ds green assets€¦ · ds green assets perspectives on commodity risk management & mitigation...

DS Green Assets

Perspectives on Commodity Risk Management & Mitigation Strategies

September 2015 - Global AgInvesting Asia

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page

I Risks in Agricultural Investments 4

II. Risk in Focus: Commodity Risk 5

III. Commodity Risk Mitigation Strategies For The Financial Investor 7

Appendix: DSGA Scope & Track Record, Current Projects, Detlef Schoen CV 9

Contact17

Contents

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I. Risks in Agricultural Investments

4

There are four essential risk categories in agricultural investments:

most generic

• Political Risk

• Price Risk

• Weather Risk

• Management Risk

most specific

The least researched and most disputed parameter in agricultural investment allocation probably

are the discount factors required to translate a gross target returns to target returns adjusted for

political and management risk factors.

Whether or not individual investors agree with the “snapshot” scores and the scale used below –

the important message here is that there need to be scores and a scale…:

Risk vss. Return Analysis

sheep & beef NZ + AUS large scale dairy AUS

arable leasing USA & Aus pastoral dairy AUS cotton AUS

pastoral dairy NZ arable cropping AUS

cash returns

20%

15%

10%

5%

0% political &

2 4 6 8 10 12 14 Implementation Risk

arable cropping Argentina arable cropping Russia & Ukraine

maize & soybeans Brazil maize & soybeans Paraguay arable cropping sub-Saharan Africa

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II. In Focus: Commodity Risk

Risk Component I

Volatility – in Simple Terms: Severity of Price Changes

Different Food Commodities Exhibit Different Volatility

“Volatility measures how much prices have moved or how they are

expected to change. Historical volatility represents past price

movements and reflects the resolution of supply and demand factors. It

is often computed as the annualized standard deviation of the change in

price.”

FAO Food Outlook - June 2008. VOLATILITY IN AGRICULTURAL COMMODITIES – AN UPDATE

Non-tropical

Agriculture

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II. In Focus: Commodity Risk

Risk Component II

Cyclicality – in Simple Terms: Speed of Supply Response

Different Food Commodities Exhibit Different Price Cyclicality

http://public.wsu.edu/~forda/Hog%20Cycle%20Jan%202015.pdf – The Hog Cycle

“These notes focus on pork, a basic commodity which can be

supplied by many different producers without qualitative

differentiation. Farmers raise hogs which are slaughtered, and the

pork is sold into a commodity market which exhibits swings in prices,

with the period of oscillations ranging from three to six years. The

oscillatory tendency has persisted over many decades.”

Price Decomposition for Non-tropical Agriculture – SUPER CYCLES OF COMMODITY PRICES SINCE THE MID-

NINETEENTH CENTURY José Antonio Ocampo, Columbia University, Presentation at the International

Monetary Fund March 20 2013

Non-tropical

Agriculture

7

The “Toolbox” *

* Excluding specific crop insurance programs such as those in the USA

III. Commodity Risk Mitigation Strategies For The Financial Investor

1. “Hedging”

a) The Effects:

o flattening of the volatility bandwidth through

locked-in forward futures prices

b) Shortcomings & Pitfalls:

o losses and profits are “hedged” = reduced in

equal measure over time

o no long-term “insurance” available

o basis risk (= non-futures component) very

difficult to hedge

o costly (margin calls)

o many markets don´t have a liquid futures market

2. Diversification

a) The Effects:

o spreading of price risk over several sectors

o can be combined with diversification of

weather, political and management risk


o at any given moment, different sectors are at

different points in their cycles � simultaneous

deployment has opportunity costs

o depending on cross-price elasticities and income

elasticities, instead of compensation there can

be accumulation effects

o does not protect against macro events

3. Vertical Integration

a) The Effects:

o capturing downstream margins � ability to

cross-subsidize

o “de-commoditization” through direct access

to the consumer


o many ag commodities only become “de-

commoditized” very late in their value chain

(grains, oilseeds) at which point integration

becomes very capital intensive

o vertical integration only works effectively if the

value chain is optimised holistically - e.g. from

the genetics of the animals to the final product

in supermarket or restaurant

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Diversification and Vertical Integration Combined

The Trade-Off: Risk versus Critical Mass

Examples :

• I = dairy farm

• I + II = cheese (family farm) or ultrafiltrated functional drink

(large-scale platform) produced on-farm

• III = large-scale corporate farming

• IV = large-scale corporate farming with own processing and distribution

(hardly exists for mainstream staple crops plus dairy and meat -

the “ABCDs” don´t farm themselves….)

III. Commodity Risk Mitigation Strategies For The Financial Investor

niche consumer outlet supermarket

lowest highest

II IV

1 sector multiple sectors

holistic value chain holistic value chains

"critical

mass"

risk investment

volume

I III

1 sector multiple sectors

primary production primary production

highest lowest

Family Farm Corporate Farming

lowest "critical mass" investment volume highest

highest risk lowest

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DS Green Assets is working with a network of partners to support large-scale financial investors in the

agricultural and agri-business sectors

Appendix I: DS Green Assets Scope & Track Record

I. Functions

a) Investment Strategy

b) Portfolio Construction

c) Manager Selection & Due Diligence

d) Investment Monitoring

e) Investment Management

II. Fields

a) Agri-Business

• Procurement

• Storage

• Transportation

• Processing

• Merchandizing

b) Large Scale Farming

• Beef cattle & sheep

• Dairy

• Grains & Oilseeds

• Cotton

c) Agri-Bulk Logistics

• Transportation chain optimization incl. ocean freight

• Port storage and infrastructure

d) Food Security & Supply Chain Management

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Appendix I: DS Green Assets Scope & Track Record

The DS Green Assets team is an experienced and successful asset managers for institutional farm investments

• At the end of 2014 - through its shareholding in and management contract with Aquila Capital Farms (ACF) - together with partners

AGInvest (NZ) and DFMC / Cowbank (AUS), DS Green Assets was the world´s largest asset manager for institutional dairy farm

investments with AUM of abt. US $ 350m*.

• The network of associated DS Green Assets partners overseeing cotton & grains and sheep & beef are experienced and successful

practitioners with further AUM of abt. US $ 300m*

• The total team have over 350 years of combined farming experience - having primarily dedicated their careers to the agricultural sector

and purchased, managed, improved and sold farming assets over numerous economic and commodity cycles

• At all times, DS Green Assets maintains an Australian deal pipeline of at least 1 bn A $

DSGA has delivered above average returns for its investors (as of Dec 2014) :

Dairy IRR net of fees Standard Deviation Range of Returns

Realised 14.1% 6.3% 4.7% – 28.9%

Unrealised 11.3% 6.1% -2.7% – 24.8%

*Includes partners’ AUM

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Appendix II: DS Green Assets Current Projects

The Opportunity:

• A small group of investors led by the DS Green Assets Team has acquired a farm that is among the top 5% of finishing

farms in Gippsland.

• The farm assets are being placed into a property-owning Farm Trust and leased at 3.5% of the asset value to the

Gippsland Grazing Trust (same ownership) which is the entity employing the manager, owning stock and generating

operating income by selling to Coles. The DS Green Assets team manages the Gippsland Grazing Trust.

• The farm supplies Coles’ exclusive grass-fed beef product. There is strong unmet demand both from Coles and other

processors for grass-fed beef that is produced in a reliable and sustainable system.

• The strategy delivers three revenue events per year i.e. each mob of cattle on average spends approximately 4 months

on the farm before being sold to Coles.

• The current manager has developed the farm over the last 10 years. He has both the capacity and enthusiasm to

develop additional properties to the standard of Dingley Dell Springs. Farms are currently for sale that are suitable for

the same production system.

Project I : Grazing Victoria

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The Proposal :

• Targeted raising of an additional $50m.

• Acquire additional fattening properties to be leased to the Gippsland Grazing Trust under the same terms.

• The Gippsland Grazing Trust adds the supply to the Coles mandate

• Investors acquire pro-rata shares in the management company (Gippsland Grazing Trust) meaning that in addition to the

“safe” lease income they receive exposure to the operations of the farms which include the scale effects that are higher

than what anyone could achieve on any one farm.

• The DS Green Assets team actively manages the Gippsland Grazing Trust in return for sweat equity, plus expenses capped

at 0.6% of total assets p.a. (not including transaction costs).

• Average target returns of the Gippsland Grazing Trust - net of the lease expense - are estimated at 1.5% initially

increasing to 3.5%., resulting in a total cash ROA of 5% – 7%, before leverage effects.

• The initial term of the investment is recommended to be 10 years – exit options range from an orderly sale of individual

farms to a trade sale.

Project I : Grazing Victoria

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Project II : Roll-Out - Genetics To Commercial Beef *

The Plan is to raise $250 Million in Two Phases, allowing

investors the unique opportunity to deploy capital alongside

the current owners who will significantly scale up their existing,

outstanding operations to create one of Australia’s leading beef

cattle operations.

This is an unparalleled opportunity to invest into the only

Australian beef cattle producer that is in full control of its genetic

base. The Company will establish a unique market position by

bringing commercial scale to this demonstrably superior genetic IP.

Principally a seedstock operation, the Company focuses on the breeding and sale of bulls, semen and embryos, alongside a commercial beef

cattle herd, and is undoubtedly one of Australia’s leading suppliers of quality genetics with most of Australia’s top beef producers and many of

the better private family operations relying on their expertise.

Most seedstock operations (studs) generate the vast majority of their income from bull sales, usually held at a single on site auction. For the

seedstock producer a sold bull only generates an income once and the benefit is gained by the buyer. The Company’s superior bulls that will now

be transferred to the own commercial herd will continue to add value to the operation for their whole working lives.

Upon completion, the aggregate turnoff of the combined operation will exceed 26,000 head per annum.

* In cooperation with Directagriculture

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Project III : Low-Cost Import-Displacement Of Fertiliser - The Latrobe Urea Fertiliser Project

Latrobe Fertilisers (“The Company” or “LFL”) is a large-scale agribusiness venture and a “proxy

investment” in Australian agriculture, providing essential inputs to farmers and thus offering

downstream benefits as well. It will have sufficient gasification capacity to produce approx.

520,000 tpa of urea (phase I: 350,000 t), with the long term price of lignite locked in for a 3 * 20

year period. The cost & time to market risk will be mitigated by using widely proven “off-the-shelf”

technology provided by global leaders in their respective fields and by having the plant assembled under a turn-key contract with a proven global

engineering and construction (”EPC”) company. Approval to build is not expected to be an issue, given that the plant will be built within the

precinct of an existing mine and power station, with key environmental consents already in place.

Latrobe Fertilisers will be in a very strong “first to market” position due to a combination of commercial rationale (unassailable captive market)

and zoning restrictions in alternative locations. The Company will have a strong focus on lignite-based soil remediation products . Due to its high

humate and humin content, the Latrobe Valley lignite is also a soil carbon remediation product in its own right, which adds significant value to

the generic urea when produced as a combined urea/carbon granule. (All economic assumptions, however, are based on the production and

distribution of generic urea only.)

The analysis shows that based on an exchange rate of $0.75 the cash cost in A$ of $172 translates into US$ 129 per tonne of urea, which puts LFL

in the lowest operating cost quartile on a global basis, and this at a time of historically low energy prices – with market prices today around A$

470. What makes this project unique is that it is located in the logistical centre of a major demand region, therefore not having to compete for

demand but simply displacing imports. This ability to displace imports - cutting out ocean freight altogether and saving on expensive local port

storage, rail and truck freight - combined with production costs in line with those of major exporters results in a significant competitive

advantage. Latrobe Fertilisers will therefore make very attractive returns even based on today's cyclically low urea prices, and future profitability

is not predicated on an upturn in the market.

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LFL Cash Cost US$129

Table 1 - Cash Cost Comparison Table 2 - Financials

Project III : Low-Cost Import-Displacement Of Fertiliser - The Latrobe Urea Fertiliser Project

Source: Integer research

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Appendix III : Detlef Schoen CV

May 1974

high school degree (Abitur), best

of class

July 1974 – March 1976

Army, Lieutenant i.r., best of class

April 1976 – October 1977

agricultural internship on Nestlé

experimental farm

November 1977 – October 1979

studies of agriculture , Göttingen ,

best of class

November 1979 – July 1981

studies of agricultural economics,

Munich, best of class

November 1981 – October 1990

career with CARGILL, the world´s

leading agribusiness company,

headquartered in Minneapolis /

USA. “Fast track” stations as

- trainee with CARGILL in Hamburg

- trader with CARGILL UK

- Merchandizing Manager, CARGILL

Germany (Grains, Oilseeds, Animal Feed

Ingredients)

- Assistant to Executive Vice President,

CARGILL Europe, London - various

acquisition projects

- Country Manager CARGILL Germany

(CMD, cocoa, coffee, FCOJ, refined veg-

oils, cotton, hybrid seeds),

- Head of EU CMD based in Paris,

responsible for abt. 14 Mill. t trade

volume, 180 employees in 6 offices,

management of price / credit / political

risk, organisation structure; initiated

trading in dairy products and cash grain

options

October 1990

Left CARGILL to become a private

agribusiness entrepreneur by buying a grain

origination company formerly owned by East

German state; establishment of family farm

1996/7

Successful exit from own business, having

grown the business from 60,000 tons p.a.

origination volume to 1 m tons

origination plus 1.5 m tons trading

volume (resulting in abt. 1 bn € turnover

p.a.) and having established the group as

Germany´s largest exporter of quality

wheat, dealing with several hundred

farmers

1997 – 2003

Private agribusiness entrepreneur, until

2001 in partnership with the Cremer

Group / Hamburg.

2004 - 2005

Managing Director International

Grains of the NIDERA group,

one of the leading international

trading companies in grains and

oilseeds, headquartered in

Rotterdam - in charge of a

worldwide network of grain

trading and shipping offices

generating a turnover close to 2

bn USD p.a., heavily involved in

grain origination from Argentina ,

the EU, Ukraine and Russia, the

US, India and China, with

shipments to destinations

primarily in North Africa, South

and East Africa, the Near / Middle

East and South East Asia.

2005

Amicable resignation from NIDERA;

return home to family farm - work as a

farmer and a freelance analyst

specializing in agri-commodities and bio-

fuels

2007 – 2015

AQUILA: responsible for establishing ACF

as a leading asset manager for farm

investments

Contact:

DS Green Assets Pte. Ltd. 61 Alexandra Terrace # 06-19, Harbour Link Complex, Singapore 119936

Australian Office: 308/2 Albert Street, St. Kilda 3182, Victoria German Office: Bardal 18, 21227 Bendestorf

Australian mobile + 61 (0) 4 3740 1111 worldwide mobile +49 (0) 172 401 5556

[email protected] skype: detlef.schoen

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