Dairy Development a Rabobank Perspective

8/2/2019 Dairy Development a Rabobank Perspective

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Enabling Policies forInvestment

A Banking PerspectiveVeiverne Yuen, Senior AnalystFood & Agribusiness Research and Advisory

19 November 2008


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Food & Agribusiness Research and Advisory2

What Well Cover Today

Perspectives1

The Cost of Money2

Making Investments3

Moving Forward4


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Food & Agribusiness Research and Advisory

A brief overview of Rabobank, Banking &Finance

Perspectives


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Section Overview

Rabobank

Point of View

A Simple Framework

A commodity appears, at first sight, a very trivial thing, and easily understood. Itsanalysis shows that it is, in reality, a very queer thing, abounding in metaphysicalsubtleties and theological niceties.

- Karl Marx


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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 worldGlobal Finance, September 2008

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

Best Investment Bank in the NetherlandsJuly 2008

Total assets of EUR 570.5 billionRabobank, December 2007

Net profit of EUR 2.7 billionRabobank, December 2007

Rabobank International


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Animal ProteinA Knowledge Leader in Food & Agribusiness

Farm Inputs

Grains & Oilseeds

Soft Commodities

Dairy

Fruit, Veg & Flowers

Non-Food

Food

Clean Technology

BeveragesAsia: 21 professionals in 10 offices

Global team of over 80analysts

Specialists in all key F&Asectors


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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 existingstakeholders:

Access global network of Agricultural companies

Bring in global expertise

Develop an implementation plan

Align stakeholder interests and strategies

Northern Corridor Economic Region,

MalaysiaDeveloped a strategic blueprint for five key vertically-integrated sectors in the NCER

Rabobank Analysis (2008)


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Integrated system to ensure feedquality & cost leadership

partnership with GLC andentrepreneur in contracting supply tofeedlot

Linking the Integrated Value ChainOptimised local resources with imported, high protein feedstuff to improve feedlots

Feed MillCenter

Farms

Farms

Roughage(local)

High ProteinSupplement

(import)

Farms

FeedR&D

Local silage & by-products Fruit by-products

Palm: OPF, PKC Kenaf Rice bran and straw Corn stalks

Centralize procurement foreconomy of scale

Soybean meal Minerals Vitamin supplements Medicinal additives

Local silage directlyavailable at farmKenafRice strawCorn strawNapier grass

Energy(local)

Local crops Corn Palm: OPF, PKC

Broken rice

FormulationOptimizing

Aggregate

Crop

Processin

g

Traceability and Transparency throughout the Value Chain



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Financing in PerspectiveWhat 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


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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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Dealing with credit riskThe Cost of Money


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Credit RiskThe risk that a counter party to a transaction will fail to perform according to theterms 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 theirrepayment commitments. Credit concentration risk arises on a portfolio basis where

the bank has significant aggregated exposures to particular credit segments orportfolios.

- Nedbank Group


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Defining Credit RiskWillingness + Ability

Product Project

Who are the counterparties?

What is their credibility?

What is the product worth?

What is the recovery value?

Who else is willing to buy?

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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Example: Vietnam Catfish SectorKey Risk Factors

Foreign Exchange Risk

Interest Rate Risk

Catfish Farmer

Trader

Processor

Exporter

Product Flows

Cash Flows

Input Provider

VND

VND

USD

USD


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Enhancing Credit RiskMaking financiers less afraid

Collateral & cross-collateral

Size / Volume

Product has good access to market (easily tradeable)

Sovereign risk offtake

Guarantees

Product itself, physical assets, rights to farm inputs, etc

Cooperative farms, dairy zones, etc

Milk powder vs Liquid milk

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

By government, institution, other bank, etc


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How attractive is a project?Making Investments


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Bear In MindAny 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 ProjectionsInterest Rates

Ease of Exit of Project


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Enhancing the Investment Profile


Making investors less afraidA solid business plan

Clear delineation of stakeholder roles

A good financial plan

Risk participation

Incentives

Well thought through, clear objective, reliable financial projections

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

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

The investor does not want to go it alone

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

A clear exit strategyAn investment is pointless if you cannot realise the gains


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Example: Poultry in MalaysiaDesigned a flagship project and a strategic development roadmap for Poultry in the ECERPrimary research:

Site visits

Meetings with brown-field stakeholder companies

On-the-ground analysis of production & processingcapability

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 existingstakeholders:

Access global network of Agricultural companies

Bring in global expertise

Develop an implementation plan & investor strategy

Align stakeholder interests and strategiesRabobank Analysis (2008)


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Poultry Value Chain

Feed Mill

Hatchery

Broiler Farm Layer Farm

ProcessingPlant

BreedingStock Farms

Retail & Food Service

Distribution

Focus on day-old-chick(DOC) production

Breeds suited to local growing

conditions

Best production methods andtechniques

Avian influenza control

Certification

Marketing

What are Revenue enhancers and Cost reducers at every level of the value chain?

Optimal feed mix

Based on breed,age, conditions,focus on meat oregg production

Cost-sensitive;local vs imported

Optimal feed & vaccinationschedules

Demand-driven production

Vertically integrated

Cold chain distribution

Export market analysis

Product positioning outside ofMalaysia and Singapore

Halal, GAAP, HACCPcertification



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Past strategic development projectsMoving Forward


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A quick recapWe 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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Are Banks the Only Solution?

Development funds

Sovereign wealth funds

Private equity

Venture capital

Hedge funds

Supranationals


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Improvements

Involve financial stakeholders early in the process

Good access to information & research

Clearly articulate government / policy support

Be confident!

Profit motive with a market focus must be the primary objectives

Better information = less uncertainty = better financing

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

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


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Suggestions

Asian Dairy Exchange

Dairy Farmers Milk credit bureau

Provide price hedging in Asia

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


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Documents

Dairy Development a Rabobank Perspective