Despite a Difficult Year for Agriculture, HAIG Farmland Investments Provided Steady Returns

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1 Hancock Agricultural Investment Group Farmland Investor Volume 22, Number 2 Spring/Summer 2015 Despite a Difficult Year for Agriculture, HAIG Farmland Investments Provided Steady Returns From drought to drones and seed traits to port strikes, 2014 marked a year of challenge and change for agricultural markets. Commodity prices continued to soften with the S&P GSCI Agricultural Enhanced Select Total Return Index which measures the total return from corn, soybeans, sugar and wheat down 8.4%. However, amid agriculture s ever evolving landscape, institutional farmland investments continued to provide steady returns for their beneficiaries. In 2014, HAIG s Global Farmland Composite, representing $2.2 billion in assets under management across three countries and more than 20 commodities, produced 6.2% income and 4.9% appreciation for a total return of 11.4%, after fees. HAIG s long-term farmland investors were rewarded with solid financial performance in 2014, as the HAIG Global Farmland Composite returned 11.4% after fees. The 2014 income return Source: HAIG of 6.2% lifted the Composite s 3- and 5-year averages, primarily due to recent years permanent crop developments reaching productive maturity. Appreciation fell from 13.2% in 2013 to 4.9% in 2014, in line with the 20-year Composite average of 4.2%. As expected, the growth in value of HAIG annual crop properties at 3.5% was slower than that of its permanent crop properties at 9.2%. This difference in appreciation is reflective of the decreased profitability of soft commodities typically grown on annual crop properties experienced in Over the twenty year history of the HAIG Global Farmland Composite, HAIG farmland has produced an annualized income return of 6.8% and appreciation of 4.2% for a total return of 11.1%, after fees. 18% 16% 14% 12% 1 8% 6% 4% 2% Figure 1: HAIG Global Farmland Composite Performance (after fees) * 11.4% (Continued on page 2) Pistachios 15.3% 12.5% 13.9% Contents 11.6% 11.1% 1-Year 3-Year 5-Year 10-Year 15-Year Since Inception Income Appreciation Total Return (1995) Despite a Difficult Year for Agriculture, HAIG Farmland Investments Provided Steady Returns 1 Canadian Cranberry Bogs See Strong Production in Celebrating One Year of Unity. 6 Employee News. 7 Australia Expects a Record Macadamia Crop in *Hancock Agricultural Investment Group Australia, Canada, and U.S. properties. The composite is valued at $2.2 billion as of December 31, All returns have been calculated at the property level. Since all return components are calculated separately, the sum of income and appreciation may not equal total return. Past performance is not a guarantee of future results. Potential for profit as well as loss exists.

2 Despite a Difficult Year for Agriculture, HAIG Farmland Investments Provided Steady Returns (Continued from page 1) 14% 12% 1 8% 6% 4% 2% 25% 2 15% 1 5% Source: USDA Net Farm Income (Constant 2009 Dollars, Billions) Income Yield on Real Estate Assets 5 per. Mov. Avg. (Income Yield on Real Estate Assets) -5% Figure 2: U.S. Net Farm Income and Return on Farmland Real Estate, Figure 3: U.S. HAIG Annual Crop Return Performance, ** Source: HAIG Income Total Return Figure 4: HAIG Permanent Crop Return Performance, ** Income Total Return According to the USDA, U.S. net farm income fell 17% in 2014, driven largely by the lower value of crop production with corn, oilseeds, and wheat experiencing some of the largest price declines. Though trending downward, farm income in constant dollar terms remains above long-run averages. However, the value of farmland was down 0.8% in 2014, reflecting the countervailing effects of weaker income, yet strong demand for quality farmland. On a percentage basis, the income yield on all farmland real estate assets was 4.4% in 2014, a decrease from 2013 s 5.4%. Despite this decrease, on a rolling five-year basis, there has been an upward trend in income yield since Overall, farm income has grown faster than values in real terms. Diverse Crop Types Provided Strong Returns Across a range of crop types, HAIG farmland investments generated solid returns in Annual crop investments produced a total return of 6.7%, while permanent crops produced 18.6%. Five commodity groups produced double -digit total returns, led by nut crops pistachios and walnuts. HAIG annual crop investments are leased to local farm operators, providing clients with relatively low-risk income returns. The softening in prices for agricultural commodities including corn, soybeans, wheat, and rice has resulted in a flattening or slight decrease of lease rates. In regard to property values, HAIG s leased row crop properties appraised generally flat or down, reflecting the decrease in underlying profitability for farm operators. In 2014, HAIG s annual crops produced a total return of 6.7%, of which 3.2% was income. Comparatively, HAIG permanent crop investments, which are operated directly by HAIG or its specialty property managers, yielded 9.4% income in Sustained permanent crop profitability continued to be the primary driver of land valuations, with appreciation bringing HAIG s permanent crop portfolio total return to 18.6%. Pistachios A larger than expected pistachio crop in combination with a low carryover crop maintained initial pricing near historic peaks, resulting in strong income in Originally forecasted at million pounds, final production estimates for the 2014 crop season are now at 519 million. Despite early season concerns regarding spotty bloom, water shortages, and pest pressure, limited impact was realized. -1 Source: HAIG (Continued on page 3) **Hancock Agricultural Investment Group U.S. properties only. All returns are calculated at the property level using NCREIF Farmland Index (NFI) methodology and include a 100 basis point deduction as a proxy for investment management fees. Since all return components are calculated separately, the sum of income and appreciation may not equal total return. Past performance is not a guarantee of future results. Potential for profit as well as loss exists. 2

3 Despite a Difficult Year for Agriculture, HAIG Farmland Investments Provided Steady Returns (Continued from page 2) The large crop, coupled with the strong U.S. dollar and decreased demand from China, has placed downward pressure on prices in recent months. Should U.S. pistachio growers produce a similar sized crop in the coming year, HAIG expects further softening of prices. Walnuts Walnut production was greater than anticipated, increasing 15% nationwide to an estimated 545,000 tons. After a sharp slowdown mid-winter, walnut shipments rebounded in early spring to levels in line with the same period in Due to the larger crop size, however, product shipped year-to-date as a percent of total production is down. Despite the larger inventory, sustained demand is expected to support pricing at elevated levels. In 2014, HAIG walnut investments generated an income return of 12.. Additionally, strong demand and limited supply of quality farmland continues to push market values upward, contributing to a total return of 24.7% for the year. Water and pest pressure will be key factors in determining crop size and quality in Almonds The almond industry recorded a smaller crop than expected, off 11% from initial projections and down 7% year-over-year. Although winter shipment backlogs due to port delays swiftly corrected in March and April, shipments year-to-date are down proportionately with lower crop size. Looking to the 2015 crop, growers observed an earlier than usual bloom and fair conditions during pollination. Bloom conditions suggest a strong crop but much will ride on weather, water, and pest pressures throughout spring and summer kernel development phase. HAIG almond properties produced 6.7% income and a total return of 20.7% in Five commodity groups produced double-digit total returns, led by nut crops pistachios and walnuts. Wine Grapes The U.S. wine industry continues to rebound as consumer demand strengthens across middle to higher price points after a sharp decline following the global financial crisis. At lower price points, prices continue to soften as evidenced by a three percent reduction in shipments for wine under $7 per bottle. Comparatively, $10 per bottle wine saw double-digit increases in shipment volume in Demand for high quality, productive vineyards with desirable varietals continues to strengthen, with valuations steadily rising over the past eighteen months. The 2014 crop was approximately 8% below 2013 s record production. Early indications are for an average to slightly above (Continued on page 4) Wine grapes 3

4 Despite a Difficult Year for Agriculture, HAIG Farmland Investments Provided Steady Returns (Continued from page 3) average crop in Grapes from HAIG properties are sold via a mix of multi-year contracts and open market sales. In 2014, HAIG wine grape investments returned 7.6% income toward a total return of 20.3%. Apples The Washington State apple crop established a new record at 150 million boxes, 15% higher than the previous record in Abundant supplies have driven down prices and enabled processors to exert a high degree of selectiveness with regard to fruit size, color, and quality. Further exacerbating the ability to move apples were port slowdowns in Seattle and an anti-dumping case filed by Mexico against the U.S. Despite these challenges, pockets of value continue to emerge in this heterogeneous industry, where prices range widely by varietal and use. In recent years, HAIG has seen a growing premium for its organic apples and for newer boutique varietals. HAIG apples yielded 6.1% income and a total return of 6.9% in % 2 15% 1 5% -5% -1 Figure 5: HAIG 2014 Performance by Commodity Group (after fees) 13.4% 21. Source: HAIG % 7.6% Pistachios Walnuts Wine Grapes 20.3% 20.7% Income 6.7% 6.9% 6.1% 5.7% Total Return -3.8% 3.2% 6.7% Almonds Apples Cranberries Leased Row Crops Hancock Agricultural Investment Group U.S. properties only. Returns reflect both mature and development properties and are calculated at the property level using NCREIF Farmland Index (NFI) methodology. A 100 basis point reduction is used as a proxy for investment management fees. Since all return components are calculated separately, the sum of income and appreciation may not equal total return. Past performance is no guarantee of future results. Potential for profit as well as loss exists. Cranberries Cranberry markets in both the U.S. and Canada continue to work through large inventories brought the second largest crop on record, and carryover inventories are projected to grow to 80 to 90 percent of sales. HAIG cranberries are sold to a variety of processors, with pricing largely driven by product. Sweetened dried cranberries command a higher premium whereas cranberry juice concentrate determines the floor of the market. Despite weak pricing, HAIG cranberries in aggregate produced a 5.7% income return. Persistently low pricing and oversupply continued to drive down valuations, resulting in a total return of -3.8% on cranberry investments in Responsible soil moisture management will continue be a top priority for HAIG operators in 2015 amid ongoing severe drought conditions in many growing regions. The percentage of the contiguous US characterized as exceptional or extreme drought increased from 3.2% to 7.4%, with the brunt of these moisture deficits borne by the Western US. 1 All HAIG farming operations utilize minimum effective water amounts, precise irrigation schedules, and efficient, targeted irrigation systems including drip lines and micro-sprinkler systems. As with all crops, water availability plays an important role in orchard planning and management. Almond trees 1 US Drought Monitor (droughtmonitor.unl.edu) 2 HAIG returns as presented are calculated using NCREIF Farmland Index (NFI) methodology. The NFI comprises directly held U.S. farmland investments managed by six participating institutional investment managers. NFI is calculated at the property-level and does not include the impact of portfolio administrative expenses, fund-level leverage or investment management fees. Development projects are excluded. The NFI is not investable as it is comprised of discrete properties for which there are no readily tradable securities. At December 31, 2014, the NFI included $5.5 billion in farmland real estate of which HAIG-managed properties represented approximately 3. 4

5 Despite a Difficult Year for Agriculture, HAIG Farmland Investments Provided Steady Returns (Continued from page 4) 15% 12% 9% 6% 3% HAIG Farmland Outperformed Investment Peers HAIG farmland investments performed favorably compared to the NCREIF Farmland Index (NFI). Income generated by HAIG investments exceeded the broader NFI by approximately 170 basis points in Over longer annualized periods, HAIG continued to outperform this benchmark. HAIG has delivered superior performance for its clients on a total return basis, exceeding the NFI across 1-, 3-, 5-, 10-, 15- and Since Inception (1991) periods 2. Figure 6: HAIG Property-level Income Performance versus NCREIF Farmland Index (before fees) *** 9.6% 9.7% 7.9% 8.2% 9.1% 9.9% 9.9% 7.8% 7.9% 7.6% 9.4% 7.1% 1-Year 3-Year 5-Year 10-Year 15-Year Since Inception (1991) Source: HAIG, NCREIF HAIG NCREIF 2015 Outlook Looking back over six decades of USDA data, we observe a general compression of capitalization rates since the early 1990s, but note that current income yields are 100 to 200 basis points above the averages of the 1980s, when farmland income returns were as low as 1.9%. With substantially less leverage and increasing technological efficiencies, the farm sector is better poised to weather weak prices in 2015 than past periods. Yet if history is an indication, operators and investors are willing to accept low returns in order to participate in farmland markets. In 2015, the strong U.S. dollar and large global stocks will continue to suppress soft commodity prices. Water will remain a pressing issue throughout the Western U.S., particularly in California s Central Valley. The passage of the 2014 Farm Bill and resolution of port strikes in the U.S. Pacific Northwest have eliminated some uncertainty for market participants, but natural weather events and changing demand from buyers of world agricultural products will continue to drive volatility in and across agriculture markets. HAIG will meet these challenges with a well-honed focus on operational efficiency and stewardship, and strive to deliver superior returns to its clients and their beneficiaries in 2015 and beyond. 25% 2 15% 1 Figure 7: HAIG Property-level Total Return Performance versus NCREIF Farmland Index (before fees) *** 14.8% 12.6% 19.4% 17.3% 16.4% 15.1% HAIG 18.4% 16.7% 15.3% 14. NCREIF 13.4% 11.9% 5% 1-Year 3-Year 5-Year 10-Year 15-Year Since Inception Source: HAIG, NCREIF (1991) Picture caption Apples ***HAIG property-level returns calculated using NCREIF Farmland Index (NFI) methodology. The NCREIF Farmland Index is presented before investment management fees, without the effects of fund-level administrative costs or debt. Developmental and non-u.s. properties are excluded. Past performance is no guarantee of future results. Potential for profit as well as loss exists. HAIG's fees are available upon request and also may be found in Part II of the Hancock Natural Resource Group Form ADV. 5

6 Canadian Cranberry Bogs See Strong Production in 2014 HAIG s Canadian cranberry bogs had one of their strongest production years in Like the U.S., the Canadian cranberry industry continues to struggle with an oversupply in the market due to record yields, resulting in decreased pricing. In 2014, HAIG s Canadian cranberry cleaning facility cleaned 16 million pounds of cranberries, including other area growers harvests. The cleaning facility revenue supplements the property s income, a significant benefit during a time of depressed cranberry pricing. Under the management of Canneberges Becancour Management, LLC, HAIG forecasts another successful crop in Celebrating One Year of Unity Hancock Natural Resource Group Receives Manulife s Star of Excellence Award for Project Unity March marked one year since HAIG acquired its long-time property management partner, Farmland Management Services (FMS). The transaction formalized the relationship of more than 25 years and furthered the partnership s strategic and competitive advantage. HAIG s acquisition of FMS has resulted in a best-in-class integrated farmland investment business, with a clear line of sight from farm gate to the investor. The partnership has enabled HAIG to fully align the interests of investors and farm management while controlling costs and mitigating risk. In May, those who worked on the acquisition and integration of FMS collectively known as the Project Unity Team were awarded one of Manulife Financial Corporation s Stars of Excellence Awards. These awards recognize extraordinary accomplishments and are the most prestigious awards given out by Manulife. Left to right: Bryan Filippi, Diana Martens, Debbie Farrell, Peta-Gaye Prinn, Jeff Hillberg, Warren Thomson, Oliver Williams, Tim Koekler, Meg Beagen, Bea Porter. 6

7 HAIG Employee News HAIG is pleased to announce Mark Royall has joined the Acquisitions Team as the Southeast Acquisitions Manager. Additionally, James Neyhard and Beatrice Porter earned promotions. Mark Royall Southeast Acquisitions Manager Mark Royall is responsible for sourcing farmland properties throughout the region to meet the investment objectives of HAIG clients. Mark brings over 20 years of experience in real estate investment, including direct management of large ranch lands and permanent crops, land acquisition for international corporations, and land development across a variety of asset types. Prior to joining HAIG, Mark was an Agricultural Land Acquisition Manager for BP PLC, sourcing renewable energy opportunities across the southern U.S. He graduated from Carson Newman College with a B.A. in Biological Sciences and has an M.B.A from Webster University. Mark grew up working on his grandfather s tobacco farm in North Carolina and currently resides in Florida. James Neyhard Resource Planning Manager James Neyhard was promoted to Resource Planning Manager. He will be responsible for the development of protocols and technology to more effectively collect, store, validate, disseminate, and use operational data to enhance the competitive advantages of HAIG s integrated management platform. He has been with HAIG since April Beatrice Porter Risk Management Manager Beatrice Porter was promoted to Risk Management Manager. She will be responsible for oversight of HAIG s farmland investment activities and be the liaison between the risk management activities of HNRG s legal/compliance team and the risk management activities of HFS in the field. She will also be responsible for maintaining the appraisal policy, approved appraiser list, scheduling appraisals, and reviewing client asset valuations as they are submitted. She has been with HAIG since May Harvested pistachios 7

8 Australia Expects a Record Macadamia Crop in 2015 Despite a cyclone in Central Queensland and heavy rainfall in northern New South Wales delaying the start of harvest, Australian macadamia growers are on track to produce a record crop this year. The Australian macadamia harvest begins in February/March and continues for up to six months, with the last nuts collected from orchard floors in August/ September. According to the Australian Macadamia Society, the 2015 crop is estimated at 43,800 tons in-shell at 3.5% moisture. In comparison, the 2014 and 2013 crops weighed in at 40,600 tons and 32,800 tons at 3.5% moisture, respectively. There is very strong global demand for both kernel and in-shell macadamias. Seventy percent of the 2015 crop is expected to be exported, with over 5 of exported to Asia. Traditional markets are expected to remain strong and new, emerging markets such as Korea and Taiwan are expected to continue to grow. Demand for in-shell macadamias from China is anticipated rise in In 2014, over 25% of the Australian macadamia crop was exported to China. With world stocks of macadamia nuts low, the Australia dollar weak, and the demand from Asia increasing, prices for the 2015 crop are expected to be higher than 2014 pricing. HAIG expects to exceed both budgeted yields and pricing in Almond orchard Disclaimers and Note on Forward Looking Statements Farmland Investor is published by the Hancock Agricultural Investment Group, a division of Hancock Natural Resource Group, Inc. headquartered in Boston, Massachusetts. Hancock Natural Resource Group, Inc. is a registered investment adviser and wholly-owned, indirect subsidiary of Manulife Financial Corporation of Toronto, Canada. The information provided herein is not an offer to sell, or a solicitation to buy any security, investment product or service. This material was prepared solely for informational purposes and it is distributed with the understanding that Hancock Agricultural Investment Group is not rendering legal, accounting or other professional services. There is no guarantee that forecasts discussed will be realized. A variety of factors, many of which are beyond Hancock Agricultural Investment Group s control, may affect performance and results, and could cause the actual performance and results of investments to materially differ from any future performance or results that may be expressed or implied by any forward-looking statement. This document may not be reproduced or transferred in any form written or electronic without the express written consent of Hancock Natural Resource Group, Inc Hancock Natural Resource Group 99 High Street 26th Floor Boston, MA First Class Mail U.S. Postage PAID Boston, MA Permit No. 11 For further information please contact : Stephen A. Kenney Vice President, Business Development (617) or visit our website at : 8