MACQUARIE AGRICULTURAL FUNDS MANAGEMENT MACQUARIE ALMONDS UPDATE OCTOBER 2010
Welcome Welcome to your annual almonds update from the Macquarie Agribusiness team. It has been another exciting year for the Macquarie Almonds Investments with AlmondCo, the processor and marketer of your almonds, successfully completing the sale of the almonds produced from last year s crop. This has allowed us to deliver investors in our 2006 and 2007 projects with their first receipts of harvest revenue during the 2010 financial year. Following the successful harvest in 2009, the orchard manager, Macquarie Agricultural Services Pty Ltd (MAS) has also completed the harvest of the 2010 crop that was recently delivered to AlmondCo to be processed for marketing and sale. Further harvest revenue from that crop is expected to be earned by investors in our 2006 and 2007 projects throughout the course of the 2011 financial year. It is also an exciting time for investors in our 2008 and 2009 projects, with the first commercial harvest for those projects expected to commence in February next year. This will be a good achievement for those investors and we will keep you up to date with the progress of the orchard. Despite the ongoing events and uncertainty surrounding some agricultural managed investment schemes, we are pleased to report that all Macquarie Almonds projects continue to operate well. The Macquarie Agribusiness team remains dedicated to the ongoing development of the Macquarie Almond Investments. We look forward to bringing new opportunities to you in the future and thank you for your continued support.
2010 almond harvest update During the second quarter of 2010, MAS completed the harvest of the 2010 crop. All almonds were successfully delivered to AlmondCo where they ve been sorted and sized in preparation for processing, marketing and sale. We are pleased to advise that a high proportion of this year s almond harvest are in the larger size ranges (22/24 and larger). Almond sizes are measured by determining the number of almond kernels per ounce. A lower number of kernels per ounce represent larger nut sizes, hence the 18/20 size category represents the largest nuts, with the 35 plus category representing smaller nuts. The graph below illustrates the size of nonpareil almonds produced from the 2010 crop from both the 2006 and 2007 projects. The Macquarie Almond Investments have again returned a good percentage of larger almond sizes, with over 50 per cent of the nonpareil crop being sized in the 22/24 range or larger. This has the potential to benefit investors with premium prices. Nonpareil kgs per size group 2010 crop 40.0% 35.0% 30.0% Percentage of crop 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% 18/20 20/22 22/24 24/27 27/30 30/32 32/35 35+ Larger Size of almonds Smaller
Interesting facts about almonds The almond is a species of tree native to the Middle East and is categorised botanically as a fruit, believed to be an ancestor of the stone fruits such as nectarines, peaches, plums and cherries. The fruit of the almond is not a true nut, but rather a drupe which consists of a softer, green outer coat (the hull), a hard shell and the seed (or kernel) that is typically enjoyed for eating on the inside. One of the most versatile nuts, almonds can be consumed in a number of various forms and can be sold in shell or shelled and consumed raw or in various other forms such as blanched, chopped, slivered, roasted, sweetened and salted. The lifecycle of the almond is an interesting one, and before reaching the consumer door, almonds undergo a number of stages including the process of hulling and shelling which occurs following the almond harvest (see almond lifecycle chart below). Hulling and shelling As described above, almonds develop in a shell that is surrounded by a hull. Following blossom and pollination of the fruit in the spring, the almond nuts mature throughout the summer allowing the hull to dry and split open, revealing the shell that encases the nut. The nuts dry naturally in the shell before they are harvested by mechanical tree shakers, which shake the almonds, still in their hulls, from the tree to the ground. MAS utilises some of the world s most advanced, state-of-the-art harvesters for this process. Once on the ground, additional machinery is used to collect the almonds and prepare them for transportation to a nearby hulling and shelling facility. The process of hulling involves transporting the almonds to the hulling and shelling facility, where the almonds are received and weighed. Additional information is gathered regarding the source of the almond, the grower and the variety. Hulling machines then begin the process of removing the hull of the nut, leaving the almond kernel inside the harder shell (commonly referred to as in shell). While it is possible that some almonds may be marketed and sold in the in shell state, most almonds continue through the processing lifecycle for shelling, where state-of-the-art technology removes the hard outer shell, leaving the almond kernel to be sized, cleaned and processed for packaging and sale. Finally, they are sold to millions of consumers around the world. Further information regarding the lifecycle of almonds can be found on the AlmondCo Australia website at almondco.com.au/virtual_tour.htm. Source: Almond Board of California.
Water update We are pleased to report that improved climatic conditions and increased rainfall in the early months of 2010 has had a positive impact on the water inflows into the Goulburn and Murray River systems. Goulburn Murray Water (G-M Water) is the managing authority of allocations for the Victorian irrigation regions and recently announced its allocation outlook for the 2010/11 irrigation season. The latest seasonal outlook announced by G-M Water on 1 October 2010, anticipates that water allocations in the Murray system are expected to reach 100 per cent later this year under all inflow conditions. The 2010/11 outlooks were recently updated based on resource improvements across the river systems in recent months, and as stated earlier, 100 per cent allocations are expected in the Murray system under each of the three inflow scenarios: Wet conditions inflow volumes with a one in 10 chance of being exceeded Average conditions inflow volumes with a five in 10 chance of being exceeded Dry conditions inflow volumes with a nine in 10 chance of being exceeded. The continued improvement in expected seasonal water allocations has been a welcome relief to many Australian growers in the area and marks a significant improvement over the prevailing seasonal water allocation outlook at this time last year. As reported to you last year, early estimates of seasonal water allocations by G-M Water for the 2009/10 season anticipated lower water allocations, and MAS procured additional temporary water to ensure sufficient water for all projects was available for the 2009/10 season. This will be reflected in your October 2010 invoice. As a result of the stronger than expected inflows to the Murray system over the second half of the 2009/10 season, MAS is pleased to inform you that it currently has excess temporary water which it is able to carry over for use into the upcoming season. It is not expected therefore that any additional temporary water purchases will be required for the 2010/11 season. Factors influencing Australian almond prices Almond prices are typically set through contractual negotiations between buyers (such as food wholesalers and retailers) and sellers (for example, the major processing and marketing companies such as AlmondCo in Australia and their equivalents in the United States). Typically, the contractual arrangements are set out on different terms and agreed at different times. For example, large industrial food companies may be prepared to take fixed price contracts for 12 months, whereas wholesale purchases may prefer to take immediate delivery at prevailing spot prices. Generally, the almond industry conducts its negotiations around a monthly spot price which varies between almond variety and size. The standard benchmark for almond spot prices is the price (in US dollars) received for nonpareil almonds in the 23/25 size category 1. While this provides a good proxy for how almond prices are moving relative to demand and supply, it does not reflect the average price that is received by growers. This price will be dependent upon a combination of factors, including the varieties produced by each grower and the respective sizes and quality of the almonds produced. The prices you receive from the harvest of the 2010 crop for the Macquarie Almond Investment will depend on a number of factors, including global supply and demand, the $A:$US exchange rate, and the quality and size of the almonds produced from the harvest. The average net price received by all growers from AlmondCo over the last 14 years has been around $6.00p/kg. This represents the sale price for all varieties and grades and is the average price returned to growers after deducting all processing and marketing costs. The final prices received for the 2010 crop will not be available until after the 2010 crop selling period finishes which is expected to occur in mid 2011. We continue to monitor the water situation closely and we will take any additional action as appropriate. Furthermore, we continue to adopt measures through our irrigation infrastructure that reduce our water usage whilst not impacting the growth of the trees in the orchard. 1 Note: AlmondCo has classified nonpareil almonds into 22/24 and 24/27 categories. The 22/24 category represents larger almond nuts than 23/25, therefore average prices for 22/24 nonpareils should theoretically be at a premium over the benchmark 23/25 size category.
Exchange rate As mentioned earlier, as the benchmark global almond prices are quoted in US dollars the price at which AlmondCo is able to market and sell your almonds in Australian dollars is influenced by the prevailing $A:$US exchange rate. Investor returns in the Macquarie Almonds Investments may therefore be subject to any exchange rate volatility. Typically, in circumstances where the Australian dollar is appreciating against the US dollar, the Australian dollar price that you receive for your almonds will be lower. Conversely, higher prices can typically be expected during times in which the Australian dollar is depreciating against the US dollar. Currently, the $A:$US exchange rate is trading at historically high levels, and well above the long term average. In September 2010, the Australian dollar traded as high as $US0.97, which is over 30 per cent above the 25 year average of $US0.72 2 (see following table and graph below). In the floated-australian dollar era, only once before have we experienced such levels, which occurred in the lead up to the 2008 Global Financial Crisis. Average $A:$US exchange rates 25 year 0.7232 20 year 0.7187 15 year 0.7148 10 year 0.7259 2 year 0.8171 Current rate 3 0.9671 The chart on the following page illustrates the exchange rate movements in the $A:$US over the last two year period. During this period, the average price for which the Australian dollar has traded at is $US0.82. Many commentators assert that one of the contributing factors, among many other things, for the rise in the Australian dollar versus the US dollar over the last 24 months has been due to the interest rate differential between the two countries, with higher benchmark interest rates in Australia comparative to the US. Over the last few years, the United States have adopted a very accommodative monetary policy, with the US Federal Reserve benchmark interest rate currently at nil to 0.25 per cent compared to the Australian cash rate which is currently 4.50 per cent 3. Currently, the strong Australian dollar presents challenges for AlmondCo, the processors and marketer of your almonds, to return a high Australian dollar almond price for your almonds in the market place. If the $A:$US exchange rate were to fall closer to the historical average throughout the remainder of the 2010/11 almond selling period, we anticipate the final prices received for your 2010 crop to respond positively. Conversely, should the appreciation in the Australian dollar continue for the remainder of the year this has the potential to affect the final prices received for your almonds for the 2010/11 crop year. Historical $A:$US exchange rate 1.10 1.00 0.90 0.80 0.70 $A:$US 0.60 0.50 0.40 0.30 0.20 0.10 0.00 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 $A:$US 25 year average ($US0.72) Source: Bloomberg, Macquarie. 2 Source: Bloomberg. 3 As at 30 September 2010.
Domestic supply The Australian industry s 2010 harvest results are yet to be finalised but early expectations indicate a total production increase from 36,500 tonnes (or circa 80.50 million pounds) to approximately 46,000 tonnes (or circa 101.40 million pounds). Further Australian production growth is anticipated to continue over the next few years with approximately 75 per cent of Australian almond plantings yet to reach full maturity. Based on 2009 planting survey results, Australia s almond plantings are just under 28,000 hectares and as plantings mature, by 2015, production is estimated to reach more than 80,000 tonnes (or approximately 176.40 million pounds). The Almond Board of Australia has outlined that it expects Australia to surpass Spain as the world s second largest almond producer within the next five years, making the Australian almond industry the fastest growing almond industry in the world. Global demand and supply The 2009/10 almond crop year in the United States proved to be yet again another all time record year for US almonds shipments (sales). Over 1.47 billion pounds of almonds were shipped by US suppliers during the year, breaking the record 1.39 billion pounds that was set the year before. The record demand saw almond prices trend significantly higher during the first half of the 2009/10 crop season (August 2009 to February 2010). After reaching a peak in January 2010, almonds were sold off heavily in April and May as concerns regarding the European debt crisis hit the global economic environment, with a number of European counterparties defaulting on purchase agreements on almonds which had already been shipped. This caused significant downward pressure on almond prices during those months, with a significant drop occurring in April (see chart on the following page). Despite prices rebounding in June, downward pressure was again put on prices in July as the US National Agricultural Statistics Service (NASS) released their objective crop (production) estimate forecast for 2010 at 1.65 billion pounds. Millions lbs 1600 1400 1200 1000 800 600 400 200 0 2001/02 US almonds shipments - history 2002/03 2003/04 2004/05 2005/06 2006/07 2007/08 2008/09 2009/10 Source: Almond Board of California. The size of this crop estimate came as a widespread surprise to the Californian almond industry and was much larger than expected, causing a further sell off in prices into July. The month of August however saw a solid rebound in prices, as buying came back in the $A:$US exchange rate (last two years) 1.00 0.90 $A:$US 0.80 0.70 0.60 0.50 Oct-08 Nov-08 Dec-08 Jan-09 Feb-09 Mar-09 Apr-09 May-09 $A:$US Jun-09 Jul-09 Aug-09 Sep-09 Oct-09 Nov-09 Dec-09 Jan-10 Two year average Feb-10 Mar-10 Apr-10 May-10 Jun-10 Jul-10 Aug-10 Sep-10 Source: Bloomberg, Macquarie.
Price trend 2009 crop year 3.00 2.75 2.50 2.25 $US 2.00 1.75 1.50 1.25 1.00 Aug-09 Sep-09 Oct-09 Nov-09 Dec-09 Jan-10 Feb-10 Mar-10 Apr-10 May-10 Jun-10 Jul-10 Aug-10 NPS 23/25 Cal SSR 27/30 AOL BSU5% Source: Derco Foods. market from purchasers who had been holding off on purchases by consuming existing inventories. A number of almond growers and processors do not anticipate the final US crop estimate to come in at the forecast 1.65 billion pounds but rather expect a much lower final US crop result. If this scenario does eventuate, it will shift the supply/demand balance back into the favour of almond sellers, such as AlmondCo, and this has the potential to benefit growers through higher prices. The reported crop estimate of 1.65 billion pounds is 17 per cent higher than figures released in May and eight per cent higher than 2009 production of 1.41 billion pounds. Assuming that the NASS objective estimate is correct, this places the overall US supply position for 2010 as follows: Carry-in from 2009 crop Less: Committed inventory Uncommitted (unsold) stock Estimate of 2010 crop Less: Losses and exemptions (3%) Total 2010 season supply 305.80 million pounds (167.0) million pounds 138.80 million pounds 1.65 billion pounds (50) million pounds 1.74 billion pounds
The challenge facing the Californian industry is how to manage the record supply. Early 2010 shipments to both domestic and international markets have been very strong. Domestic shipments for August set a new record of 45.77 million pounds (a 17 per cent increase on August 2009). Total domestic and international shipments were also up 1.40 per cent on the corresponding prior year period at 125 million pounds. Despite difficult global economic conditions, processors and exporters in the US have confirmed that shipments for September are very strong and expect this trend to continue for the remainder of the year. The strong international shipment figures are largely being driven by demand from Asia. Chinese importers have been very active in the market while strong demand from India has pushed prices for in shell nonpareil almonds up 17 per cent. Strong demand has also been seen coming out of the Middle East, particularly for the premium nonpareil variety. Continued demand from these regions will be an important factor in determining the ongoing price of nonpareil almonds. Notwithstanding the expectations of a record US crop, new California almond orchard plantings have slowed in recent years. Over 130,000 acres of US almond orchards are more than 20 years old and as a result pullouts may exceed the rate of new plantings in the near future. With such a large influence on the global almond industry, any reduction of production from the US will likely reduce total global supply over the next few years. Global demand for almonds on the other hand continues to grow. Over the past 10 years global consumption of almonds has grown at a compound rate of 8.40 per cent per annum. This growth has largely been fuelled by increasing demand from the Asian region, particularly China and India 4. According to the Almond Board of Australia, if these trends continue there is a possibility that global demand for almonds could outstrip supply by 2013 (see graph below) and with Australian production expected to increase during the period, domestic growers should be in a strong position to take advantage of any potential supply/demand imbalance. Quality of the almonds Almonds of better quality have a direct correlation with premium prices. Globally, Australian almonds are considered to be of the highest quality and are free of many pests and diseases that impact production levels in other countries. Australia also benefits from a more reliable climate and access to adequate irrigation water, which allows the local industry to consistently maintain high levels of production. Further, the Macquarie Almond Investments are focused on producing high quality almond varieties. The nonpareil almond is the most popular almond nut and generally commands premium prices. Approximately 50 per cent of the trees planted on the Macquarie Almond orchards consist of the nonpareil nut variety compared to less than 40 per cent in California. Global almond supply versus demand forecast 1,000,000 800,000 Tonnes 600,000 400,000 200,000 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Total supply Demand Global production Carry-out Source: Almond Board of Australia. 4 In 2009, 39 per cent of Australia s total almond supply was exported to India. India remains Australia s largest almond export destination.
Macquarie Almond Investment 2006 project update The Macquarie Almond Investment 2006 consists of 313 hectares of trees planted in 2006. We are pleased to inform you that during the second quarter of 2010, MAS completed the annual harvest of your second almond crop. All almonds were successfully delivered to AlmondCo, where they ve been sorted and sized in preparation for processing, marketing and sale. You can expect to receive revenue from the proceeds of sale throughout the course of the 2011 financial year. The 2006 project once again produced a crop containing a good amount of larger sized almond nuts, with a large proportion of the nonpareil crop producing almonds in the large 22/24 size category or higher. Larger sized almonds typically command a price premium over the smaller sizes. Although the overall quality of the almonds produced from the 2010 crop was satisfactory, it is estimated that for the 2006 project, the final merchantable yields achieved will be approximately 25-30 per cent below original Product Disclosure Statement (PDS) projections. The lower than expected yields have been attributed to an irrigation system anomaly which caused uneven amounts of fertiliser to be distributed to various parts of the orchard. This resulted in a lower than desired delivery of fertiliser to those almond trees comprising the 2006 project. It is important to note that the irrigation system anomaly did not negatively affect all almond trees on the Macquarie orchard, and merchantable yields obtained from the trees relating to other projects, in fact, exceeded production PDS projections. The irrigation system anomaly was identified through extensive irrigation valve testing by the team at MAS, and measures were immediately taken to rectify the situation once the cause was identified. As a result, production levels across the entire orchard, including those trees comprising the 2006 project are expected to return to normal levels over the next two years. Following the positive measures taken to address the situation, the entire Macquarie orchard continues to perform and operate well. Macquarie Almond Investment 2007 project update We are pleased to report that final results for the 2010 harvest of the 2007 project have exceeded PDS yield projections. The 2007 project consists of two separate almond plantings, 187 hectares planted in 2006 and 195 hectares planted in 2007. As anticipated, the entire 382 hectares of the 2007 project produced a commercial harvest for Growers in early 2010. It is estimated that the harvest for the entire 2007 project has produced a final merchantable yield of 1,159 kilograms per hectare, 19 per cent above the original PDS expectation of 972 kilograms per hectare. All almonds harvested were successfully delivered to AlmondCo, where they have since been sorted and sized in preparation for processing, marketing and sale. You can expect to receive revenue from the proceeds of sale throughout the course of the 2011 financial year. Macquarie Almond Investment 2008 - project update The 2008 project consists of 86.50 hectares of almonds planted in 2008 on the Margooya property. It is an exciting time for investors in the 2008 project as the trees are entering their third year of growth and we anticipate that the project will produce its first commercial harvest of almonds in February to April 2011. This would provide investors with their first receipt of almond harvest revenue in the 2012 financial year. Current observations from the orchard indicate that the project is performing well, and we look forward to reporting the outcome from the first harvest next year.
Macquarie Almond Investment 2009 project update The 2009 Almond Investment consists of 178.25 hectares planted in 2008 on the Margooya property. It is an exciting time for investors in the 2009 project as we expect the project to produce its first commercial harvest of almonds in February to April 2011. Current observations from the orchard indicate that the project is performing well, and we look forward to reporting the outcome from the first harvest next year. The Independent Horticulturalist Expert completed a final establishment report for the project in June 2010 outlining that the almond orchard has been well developed. The report confirms that soil surveys, land preparation, irrigation system, planting design, nursery trees, orchard management and infrastructure have been conducted or are at a good industry standard. The tree growth is uniform and at industry benchmark standards. The report commented on the project s irrigation efficiencies. Irrigation records provided to the Independent Expert by MAS indicates that 1.70mg/l per hectare of irrigation water was applied to the trees during the 2008/2009 season and to date 3mg/l per hectare has been applied in the 2009/2010 season. Despite the usage of water being considerably less than that proposed in the project s PDS, the trees have been adequately supplied with water and are growing in line with industry benchmarks. A major contribution to this water saving has been irrigation techniques implemented by MAS with the use of clips to block emitters between trees. The independent report is available to you on our website at macquarie.com.au/almonds. About Macquarie Agricultural Funds Management Macquarie Agricultural Funds Management (MAFM) invests in real assets and their potential, seeking investment opportunities which leverage demand for basic resources the world cannot live without. MAFM invests in an inescapable fact: people need to eat, and there is no alternative to food. This demand is exacerbated by the continued growth of agricultural commodities consumption globally. MAFM takes a unique approach to investing in both food and agricultural production, bringing both investment management and farming expertise in-house and under one roof. We have in place a rigorous risk management framework overlayed with the Macquarie Bank experience and fiscal accountability in order to make farming a truly modern and investable proposition. We continue exploring new and innovative ways to increase agricultural productivity, combining modern farm management with our financial intelligence and investment bank processes. Awarded Real Assets Manager of the Year in 2009 5, MAFM has the capability, long term commitment, expertise and scale to deliver results while proactively managing investment risks. Currently, MAFM manages: More than 3.2 million hectares of agricultural land across Australia (larger than the size of Belgium); Over $A1 billion in funds under management or committed for a range of institutional and retail investors; Over 200 staff in operations across a wide range of agricultural assets, including staff located throughout Australia and in Brazil. MAFM has a global reach, focused on risk management and returns. For further information about our activities, please visit our website at macquarie.com.au/agribusiness. 5 by Foundation & Endowment Money Management Nonprofit Awards for Excellence.
IMPORTANT INFORMATION This information has been prepared by Macquarie Alternative Assets Management Limited ABN 30 103 237 181, AFSL 225758, (MAAML) and is current as at 30 September 2010. This information has been prepared for general information purposes and does not take account of your objectives, financial situation or needs. Before acting on this general advice, you should therefore consider the appropriateness of the advice having regard to your situation. We recommend you obtain financial, legal and taxation advice before making any financial investment decision. The Macquarie Almond Investment 2006, 2007, 2008 and 2009 were offered under Product Disclosure Statements (PDSs). The offers for the Macquarie Almond Investment 2006, 2007, 2008 and 2009 are now closed. The PDSs are available from No. 1 Martin Place, Sydney or by phoning1800 617 900. In deciding whether to acquire or continue to hold an investment in the Macquarie Almond Investment, you should obtain the relevant PDS and consider its contents. MAAML or its associates, officers or employees may have interests in the financial products referred to in this information by acting in various roles including as investment banker, broker, lender or adviser. MAAML or its associates may receive fees, brokerage or commissions for acting in these capacities. In addition, MAAML or its associates, officers or employees may buy or sell the financial products as principal or agent. You may contact MAAML on 1800 617 900. Investments in the Macquarie Almond Investment 2006, 2007, 2008 and 2009 are not deposits with, or other liabilities of Macquarie Bank Limited ABN 46 008 583 542 nor any other Macquarie Group company, and are subject to investment risk, including possible delays in repayment and loss of income or capital invested. None of Macquarie Bank Limited nor any other Macquarie Group company guarantees any particular rate of return on, or the performance of, the Macquarie Almond Investment 2006, 2007, 2008 and 2009 nor do they guarantee the repayment of capital from any of those Macquarie Almond Investments. Macquarie Group