The Future of Agriculture

Rajiv Singh CEO, Rabobank North America Wholesale Banking

USDA Agricultural Outlook Forum Washington, DC February 23rd, 2017 Introduction to Rabobank Group

The world’s leading Food and Agriculture (“F&A”) bank Global presence

25countries 18 countries 2 1 Setting the scene Agricultural production is driven by five key variables

Growing global population Increasing global wealth and urbanization USD USD Bn people (LatAm/Asia/World) (US/EU) 12,000 60,000 8.0 10,000 50,000 6.0 8,000 40,000

4.0 6,000 30,000 4,000 20,000 2.0 2,000 10,000

0.0 0 0

US European Union Latin America & Caribbean East Asea & Pasific Latin America & Caribbean World US European Union East Asia & Pacific Middle income World

Need for yield improvement given Increasing animal protein consumption1 Climate volatility and water scarcity reduced land availability Kg per capita per year Annual freshwater Kg per capita per year Agricultural land (% of land area) (EU & US) (BRICS & World) withdrawals (bn m2) 100.0 40.00 500 55.0% 450 80.0 35.00 400 50.0% 60.0 350 30.00 45.0% 40.0 300 25.00 250 40.0% 20.0 200 35.0% 0.0 20.00 150 1990 1994 1998 2002 2006 2010 2014 1995 1999 2003 2007 2011 2015 2019 2023 1992 1995 1998 2001 2004 2007 2010 2013 US European Union US European Union BRICS World US European Union East Asia & Pacific World

Sources: World bank, OECD, Note 1: cumulative consumption of beef, pig, poultry and sheep 4 Several of these underpin the industry’s long-term growth story

Expanding Long-Term Growth Demand for Population & Protein-Rich Diets (Grains, Dairy, Animal Affluence Protein)

Relevant Mega-Trends: • Changing Demographics • Consumer Preferences (Organic, Non GMO) • Urbanization • Resource Scarcity (Water, Land) • Data and Technology • Globally Linked Markets

5 Farmer profits have been under pressure since the peak in commodity prices during 2013

The fall in grain prices since 2013 Has led to a third year of negative row crop farm income USD/bushel USD / acre 2,000 1,200

1,000 1,600

800 1,200 600

800 400

200 400

0 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015e

Labor Land Fert/Chem/Seed (FCS) Machinery Corn CBOT Wheat CBOT Soy CBOT Value of Corn/Acre - IA Crop Value with Govt. Payments

Source: Bloomberg, LP , Iowa State University, University of Illinois, Purdue, Rabobank, 2016 6 Causing a major reduction in farm inputs spending; we see returns stabilizing in 2017 / 2018

2013 INCOME PEAKS TODAY 2014-2015 1. Reduce equipment purchases

2. Cutback/minimize fertilizer applications RECOVERY LAGS 2016 6. Optimize yield 3. Switch to cheaper seed 5. Establish planting 4. Negotiate for lower discipline land costs

Operating capital dries up 2017

6 7 Although crop receipts have continued to decline in 2016, the situation seems to be stabilizing

25.0% 22.9% $250,000,000

$230,000,000 20.0%

15.9% 15.2% $210,000,000 15.0% 11.5% $190,000,000 9.6% 10.0% 7.8% $170,000,000 5.3% 5.1% 5.0% 3.7% $150,000,000 0.9% 1.4% $130,000,000 0.0%

-1.3% -0.9% $110,000,000 -5.0% -4.8%-5.1% $90,000,000

-10.0% -8.6% $70,000,000

-15.0% $50,000,000

% Change Crop Receipts

Source: USDA, Rabobank 8 The issue however is that we forecast a period of low (although stable) grain prices over the next five years

9 Which means that crop farming will NOT see a cycle upturn but rather an extended period of low returns

300 250 200 150 100 50

USD/Acre 0 -50 -100 -150 -200 1982 1983 1984 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 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025

10 Modest expectations from the next cycle…

11 The situation has punished the results of the major input providers, a key factor driving the mega-Mergers

Recent Deals Themes / Transaction Rationale Combination Value Announced • Access to new markets, technologies and expertise (ChemChina/Syngenta) Bayer/Monsanto $66 billion 2016 • Food security and reduced reliance on imports Agrium / Potash Corp $36 billion 2016 (ChemChina/Syngenta) ChemChina / Syngenta $43 billion 2016 • Value creation through scale and market share (Dow AgroScience / DuPont Pioneer) Dow / DuPont $130 billion* 2015 • Market dominance in key product categories

Source: company reports, *Dow DuPont reflects non-Ag businesses also (Bayer/Monsanto)

Key Deal Drivers • Operational efficiencies through vertical and horizontal integration (Agrium/PotashCorp) • Structurally low farmer demand and excess supply • Positioning for secular changes in F&A (all deals) • The need for technological innovation to deliver value in a sustainable way  Organic and non-GMO are a $50 billion market in the USA • The need/desire to transform from stand alone product sellers into integrated service providers  Its growth will further threaten demand for crop protection chemicals and other inputs

12 Consolidation has different implications across the value chain; distributors likely to be the most at risk

Farmers could actually benefit from industry consolidation in the form of new 1 Growers products and service

Little expected incremental impact from the announced CPC/seed mergers, 2 Fertilizer although Agrium/PotashCorp could drive smaller nutrient players to merge Manufacturers

Little expected incremental impact from the announced CPC/seed mergers G&O near-term although structural changes in farm inputs could undoubtedly 3 impact the ABCDs in the long-run

Greater concentration of supplier power; thus retailers, wholesales and Distributors cooperatives will experience even greater margin pressure as input 4 manufacturers renegotiate selling commissions and concessions

13 A Lot Else is Changing… 2 Behind the Scenes The composition of the population is changing…

Share of women in US Increasingly multicultural labor force Asian Native 5% 1%

Black 70% 13% of households have no 47% children under 18 Hispani c White 17% 62%

Asians projected to become the largest immigrant group % of total immigrants

11 Asian 23 26 32 25 36 4 27% 44 Hispanic 47 40 34 Single person households 59 7 Black 8 9 9 25% 25 18 18 19 White Millenials have become the largest generation 1975 1995 2015 2035 2055 Actual Projected 15 And technology is transforming our lives

89% 77% 1.8 billion of the U.S. of U.S. adults have active users globally population has a smartphone internet access (99% of millennials)

How people spend their time online Population without access to fixed broadband Search Online engines shopping 39% 1% Social 6% media 28% Video 19% 7.6 10% Hrs./day 4% Surfing Checking content email 23% 24% United States Rural Areas Urban Areas Source: Multiview Source: FCC, 2016 Broadband Progress Report 16 Consumer preferences are changing as a result

Health and wellness Transparency Hybrid Consumer

• Definition of healthy has changed • Today’s consumers demand information • Emphasis on quality ingredients leads to – means fresh, natural, organic, high regarding what is in their food, how it is increased demand for premium products protein, non-GMO, and many other free- made, where does it come from and what across all categories its environmental footprint is froms • Dichotomy: there is also strong demand for • Strong preference towards minimally ‘value’ products. The middle ground is processed and clean labels shrinking

Convenience Novelty and customization

• Shorter prep times, single serve packaging, • Millennials in particular are looking for new on the go alternatives, delivery and innovative experiences • Rise of snacking: no longer three sit down • Success of ethnic and bold flavors meals a day but snacking throughout • Do-it-yourself options, personalized marketing campaigns

17 Consumers are moving away from ‘big brands’

Big brands are losing share to smaller, more innovative brands 20%

15%

10% Gain 5%

Loss -5%

-10%

-15%

-20%

Big Brand Small Brand Private Label

Source: Rabobank, Euromonitor 2016. Big Brand >3% market share. 18 And driving new trends (or fads): Gluten Free

. While only 1% of the population has Celiac disease, 30% say they are trying to reduce their gluten intake . Major grain-based categories are struggling

Wheat Consumption in the U.S. (lbs/capita) Sales volume of major grain based categories

150 2%

1% 140 0%

-1% 130 -10% -2% lbs. per capita

120 rate grow Annual volume -3%

-4%

110 -5% 1971 1986 2001 2016 Bread Cereal Cookies Crackers 2013 2014 2015 2016 LTM

Source: USDA Source: IRI 19 And driving new trends (or fads): Natural and organic

. Organic sales have been growing at an average annual rate of 10% for the past five years . But many raw materials are being imported

US Trade in Organic Products Top 5 Organic Imports

1,800 400

1,600 350

1,400 300

1,200 250

1,000 200

800 Million $ 150 Million $ 600 100

400 50

200 0 Yellow Olive Oil Bananas Soybeans Coffee 0 Corn 2011 2012 2013 2014 2015 2016

Imports Exports 2013 2014 2015 Source: USDA Source: USDA 20 ‘The experts’ are no longer the main source of information

. There is more information available on the internet than ever before

. Millennials trust a wide range of sources for information about which foods they should eat: • personal healthcare professionals (68%) • friends or family members (41%) • health, food and nutrition bloggers (33%) • U.S. government agencies (28%)

Are genetically modified foods healthy? Are granola bars healthy?

Scientists U.S. PublicNutritionists U.S. Public

YesNo NoYes Yes No Yes No Yes No

Source: Pew Institute, American Association for the Advancement of Science (2016), The New York Times (2016), Food Dive (2016) 21 3 How can ag respond Ag sector has been extremely efficient in providing plentiful and accessible farm products to big food processors

Increase in Food Production, and Food Spending as a share of Disposable Income

120 18.0

16.0 100 14.0

80 12.0

10.0

60 % 8.0

40 6.0

Index 2004-2006=100 4.0 20 2.0

0 0.0 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015

Food production index (LHS) Food expenditures as a share of disposable income (RHS)

Source: World Bank, World Development Indicators 23 Most of the increase has been due to TFP growth

-1 Average annual growth rate (%) annual growth rate Average

-2

Labor Capital Materials TFP Output Growth

Source: USDA 24 But, what worked in the past may not now. Need to innovate…

Total Output 1960=100 100 248 100358 100 429

100%

90%

80%

70% Feed & Pharma 60% Fert & Seed

50% Machinery

40% Livestock Land 30% Labour 20%

10%

0% 1960 2010 1960 2010 1960 2010 North America Developed Countries Lower-middle income excluding North America countries

Source: Rabobank analysis 25 1. Looking beyond the mainstream products

The Long Tail theory: . Our culture and economy is increasingly shifting away from a focus on a relatively small number of "hits" (mainstream products and markets) at the head of the demand curve and toward a huge number of niches in the tail . Products that have a low sales volume can collectively make up a market share that rivals or exceeds the head

The internet and online retailing lower:

• Search costs

• Marketing costs

• Inventory costs

Less need to lump products and consumers into a few big categories

26 Long tail example in milk

Milk and milk-alternative sales, 2016

6 $ billion

2 -5% CAGR 9% 2013-16 CAGR 1 2013-16

- Lowfat Whole Almond Organic Soy Kefir Other Coconut milk milk milk milk milk non milk dairy Source: Rabobank, IRI 27 2. Use of Technology

Smarter Big data Technology Algorithms food system Data available in the world today

Technology collects Technology collects Big data tells us data and data and what is happening 90% of the data in automates the way automates the way in lots of detail the world today has things are done things are done been created in the last two years alone

Data created in all of 10% history

28 Ag Tech investments across the supply chain

Ag Biotechnology Supply Chain Technologies On-farm inputs for crop & animal ag including Food safety & traceability tech, logistics & transport, genetics, microbiome, breeding food processing

Farm IoT Ag data capturing devices, decision support software, Bioenergy & Biomaterials big data analytics Non-food extraction & processing, feedstock technology

Robotics Innovative Food On-farm machinery, automation, drone Alternative proteins, novel ingredients & supplements manufacturers, grow equipment

Food Ecommerce Novel Farming System Online Farm-2-Consumer, meal kits, specialist consumer Indoor farms, insect, algae & microbe production food delivery

Other Other Equipment sharing software, cultured leather, etc. Equipment sharing software, cultured leather, etc.

Source: Agfunder AgTech Funding Report 2016 29 Exponentially Improving Gene Read/Write/Edit Capabilities

Boeke, Church, et al. 2016 Science. The Genome Project-Write.

1E+7 6E6 nt/$ 2E6 nt/$ 1E+6

1E+5 Oligo bp/$

1E+4 Seq bp/$

1E+3

1E+2

1E+1

1E+0

1E-1

1E-2

1E-3 1980 1985 1990 1995 2000 2005 2010 2015

30 3. Global linkages

Agricultural exports, imports and trade balance U.S. exports of bulk and high-value products

160 160

140 140

120 120

100 100

80 80 Billion $

Billion $ 60 60 40 40 20 20 0 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017f 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017f Bulk exports High value products Trade Balance Imports Exports All Ag Exports

Source: USDA Source: USDA 31 4. Connecting with the consumers

. Consumers want to know more about where their food comes from (most of them know very little) The - Overwhelmingly farmers and consumers share the same values consumer with respect to environmental stewardship and animal care has gone . The internet and social media provide a unique tool to generate digital communities around topics of interest and to bridge the communication and information gap . The food industry needs to be seen as tech savvy and in touch People interact through communities

Farmers and Corporates need to get involved

32 How Rabobank is helping address 4 these challenges 1.Remaining close to farmers through cycles

Our Contribution Banking for Food

Banking for Food is Rabobank’s approach to addressing the global food security challenge

For farmers, by farmers “Global Farmers is a community where farmers can connect, share and learn from each other (and) a great way for Rabobank to share its knowledge”

- Berry Marttin, Rabobank Executive Board

34 2. Working across the value chain

FARM INPUTS FARM INPUTS PRIMARY SECTOR TRADE & EXPORT PROCESSING RETAIL

Rabo Foundation 25 countries Rabo Development 16 countries

Rabo Development Financial inclusion for 7.5 mln people incl. 2 mln farmers Partnership Rabobank Group FAO & Rabobank 47 countries Foundation 3215 client branches in Africa

35 3. Finding value and growth by getting closer consumers through innovation

FoodBytes! Is dedicated to helping investors in the food industry Arlon Group is an investment firm with a global network that meet new innovative companies in food-related software and supports investments across the entire food supply chain in the applications, distribution, manufacturing, and production Americas

Anterra Capital is a specialist venture capital investor, with a First-of-its-kind accelerator-type program bringing together the dedicated focus on technology-driven companies across the food industry’s most disruptive startups and progressive corporations supply chain in Europe or in North America

12 36 Thank you