Enabling Policies for Investment

A Banking Perspective
Veiverne Yuen, Senior Analyst Food & Agribusiness Research and Advisory 19 November 2008

What Well Cover Today

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Perspectives The Cost of Money Making Investments Moving Forward

Food & Agribusiness Research and Advisory

Perspectives
A brief overview of Rabobank, Banking & Finance

Food & Agribusiness Research and Advisory

Section Overview
Rabobank Point of View A Simple Framework

A commodity appears, at first sight, a very trivial thing, and easily understood. Its analysis shows that it is, in reality, a very queer thing, abounding in metaphysical subtleties and theological niceties. - Karl Marx

Food & Agribusiness Research and Advisory

Rabobank International
Present in 43 countries worldwide with 1,508 offices Over 60,000 staff serving over 9,000,000 clients Ranked 4th safest bank in the world
Global Finance, September 2008

AAA rated
Standard & Poors, Moodys, since 1981 Dominion Bond Rating Service, since 2001

Best Investment Bank in the Netherlands

July 2008

Total assets of EUR 570.5 billion

Rabobank, December 2007

Net profit of EUR 2.7 billion

Rabobank, December 2007

Food & Agribusiness Research and Advisory

A Knowledge Leader in Food & Agribusiness

Animal Protein Beverages Clean Technology Dairy Farm Inputs Food Fruit, Veg & Flowers Grains & Oilseeds Non-Food Soft Commodities
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Asia: 21 professionals in 10 offices

Specialists in all key F&A sectors

Global team of over 80 analysts

Food & Agribusiness Research and Advisory

Northern Corridor Economic Region, Malaysia

Developed a strategic blueprint for five key vertically-integrated sectors in the NCER
Opportunity analysis:
Aquaculture Animal Husbandry Fruits and Vegetables Specialty Crops Paddy

Comprehensive business plan:

Identify local comparative advantage Develop a framework for an aggregation and distribution Identify downstream value-add industries

Integrate potential players and existing stakeholders:

Rabobank Analysis (2008)

Access global network of Agricultural companies Bring in global expertise Develop an implementation plan Align stakeholder interests and strategies
Food & Agribusiness Research and Advisory

Linking the Integrated Value Chain

Optimised local resources with imported, high protein feedstuff to improve feedlots
Local crops Corn Palm: OPF, PKC Broken rice Local silage & by-products Fruit by-products Palm: OPF, PKC Kenaf Rice bran and straw Corn stalks Centralize procurement for economy of scale Soybean meal Minerals Vitamin supplements Medicinal additives Energy (local) Aggregate Crop Processin g Local silage directly available at farm Kenaf Rice straw Corn straw Napier grass

Roughage (local) Feed R&D Farms High Protein Supplement (import) Formulation Optimizing Feed Mill Center Integrated system to ensure feed quality & cost leadership partnership with GLC and entrepreneur in contracting supply to feedlot Farms

Farms

Traceability and Transparency throughout the Value Chain

Rabobank Analysis (2008)

Food & Agribusiness Research and Advisory

Financing in Perspective
What can be done?
Debt Equity Foreign Exchange Commodities

For whom?
Product: Trade finance, FX, guarantees, insurance, etc Company: Projects, short-term credit, insurance, assurance, FX, etc

Food & Agribusiness Research and Advisory

A Simple Framework
How do we make financial institutions less afraid? What are they afraid of? What reassurances can we provide?

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Food & Agribusiness Research and Advisory

The Cost of Money

Dealing with credit risk

Food & Agribusiness Research and Advisory

Credit Risk
The risk that a counter party to a transaction will fail to perform according to the terms and conditions of the contract, thus causing the holder of the claim to suffer a loss. - FoxFMC

The possibility that a debtor may not be able to repay. - Sybe Learning The risk arising from the failure of borrowers and counterparties to meet their repayment commitments. Credit concentration risk arises on a portfolio basis where the bank has significant aggregated exposures to particular credit segments or portfolios. - Nedbank Group

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Food & Agribusiness Research and Advisory

Defining Credit Risk

Willingness

Ability

Product
Who are the counterparties? What is their credibility? What is the product worth? What is the recovery value? Who else is willing to buy?

Project
Who is involved? What is being produced? How big is this project? What are the future cash flows? How certain are these cash flows?

What is the enforceability of my contract?

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What Influences Credit Risk?

Factors
Price Risk Market Risk Foreign Exchange Risk Reputational Risk Sovereign Risk Interest Rate Risk

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Food & Agribusiness Research and Advisory

Example: Vietnam Catfish Sector

Key Risk Factors
Foreign Exchange Risk Interest Rate Risk Trader Catfish Farmer
VND Product Flows Cash Flows

USD

VND

Input Provider

USD

Processor Exporter

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Food & Agribusiness Research and Advisory

Enhancing Credit Risk

Making financiers less afraid
Collateral & cross-collateral
Product itself, physical assets, rights to farm inputs, etc

Size / Volume

Cooperative farms, dairy zones, etc

Product has good access to market (easily tradeable)

Milk powder vs Liquid milk

Sovereign risk offtake

Joint financed by government, International Finance Corp, Asian Development Bank, etc

Guarantees
By government, institution, other bank, etc

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Food & Agribusiness Research and Advisory

Making Investments
How attractive is a project?

Food & Agribusiness Research and Advisory

Bear In Mind
Any investor is concerned, almost to exclusion, with financial returns:
ROE: Return on Equity ROA: Return on Assets PBP: Payback Period IRR: Internal Rate of Return FCF: Free Cash Flow

These factors are dependent on a number of items:

Cash Flow Projections Interest Rates Ease of Exit of Project
Food & Agribusiness Research and Advisory

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Enhancing the Investment Profile

Making investors less afraid
A solid business plan
Well thought through, clear objective, reliable financial projections

Clear delineation of stakeholder roles A good financial plan Risk participation

The investor does not want to go it alone

Investor, national government, regional government, supranational, local farmers

Where to raise money, how to finance interest costs, a clear hedging strategy

Incentives
The investor always wants to have a clear competitive advantage, at least a level playing field

A clear exit strategy

An investment is pointless if you cannot realise the gains

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Food & Agribusiness Research and Advisory

Example: Poultry in Malaysia

Designed a flagship project and a strategic development roadmap for Poultry in the ECER
Primary research:
Site visits Meetings with brown-field stakeholder companies On-the-ground analysis of production & processing capability Comparisons with overseas companies in Thailand, Brazil

Develop strategic blueprint:

Flagship projects to demonstrate competitive advantage Build relationships along the value chain Identify high-value export markets

Integrate potential players and existing stakeholders:

Access global network of Agricultural companies Bring in global expertise Develop an implementation plan & investor strategy Align stakeholder interests and strategies
Food & Agribusiness Research and Advisory

Rabobank Analysis (2008)

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Poultry Value Chain

What are Revenue enhancers and Cost reducers at every level of the value chain?
Feed Mill Optimal feed mix Based on breed, age, conditions, focus on meat or egg production Cost-sensitive; local vs imported Broiler Farm Hatchery Breeding Stock Farms Focus on day-old-chick (DOC) production Breeds suited to local growing conditions Best production methods and techniques Avian influenza control Optimal feed & vaccination schedules Demand-driven production Processing Plant Vertically integrated Cold chain distribution Export market analysis Certification Marketing
Rabobank Analysis (2008)

Layer Farm

Distribution

Retail & Food Service

Product positioning outside of Malaysia and Singapore Halal, GAAP, HACCP certification
Food & Agribusiness Research and Advisory

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Moving Forward
Past strategic development projects

Food & Agribusiness Research and Advisory

A quick recap
We have learned that financial institutions can be:
Insecure Afraid of risk Possibly irrational Not overly benevolent Heavily influenced by politics

Successful investing is anticipating the anticipations of others - John Maynard Keynes

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Food & Agribusiness Research and Advisory

Are Banks the Only Solution?

Development funds Sovereign wealth funds Private equity Venture capital Hedge funds Supranationals

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Food & Agribusiness Research and Advisory

Improvements
Involve financial stakeholders early in the process
Profit motive with a market focus must be the primary objectives

Good access to information & research

Better information = less uncertainty = better financing

Clearly articulate government / policy support

Lower risk = lower risk-rated return = higher willingness to provide financing

Be confident!
Financing & Investing decisions are still a judgment calls made by people

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Food & Agribusiness Research and Advisory

Suggestions

Asian Dairy Exchange

Provide price hedging in Asia

Dairy Farmers Milk credit bureau

Historical data will help financiers make decisions and reward good farmers with better support

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Food & Agribusiness Research and Advisory

Veiverne Yuen
Senior Analyst Food & Agribusiness Research and Advisory Rabobank International Singapore t: +65 9736 8370 e: veiverne.yuen@rabobank.com

Food & Agribusiness Research and Advisory

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