Eclectica Agriculture Fund 0812 Monsanto Analysis

CF ECLECTICA AGRICULTURE FUND MONTHLY REPORT 31 December 2008

December saw something of a rebound in financial markets, with the MSCI World equity index gaining 9.3% and agricultural commodities 4.7%. The fund also performed well, returning 8.9% in sterling terms. The main contributors to this performance were Syngenta (1.0%), Bunge (0.9%) and Viterra (0.7%). Laggards included Monsanto (0.6%) and AGCO (0.3%). The main news in the soft commodity markets was the Chinese announcement that their corn harvest had been much better than previously thought in 2008, with production higher by around 3%. As China is 20% of global supply, this alone is sufficient to add 4% to global inventories. Furthermore, with economics for the US protein and ethanol industry poor, demand growth from these consumers has been revised downwards, with the USDA now expecting global grain demand to grow 3% rather than 3.3% in the 2008/09 crop year. Offsetting these two negatives to some extent is the news that a moderate La Nina weather pattern is causing very hot and dry conditions in Latin America, with the Brazilian harvest for corn expected to be down by 10%, soybeans by 5% and Argentine wheat by almost 40%. The supply picture for the 2009/10 crop year is beginning to look more interesting. Following on from the announcement that FSU countries have seen declines of 7-8% in winter wheat planting, we have learned that sowing in the US was also down 9% on last year’s level. This is partly due to the late harvest, which gave farmers limited time to turn the land round before the cold weather came in, but also due to the less attractive market price of wheat. These two major wheat producers accounted for over 25% of global wheat production in 2008, and with winter wheat accounting for over two-thirds of their combined production, total wheat acreage for 2009 is already down by nearly 2%. Fertiliser markets have been frozen since autumn. Data from the Brazilian fertiliser agency ANDA showed consumption in October and November down as much as 35% compared with last year’s figures. With customers at the farm and distribution level both unwilling to buy and limited on-site storage, producers have been forced to cut back on production. For example, Yara has temporarily shut down as much as 30% of ammonia capacity. Supply is also facing disruption caused by strikes at plants in India and the impact of the annual RussiaUkraine gas price dispute, which has forced a further 3% of global supply out of the market owing to a lack of raw materials. With limited inventory held in the supply chain, prices may respond surprisingly quickly when farmers return to the market in spring. Although farmers can to some extent play catch-up with fertiliser application later in the season, the industry will face a logistical challenge getting product to the farm. Fluctuations in regional gas prices have meant that upstream nitrogen

producers have migrated to low cost gas regions such as Qatar, far away from key agricultural economies such as the US and Europe who now import 25% and 40% respectively of their fertiliser requirements. Taking into account the nonexistent start to the season and this logistical bottleneck, it looks like consumption of nitrogen fertiliser globally might be down as much as 10% in 2009. The yield implications of this will depend to some extent on who bears the brunt of this lower consumption. A marginal Brazilian farmer who uses 40% less fertiliser will see his yields fall much more than an Iowa corn farmer who decides to hold off on the last 10% of his optimal application pattern. But historical data suggests that a 10% global reduction in use of nitrogen fertiliser could reduce yields by as much as 4-5%. Stock Insight: Monsanto We have recently increased the fund’s holding in Monsanto substantially to 9.5% of NAV. Over time, one would expect seed companies to be at the forefront of agricultural productivity growth: if the total area of land cannot grow to keep pace with demand growth, it is imperative that we find ways of increasing yields on our existing farmland. Back in the 50s and 60s, great advances were made in yields of crops like rice. Some of this increase came from the introduction of artificial fertiliser, but higher-yielding seed varieties were also vital. However, since the Green Revolution, with surplus food stocks giving the perception that there will always be enough food to go round, the world has neglected to continue research in this area. Much of the money available to charities and statefunded research organisations was diverted to other, seemingly more pressing, causes such as AIDS and cancer. As the research tailed off, so did the yield improvement, and yields in areas such as rice in Asia and wheat in Europe have noticeably flattened out over the last twenty years. Research in areas such as chemicals and healthcare has always gone in cycles. Large pharmaceutical companies like Glaxo and AstraZeneca produced a succession of blockbuster drugs through the 1990s using what could broadly be called small molecule chemistry. But once the big opportunities opened up by that particular technology have been found, the industry tends to stagnate, as big pharma has done over the last decade. In a similar vein, agricultural chemical companies had their last run of incredible return on R&D in the 1970s with killer products like glyphosate, an all-purpose herbicide. By the 1990s, companies like Monsanto were on the verge of giving up on what appeared to have become a commoditised, capital -intensive business. However, research into genetics has opened up a platform for the next cycle of commercial discoveries. Unfortunately for the pharma companies, concerns about genetic engineering of human beings have made the application of this new

CF ECLECTICA AGRICULTURE FUND MONTHLY REPORT

technology to human healthcare complicated. New drugs have generally come from proteins rather than direct genetic manipulation. However, back in the 1980s a small group of companies, led by Monsanto, began to invest in genetic research on plants. This was a long and expensive process which only really began to bear fruit around the turn of the century. However, since these GM seeds came on to the market, it is clear that yields in regions which allow GM crops (basically the Americas) have begun to outstrip yields in those opposed to GM technology (most notably Europe and Africa). The rapid growth of this new market for GM seeds has allowed Monsanto to grow earnings per share at 30% compound over the last five years. Crucially, this growth progression looks set to continue. There are two main issues here: the affordability of the product in a financial meltdown, and the strength of Monsanto’s pipeline over the next five years. Unlike fertiliser, or a $250,000 John Deere tractor, seeds make up a relatively small part of a farmer’s cost base. The super-premium Monsanto corn seed would cost $35 per acre, around 5% of sales for a typical MidWest farmer, and only an eighth of his fertiliser bill last year. As well as being relatively inexpensive in absolute terms, the return on investing in a high quality seed should be positive for the farmer even in a $2.50 corn price environment. Farmers will cut back on fertiliser and capex long before they cut back on seed expenditure. This was confirmed in the recently announced Q1 figures, which showed seed revenues up over 30% on the same quarter last year. The pipeline of new products is strong, with key products including corn which can grow under drought conditions, corn which can absorb nitrogen more efficiently than existing varieties (which should reduce a farmer’s fertiliser bill) and higher yielding soybeans. These new traits will be the basis for continuing earnings growth of 20% per annum over the next five years. The most exciting thing about Monsanto now is the valuation. The opportunities presented by their biotech pipeline should mean that this business trades at a significant premium to pharmaceutical companies, who are burdened with a large and declining legacy revenue stream. Even ‘superior’ pharma assets like Roche, trading on 13x earnings, only manage earnings growth of just over 10% per annum. The smaller biotech outfits with the potential to grow earnings strongly tend to trade on more like 25x earnings. Historically, the market has recognised this similarity and valued Monsanto richly, often on a P/E ratio as high as 30 or 40x. But the broad sell-off in anything related to agriculture has meant that a business which should make earnings per share of around $4.50 in 2009 was trading at $69 per share, only 15x earnings.

NET ASSET VALUES 'A' Shares 'C' Shares

£p 74.66 74.85

€¢ 77.98 78.09

Relative

MSCI World +9.3 -19.9 -19.9 +4.9 -16.0 -10.5

FUND PERFORMANCE

PERFORMANCE SUMMARY % EAGF Month to date One year Year to date 2007 (from June) Since launch C.A.R. since inception

+8.9 -34.6 -34.6 +14.2 -25.3 -17.0

-0.4 -14.7 -14.7 +9.3 -9.3 -6.5

ASSETS UNDER MANAGEMENT AUM

£96.2m

ASSET ALLOCATION Cash Equity Total

+11.8 +88.2 +100.0

TOTAL POSITIONS Total Positions

74

CF ECLECTICA AGRICULTURE FUND MONTHLY REPORT

TOP EQUITY HOLDINGS 1 SYNGENTA AG (VX*) 2 MONSANTO CO (UN*) 3 ARCHER-DANIELS-MIDLAND CO (UN*) 4 BUNGE LIMITED (UN*) 5 POTASH CORP OF SASKATCHEWAN (CT*) 6 KWS SAAT AG (GY*) 7 TERRA NITROGEN COMPANY LP (UN*) 8 VITERRA INC (CT*) 9 CORN PRODUCTS INTL INC (UN*) 10 K+S AG (GF) COUNTRY BREAKDOWN

Long Long Long Long Long

+9.4 +8.4 +5.2 +3.7 +3.4

Long Long Long Long Long

+2.9 +2.8 +2.6 +2.6 +2.4

CF ECLECTICA AGRICULTURE FUND MONTHLY REPORT

Investment Objective

Price Reporting

The investment objective of the fund is to achieve long-term capital growth through investment in a diversified portfolio of global quoted equity investments that are involved in, related to, concerned with or affected by agriculture and farming related issues. The fund may also invest in collective investment schemes and cash and near cash in the interests of achieving its objective of capital growth. The fund may utilise currency hedging in the interests of achieving that objective.

NAVs are published daily in the Financial Times (Managed Funds Service under Eclectica Asset Management LLP);

Comparative MSCI World Total Return (NET) index. Structure The fund is a sub-fund of CF Eclectica Funds which is an investment company with variable capital established pursuant to an authorisation order of the Financial Services Authority ("FSA") on 24 March 2006 and falls in the category of being a "UCITS scheme" and which is also an umbrella company for the purposes of the Open-Ended Investment Companies Regulations 2001. Accounts Date Financial year end 31st December. Dealing Class A and Class C £ accumulation shares and Class A and Class C € accumulation shares are available for subscription daily at 12pm based on applications received before 12pm. Pricing In order to protect the interests of existing shareholders the fund applies an anti-dilution levy of 0.5% to subscriptions or redemptions over 1% of the fund's value. Launch date 8th June 2007. Dividends Income is accumulated within the fund. Charges Management fee: 1.75% for Class A Shares; 1.25% for Class C Shares. Subscription Charge: 5% (3% of which may be paid to qualifying intermediaries). Subscription Minimum of £5,000 and its equivalent in Euros for Class A Shares and £2m and its equivalent in Euros for Class C Shares.

Class A: SEDOL and ISIN identifiers are B1XGDS0 and GB00B1XGDS05 for £ Shares, B1XGDP7 and GB00B1XGDP73 for € Shares respectively. Class C: SEDOL and ISIN identifiers are B3B02F8 and GB00B3B02F88 for £ Shares, B3B02P8 and GB00B3B02P86 for € Shares respectively. Authorised Corporate Director Capita Financial Managers Ltd. Investment Manager Eclectica Asset Management LLP. Administrator Capita Financial Administrators Limited. Dealing line 08459 22 00 44. Depositary Bank of New York. Auditors Ernst & Young.

CF ECLECTICA AGRICULTURE FUND MONTHLY REPORT

This document is being issued by Eclectica Asset Management LLP ("EAM"), which is authorised and regulated by the Financial Services Authority. The information contained in this document relates to the promotion of shares in one or more collective investment schemes managed by EAM (the "Funds"). The promotion of the Funds and the distribution of this document in the United Kingdom is restricted by law. This document is being issued by EAM to and/or is directed at persons of a kind to whom the Funds may lawfully be promoted. No recipient of this document may distribute it to any other person. No representation, warranty or undertaking, express or implied, is given as to the accuracy or completeness of, and no liability is accepted for, the information or opinions contained in this document by any of EAM, any of the funds managed by EAM or their respective directors. This does not exclude or restrict any duty or liability that EAM has to its customers under the UK regulatory system. This document does not constitute or form part of any offer to issue or sell, or any solicitation of any offer to subscribe or purchase, any securities mentioned herein nor shall it or the fact of its distribution form the basis of, or be relied on in connection with, any contract therefor. Recipients of this document who intend to apply for securities are reminded that any such application may be made solely on the basis of the information and opinions contained in the relevant prospectus which may be different from the information and opinions contained in this document. The value of all investments and the income derived therefrom can decrease as well as increase. This may be partly due to exchange rate fluctuations in investments that have an exposure to currencies other than the base currency of the relevant fund. Historic performance is not a guide to future performance. All charts are sourced from Eclectica Asset Management LLP. Net Asset Values are as at the date of the document. © 2005-07 Eclectica Asset Management LLP; Registration No. OC312442; registered office at 6 Salem Road, London, W2 4BU.

6 Salem Road London W2 4BU Phone 020 7792 6400 Fax 020 7792 6401 www.Eclectica-am.com