Absa AgriBusiness

Presenter nameSubject

ABSA AgriBusiness

15 June 2009

Disclaimer: Although everything has been done to ensure the accuracy of the information, the Bank

takes no responsibility for actions or losses that might occur due to the usage of this information.

Absa AgriBusiness

Discussion agenda

1. Macro economic trends – World social spend supports agriculture

2. Agricultural insights - Golden days for agriculture is back

3. Africa the new frontier

Absa AgriBusiness

Can you make a cup of coffee?

IF you answered yes, be

sure with out a market this

will be impossible

The essence of food

security therefore lies in a

efficient free market as

this will insure the effective

allocation of scarce recourses

Absa AgriBusiness

Market principles within agriculture

• Price risk trends– South African farmers price exposure to the outside world is calculated

to be 60-70% and are therefore by implication global players in a global market.

– This implies that farmers do not have any control over the following factors like international production trends, international farming subsidies, exchange rates, import and export tariffs.

– They therefore have very little control over price volatility as they are price takers, with an additional exposure to prices volatility as prices can swings from import parity to export parity and vice a versa depended on local supply and demand. Price volatility therefore has a direct effect on the potential of a farmer to repay his debt, this therefore increases the credit risk of the client. Price volatility risk can however easily be offset by forward, future or derivative instruments.

• Production risk trends– Production risk due to the vagaries of the South African climatic has

always been with us (drought, hail etc). Due to the liberalisation and deregulation of the agricultural market new risks like imported deceases, pests and substances (bird flue, melamine etc) also have an effect on production volumes and therefore increase the risk of producers to service their debt. Production volatility can however easily be managed by insurance products like drought insurance or by the use of cutting edge gene technology.

Framers therefore have to manage price and production volatility if they want to make a success of their business

Like wise Absa will have to develop new commodity focused finical solutions to manage these risk to minimize our credit risk.

SA Rainfall trends

0

200

400

600

800

1000

59/60

64/65

69/7

0

74/7

5

79/8

0

84/85

89/90

94/9

5

99/0

0

04/0

5

'10/

11

Rai

n(m

m)

Rain 3 yr Avg Long-term Avg

SA Agriculture exposure to International market

R -

R 10,000

R 20,000

R 30,000

R 40,000

R 50,000

R 60,000

R 70,000

R 80,000

R 90,000

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

0%

10%

20%

30%

40%

50%

60%

70%

80%

Imports Exports In & Ex as % of GPV

SA White maize price (R/t)

200

700

1,200

1,700

2,200

2,700

3,200

3,700

Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11

Import Parity Export Parity Domestic

Absa AgriBusiness

Market principles within agriculture

Cost curve

In the long term agriculture is experiencing a cost curve of approximately 3% per

annum (The price of Farming requisites increases faster than producer prices

however for 2008/09 season a cost curve of more than 30% is expected).

To survive this, farmers need to become more productive (increase output in

relation to inputs) this is mainly done by improving production efficiencies

through the use of technology, value adding and lowering fixed costs

(economies of scale)

This to a large extend implies that farming units will continue to

grow in size (les clients Year on Year)

World agriculture is poised to enter a new growth phase that will be

much greater than colonization and industrialization.

• During the period of industrialization after the second world war,

agricultural production expanded exponentially, compared to the growth in

population (due to the development of fertilizer and production machinery).

• Production of coarse grains, beef and mutton however peaked during mid

eighties due to availability of natural resources. Commodities like poultry

and pork continued to grow as they were able to utilize surplus coarse

grains.

• Production has once again started to increase due to advances in bio-

technology (GMOS etc.)

Production volumes will continue to increase thus improving the

survival potential of agriculture in general

Maize yield

-

1.00

2.00

3.00

4.00

5.00

6.00

1960 1965 1970 1975 1980 1985 1990 1995 2000 2005

(to

n/h

a)

World yields SA yields

Maize yield

-

1.00

2.00

3.00

4.00

5.00

6.00

1960 1965 1970 1975 1980 1985 1990 1995 2000 2005

(to

n/h

a)

World yields SA yields

Agricultural Cost curve trends (Index 1980 = 100)

0

500

1000

1500

2000

2500

3000

3500

4000

4500

5000

1980 1983 1986 1989 1992 1995 1998 2001 2004 2007

Gross producer value Input cost

Absa AgriBusiness

World agriculture commodity prices to increase substantial over the medium term

There are two main driving forces at work that will have a

positive impact on agricultural commodity prices

namely:

• Global Warming

Sentiment around global warming is driving legislature

around the world to continuously push for the

implementation of so-called carbon friendly

legislation. As agriculture is the prime beneficiary this

type of legislation (due to the ability of plants to extract

carbon from the air) new markets will place upward

pressure on agricultural commodity prices. Agriculture

could however never produce enough energy to replace

all fossil fuels.

• Demand for Food and Energy

During the late nineties Capitalism replaced Communism

as economic system in the world (signs of the time where

the collapse of the Berlin wall in ’98 the repatriation of

Hong Kong in to China in ‘99)

This led to an exponential economic growth in Eastern

European, Middle East and Asian countries with a

resulting increase in the buying power of these

consumers, hence the growth in demand for food and

energy

World Crude oil price & production trends

0.00

20.00

40.00

60.00

80.00

100.00

1970 1975 1980 1985 1990 1995 2000 2005 2010

Pri

ce (

US

$/b

rr)

40.00

50.00

60.00

70.00

80.00

Pro

du

cti

on

(M

brr

/day)

Crude Oil Production Price

Iran /

Irac

Berlin w all

Hong Kong

Financial

crisis

USA Maize price (US $/ton)

-

20.0

40.0

60.0

80.0

100.0

120.0

140.0

160.0

180.0

200.0

220.0

240.0

1966 1971 1976 1981 1986 1991 1996 2001 2006 2011

Absa AgriBusiness

Agricultural economic indicators

Net Farm Income

• Net Farm Income determines the rate at which capital can be repaid. As a result, fixed investment in agriculture (property and fixed infrastructure) is to a large extent determined by Net Farm Income. Property values are however further supported by Lifestyle buyers as well as the Governments restitution and redistribution program of agricultural land.

• Net Farm Income as a portion of total agricultural debt has however continued to declined over time placing pressure not only on the security value of a farm but also on the ability of farmers to repay their debt should something go wrong. This combined with the need for more production credit, has substantially increased the risk within the farming industry.

Security

• In financing farmers there are two main criteria namely; cash flow and asset based lending. Although there has been a shift in the past few years to cash flow based financing, asset values remain important in limiting credit risk and are still being used in calculating credit exposure in terms of various ratios. The ratio of farm debt to agricultural fixed assets (farm land) has substantially improved over the past decade since the liberalisation and deregulation of the agricultural market, a clear sign that agricultural profitability has improved substantially. The debt to turnover (Gross Production Value) ratio has also improved substantially lowering the risk of cash flow based finical lending products based on the repayable of the farming enterprise

Farm income and expenditure

0

20000

40000

60000

80000

100000

120000

140000

160000

180000

69/70 73/74 77/78 81/82 85/86 89/90 93/94 97/98 01/02 05/06 09/10

Yearly Farm Debt Commitment Expenditure on InputsGross Producer Income Net Farm IncomeValue of Fixed Assets 50% margin

A g ricult ural D eb t t o asset and t urnover rat io

0%

20%

40%

60%

80%

100%

120%

1980 1985 1990 1995 2000 2005

Debt/Fix Asset Debt/GPV

Absa AgriBusiness

Discussion agenda

1. Macro economic trends – World social spend supports agriculture

2. Agricultural insights - Golden days for agriculture is back

3. Africa the new frontier

Absa AgriBusiness

12

3

45

6

7

Pool gebied

Berg gebied

Toendra / Taiga

Gematigde

Mediterreens

Droë Grassvelde

Woestyn

Subtrope

Trope

Klimaat Topografie

12

3

45

6

7

Pool gebied

Berg gebied

Toendra / Taiga

Gematigde

Mediterreens

Droë Grassvelde

Woestyn

Subtrope

Trope

Klimaat Topografie

Polar area

Mountain area

Tundra / Taiga

Moderate

Mediterranean

Dry grasslands

Desert

Subtropical

Tropical

Climatic topography

Absa AgriBusiness

Market environment – World Market growth potential (2)

Pointers

• Production growth

potential for 2050 must be

viewed against expected

growth in demand of

approximately 40 – 60 %

over the same period

• This is mainly the result of

an expected population

growth rate of between

0,9% to 1,1% and

improvements in the

economic welfare of

consumers due to

economic growth.

• Only a portion of

economic growth will

impact on the growth in

demand for food as food is

classified as one of the

basic needs.

1980

2004

Growth 1980 tot

2004

Expected Production

2050

%

North and Central America

Agricultural Land (Ha million) Arable Land (Ha million)

Coarse grain production (Ton million) Oil seed production (Ton million)

Meat production (Ton million)

624 279 337 13 31

621 272 478

23 50

-0.5% -2.3% 41.9% 79.4% 64.2%

611 278 579 38 73

-1.7% 2.0%

21.0% 66.0% 44.0%

Europe

Agricultural Land (Ha million) Arable Land (Ha million)

Coarse grain production (Ton million) Oil seed production (Ton million)

Meat production (Ton million)

227 141 258

5 39

487 304 466

16 53

114.4% 116.0%

80.6% 229.9%

33.3%

477 289 671 31 87

-2.0% -5.0% 44.0%

102.0% 66.0%

Russia

Agricultural Land (Ha million) Arable Land (Ha million)

Coarse grain production (Ton million) Oil seed production (Ton million)

Meat production (Ton million)

553 232 170

3 15

567 207 157

5 10

2.4% -10.8% -7.8% 56.7%

-36.9%

578 217 171

8 18

2.0% 5.0% 9.0%

65.0% 88.0%

South America and Caribbean

Agricultural Land (Ha million) Arable Land (Ha million)

Coarse grain production (Ton million) Oil seed production (Ton million)

Meat production (Ton million)

717 146 88 6

16

784 169 158

21 38

9.4% 16.0% 79.2%

220.8% 138.4%

831 235 253 46

101

6.0% 39.0% 59.9%

124.0% 168.0%

Absa AgriBusiness

Market environment – World market growth potential (3)

Pointers

• In the short term stiff

competition in terms of

production expansion will

come from South America.

• The most significant

untapped opportunity is

Africa

• As production expansion

exceed demand

expectations, prices of

soft commodities will

remain fairly depressed

forcing farmers to improve

efficiencies. This is only

possible if producers

incorporate new

technology to improve

efficiencies or use

efficiencies of scale.

1980

2004

Growth 1980 tot

2004

Expected Production

2050

%

Africa

Agricultural Land (Ha million) Arable Land (Ha million)

Coarse grain production (Ton million) Oil seed production (Ton million)

Meat production (Ton million)

1,077 178 73 4 7

1,111 211 128

8 12

3.2% 18.3% 75.9% 67.4% 79.9%

1,200 337 323 20 28

8.0% 60.0%

153.0% 172.0% 132.0%

Asia

Agricultural Land (Ha million) Arable Land (Ha million)

Coarse grain production (Ton million) Oil seed production (Ton million)

Meat production (Ton million)

1,153 458 632 18 29

1,684 573

1,038 66

108

46.1% 25.1% 64.2%

261.0% 277.1%

1,852 642

1,525 149 239

10.0% 12.0% 47.0%

126.0% 121.0%

Australia and New-Zeeland

Agricultural Land (Ha million) Arable Land (Ha million)

Coarse grain production (Ton million) Oil seed production (Ton million)

Meat production (Ton million)

483 44 16 0 3

447 49 31 1 4

-7.4% 10.0% 91.1%

504.2% 41.0%

429 59 61 2 7

-4.0% 22.0% 94.0%

223.0% 80.0%

World

Agricultural Land (Ha million) Arable Land (Ha million)

Coarse grain production (Ton million) Oil seed production (Ton million)

Meat production (Ton million)

4,117 1,332 1,486

43 123

4,917 1,616 2,298

117 236

19.4% 21.3% 54.6%

170.7% 91.8%

5,978 2,057 3,584

295 552

4.9% 15.3% 45.9%

114.0% 101.5%

Absa AgriBusiness

Thank you for the opportunity to share some ideas

Contact details

E Janovsky

Tel (011) 350 6102

Email ernst.janovsky@absa.co.za

Disclaimer: Although everything has been done to ensure the accuracy of the information, the Bank takes no

responsibility for actions or losses that might occur due to the usage of this information.