Grains, Beans and Farmland: The True Diversifiers

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1 Grains, Beans and Farmland: The True Diversifiers Sumit Roy, Moderator Managing Editor HardAssetsInvestor.com Greyson Colvin, Panelist Managing Partner Colvin & Co Michael Cox, Panelist Managing Partner, Equity Research Analyst Piper Jaffray

2 Grains, Beans and Farmland: The True Diversifiers Sumit Roy Managing Editor HardAssetsInvestor.com Greyson Colvin Managing Partner Colvin & Co Michael Cox Managing Partner, Equity Research Analyst Piper Jaffray

3 Grains, Beans and Farmland: The True Diversifiers Michael Cox, CFA Managing Partner, Equity Research Analyst Piper Jaffray

4 Disclosures Disclosures for equity universe of: Mike Cox 1. I or a household member have a financial interest in the securities of the following companies: none 2. I or a household member is an officer, director, or advisory board member of the following companies: none 3. I have received compensation within the past 12 months from the following companies: none 4. Piper Jaffray or its affiliates beneficially own 1% or more of any class of common equities of the following companies: none 5. The following companies have been investment banking clients of Piper Jaffray during the past 12 months: CERE, SANW, MBII 6. Piper Jaffray expects to have the following companies as investment banking clients within the next three months: none 7. Other material conflicts of interest for Mike Cox or Piper Jaffray regarding companies in my universe for which I am aware include: SANW, MBII: underwriting 8. Piper Jaffray received non-investment banking securities-related compensation from the following companies during the past 12 months: REGI 9. Piper Jaffray makes a market in the securities of the following companies, and will buy and sell the securities of these companies on a principal basis: AGCO, AVD, BG, BMI, CCC, CERE, CNH, DD, DE, GPRE, MON, MOS, REGI, SANW, TITN, TRMB 10. Piper Jaffray usually provides bids and offers for the securities of the following companies and will, from time to time, buy and sell the securities of these companies on a principal basis: AGU, CF, LNN

5 E The Big Picture Increasing global food demand due to rising population The World Bank estimates that in 2015, 1 ha will need to feed 5 people, whereas in ha only needed to feed 2 people. Arable land shortages $140 $120 $100 $80 $60 $40 $20 $0 U.S. Farm Income ($Bil) Arable Land (Hectare/Person) Population (Billions) Shift in developing countries diets to higher protein consumption More grain needed to feed livestock Increasing biofuel demand/production ~50% increase in average farm income following the onset of the RFS mandate Source: Piper Jaffray research, USDA, CropLife International, World Bank

6 Global Corn Yield Comparison Corn acreage growth is unlikely to keep pace with global consumption growth. As a result production yields globally must improve to supply population growth and increased protein consumption. Global Corn Production Acreage +/-/= Yield U.S. 97 = 150 China Brazil Eastern Europe EU = 120 Argentina 12 = 130 India 10 = 40 South Africa 7 = 70 Mexico Canada 2 = 145 Total (Wtd Avg) Brazil and Eastern Europe represent the most significant opportunities over the next 3+ years, in our view, from an acreage and yield perspective. China represents a longer term opportunity largely in terms of yield. Source: FAO World Bank, Monsanto company reports, Piper Jaffray research

7 Corn Production & Stocks to Use U.S. Corn Supply / Demand Analysis - Historical & Projected Feb/Mar Sep Est. PJC PJC USDA USDA Estimate Estimate 10-Yr '09/'10 A '10/'11 A '11/'12 A '12/'13 E '13/'14 E '14/'15 E Average Area Planted Area Harvested Yield per Harvested Acre Beginning Stocks 1,673 1,708 1, ,461 New Production 13,094 12,438 12,365 10,780 14,530 13,843 13,500 13,504 Total Supply 14,774 14,182 13,516 11,931 15,187 14,530 14,161 14,964 Feed 5,125 4,793 4,545 4,475 5,400 5,100 5,000 5,300 Ethanol 4,591 5,021 5,011 4,665 4,675 4,900 4,950 4,950 Food, other 1,370 1,406 1,428 1,395 1,435 1,450 1,450 1,450 Exports 1,980 1,835 1, ,500 1,225 1,300 1,600 Total Demand 13,066 13,055 12,527 11,270 13,010 12,675 12,700 13,300 Ending Stocks 1,708 1, ,177 1,855 1,461 1,664 1,407 Stocks-to-Use 13.1% 8.6% 7.9% 5.9% 16.7% 14.6% 11.5% 12.5% 12.0% Despite recent hot & dry weather, farmers we speak with are optimistic about yields, where some in regions less impacted by the unfavorable weather this growing season expect trendline or better yields. We expect 154bpa yields, which likely puts a ceiling on corn prices at the $5 level our checks point to being a key psychological level for farmers around discretionary spending. Though we see two demand drivers that could surprise positively: Ethanol margins are positive which will spur increased production. Exports forecasts are ~30% below historical norms. Source: Piper Jaffray research, USDA, National Corn Growers Association

8 Agriculture The Big Picture Corn Corn Corn Soybean Corn Soybean Revenue: Unit Price Per Acre Unit Price Per Acre Unit Price Per Acre Unit Price Per Acre Unit Price Per Acre Unit Price Per Acre Yield Price/bu $5.50 $6.50 $4.80 $12.50 $4.85 $12.50 Revenue $810 $802 $741 $525 $761 $563 Operating Expenses: Total Fertilizer $171 $186 $152 $75 $135 $66 Total Seed $95 $98 $104 $60 $108 $61 Drying Fuel (gal propane) 13 $3 $33 13 $3 $33 13 $3 $33 3 $3 $8 13 $3 $33 3 $3 $8 Pesticide & Herbicide $35 $45 $46 $31 $46 $31 Labor 3 $12 $36 3 $12 $36 3 $12 $36 2 $12 $24 3 $12 $36 2 $12 $24 Machinery Fuel (gal diesel) 8 $3 $23 8 $3 $23 8 $3 $21 4 $3 $10 8 $3 $21 4 $3 $10 Total Operating Expense $393 $420 $392 $207 $380 $199 Variable Profits $417 $382 $350 $318 $382 $363 Fixed Expenses: Cash land rent 160 $1.25 $ $1.37 $ $1.41 $ $1.41 $ $1.36 $ $1.36 $218 Crop Insurance $20 $19 $19 $9 $19 $9 Machinery Maintenance $14 $14 $14 $14 $14 $14 Interest $15 $13 $12 $6 $11 $6 Other $10 $10 $10 $5 $10 $5 Total Fixed Expense $259 $275 $280 $260 $272 $252 Total Expenses $652 $694 $672 $467 $651 $451 Pre-Tax Income $158 $108 $69 $58 $110 $111 Cost / Margin (Assuming 155bpa corn & 45bpa soybean): Operating Cost per Bushel $2.54 $2.71 $2.53 $4.60 $2.45 $4.43 Total Cost per Bushel $4.20 $4.48 $4.33 $10.38 $4.20 $10.03 Profit Margin per Bushel 23.6% 31.1% 9.7% 16.9% 13.4% 19.8% Source: Piper Jaffray research, USDA, CropLife International, World Bank

9 Important Research Disclosures Analyst Certification Mike Cox, Senior Research Analyst The views expressed in this report accurately reflect my personal views about the subject company and the subject security. In addition, no part of my compensation was, is, or will be directly or indirectly related to the specific recommendations or views contained in this report. Piper Jaffray research analysts receive compensation that is based, in part, on the firm's overall revenues, which include investment banking revenues. Piper Jaffray does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decisions. This report should be read in conjunction with important disclosure information, including an attestation under Regulation Analyst Certification, found at the following site: Ratings and Other Definitions Stock Ratings: Piper Jaffray ratings are indicators of expected total return (price appreciation plus dividend) within the next 12 months. At times analysts may specify a different investment horizon or may include additional investment time horizons for specific stocks. Stock performance is measured relative to the group of stocks covered by each analyst. Lists of the stocks covered by each are available at Stock ratings and/or stock coverage may be suspended from time to time in the event that there is no active analyst opinion or analyst coverage, but the opinion or coverage is expected to resume. Research reports and ratings should not be relied upon as individual investment advice. As always, an investor s decision to buy or sell a security must depend on individual circumstances, including existing holdings, time horizons and risk tolerance. Piper Jaffray sales and trading personnel may provide written or oral commentary, trade ideas, or other information about a particular stock to clients or internal trading desks reflecting different opinions than those expressed by the research analyst. In addition, Piper Jaffray technical research products are based on different methodologies and may contradict the opinions contained in fundamental research reports. Overweight (OW): Anticipated to outperform relative to the median of the group of stocks covered by the analyst. Neutral (N): Anticipated to perform in line relative to the median of the group of stocks covered by the analyst. Underweight (UW): Anticipated to underperform relative to the median of the group of stocks covered by the analyst.

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11 Grains, Beans and Farmland: The True Diversifiers Greyson Colvin Managing Partner Colvin & Co

12 The Rise of the Farmer Average Value per Acre of U.S. Farmland ( ) $3,000 $2,500 $2,000 $1,500 $1, Source: USDA Economic Research Service

13 Record Net Farm Income U.S. Net Farm Income ( ) ($ billions) $130 $110 $90 $70 $50 $ Source: ERS/USDA

14 Valuation of Iowa Farmland Per Acre According to USDA $ 8, Revenues Per Acre $ Land Owner Cash Rent $ Capitalization Rate 5.0% Valuation Per Acre $ 8, Source: USDA and Colvin & Co. Estimates

15 Looking Forward Farmer Debt at 40 Year Lows As of 2013, 78% of Iowa farmland has no debt. Global Demand Story Agricultural output must double by Limited Supply of Arable Land Farmland is disappearing at a rate of two acres per minute. Diversification and Inflation Hedge

16 Thank You. Questions?

17 Grains, Beans and Farmland: The True Diversifiers Sumit Roy, Moderator Managing Editor HardAssetsInvestor.com Greyson Colvin, Panelist Managing Partner Colvin & Co Michael Cox, Panelist Managing Partner, Equity Research Analyst Piper Jaffray