Agcapita is Canada's only RRSP and TFSA eligible farmland fund and is part of a family of funds with almost $100 million in assets under management. Agcapita believes farmland is a safe investment, that supply is shrinking and that unprecedented demand for "food, feed and fuel" will continue to move crop prices higher over the long-term. Agcapita created the Farmland Investment Partnership to allow investors to add professionally managed farmland to their portfolios. Agcapita publishes a monthly agriculture briefing.
4. Agriculture Update (continued) FOOD PRICE UPDATE Recent
developments in world agricultural markets cereals, oilseeds,
dairy, meat and sugar, has risen for basic food commodities have
raised concern uninterruptedly since August 2009, a trend shared
about a possible return to another round of high by nearly all its
components. In November the index prices. In general, however, the
difficulties facing averaged 168 points, the highest since
September markets today are different from those experienced 2008,
although still 21 percent below its peak in June during the 2007/08
food price surge. The FAO Food 2008. Prior to the price spike of
2007/08, the index Price Index, a measure of the monthly change in
never exceeded 120 points and, for most of the time, international
prices of a food basket composed of was below 100 points.Source:FAO
CHART 3: FAO FOOD PRICE INDEX CHART 4: FOOD COMMODITY PRICE INDICES
2002-2004=100 2002-2004=100 230 340 2008 Sugar 200 280 2007 170 220
Dairy Cereals 2009 140 160 Oils& Fats 2006 Meat 2005 110 100
JFMAMJJASOND N D J F M A M J JA SO N Source:FAO 2008 2009
Source:FAO 3
7. Summary DEMOGRAPHICS ARE DESTINY The 19th century belonged
to the UK, the 20th century belonged to the US and it appears that
the 21st century may belong to China. A consistent theme in the
emergence of a new global power is a young population with a large
and growing pool of domestic savings and a focus on investing in
the capital base of the economy rather than consumption. The worlds
western economies find themselves heavily in debt with
deteriorating demographics (our populations are aging and our birth
rates are low) and economies skewed towards consumption. We are
accruing ever-greater liabilities to cover vast social, medical and
retirement programs that we currently do not have the workers or
more importantly the high growth economies to pay for. It has been
said that demographics are destiny. Unfortunately, rather than face
these issues, our governments are attempting to fix our manifest
problems by accelerating the CONTENTS consumption friendly policies
that were largely responsible for M1 Demographics Are Destiny
getting us into this situation in the first place. As an example of
M3 Forty Percent of US Corporate this, the US Federal funding gap
is growing rapidly. Over the last six Profits From Finance! years:
M4 Americas Current Export Inflation unfunded obligations increased
approximately 50% from US$79 M4 How Can this End Well? trillion to
US$114.7 trillion; but M4 ZIRP and Commodity Prices revenue rose
approximately 12%. Is There A Link? M5 Money Velocity Increasing
The US government is now in the position of increasing its
liabilities M6 Interest on US Debt four times faster than its tax
receipts. This is a trend being repeated M6 US Residential Housing
Sector throughout the developed world. The US Federal Reserve
recently Losses Now Nationalized? disclosed that it purchased half
of the newly issued US Treasuries M7 Private Sector Growth is in
the second quarter of 2009 all of which would have been Absent in
the US purchased with newly created money direct debt monetization.
M7 US Bailout Cost M7 Equity and House Price Investors must be
alive to the growing divergence between the Declines Over?
economies of the west and those in the emerging world and M7
Government Fiscal Deficits Will position themselves accordingly. We
believe that the way to benefit Continue to Worsen from long-term
Chinese growth is to invest in what China needs M8 Top 10 Points
for Canadian in politically stable parts of the world. That gives
you the best of Limited Partnership Investors M9 Quick News Review
M1
8. both options first world political risk and transparency
combined with emerging world growth rates. Clearly a category that
fits this description is commodity investment in western Canada
Agriculture Energy And to a lesser degree commodity linked
investment in western Canada: Businesses that service the commodity
sector Businesses and sectors that benefit from general population/
economic growth in Western Canada M2
9. Global Macro Update FORTY PERCENT OF US CORPORATE PROFITS
FROM FINANCE! Given the rapid reflation of the prices of
speculative Despite widespread belief to the contrary, assets and
the collapse of risk premiums, the government intervention into
broad swathes of the ongoing money printing efforts in the
developed economy to support too big to fail companies world are
having limited effect outside of the finance or more accurately to
prevent capital destroying economy. It is estimated that up to 40%
of US business activity from being eliminated to the benefit
corporate profits are generated by the finance sector of the entire
economy is not a positive for future largely from speculative
activities. Corporate profits growth. There is an economic truism
that whatever attributable to the finance sector were effectively
you subsidize you get more of hence by subsidizing stable until the
1970s when the growth in the US failure we are ensuring bigger
failures in the future money supply turned sharply higher on a
sustained and worst of all penalizing well run businesses. The
basis. Given the finance sectors intimate relationship firms that
were prudently managed leading up to the with the US Federal
Government and the Federal crisis should have benefited from the
demise of their Reserve banking system it is not surprising that
the poorly run competitors in a free economy capital newly printed
money has flowed into and through would have flowed to the
profitable businesses rather the finance sector acting as a
wholesale subsidy than the loss making ones. The fact that this
didnt that drove corporate profits, compensation and happen creates
a perverse if you cant beatem, speculation. joinem mentality with
respect to risky and imprudent business practices. QUICK FACTS
China US GDP: $14.2 trillion - increased a total of 18% (real GDP:
$4.3 trillion increased a total of 430% in last terms) in last 10
years and added ZERO private 10 years sector jobs 20% percent of
economy in state sector 30% percent of economy in state sector
Consumer demand is 35 per cent of GDP Consumer demand is 70 per
cent of GDP Savings rate is 40 percent of household disposable
Savings rate is 6 percent of household disposable income (one of
the highest in the world) income M3
10. Global Macro Update (continued) AMERICAS CURRENT EXPORT
INFLATION CHART 2: CRB SPOT INDEX (1967 = 100) The US zero-interest
rate policy (ZIRP) has lead to sustained efforts to cause currency
devaluations on 550 the part of its trading partners. The idea is
that if they 500 weaken their currencies, domestic producers will
be 450 able to maintain market share in the US. The net 400 result
is that the US is effectively exporting inflation to 350 its global
trading partners. 300 250 200 HOW CAN THIS END WELL? 150 100 Often
a picture is worth a thousand words 50 1947 1951 1955 1959 1963
1967 1971 1975 1979 1983 1987 1991 1995 1999 2003 2007 CHART 1:
FEDERAL SURPLUS OR DEFICIT Source: Commodity Research Bureau (USD$
BILLIONS) 400,000 200,000 CHART 3: 2009 CRB INDEX CONSTITUENT 0
-200,000 RETURNS (Millions of Dollars) -400,000 Wheat -11.46%
-600,000 Nat Gas -0.89% Live Cattle 0.15% -800,000 Corn 1.72%
-1,000,000 Soybeans 6.97% Lean Hogs 7.84% -1,200,000 Coffee 21%
Gold 22.91% -1,400,000 Cocoa 23.41% -1,600,000 Aluminium 44.81%
1895 1910 1925 1940 1955 1970 1985 2000 2015 Silver 48.5% Heating
Oil 50.73% Cotton 54.22% Source: St. Louis Federal Reserve, White
House Office of Nickel 58.33% Crude 77.94% Management and Budget
(shaded areas indicate recessions) Orange Juice 88.25% RBOB 102%
Sugar 128.19% Copper 138.38% -30 0 30 60 90 120 150 Source: Reuters
ZIRP AND COMMODITY PRICES IS THERE A LINK? The CRB Index of 19 raw
materials increased 23 The rebound in commodity prices was lead by
oil percent in 2009 as can be seen in Chart 2 this copper and sugar
(see Chart 3) as Chinas demand represents the largest annual
increase since 1979 continued to grow even in the face of the
global the last period of highly inflationary monetary policy.
recession. M4
11. Global Macro Update (continued) Interestingly, the rebound
in the CRB index is mirrored increasing after it started falling in
the first quarter by another powerful upward surge in US base money
of 2007 - six quarters before economic growth supply (M0) after its
initial doubling in late 2008, early slumped. The recent increase
in MZM velocity may 2009. point to increased economic activity, the
question then becomes whether it will be sustained as can be MONEY
VELOCITY INCREASING seen in the capacity utilization numbers. For
those who are adherents of the money velocity theory of economic
activity, the velocity of MZM is CHART 6: MZM VELOCITY (DARK BLUE)
V. US GDP % GROWTH (LIGHT BLUE) CHART 4: US M0 (US$ BILLIONS) 2.4
10.0% GDP Growth current terms 8.0% 2.2 6.0% MZM Velocity 2,400 2.0
4.0% 2,000 2.0% 1,600 1.8 (Billions of Dollars) 0.0% 1,200 1.6
-2.0% 800 1.4 -4.0% 400 Jun-99 Jun-00 Jun-01 Jun-02 Jun-03 Jun-04
Jun-05 Jun-06 Jun-07 Jun-08 Jun-09 0 -400 1910 1920 1930 1940 1950
1960 1970 1980 1990 2000 2010 Source: St. Louis Federal Reserve
Source: St. Louis Federal Reserve (shaded areas indicate
recessions) CHART 7: ESTIMATED US INTEREST PAYMENTS CHART 5:
CAPACITY UTILIZATION (PERCENT OF CAPACITY) $800 in billions 90 700
85 600 (Percent of Capacity) 500 80 400 75 300 70 200 65 1965 1970
1975 1980 1985 1990 1995 2000 2005 2010 2010 2019 Source: St. Louis
Federal Reserve (shaded areas indicate Source: GAO recessions)
M5
12. Global Macro Update (continued) Further increases in this
velocity are considered Treasury departments recent announcement
that it by many as an essential precursor for sustained will
provide unlimited backing to Freddie Mae and economic growth.
Fannie Mac these two organizations now underwrite almost 80% of all
new mortgage lending in the US INTEREST ON US DEBT de facto
nationalizing of the market, a market that represents: More than
half of the $9 trillion in debt the US Federal government is
expected to build up over the next $14.6 trillion in total U.S.
mortgage debt decade will be incurred to pay interest charges -
outstanding US$4.8 trillion. $8.9 trillion in total U.S.
mortgage-related securities. In 2015 $533 billion in interest
payments will be $7.5 trillion in pooled mortgages, of which about
equal to a third of the federal income taxes expected $5 trillion
is securitized or guaranteed by Freddie to be paid that year
obviously a dangerous trend Mae, Fannie Mac or FHA given that
longer term interest rates can be expected increase from their
currently historically low levels. Charts 8 & 9 show that while
most mortgage lenders The other issue for the US is that the
duration of have been withdrawing from the US residential its
borrowing is rather short in simple terms that housing market,
Freddie and Fannie loan books are means the US federal government
must constantly exploding. refinances its existing debt in addition
to borrowing more to fund ongoing deficits. The magnitude of this
issue is shown in that the US Treasury estimated CHART 8: REAL
ESTATE LOAN AT COMMERCIAL in November 2009 that approximately 40
percent BANKS (US$ BILLIONS) of the debt will need to be refinanced
in less than one year. This shortened duration leaves the US 4,000
3,600 quickly exposed to any increases in borrowing costs 3,200
demanded by the markets. (Billions of Dollars) 2,800 2,400 2,000
1,600 US RESIDENTIAL HOUSING SECTOR LOSSES 1,200 NOW NATIONALIZED?
800 400 0 The US automobile industry has been nationalized, -400
the banking sector has been nationalized, medical 1940 1950 1960
1970 1980 1990 2000 2010 care has been nationalized and now the
residential Source: St. Louis Federal Reserve (shaded areas
indicate housing sector has been nationalized. With the recessions)
M6
13. Global Macro Update (continued) EQUITY AND HOUSE PRICE
DECLINES OVER? CHART 9: TOTAL FEDERAL GOVERNMENT AND SALLIE MAE
CONSUMER LOANS Research (Aftermath of Financial Crisis, Reinhart
and (US$ BILLIONS) Rogoff, 2008) shows that the average real
decline in equity and house prices following a banking 200 180
crisis is 56% and 35% over 3.4 years and 6 years (Billions of
Dollars) 160 respectively. If this historical average holds, and
140 120 arguably the current crisis far exceeds virtually all the
100 80 others over the past 100 years, then both house and 60
equity prices will fall much farther in real terms. 40 20 0 -20
GOVERNMENT FISCAL DEFICITS WILL 1975 1980 1985 1990 1995 2000 2005
2010 CONTINUE TO WORSEN Source: St. Louis Federal Reserve (shaded
areas indicate recessions) Research shows that even with the
current dramatic deterioration in G7 government finances we can
expect worse to come (Aftermath of Financial Crisis, PRIVATE SECTOR
GROWTH IS ABSENT IN THE US Reinhart and Rogoff, 2008). Over the
course of the typical banking crisis government debt levels rise an
Private sector has actually shed jobs in the last decade and
generated very little in inflation adjusted GDP growth hence the
nagging feeling CHART 10: US JOB GROWTH BY DECADE in the middle
class that they are not getting ahead. Unfortunately the same
cannot be said for the US % change in gross domestic % change in
household net government that continues to grow relentlessly.
product By decade, worth By decade, 38% inflation adjusted
inflation adjusted 1940s 72.0% unavailable US BAILOUT COST 1960s
53.1% 44% 1970s 38.1% 28% Despite the varied and often conflicting
reports 1950s 1980s 51.3% unavailable 34.9% 42% about the total
cost of the US bailouts when all 1990s 38.6% 58% the programs are
taken into account the cost is approximately US$14 trillion. Given
the pre-bailout 0% money supply of the US was around US$ 15
trillion 0 2000s 17.8% -4% Year in Decade this represents a truly
staggering amount of money. 1 2 3 4 5 6 7 8 9 10 Source: Washington
Post M7
14. Global Macro Update (continued) average of 86 percent in
the three years following. produce a superior performance unless
you do The buildup in government debt has been a defining something
different from the majority... characteristic of the aftermath of
banking crises for 3. Tax efficient structure Tax can have a major
over a century. The question that will inevitably effect on your
returns. Make sure that all arise is that if investment demand is
not present reasonable and credible steps have been for the huge
debt issuances that this will entail, will taken by the management
team to manage tax the worlds central banks revert to monetizing
their obligations. governments debts or in simple terms printing
the 4. Audited financial statements Management must money. provide
annual audited financial statements. A past failure to do so should
act as a red flag. TOP 10 POINTS FOR CANADIAN LIMITED 5. Regular
operational reporting Management PARTNERSHIP INVESTORS must be open
and available to answer your questions about the business.
Investors in private limited partnerships are faced 6. Clearly
defined hold period Make sure that with a wide range of offerings
from classic private the hold period is clearly defined and cannot
equity vehicles to real estate development projects. be arbitrarily
changed or extended by the Here are some simple criteria to help
you make your management team. You need to know how long decisions
about what private LPs to consider for their your investment will
be committed and exactly RRSP portfolio this year. when you can
expect repayment. 7. No non-arms length transactions Situation 1.
Experienced management team A significant where the management team
acquires the target number of investment teams have NO experience
assets first and then sells them to the fund for in fund management
or even in the sector in an upfront profit. Even if disclosed in
the offering which they are investing your capital. Work documents
this is a poor practice and creates with teams that have a track
record at both a mismatch between the economic interests of the
investment management level and at the the management team and the
interests of the operational level there is NO substitute for
investors. a track record of successful investment and 8. No
acquisition fees - Fees where the operation in the business area by
the team you management team gets paid a portion of all are
trusting to act on your behalf. capital deployed. This creates a
mismatch 2. Clear investment premise The investment between the
economic interests of the premise should be based on sound
fundamental management team and the interests of the analysis that
is simple to understand and clearly investors, as acquisition fees
are not tied to laid out in the presentation. Avoid momentum-
returns. based investments where the core rationale is 9. No fee
escalation Management fees should not effectively that everyone
else is doing it. To be tied to appraised or calculated asset value
that quote Sir John Templeton - It is impossible to is an
unrealized gain. The only valuations that matter are the purchase
price and the sale price. M8
15. Global Macro Update (continued) Management should receive
the bulk of their standing in the tropical sun outside a popular
fees based on gains that are actually realized for store. The
government acknowledges prices will investors. rise after the
devaluation, but say the upward trend 10. Incentives reward
ACHEIVED performance will be more gradual. State run television and
radio Favor investments where the manager makes stations avoided
using the word devaluation, the bulk of his return only when you
make a preferring the word adjustment. One pro-Chavez return. This
fee structure is commonly referred radio station responded to
critics of the measure by to as success based. Lifts, acquisition
fees, playing a popular Argentine song called Imbecile. escalating
annual management fees are not With oil crowding out other sectors
of the economy, success based. Venezuela heavily relies on imports
for consumer goods, leaving it subject to big price swings QUICK
NEWS REVIEW depending on the exchange rate. Older Venezuelans are
accustomed to sharp losses in the value of their Venezuela
Devalues: Shouting buy, buy, the world money, with numerous
devaluations and currency is going to die, Venezuelans went on a
frantic regimes over the last three decades of economic shopping
spree on Saturday following a sharp turmoil. Inflation, the highest
in the Americas, at currency devaluation that is expected to drive
up 25 percent last year, reached 103 percent in 1996 prices.
President Hugo Chavez announced a dual after a previous president
lifted exchange and price system for the fixed rate Bolivar Friday
night while controls. Chavezs high-spending policies during an much
of the country was watching a baseball game. oil bonanza fueled a
massive consumer boom and Ive been lining up for two hours outside
to buy a fast growth that shuddered to a halt when oil prices
television and two speakers because by Monday plunged a year ago.
The sharp drop in oil revenues everything is bound to be double the
current price, also undermined the Bolivar and made a devaluation
said Miguel Gonzalez, a 56-year-old engineer inevitable at some
point. Source: Reuters Jan 2010 M9
