crops. First-generation crops exhibit input/farm side characteristics like increased yield, improved pest and plant disease resistance (Bt Cotton resisting Bollworm attacks), environment stress tolerance (drought-resistant crops, higher soil salinity tolerance), improvements in soil chemistry (plants supplying nutrients to the soil). Second-generation crops exhibit the consumer/output side characteristics like improved oil quality (more beneficial omega fats in soybean), enhanced nutrition, taste and flavour (golden rice enhanced with vitamin A), improved post-harvest shelf life, ease of processing (less waste), and functional and fortified foods. Third-generation crops work as plant-based factories like pharmaceutical crops (a banana delivering a vaccine for polio immunization), non-food industrial crops (biodegradable plastics from sugarcane), and phyto-remediation (plants removing toxins and pollutants from the environment). First-generation GM crops of cotton, soybean, canola, and corn have gained acceptance from the regulators and farmers across the world. R&D work is being conducted across the globe to produce newer breeds of genetic crops.
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USDA and EU food police

US Department of Agriculture (USDA), the Food and Drug Administration (FDA) and Environmental Protection Agency (EPA) are responsible for the approval of the introduction of the GM crops in US farms and supermarkets. GM crops are assessed for the potential migration of the unique traits from the engineered crops to the wild varieties, weed characteristics of new crops, the effects of GM crops on birds, insects, mammals and worms. The crop is checked for various proteins, amino acids, and toxicity levels. US companies maintain traceability of the food produced, helping them track the food contamination and control the damage caused by them. The traceability of the meat products is considered good, while for grains it is considered to be average by USDA studies. The U.S. does not have any food labelling policy to indicate GM or non-GM foods; as such, US consumers do not have a choice to accept or reject GM foods. However, the nutrient labelling requirements for processed foods is compulsory, helping consumers make informed choices. The import of food products in the U.S. has been broadly divided into import of unprocessed foods and processed foods. The unprocessed food import has the potential to introduce new and exotic biological matters in the environment. All exporters of unprocessed foods are required to have a Food Safety & Inspection Service (FSIS) certified inspection and testing facility in their home countries to export to the U.S. These inspection facilities are audited by FSIS on an annual basis. The FDA is charged with the inspection and regulation of imports of processed foods. The European Food Safety Authority (EFSA) is the nodal agency in Europe charged to assess and communicate risks associated with the food sector. EFSA works in close conjunction with member states to assess risks in the food chain from the farm to the fork, from domestic, intra-EU and international suppliers. It helps member nations to formulate policies to ensure food safety for their citizens. Europe is the biggest exporter and importer of food (sourcing food from 200 countries) and has the most stringent sanitary and phyto-sanitary standards. EU food laws make nutrient labelling, additive labelling, and GM food labelling compulsory for all food items to help its citizens make informed decisions. Traceability of food from the source to the consumer is mandatory in the EU. EFSA provides scientific advice on the risks associated with introducing GM food in the Euro zone. The EU has been very conservative in introducing GM food entry via imports and GM food production. EFSA has set up a working group for assessing the safety of nanotechnology enhanced food. EU governments provide financial support to the developing and underdeveloped countries to upgrade their agriculture support infrastructure to meet the stringent food safety norms and to facilitate improved agrotrade.
Implications
The primary benefit of GM crops is higher productivity and yield per unit of agricultural input resources. As is the case with any new technology, genetic engineering is facing both awe and apprehension from admirers and sceptics in international multilateral organizations, governments, regulators, farmers, bio-tech companies, and farm/trade-related companies. Since this technology has a direct impact on the global food chain, it needs to be closely monitored and regulated both at the domestic and international level until it is scientifically tested and found to be safe. Interest groups favouring GM crops cite the benefits of higher yields per unit of agricultural input resources, drought-resistant crops, chemical fertilizers, and pesticides. Lower resource requirements and higher yields per acre also translate into higher returns for farmers. Further benefits arise from bringing the current waste lands and
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saline lands into agriculture production by using adverse environment-resistant seeds which will boost the agricultural area and production. Various nutrient-enhanced and nutrient-fortified crops like vitamin-enriched golden rice could help to reduce and eliminate nutrient deficiency in impoverished societies. On the other hand, critics opposing GM crops have dubbed them Frankenstein foods. They cite that GM foods are cross species which is the equivalent of a new organism entering the environment. The entry of the new organism must be tested for their compatibility with the environment, toxicity, effects on the soil, and long-term effects of their consumption before being allowed wide-scale commercial production. They also claim that introduction of GM crops will reduce the bio-diversity of the available seed banks with the farmers and will lead to global mono-culture crop cultivation. This assumes significance as agricultural scientists have observed that bio-diversity is the best defence against a crop disease, pests and climate change. Some of the GM seeds introduced have terminator and traitor genes. The terminator seeds are designed not to reproduce in their second generation and hence cannot be sown again. The traitor seeds are designed to geminate and grow only on application of certain pesticides or fertilizers. Although these seeds are designed to protect the intellectual capital of the innovator companies they would make the farmers totally dependent on the seeds, chemical fertilizers and nutrients supplied by the agro-MNC. Environmentalists are worried about the possible cross breeding of the GM crops with non-GM crops which could release super-weeds in the environment. Managing these super weeds would be a difficult task. Since the gene transfers are related to the proteins of the organisms, the GM foods consumption could result in an increase in food allergies for the population. Ethical queries have been raised over whether to classify plant-animal trans-genic foods as vegetarian or non-vegetarian and how far humans should interfere in the natural selection process. The development of new GM foods would help increase in yields for the crops, offer better plant protection, offer better flavour and nutrients to the consumers, offer vaccines against dreaded diseases. The GM animals could be developed to give high milk yielding cows, lean meat animals, and nutrient dense eggs. The future possibilities offered from genetic engineering range from customized genetic medicines, cloning of humans, designer babies, to creation of new superior species and artificial life. The ability to tinker at the level of the building blocks of life (genes) gives the scientists enormous power to manipulate life, inviting criticism for playing God. Like any new technology, it is for us to decide how we want to reap the benefits of it or allow its usage for misery and destruction. The GM food industry has to address the concerns of the regulators, government, farmers, and consumers in a scientific manner to usher in the next green revolution.
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FERTILIZERS
We have discussed the growth in protein-rich diets and the grains required to fuel this growth. As the world grapples with expanding grain use and low grain inventories, the only solution is to grow greater amounts of grain through either increased plantings or yield growth. A significant determining factor of increased yield growth is the optimal use of fertilizer, and in many countries, this requires significant amounts of fertilizer in addition to what is already being consumed. Grain inventories and related stock-to-use ratios are at their lowest levels in decades due to the onset of an expanding middle class in the developing world, most notably China and India. As lower-income earners graduate to middle income, their diets evolve and become more protein-oriented as they consume better qualities of food. What was formally a rice diet now becomes a chicken-and-meat diet. Most importantly, as diet and income graduate to a higher level, individuals rarely revert back to their previous lifestyle. As the world consumes greater amounts of protein, we require larger quantities of poultry and beef and the vast amounts of feed grain to serve those animals. Currently, half of the worlds population uses rice as their primary staple. As the world becomes wealthier, the possibility for shifting asset classes is staggering, and the potential for increasing the protein diet among certain nations is immense. Basic food staples are almost recession proof after all, people must eat. And fearing massive social unrest, governments will attempt to secure an adequate food supply for the population. Figure 120: Kilograms of grain to produce one kilogram of meat
Source: Doane, PotashCorp
As corporations and governments work to provide solutions to augment crop yields, one obvious end result will be an increased use of fertilizer. As fertilizer application to increased yield is a proven cause and effect, we are certain the world will continue to use greater amounts of fertilizer in the future than that of the past. All crops require nitrogen (N), phosphate (P), and potash (K) to grow, but the staple crops required for human and animal consumption require the greatest amount of fertilizer.
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Figure 121: World NPK fertilizer consumption by crop
Source: FAO, IFDC, PotashCorp
Furthermore, the developing world will use an optimal application mixture that allows much larger yielding crops per acre than less developed countries. We note that there are other factors at work including irrigation, the use of GMOs, and technology, to name a few. However, singling out fertilizers, over time, we expect the developing world to close the yield gap versus developed nations regarding the optimal use of fertilizer per crop. We do not expect the gap to disappear, nor to close quickly, but a gradual tightening of the spread is expected as we move forward. The resulting potential growth in fertilizer consumption in these economies is enormous. Figure 122: Potential fertilizer consumption growth
Source: IPNI, Fertecon, PotashCorp
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As we venture into the topic of fertilizers, we will discuss each in turn, including their characteristics, individual demand/supply function, and forecasts for growth. We will conclude with an outlook on the individual fertilizers over the short and medium term. Figure 123: Global fertilizer demand, 2007
Potassium 16%
Total Demand 195 million tons

Nitrogen Phosphorus 18% 66%
Source: FAO Fertilizer Outlook
Although nitrogen fertilizers hold a majority share, the proportion of potash and phosphate fertilizers is expected to increase over time as countries seek greater yields. As we will discuss in greater detail, we expect strong pricing levels for all three nutrients over our forecast period but prefer the outlook for potash and phosphate fertilizers over nitrogen fertilizers.
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Nitrogen fertilizers
Nitrogen is essential for protein formation and plant growth. Nitrogen provides vegetation with strong root development, stems, leaves, colour, and yield. Figure 124: Nitrogen process chart
Source: PotashCorp
Nitrogen fertilizers are manufactured by reacting atmospheric nitrogen with natural gas. The resulting initial product of ammonia is then utilized to produce various forms of nitrogen product, both solid and liquid. As such, the prices of these fertilizers are affected by the price of natural gas. Since transportation of fertilizers is easier than the transportation of natural gas, the global nitrogen fertilizer industry is witnessing a shift of its production base to the inexpensive natural gas-rich regions. As we will see in our company reports that follow, the benefit of a lower-cost feedstock is sometimes offset by the political risk and supply risk of the particular country. Nitrogen fertilizers are the most widely used fertilizer with a market share of 66% by weight in 2007. Urea, the most common form of solid nitrogen fertilizer, displayed strong pricing over the past six months due to tight supply and strong demand from Latin America and continued purchases from India. In April, the Chinese government announced an increase of their then 35% export tax to 135%, effective April 20, 2008 until September 2008. This announcement had an immediate impact on price, driving it up dramatically to U$700/t from U$400/t in slightly over a months time. We could safely assume approximately U$200/t of this impact was a direct result of the Chinese announcement (Figure 125).
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Figure 125: Urea pricing
Source: British Sulphur
To understand the significance of the Chinese announcement, we note that in 2007 China was the largest exporter of urea, estimated at 5.9mt (15.7% of the export market). Due to government-controlled urea pricing within China (at approximately U$170/t), urea producers were exporting product in order to secure the highest margins. It became evident to the government that the 35% tax in place was having little effect on deterring domestic producers from exporting product. In order to secure supply for domestic use, the government implemented the large increase in taxes. Over the past three to four years, China has implemented export taxes of 15% in the winter and 30% in the summer, increasing the amount to 35% this past winter, and then 135% in April. That speaks volumes to how market pricing has changed compared to their domestic pricing controls. We believe the direction of world pricing will be a direct result of what the Chinese government will decide in September regarding export taxes. If the tax is extended, the current situation will remain with elevated pricing. If the tax is removed, we assume urea pricing will decrease significantly as Chinese exports return to the market. We caution that this year is unlike previous years and in the current environment, we would expect the government to announce an extension of the export tax or an increase if urea pricing were to rise further. We do not envision a situation where the tax would be returned to 35%, unless the government significantly increased the allowed domestic price. We believe this is a very remote possibility. Production capacity is expected to grow at a 3.8% CAGR in the next four years, while demand is likely to lag at 2.8%. China, India, Russia, Pakistan, the Ukraine, and Egypt were the leading manufacturers of urea fertilizers in 2007 while China (35%), South Asia (including India) (26%), North America (8%), and Latin America (5%) accounted for the majority of the consumption.
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Figure 126: Global nitrogen fertilizer demand-supply trends, 2006-2016
We should note two items regarding the estimated capacity increases in the CAGR mentioned above: (1) in the above chart, the supply is represented by capacity. Due to plant turnarounds, limitations on carbon dioxide supply, contracts, etc., the amount of supply will always be less than the amount of available capacity. Therefore, any increase in capacity will be a lesser increase in supply, which would overstate the above calculated CAGR of 3.8%. This would explain why the market supply/demand function is tight but a gap exists between demand and what we would call perceived supply in the above chart; and (2) of the forecasted 26.4mt of additional capacity to come online between 2008 and 2012, 11.7mt (or 44%) is expected from China. This should help state the full impact of the urea market pricing outlook on what would occur when the Chinese government decides the fate of their export taxes at the end of Q3/2008 and the profound impact on pricing over the next 12 months and possibly beyond. It follows then that the growth in capacity over demand would affect the utilization rate. As a rule, we expect pricing to follow the utilization rate. As the above chart illustrates, due to the expected supply additions over the next few years, pricing should soften somewhat before being absorbed in the market, followed by marginally tighter supply/demand beginning in 2012. The decline in the price depends on a variety of factors, not the least of which is the cost of the marginal producer. There are two important points that we must discuss to this end: (1) we expect Russia to continue to increase natural gas pricing to the Ukraine from its current US$5.80/mmbtu in 2008 to a supposed range of US$9.60-US$11.50/mmbtu; and (2) this would have an immediate effect of raising the base price of ammonia and urea, forcing marginal producers to close facilities and others to switch product to industrial from agricultural. We believe the fertilizer market has performed a step change where pricing will not revert back to previous levels, and the market will experience much higher cyclical highs and lows in the future. This is a result of the tightness in the market, the increased cost of the marginal producer, and poor government policies now and in the future. Our forecasts assume a softening in pricing from current levels but still above the pricing levels of 2007. We believe the risk remains to the upside of our pricing forecast as we await the outcome of the China decision.
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Phosphate fertilizers
Phosphate is vital to a plants health, structure, growth, early maturity, and for the conversion of the suns energy. Phosphate rock is mined extensively in the U.S., Morocco, Russia, Tunisia, Brazil, Israel, South Africa, Senegal, Togo and Syria. Key phosphorus fertilizer manufacturing countries are China, the U.S., Russia, Brazil, India and Morocco. Phosphate fertilizers are manufactured by reacting phosphate rock with sulphuric acid to form phosphoric acid. It is further processed to produce various phosphate-based fertilizers, both liquid and solid form (Figure 127). The most common form of phosphate fertilizer is diammonium phosphate (DAP) representing approximately 30% of production. Monoammonium phosphate (MAP) has experienced a higher growth rate in applications over the past decade and now accounts for 22% of total production. Figure 127: Phosphate flow diagram
Source: PotashCorp
To better understand the pricing structure of DAP, it is important that we distinguish between integrated (70% of world production) and non-integrated producers (30%). The integrated producers own their rock supply and may purchase all or some of the added ingredients to produce the phosphate fertilizers through their production plants. Nonintegrated producers manufacture the end product, but purchase all of the inputs. Examples of North American integrated producers are Mosaic, Potash Corp. and Agrium.
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Figure 128: Integrated versus non-integrated DAP producer
Source: Fertecon, Mosaic
It is important to explain how we arrived at todays current pricing and how that impacts the non-integrated versus the integrated producer. Below, we discuss each major input. Rock pricing: Of the 30mt of annually traded phosphate rock, OCP (Morocco) accounts for 45% of the trade volume. Furthermore, the top five producers control 75% of the traded volume. We have witnessed a step change in phosphate product pricing primarily due to increased rock costs. The rock supply has become constrained and demand has proved to be inelastic to date. The OCP-lead quasi-cartel is managing supply in order to provide continued strength in pricing. To that end, a portion of the tightness in the phosphate rock supply is created artificially and we expect it to remain over the next four years. The old adage high prices are the best cure for high prices holds true, in this regard. As rock prices have increased to the U$400 level and purchasers look for an alternate source of rock, new rock mines are beginning to put forth plans for production. However, this is not an immediate solution, as new mines take time to enter production. Once the new supply enters production, we expect, similar to the structure in potash, continued management of supply by the largest suppliers, keeping pricing elevated over historic levels and the formation of higher base pricing. The end result will be higher longer-term pricing of phosphate rock, phosphoric acid and solid fertilizers (DAP and MAP). Sulphur: Sulphur prices have increased dramatically over the past 12 months due to supply constraints (Figure 129). We expect sulphur to soften as new supply from oil producers enters production within 12-18 months, reducing the overall cost of phosphate products (isolating sulphur input only). The end result would be a reduction in the overall cost for the non-integrated producer and slightly reduced margins for the integrated
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producer (from North America). In the short term, we still expect sulphur pricing to increase, affecting the DAP price accordingly. Figure 129: Monthly Contracted Sulphur Prices for Africa/Asia
Ammonia: We expect ammonia prices to remain firm but do not believe it will have a material impact on the pricing of finished product when compared to rock and sulphur costs. Economic Impact As an example, if we require approximately 1.5 units of phosphate rock, 0.42 units of sulphur, and 0.22 of units ammonia to produce a unit of DAP, it is understandable how an integrated producer will benefit significantly in rock pricing alone. The cost of rock production to an integrated producer for a unit of DAP is between US$60-US$100 compared to greater than US$600 for a non-integrated producer. In addition, a North American producer will benefit slightly from the discrepancy between North American sulphur pricing and that of Asia. And within North America, a Canadian-based producer will further benefit over that of its American-based peer. Phosphoric Acid and DAP Supply/Demand We have witnessed a tightening market in phosphoric acid over the past few years due to strong demand and a lack of new supply. World phosacid capacity utilization rates rose consecutively from 2001 to 2007, as excess capacity decreased to 7.5mt P2O5 from 13.6mt in 2001. Going forward, we expect this utilization rate to remain elevated versus historical rates, declining in 2011 due in large part to the addition of the 1.4mtpa Maaden project in Saudi Arabia. We assume the project will be delayed further into 2012, but will have an impact of softening prices for up to two years as the market absorbs the supply before further tightening occurs ion 2014.
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Figure 130: Phosphoric acid supply/demand balance (million tonnes P2O5)
China went from a major importer of phosphate fertilizer of over 5mt in the late 1990s to a significant exporter of almost 4mt in 2007. Between 2000 and 2006, Chinese phosphoric acid production increased from 1.8mt to 8.1mt. In so doing, the country went from the largest importer to the second-largest exporter. This was due to the governments decision to build capacity to secure supply and eliminate its reliance on imports. The impact from this policy was mostly felt over the past four years and forced the closure of several higher-cost U.S.-based facilities that relied on the export market specifically, China, and Asian customers that are now supplied by China. On a capacity basis, the impact of that growth on worldwide supply was muted by the U.S. closures. Globally, the phosphate market lacked the required supply growth in the past few years, tightening the markets considerably. The previously mentioned increase in the Chinese export tax to 135% in April only exacerbated the situation. In the solid fertilizer market, we expect a continued tightness in the market until the supply-side is relieved in 2012 from the expected start-up of the Maaden facility at a 3mtpa combination of DAP and MAP, once in full production. There is discussion regarding a doubling of output at Maaden once the initial construction is complete. Given the difficulty the project has experienced to date, we would caution against a doubling, and assume a more gradual increase. With solid fertilizer demand growing at a rate of 3.5% per annum the past two years, the market requires a further 1.5mt of supply each year. We expect this supply to remain constrained until 2012, followed by a softening of prices for up to two years as Maaden would represent a large portion of the global traded market. Similar to the situation in phosacid, we estimate the absorption into the market would take a maximum of two years before pricing tightened again. The overall capacity CAGR through 2016 is expected to be 2.5% per annum.
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Figure 131: Phosphorus fertilizer demand by region 2007

E Europe West and C Asia Europe 2% 6% Central Europe 2% Total Demand 36 million tons East Asia 35% Oceania 4% Africa 3%
North America 12%
Latin America 13%
West Asia 3% South Asia 20%
Source: FAO Fertilizer Outlook
South Asia is expected to account for 36% of the growth in demand for phosphorus fertilizer, while East Asia and Latin America account for 34% and 18% of the growth respectively. South Asia, East Asia, and Western Europe are expected to be net importers, while Africa is expected to be the major exporter. Phosphate pricing will continue to remain elevated due to the shortage of inputs to produce the end products. From an integrated producer perspective, these companies will continue to benefit from current pricing through 2012. As 30% of the overall market is supplied by non-integrated production, it is the combination of the tightness in the supply of phosphate rock, the supply of sulphur and the lack of new supply during this time frame that will ensure the market is robust. Beyond 2012, we would assume the significance of the Maaden project will be absorbed into the market during 2012-2013 and will depress prices somewhat before they strengthen again. More importantly, integrated producers will be generating significant earnings over our forecast period.
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Figure 132: DAP Pricing 20022008

1400 1200 1000 US$ per tonne 800 600 400 200 0 2002 2003 2004 2005 2006 2007 2008f
fob N. Africa fob Tampa
Potash fertilizers
Potash is an important ingredient that benefits plants through increased strength, increased yields, higher water retention, and resistance to disease. Potash is extracted from deep underground mines where deposits were formed by evaporated seas millions of years ago. Over time, sediment layers were formed atop the potash mineralization. The minerals are extracted via conventional or solution mining. Conventional mining involves sinking a shaft to depths of up to 3,000 feet and employing a continuous miner to remove the ore to load onto conveyor belts to the ore crusher and then hoist to the surface for refining. In solution mining, heated brine is injected into the potash deposit via wells to dissolve the ore. The solution is then pumped to the surface for refining. The potash industry is primarily driven on the supply side by the production of two cartels, Canpotex and the Belarusian Potash Company (BPC), both of whom have the economics of business as their motivating priority (versus government ownership that is more concerned about supply over returns). 81% of current potash production is owned by corporations who make production decisions based on economics. This lowers the risk that supply additions will be the result of political forces. It is this lack of participants in the sector that further adds to the tightness in the supply/demand function over the medium term and it allows those who produce the product to manage supply in order to reduce volatility in pricing. At present, it takes at least five years to build a greenfield potash deposit, and the standard 2mt conventional deposit has a hefty $2.6+ billion cost that is risked to the upside. There is also a great amount of visibility in the build-out of new supply which allows potash producers who have excess capacity to add new supply when the market warrants it (and remove supply when the market weakens).
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Figure 133: Potash export sources of supply 2007
Source: Ferticon
The potash market is a spot market for all but two of the largest users, China and India. This is important to note, as these two countries accounted for 30% of potash demand in 2007. In 2008, both countries agreed to pay significant increases over their prior-year contracts. This is reflected in the fact that India, a major importer of potassium fertilizers had to negotiate and settle for an import price of U$625/t in March 2008, which is significantly higher as compared to the U$270/t for the previous year. China then followed suit with a U$576/t fob price (which is higher than the Indian settlement when accounting for freight). The two contracts signaled to the market that we were at a new plateau in world pricing. Now we look to how tight the market will be when both countries renegotiate for the upcoming 2009 year. As China extended its contract negotiations well into the current year, the tightness of the potash market removed any potential overhang in supply from China having been removed for the initial six months of 2008. During that period, customers were placed on allocations as producers were routinely sold out of inventory, increasing the price of the commodity dramatically. However, due to the limited amount of internal production from China and its limited inventory position, we do not believe that China will be able to extend the negotiation in 2009, nor will it be in their best interest as we forecast a much higher price next year. Echoing this sentiment, Sinofert, Chinas largest distributor of potash, is concerned about a shortage of the fertilizer. As such, the company is looking to secure potash through an earlier negotiation for the 2009 season, with a goal to finalize a deal in late 2008. Current spot pricing has been listed at U$750/t cfr for Canpotex shipments while BPC is tabling pricing on the spot market of U$1,000/t cfr. This is indicative of how tight the market is and the direction of pricing as we enter the latter half of 2008.
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Figure 134: Historical price of MOP
Source: Fertecon
As the supply of arable land is constrained, it will simply become a necessity for the growing regions of China, India, and Brazil to employ a more optimal amount of potash to generate higher-yielding crops. China, in particular, has a significant structural problem regarding their potash requirements. Of the 11.5mt KCl they required in potash fertilizer in 2007, their domestic production only produced 3.4mt. The remaining 8.1mt must be procured from foreign means. The bottom line is that China is much more concerned about securing their fertilizer requirements in order to maintain its agricultural security and keep its population fed. To put it another way, securing potash supply is more important than price, regardless of the chess game that is played during each contract negotiation. In Figure 135, we isolate a portion of a chart we presented earlier in the fertilizer section that displays potash deficiencies to optimal application rates in China, India and Brazil. The reason we have done so is to graphically display that potash is the fertilizer that has the greatest discrepancy between actual and optimal rates. The end result is clear: the world requires more potash. The fact that so much growth can and will come from China, India and Brazil is immensely bullish for the commodity.
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Figure 135: Potential potash consumption growth
Source: Potash Corp., IPNI, Ferticon
Figure 136: Potassium fertilizer demand by region 2007
Source: Ferticon
With the expected growth in demand over the next five years to average above 4% per annum, the world will require the equivalent of a new 2.0mtpa potash mine each year to keep pace with demand. As we expect supply to struggle to maintain balanced within the marketplace, the current tightness in the market is expected to remain throughout our forecast period. As we have seen through announcements of the various debottlenecking projects of the large global producers, additional supply from new entrants will be warranted.
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Figure 137: Global potassium fertilizer demand trends 19852020
Source: Ferticon
We are very bullish on potash pricing through our forecast period. We see pricing continuing to rise in the latter half of 2008, and well into 2009, remaining elevated at these levels through 2012. The world is short the commodity, customers are on allocations, and the build out in supply, which has great visibility, will take until 2012 (at the earliest) to reduce this tightness. However, supply should be managed going forward and elevated pricing will be the norm beyond 2012, never again reaching the pricing level we witnessed only a few years ago.
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AGRICULTURE TECHNOLOGY
The U.S. is at the forefront of agriculture technology worldwide and, over the last 50 years, gains in productivity have been a driving force for US agriculture. The results have been exceptional; for instance, the average amount of milk per cow increased from 5,314 pounds per year in 1950 to 18,201 pounds in 2000. Similarly, the average yield of corn per acre increased from 39 bushels in 1950 to 153 bushels in 2000, and each man-hour of farm labour produced 12 times the farm output in 2000 as compared to 1950. The primary reason for these improvements is the development of new technology and the productivity increase in the US needs to be customized and replicated in other developing nations as well. In the U.S., agricultural inputs such as capital, labour, land, energy and chemical inputs began to decline after 1980. However, agricultural output continued to grow and this output growth was entirely driven by higher productivity. Additionally, the high growth in productivity limited price increases and between 1948 and 2004, prices of agricultural commodities increased at less than half the rate of economy wide prices. Here, it is imperative to analyze trends over the long-term since agricultural productivity can fluctuate significantly in the short-term primarily as a result of weather conditions. Figure 138: Changes in output, input and total factor productivity18, U.S., 1948-2004
260 240 220 200 180 160 140 120 100 80 1948 1953 1958 1963 1968 1973 1978 1983 1988 1993 1998 2003 Total output
Source: ERS USDA
The average yield of corn per acre increased from 39 bushels in 1950 to 153 bushels in 2000 due to improvements in productivity as a result of better technology.
Total farm input
Total factor productivity
Agriculture in the U.S. witnessed a decline in the inputs of crop land, labour and financial capital invested and an increase in price of the seeds, agrochemicals and machine farm equipment. The decline in inputs of crop land, labour and capital has been much higher than the increase in costs of seeds, agrochemicals and machinery from 1948 to 2004 leading to a marginal decline in the inputs while the farm output has increased by 170%. This translates into a CAGR of 1.8% for total factor productivity (TFP) in US agriculture. Similarly, labour inputs have declined by 0.6%, capital by 0.1%, while the material inputs have increased by 0.6% annually from 1948 to 2004. Agricultural productivity growth in the US has been achieved in two distinct phases. The first phase
18
Total factor productivity measures total output per total inputs, or the overall efficiency of agricultural production.
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from 1948 until 1980 witnessed substitution of labour with non-labour inputs of agrochemicals and machinery to increase productivity. However, since the 1980s, there has been a decline in both labour and non-labour inputs, without a decline in farm output growth. Figure 139: Trends in Total Factor Productivity, U.S., 1948-2004
10% 250 5% 200 0%
150
100
-5%
50
-10%
0 -15% 1948 1953 1958 1963 1968 1973 1978 1983 1988 1993 1998 2003 Total factor productivity
Source: ERS USDA
Trend
Deviation RHS
The growth in the TFP has been consistently positive over the long term. However, the growth in TFP has not been uniform and in the short term, there have been significant declines due to oil shocks in 1974 and 1979, and droughts in 1983, 1988 and 1995. The decline in productivity in 1983 was compounded by the US Governments payment in kind (PIK) program. The US Government, confronted with a huge agriculture surplus at that time, launched the PIK program to discourage farmers from increasing agricultural production. Long term production growth is affected by Government policies on investments in irrigation, transport networks, grain handling facilities and agro-R&D, market development and trade policies. As observed in the TFP data, weather conditions play a very important role in productivity. Any change in the global weather patterns can have a disruptive effect on the global agricultural growth, threatening global food security. Additionally, global macro economic events such as oil shocks and wars, and Government-led interventions in the agriculture market can distort the market and disrupt the growth of agriculture productivity. Figure 140: Growth factors for US agriculture and industry, 1960-2004
US Agriculture Average annual growth in output Factors affecting output Growth in non-labour inputs Growth in labour hours Growth in labour quality Growth in TFP Source: ERS USDA 1.7% 11.8% -34.2% 5.6% 116.8% 100.0% US Industry 3.2% 54.1% 23.7% 8.8% 13.4% 100.0%
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To summarize, productivity growth has been the most significant growth driver for US agriculture over the last 45 years. While the industrial sector exhibited high growth as a result of high investments and increase in labour, the total factor productivity of the industrial sector has been much lower than the agriculture sector. Consequent to a decline in overall labour hours, it had a (-34.2%) impact on the agriculture output. The corresponding figure for industrys output growth was +23.7%. Non-labour inputs contributed a significant 54.1% to output growth for the industrial sector while the corresponding figure for agriculture was 11.8%. Figure 141: Price movements in U.S., 1948-2004
700 600 500 400 300 200 100 0 1948 1953 1958 1963 1968 1973 1978 1983 1988 1993 1998 2003 General Price Index
Source: ERS USDA
Output Price Index
Input Price Index
Due to the improvement in agricultural productivity, the US agriculture sector has managed to keep the increase in prices of food and other agriculture products at reasonable levels as compared to the general price index in the US. This has benefited farmers as well as agro-product based industries. The agriculture input price index has generally moved along with the general price index, however, the input price index changed significantly during the 1973 oil crisis. The gains in agriculture productivity have benefitted consumers by keeping the increase in prices well below the general price index and have helped US agriculture to maintain its competitiveness with the rest of the world.
Development of new biofuels

The high demand for petroleum products and consequently, their high prices have led to significant interest in alternative sources of energy. Biofuel, being a renewable source of energy, is an attractive alternative propostion. Biofuels are now used globally and are consumed extensively for automotive transport and as a result, this industry is growing rapidly across the world. Since 2000 and beyond, there has been a renewed interest in biofuel research and development primarily due to the rising oil prices, apprehension over the possible oil
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peak19, greenhouse gas emissions, rural deveolopment interest and instability in the middle east (the major exporters of oil). Biofuels can be produced from any carbon source. Until now, the types of biofuels can broadly be categorized into three different generations. The first generation biofuels refers to biofuels extracted from sugar, starch, vegetable oil or animal fats. Ethanol fuel is the most commonly used under this category. It is extracted from the fermentation of sugars derived from wheat, corn, sugar cane etc. Although biofuels are considered to reduce global warming and improve energy security, the use of corn-based ethanol poses several problems. The entire US corn crop if dedicated to ethanol production would only cover about 15% of the gasoline demand. Additionally, the release of nitrous oxide from rapseed oil and corn contributes more to global warming than the fossil fuel they replace. In addition, diverting crops from food to fuel has created a high demand for crops used as biofuel, thereby increasing prices of food products. Farmers are now more interested in cultivating feedstocks for biofuels as it is more profitable thus creating problem for global food security. Such significant limitaions of the first generation of biofuels have lead to the development of second generation of biofuels. The second generation biofuels are derived from non-food crops, which include waste biomass, stalks of wheat, corn, wood etc. All plants contain cellulose which have sugar molecules. These sugar molecules can be fermentated to produce ethanol. Supporters of biofuels consider second generation biofuel as a more viable solution for the replacement of non renewable sources.These biofuels do not compete with food crops nor do they require any extra land to grow thereby solving the problem of lower food production and tropical deforestation. Many second-generation biofuels are still under development such as biohydrogen, biomethanol, DMF (2,5-dimethyl furan), bio-DME (dimethyl ether), Fischer-Tropsch diesel, biohydrogen diesel, mixed alcohols and wood diesel. Second generation biofuel techniques have the capacity to produce more biofuel with environmental gains but a major constraint is the eastablishment of second genration biofuel manufacturing facilities, which are estimated to require high capital investments. Altough second generation biofuels have several advantages over its predecesors, third generation biofuels are expected to be the most promising fuels for the future. Algae fuel, also known as oilgae, is a third generation biofuel extracted from algae. Algae is a low cost input feed which can produce almost 30 times more energy per acre as compared to first generation biofuels. It can produce 5,000 galllons of bio diesel in a year from an acre of land. Additionally, it helps in reducing greenhouse gases by capturing large amounts of carbon dioxide and nitrogen oxide present in the atmosphere. According to the United States Department of Energy, about 39,000 square kilometres of algae farming will be enough to replace the total demand of petroleum in the country. If cultivated properly, micro-algae can yield 10 times more oil than Jatropha, a second generation biofuel that can be grown in deserts, in the same piece of land. More research is currently in progress to produce different fuels from algae cultures for making biodiesel, bioethanol, biomethanol, biobutanol and other biofuels.
Algae fuel, a third-generation biofuel, can produce almost 30 times more energy per acre as compared to first-generation biofuels such as corn.
19
Peak oil is the point of time when extraction of oil from the earth reaches its maximum and then starts declining. Some experts believe that 2000 was the year of global peak oil production.
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Precision agriculture
Due to the increasing costs of agro-inputs and concerns of the environmental impact of the intensive agricultural practices followed in the US, emerging agro-technologies focus on getting optimal yields from the land rather than the maximum possible. A doctrine of precision agriculture has been proposed; it has been defined as a management system that is information and technology based, is site specific and uses one or more of the following sources of data: soils, crops, nutrients, pests, moisture, or yield, for optimum profitability, sustainability, and protection of the environment (adapted from Precision Ag. 2003). It is a need-based input application policy instead of uniform application of inputs. It is expected to assist farmers to increase the economic returns from agriculture while minimizing the environmental impact to soil, air and water bodies. It helps farmers in identifying the specific areas in their fields that require extra application of fertilizers to boost yields, optimal water application in different farm segments and application of herbicides and pesticides to the infested farms only. Various tools such as GPS guided auto-steer equipment is used to precisely align the equipment. A light bar guided system is the most inexpensive such system; it shows the path to the tractor operator to uniformly fertilize a farm without overlapping pesticide application. The farmer obtains the crop patterns of his farms using satellite-based remote sensing systems. He then looks for any crop growth deviations and checks in the field for any nutrient deficiency or crop infestation and takes appropriate remedial actions. The soil samples are tested for each farm to assess the nutrient requirements of every field. All this information is utilized to plan the nutrient application for every field and is entirely computerized and synchronized with different farm equipment. Modern farm equipment is equipped with variable flow systems that work in accordance with data inputs in the central computers. This delivers plant nutrients in the right quantity and to the right areas in the farm. The key benefits of precision agriculture are reduced utilization of fertilizers and agro-chemicals, thus increasing farm productivity and reducing the impact on the environment. The soil not suitable for crop growing can be identified and set aside as fallow. Variable rate irrigation systems instead of the traditionally used center pivot irrigation system is used when multiple crops are being sown in the same fields or the soil moisture holding characteristics vary widely in the field. This helps in optimum application of water in the fields. Drip irrigation technology is used in water stressed regions of the world. It has been successful for growing horticultural and floricultural crops. It delivers the precise amount of water right at the roots of the plants. This helps in significantly reducing water requirements as the entire field is not irrigated and field vaporization losses are minimized. The plant nutrients required are also applied using the drip irrigation, consequently eliminating any waste of nutrients and preserving soil salinity. Due to restricted moisture availability in the field, the growth of weeds is also restricted. A variant of drip irrigation is sub-terrain irrigation used for deep rooted trees. Perforated water pipes are inserted into the soil near the deep rooted trees and water is supplied to them. This helps in keeping sub-terrain soil moist around the plants while achieving high water saving. Drip irrigation however suffers from high initial cost involved in setting up the irrigation system and finds utility in regions where water availability is limited.
Agriculture technology in developing countries

Success in the agriculture business relies on multiple externalities like quality and reliability of water availability, favourable weather patterns, optimal soil condition, seed
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input, fertilizers and agrochemicals applied, insect, pests & weed growth, degree of farm mechanization, market demand and supply situation, weather and calamity insurance, availability of bank credit, supporting infrastructure, handling and transportation networks, etc. In contrast to the farmers in the developed countries, the farmers in the developing countries face numerous disadvantages. The developing country farms are dependent on rains and do not have assured irrigation facilities. The farmers do not have access to local weather patterns resulting in considerable yield reduction, limited availability of soil testing facilities to recommend optimal fertilizer application and poor communication flow of market price trends. Due to the abundant availability of labour and fragmented land holding of the farm, farm mechanization levels are low. The rural transport and distribution infrastructure networks are weak leading to higher costs of transportation and distribution for both agricultural inputs and agricultural produce. Formal institutions (banks, farmer cooperatives) to disburse farm credit are absent or inadequate, forcing farmers to rely on money lenders charging usurious interest rates. e-Choupal in India has emerged as a successful example of private sector rural development mechanism. e-Choupal is a village-based farmer information dissemination, agro-input supplier and grain procurement system, pioneered by a diversified Indian company, ITC India Ltd. Choupal in the local language in India (Hindi) means a centrally located place to meet, discuss and trade. e-Choupal has provided farmers in India access to information on prevalent global (CBOT) and regional wholesale market prices of the farm crop output and district level weather forecasts. This helps the farmer decide which would be the most lucrative crops to grow. With the availability of the weather forecasts, the farmer is able to advance or postpone the sowing of the seeds to protect its crop from adverse weather conditions. A local village farmer is appointed the coordinator to manage the e-Choupal centre. This facilitates easy communication and trust building between the coordinators and the farmers as coordinators are fellow village men. The coordinators are trained by the ITC centers on usage of computers, crop quality testing machines and soil quality testing kits. The coordinators at the village level provide value added services of soil testing facility, quality seeds and trends in agriculture to help the farmer decide the crops they should be sowing to get the best returns for their efforts. The soil testing facility helps farmers assess the deficiencies of the soil and allows them to decide the optimum application of the soil nutrients and fertilizers to get the best yields. With the availability of higher yield seeds through e-Choupal, farmers can select the better varieties of seeds to improve the per acre yield. During the harvest season, the e-Choupal sets the benchmark procurement prices for the crops on a daily basis. These prices are based on the prices prevalent in the wholesale market. The crops are directly purchased from the cultivators at the e-Choupal centers. The crop quality is tested at e-Choupal and the farmer is paid according to the quality of the produce. The farmer gets the money immediately and is not at the mercy of the middlemen at the wholesale market; the previously prevalent system was highly inefficient and involved at least six to eight middle men between the farmer and the end consumer. By selling to e-Choupal, the farmer benefits by getting a fair price for a better quality crop, saves the transportation and travelling costs to the local wholesale market, gets immediate payment for his crop reducing his interest burden.
e-Choupal, an initiative in India, offers farmers information on commodity prices, supplies most inputs, and also procures grains from them making the supply chain more efficient and reducing the role of middlemen.
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e-Choupal, therefore, acts as a single point shop for the farmer to purchase the key agroinputs of seeds, fertilizers and agro-chemicals like pesticides, and herbicides All these facilities help the farmer concentrate on his core competency of managing the farm activities. The e-Choupal network is beneficial to ITC as well by helping them manage their agriculture procurements better. The company is able to grade the agriculture crops at the farm gate itself leading to better quality management of procurement; it helps them in having a complete traceability record of the produce starting from the farm gate. Traceability of the food to the farm gate is an important prerequisite for agriculture-based exports to European Union. The company has also been able to setup an inbound distribution setup in the rural India which helps the company to sell agricultural inputs and its FMCG products in rural India. Financial institutions like bank and microfinance groups can associate themselves with the e-Choupal network to provide affordable credit to the farmers. Consequently, e-Choupal has become an important point of communication, information, trading for the farmers of rural India. It was launched by ITC in June 2000 and today reaches out to about 3.5 million Indian farmers in 31,000 Indian villages through 52,000 kiosks. This is expected to assist the farmers in raising the productivity in their farms and achieve greater economic prosperity and better agriculture sustainability in India, which continues to rely on small scale agriculture as compared to the intensive agriculture approach of the developed nations.
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FINAL THOUGHTS
As we have stated throughout the report, the current global food crisis is the product of years in the making. As a massive amount of people in the developing world attain middle class status, and demand better nutrition, it creates a ripple effect in the demand for livestock, grains, arable land, irrigation, genetic seeds and fertilizer, to name a few. As this wave of change occurs, our agricultural resources are being strained and many individuals are finding a world with much higher food prices due in part to low levels of inventories of various commodities and significant increases in the input costs of final downstream products. Compounding the issue are the numerous governments that failed to develop strategies to help alleviate some of the issues that we see today. Although we do not believe corn to be the solution to Americas energy woes, to assume the worlds food crisis should be blamed on a fraction of the world agriculture story is incredibly misleading, in our opinion. Moreover, we feel for foreign governments to state the same is a simple case of shifting blame from either their lack of foresight or their inability to develop food security for their respective populations.
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Potash Corporation of Saskatchewan Inc.

POT : TSX : C$211.25 POT : NYSE
BUY Target: C$425.00

Keith Carpenter, MBA, CFA 1.416.869.7325 keith.carpenter@canaccordadams.com
COMPANY STATISTICS:
52-week Range: Avg. Daily Vol. (000s): Market Cap (M): Shares Out (M) basic: Shares Out (M) diluted: C$76.96-246.29 3560.0 C$68,884.6 315.7 326.1
Metals and Mining Agriculture
INITIATING COVERAGE WITH A BUY ADDING TO OUR BEST IDEAS LIST

Investment thesis
We are initiating coverage of Potash Corporation of Saskatchewan Inc. (Potash Corp.) with a BUY rating based on the following conclusions: Strong fertilizer markets throughout our forecast period As we highlighted in our thematic piece, The Modernization of the BRICs, we believe the fertilizer market will be robust for years into the future, specifically the potash and phosphate sectors. Prices are expected to remain strong as supply will not be able to meet the growth in demand over the next five years. With current pricing expected to rise into 2009 and 2010, earnings should continue to increase. Strong margin expansion throughout our earnings forecast Given the production profile, our view on fertilizer pricing throughout our forecast period, the firms low operating cost and growth profile over the same period, Potash Corp. should be accumulating significant earnings, we believe unmatched by its peers. Adding to its position as world leader in potash production Potash Corp. has implemented a growth strategy that should see it adding on average 1mt or production capacity every year through 2012. Valuation We value the shares of Potash Corp. on a 17x multiple of 2009E EPS of $25.21, for a target price of C$425.00, representing a 103% return to the current share price.
EARNINGS SUMMARY:
FYE Dec 2006A 2007A 2008E 2009E Revenue (M): US$3,377 US$4,764 US$11,157 US$19,106 EV/EBITDA (x): 64.2 38.0 11.8 5.9 EPS: US$2.08 US$3.52 US$12.40 US$25.21 P/E (x): 101.8 60.0 17.0 8.4
SHARE PRICE PERFORMANCE:
COMPANY SUMMARY:
Potash Corporation of Saskatchewan is the worlds largest producer of potash, second-largest nitrogen producer by ammonia capacity and the third-largest producer of phosphate. In 2007, Potash Corp. produced 17% of the worlds potash, 2% of the worlds ammonia, and 6% of the worlds phosphoric acid.
All amounts in US$ unless otherwise noted.
Canaccord Adams is the global capital markets group of Canaccord Capital Inc. (CCI : TSX|AIM) The recommendations and opinions expressed in this Investment Research accurately reflect the Investment Analysts personal, independent and objective views about any and all the Designated Investments and Relevant Issuers discussed herein. For important information, please see the Important Disclosures section in the appendix of this document or visit http://www.canaccordadams.com/research/Disclosure.htm.
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INTRODUCTION
Potash Corp. is the worlds largest producer of potash, second largest nitrogen producer by ammonia capacity and the third-largest producer of phosphate. In 2007, Potash Corp. produced 17% of the worlds potash, 2% of the worlds ammonia and 6% of the worlds phosphoric acid. The company is well positioned to capture stronger margins across its business units as we believe the fertilizer story is still in the early days of an upswing as the world will require significant amounts of fertilizer at prices higher and for longer than the investment community has assumed to date.
Strong fertilizer pricing throughout our forecast period

As we detailed in our thematic piece, The Modernization of the BRICs, we believe that fertilizer pricing has performed a step-change, as a solution to the worlds food crisis has become dependent on a variety of factors, one of which is the increased usage of fertilizer. Among the fertilizers, we believe potash has the strongest outlook over the near, medium and long term. A close second, phosphate pricing should remain strong until at least 2012. Although we place nitrogen third due to our concern over high gas prices, we do note that Potash Corp. should benefit from significant margins at its low-cost Trinidad operations. For these reasons, we believe the company is well positioned for an explosion of margins over our forecast period.
Strong margin expansion throughout our earnings forecast

Given the production profile, our view on potash pricing throughout our forecast period, the firms low operating cost and growth profile over the same period, Potash Corp. should accumulate significant earnings, we believe unmatched by its peers. Margins will increase significantly beyond levels witnessed to date as the company expands output, prices increase and a large portion of its operating costs remain muted. Potash Corp. should generate earnings next year that in hindsight could prove todays stock price is very inexpensive.
Adding to its position as world leader in potash production

Through its production growth profile, we should see an average of 1mt of potash capacity added by the company per annum through 2012 for a total growth in output of approximately 50% over 2007 levels.
Where to next?
Many investors ask how long fertilizer companies can continue to enjoy upward momentum in their respective share prices. As we have detailed in our thematic report, due to the growth in demand of better food, the world requires more fertilizer in order to grow those crops that are the inputs for better food. As this demand has been and is expected to remain strong, and the supply of that fertilizer is capacity constrained, specifically in the potash and phosphate sectors, fertilizer producers should continue to increase margins and earnings and therefore share prices. As we attempt to demonstrate in our Valuation section at the end of this report, the thesis for owning Potash Corp. is straightforward: the world requires more fertilizer. Throughout our forecast period, we believe Potash Corp. will continue to benefit from increasing margins due to commodity price increases; the company offers low potash operating costs; and the potash segment is expected to see increasing production through 2012 of greater than 50% over 2007. Finally, we believe that it is going to take some time to correct the current food crisis,
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which has been building for years, much longer than the result of next years crops and fertilizer application cycles.
THE COMPANY
Potash Corp. enjoyed significant earnings contributions from all three segments in 2007, but we must highlight the contributions enjoyed by both the potash and phosphate businesses, and the forecast gross margins for 2008 as expected by the company for illustrative purposes: Figure 142: Gross margin contribution by segment
Source: Potash Corp.
Although the company produces a significant amount of ammonia, it is its competitive advantage in the production of potash and phosphate that provides the most upside to valuation. Within the potash segment, the company does not experience much inflation within its operating costs. However, as we have detailed in our thematic report, the structural issues within the potash market should ensure that prices remain elevated throughout our forecast period. Within phosphate, although Potash Corp. has experienced cost input pressures similar to its peers, due to the company being an integrated producer of phosphate products, we expect margins to increase as input costs are increasing. Furthermore, few companies can match Potash Corp.s competitive cost advantage regarding brownfield potash supply additions.
Potash strategy
From a competitive point of view, the potash commodity is the most insulated from a glut of near- or medium-term supply additions. The barriers to entry are significant financially, as well as from an infrastructure and time to production viewpoint. This allows the market great visibility to assess the supply situation over the short, medium and long term. This market structure enables Potash Corp. to bring significant new supply online in a timely and cost-competitive manner, which is the cornerstone of the companys rollout of
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production expansions. Its first debottlenecking measures were announced at Rocanville in 2003 and completed in 2005, with several more announced after. We expect to witness capacity growth of 57% between 2006 and 2012 (that has been announced), and an anticipated further addition of 1.5mt by 2015, or sooner. Additionally, the company is evaluating a potential greenfield project at Bredenbury, Saskatchewan. The company expects to add on average, 1mt of new capacity per annum through 2012, providing an earnings capability that will be quite significant (see Valuation discussion below). As seen in 2006 when demand was temporarily disrupted by extended price negotiations with significant offshore customers, the company follows a strategy of matching production to market demand (that year pulled over 2 million tonnes offline) to prevent an oversupplied market. The above-noted expansions should also allow Potash Corp. to be viewed as a growth company. The combined potential earnings contribution from both the estimated price increases and production expansions is enormous. Because the company began this process of expansion several years ago, they are the only company that will see the full benefit of the bullish outlook in potash over the next five years. Figure 143: Planned potash capacity expansions
Phosphate strategy
Management is confident that that the phosphate business will be strong throughout our forecast period; however, similar to its peers, expansions within the industry are more difficult to locate. Organically, Potash Corp. is set to expand its Aurora facility in 2009 with the addition of 180kt of P2O5 output. Due to the high quality rock at its North Carolina operation, the company has the flexibility to move between product lines based on the margin dynamics in any given year. This will serve the company well going forward in order to benefit from a maximum gross margin. Regarding expansion outside its assets, management is always looking but nothing is imminent. The company has stated that it would look at opportunities where it can have more of a marketing focus, similar to potash where price is more important than volume.
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Nitrogen strategy
Although the nitrogen business is expected to remain the smallest contributor to earnings over our forecast period, it is a segment that will remain core to the companys operations. Management made a strategic move in 1997 to push forward with an offshore platform through the addition of the Trinidad Nitrogen Complex. Due to the cost of natural gas, Potash Corp. added this significant lower cost operation to its nitrogen portfolio. The Trinidad complex accounted for 65% of 2007 ammonia production. Although nothing has been announced regarding expansion within the nitrogen business, management is exploring the possibility of expanding the Trinidad complex by adding a fifth train at 700kt or larger due to the available space and infrastructure, and modular design of the existing operation. If this addition can be accomplished on similar terms of the original gas agreement, the low cost nature of the operation will continue to add to the companys bottom line and expanded earnings. We remain concerned about the impact of sustained high natural gas pricing as it affects the margins on southern US operators, but with a significant portion of the companys nitrogen output coming from a lower-cost base offshore, we believe this impact would be muted in that scenario.
OPERATIONS
Potash operations
The companys potash production comes from a total of seven plants (six in Saskatchewan, and one in New Brunswick). Of the seven facilities, all but one (Esterhazy), are owned and operated by Potash Corp. In 2007, the company produced 9.2mt of potash and has guided to production of just over 10.0mt in 2008. Although the company has a stated nameplate capacity of 13.2mt, as we will discuss in the Canpotex section below, this is not a realistic attainable capacity. Figure 144: Location of Potash Corp.s potash operations
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Saskatchewan
Allan The Allan facility produced 1.7mt KCI in 2007 and has a capacity of 1.9mtpa. The ore is mined at a depth of approximately 3,400 feet and then processed into standard, granular and soluble fertilizer products as well as industrial grade. Cory The Cory deposit is undergoing a debottlenecking and expansion project that will increase capacity by 1.2mtpa to 2.0mtpa by mid-2010. Expected cost of the project is $890 million. The facility produced 0.8mt in 2007. The mine is at a depth of approximately 3,400 feet and currently produces only white MOP products (soluble and granular product, chicklets and k-prills), however all tones in the debottlenecking/expansion will be red product (fertilizer). Esterhazy Esterhazy is owned by Mosaic and has a capacity of 5.3mt. Through an agreement with Mosaic, Mosaic mines and processes Potash Corp.s mineral rights at Esterhazy. Under the agreement and following the expansion at the mine in 2007, the most Potash Corp. can receive from the mine is 1.313mt in a given year, with 453.6kt as a minimum. As prices have reached all-time highs and capacity is very tight, Potash Corp. will be receiving 1.0mtpa from Esterhazy throughout our forecast period. The original Esterhazy agreement was made in the 1960s under predecessor companies and contained a variety of parameters, including the amount of ore produced. A timeframe of 2013 was originally assumed as the end of the agreement. However, due to the recent ramp in production, that end date has been moved forward, but the exact date of that push forward is open to negotiation. Managements of both companies are in discussions on when the agreement will and should conclude. It is possible that we may have a solution by year-end. We have assumed that the allocation to Potash Corp. reverts back to Mosaic in 2012. Lanigan The mine produced 1.9mt in 2007 and has a current capacity of 3.8mtpa. The 1.5mtpa debottlenecking project has a cost of $410 million and will be completed by July 2008. Lanigan is Potash Corp. largest potash mine. It operates at a depth of 3,600 feet and produces granular, standard and suspension potash products. Patience Lake Patience Lake is the only Potash Corp. mine that is solution mined. Originally a conventional operation, it was converted to solution mining in 1988 following two periods of closure due to flooding. The facility produced 0.3mt in 2007. The debottlenecking project at Patience Lake should be completed by year-end 2008, adding 0.4mt in capacity at a cost of $110 million. Nameplate capacity is 1.0mtpa (established before flooding), however it is not expected to ever produce at that level. The mining operations are at approximately 3,300 feet below surface with final products consisting of lawn and garden and granular grade potash for agricultural purposes. Rocanville Rocanville produced 2.6mt in 2007 and has a capacity of 3.0mtpa. Management announced an expansion to the Rocanville operation, which includes the enlargement of both the mine and the mill, with an expected completion date of 2012 at an announced
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cost of $1.8 billion. The mine depth is 3,150 feet and produces granular and standard potash for agricultural purposes and standard industrial potash.
Sussex, New Brunswick

2007 production equaled the mines current capacity of 0.8mtpa. The company announced in July 2007 that it was expanding the facility through the addition of a new mine and expanded milling facility. The mine plan entails a 2.0mtpa greenfield mine (to replace the existing 0.8mtpa mine plagued by brine inflow) and a 1.2 mtpa mill expansion with initial production from the new deposit by year-end 2011 at an announced cost of $1.66 billion. Mining occurs between 400-700m and produces both potash and salt.
Reserves
Figure 145: Potash reserves
Source: Company reports
Years of remaining life are based on current output rates. In addition to the reserves, the company has mineral resources of significance. Due to the nature of the solution mine, the company states that it cannot complete a reserve or resource calculation at Patience Lake.
Port expansion
Canpotex recently announced an over $500 million port capacity expansion, adding 11mt of shipping capacity to its existing 12mt. The additional capacity will include an expansion of its existing Vancouver facility as well as a new terminal at Ridley Island near Prince Rupert, British Columbia. The added shipping tonnage is expected to be in service by 2012 in order to accommodate the expansion plans of its three member owners. We have assumed Potash Corp. will pay approximately 55% of the cost due to its weighting within Canpotex.
Bredenbury
Bredenbury is a greenfield site in Saskatchewan the company has deemed a target of potential production growth. Historically, Potash Corp. completed geological work on the site in the early 1980s with dozens of test holes and the inclusion of pilot holes having been drilled for eventual shaft construction. The company is currently revamping the site with 3D seismic testing (which wasnt available in the early 1980s) in order to better understand the geological formation with regard to anomalies. It would be a logical step that this site would be added to the list of operational capacity additions during the 20152020 period. Currently, management assumes that it will be able to add capacity through brownfield expansions until the overall capacity is roughly 18mt of annual output.
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Phosphate operations
Potash Corp. produces phosphoric acid, solid and liquid phosphate fertilizers, animal feed supplements and purified phosacid. The company operates two mines, three processing plants and six feed plants in the US as well as a feed plant in Brazil. Figure 146: Location of Potash Corp.s phosphate operations
Aurora, North Carolina This integrated plant consists of a phosphate mine and a processing plant. The mine produces 6mtpa of phosphate rock and the plant can produce 1.2mtpa of phosphoric acid (P2O5). The facility also boasts four sulphuric acid plants, four phosphoric acid plants, four purified acid plants, a liquid fertilizer plant, a superphosphoric acid plant (SPA), a deflourinated phosphate plant (animal feed), two granulation plants (for production of DAP or MAP), and a silicon tetrafluoride plant. The Aurora facility hosts a phosphate rock that allows the company to produce purified acid for the industrial market. Historically, this product is a higher margin product that is sold pursuant to long-term contracts. Of course, during the recent increase in DAP pricing, those existing contracts have become lower margin contracts relative to the current margins enjoyed in the production of DAP. As the company rolls those contracts forward, we expect to see an increase in margins quarter over quarter throughout 2008, and then a large increase in margins during 2009 as a large portion of the existing contract is renewed at significantly higher prices. White Springs, Florida The companys White Springs facility encompasses a mine and two processing plants (Suwannee River and Swift Creek). The Suwannee plant is home to two sulphuric acid plants, one phosacid plant, two DAP plants, an SPA plant, a dicalcium phosphate plant and a DFP plant. At the Swift Creek complex, the company operates two sulphuric acid plants, a phosacid plant and an SPA plant. Other facilities Potash Corp. produces animal feed at its Marseilles, Illinois; Weeping Water, Nebraska; Joplin, Missouri; and Sao Vincente, Brazil facilities. In addition, the company owns a technical and food grade phosphate plant in Cincinnati, Ohio, and terminal facilities at Morehead City, North Carolina, and Savannah, Georgia.
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Reserves
Both the Aurora and White Springs complexes process the phosphate rock that is mined at site. At the Geismar, Louisiana, nitrogen facility, phosphate rock is purchased under a long-term agreement with a Moroccan government-owned entity, with pricing set at predetermined dates at negotiated rates. Figure 147: Phosphate Proven and Probable Reserves
At current output rates, the above reserves would provide a further 88 years of production at Aurora and 16 years at White Springs. It should be noted that the above grades are listed post-beneficiation. Sulphur Potash Corp. purchases sulphur in order to produce sulphuric acid, which is one of the primary ingredients in the production of phosphoric acid. The company currently sources its sulphur needs from oil refiners primarily in North America and Latin America, with sulphur price contracts typically established on a quarterly basis. Ammonia Ammonia is added to phosphoric acid to produce both DAP and MAP. Potash Corp. sources a portion of these ammonia requirements from third parties at market rates. Nitrogen Potash Corp. owns four nitrogen facilities (three in the US and one in Trinidad). The company produces nitrogen fertilizer, nitrogen feed and industrial products. In 2007, Potash Corp. produced 3.2mt of ammonia and had a nameplate capacity of 3.9mt. A substantial portion of the ammonia output is upgraded to urea solids, nitrogen solutions, nitric acid, and ammonium nitrate solids. Point Lisas, Trinidad The complex in Trinidad is the companys newest and largest facility with a gross ammonia capacity of 2.2mt. In 2007, gross ammonia output totalled 2.1mt with a portion of that upgraded into urea. The urea is sold into Latin America and the ammonia is shipped to end users primarily in the U.S. The company has secured a long-term low gas contract for the facility (see below) and long-term charters of specialized vessel for the movement of ammonia into several available deepwater terminals in the US Gulf.
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Augusta, Georgia The facility has a gross ammonia capacity of 0.7mt with 2007 output of 0.6mt. The plant has the capability to upgrade the ammonia to urea, nitric acid, ammonium nitrate and nitrogen solutions. Lima, Ohio The Lima operation produced 0.5mt of ammonia in 2007 and has a gross capacity of 0.6mt. The plant upgrades ammonia to urea, nitric acid and nitrogen solutions. Geismar, Louisiana The facility is the companys smallest with a gross ammonia capacity of 0.5mt. The plant has the capability to produce nitric acid and nitrogen solutions. In June 2003, Potash Corp. discontinued ammonia and nitrogen solutions sales due to high natural gas prices and subsequent low margins. In September, management decided to restart nitrogen solutions output but ammonia output remained nil for 2007 (necessary ammonia is imported and carbon dioxide required to make urea is purchased off a pipeline). The Geismar facility has an associated phosphate operation, including a sulphuric acid plant, a phosacid plant and a liquid fertilizer plant. The majority of the phosacid production from Geismar is sold under a long-term contract to an industrial customer.
Natural gas
Potash Corp. employs hedging contracts for its natural gas requirements in the US. In Trinidad, Potash Corp. has multiple long-term take or pay contracts for natural gas that utilizes pricing formulas based on the prevalent market price of ammonia. The Trinidad contracts supply 100% of its needs through 2010, 90% in 2011, 83% in 2012, 67% in 2013, 56% in 2014-15, and 51% in 2016-2018. Currently, 62% of the companys gas requirements are for its Trinidad operation, with the remainder used in the U.S. facilities.
CANPOTEX
Canpotex is owned by Potash Corp., Mosaic and Agrium. It is the marketing arm for all non-North American sales of Saskatchewan potash for its three owners. Historically, the sales of potash are done on a spot basis, with India and China the major exceptions. Contracts with China have typically been for 12 month (calendar year) durations, while contracts with India are with durations of 6-12 months. As part of the Canpotex agreement, all new capacity enhancements if the company desires to include these potential volumes in their Canpotex allocation calculation -, are to be proven through a 90 day operational trial of the additional capacity. A company will attempt to run the plant at its maximum output over that period in order to have maximum impact on raising its allocation. However, this is an inaccurate test to where a plant can run during normal operations due to the regular maintenance schedule and execution of a sustainable mining plan at any facility. There are a few other factors that make the numbers unattainable. As an example to Potash Corp., the Patience Lake capacity relates to a trial run of the old conventional mine that was flooded. Although it currently operates as a solution mine, about 0.5mt of the nameplate capacity is no longer possible of attaining. In essence, it is grandfathered under the Canpotex system. We highlight this for two reasons: one, to understand the difference between operational and nameplate capacity; and two, to display why alleviating the current supply constraints in the marketplace with this excess capacity isnt as easy as turning a switch.
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STRATEGIC INVESTMENTS
Potash Corp. owns investments in Israel Chemicals Ltd. (10%), Arab Potash Company (28%), Sociedad Quimica y Minera de Chile (SQM) (32%) and Sinofert Holdings Ltd. (20%). These investments cost the company $1.25 billion and have a current market value of greater than $10 billion, or $35 per Potash Corp share. It is managements view that these potash-related investments are long-term holdings and provide significant global strategic value. The company has the intention of adding further levels of ownership in the future wherever possible.
CAPITALIZATION
There are 316 million shares outstanding (326 million diluted). As of March 31, 2008, the company had debt of $1.4 billion versus cash of $365 million.
Share repurchase program

In January, Potash Corp. announced a normal course issuer bid for up to 5% of the outstanding shares of the company over a one-year period. This would equate to a potential repurchase of approximately 15.8 million shares.
Dividend policy
Potash Corp. currently pays out US$0.10 per share in the form of dividends on a quarterly basis.
INVESTMENT RISKS
Brine inflow
Water inflow is the single most structural risk to a potash mine. It is not an uncommon event and is often dealt with through the use of pumps. If water inflow becomes uncontrollable, it can ruin a mine which would have a material impact to the companys earnings.
Sulphur
As one of the key ingredients in the production of phosphate fertilizers, the company requires an uninterrupted supply of sulphur. If the supply were constrained, the production of the end product would be negatively impacted, affecting the earnings contribution to the company.
MANAGEMENT
Bill Doyle, President and Chief Executive Officer
Mr. Doyle joined Potash Corp in 1987 as President, Potash Corp. Sales, covering all of the firms potash sales. In 1995, he assumed the role of Executive Vice-President, where he held responsibility for all potash, phosphate and nitrogen sales. On July 1, 1998, Mr. Doyle was appointed President and Chief Operating Officer, and a year later, was appointed Chief Executive Officer. Mr. Doyle also serves as Chairman of Canpotex Ltd.
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Wayne Brownlee, Chief Financial Officer
Mr. Brownlee joined Potash Corp in the 1980s where he coordinated the privatization of Potash Corp. in 1988. From 1988 until 1999, Mr. Brownlees main role was overseeing expansion and business development. He was appointed Chief Financial Officer in 1999.
James Dietz, Chief Operating Officer

Mr. Dietz joined Potash Corp in 1997 as the EVP, Potash Corp. Nitrogen and lead the nitrogen unit until his appointment as Chief Operating Officer in 2000. Prior to joining Potash Corp., Mr. Dietz was employed in the chemical industry within North America and Europe.
VALUATION
We derive a C$425 per share target price for Potash Corp. by applying a 17x multiple of 2009E EPS of $25.21 using the following assumptions: Production of 11mt of potash, 4.2mt of phosphate and 5.7mt of nitrogen fertilizers in 2009. An average netback to the mine potash price of US$970/t. An average phosphate product price of US$1075/t and an average nitrogen product price of US$425/t. An effective income tax rate of 29%. A potash operating cost per tonne of $78/t. Phosphate and nitrogen segment operating costs of US$534/t and US$317/t, respectively. A CAD/USD exchange rate of 1.0.
Based on these assumptions, Potash Corp. is currently trading at a 51% discount to our target price of C$425.
CONCLUSION
We believe Potash Corp. is well positioned to continue to benefit from our strong fertilizer outlook due to its leadership in production, low cost assets and strong production growth going forward. Furthermore, we believe the significant increase in the companys earnings over the next few years will prove current valuations on the stock price to be very conservative. For these reasons, we initiate coverage of Potash Corp. as our Best Idea with a BUY rating and a 12-month target price of C$425.00.
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Figure 148: Potash Corp. Income Statement, FYE Dec

Income Statement US$ M Sales Less Freight Transportation and distribution Net Sales YOY Growth Sequential growth Operating Costs Depreciation Total Gross Profit YOY Growth Sequential Growth Gross Margin % Expenses Selling, general and administrative Provincial mining and other taxes Foregin Exchange gain (loss) Other income Total Expenses YOY Growth Sequential Growth % of Total Revenues Operating Income (EBIT) YOY Growth Sequential Growth Operating Margin Interest expense EBT YOY Growth Sequential Growth EBT Margin Income taxes Effective tax rate Net Earnings (reported) YOY Growth Sequential Growth Net Margin Shares Outstanding Basic Fully Diluted EPS (reported) - GAAP Basic Fully Diluted Source: Canaccord Adams estimates FY E 31-Dec-06 3,767 255.8 134.1 3,377 -3% FY E 31-Dec-07 5,234 346.1 124.1 4,764 41% FY E 31-Dec-08 11,698 404.9 136.0 11,157 134% FY E 31-Dec-09 19,721 460.6 154.2 19,106 71%
2,144 231 1,002 -10.9% 26.6%
2,602 281 1,881 87.7% 35.9%
4,284 321 6,551 248.3% 58.7%
5,111 348 13,647 108.3% 71.4%
158 67 (4) (94) 127 -45.6% 3.7% 876 -1.9% 23.2% 86 790 -2.5% 21.0% 158 20.0% 632 16.4% 16.8%
213 135 70 (126) 293 131.4% 6.1% 1,589 81.4% 30.3% 69 1,520 92.4% 29.0% 416 27.4% 1,104 74.7% 21.1%
273 635 (28) (12) 868 196.5% 7.8% 5,684 257.8% 48.6% 45 5,639 271.0% 48.2% 1,593 28.3% 4,046 266.6% 34.6%
395 1,462 0 0 1,857 114.0% 9.7% 11,791 107.5% 59.8% 45 11,746 108.3% 59.6% 3,406 29.0% 8,340 106.1% 42.3%
312 319
316 324
317 327
321 332
2.03 1.98
3.50 3.40
12.75 12.36
26.02 25.16
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The Mosaic Company

MOS : NYSE : US$129.34
BUY Target: US$210.00

COMPANY STATISTICS:
52-week Range: Avg. Daily Vol. (000s): Market Cap (M): Shares Out (M) basic: Shares Out (M) diluted: US$32.50-163.25 6,595.7 US$57,699 443.3 446.1
INITIATING COVERAGE
Investment thesis
We are initiating coverage of The Mosaic Company with a BUY rating based on the following conclusions: Strong fertilizer markets throughout our forecast period As we highlighted in our thematic piece, The Modernization of the BRICs, we believe the fertilizer market will be robust for years into the future, specifically the potash and phosphate sectors. Prices are expected to remain strong as supply will not be able to meet growth in demand over the next five years. With current pricing expected to rise into 2009 and 2010, earnings should continue to increase. Strong margin expansion throughout our earnings forecast Given the companys position as the world leader in phosphate and the worlds third-largest producer of potash, our view on product pricing throughout our forecast period, and the firms low operating cost in potash, Mosaic should accumulate significant earnings. Positioning the company for the future with added potash capacity Mosaic has implemented a growth strategy in potash that should position the company for significant additional earnings contributions beginning in 2012. Valuation We value the shares of Mosaic on a 16x multiple of F2009E EPS of US$13.03, for a target price of US$210.00, representing a 61% return to the current share price.
EARNINGS SUMMARY:
FYE May Revenue (M): EV/EBITDA (x): EPS: P/E (x): 2006A 2007A 2008E 2009E US$5,179 US$5,774 US$9,159 US$17,306 323.0 US$(0.94) NM 61.3 US$1.01 128.5 19.1 US$4.16 31.1 6.4 US$13.22 9.8
COMPANY SUMMARY:
Mosaic is the world largest producer of phosphate fertilizer, the largest producer of phosphate-based animal feed ingredients in the United States and the worlds third-largest producer of potash fertilizer. During fiscal 2007 (May year-end), the company produced 7.9mt of phosphate fertilizers and 7.9mt of potash fertilizers.
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INTRODUCTION
Mosaic is the world largest producer of phosphate fertilizer, the largest producer of phosphate-based animal feed ingredients in the United States and the worlds third-largest producer of potash fertilizer. During fiscal 2007 (May year-end), the company produced 7.9mt of phosphate fertilizers and 7.9mt of potash fertilizers.

As we detailed in our thematic report, The Modernization of the BRICs, we believe that fertilizer pricing has performed a step-change, as a solution to the worlds food crisis has become dependent on a variety of factors, one of which is increased usage of fertilizer. Among the fertilizers, we believe potash stands to have the strongest outlook over the near, medium and long term. A close second, phosphate pricing should remain strong until at least 2012, positioning the company for an explosion of margins from two significant contributors to earnings.
Strong margin expansion throughout our earnings forecast

Given the companys position as the world leader in phosphate output and the worlds third-largest produce of potash, our view on potash pricing throughout our forecast period, and the firms low operating cost in potash, Mosaic should accumulate significant earnings.
Positioning the company for the future with added potash capacity
Mosaic has implemented a growth strategy in potash that will position the company for significant additional earnings contributions beginning in 2012. The company has the ability to increase production through brownfield capacity expansions at its existing operations. Although the company will not see a significant impact to output until 2012, it should enjoy a massive increase in production capacity at that time due to announced expansions and the reversion of the third-party tolling agreement at Esterhazy.
Where to next?
Many investors ask how long fertilizer companies can continue to enjoy upward momentum in their respective share prices. As we have detailed in our thematic report, due to the growth in demand of better food, the world requires more fertilizer in order to grow those crops that are the inputs for better food. As this demand has been and is expected to remain strong, and the supply of that fertilizer is capacity constrained, specifically in the potash and phosphate sectors, fertilizer producers will continue to increase margins and earnings, and therefore share prices. As we attempt to demonstrate in our Valuation section at the end of this report, our thesis for owning Mosaic is straightforward: The world requires more fertilizer. Specific to Mosaic, the company should continue to benefit from increasing margins due to commodity price increases and low potash operating costs. Finally, we believe that it is going to take some time to correct the current food crisis, which has been building for years, much longer than the result of next years crops and fertilizer application cycles.
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THE COMPANY
Mosaic was formed in 2004 following the merger of IMC Global Inc. and the Cargill Crop Nutrition fertilizer businesses of Cargill Inc. Under Mosaic, IMC Global comprised the potash business and approximately 25% of the phosphate business, while the fertilizer unit of Cargill accounted for approximately 75% of the phosphate business and the Offshore segment operations. Cargill is the majority shareholder of Mosaic, owners of approximately 65% of the outstanding shares. Mosaic operates under two principal business units with the phosphate and potash segments combining for 99% of F2007 operating earnings. Figure 149: F2007 segmented net sales and operating earnings
Phosphate strategy
As the world leader in phosphate output, and more importantly, an integrated producer of phosphate fertilizers, Mosaic is well positioned to benefit from expanding gross margins throughout our forecast period due to the continued strength in finished product pricing. We reproduce a slide below from our thematic piece, The Modernization of the BRICs to demonstrate how an integrated producer like Mosaic is benefiting from margin expansion over that of a non-integrated producer (the marginal producer). Non-integrated producers account for approximately 30% of the phosphate fertilizer market.
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Figure 150: Mosaic versus non-integrated Indian producer
As an example, Mosaic requires 1.7 units of phosphate rock, 0.42 units of sulphuric acid, and 0.22 units of ammonia to produce a unit of DAP. The most significant cost to a nonintegrated producer is the price of the rock, followed by the cost of the sulphur. Please refer to the Fertilizer section in our thematic report for a more detailed explanation on the input cost for the production of phosphate fertilizer. As Mosaic is sourcing its own rock requirements and sulphur predominantly from within North America at lower prices than the non-integrated producer, the company has and should continue to enjoy margin expansion based on the pricing of finished product that must clear that of a non-integrated producer. As we forecast pricing to remain strong throughout our forecast period, Mosaic should continue to enjoy strong margins in its phosphate division. Although management would like to expand its phosphate business within the western hemisphere and is currently looking at opportunities within Brazil, Argentina and Chile, nothing has been announced. Locating the proper asset with access to the applicable infrastructure remains the primary focus and issue within its expansion plans. Management continues to monitor what assets it can add to expand its production base, which ultimately would serve those markets within South America. Organically, the company does not have the additional rock capacity to significantly increase its output of finished phosphate products.
Potash strategy
As we detailed in our fertilizer segment piece, we believe the outlook for potash over the short, medium and long term is positive due to strong demand and a restricted supply. The only addition of new mine supply over our forecast period is through debottlenecking projects. Mosaic will benefit from this market structure in two ways: through continued strength in pricing that will expand margins for its low cost operating mines in
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Saskatchewan and through new production through the companys debottlenecking platform, which should provide strong additional growth in earnings in 2012, positioning the company for a stronger future. Highlighting its confidence in the potash markets, Mosaic has announced growth plans for its potash build-out through 2020 (Figure 151). The company details a 5.1mt annual capacity expansion at its existing facilities. What is important to note is the ramp in production in 2012. In addition to the 1.3mt expansion that will be added that year, we forecast the third-party tolling capacity of 1.3mtpa at Esterhazy to revert to Mosaic in 2012, netting the company total growth of 2.6mt, or 33% of fiscal 2007 output. It is worth noting the cost differential when expanding capacity versus adding new capacity. All of these expansions will utilize some of the existing infrastructure at the current operations, making it a cheaper alternative to greenfield expansions. Most importantly, the reversion of the 1.3mt at Esterhazy will not cost the company any capital as it is a portion of current mine production. In line with its Canpotex partners, Mosaic will be adding capacity over an extended period (12 years as outlined by the company), ensuring there is no supply shock that would be detrimental to the industry or Mosaics expansion plans. Keep in mind that the projects that are the furthest out will not be put forward immediately and still provide the company with flexibility to amend the expansion plans, as the market evolves. Figure 151: Time chart for potash expansions
Source: Mosaic
OPERATIONS
Phosphate operations
Mosaic operates five mines and three concentrates plants in Florida and a concentrates plant in Louisiana. In fiscal 2007, Mosaic produced 16% and 57% of global and USs phosphate fertilizer output, respectively. Mosaic produces phosphoric acid (P2O5), diammonium phosphate (DAP), and monoammonium phosphate (MAP). The company produced 4.1mt of P2O5 (capacity of 4.4mt), 7.9mt of phosphoric fertilizers (capacity of 9.4mt), and full capacity of 0.9mt of animal feed phosphate. It must be noted that the stated capacity for both phosphate and potash facilities is based on trial runs that excluded maintenance downtime, and thus stated capacities will be higher than realized production capabilities over a given year.
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Figure 152: Map of phosphate operations
Source: Mosaic
Concentrates plants
Bartow (Florida) The phosphate plant has a P2O5 capacity of 1.0mtpa and a processed phosphate annual capacity of 2.0mt. New Wales (Florida) With an annual capacity of 1.7mt of P2O5 and 3.9mt processed phosphate, this plant is the companys largest. In addition the plant produces animal feed phosphates with a capacity of 0.7mtpa. Riverview (Florida) The plant has an annual capacity of 0.9mt P2O5, 1.7mt of processed phosphate and 0.2mtpa of animal feed phosphates. Uncle Sam/Faustina (Louisiana) The plant at Uncle Sam has a capacity of 0.8mt of P2O5, which provides the feedstock for the 1.8mt processed phosphate capacity plant at Faustina. The Faustina plant also produces ammonia.
Phosphate Mines
The company owns the Four Corners (annual capacity of 6.4mt), South Fort Meade (5.9mt), Hookers Prairie (1.8mt), Wingate (0.9mt), and Hopewell (0.5mt) phosphate mines. The total combined annual capacity of the mines is 15.5mt. The Wingate mine was reopened in June 2007 after having been on care and maintenance since November 2005. The Fort Green mine was placed on care and maintenance in May 2006 due to a corporate restructuring. In fiscal 2007, Mosaics production of 13.7mt provided approximately 8% of world phosphate rock production. The company uses all of its produced rock for its internal purposes following the 2005 termination of a 2mtpa supply contract to a third
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party. Mosaic is the worlds second-largest supplier of phosphate rock, albeit for internal usage. The company does on occasion, purchase rock from third parties. Figure 153: Phosphate mine output 2005-2007
Source: Mosaic
Reserves
Figure 154: Phosphate mine reserves
Source: Mosaic
Management intends to put the Ona/Pine Level and Pioneer mines into production (as one facility) within five years to replace the Four Corners mine, where the remaining life expectancy is through 2013.
Sulphur
Mosaic purchases sulphur in order to produce sulphuric acid, which is one of the primary ingredients in the production of phosphoric acid. During fiscal 2007, Mosaic purchased 3.8mt of sulphur. The company predominantly sources its sulphur needs from US oil and gas producers under contract. Due to recent availability issues within the US, Mosaic sourced a small percentage of its sulphur requirements from Canada and Russia at a higher cost. Contracts for sulphur volumes are set annually with pricing set on a calendar quarterly basis. The trend for the remainder of the year is to tighter conditions and higher pricing. Oil sands expansions should help alleviate the supply constraint in the sulphur market over the next 18-24 months. Still, due to the structure of the pricing of DAP, and the Asian price of sulphur, Mosaic is still expected to increase margins slightly when solely looking at the sulphur input equation, all else being equal.
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Ammonia
Ammonia is added to phosphoric acid to produce both DAP and MAP. In fiscal 2007, Mosaic consumed 1.5mt of ammonia, of which it produced a third and sourced the remainder from Trinidad under short-term contracts where price is agreed to monthly. The Faustina plant in Louisiana is self-sufficient in ammonia. Mosaic sources most of its gas needs through fixed-price contracts (Natural gas accounts for approximately 87% of the cost to produce ammonia at Faustina).
Potash
Mosaic has annual capacity of 10.4mt potash (excluding third-party production at Esterhazy see below), equivalent to 14% of world capacity. The company produced 7.9mt (approximately 15% of world output) in fiscal 2007. Mosaic operates four mines in Saskatchewan, one mine in Michigan and one mine in New Mexico. Of the 7.9mt of production, 6.9mt was in the form of muriate of potash (MOP) with the remaining amount produced as K-Mag, a double sulphate of potash magnesia. Figure 155: Map of potash operations
Source: Mosaic
Belle Plaine, Saskatchewan Belle Plaine is the companys lone solution mine (the others employ the standard shaft access). The mine has a capacity of 2.8mt with production of 2.2mt in fiscal 2007. Colonsay, Saskatchewan Colonsay has an annual capacity of 1.8mt of MOP. The facility produced 1.3mt in fiscal 2007. Esterhazy, Saskatchewan Esterhazy consists of two mines, K1 and K2, which have a combined capacity of 5.3mt. Through an agreement with Potash Corp., Mosaic mines and processes Potash Corp.s mineral rights at Esterhazy. Under the agreement and following the expansion at the mine
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in 2007, the most Potash Corp. can receive from the mine is 1.313mt in a given year, with 453.6kt as a minimum. As prices are at all-time highs and capacity is very tight, Potash Corp. will be receiving 1.3mtpa from Esterhazy through our forecast period. Excluding the toll production, Mosaic produced 2.9mt of MOP at Esterhazy in fiscal 2007. The original Esterhazy agreement was made in the 1960s under predecessor companies based on a variety of parameters, including the amount of ore produced. A timeframe of 2013 was originally assumed as the end of the agreement. However, due to the recent ramp in production, that end date has been moved forward, but the exact date of that push forward is open to debate. Management of both companies is in discussions on when the agreement will and should conclude. It is possible that we may have a solution by yearend. We have assumed that the allocation to Potash Corp. reverts back to Mosaic in 2012. Carlsbad, New Mexico At the companys Saskatchewan potash assets, the minerals are found in the form of sylvinite, a mixture of potassium chloride and sodium chloride. From this ore, the company produces MOP. At Carlsbad, Mosaic produces both potash products from sylvinite, and langbeinite, a double sulphate of potash magnesia which the company markets as K-Mag. Annual capacity is 0.5mt of MOP and 1.2mt of K-Mag.
Conventional versus solution mining

Mosaic employs traditional shaft mining at four of its five potash facilities. This involves sinking a shaft to depths of 3,000 feet and employing a continuous miner to remove the ore to load onto conveyor belts to the ore crusher and then hoisted to the surface for refining. In solution mining, heated brine is injected into the potash deposit to dissolve the ore. The solution is then pumped to the surface and refined through evaporation and crystallization techniques.
Reserves
Figure 156: Potash reserves
Source: Mosaic
Similar to its peers in the Saskatchewan potash evaporite, Mosaic has enough reserves and resources that allow the company to produce for many years into the future without concern for exhaustion of resources.
Port expansion
Canpotex recently announced a $500 million port capacity expansion, adding 11mt of annual shipping capacity to its existing 12mt. The additional capacity will include an
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expansion of the existing Vancouver facility as well as a new terminal at Ridley Island near Prince Rupert, BC. The added shipping tonnage is expected to be in service by 2012 in order to accommodate the expansion plans of its three member owners. We have assumed Mosaic will pay approximately 36% of the cost due to its weighting within Canpotex.
Nitrogen and offshore

Mosaic owns a 50% interest in Saskferco Products Inc., a Saskatchewan-based producer of nitrogen fertilizer. The company announced in June that it will look to divest its ownership of Saskferco. The offshore segment includes sales offices, blending and bagging operations, port terminals and a distribution network that includes 24 storage facilities with a combined capacity of 1mt. The Offshore segment also includes strategic investments in overseas production facilities, including Fosfertil (19.9% ownership), a Brazilian phosphate producer. The combined contribution of nitrogen and offshore to fiscal 2007 earnings was 1%.
CANPOTEX
Canpotex is owned by Potash Corp., Mosaic and Agrium. It is the marketing arm for all non-North American sales of Saskatchewan potash for its three owners. Historically, the sales of potash are done on a spot basis, with India and China the major exceptions. Contracts with China have typically been for 12 month (calendar year) durations, while contracts with India are with durations of 6-12 months. As part of the Canpotex agreement, all new capacity enhancements if the company desires to include these potential volumes in their Canpotex allocation calculation -, are to be proven through a 90 day operational trial of the additional capacity. A company will attempt to run the plant at its maximum output over that period in order to have maximum impact on raising its allocation. However, this is an inaccurate test to where a plant can run during normal operations due to the regular maintenance schedule and execution of a sustainable mining plan at any facility. There are a few other factors that make the numbers unattainable. As an example to Potash Corp., the Patience Lake capacity relates to a trial run of the old conventional mine that was flooded. Although it currently operates as a solution mine, about 0.5mt of the nameplate capacity is no longer possible of attaining. In essence, it is grandfathered under the Canpotex system. We highlight this for two reasons: one, to understand the difference between operational and nameplate capacity; and two, to display why alleviating the current supply constraints in the marketplace with this excess capacity isnt as easy as turning a switch.
CAPITALIZATION
There are 443 million shares outstanding (446 million diluted). As of March 31, 2008, the company had debt of $1.65 billion versus cash of $1.13 billion.
Debt
Following its 2004 creation through a merger, Mosaic had a significant debt level, and as a result, a poor balance sheet. In seven months from May 2007, the company pre-paid $1 billion in debt in order to raise its debt rating to investment grade. Managements focus was two-fold: attain an investment grade rating and build out additional capacity to capitalize on a strong market. On June 9, 2008, the company was granted investment grade status by Fitch and S&P for its unsecured debt. With the amount of cash flow that
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will be generated over our forecast horizon, Mosaic will be able to accomplish its capital expenditure program through cash on hand. Following the investment grade rating, it can be expected that the company will implement a modest dividend program, in line with its peers. As per acquisitions, management will be hesitant to spend money using its cash and would most likely use equity as a means of transacting if an opportunity were to present itself.
Capital expenditures
Management has forecasted the US$3.2 billion in capital expenditures for the potash expansions to be evenly distributed over the 12-year build-out period.
MANAGEMENT
James Prokopanko, President and Chief Executive Officer
Mr Prokopanko joined Mosaic in 2006 as the Chief Operating Officer and was appointed President and Chief Executive Officer on January 1, 2007, following the retirement of Fredric Corrigan. From 1978 to 2006, Mr. Prokopanko was employed with Cargill. During his tenure, he was involved in the retail agriculture business in North America, Brazil, Argentina and the United Kingdom, followed by positions as Vice President of North American crop inputs, Corporate Vice President responsible for procurement and as leader of the Cargil Ag Producer Services Platform.
Lawrence Stranghoener, Chief Financial Officer

Mr. Stranghoener joined Mosaic in 2004 as Chief Financial Officer. Previously, Mr. Stranghoener was Chief Financial Officer of Thrivent Financial for Lutherans from 2001 to 2004 following a 17-year career at Honeywell, the last three of which as the companys CFO until its merger in 1999.
Norman Beug, Senior Vice President, Potash Operations

Prior to joining Mosaic, Mr. Beug was the vice president and general manager of IMC Globals Potash Business Unit. Mr. Beug has been involved in the potash industry since 1977 and has held various supervisory and management positions including general manager of the Belle Plaine mine.
Steven Pinney, Senior Vice President, Phosphate Operations

Prior to joining Mosaic, Mr. Pinney was a senior vice president of Cargill and leader of the Phosphate Production Business Unit. Mr. Pinney joined Cargill in 1976 and held various positions, including plant engineer in the companys Oilseeds Processing and Fertilizer businesses, and as business unit leader for phosphate operations in Brazil and China.
Rick McLellan, Senior Vice President, Commercial

Mr. McLellan previously held the position of Vice-President, North America Sales. He has also held various positions, including country manager for Brazil, leadership responsibilities for fertilizer distribution, import and production in Brazil, as well as various positions with Cargills Canadian and US operations.
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INVESTMENT RISKS
Brine Inflow
Water inflow is the single most structural risk to a potash mine. It is not an uncommon event and is often dealt with through the use of pumps. If water inflow becomes uncontrollable, it can ruin a mine which would have a material impact to the companys earnings. At Esterhazy, brine inflow has been managed since 1985. In early 2007, the brine inflow at Esterhazy increased significantly, beyond that of pumping capabilities. The company responded by grouting around the inflow and succeeded in lowering the level of inflow to that of the previous two decade average.
Sulphur
As one of the key ingredients in the production of phosphate fertilizers, the company requires an uninterrupted supply of sulphur. If the supply were constrained, the production of the end product would be negatively impacted, affecting the earnings contribution to the company
Ammonia
Ammonia is a key input for the production of phosphate and its cost can impact margins. Management has in place long term contractual arrangements for the supply of ammonia and hedges the cost through a natural gas hedging program. Mosaic will take positions in natural gas up to a year to lock in the cost for their expected annual production. The company does not speculate on gas beyond their requirements. As a rule, approximately 80% of the upcoming quarter will be hedged, followed by 50-60% two and three quarters out and 15-20% 12 months out.
VALUATION
We derive our 12-month target price of US$210.00 per share by applying a 16x multiple of F2009E EPS of US$13.22 using the following assumptions: Production of 9.3mt of phosphate and 8.5mt of potash in F2009. A F2009 average phosphate price of US$1050/t and average netback to the mine potash price of US$800/t. An effective income tax rate of 33%. A phosphate and potash operating cost per tonne of US$458/t and US$80/t, respectively. A CAD/USD exchange rate of 1.0.
Based on these assumptions, Mosaic is currently trading at a 39% discount to our target price of US$210.
CONCLUSION
We believe Mosaic is well positioned to continue to benefit from our strong fertilizer outlook due to its leadership role in phosphate production, strong position in potash production, low cost potash assets and production growth over the medium term. Furthermore, we believe the companys earnings over the next few years will prove current valuations on the stock price to be very conservative. For these reasons, we initiate coverage of Mosaic with a BUY rating and a 12-month target price of US$210.00.
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Figure 157: The Mosaic Company Income Statement, FYE May

Income Statement US$ M Sales YOY Growth Operating Costs Depreciation Total Gross Profit YOY Growth Gross Margin % Expenses Selling, general and administrative Restructuring Other operating (income) expense Total Expenses YOY Growth Sequential Growth % of Total Revenues Operating Income (EBIT) YOY Growth Sequential Growth Operating Margin Interest expense Foreign Currency Transaction (gain) loss Loss( gain) on extinguishment of debt Other Income EBT YOY Growth Sequential Growth EBT Margin Income taxes Effective tax rate Net Earnings from Consolidated Companies Net Margin Equity in net earnings of non-consolidated companies Minority interests in net earnings of consolidated companies Net Earnings YOY Growth Sequential Growth Shares Outstanding Basic Fully Diluted EPS (reported) - GAAP Basic Fully Diluted Source: Canaccord Adams estimates FY E 31-May-06 5,179 18% 4,464 324 391 -25.6% 7.5% FY E 31-May-07 5,774 11% 4,518 329 926 137.0% 16.0% FY E 31-May-08 9,159 59% 5,787 341 3,031 227.3% 33.1% FY E 31-May-09 17,306 89% 7,923 374 9,009 197.2% 52.1%
241 288 7 536 158.7% 10.3% (145) -145.4% -2.8% 153 101 0 8 (406.7) -289.3% -7.9% 5 -1.3% (412) -8.0% 48 (4) (368) -319.6%
310 (2) 2 310 -42.1% 5.4% 616 -525.9% 10.7% 150 9 (35) (13) 505.7 -224.3% 8.8% 123 24.4% 382 6.6% 41 (4) 420 -214.0%
325 10 9 344 10.9% 3.8% 2,687 336.0% 29.3% 119 69 3 (57) 2,553.4 404.9% 27.9% 698 27.3% 1,855 20.3% 113 (11) 1,958 366.5%
382 0 0 382 11.0% 2.2% 8,627 221.0% 49.8% 140 (6) 2 (108) 8,599.0 236.8% 49.7% 2,752 32.0% 5,847 33.8% 100 (16) 5,931 203.0%
382 382
434 440
443 446
445 451
(0.96) (0.96)
0.97 0.95
4.42 4.39
13.33 13.17
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Agrium
AGU : TSX : C$99.22 AGU : NYSE
BUY Target: C$160.00

COMPANY STATISTICS:
52-week Range: Avg. Daily Vol. (000s): Market Cap (M): Shares Out (M) basic: Shares Out (M) diluted: C$37.21-116.15 5,093.7 C$15,776.0 158.0 159.0
INITIATING COVERAGE
Investment Thesis
We are initiating coverage of Agrium with a BUY rating based on the following conclusions: Strong fertilizer markets throughout our forecast period As we highlighted in our sector piece The Modernization of the BRICs, we believe the fertilizer market will be robust for years into the future, specifically the potash and phosphate sectors. Prices are expected to remain strong as supply will not be able to meet the growth in demand over the next five years. With current pricing expected to rise into 2009 and 2010, earnings should also continue to increase. Strong margin expansion and production growth throughout our earnings forecast Agriums earnings are derived from a blend of wholesale and retail businesses that will combine to provide the company with increased margins over our forecast period. Given the companys product offering in wholesale, its leading position in U.S. retail, and our view on product pricing throughout our forecast period, Agrium is expected to accumulate significant earnings. Stability of earnings over the long-run Agriums strategy of combining wholesale and retail business provides greater stability in earnings over the long run. Valuation We value the shares of Agrium on a 13x 2009E EPS of $12.42, for a target price of C$160.00, representing a 63% potential return to the current share price.
EARNINGS SUMMARY:
FYE Dec 2006A 2007A 2008E 2009E Revenue (M): US$4,193 US$5,270 US$9,046 US$11,166 EV/EBITDA (x): 39.5 16.8 6.5 5.0 EPS: US$1.28 US$3.62 US$9.19 US$12.42 P/E (x): 77.8 27.4 10.8 8.0
COMPANY SUMMARY:
Agrium Inc. is a leading global producer and marketer of agricultural nutrients, industrial products, specialty fertilizers, and a major retail supplier of agricultural products and services in both North and South America.
All amounts in C$ unless otherwise noted.
160
INTRODUCTION
Agriums strategy is to grow across the value chain through organic growth, acquisitions, and development of new products. The company operates three lines of business: a retail unit that is a major producer and supplier of retail products in both North and South America; a wholesale unit that produces nitrogen, phosphate and potash for the wholesale market; and the Advanced Technologies unit which produces specialty fertilizers and chemicals. The company is the worlds third largest producer of nitrogen and the largest U.S. retailer of crop products.

As we detailed in our thematic report The Modernization of the BRICs, we believe that fertilizer pricing has performed a step-change as a solution to the worlds food crisis has become dependent on a variety of factors, one of which is the increased usage of fertilizer going forward. Within the fertilizers, we believe potash stands to have the strongest outlook over the near, medium and long term. A close second, we believe phosphate pricing will remain strong until at least 2012. Although we are not as bullish on nitrogen, the potential risk to the upside in pricing exists. These factors will bode well for Agrium as we expect an increase in margins and earnings throughout our forecast period.
Strong margin expansion and production growth throughout our earnings forecast
Agriums earnings are derived from a blend of wholesale and retail businesses that should combine to provide the company with increased margins over our forecast period. Given the companys product offering in wholesale, its leading position in U.S. retail, and our view on product pricing throughout our forecast period, Agrium should continue to capitalize on its significant earnings opportunity.
Stability of earnings over the long run

Agrium has a different philosophy towards building its business versus its peers. The company has added a great emphasis on the retail aspect of the industry, evidenced over the past two years with the companys acquisitions of Royster-Clark and, most recently, UAP Holdings. Managements philosophy is to grow the company to enjoy the benefits of both the current upswing in the agricultural sector and to provide more stable margins during any potential market downturn.
Where to Next?
Many investors ask how long fertilizer companies can continue to enjoy upward momentum in their respective share prices. As we have detailed in our thematic report, due to the growth in demand of better food, the world requires more fertilizer in order to grow those crops that are the inputs for better food. As this demand has been and is expected to remain strong, and the supply of that fertilizer is capacity constrained, specifically in the potash and phosphate sectors, fertilizer producers should continue to increase margins and earnings, and therefore share prices. As we attempt to demonstrate in the Valuation section below, our thesis for owning Agrium is straightforward: The world requires more fertilizer. Specific to Agrium, the company will continue to benefit from increasing earnings due to a mixture of commodity price increases; low potash operating costs; and greater demand for retail products. Finally, we believe that it is going to take some time to correct the current food crisis, much longer than the result of next years
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crops and fertilizer application cycles. The world has been years in building up to this crisis, and we believe that it is going to take quite a while to correct.
THE COMPANY
Agrium produces 8mt of product and markets 18mt (including UAP), or 14mt net of intercompany transfers. Within the wholesale segment, its primary focus is on the nitrogen business, with growth expected in the potash business and a steady state phosphate business. As noted in Figure 158 below, Agriums recent M&A activity in the retail business has had a profound impact on the companys expected earnings going forward. Agrium has a sound business model that provides the company a strong position across the production and distribution chain. The company has built a stable business platform; however, due to the companys relatively lower (albeit stable) margins across the retail business, Agrium has been awarded lower valuation multiples during the current agricultural boom versus its wholesale-weighted peers, where wholesale margins are much higher and stronger, and are expected to remain throughout our forecast period. That being said, we forecast Agrium to exhibit continued strong earnings growth over our forecast period and we expect its share price to react accordingly. Figure 158: 2007 EBITDA (Actual versus Pro forma)
Note: Pro forma includes synergies. *EBITDA. Source: Company reports
Wholesale Strategy
The company produces, distributes and markets crop nutrients to wholesale customers. In 2007, Agrium produced 4.9mt nitrogen, 1.7mt potash and 1.0mt phosphate for a total of 7.7mt of product. Management has built its wholesale division around its nitrogen production. Within Canada, the firm has a competitive advantage to US-based nitrogen plants based on the spread in the AECO-NYMEX gas cost. This allows the company to service its customers in Western Canada and the Northwestern United States at a lower cost than its peers in the United States. This will serve the company well if gas prices continue to rise as some Southeastern U.S.-based facilities may begin to feel squeezed on margins. Most recently and going forward, management has implemented a growth platform based on the availability of low-cost natural gas feedstock. As we have seen in
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Argentina and Egypt, this strategy is not without risk (for further discussion, please see below). In the phosphate business, management is not looking to expand organically or through acquisition. As part of Agriums balanced growth plan, management has put an emphasis on growing its potash business through further expansions at Vanscoy and the possibility of a greenfield mine addition. Deemed a high priority, management continues to evaluate its options with a decision expected during Q4/2008 regarding further expansion. Management is positioning the company to take full advantage of a strong market with a continued focus on brownfield expansions which utilize the same infrastructure, thus minimizing cost and time to completion. Although smaller in scope, we are still expecting a 38% capacity expansion through brownfield by 2013 (to 2.9mt from the current 2.1mt through two 400kt increments). A potential greenfield expansion could further increase capacity by 2mt in 2015.
Retail Strategy
Beyond the recent sizable acquisitions of Royster-Clark (RC) and UAP, Agrium will continue to look for acquisitions within the United States and abroad. With 15% of the retail market in the US controlled by Agrium, there is significant room to grow its capacity within the country. Most additions going forward will most likely be in the form of smaller acquisitions (below US$60 million) where the approval of the FCC is not required. Like the RC acquisition, management will continue to look for operations where Agrium can implement greater efficiencies and scale in order to improve margins. RC had significant inefficiencies when Agrium purchased the company. Although, the company envisions synergies with the UAP acquisition, it does not foresee the same inefficiencies that were embedded at RC.
UAP Acquisition
On December 2, 2007, Agrium entered into a definitive agreement to acquire all of the outstanding shares of United Agri-Products Holding Corp. (UAP) for US$39 per share in cash (US$2.65 billion), including US$487 million in assumed debt. Management has assumed synergies of US$80 million in 2009 and US$115 million per annum by 2010. Agrium closed the deal on May 7, 2008 after agreeing to sell seven centers that the U.S. regulatory authorities deemed to have conflicted with their antitrust laws. We expect the acquisition to run smoothly as shown by Agriums successful integration of Royster-Clark in 2006. Management took an inefficient company in RC and ran ahead of synergies and expectations in its first year of amalgamation. Following the success of that integration, the benefit of the doubt has been given to management for the UAP acquisition. With UAP, the retail segment will have greater than US$5 billion in revenues on a go-forward basis.
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Common Market Fertilizers Acquisition

On April 10, 2008, Agrium announced that it was expanding its retail business after entering into an exclusive agreement to acquire a 70% interest in Common Market Fertilizers S.A. (CMF) for $16 million plus $50 million in working capital. CMF is a Western European fertilizer distribution company with crop nutrient sales of up to 2.5mt, annual sales of $600 million and an annual EBITDA of close to $10 million. The transaction closed on July 8, 2008. The purchase provides Agrium with a foothold into Western Europe and as a vehicle for further expansion targeted to Eastern Europe.
Advanced Technologies Strategy

The Advanced Technologies (AT) segment is a small portion of the companys overall earnings profile. Although the company is excited about its future, but incremental growth in the segment will not be a significant contributor to the companys earnings within the near future. Figure 159: Wholesale Operations
OPERATIONS
Nitrogen Operations
Agrium owns and operates six nitrogen facilities (four in Alberta, one in Texas and one in Argentina) with a combined capacity of 3.3mt of ammonia (or 4.6mt of upgraded nitrogen products). Alberta The majority of nitrogen product produced in Alberta is sold into Western Canada, Northwestern U.S. and the Northern Plains of the U.S.
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Carseland The Carseland facility produces 535kt of ammonia and 695kt of urea. 140kt of the ammonia is sold to a third party, with the remainder being used for the production of urea at Carseland. Included within the urea production is 190kt of controlled release urea in the form of 150kt of ESN and 40kt of Duration, two specialty fertilizers that are sold under the Advanced Technologies division. The output from Carseland is sold into markets in Western Canada and the Northwestern Unites States. The facility has storage capacity of 36kt of ammonia, 50kt of urea and 22kt of controlled release urea. The product is loaded onto both rail cars and trucks for transport to market. Red Water The Red Water facility is the companys largest in terms of output with an annual capacity of 1.4mt of nitrogen-based fertilizers and 680kt of monoammonium phosphate (MAP). The companys Kapuskasing mine in Ontario provides the phosphate rock required to produce the MAP. The facility produces all forms of nitrogen products, including capacities of 960kt of ammonia, 720kt of urea, 215kt of ammonium nitrate, 300kt of ammonium sulphate and 180kt of UAN solution. Storage capability at the facility totals 172kt of ammonium product, 70kt of urea and 90kt of MAP. Fort Saskatchewan The Fort Saskatchewan operation produces 465kt of anhydrous ammonia, 95kt of 29% aqua ammonia and 430kt of granular urea. Agrium added 80kt of aqua ammonia capacity to the facility in 2007. Storage capacity at site is 36kt of ammonia and 65kt of urea. Joffre The Joffre facility produces 450kt of anhydrous ammonia. The output from Joffre is transported via a 19km pipeline to the Chigwell facility. Borger, Texas The Borger facility produces 490kt of ammonia and 99kt of urea. All nitrogen products from this facility are sold into the Texas panhandle with ammonia being piped to the western cornbelt via a 900km third-party owned pipeline to nine distribution terminals and storage sites. The facility produces both granular and prilled urea and sells the product to both fertilizer dealers (granular) and animal feed suppliers (prilled). The facility has a storage capacity of 0.9kt of ammonia and 16kt of urea product. Bahia Blanca (Profertil), Argentina Agrium owns 50% of the Profertil operation (Repsol YPF 50%). The facility has seen an interruption of gas supply over the past year due to colder than normal weather in Argentina, which led to lower production volumes. The Argentinean government has since implemented a price cap on urea at US$410/t. This obviously places a cap on the upside potential of this facility as the company noted it would abide by the cap and not attempt to sell product into Brazil in lieu of Argentina. It goes without saying the Argentinean government would not look kindly upon a move of that nature and repercussions would most likely ensue. Due to the nature of their gas contract, Agrium does capture significant margins at US$410/t pricing, but with current international urea prices well above the price cap, the company is losing significant upside. With a further interruption of gas supply in May 2008, the government offered to import LNG to supply the facility, at a cost expected to be borne by the government. Urea production has been intermittent since then
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and is expected to remain so through mid-August, followed by full production towards the latter half of Q3/2008.
Eqypt
The now-cancelled project is 60% owned by Agrium (Egyptian Petrochemicals holding Company and Egyptian Natural Gas Holding Company 24%, Egyptian Natural Gas Company - 9%, and Arab Petroleum Investments Corporation 7%). The Egyptian parliament voted down the project due to the opposition of the local government to the site being used for industrial purposes versus the expansion of a nearby resort town. Agrium is in current discussions with the government regarding restitution. The company suggested that it may take a US$280 million write-down of the facility on its second quarter earnings.
Upgrading Facilities
Agrium owns and operates several upgrading facilities including three in the United States and two in Alberta. These facilities upgrade ammonia to nitrogen solutions (UAN) and nitric acid.
Natural Gas Pricing

The companys largest input cost is the ammonia feedstock cost of natural gas. In Alberta and Texas, Agrium pays spot prices for gas but will purchase contracts throughout the year in order to lock-in margins on nitrogen sales. In Argentina, the company operates under a long-term natural gas contract for 80% of its gas requirements where the blended price of contracted and spot gas in the most recent quarter was approximately US$3 per mmbtu. Approximately 70% of Agriums gas purchases are for its Alberta operations, 17% for the U.S. operations and 13% for the Argentinean operations.
Phosphate Operations
The companys phosphate operations consist of two phosphate rock mines and two production facilities with a total capacity of 1.3mt. Agrium also operates a granular micronutrient facility as well as several fertilizer granulation and blending plants, all in the U.S. Kapuskasing, Ontario The facility includes an open-pit mining operation, where phosphate rock is mined and fed into the onsite mill where it is processed and then transported to the companys Redwater facility in Alberta for further processing. The company did have a problem with high iron content and hard rock issues that led to a lower output and higher costs in 2006. This issue has since been corrected and the mine is operating at full capacity. The mine produces 1.1mt of rock concentrate at a post beneficiation concentrate of 37% P2O5. Current reserves at the mine provide an economic operating life through 2013. Management is reevaluating the deposit to gauge if further economically operational years are possible. Redwater, Alberta In addition to the above nitrogen products, the facility produces sulphur and phosphate fertilizers with rock supplied from the Kapuskasing mine. The capacity of the facility is 680kt of MAP.
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Conda, Idaho The Conda operation has a capacity to produce 488kt of phosphate fertilizers, including 300kt of MAP, 177kt of SPA and 11kt of MGA. The facility is supplied phosphate rock from Agriums Dry Valley open pit mine, located 24km to the north of Conda. The mine produces 1.3mt of 32% P2O5 concentrate. Sulphur Agrium sources its sulphur and sulphuric acid for its Conda operation locally and from Western U.S. natural gas producers. The companys Redwater facility sources sulphur locally.
Potash Operations
Vanscoy, Saskatchewan The Vanscoy facility consists of a conventional mining operation at a depth of approximately 1,000m and plant facility with a capacity of 2.1mtpa of MOP in coarse and granular form. The facility has a storage capacity of 230kt. Following a 400kt expansion in 2007, management has indicated that it intends to expand the mine in two further increments of 400kt in 2011 and 2014. A final decision on the next expansion is expected by Q4/2008. Approximately 40% of the output at Vanscoy is marketed outside of North America.
Greenfield Sites
The company is evaluating two greenfield sites in Saskatchewan and Manitoba. 2D seismic has been completed on the Saskatchewan site with 3D seismic planned for this summer, followed by a possibility of geotechnical work in 2009. If approved, a 2mtpa production scenario is envisioned for 2015.
Retail Operations
The retail segment provides services through its more than 850 retail centers across the United States, Argentina and Chile. Through this retail chain, Agrium provides a variety of products, including crop nutrients, crop protection, seed, services and other products. Agrium is the largest agricultural retailer in the United States. A retail centre consists of an outlet located in a farming region that sells products in both bulk and packaged form to farmers within its area. A portion of these products are sourced from Agriums wholesale operations, with the remainder purchased through other major fertilizer companies.
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Figure 160: Retail Operations in the United States
Crop Nutrients Agrium provides both liquid and dry crop nutrients including nitrogen, phosphate, potash, sulphur and micronutrients. As practice, the crop nutrients are customized into a mixture to suit the requirements of an individual customer. Crop Protection The crop protection segment includes fungicides, herbicides, and insecticides to combat disease, weeds and insects, respectively. The amount of product varies per region, due to product selection and the increased use of Genetically Modified Seeds (GMOs). Seed, Services and Other Products Agrium offers its customers application services that include customized applications and application machinery. The company also provides crop advisory services that include weather analysis, soil analysis, etc. Through its farm centers, Agrium provides its customers with seeds, both major producers and Agriums brand.
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Advanced Technologies Operations The newest and smallest segment for Agrium, Advanced Technologies comprises of fertilizer technologies and professional products. Fertilizer technologies include controlled release fertilizers (comprising the Nu-Gro and Pursell brands). Urea from the Carseland facility is used to produce ESN for the Advanced Technologies segment. The controlled release fertilizers are produced at four locations Mobile and Sylacauga, Alabama, Courtright, Ontario and Carseland, Alberta. Professional products include fertilizer and pest control products for the golf course and lawn care corporation market and structural pest control industry. These products are produced at facilities in Putnam and Brighton, Ontario and marketed through a Canadian distribution network. Management envisions the AT segment doubling or tripling in asset value over the next five years. Agrium owns a 19.6% interest in Hanfeng Evergreen, a Chinese specialty fertilizer company. As part of the April 2007 agreement, Agrium has until April 2009 to opt into a joint venture with Hanfeng, whereby AGU participates in 25% of Hanfengs expansions under the agreement. Agrium announced in April that it had opened a small office in Beijing.
MARKETING
All of Agriums North American nitrogen production is marketed within North America. The production from Profertil (Argentina) is marketed to both the Argentinean market and Brazil.
Canpotex
Canpotex is owned by Potash Corp., Mosaic and Agrium. It is the marketing arm for all non-North American sales of Saskatchewan potash for its three owners. Historically, the sales of potash are contracted on a spot basis, with India and China the exception. Contracts with China are for 12 month durations, while contracts with India for durations of 6-12 months. Agrium accounts for approximately 9% of Canpotex sales.
CAPITALIZATION
Share Capital
There are 158 million shares outstanding (159 million diluted). As of March 31, 2008, the company had debt of $957 million versus cash of $1.76 billion (prior to the acquisition of UAP).
Dividend Policy
The current semi-annual dividend per share of $0.055 has been paid to shareholders since 1996.
MANAGEMENT
Mike Wilson President and Chief Executive Officer
Mr. Wilson joined Agrium as Executive Vice President and Chief Operating Officer in 2000. Previously, Mr. Wilson was President of Methanex Corporation, a leading producer in methanol. Prior to that, he held various senior positions in North America and Asia during his 18 years with Dow Chemical. Mr. Wilson is a chemical engineer.
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Bruce Waterman Chief Financial Officer
Mr. Waterman joined Agrium in 2000 as Senior Vice President, Finance and Chief Financial Officer. Previously, he was Chief Financial Officer of Talisman Energy. Mr. Waterman has over 30 years of financial and management experience.
Richard Gearheard President, Retail

Mr. Gearheard has been employed by Agrium and its predecessor companies for more than 30 years. Mr. Gearheard was appointed Senior Vice President of Agrium and President of Retail in 1996. Previously, he was Chief Financial Officer of Crop Protection Services and Northwest Region Vice President of Western Farm Service.
Ron Wilkinson President, Wholesale

Mr. Wilkinson joined Agrium in 1996 and has held positions within Agrium including Vice President Operations and Technology, General Manager of South American Operations, and General Manager of Operations and Projects, Asia Pacific. Previously, he was employed in the petrochemical industry. Mr. Wilkinson is a chemical engineer.
INVESTMENT RISKS
Political risk
As we have seen in Argentina and most recently in Egypt, political policies can have an impact on the companys ongoing operations or construction activities, adversely affecting the company financially.
Energy Costs
Agriums operations may be negatively impacted by a sharp increase in natural gas prices. Due to the size of the companys nitrogen operations, such an impact could be significant financially.
Sulphur
As one of the key ingredients in the production of phosphate fertilizers, the company requires an uninterrupted supply of sulphur. If the supply were constrained, the production of the end product would be negatively impacted, affecting the earnings contribution to the company.
VALUATION
We derive our C$160.00 per share target price for Agrium by applying a 13x 2009E EPS of $12.42 using the following assumptions: Production of 5.2mt of nitrogen, 2.0mt of potash and 1.0mt of phosphate fertilizers in 2009. An average netback to the mine potash price in of US$933/t. An average phosphate product price of US$1,200/t and an average nitrogen product price of US$575/t. Retail synergies of $80 million in 2009. An effective income tax rate of 32%. A potash operating cost per tonne of $100. Phosphate and nitrogen segment operating costs of US$621/t and US$407/t, respectively.
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A CAD/USD exchange rate of 1.0.
Based on these assumptions, Agrium is currently trading at a 39% discount to our target price of $160.
CONCLUSION
We believe Agrium is well positioned to continue to benefit from our bullish fertilizer outlook due to the companys product offering in wholesale, its leading position in U.S. retail and our view on product pricing throughout our forecast period. Furthermore, we believe the companys earnings over the next few years will prove current valuations on the stock price to be very conservative. For these reasons, we initiate coverage of AGU with a BUY rating and a target price of $160.
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Figure 161: Agrium Income Statement, FYE December

Income Statement US$ M Sales Less Freight Net Sales YOY Growth Operating Costs Total Gross Profit YOY Growth Gross Margin % Expenses Selling General and administrative Depreciation and amortization Other Royalties and other taxes Other expenses Total Expenses YOY Growth % of Total Revenues Operating Income (EBIT) YOY Growth Operating Margin Interest on long term debt YOY Growth Other interest EBT YOY Growth EBT Margin Current income taxes Future income taxes Income taxes Effective tax rate Net Earnings (reported) YOY Growth Net Margin Shares Outstanding Basic Fully Diluted EPS (reported) - GAAP Basic Fully Diluted Source: Canaccord Adams estimates FY E 31-Dec-06 4,373 180 4,193 27% 958 21.9% FY E 31-Dec-07 5,491 221 5,270 26% 1,598 29.1% FY E 31-Dec-08 9,262 216 9,046 72% 3,323 35.9% FY E 31-Dec-09 11,382 216 11,166 23% 4,558 40.0%
285 201 169
471 125 173
640 179 164
718 215 172
20 75 750 17.9% 208 5.0% 52 11 145 3.3% 63 (44) (24) -16.6% 169 -40.3% 3.9%
43 71 883 16.8% 715 13.6% 52 18 645 11.7% 85 119 204 31.6% 441 160.9% 8.0%
176 49 1,208 36.8% 13.4% 2,115 23.4% 53 2 2,060 22.2% 74 23 663 32.2% 1,397 216.8% 15.1%
418 200 1,722 42.6% 15.4% 2,836 25.4% 56 0 2,780 24.4% 0 0 889 32.0% 1,890 35.3% 16.6%
132 133
135 136
158 161
158 161
1.28 1.28
3.27 3.25
8.84 8.70
11.96 11.78
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MagIndustries Corp.
MAA : TSX-V : C$3.15
BUY Target: C$8.50

COMPANY STATISTICS:
52-week Range: Avg. Daily Vol. (000s): Market Cap (M): Shares Out (M) basic: Shares Out (M) diluted: NAV: Cash (M): LT Debt (M): C$1.25-3.72 1,889.5 C$660.2 194.7 209.6 8.57 US$21.0 US$20.1
INITIATING COVERAGE
Investment thesis
We are initiating coverage on the shares of MagIndustries with a BUY rating and a 12-month target price of C$8.50 based on the following conclusions: Step-change in potash pricing going forward As we highlighted in our thematic piece, The Modernization of the BRICs, we believe the potash market will be robust for years into the future. Prices are expected to remain strong as supply will not be able to meet growth in demand over the next five years. First new potash project to enter production We believe MagIndustries will be the first Canadian-listed junior potash company to enter production when Phase I of the Kouilou project is completed in 2011. Existing infrastructure and low operating costs The Kouilou project is expected to benefit from existing infrastructure and low operating costs that make the project stand out versus its peers operating in Canada. Optionality with other projects The company has additional value extraction in its other three segments. Valuation We value the shares of MagIndustries on a 1.0x NAV of $8.57, using a long-term potash price of US$500/t fob Pointe Noire and a 12% discount rate.
EARNINGS SUMMARY:
FYE Dec 2008E 2009E 2010E 2011E 2012E Revenue (M): US$17 US$48 US$49 US$450 US$781 EPS: US$(0.19) US$(0.12) US$(0.12) US$0.77 US$1.57 P/E (x): NM NM NM 4.1 2.0 CFPS: US$(0.18) US$(0.15) US$(0.10) US$0.32 US$1.29
COMPANY SUMMARY:
MagIndustries comprises four business units, three of which (MagMinerals, MagForestry and MagMetals) are located in the Republic of Congo (ROC) and the fourth (MagEnergy) in the Democratic Republic of Congo (DRC).
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INTRODUCTION
MagIndustries comprises four business units, three of which (MagMinerals, MagForestry and MagMetals) are located in the Republic of Congo (ROC) and the fourth (MagEnergy) in the Democratic Republic of Congo (DRC). For the purposes of this report, we value MagIndustries as a junior potash company due to the substantial valuation of the potash project within the company. MagIndustries has the most advanced project of the companies we cover in the junior fertilizer space. In this report, we will detail why the overall risk of the project has been substantially reduced by management, taking into account political, financing, project execution, infrastructure and time to production. A modular design, the initial 600ktpa operation is expected to reach commercial production in 2011, potentially followed by a doubling or tripling of capacity. As we will detail in this report, we believe MagIndustries has the management team to put the project into production, the infrastructure in place to bring the product to market, a government that is pro-mining and wants the project to succeed, financing that is expected to be completed by Q4/08 and a low operating cost. Additionally, the company has potential upside regarding the before-mentioned non-potash projects. All of these items and a strong valuation make MagIndustries our top pick on a risk-adjusted basis among the junior fertilizer names.
Potash pricing
As we detailed in our thematic piece, The Modernization of the BRICs, we believe that potash pricing has performed a step-change, as a solution to the worlds food crisis has become dependent on a variety of factors, one of which is increased fertilizer application rates going forward. Among the fertilizers, in our opinion, potash has the strongest outlook over the near, medium and long term.
First greenfield potash project to enter production

MagIndustries should be the first Canadian-listed junior potash company to enter production when Phase I of the Kouilou project is completed in 2011. We believe the company will have the added benefit of stronger potash pricing over and above our longterm average during the initial years of the projects life, generating significant margins.
Existing infrastructure and low operating costs

The Kouilou property has the benefit of being located 20 kilometres from a deep-water port and all the associated infrastructure required to export the product to market. In contrast to its Canadian peers, the company has no need to identify a partner on port facilities. The port facilities have been secured by the company through a 70-year lease with the ROC government. Furthermore, an off-take agreement has been signed, covering 100% of the potash production. Once in production, the Kouilou project will have a low operating rate due to the low cost of gas to be used in the solution mining process. With significantly higher potash prices going forward, the company will greatly benefit from strong margins throughout the expected mine life.
Optionality with other projects

The company has additional value extraction in its other three segments, including expansions in forestry, a potential magnesium plant and additional energy capacity.
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THE KOUILOU PROJECT

The Kouilou potash project will be the ROCs second-largest private project ever in terms of capital investment. MagIndustries has fostered strong governmental relationships over its 11-year history, and it is paying dividends as the company is in the final stages of preconstruction. Managements strategy of seeing the potash industrys structural change early and going forward with the project has placed the company in the enviable position of being the next entrant into the industry. Figure 162: Location of MagIndustries projects
Source: MagIndustries
History
In 1997, MagIndustries acquired the rights to a magnesium/potash deposit in the ROC and proceeded with a feasibility study on a magnesium project. It was deemed an economic success dependent on a reliable and inexpensive power source for an energy-intensive magnesium smelter. The company located such a power source, the INGA power facility along the Congo River in the DRC. The facility was in desperate and immediate need of overhaul, and Mag initiated discussions with the government to refurbish the site. Shortly thereafter, in 1998, the DRC entered a four-year civil war which prompted all discussions on INGA to cease. Without the possibility for power, there was no further advancement of the magnesium project. When the war was ending, Mag re-entered discussions with the government and, in 2005, the company was awarded the rights to refurbish five generators through two phases. By that time, potash had supplanted magnesium as the
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companys leading focus, and forestry was added to the project list through both an opportunity and as a defensive measure (see below). The Pointe-Noire asset encompasses three of the companys four business units. On surface, the eucalyptus plantation is the feedstock for the companys forestry business. Below the surface lies a deposit that hosts the potassium and magnesium mineralization to support the minerals and metals subsidiaries. Mag is also pursuing independent power projects in the DRC, irrespective of the outcome of the current INGA negotiations. Figure 163: MagIndustries business units
Political and economic status

A former French colony, the Republic of Congo gained independence in 1960. In 1992, President Sassou-Nguesso allowed initial democratic elections to take place in which he was chosen as the first democratically elected leader of the Congo. In 1997, a brief civil war broke out in the capital city of Brazzaville, adding instability to the region. The war ended in October of the same year and President Sassou-Nguesso regained the leadership. The area has seen relative peace since 1997, and the government functions to improve the economic prosperity of its people. The president stands for re-election in 2009 and is widely expected to retain his office. The ROC has approximately 3.9 million inhabitants, concentrated in its two principal cities of capital city Brazzaville (population 1.6 million) and the port city of Pointe-Noire (population 1.0 million). The GDP of the country was approximately US$13 billion in 2007. The country is Africas fourth-largest producer of oil at 236,000 bbls/d, which is currently the companys largest industry. MagIndustries is the largest private employer in the ROC through its forestry division. The Kouilou potash project will be the second-largest infrastructure project in the countrys history.
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MAGMINERALS
Mag is developing the Kouilou potash project located 20 kilometres from the port city of Pointe-Noire. The project will entail a solution mine and processing plant at surface. Management envisions a two-stage development with an initial production of 600ktpa expected to enter production in 2011, followed by a doubling of capacity to 1.2mtpa in 2013. Management has stated that it is conceivable to expand the facility to 1.8mtpa in the 2015 time frame due to the modular design of the process plant, abundant resources and available infrastructure. The ROC government has a 10% free-carried interest. We have modelled for one expansion to 1.2mtpa of output.
Resources
An NI 43-101 reserve estimate was completed on the project in February 2008. The project has proven and probable reserves of 21mt of recoverable KCl and remains open in all directions. At an initial output of 600kt provides a mine life of 35 years. At 1.2mtpa, the mine life is over 17 years. Additional inferred resources total 185.9mt of KCl, which includes 61mt from horizon 1 (see Geology section below). The company is currently having its reserves recalculated on a different cavern parameter, with the potential to add three to four years of mine production. Further drilling will be completed at a later date, with no current timeline or budget specified. The current resource is found on less than 7km of the 136km exploitation area.
Geology
Oil drilling conducted since the 1950s delineated a potash evaporite that extends from Cabinda (Angola) in the south across western ROC to Gabon in the north. The area hosts both silvite and carnallite mineralization. The mineralization occurs in four distinct horizons and is uniform across the deposit. The grades of 44-90% carnallite are within design specifications and there are no undesirable pollutants within the ore body. As per the mine plan, wells will be drilled to remove the carnallite from the lowest layer (horizon 4), and working their way up as extraction progresses. At this time, it is unknown whether the company will be able to extract from the uppermost layer (horizon 1) due to the structure of the roof. As such, only the three lower horizons of mineralization have been included in the mine plan.
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Figure 164: Diagram of a solution mine
Bankable feasibility study

The BFS was completed in Q1/08 with the following key point: Construction costs for the initial phase of the project will total approximately US$723 million. The project benefits from proximity to the ocean and via low mining operating costs, estimated at US$84/t. It has always been the companys position to expand into a Phase II, as many of the built-in costs of Phase I would support an additional phase at reduced cost. A report on Phase II should be forthcoming by year-end 2008.
INFRASTRUCTURE
Rail
The national rail line passes through Mags potash concession. The company will be required to build two spur lines, a 3.8-kilometre line connecting the plant to the main rail line and a 2.1 kilometre section connecting the main rail line to the port facility. MagIndustries will purchase two locomotives and 18 rail cars for the initial phase of its project. Under a Phase II scenario, a further 18 rail cars would be purchased. The lead time to receiving the rolling stock is currently 12-15 months. We must highlight that relative to its peers, no other company can state that it requires only 6 kilometres of rail to be built to ship its product to the port.
Port
Pointe-Noire is known to have the best deepwater port in western Africa. A permit is in place to construct a 50kt storage unit at the port, sufficient to handle capacity for the initial two phases. If the company were to develop a third phase, an expanded facility would be required at the port (not necessarily adjacent to the planned storage area for Phases I and II). The ROC government has granted MagIndustries a 70-year lease at the port. Again, it must be highlighted that MagIndustries is the only company that has ready access to a deepwater port, as its peers must locate a port through which to ship their product.
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Figure 165: Aerial view of Port of Pointe-Noire
Gas
The ROC produces approximately 236kbbls/d of oil. At present, the natural gas byproduct from these wells is being flared due to the lack of a domestic market. The ROC has proven reserves of 87 billion cubic metres of natural gas. Furthermore, due to ROC regulations, the government owns the gas that is being pumped out of the private oil companies wells. Mag has received an assurance, signed by the Minister of Hydrocarbons and State, of a natural gas supply. A potential source is Mboundi, an ENI-owned field where 2.5 mmcf/d of gas is currently being flared. The agreed-upon price has not yet been finalized, but it is expected within the coming weeks. We have assumed a cost of US$0.20 per mmbtu. A 7kilometre gas pipeline would be constructed to connect the potash plant to a gas line currently under construction by ENI. The gas use will be two-fold: power supply for the potash plant (see below) and to heat the water injected into the caverns. The gas supply contract is a significant reason for the projected US$84/t operating cost.
Power
Several initiatives are underway in the country that use natural gas as feedstock for power generation. ENI is expected to complete a 25MW facility by year-end 2008 and is studying a 300MW facility for year-end 2009. MagIndustries has budgeted within its feasibility report a 26 MW facility that will be serviced by the same 7-kilometre gas pipeline. Phase I of the potash plant will require 26 MW once fully operational.
Water
A pumping station will be installed at the Loeme River and transported via a 20-kilometre pipeline to the Kouilou project. A second pipeline will begin at the compaction plant, delivering the discharged benign brine 20-kilometre to the ocean for disposal.
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Offtake agreement
Mag signed an offtake agreement with Ameropa AG for 100% of the output of Phases I and II of the Kouilou project for the initial 12 years of production, with pricing based on contracts settled by Ameropa in the market for which the product will be sold to. The contract includes a US$5/t flat fee and a floor price agreement. Ameropas costs including freight charges and other costs totaling $50-80/t will be netted out of the landed price. Ameropa is a private Swiss-based company which specializes in the marketing of grains and fertilizer products, selling 11mt annually. It is assumed that most of the Mag potash fertilizer will be sold to end users in Brazil, and south and west Africa. Figure 166: Regional potash supply imbalances

Conventional mining involves sinking a shaft to depths of up to 3,000 feet and employing a continuous miner to remove the ore to load onto conveyor belts to the ore crusher and then hoist to the surface for refining. In solution mining, heated brine is injected into the potash deposit to dissolve the ore. The solution is then pumped to the surface and refined through evaporation and crystallization techniques. The company will utilize two wells for each of the 25 caverns for a total of 50 wells. In the two-well system, one well will inject the water into the cavern, and the other will remove the solution to the surface for processing. The 25 pairs of wells is the design for Phase I. For a doubling of output, the company would require a further 25 caverns. Once the solution is extracted to the surface, the processing of the product commences with the separation of the benign MgCl, which is sent to the sea via pipeline for disposal. The salt is then removed from the KCl and the wet KCl crystals are dried and further processed through the compactor where it is formed into flakes and sized into particle form. Finally, a resin coating is added to secure the product from damage during the transportation to the port and the eventual end user.
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Figure 167: Solution mining process flow sheet

Brine from Solution Mining
Carnallite Decomposition
KCl/NaCl
Hot Leach
B rine
KCl Crystallization
KCl
KCl Drying and Compaction
KCl Product
NaCl/Carnallite
Brine
NaCl to Disposal / Mine
Steam
Carnallite Evaporation
Process condensate
MgCl2 Brine to Ocean
Spin-off of MagPotash
In financing the equity portion of the Kouilou potash project, MagIndustries has sold 33% of its ownership in the potash project ($205 million) to investors in 2008. Subject to a liquidity event (IPO) in Q4/08 and following a further estimated equity raise of $45 million in MagPotash, MagIndustries will own approximately 63% of the shares of the newly formed MagPotash (where the ownership of the Kouilou potash project will be held), which is expected to trade on the TSX.
TIMELINE
Permitting
In March 2008, the government of the ROC granted Mag a 25-year mining licence for Kouilou potash project. It is important to note that the exploitation licence in the ROC is considered to be a strong indicator that the state wants the project to move forward. Management is currently awaiting finalization of the investment agreement regarding gas supply, rail use and port use to complete the project financing. These negotiations are near an end as all three documents have been drafted and presented to the government, and are in the final stages of approval. An Environmental Social Impact Analysis will be completed in Q3/08.
Financing
Once the permitting process is concluded, management will look to complete the debt and equity financing, expected in early Q4/08. We estimate MagPotash will look to raise a further $545 million in capital ($45 million in equity and $500 million in debt). The debt financing is being organized by the firms advisor, BNP Paribas and is in the final stages of approval. The consortium of lenders includes European Investment Bank, African Development Bank, and Export Development Canada. Combined with the previously mentioned $205 million equity raise in 2008, the total amount raised will be $750 million.
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Construction
A 30-month construction schedule is expected to begin immediately following the close of financing (Q3/08), followed by a three-month commissioning period in early 2011 and full ramp-up by mid-2011. The company has included all long lead-time items into its timeline, including bearings for the compaction plant which were ordered in March 2008 with an expected delivery time of 26 months. A drilling contractor will begin drilling the first of 50 wells in September 2008 with completion of the final well by Q1/10. The 50 wells will create 25 caverns for the solution mining process.
MAGFORESTRY
The forestry concessions consists of 68k hectares (ha) over three properties close to PointeNoire. As shown in Figure 167 above, a significant portion of the forestry concession lies atop the potash/magnesium deposit. Although MagIndustries has become a diverse company, there is a strategic as well as financial reason for owning the forestry business. In 2005, a private South African company had won tender from the state to takeover the eucalyptus plantation from the state but could not obtain the funds to close the deal. Rather than see the project pass to a Chinese group waiting in the wings, Mag purchased the South African based company in two instalments between 2005 and 2006 for a total of $6 million in order to acquire the surface rights, and remove a potential problem of negotiating access or compensation issues with an unfamiliar party. Figure: 168 MagForestry eucalyptus plantation
The company has planted eucalyptus trees across 42k hectares of its 68k hectare plantation, which have a seven-year growth cycle. The original plantation is 30 years old and thus all levels of tree growth exist on the plantation. Once the trees are harvested, they are sent by truck 12km to the newly constructed 1.5 million m3 per annum chipping mill at the companys port facilities. The US$25 million chipping plant was commissioned in June
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2008. The trees are processed at the plant and then shipped to Portugal and Spain under two contracted agreements. Management is continuously evaluating growth within the forestry segment. A preliminary idea being discussed is the possibility of higher margin business with the addition of an MDF (fibreboard) plant. The forestry segment provides approximately 10% to our NAV calculation. Figure 169: MagForestry chipping facility at Pointe Noire
MAGENERGY
All of the companys power focus is concentrated in the DRC. Management has a twopronged approach regarding power: refurbishing existing power generation infrastructure and building new power plants to fill the countrys mining energy requirements. Within the DRC, the government utility, SNEL, owns existing power infrastructure. However, new power facilities can be built and owned by private companies.
INGA hydro facility

The INGA power facility consists of 14 turbines (INGA I six turbines of 52MW each and INGA II eight turbines of 168-178MW each) that were financed by the World Bank during the 1970s and 1980s at a total cost of US$2 billion. Due to a lack of funding, neglect and civil war, the facility has never reached its full potential of 1,774 MW and is currently operating at approximately 20-30% of design capacity. In 2005, MagIndustries signed an agreement with the government that allowed it to refurbish five units at INGA II under two phases:
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Phase I Phase I involves the complete refurbishment of a 168MW turbine at a total capital cost of US$25 million. MagIndustries has been granted the rights to 50% of the restored capacity for six years beginning in Q4/08. Mags 84MW allocation is split 70% to Mag and 30% to financial partner Industrial Development Corporation of South Africa. Phase II Phase II involves the refurbishment of four INGA II turbines totalling 656MW at an estimated cost of US$140 million (75% to be funded by MagEnergy). Once complete, 25% of the restored capacity (164MW) will be marketed for 15 years by MagEnergy (where it will receive 85% of the revenues). The company is still awaiting final approval from the DRC government to proceed with the refurbishment. It was originally expected in early 2007. There are numerous issues at hand, all of them political and all out of MagEnergys control. At this point it is unclear whether the company will be able to benefit from Phase II of the project. Clouding the issue is the fact that the Chinese have reportedly offered the DRC government US$10 billion in infrastructure build for which they would expect significant resources in return. This may be part of the reason the mining industry in the DRC is undergoing a contract review and is perhaps impacting the review of MagEnergys INGA Phase II contract. As such we offer a 25% possibility in our NAV calculation that the project will be approved. Figure 170: INGA hydroelectric facility
New hydro
Mag has secured the rights to new hydro build within the DRC. Two sites the company is evaluating are the Busanga and Zongo 2. We currently offer no value for these projects in our NAV calculation.
Busanga
Busanga has the potential to be a 250MW facility along the Congo River, in the southeastern portion of the country. A technical feasibility study was completed in March
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2008. The study has provided the company with data for discussion with potential off-take partners.
Zongo 2
The company has initiated a scoping study on a 100MW hydroelectric power facility, located 80 kilometres southeast of Kinshasa, the capital of the DRC. The scoping study is expected to be completed by Q3/08.
MAGMETALS
A feasibility study was completed in 1999 on a magnesium facility at the Kouilou site. The company is planning a new feasibility study on a magnesium plant, which would be adjacent to the companys potash facility. From an economic perspective, the operating cost associated with the magnesium plant would be greatly reduced as the cost of retrieving the magnesium from below the surface is already accounted for in the potash operational cost base combined with a low cost of electricity due to inexpensive gas (as per the potash plant above). This is significant as the 120-150 MW energy requirement is expected to equal 35% of the operating cost. A feasibility study for the 60ktpa magnesium smelter will begin in early 2009 with expected completion of year-end 2009. Assuming a positive assessment of the project, construction could begin in 2011, with completion by 2014. Management would probably look to auto manufacturers for a bankable off-take agreement. In June 2008, MagMetals announced the signing of a technology licensing agreement with Norsk Hydro. The agreement allows MagMetals a non-exclusive licence to use Norsk Hydros technology for the construction of a magnesium smelter adjacent to its Kouilou potash plant. Additionally, MagMetals has purchased some key process technology equipment from Norsk Hydros recently closed magnesium smelter in Quebec. This equipment will aid the company in preparing its updated feasibility study on the Kouilou magnesium smelter. Although we cannot determine a project value at this time, we do apply a small $0.25 per share valuation for the optionality the project presents to MagIndustries.
CAPITALIZATION
There are currently 195 million shares outstanding (210 million diluted). Taking into account the recent financial raises in Q2, we estimate the company has $125 million in cash and $20 million in debt.
Ownership
Management owns 2.1% of the shares outstanding. Ospraie is the largest (published) institutional shareholder at 9.1%.
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MANAGEMENT
Bill Burton, President and Chief Executive Officer
Mr. Burton founded MagIndustries in 1997. Mr. Burton has over 30 years of global experience in mineral property development. Twelve of those years were in the employment of Rio Tinto.
Stphane Rigny, Executive Vice President, Finance

Mr. Rigny joined MagIndustries in 2003 as Executive Vice President, Finance. He has extensive experience in Africa, specifically the ROC, due to his 11 years of project finance with Rand Merchant Bank of Johannesburg. Mr. Rigny has forged a strong relationship with the government of the ROC and through past and current dealings, and thoroughly understands completely the political and social aspects of the country. This point cannot be understated.
Willy Verbrugghe, CEO, MagMinerals

Mr. Verbrugghe was appointed CEO of MagMinerals in May 2008. Mr. Verbrugghe has over 30 years of operational experience, including executive management positions. He has worked with Westinghouse Energy Systems, Kollmorgan Corp. and Sermatech to name a few. During that time, Mr. Verbrugghe has participated or led the construction of numerous large industrial projects.
INVESTMENT RISKS
Political
There exists serious political risk in the DRC, as that countrys leaders have demonstrated in the recent re-evaluation of the countrys mining projects that a contract is never assumed to be final, as we have seen with the delay in the approval of the permit for Phase II of the INGA project. It remains anyones guess as to when or if the INGA II contract will be finalized. Within the ROC, the political risk is very much muted, but with any mid-African country, the risk must always be appreciated.
Financial risk
The project will require significant funds to be raised in the capital market place. It is not guaranteed that the company will be able to raise the required funds in order to move their project forward to production.
Project risk
If the capital expenditure assumption exceeds our estimate or if there are delays in the construction of the project, it will be detrimental to the valuation of the company.
Gas supply
The operation of the project is dependent on the availability of gas to heat the water being pumped into the deposit and to power the potash plant. If gas is not available within the specified project timeline, the start-up of the project will be delayed and the valuation negatively affected as a result.
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VALUATION
We derive a 12-month target of C$8.50 per share for MagIndustries using a 12% discount rate and the following assumptions: Initial production beginning in H1/11 with 600kt in 2012, 900kt in 2013 and 1.2mtpa by 2014. A long-term (beginning 2018) potash price of US$500/t fob Pointe Noire. An assumed Phase I financial raise of $750 million, including capital expenditure of $723 million plus $27 million in additional financing to cover interest and miscellaneous costs. Furthermore, we have assumed a debt to equity ratio of 70:30. We assume the debt will be raised in one instalment in Q4/08, and the final equity instalment during Q4/08. An assumed Phase II financial raise of $320 million, with capital expenditure of $450 million, with the difference funded through revenues generated from Phase I. In addition, we have assumed a debt to equity ratio of 70:30, with the equity raise in F2010 and the debt raise in F2011. A 10% government free-carried interest on the Kouilou potash project. An effective income tax rate of 30% following a tax holiday on the forestry segment until 2015 and the potash segment until 2020. A mine life of 40 years based on current and expected resource escalation due to the continuous nature of the ore body. A mine operating cost of $84/t. A CAD/USD exchange rate of 1.0. A $0.25 NAVPS for the optionality the magnesium project presents to MagIndustries and a $0.15 NAVPS for the optionality of INGA Phase II
Based on these assumptions, MagIndustries is currently trading at a 63% discount to our 12% net asset value per share of $8.57. We derive a 12-month target price of C$8.50 by applying a 1.0x multiple to the NAVPS.
Sensitivity analysis
We applied the following sensitivity analysis to our model: Figure 171: NAV sensitivity to debt/equity financing ratio
70/30 10.48 8.57 Debt/Equity Financing 50/50 9.40 7.70 30/70 8.53 7.00
Discount Rate Source: Canaccord Adams
10% 12%
We have assumed a 70:30 debt to equity ratio for Phase I. Unlike the companys junior potash peers in Saskatchewan, the debt that we assume to be available to MagIndustries will be from quasi-governmental agencies focused on building projects within Africa. As illustrated by the figure above, the 70:30 debt to equity mix offers the company significant upside potential in valuation.
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Figure 172: NAV sensitivity to long-term potash price

$ 8.57 800,000,000 1,000,000,000 1,200,000,000 1,400,000,000 1,600,000,000 450 8.18 8.27 7.93 7.81 7.68 Long Term Potash Price (fob Pointe Noire) 500 550 8.51 8.84 8.60 8.93 8.26 8.57 8.14 8.47 8.01 8.34 600 9.17 9.26 8.92 8.79 8.67
Capex
Source: Canaccord Adams
With a long-term fob Pointe Noire price of US$500/t, and assuming a financial raise of $723 million, we have arrived at an NAV of $8.57. Due to the assumption of a 70:30 debt to equity and the project benefiting from higher potash prices in the initial years of production, the NAV is not as sensitive to changes in capex or long-term potash price. We do not offer financial comparisons within potash deposits based on resources or pounds in the ground as the deposits are continuous and relatively easy to find. The value added is derived from a geologically significant resource, a strong management team and financial backing to move it forward.
CONCLUSION
MagIndustries is our top selection among our non-producing fertilizer companies. The company will benefit from high potash prices in its initial years of production, a lower financing and time risk versus its peers, a low operating cost, strong government support, continued access to financial partnerships to fund expansions, and a management team that will be able to see the project through to production. For these reasons, we initiate coverage of MagIndustries with a BUY rating and a 12-month target price of C$8.50.
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Figure 173: Consolidated cash flow statement, MagIndustries, FYE Dec

US$ Cash flows from operating activities: Net earnings Items not affecting cash: Stock Based compensation Amortization, depreciation Non-controlling interest Foreign exchange loss Change in non-cash working capital Cash from (used in) discontinued operations FY09E 31-Dec-09 (25,573,561) 1,692,238 2,700,000 0 0 (21,181,324) (9,204,973) (30,386,296) FY10E 31-Dec-10 (32,226,224) FY11E 31-Dec-11 154,053,961 FY12E 31-Dec-12 FY13E 31-Dec-13 FY14E 31-Dec-14 503,638,982 2,725,366 61,850,000 0 0 568,214,348 (44,325,000) 523,889,348 FY15E 31-Dec-15 382,963,488 2,997,902 61,850,000 0 0 447,811,390 57,537,288 505,348,678 FY16E 31-Dec-16 384,017,207 3,297,693 61,850,000 0 0 449,164,900 (11,040,000) 438,124,900 FY17E 31-Dec-17 382,715,400 3,627,462 61,850,000 0 0 448,192,862 0 448,192,862
327,862,300 437,802,720 2,252,369 2,477,605 39,350,000 61,850,000 0 0 0 0 369,464,668 502,130,326 (99,540,000) (77,430,600) 269,924,668 424,699,726
1,861,462 2,047,608 2,700,000 39,350,000 0 0 0 0 (27,664,762) 195,451,569 0 (134,862,888) (27,664,762) 60,588,681
Cash flows from investing activities: Sustained Capex Project Capex Additions to Timber holdings
(2,500,000) (2,500,000) (2,500,000) (2,500,000) (350,000,000) (373,000,000) (225,000,000) (225,000,000) (1,000,000) (1,000,000) 0 0 (353,500,000) (376,500,000) (228,500,000) (228,500,000)
(2,500,000) 0 0 (3,500,000)
(2,500,000) 0 0 (3,500,000)
(2,500,000) 0 0 (3,500,000)
(2,500,000) 0 0 (3,500,000)
(2,500,000) 0 0 (3,500,000)
Cash flows from financing activities: Issue of corporate notes Issue of common shares Long term debt issued Cash generated by financing activities Effect of exchange rate changes on cash Net cash flow Cash, beginning of period Cash, end of period CFPS EPS
0 0 0 0 0
0 120,000,000 0 120,000,000 0
0 0 200,000,000 200,000,000 0 38,136,181 38,426,673 76,562,854 0.29 0.74
0 0 0 0 0
0 0 0 0 0
0 0 0 0 0
0 0 0 0 0
0 0 0 0 0
0 0 0 0 0
(383,886,296) (277,604,762) 699,917,732 316,031,435 316,031,435 38,426,673 (0.14) (0.13) (0.13) (0.17)
41,424,668 421,199,726 520,389,348 501,848,678 434,624,900 444,692,862 76,562,854 117,987,522 539,187,248 1,059,576,595 1,561,425,274 1,996,050,174 117,987,522 539,187,248 1,059,576,595 1,561,425,274 1,996,050,174 2,440,743,036 1.29 1.56 2.03 2.09 2.50 2.40 2.41 1.83 2.09 1.83 2.14 1.83
Source: Canaccord Adams estimates
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PhosCan Chemical Corp.

FOS : TSX-V : C$1.75
BUY Target: C$3.20
Keith Carpenter, MBA, CFA 1.416.869.7325 keith.carpenter@canaccordadams.com Neal Gilmer, MBA 1.416.869.7294 neal.gilmer@canaccordadams.com
COMPANY STATISTICS:
52-week Range: Avg. Daily Vol. (000s): Market Cap (M): Shares Out (M) basic: Shares Out (M) diluted: NAV: Cash (M): LT Debt (M): C$0.50-2.48 1,377.6 C$301.8 169.2 172.5 3.21 79.0 0 2014E 2015E 2016E
INITIATING COVERAGE WITH A BUY RATING AND C$3.20 TARGET PRICE

Investment thesis
We are initiating coverage of the PhosCan Chemical with a BUY rating based on the following conclusions: Stronger phosphate markets going forward As we highlighted in our thematic piece, The Modernization of the BRICs, we believe the phosphate market has undergone a significant change that will lead to higher prices going forward. Lower-cost access to markets PhosCans proposed Martison project is expected to benefit from a superior product in super phosphoric acid (SPA) and lower-cost access to its target markets for both monoammonium phosphate (MAP) and SPA. Ability to capitalize on structural issues in the SPA market Due to the structure of the market and recent events, PhosCan has an opportunity to serve the supply-constrained SPA market with a product offering that provides flexibility in output. Strong management team PhosCan has done an excellent job in sourcing the strongest management team in the junior fertilizer space, in our opinion, to move the project through to production. Valuation We value the shares of PhosCan Chemical on a 1.0x NAV of C$3.20, using a long-term MAP and SPA price of US$650/t and US$1,250/t fob, respectively, and a 10% discount rate.
EARNINGS SUMMARY:
FYE Jan Revenue (M): EPS: CFPS: 2012E 2013E C$433 C$580 C$603 C$586 C$553 0.32 0.50 0.53 0.50 0.38 C$0.61 C$0.90 C$1.00 C$0.97 C$0.92
COMPANY SUMMARY:
PhosCan is advancing its 100%-owned vertically integrated Martison phosphate project near Hearst, Ontario, in order to take full advantage of the structural constraints that are expected to remain over the long term. PhosCan has the ability to potentially service customers in western Canada and the Midwest US by capitalizing on its cost competitiveness due to its relative proximity to its target markets versus its peers and its mixture and flexibility of product offering which includes a higher value product.
190
INTRODUCTION
PhosCan is advancing its 100%-owned vertically integrated Martison phosphate project near Hearst, Ontario, in order to take full advantage of the structural constraints that are expected to remain over the long term. PhosCan has the ability to potentially service customers in western Canada and the Midwest US by capitalizing on its cost competitiveness due to its proximity to its target markets relative to its peers and its mixture and flexibility of product offering which includes a higher value product.
Phosphate pricing
As we detailed in our thematic piece, The Modernization of the BRICs, we believe that phosphate pricing has witnessed a significant change in pricing structure that has permanently increased the base pricing for phosphate fertilizers in the long run, due to the increased usage of fertilizer application rates and the components that provide the inputs to the finished product.
Lower-cost access to markets

PhosCan will look to enter the MAP and SPA market based on continued demand for the products, a freight cost advantage over competitors, and a higher value product with its output of SPA (discussed in greater detail below). Additionally, PhosCan will provide optionality within the two product offerings it will be bringing to market. As we discuss below, the range of operating capacities between the two products and product offering provides the company over the long term with leverage to areas that are commanding premiums to areas when markets are soft. As the planned facilities are based upon a long mine life, optionality is a prudent function.
Structural issues within the SPA market

The market for SPA has become very tight recently, as pricing for the fertilizer has shown. Only four facilities produce the product within the US: Potash Corp.s Aurora facility in North Carolina; Agriums Conda, Idaho, plant; Simplots facility in Wyoming; and Agrifos operation in Texas. Agrifos ceased SPA production in mid-May 2008 due to environmental concerns in the groundwater per the EPA. The company claims that this is temporary time will tell. There are no SPA production facilities in Canada. As a result of strong demand and constrained supply, pricing has reached all-time highs.
Management
PhosCan continues to do an excellent job of sourcing the appropriate pool of expertise to move the Martison project into production. As highlighted in the management section, below, the combination of years of experience and knowledge within the phosphate business should prove extremely beneficial as the company moves the project towards production.
Optionality
Beyond our write-up on the phosphate markets in our thematic piece, The Modernization of the BRICs, we believe there is added value within the PhosCan business plan due to the production of SPA in addition to MAP. As outlined below, the company contemplated two scenarios in its prefeasibility report (released in May 2008): Scenario A, which assumes the production of both products; and Scenario B, which outlines only MAP production. We will offer a valuation for Scenario A, as we believe management will choose this option.
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Managements reasons for potential SPA output are many: The markets need for the product; the ability of the company to produce the product given its higher-quality rock; the companys cost advantage of producing the product versus its peers; and the relative stability of the SPA market versus the MAP market during economic downturns. The timeline on the project includes a bankable feasibility study (BFS) due by early 2010, immediately followed by financing and two years of construction for an initial production date of early 2012.
THE MARTISON PROJECT

The Martison project consists of a mine and beneficiation plant to be located 70 kilometres north of Hearst, Ontario, and an associated chemical plant to be situated near Hearst, adjacent to Ontario Northland Railway (ONR) and 24 kilometres from the CN Railway terminal in the City of Hearst. The mine site would be connected to the plant via an 86 kilometre slurry pipeline carrying a mixture of phosphate ore and water. The chemical plant will produce two products: Merchant Grade Acid (MGA), an intermediate product that would be shipped via rail to the companys granulation plant in Brandon, Manitoba; and SPA, shipped directly to the customer in Canada and in the US. Figure 174: Location of Martison project
Source: PhosCan
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Geology
Phosphate occurs in two types of mineralization: igneous and sedimentary. Igneous deposits are formed through the solidification of molten material that originated within the earth and sedimentary deposits are made up of ancient fossilized sea life formed over millions of years. The Martison deposit is an igneous deposit with a low level of impurities. This relative lack of impurities allows for the production of higher-value SPA. It should be noted that SPA product cannot be produced economically from every phosphate deposit. For example, the impurity content in central Florida phosphate can be readily used to produce several end products including DAP, but it is much harder to produce SPA (a higher-margin product). The ore body begins at 30 metres depth and angles down toward the west to a yet-to-be-determined depth. In some areas, the ore body extends beyond drilled depths of 200 metres. Exploration drilling to date shows an area in the northeast portion of Anomaly A where a low-grade phosphate layer with up to 1% niobium exists. Within the overall deposit, the niobium grade is 0.34%.
Resource
The deposit contains NI 43-101 measured and indicated resources of 62.3 mt, grading 23.55% P2O5 and 0.34% Nb2O5 (Figure 175). Further inferred resources total 55.7mt at 21.87% P2O5 and 0.34% Nb2O5 (Figure 176). It is to be noted that these are as-mined (in situ) assays. Figure 175: Measured and indicated resources
Source: PhosCan
Figure 176: Inferred resources
Source: PhosCan
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The resource pertains only to Anomaly A shown in Figure 177. Anomaly A remains open at depth and to the northwest and southeast. Approximately 35% of the 28 km property has been drilled to date. Aeromagnetic imagery indicates a significant potential upside to the resource base. Further exploration drilling will be conducted to prove this expectation. Currently, on a measured and indicated basis, the mine life totals 19 years under either scenario (see below). In conjunction with the current BFS, an additional 70+ holes will be drilled on Anomaly A in 2009 to further add to the resource. Figure 177: Magnetic survey and location of completed drilling
Source: PhosCan
PREFEASIBILITY STUDY
Jacobs Engineering, supported by a mine design prepared by Golder Associates, completed a prefeasibility study in May 2008 with the following highlights:
Mining
The mining operation will involve an open pit, truck and shovel operation, to be loaded into the on-site beneficiation plant where the product will be upgraded to 37.5% P2O5 content. Approximately 1.16 mtpa of phosphate rock concentrate will be transported as a slurry (with water) in a pipeline to the chemical plant in Hearst. Operating rates are estimated to reach 69% in year 1 (2012), 95% in year 2 and full production beginning with year 3.
Processing
Chemical tests have concluded that PhosCan can expect to recover 75% of the phosphate in a 37% P2O5 rock concentrate. Tests produced MGA and SPA, which were further upgraded
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to high-quality MAP and 10-34-0 liquid fertilizer, respectively. The plant will have a capacity of 400kt P2O5 per annum. We note that management will be studying a 500kt plant in the feasibility study. This will provide the company with further optionality and a capital cost efficient increase in capacity. Included in the chemical plant would be an SPA plant with a design capacity of 150ktpa of P2O5 (under the most probable Scenario A). The facility would also include all the relevant storage capabilities for SPA, MGA, sulphur and sulphuric acid. The processing facility at Brandon would include a granulation plant, raw material (MGA and ammonia) receiving and storage, process utilities, and product storage and shipping.
Scenario A
Scenario A envisions a plant that would produce 215ktpa of SPA solution (70% P2O5) and 461kt of MGA solution (54% P2O5) utilizing sulphuric acid supplied by base metal smelters. The SPA would be sold directly to market and the MGA would be sent via rail to a proposed granulation plant in Brandon, Manitoba, for processing into 474ktpa of MAP. The MAP would then be sold to market.
Scenario B
Scenario B envisions a plant that would produce 754ktpa of MGA solution, utilizing onsite production of sulphuric acid, with sulphur sourced from northern Alberta. The MGA would then be sent via rail to the granulation plant in Brandon to produce 775ktpa of MAP. Figure 178: Diagram of PhosCan product supply chain
Source: PhosCan
Ammonia
Ammonia will be added to the phosphoric acid (MGA) at the Brandon, Manitoba, facility to produce MAP. PhosCan intends to source its ammonia requirements from western Canadian producers as the Brandon facility is within close proximity of several ammonia plants and storage terminals and along a rail line that transports a majority of the ammonia that is shipped to the US.
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Sulphuric Acid
Sulphuric acid is required as an input to produce phosphate fertilizers. Under Scenario A, PhosCan would require sulphuric acid from a smelter. The smelters under consideration are: Kidd Creek (Timmins, Ontario), Copper Cliff and Falconbridge (Sudbury, Ontario) and Horne (Quebec). Management estimates that some 2mtpa of sulphuric acid is produced by these four smelters with 70% destined for the United States. The Martison project will consume an estimated 1mtpa.
Sulphur
Alternatively, under Scenario B, the company would source sulphur from northern Alberta gas producers and upgrade it to sulphuric acid in its own plant at Hearst. Under this scenario, the company would require 346ktpa of sulphur. The 3,200tpd sulphuric acid plant would produce steam that could supply the phosacid plant and generate up to 45MW of power, of which PhosCan would require 25MW, netting up to 20MW to the grid. A variety of economic factors could influence the companys decision to produce or purchase sulphuric acid. Availability and reliability of sulphuric acid supply from the above-mentioned smelter operations is a major concern of PhosCan. The supply of sulphur however, is not perceived to have a supply risk. As an additional benefit of the sulphuric acid plant, credits from the waste heat energy produced in both steam and electric power would offer significant operating cost savings.
Combination of Scenarios A and B

We have assumed that PhosCan will employ a combination of Scenario A and Scenario B that involves the production outlined in Scenario A with the sulphuric acid plant described in Scenario B. However, due to the number of unknowns in the cost structure of the sulphuric acid plant at this time, we have not added it to our model. Management is considering several options pertaining to the facility that include building it themselves or moving it off balance-sheet and leasing it from an operator.
INFRASTRUCTURE
Ontario
Plant The Ontario Northland Rail line lies adjacent to the proposed fertilizer plant near Hearst and CNs rail line is within 24 kilometres of the facility. The site can be easily connected to the power grid and the gas pipeline, as both are within close proximity of the site. Mine site An 85 kilometre road will connect the deposit to the Hearst plant site. Of this, 47 kilometres exists today and will only require upgrading for heavy-duty year-round use. The northern 38 kilometres will need to be constructed. Work will begin this quarter with an expected completion by late Q2/09 at an estimated cost of $15-18 million. A right-of way alongside the road to Hearst will host the slurry pipeline and power line.
Brandon, Manitoba
The proposed site for the granulation plant is in an industrialized area with proximal access to power, paved road, gas, city provided utilities and both CN Railway and CP Railway.
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Rail equipment PhosCan will look to lease approximately 100 rail cars for the MGA and SPA products.
END MARKETS
PhosCan will look to sell its end products into the grain-producing regions of Canada and the midwestern US. Figures 179 and 180 illustrate the North American supply/demand parameters of MAP and SPA, respectively. Figure 179: North American supply/demand function of MAP
Source: PhosCan
MAP market
MAP is the most common fertilizer used in Canada and the upper Midwest US with much of the supply coming from the US Gulf (Florida and Louisiana). The Brandon granulation plant, however, will be able to produce DAP for the region as well as MAP. Much of the target market is well within truck-hauling distance giving the project a decided freight advantage over all other producers, including water bound imports.
SPA market
SPA is used primarily as a starter fertilizer in springtime applications. SPA market demand within North America can only be serviced domestically as no vessels or unloading facilities are capable of handling water-bound SPA imports. This is due to the special equipment required for shipping and handling the product over long distances and the relatively small end market compared with the much larger DAP/MAP solids market. The market for SPA has become very tight recently, as pricing for the fertilizer has shown. Only four facilities in the US produce the product: Potash Corp.s White Springs facility in north Florida; Agriums Conda, Idaho, plant; Simplots facility in Wyoming; and Agrifos
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operation in Pasadena, Texas). Agrifos ceased SPA production in mid-May 2008 due to environmental concerns in the gypstack water under a directive by both the EPA and Texas state authorities. The company claims that this is temporarytime will tell. There are no SPA production facilities in Canada. Enter PhosCan, with a high-quality product due to the low impurity content of the phosphate rock and a freight advantage to markets in western Canada and Midwest US. Aside from the product quality and margin advantage, the market for SPA is bordering on demand destruction if new product is not brought to market, as dealers will be forced to find alternative sources of phosphate fertilizer (i.e., solids). PCS-Aurora, which is planning a 180kt P2O5 expansion by 2009. However, most of that expansion will be used for purified acid growth and it remains to be seen if any will be utilized for SPA. SPA is sold on a quarterly and longer-term contract basis to dealers who convert the product to 10-34-0. Although primarily used as a starter fertilizer in the spring planting season, the SPA will be shipped year-round and converted to 10-34-0, so that it can be stored until required. Both customers and PhosCan benefit from the higher-quality product and lower freight costs. Figure 180: North American supply/demand function of SPA
Source: PhosCan
COST
Operating costs
We have assumed an operating cost of $335/t SPA and $288/t MAP. At an assumed longterm price of US$1,250/t SPA and US$650/t MAP, the gross margins should be significant throughout the projects mine life.
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The cost as laid out in the prefeasibility study is $855 million for Scenario A and $977 million for Scenario B. The major difference between the two costs is the addition of a sulphuric acid plant and the enlarged granulation plant and storage facilities under Scenario B. Offsetting this would be lower operating costs. We have assumed a Scenario A capital requirement, with the expectation that a sulphuric acid plant would be built off balance-sheet.
Royalties
Several royalties exist on the property. A net sales return royalty of 1% on phosphate concentrate exists whereby PhosCan can elect to purchase the royalty prior to the commencement of commercial production for a one-time payment of $3 million.
TIMELINE
A bankable feasibility study was initiated in February 2008 and is expected to be completed by March 2010. Although we believe PhosCan will have concluded an investment agreement with an equity partner prior to March 2010, we have modelled the company accessing the capital markets for $920 million in the form of 40% debt and 60% equity in March 2010. Construction of the facility would begin immediately following financing of the project with an expected completion date of mid-2012. Commercial production would follow by year-end 2012 and full ramp during 2013.
CAPITALIZATION
The prefeasibility study detailed two capital expenditure figures. Scenario A has a capital estimate, including working capital, of $893 million. Scenario B is estimated at $1.017 billion. Management envisions a capital expenditure budget of $70 million over the next 20 months. As at July 2008, the company had $79 million in cash. Management expects current cash on hand to cover all expenditures through to construction start-up in Q2/10. We have assumed the eventual capital requirement raise will be 60% equity and 40% debt. The BFS is expected to cost approximately $30 million, and an estimated $40 million will be spent on long lead time items. Management intends to be creative with the financing of the sulphuric acid plant. They have held initial discussions with several firms regarding moving the plant off balancesheet and debt financing it to the tune of 80%.
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MANAGEMENT
Steve Case, President and Chief Executive Officer
Mr. Case has over 18 years of financing and development experience of mineral assets in North America. Mr. Case was previously a co-founder of RFC Resource Finance Corporation, which was sold to Teck Cominco.
James Pringle, Chief Financial Officer

Mr. Pringle joined PhosCan in 2008 as Chief Financial Officer. Previously, Mr. Pringle was CFO of Frontera Copper Corporation from 2004 to 2005, where he oversaw the successful financing of the Piedras Verdes project in Mexico, and from 1997-2003, he was an investment banker with RBC Dominion Securities and CIBC World Markets. Mr. Pringle is Metallurgical Engineer.
Henry (Hank) Giegerich, Director

Mr. Giegerich has over 40 years experience in the mining industry. Under his direction as President and General Manager of Cominco Alaska Inc., the Red Dog project progressed from the exploration stage to the construction phase. Prior to that assignment, as Vice President, Northern Group, for Cominco, he was responsible for bringing the Polaris Mine into production, as well as the operation of the Con Gold Mine and the Pine Point Mine. For the past 15 years, he has been a consulting mining engineer providing a variety of services to various projects worldwide.
Glen Magnuson, Director

Mr. Magnuson has 37 years of agriculture and fertilizer industry experience, 25 of which were spent at Cargill where he retired as Vice President of the Fertilizer Division. With Cargill, Mr. Magnuson was involved with the purchase of the Gardiner phosphate facility in 1985 and the development of the Saskferco nitrogen complex. Mr. Magnuson is currently employed as a consultant to the fertilizer industry.
John Yokley, Director

Mr. Yokley retired in 2006 following a career in the fertilizer industry, most recently with Agrium where he spent 10 years covering strategic development and planning, marketing and distribution, and specialty businesses. Prior to 1995, Mr. Yokley was Vice President of national accounts sales, distribution and raw material purchasing for Nu-West Industries, a US phosphate producer.
Garry Pigg, Project Manager

Mr. Pigg has over 40 years in the mining and fertilizer industry having senior managerial experience with both Freeport-McMoRan and IMC Global (two predecessor firms to Mosaic). He has acted as a consultant to companies with interests in potash and phosphate mining and has managed and directed various aspects of business, plant and product development. Mr. Pigg is a chemical engineer.
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INVESTMENT RISKS
Sulphur
We have assumed the company will have unlimited access to sulphur at reasonable prices. If the supply of sulphur were interrupted or the cost increased significantly, then it would materially affect the operation and income of the company.
Permitting risk
PhosCan has not obtained all the necessary permits to allow it to graduate from an exploration company to a development entity. The most significant is the environmental permit. If permitting is delayed, it will negatively impact the production timeline and the valuation as a result.
Financial risk
The project will require significant funds to be raised in the capital market place. It is not guaranteed that the company will be able to raise the required funds in order to move its project forward to production.
Project risk
VALUATION
We derive a 12-month target price of C$3.20 for PhosCan Chemical using a 10% discount rate and the following assumptions: Initial production beginning in Q4/12 with full production of 150ktpa of SPA and 474ktpa of MAP by 2013. A long-term MAP and SPA price of US$650/t and US$1250/t fob, respectively. An assumed financial raise of $920 million in addition to the recent raise of $55 million, including capital expenditure of $900 million plus $20 million in additional financing to cover interest and miscellaneous costs. Furthermore, we have assumed a debt to equity ratio of 40:60. We assume the debt and equity will be raised in one instalment in Q2/10. We assume the company will join with a financial partner, but for the purpose of our model, we assume the partner to take part of the equity raise in 2010. An effective income tax rate of 21%. A mine life of 19 years. A mine operating cost of $335/t SPA and $287/t MAP. A CAD/USD exchange rate of 1.0.
Based on these assumptions, PhosCan is currently trading at a 45% discount to our 10% net asset value per share of $3.21. We derive a 12-month target price of C$3.20 by applying a 1.0x multiple to the NAVPS.
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8% 10%
We have assumed a 40:60 debt to equity ratio, believing that the company will not be able to raise predominantly debt. We expect management to enter discussions with potential partners and investors to offer the company financing. As illustrated by the chart above, the risk to the mix between 40:60 and 60:40 debt to equity is to the upside in valuation. We believe the company will be able to raise the appropriate funding. The questions remaining are: In what form and with whom? We believe these questions will be answered within the next two years. Figure 182: NAV sensitivity to long-term MAP price
550 3.54 3.23 2.92 2.62 2.31 600 3.68 3.38 3.07 2.76 2.45 MAP 650 3.83 3.52 3.21 2.90 2.60 700 3.97 3.66 3.36 3.05 2.74 750 4.12 3.81 3.50 3.19 2.88
Capex
700,000,000 800,000,000 900,000,000 1,000,000,000 1,100,000,000
Figure 183: NAV sensitivity to long-term SPA price

1150 3.74 3.43 3.12 2.81 2.50 1200 3.78 3.48 3.17 2.86 2.55 SPA 1250 3.83 3.52 3.21 2.90 2.60 1300 3.87 3.57 3.26 2.95 2.64 1350 3.92 3.61 3.30 3.00 2.69
Capex
700,000,000 800,000,000 900,000,000 1,000,000,000 1,100,000,000
With long-term pricing of US$650/t for MAP and US$1250/t for SPA, and assuming a financial raise of $920 million, we have arrived at an NAV of $3.21. Figures 182 and 183 conclude that relative percentage changes in MAP pricing are more sensitive to changes in SPA pricing. The shares of PhosCan are quite sensitive to changes in capex assumptions.
CONCLUSION
We believe PhosCan will benefit over the long term from a strong MAP and SPA price environment, low operating costs and strong margins, optionality in its product offering, access to financial partnerships to help fund the project, and a management team that will be able to see the project through to production. For these reasons, we initiate coverage of PhosCan with a BUY rating and a 12-month target price of C$3.20.
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Figure 184: Cash flow statement, PhosCan, FYE January

Net Income (Loss) Non-cash Adjustments Stock based comp Amortization Future income taxes (recovery) F/X Loss Write off mining interests, subsidiary Net change in W/C CFO Cash flows from investing Sustaining Capex Project Capex Redeption (Purchase) of STI Prepaid transaction costs Mineral property expenditures CFI Cash flows from financing Advances to related party Proceeds from issuance of shares Proceeds from the issuance of debt Deferred share issue costs Share issuance costs CFF Effect of FX on cash held in foreign curr Net change in cash flows Cash beginning of period Cash end of period 2009 (1,367,989) 1,101,165 789 (1,671) 2010 (18,700,000) 145,994 2011 (33,900,000) 160,593 2012 108,728,866 160,593 144,400,000 2013 171,704,184 176,652 163,200,000 2014 181,182,842 194,318 160,200,000 2015 171,033,425 213,749 154,300,000 2016 128,964,851 235,124 175,400,000 2017 166,314,232 258,637 109,800,000 2018 243,432,908 284,501 6,100,000 -
(1,876,999) (2,144,705)
(18,554,006)
110,071 (33,629,336)
(44,540,782) 208,748,677
(24,982,000) 310,098,837
66,300 341,643,459
8,667,930 334,215,104
12,432,223 317,032,199
12,573,945 288,946,814
12,213,340 262,030,748
(30,000,000) 355,805 847,809 (2,189,646) (30,986,032) 36,848 55,503,200 55,540,048 1,671 22,409,311 29,870,552 52,281,534
(2,500,000) (315,000,000) (317,500,000) 340,000,000 380,000,000 720,000,000
(2,500,000) (585,000,000) (587,500,000) 200,000,000 200,000,000
(2,000,000) (1,000,000) (3,000,000) -
(2,000,000) (400,000) (2,400,000) -
(2,000,000) (8,600,000) (10,600,000) -
(2,000,000) (9,800,000) (11,800,000) -
(2,000,000) (8,600,000) (10,600,000) -
(2,000,000) (8,700,000) (10,700,000) (400,000,000) (400,000,000)
(2,000,000) (19,500,000) (21,500,000) -
383,945,994 52,281,534 436,227,528
(421,129,336) 436,227,528 15,098,192
205,748,677 15,098,192 220,846,869
307,698,837 220,846,869 528,545,706
331,043,459 528,545,706 859,589,165
322,415,104 859,589,165 1,182,004,270
306,432,199 1,182,004,270 1,488,436,468
(121,753,186) 1,488,436,468 1,366,683,282
240,530,748 1,366,683,282 1,607,214,030
CFPS EPS
(0.01) (0.02)
(0.06) (0.07)
(0.10) (0.10)
0.61 0.32
0.90 0.50
1.00 0.53
0.97 0.50
0.92 0.38
0.84 0.48
0.76 0.71
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Potash One Inc.

KCL : TSX : C$4.29
SPECULATIVE BUY Target: C$7.75

COMPANY STATISTICS:
52-week Range: Avg. Daily Vol. (000s): Market Cap (M): Shares Out (M) basic: Shares Out (M) diluted: Cash (M): LT Debt (M): C$0.93-6.25 971.3 C$147.8 27.2 34.4 13.8 0
INITIATING COVERAGE
Investment thesis
We are initiating coverage of Potash One with a SPECULATIVE BUY rating and a 12-month target price of C$7.75 based on the following conclusions: Step-change in potash pricing going forward As we highlighted in our thematic piece, The Modernization of the BRICs, we believe the potash market will be robust for years into the future. Prices are expected to remain strong as supply will not be able to meet the growth in demand over the next five years. Earlier to production and lower capex We believe Potash One will be the first to production of the Saskatchewan-based juniors in H1/13 at a lower capital expenditure that will more than offset a higher operating cost of production versus conventional mine operators. Financing partnerships forthcoming There is unprecedented international demand that should ensure the junior companies have access to financial partnerships. We believe this will reduce the greatest risk to the junior players in Saskatchewan. Valuation We value the shares of Potash One on a 1.0x NAV of $7.75, using a long-term potash price of US$500/t fob Vancouver and a 10% discount rate.
EARNINGS SUMMARY:
FYE Apr Revenue (M): EPS: CFPS: 2013E 2014E 2015E 2016E C$525 C$1,125 C$1,500 C$1,500 C$0.99 C$2.13 C$2.86 C$2.86 C$0.78 C$2.31 C$3.15 C$3.32
COMPANY SUMMARY:
Potash One is engaged in the acquisition, exploration and development of solution mine amenable potash deposits in Saskatchewan. The company holds an option to purchase 100% of a 97,000-acre exploration permit in Saskatchewan and owns 100% of three exploration properties totaling 239,000 acres. The companys primary focus is the advancement of its optioned land, the Legacy potash project, located 80 kilometres northwest of Regina and 32km to the north of Mosaics Belle Plaine mine.
CAnaccord Adams is the global capital markets group of Canaccord Capital Inc. (CCI : TSX|AIM) The recommendations and opinions expressed in this Investment Research accurately reflect the Investment Analysts personal, independent and objective views about any and all the Designated Investments and Relevant Issuers discussed herein. For important information, please see the Important Disclosures section in the appendix of this document or visit http://www.canaccordadams.com/research/Disclosure.htm.
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INTRODUCTION
Potash One is engaged in the acquisition, exploration and development of solution mine amenable potash deposits in Saskatchewan. The company holds an option to purchase 100% of a 97,000-acre exploration permit in Saskatchewan and owns 100% of three exploration properties totalling 239,000 acres. The companys primary focus is the advancement of its optioned land, the Legacy potash project, located 80 kilometres northwest of Regina and 32 kilometres north of Mosaics Belle Plaine mine. The project currently has 36mt in indicated resources and a further 360mt of inferred resources. Management intends to further delineate the project through an updated resource estimation in early 2009. We estimate the project will begin production in H1/13 and ramp up to full production of 2mtpa by 2015, capturing a potash pricing environment that has increased due to a step change in the fundamentals of the industry. As we will see though our valuation discussion, the shorter timeline to production and the lesser amount of required capital expenditures more than offsets the higher operating costs as a result of solution mining and thus offers investors significant upside to the current share price.
Potash pricing
As we detailed in our thematic piece, The Modernization of the BRICs, we believe that potash pricing has performed a step-change going forward as a solution to the worlds food crisis has become dependent on a variety of factors, one of which is the increase usage of fertilizer application rates going forward. Within the fertilizers, potash stands to have the strongest outlook over the near, medium and long term. Although the operating costs will be significantly higher than their conventional mining peers, the expectation for a stronger potash price going forward should ensure the company has strong margins and cash flow once in production.
Production earlier and at a lower capex level

Due to the nature of the build-out of a solution mine, the time to production is less than that of a similar-sized conventional mine due mainly to the lack of shaft construction in a solution mine. The lack of a shaft offers the company significant capital savings and allows the company to generate earlier cash flows, which on a discounted cash flow basis, offers significant upside to valuation.
Strategic partnerships
It must be noted that with any significant project undertaking, substantial risks are inherent to any early-stage company. Regardless of the companys management or the projects method of potential mining, all of these exploration/development junior potash companies will require significant capital inflow, and specific to the central Canadian deposits, significant infrastructure requirements with regards to shipping the product to the end user. Potash One management is in discussions with potential financial partners, both as an off-take partner and as a port operator. For the sake of the following discussion, we will de-risk the geology of the project for the sole purpose of highlighting the risk associated with the financing of the project. Much has been discussed regarding BHP Billitons offer to acquire Anglo Potash in order to consolidate its ownership in its potash leases. We have little doubt that given BHPs balance sheet, it will be a force in Saskatchewans potash business at some point in the future. The reason is simple: BHP has the financial strength to carry out any project that has economic merit. This is not the case for junior development potash companies in
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Saskatchewan. We are not stating that it would be impossible for any of these companies to go from exploration and developer to producer. We have seen this occur in other sectors, but we believe that, due to the risk and timeline related to developing and operating a potash operation, further joint ventures or equity alliances will be formed as this process plays out. We have assumed that all the junior potash companies with Canadian-based assets will form a financial alliance to serve their fund raising requirements. And like any sector, some companies with lesser projects will never reach the point of production. However, we believe Potash One (in addition to Athabasca Potash) will be such a company that will be able to reach a production level in the future, but under an alliance of some degree. Since we believe the future is resoundingly positive in the space, the suitors for financial partnerships are many, some of whom have already held various levels of discussions with the companies involved.
LEGACY PROJECT
Management envisions the Legacy project producing 2mtpa of potash at full production through a solution mining process (see below) due to the nature of the ore body. In solution mining (versus conventional), the company will have the benefit of lower pre-production capital expenditures and a shorter timeline to production, which will be offset somewhat by a higher operating cost. A prefeasibility study will begin in Q3/08, followed by the commencement of a feasibility study in Q2/09 with an expected 13-month completion date (mid-2010). Figure 185: Location of Potash Ones permits
Source: Potash One
History
The company has focused on the Legacy project due to the historical work completed at the site in the 1960s. The Legacy project was formerly owned and explored by Imperial Oil and Lumsden Potash Corporation with 25 surface drill holes completed in the 1960s, 14 of which penetrated the Prairie Evaporite, for which data is available. The two companies
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confirmed potash mineralization over two pilot test sites but the sites were abandoned in the late 1960s. In May 2006, Potash One optioned the land from Invictus Minerals Corporation (a Saskatchewan-based oil and gas exploration company). Potash One currently owns 25% of the permit, and as part of the option agreement, the company will make a $1 million cash payment by September 2008 for a further 26% of the option, followed by a $1 million in cash and $1 million in shares payment for the remaining 49% by December 2008. In March 2008, Potash One purchased three potash exploration permits (KP 355, KP 356 and KP 357) from Giant Potash Corporation (a private Alberta firm) covering 239,000 acres.
Geology
Within the Prairie Evaporite, there are four members of mineralization (the Patience Lake, Belle Plaine, Esterhazy and White Bear). Analysis of the historical information shows the mineralization to have possible economic significance in the Patience Lake and Belle Plaine members. Further analysis of the five drill holes within close proximity to the two test well sites are listed in Figure 186. The results point to a consistent orebody with similar grades, thickness, low magnesium content and percentage of insolubles. The mineralization generally consists of silvite and halite, with minor amounts of clay, dolomite, anhydrite and carnallite. Due to the characteristics of the ore body, the company will employ a solution mining technique. The geology of the Legacy project is similar to that of Mosaics Belle Plaine solution mine to the south. Figure 186: Grade and thickness parameters of the two pilot test sites
Source: Potash One
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Resources
A NI 43-101 compliant resource was completed on the Legacy project in February 2007, identifying an indicated resource of 186mt, grading 20.6% K2O (36mt of recoverable resource) and further inferred resources of 2.1bt at 20.6% K2O (360mt of recoverable resource) within the Belle Plaine and Patience Lake members. The resources are calculated based on the 5 historical drill holes. Figure 187 displays the indicated (inner blue circles) and inferred (large red circles) resources with regards to the permit area. Currently, the indicated resources offer a mine life of less than 20 years. Once the new resource estimate is released, the estimated mine life by indicated resources should increase substantially. Figure 187: Diagram of the indicated and inferred resources at the Legacy project
Source: Potash One
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Resource upgrade
Management will look to publish an updated NI 43-101 resource by year-end 2008 or early 2009 based on seismic data collection and new drilling. The purpose of the new resource estimate will be to further define the resource to measured and indicated status, and to expand the resource. A 3D seismic interpretation of the area has been concluded to outline anomalous areas to avoid during mining. Details of the findings will be released in the coming days. The company has recently completed a 2D seismic study, expected to be released by the end of July, for the purpose of defining a larger scale of the surrounding area that would display the angle of the ore body, possibly locating more opportune areas for exploration and to help finalize the location of the plant site. A drill program will run from August 2008 through to November and include 10-12 holes.
Newly acquired permits

Due to the continuous nature of the prairie evaporate, we have no question the company will find additional resources on its newly acquired permits. However, given the commitment required for the Legacy project, we will not offer any value for these other properties as they will be idled assets with no possibility for advancement by KCL prior to 2015.

Conventional mining involves sinking a shaft to depths of up to 3,000 feet and employing a continuous miner to remove the ore to load onto conveyor belts to the ore crusher and then hoist to the surface for refining. In solution mining, heated brine is injected into the potash deposit to dissolve the ore. The solution is then pumped to the surface and refined through evaporation and crystallization techniques. Management intends to employ primary and secondary mining. In primary mining, heated water is injected into the ore body in order to dissolve the mineralization and form a cavern. The single well acts as the injection and suction of the brine. In secondary mining, two caverns are linked together. At this point, the water is pumped into the cavern via one well and pumped back to surface in a second well. Oil is then injected into the well to prevent the salt roof from dissolving. The company will utilize two wells for each of the planned 41 caverns for a total of 82 wells. The caverns will have a diameter of 70 metres and a height of 25 metres.
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Figure 188: Diagram of a solution mine
Source: Potash One
Once the solution is extracted to the surface, the processing of the product commences with the separation of the impurities from the brine. The salt is then removed from the KCl and the wet KCl crystals are dried and further processed through the compactor where it is formed into flakes and sized into particle form. Finally, a resin is added to secure the product from damage during the transportation to the port and the eventual end user. Figure 189: Solution mining process flow sheet
Source: Potash One
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Environmental studies
The Environmental Impact Study (EIS) began in March 2008 with an expected completion and response by the provincial government in Q3/10. Until the government has approved the EIS, Potash One cannot begin construction on their property.
Feasibility studies
The prefeasibility study is expected to commence in the third quarter of 2008 with a completion date of Q2/09. Potash One will choose an engineering firm within the coming weeks. The feasibility study will then follow in Q2/09, with a 13-month completion timeline of late Q2/10. Figure 190: Project timeline through 2010
Source: Potash One
Production
We assume the construction timeline would entail a 24-month build for the surface facilities, during which time approximately 50% of the wells will be completed. First production could be reached in H1/13 with full ramp-up of 2mtpa by 2015.
INFRASTRUCTURE
The Legacy deposit lies within the potash evaporite, well serviced by roads, rail and power. The company would have to build spur lines to the rail line, gas pipeline and local power grid. All-in costs of the infrastructure build are estimated at approximately $150 million.
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Road
Paved roads lie within 10 kilometres of the project.
Rail
The CP and CN rail lines are approximately 2 kilometres and 25 kilometres, respectively, from the Legacy mine. Spur lines would be required to connect the mine to either rail line.
Gas
A contract will be required for the supply of gas for the operation of the solution mine. The company will require a 30-kilometre spur line to connect to the local gas infrastructure. At full production, the Legacy project will require 232 million m of gas per annum.
Power
Power would be purchased from the provincial power grid through SaskPower. A spur line would be required to connect to the local grid 9 kilometres away. The project requires 75MW of power per annum.
Plant
The plant facilities would include an evaporation plant, crystallization plant, compaction plant, cooling ponds, product drying, product storage, to name a few. All of these facilities will be included in the pre-feasibility and feasibility studies undertaken by management.
Port
Discussions are ongoing between Potash One and numerous parties on several solutions. These include the discussion of a port retrofitting with the cost borne by the terminal operator, taking on a partner to build a new facility, or another agreement to lessen the financial risk of Potash One. We would not be surprised if discussions on this level reach an agreement within the next twelve months.
Off-take agreement
The potential suitors for an off-take agreement are numerous. Management is currently in discussions with a number of parties, including those with significant financial backing with or without mining experience, those who want the product for their own use and those who want to control supply of that product.
COST
Operating costs
We estimate the Legacy project will have an operating cost of $140/t. This takes into assumption the assumed cost inflator to Mosaics Belle Plaine solution mine, higher longterm energy costs, ongoing maintenance, and the recent feasibility level cost of the Kouilou project in the Republic of Congo.
The expected budget over the next three years is $36 million. The prefeasibility will cost an estimated $3-4 million, followed by $20 million for the feasibility study. The current
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drill program will cost an additional $12 million. The current budget incorporates 10-12 drill holes at $1 million each. The high cost per hole is due to the nature of the well. These holes have a dual purpose: they will aide in the exploration program and they will be used for the solution mining process once in operation. The estimated capital expenditure for construction totals $1.8 billion. Although we believe that the company will form a financial partnership, for the purposes of our financial modeling, a 40/60 debt/equity financing is assumed. We opted to use a lower debt amount than management is forecasting due to the size of the expected raise and the thesis that equity partnerships will play a significant role in the projects future.
CAPITALIZATION
There are currently 42.6 million shares outstanding (50.4 million diluted). As of June 2008, the company had $27 million in cash versus zero debt. Fully diluted cash totals $52 million. The company has further investments of approximately $32 million.
Ownership
Management owns 1.4% of the shares outstanding. Pinetree Capital is the largest (published) institutional shareholder at 9.0%.
MANAGEMENT
Paul Matysek, President and Chief Executive Officer
In November 2007, Mr. Matysek was appointed President and Chief Executive Officer of Potash One. Previously, from 2004-2007 he was the Chief Executive Officer of Energy Metals, a company he founded and subsequently sold to Uranium One in 2007 for $1.8 billion. Mr. Matysek has over 20 years of experience in acquiring and developing resource companies.
George Lim, Chief Financial Officer

Mr. Lim was appointed Chief Financial Officer in 2008. Previously, Mr. Lin was Chief Financial Officer of Energy Metals for three years. Prior to 2004, Mr. Lin spent five years as CFO for a group of resource companies with operations in the Americas.
Mike Ferguson, Chief Project Director

Prior to joining Potash One in 2008, Mr. Ferguson served as a general manager for Wardrup Engineering and operations manager at AMEC. From 1984-2004, Mr. Ferguson held various management roles in the potash business at Agrium, Mosaic and Potash Corp. Mr. Ferguson is a mechanical engineer.
INVESTMENT RISKS
Port infrastructure
A significant issue with a new potash project in Saskatchewan will be the means to which the product is shipped to market. If the company cannot finalize a deal in the appropriate time in order to export their product to market, the valuation of the company will be negatively affected.
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Permitting risk
Potash One has not obtained all the necessary permits to allow it to graduate from an exploration company to a development entity. The most significant is the environmental permit. If permitting is delayed, it will negatively impact the production timeline and the valuation as a result.
Financial risk
The project will require significant funds to be raised in the capital market place. It is not guaranteed that the company will be able to raise the required funds in order to move their project forward to production.
Project risk
If the capital expenditure assumption exceeds our estimate, or if there are delays in the construction of the project, it will be detrimental to the valuation of the company.
Energy costs
The assumed operating cost is very sensitive to the price of natural gas. As such, if gas costs remain elevated beyond our forecast, it will have a negative impact on the earnings of the company.
VALUATION
We derive a 12-month target price of C$7.75 per for Potash One using a 10% discount rate and the following assumptions: Initial production beginning in H1/13 with full production of 2mtpa by late 2015. A long-term potash price (beginning in 2018) of US$500/t fob Vancouver. An assumed financial raise of $1.93 billion, including capital expenditure of $1.80 billion plus $125 million in additional financing to cover interest and miscellaneous costs. Furthermore, we have assumed a debt/equity ratio of 40/60. We assume the debt will be raised in one installment in H2/10, and the equity in several instalments between 2011 and 2012. We assume no further capex cost borne by the use of a port. We assume the company will have access to a port through either an off-take agreement or financial partnership. A 4.5% royalty tax payable to the Saskatchewan government. An effective income tax rate of 30%. A mine life of 40 years based on current and expected resource escalation due to the continuous nature of the orebody. A mine operating cost of $140/t. A CAD/USD exchange rate of 1.0.
Based on these assumptions, Potash One is currently trading at a 45% discount to our 10% net asset value per share of $7.75. We derive a 12-month target price of C$7.75 by applying a 1.0x multiple to the NAVPS.
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SENSITIVITY ANALYSIS
8% 10%
We have assumed a 40:60 debt to equity ratio, believing that the company will not be able to raise predominantly debt. Management is in early discussions with potential offtake partners and investors to offer the company financing. As illustrated by the chart above, the risk to the mix between 40:60 and 60:40 debt to equity is to the upside in valuation. We believe the company will be able to raise the appropriate funding. The remaining questions are: In what form and with whom? We believe these questions will be answered within the next two years. Figure 192: NAV sensitivity to long-term potash price
$ 7.75 (1,400,000,000) (1,600,000,000) (1,800,000,000) (2,000,000,000) (2,200,000,000) 450 7.90 7.25 6.59 5.94 5.29 500 9.05 8.40 7.75 7.10 6.45 Potash Price 550 10.21 9.55 8.90 8.25 7.60 600 11.36 10.71 10.06 9.40 8.75
Capex
With a long-term (beginning in 2018) of US$500/t fob Vancouver, and assuming a financial raise of $1.93 billion, we have arrived at an NAV of $7.75. The chart concludes that relative percentage changes in potash pricing are twice as sensitive to similar changes in financial raise. We do not offer financial comparisons within potash deposits based on resources or pounds in the ground as the deposits are continuous and relatively easy to find. The value added is derived from a geologically significant resource, a strong management team and financial backing to move the project forward.
CONCLUSION
We believe Potash One will benefit over the long-term from strong potash prices, lower capital costs and a shorter time to production than its conventional mining counterparts, access to financial partnerships to help fund the project, and a management team that will be able to see the project through to production. For these reasons, we initiate coverage of Potash One with a SPECULATIVE BUY rating and a 12-month target price of C$7.75.
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Figure 193: Cash flow statement, Potash One, FYE Apr

FY09E FY10E 30-Apr-09 30-Apr-10 (6,969,872) (35,800,000) 6,487,556 6,487,556 (482,316) (29,312,444) FY11E 30-Apr-11 (64,600,000) 6,487,556 (58,112,444) FY12E 30-Apr-12 (64,600,000) 6,487,556 (58,112,444) FY13E 30-Apr-13 212,642,500 6,487,556 (52,590,415) 166,539,641 FY14E 30-Apr-14 454,427,234 92,593,237 6,487,556 (60,000,000) 493,508,027 FY15E 30-Apr-15 610,614,734 92,593,237 6,487,556 (37,500,000) 672,195,527 FY16E 30-Apr-16 610,614,734 92,593,237 6,487,556 709,695,527 FY17E 30-Apr-17 610,614,734 92,593,237 6,487,556 709,695,527 FY18E 30-Apr-18 276,364,734 92,593,237 6,487,556 50,000,000 425,445,527
Net Income (Loss) Non-cash Adjustments Amortization Future income taxes (recovery) Stock based comp Net change in W/C CFO Cash flows from investing Sustaining Capex Project Capex Mineral property expenditures CFI Cash flows from financing Advances to related party Note payable Proceeds from issuance of shares Proceeds from issuance of debt Deferred share issue costs Share subscriptions (Share issuance costs) CFF Net change in cash flows Cash beginning of period Cash end of period CFPS EPS
(50,000,000) (50,000,000) 80,000,000
(3,000,000) (3,000,000)
(3,000,000) (3,000,000)
(3,000,000) (3,000,000)
(3,000,000) (3,000,000)
720,000,000 80,000,000 720,000,000
525,000,000 525,000,000
600,000,000 600,000,000
29,517,684 690,687,556 466,887,556 541,887,556 166,539,641 493,508,027 669,195,527 706,695,527 706,695,527 422,445,527 13,591,458 43,109,142 733,796,698 1,200,684,254 1,742,571,810 1,909,111,451 2,402,619,478 3,071,815,005 3,778,510,532 4,485,206,059 43,109,142 733,796,698 1,200,684,254 1,742,571,810 1,909,111,451 2,402,619,478 3,071,815,005 3,778,510,532 4,485,206,059 4,907,651,586 (0.01) (0.15) (0.72) (0.88) (0.45) (0.50) (0.27) (0.30) 0.78 0.99 2.31 2.13 3.15 2.86 3.32 2.86 3.32 2.86 1.99 1.29
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Athabasca Potash Inc.

API : TSX : C$7.57
HOLD Target: C$9.50

COMPANY STATISTICS:
52-week Range: Avg. Daily Vol. (000s): Market Cap (M): Shares Out (M) basic: Shares Out (M) diluted: NAV: C$3.60-10.47 289.5 C$301.8 36.6 40.2 9.58 2014E C$900 1.76 2.19 2015E C$1,125 2.34 3.18 2016E C$1,500 3.43 4.32
INITIATING COVERAGE
Investment thesis
We are initiating coverage on the shares of Athabasca Potash with a HOLD rating and 12-month target price of C$9.50 based on the following conclusions: Step change in potash pricing going forward As we highlighted in our thematic piece The Modernization of the BRICs, we believe the potash market will be robust for years into the future. Prices are expected to remain strong as supply will not be able to meet the growth in demand over the next five years. Low operating cost and strong margins Athabasca Potash should benefit from an operating cost comparable to those of the lowest-cost conventional potash mines in Saskatchewan, ensuring strong margins for the company once in production. Financing partnerships forthcoming There is unprecedented international demand that will ensure the junior companies will have access to financial partnerships. We believe this will reduce the greatest risk to the junior players in Saskatchewan. Improving management team Athabasca Potash continues to build upon its management and consultant team to push forward on all the major aspects of the Burr project. Valuation We value the shares of Athabasca Potash on a 1.0x NAV of C$9.50, using a long-term potash price of US$500 fob Vancouver, and a 10% discount rate.
EARNINGS SUMMARY:
FYE Dec Revenue (M): EPS: CFPS:
COMPANY SUMMARY:
Athabasca Potash is an exploration and development company focused on its 100%-owned land package in the potash-producing region of Saskatchewan, comprising 23 exploration permits and totalling approximately 1.5 million acres. Athabasca Potashs primary focus is the development of the Burr project to become the first potash-only producing conventional mining company operating in Saskatchewan.
217
INTRODUCTION
Athabasca Potash is an exploration and development company focused on its 100%- owned land package in the potash-producing region of Saskatchewan, comprising 23 exploration permits and totalling approximately 1.5 million acres. Athabasca Potashs primary focus is the development of the Burr project to become the first potash-only producing conventional mining company operating in Saskatchewan. The company has been adding to its management expertise as it moves its project toward a production decision. The asset itself has had significant exploration work completed on it, and a sizable upside to the resource is expected in August 2008. As we will discuss in greater detail, we forecast Athabasca Potash will be producing potash from its Burr project beginning in 2014, ramping to full production of 2 mtpa by 2016 at significant margins similar to those of its peers in the Saskatchewan evaporite. To accomplish this and bring the project into production, the company will require a strong pricing environment, low operating costs, significant financing, including financial partnerships, and management expertise.
Potash pricing
As we detailed in our thematic piece The Modernization of the BRICs, we believe that potash pricing has performed a step-change, as a solution to the worlds food crisis has become dependent on a variety of factors, one of which is increased fertilizer application rates. Among the fertilizers, potash stands to have the strongest outlook over the near, medium and long term, in our opinion.
Low operating costs

Once in production, the Burr project is expected to be among the low-cost conventional producing mines in the region. With significantly higher potash prices going forward, the company should greatly benefit from strong margins throughout the expected mine life.
Strategic partnerships
It must be noted that, with any significant project undertaking, substantial risks are inherent in any early-stage company. Regardless of a companys management or a projects method of potential mining, junior potash exploration/development companies require significant capital inflow and, specific to the central Canadian deposits, extensive infrastructure requirements to enable shipment of product to the end user. In our opinion, Athabasca Potashs management is pushing forward all of these issues in order to alleviate risks and concerns and to put forth a viable investment project. For the sake of the following discussion, we will de-risk the geology of the project for the purpose of highlighting the risk associated with project financing. Much has been said about BHP Billitons offer to acquire Anglo Potash in order to consolidate its ownership in its potash leases. We have little doubt that, given BHPs balance sheet, the company will be a force in the Saskatchewan potash business in at some point in the future. The reason is simple: BHP has the financial strength to carry out any project that has economic merit. This is not the case for junior development potash companies in Saskatchewan. We are not stating that it would be impossible for any of these companies to go from exploration and development to productionwe have seen this occur in other sectorsbut we do believe that, due to the risk and timeline related to developing and operating a potash operation, further joint ventures or equity alliances will be formed as this process plays out. We have assumed that all the junior potash companies with Canadian-based assets will form a financial alliance to serve their fundraising requirements and that, as in any sector, some
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companies with lesser projects will never reach production. That said, we believe Athabasca Potash (and Potash One, for that matter) will reach a production but under an alliance of some kind. Since the future of the space appears resoundingly positive, suitors for financial partnerships are many and some have already held various levels of discussions with the companies involved. Athabasca Potash management is currently developing marketing relationships with counterparties in China, India and other Asian nations.
Management
The company has been adding appropriate expertise during the past year in the areas of project construction, financial planning, potash mine operation and geology. We expect the combined management teams knowledge and experience to help push the Burr project forward to a construction decision and eventual production.
BURR PROJECT
History
The Burr project is located 107 kilometres east of Saskatoon, adjacent to the northern end of Potash Corp.s Lanigan mine (Figure 194). It is in close proximity to operating mines and well served by existing infrastructure. Six holes were drilled on the property during the 1950s, defining potash mineralization across five of the holes. Over the years, Potash Corp. acquired the rights to the land before allowing its lease to expire in the 1990s. In 2005, Dawn Zhou, founder and CEO of Athabasca Potash, saw an opportunity to acquire the rights to the land, and a permit was obtained in 2006. Athabasca Potash commissioned AMEC to conduct an NI 43-101 resource calculation based on the historical drilling results only, the results of which were released in September 2007 (for further discussion, please see Resource section below). Figure 194: Map of Burr project and surrounding operating potash mines
Source: Athabasca Potash
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Geology
Historically, the average width of the potash intercepts at the Burr deposit are 4.22 metres, in line with regional producing mines. The salt back is considered to be of the required width for conventional mining and the impurities to be within the desired limit, detailing a low ratio of insolubles and a low ratio of carnallite. Due to the geological understanding and consistency of the Saskatchewan potash beds, relatively few holes and seismic tests can outline, with confidence, a continuous resource. Within the evaporite, there are four potashbearing members: the Patience Lake, Belle Plaine, Esterhazy and White Bear members. The Burr property lies on a slight incline from 1,000 metres depth to 950 metres, with the Lower and Upper Patience Lake sub-members providing the resource tonnage. It should be noted that the resources are calculated from only one of the sub-members in any given area due to the narrow layer between the two members, which prevents conventional mining of both sub-members in the same area. When making comparisons to the Lanigan mine, the grades are slightly higher. Due to the continuous nature of the prairie evaporite in Saskatchewan, it can be reasonably assumed that resources are continuous across claims, allowing for a discount based on assumed anomalies.
Resource
The current NI 43-101 estimated inferred resource totals 73.4 mt at 25.64% K2O and is based on six historical drill holes totalling 6,021 metres completed during 1956-1959. A new NI 43-101 compliant resource that will incorporate the drilling results from 2007 will be released in August 2008. We expect the resource to increase and to include indicated and inferred resources. Further drilling on the northeast portion of the property (Figure 195) will begin in August, and another updated resource is expected in 2009. The program will consist of four to six holes to expand the known resource and further define inferred resources to indicated. We expect the current resource to double or possibly triple by 2009. Furthermore, if the company can attain some of the freehold rights on the property, the resources around the previously drilled areas will increase by a wide margin over the current NI 43-101 resource. Figure 195: Inferred resources
Property preparation
Management is advancing the project through the use of both drilling and seismic testing. Six historical drill holes were completed in the 1950s. In 2006, Athabasca Potash completed a 2D seismic survey of the area and followed it with a five-drill hole (5,617 metre) program in mid-2007 and a 3D seismic survey in late 2007. The company has decided against confirmatory drilling and has instead focused on expanding the known resource. The results of the five new drill holes and seismic surveys will be included in the
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updated resource estimate to be released in August 2008. A scoping study on the project is expected to be completed by September 2008, forming the basis for a feasibility study, expected to commence in early Q4/08 and to be completed in Q4/09. The company intends to combine the prefeasibility and feasibility into one document for release in Q4/09. The shaft pilot hole will be completed by year-end or early 2009. Figure 196: News flow through early 2009
2008 program
The company has planned an additional six drill holes on the Burr project in 2008. The drilling will begin in July, followed by a further 3D seismic evaluation of the property during the fall to expand to the immediate north and east of the 2007 program.
Regional exploration program

Athabasca Potash will begin exploring other leases within its property limits in 2009 with 2D seismic analysis followed by targeted drilling. It is assumed that management is attempting to add tonnage to the companys overall portfolio as it intends to look for financial partners in the coming years. It is possible that the company would look for a JV partner on other properties as part of a financial agreement on the Burr property. As mentioned previously, due to the continuous nature of the prairie evaporate, we are confident that the company will find additional resources. However, given the commitment required for the Burr project, we will not offer any value for these other properties as they will be idled assets with no possibility for advancement by Athabasca Potash prior to 2016.
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Figure 197: Map of 2D and 3D seismic surveys and drilling completed to date
INFRASTRUCTURE
As the deposit is in a potash-producing region, it is within close proximity of all major infrastructure, including road, rail and power.
Road
A paved road runs through the property. Once the shaft pilot hole is decided upon, a connecting road would be constructed with a maximum length of 8 kilometres.
Rail
The Saskatoon area is well serviced by both CP Railway and CN Railway. At the Burr property, CP Railway runs parallel to the south and CN Railway runs parallel to the north. A CP spur line runs up to the property from the main line. The company would have to construct an additional 5 to 8 kilometre spur to connect to the CP line. To the north, Athabasca Potash would need to construct a 25 kilometre line to link to the CN line. The rail infrastructure will be included within the transportation study (see below).
Power
Power would be purchased from the provincial power grid under a long-term contract with SaskPower, the provincial power company. A further gas contract may be initiated with SaskEnergy, the provincial operator. Infrastructure for both electricity and gas are relatively close to the Burr property.
Port
Options are currently being investigated as part of the companys transportation study (see below).
Plant and mine

The proposed conventional mine will include a 1,000-metre shaft, related underground equipment and surface infrastructure. The definitive feasibility study (DFS) will outline a more precise estimate of the cost when it is complete in Q4/09. Athabasca Potash intends to build a surface operation similar to that of the Lanigan mine.
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Transportation study
A significant aspect of the feasibility study will include a transportation study that will determine what options are available to the company in terms of moving the product from the mine site to its end customers. This will involve varying scenarios on rail, including capital expenditures for rail spur lines, purchasing rolling stock versus leasing it or thirdparty operation. More are the companys options with regard to port access for eventual overseas shipping. Several studies and discussions are underway, including the building of facilities at a port, partnering with third parties on port construction, leasing facilities from a third party, or having a third party contracted to handle all of the rail and port logistics and infrastructure. The transportation study is expected to be concluded alongside the DFS in Q4/09.
Timeline
An environmental baseline study began this spring and is expected to take two years to complete. Assuming a positive outcome from the government, the company will immediately proceed to financing followed by a construction time frame of three and a half years, and a commissioning period of 6-12 months. This would place initial commercial production in 2H/14. Full production would not be reached until late 2015.
COSTS
Operating costs
The operating costs of the conventional mines in the immediate area are expected to operate on a US$65-75/t cost going forward versus our estimate of US$75/t for the Burr project. The mining method and conditions are expected to be similar to those of Potash Corp.s Lanigan mine, immediately south of the Burr property.
The company had AMEC produce an order of magnitude study in September 2007, which outlined an expected capital cost of $2 billion, including a 20% contingency. Also included in the total cost were surface facilities of $1.1 billion, shafts and hoists of $289 million, and mine equipment totalling $222 million. We have assumed that, along with inflationary costs and keeping a sound contingency, capital expenditures total $2.6 billion. However, we estimate the total financial raise required by the company to be $2.9 billion due to financing costs and miscellaneous items. It remains to be seen what capital costs would be involved in the procurement of rail and port infrastructure. We have assumed the financing will be raised on a 40:60 debt:equity ratio and that a financial partner will be involved in financing the project.
CAPITALIZATION
Athabasca Potash launched an initial public offering in December 2007, raising net proceeds to the company of $40.5 million through the sale of 10.14 million shares at a price of $4.25. There are currently 36.6 million shares outstanding (40.2 million diluted). The company has no debt. Management envisions a capital expenditure budget of $40 million over the next 12 months. As at June 2008, the company had $45.5 million in cash.
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Ownership
Management owns 29.1% of the shares outstanding. Tom MacNeill and his control of 49 North is the largest shareholder at 13.3%. Dawn Zhou and 100%-owned CSIT Consulting own 12.9% of shares outstanding.
MANAGEMENT
Dawn Zhou, President and Chief Executive Officer
Ms. Zhou founded Athabasca Potash in 2006 after studying the various potash land claims in Saskatchewan and locked in a substantial portion of the available leases after realizing they had been allowed to lapse by the previous holders. Ms. Zhou was studying for a PhD at the University of Saskatchewan at the time of the purchase of the leases. Prior to 2006, Ms. Zhou had been involved in the exploration of potash and oil resources within Saskatchewan. Ms. Zhou is a geologist.
Terry Walbaum, Chief Operating Officer

Mr. Walbaum joined Athabasca Potash in 2008. Mr. Walbaum has 29 years of experience, the last 27 of which were spent with SNC Lavelin, specializing in prefeasibility and feasibility level studies in the mining industry, including engineering design, procurement, construction management and environmental management.
Gary Billingsley, Chief Financial Officer

Mr. Billingsley joined Athabasca Potash as Chief Financial Officer in 2006. Mr. Billingsley has 32 years of mineral industry experience, 24 of which have been spent in Saskatchewan. He has held several director and officer positions within the mining industry. Mr. Billingsley is a Chartered Accountant, Professional Engineer and a geologist.
Brad Fettis, VP, Mining

Mr. Fettis has spent 11 years in the potash industry with Potash Corp. He has worked in four of Potash Corp.s conventional mines, including the Lanigan mine, located immediately south of Athabasca Potashs Burr project. Most recently, Mr. Fettis was mine manager at PCS Allan. Mr. Fettis is a mechanical engineer.
Kevan Bender, Vice President Communications and Investor Relations

Mr. Bender received his Bachelor of Science in Agriculture Economics from the University of Saskatchewan in 1995. Previously Mr. Bender held various commercial banking and client relations positions.
INVESTMENT RISKS
Brine inflow
The largest mining risk to a conventional mine is an uncontrollable brine inflow. This is an even more substantial risk with a one-deposit company as a brine inflow can ruin an asset and thus the company.
Port infrastructure
A significant issue with a new potash project in Saskatchewan will be the means by which product is shipped to market. If the company cannot finalize a deal in the appropriate time
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in order to export its product to market, the valuation of the company will be negatively affected.
Permitting risk
Athabasca Potash has not obtained all the necessary permits to allow it to graduate from an exploration company to a development entity. The most significant is the environmental permit. If permitting is delayed, it will negatively impact the production timeline and the valuation as a result.
Financial risk
The project will require significant funds to be raised in the capital market place. It is not guaranteed that the company will be able to raise the required funds in order to move its project forward to production.
Project risk
VALUATION
We derive a 12-month target price of C$9.50 per share for Athabasca Potash using a 10% discount rate and the following assumptions: Initial production beginning in H1/2014 with full production of 2 mtpa by early 2016. A long-term KCl price (beginning in 2018) of US$500/t fob Vancouver. An assumed financial raise of $2.9 billion, including capital expenditure of $2.6 billion plus $300 million in additional financing to cover interest and miscellaneous costs. Furthermore, we have assumed a debt/equity ratio of 40/60. We assume the debt will be raised in one instalment in 2H/10, and the equity in several instalments between 2010 and 2013. We assume no further capex cost borne by the use of a port. We assume the company will have access to a port through either an off-take agreement or financial partnership. A 4.5% royalty tax payable to the Saskatchewan government. An effective income tax rate of 30%. A mine life of 40 years based on current and expected resource escalation due to the continuous nature of the orebody. A mine operating cost of $75/t. A CAD/USD exchange rate of 1.0.
Based on these assumptions, Athabasca is currently trading at a 21% discount to our 10% net asset value per share of $9.58. We derive a 12-month target price of C$9.50 by applying a 1.0x multiple to the NAVPS.
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Discount Rate Source: Canaccord Adams:
8% 10%
We have assumed a 40:60 debt:equity ratio, believing that the company will not be able to raise predominantly debt. Management is in early discussions with potential off-take partners and investors to offer the company debt financing. As illustrated by the chart above, the risk to the mix between 40:60 and 60:40 debt:equity is to the upside in valuation. We believe the company will be able to raise the appropriate funding. The questions are: In what form and with whom? We believe these questions will be answered within the next two years. Figure 199: NAV sensitivity to long-term potash price
$ 9.58 2,200,000,000 2,400,000,000 2,600,000,000 2,800,000,000 3,000,000,000 450 9.58 8.86 8.14 7.43 6.71 Potash Price (FOB Vancouver) 500 550 11.01 12.45 10.3 11.73 9.58 11.01 8.86 10.30 8.14 9.58 600 13.88 13.17 12.45 11.73 11.01
Capex
With a long-term KCl price of US$500 fob Vancouver and assuming a financial raise of $2.9 billion, we have arrived at an NAV of $9.58. The chart concludes that relative percentage changes in potash pricing are more than twice as sensitive to similar changes in financial raise. We do not offer financial comparisons within potash deposits based on resources or pounds in the ground as the deposits are continuous and relatively easy to find. The value added is derived from a geologically significant resource, a strong management team and financial backing to move it forward.
CONCLUSION
We believe Athabasca Potash will benefit over the long term from sustained potash prices, low operating costs, strong margins and the ability of management to bring the current project to production. However, based on our valuation, we believe that the risk reward is balanced. As such, we are initiating with a HOLD and a C$9.50 target. Due to the assumed 40:60 debt:equity ratio and estimated $2.6 billion in capex, we believe that our target price upside of 27% does not warrant a Buy recommendation given the inherent risk in the project versus the current share price.
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Figure 200: Cash flow statement, Athabasca Potash, FYE Dec

FY09E 31-Dec-09 (16,000,000) 3,428,672 (12,571,328) FY10E 31-Dec-10 (46,721,858) 3,531,532 (43,190,326) FY11E 31-Dec-11 (92,975,122) 3,637,478 (89,337,644) FY12E 31-Dec-12 (93,227,733) 3,746,602 (89,481,131) FY13E FY14E 31-Dec-13 31-Dec-14 (93,227,733) 336,243,344 - 132,152,366 - 36,026,073 3,859,000 3,974,770 24,960 (90,274,557) (89,343,773) 418,121,996 FY15E 31-Dec-15 445,005,844 132,152,366 47,679,198 4,094,013 (22,500,000) 606,431,421 FY16E 31-Dec-16 653,973,344 132,152,366 70,068,573 4,216,834 (37,500,000) 822,911,116 FY17E 31-Dec-17 652,429,844 132,152,366 69,903,198 4,343,339 858,828,746 FY18E 31-Dec-18 327,759,169 132,152,366 35,117,054 4,473,639 50,000,000 549,502,227
Net Income (Loss) Non-cash Adjustments Amortization Future income taxes (recovery) Stock based comp Net change in W/C CFO
Cash flows from investing Purchase of capital assets (Project) (25,000,000) Sustaining Capex Proceeds from disposal of mineral properties CFI Cash flows from financing Advances to related party Proceeds from issuance of shares Proceeds from Debt Issuance Deferred share issue costs Share issuance costs CFF Net change in cash flows Cash beginning of period Cash end of period CFPS EPS (25,000,000) 45,000,000
(260,000,000) (260,000,000)
(806,000,000) (806,000,000) (728,000,000) -
(2,500,000) (2,500,000)
(2,500,000) (2,500,000)
(2,500,000) (2,500,000)
(2,500,000) (2,500,000)
(2,500,000) (2,500,000)
(806,000,000) (806,000,000) (728,000,000)
200,000,000 1,150,000,000 45,000,000 1,350,000,000
300,000,000 300,000,000
600,000,000 600,000,000
650,000,000 650,000,000
(400,000,000) (400,000,000)
7,428,672 1,046,809,674 (595,337,644) (295,481,131) (167,343,773) 415,621,996 603,931,421 820,411,116 856,328,746 147,002,227 23,461,995 30,890,667 1,077,700,340 482,362,696 186,881,565 19,537,792 435,159,787 1,039,091,208 1,859,502,324 2,715,831,070 30,890,667 1,077,700,340 482,362,696 186,881,565 19,537,792 435,159,787 1,039,091,208 1,859,502,324 2,715,831,070 2,862,833,298 (0.29) (0.37) (0.68) (0.74) (0.99) (1.03) (0.64) (0.66) (0.47) (0.49) 2.19 1.76 3.18 2.34 4.32 3.43 4.51 3.42 2.88 1.72
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Figure 201: Comparables

EPS Company Producer Agrium Inc CF Industries ** Hanfeng Evergreen * Migao Corp * Mosaic Co Potash Corp of Sask Terra Industries ** Average Non-producer Athabasca Potash Phoscan Chemical Potash One MagIndustries Ticker AGU CF HF MGO MOS POT TRA Currency C$ US$ C$ C$ US$ C$ US$ Shr Price $ $ $ $ $ $ $ 99.22 147.16 12.05 8.15 129.43 211.25 45.16 Target Price C$160.00 NR C$16.00 C$11.75 US$210.00 C$425.00 NR 2008 9.19 14.06 0.51 0.50 4.16 12.40 4.33 2009 12.42 19.01 0.78 0.76 13.22 25.21 4.65 2008 8.52 17.66 0.60 0.59 5.25 9.67 5.64 CFPS 2009 11.80 22.42 0.90 0.92 12.56 21.77 7.14 2008 10.8 10.5 23.6 16.3 31.1 17.0 10.4 17.1 P/E 2009 8.0 7.7 15.4 10.7 9.8 8.4 9.7 10.0 2008 11.6 8.3 20.1 13.8 24.7 21.8 8.0 15.5 P/CF 2009 8.4 6.6 13.4 8.9 10.3 9.7 6.3 9.1
API FOS KCL MAA
C$ C$ C$ C$
$ $ $ $
7.57 1.75 4.29 3.15
C$9.50 C$4.70 C$7.75 C$8.50
*Covered by Michael Deng **Estimates for CF and TRA from Bloomberg July 3, 2008 Source: Canaccord Adams
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NOTES
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NOTES
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APPENDIX: IMPORTANT DISCLOSURES Analyst Certification:

Each authoring analyst of Canaccord Adams whose name appears on the front page of this investment research hereby certifies that (i) the recommendations and opinions expressed in this investment research accurately reflect the authoring analysts personal, independent and objective views about any and all of the designated investments or relevant issuers discussed herein that are within such authoring analysts coverage universe and (ii) no part of the authoring analysts compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed by the authoring analyst in the investment research. Coverage Universe # % 353 61.8% 59 10.3% 136 23.8% 23 4.0% 571 100.0% IB Clients % 38.0% 61.0% 24.3% 13.0%
Distribution of Ratings:
Global Stock Ratings (as of 4 July 2008)
Rating Buy Speculative Buy Hold Sell
Canaccord Adams Ratings System:
BUY: The stock is expected to generate risk-adjusted returns of over 10% during the next 12 months. HOLD: The stock is expected to generate risk-adjusted returns of 0-10% during the next 12 months. SELL: The stock is expected to generate negative risk-adjusted returns during the next 12 months. NOT RATED: Canaccord Adams does not provide research coverage of the relevant issuer. Risk-adjusted return refers to the expected return in relation to the amount of risk associated with the designated investment or the relevant issuer.
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Keith Carpenter, MBA, CFA 416.869.7325 keith.carpenter@canaccordadams.com Neal Gilmer, MBA 416.869.7294 neal.gilmer@canaccordadams.

The Modernization of the BRICs

The Modernization of the BRICs

GLOBAL MACRO OVERVIEW

Source: United States Census Bureau

The Modernization of the BRICs

60- 64 50- 54 40- 44 30- 34 20- 24 10- 14 0- 4

50- 54 40- 44 30- 34 20- 24 10- 14 0- 4 15 10 5 0 In million 5 10 15

Source: United States Census Bureau

Aging and urbanization

The Modernization of the BRICs

Source: United Nations Department of Economics and Social Affairs/Population Division

The Modernization of the BRICs

70% of the world population is expected to live in urban areas by 2050.

Source: United Nations Department of Economics and Social Affairs/Population Division

The impact of urbanization on agriculture

The Modernization of the BRICs

Figure 5: Changes in dietary consumption with urbanization in 180 countries

The Modernization of the BRICs

FDI inflows (in US$ billion)

20% 9% 10% 0% -4% -10%

40 13% 20 0.05% 0 2003 2004 2005 2006 2007

Source: UNCTAD, World Investment Report 2007

The Modernization of the BRICs

Annualized FDI growth

7,736 CAGR 9.0%

50% 40% 30% Real GDP Growth

Source: The Economist Intelligence Unit (EIU)

The Modernization of the BRICs

50% 40% 30% Real GDP Growth

India has been growing at a high rate of over 8% since 2003.

Nominal GDP (USD billion)

The Modernization of the BRICs

The Modernization of the BRICs

592 432 7.3% 7.2% 4.7% 2003 2004

Total Exports Manufactured goods

Fuels Ores and metal

The Modernization of the BRICs

The Modernization of the BRICs

Figure 11: Brazils GDP growth

The Modernization of the BRICs

The Modernization of the BRICs

The Modernization of the BRICs

THE REST OF THE WORLD

Source: United Nations Conference on Trade and Development (UNCTAD)

The Modernization of the BRICs

Source: United Nations Conference on Trade and Development (UNCTAD)

The Cairns Group

The Modernization of the BRICs

The Modernization of the BRICs

INDUSTRIALIZATION OF THE BRIC COUNTRIES

US China India Brazil Russia Source: EIU

2.3% 6.8% 8.5% 5.2% 4.3%

The Modernization of the BRICs

Figure 18: Per capita consumption of food, beverages and tobacco

2000 China India

The Modernization of the BRICs

Figure 19: Urban population as a % of total population

25% 0% USA Brazil 1990 Russia China India 2010E Nigeria

The Modernization of the BRICs

Chinese Food, Beverages and Tobacco Market Forecast Report

The Modernization of the BRICs