20-F 1 d340331d20f.htm FORM 20-F Form 20-F
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 20-F

 

 

     ¨   REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934

OR

 

     x   ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED ON DECEMBER 31, 2011

OR

 

     ¨   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM             TO            

OR

 

     ¨   SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Date of event requiring this shell company report                     

COMMISSION FILE NUMBER: 001-35052

 

Adecoagro S.A.

(Exact name of Registrant as specified in its charter)

 

N/A

(Translation of Registrant’s name into English)

 

Grand Duchy of Luxembourg

(Jurisdiction of incorporation or organization)

 

13-15 Avenue de la Liberté

L-1931 Luxembourg

R.C.S. Luxembourg B 153 681

+352 2689-8213

(Address of principal executive offices)

 

Abdelhakim Chagaar

13-15, avenue de la Liberté

L — 1931 Luxembourg

Email: abdelhakim.chagaar@atcgroup.com

Tel: +352.2689.0112

(Name, Telephone, E-Mail and/or Facsimile number and Address of Company Contact Person)

Securities registered or to be registered pursuant to Section 12(b) of the Act.

 

Title of Each Class        Name of Each Exchange on Which Registered
Common Shares      New York Stock Exchange

Securities registered or to be registered pursuant to Section 12(g) of the Act:

None

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:

None

The number of outstanding shares of each of the issuer’s classes of capital stock

as of December 31, 2011:

120,531,045 Common Shares, par value $1.50 per share

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ¨    No  x

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.    Yes  ¨    No  x

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ¨    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer  ¨                 Accelerated filer  ¨                 Non-accelerated filer  x

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

 

U.S. GAAP  ¨

    

International Financial Reporting Standards as issued

by the International Accounting Standards Board  x

   Other  ¨

If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the Registrant has elected to follow:      Item 17  ¨    Item 18  ¨

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

 

 

 


Table of Contents

TABLE OF CONTENTS

 

         Page  

Forward-Looking Statements

     ii   

Presentation of Financial and Other Information

     iii   

PART I

     1   

Item 1. Identity of Directors, Senior Management and Advisers

     1   

Item 2. Offer Statistics and Expected Timetable

     1   

Item 3. Key Information

     1   
  A. Selected Financial Data      1   
  B. Capitalization and Indebtedness      8   
  C. Reasons for the Offer and Use of Proceeds      8   
  D. Risk Factors      9   

Item 4. Information on the Company

     34   
  A. History and Development of the Company      34   
  B. Business Overview      37   
  C. Organizational Structure      82   
  D. Property, Plants and Equipment      82   

Item 4A. Unresolved Staff Comments

     83   

Item 5. Operating and Financial Review and Prospects

     83   
  A. Operating Results      85   
  B. Liquidity and Capital Resources      114   
  C. Research And Development, Patents and Licenses, Etc.      120   
  D. Trend Information      121   
  E. Off-Balance Sheet Arrangements      121   
  F. Tabular Disclosure of Contractual Obligations      121   
  G. Safe Harbor      121   

Item 6. Directors, Senior Management and Employees

     122   
  A. Directors and Senior Management      122   
  B. Compensation      126   
  C. Board Practices      126   
  D. Employees      129   
  E. Share Ownership      129   

Item 7. Major Shareholders and Related Party Transactions

     132   
  A. Major Shareholders      132   
  B. Related Party Transactions      134   
  C. Interests of Experts and Counsel      135   
Item 8. Financial Information      135   
  A. Consolidated Statements and Other Financial Information      135   
  B. Significant Changes      136   

Item 9. The Offer and Listing

     136   
  A. Offer and Listing Details      136   
  B. Plan of Distribution      136   
  C. Markets      136   
  D. Selling Shareholders      136   
  E. Dilution      137   
  F. Expenses of the Issue      137   

Item 10. Additional Information

     137   
  A. Share Capital      137   
  B. Memorandum and Articles of Association      137   
  C. Material Contracts      145   
  D. Exchange Controls      146   
  E. Taxation      149   
  F. Dividends and Paying Agents      155   
  G. Statement by Experts      155   
  H. Documents on Display      155   
  I. Subsidiary Information      155   

Item 11. Quantitative and Qualitative Disclosures About Market Risk

     155   

 

i


Table of Contents

Item 12. Description of Securities Other than Equity Securities

     156   
  A. Debt Securities      156   
  B. Warrants and Rights      156   
  C. Other Securities      156   
  D. American Depositary Shares      156   

PART II

     156   

Item 13. Defaults, Dividend Arrearages and Delinquencies

     156   

Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds

     156   

Item 15. Controls and Procedures

     156   

Item 16A. Audit Committee Financial Expert

     157   

Item 16B. Code of Ethics

     157   

Item 16C. Principal Accountant Fees and Services

     157   

Item 16D. Exemptions from the Listing Standards for Audit Committees

     158   

Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers

     158   

Item 16F. Change in Registrant’s Certifying Accountant

     158   

Item 16G. Corporate Governance

     158   

Item 16H. Mine Safety Disclosure

     160   

PART III

     160   

Item 17. Financial Statements

     160   

Item 18. Financial Statements

     160   

Item 19. Exhibits

     160   

FORWARD-LOOKING STATEMENTS

This annual report contains forward-looking statements that are based on our current expectations, assumptions, estimates and projections about us and our industry. These forward-looking statements can be identified by words or phrases such as “anticipate,” “believe,” “continue,” “estimate,” “expect,” “intend,” “is/are likely to,” “may,” “plan,” “should,” “would,” or other similar expressions. The forward-looking statements included in this annual report relate to, among others:

 

   

our business prospects and future results of operations;

 

   

weather and other natural phenomena;

 

   

developments in, or changes to, the laws, regulations and governmental policies governing our business, including limitations on ownership of farmland by foreign entities in certain jurisdiction in which we operate, environmental laws and regulations;

 

   

the implementation of our business strategy, including our development of the Ivinhema mill and other current projects;

 

   

our plans relating to acquisitions, joint ventures, strategic alliances or divestitures;

 

   

the implementation of our financing strategy and capital expenditure plan;

 

   

the maintenance of our relationships with customers;

 

   

the competitive nature of the industries in which we operate;

 

   

the cost and availability of financing;

 

   

future demand for the commodities we produce;

 

   

international prices for commodities;

 

   

the condition of our land holdings;

 

ii


Table of Contents
   

the development of the logistics and infrastructure for transportation of our products in the countries where we operate;

 

   

the performance of the South American and world economies;

 

   

the relative value of the Brazilian Real, the Argentine Peso, and the Uruguayan Peso compared to other currencies; and

 

   

the factors discussed under the section entitled “Risk Factors” in this annual report.

These forward-looking statements involve various risks and uncertainties. Although we believe that our expectations expressed in these forward-looking statements are reasonable, our expectations may turn out to be incorrect. Our actual results could be materially different from our expectations. In light of the risks and uncertainties described above, the estimates and forward-looking statements discussed in this annual report might not occur, and our future results and our performance may differ materially from those expressed in these forward-looking statements due to, inclusive, but not limited to, the factors mentioned above. Because of these uncertainties, you should not make any investment decision based on these estimates and forward-looking statements.

The forward-looking statements made in this annual report relate only to events or information as of the date on which the statements are made. We undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date on which the statements are made or to reflect the occurrence of unanticipated events.

PRESENTATION OF FINANCIAL AND OTHER INFORMATION

Certain Defined Terms

In this annual report, unless otherwise specified or if the context so requires:

 

   

References to the terms “Adecoagro S.A.,” “Adecoagro,” “we,” “us,” “our,” “Company” and “our company” refer to, Adecoagro S.A., a corporation organized under the form of a société anonyme under the laws of the Grand Duchy of Luxembourg, and its subsidiaries, except in the case of historical financial and operating information and results where we are referring to IFH LLC and unless otherwise indicated.

 

   

References to “IFH” and “IFH LP” mean International Farmland Holdings, LP, a limited partnership (previously International Farmland Holdings, LLC, or IFH LLC) organized under the laws of Delaware, and its subsidiaries.

 

   

References to “Adecoagro LP” mean Adecoagro, LP, a limited partnership (previously Adecoagro, LLC) organized under the laws of Delaware, and its subsidiaries.

 

   

References to “$,” “US$,” “U.S. dollars” and “dollars” are to U.S. dollars.

 

   

References to “Argentine Pesos,” “Pesos” or “Ps.” are to Argentine Pesos, the official currency of Argentina.

 

   

References to “Brazilian Real,” “Real,” “Reais” or “R$” are to the Brazilian Real, the official currency of Brazil.

 

   

Unless stated otherwise, references to “sales” are to the combined sales of manufactured products and services rendered plus sales of agricultural produce and biological assets.

Financial Statements

Background

As part of a corporate reorganization (the “Reorganization”), Adecoagro, a Luxembourg corporation under the form of a société anonyme, was formed as a holding company for IFH for the purpose, among others, of facilitating

 

iii


Table of Contents

the initial public offering (the “IPO”) of our common shares, completed on January 28, 2011. Before the IPO, Adecoagro had not engaged in any business or other activities except in connection with its formation and the Reorganization. For an additional discussion of the Reorganization, see “Item 4. Information of the Company—A. History and Development of the Company—History.”

The Reorganization was limited to entities which were all under the control of the same shareholder group and was implemented in part to facilitate the IPO. In accordance with IFRS, the Reorganization did not qualify as a business combination under common control; rather, it was a simple reorganization of the capital of IFH. The Reorganization was completed on October 30, 2010. In accordance with IFRS, the Reorganization was retroactively reflected in the consolidated financial statements as of and for the year ended December 31, 2010. Therefore, all financial and other information herein relating to December 2010, 2009, 2008 and 2007 are presented using the historical values from the consolidated financial statements of IFH. However, the issued share capital reflects that of Adecoagro as of the Reorganization date.

On January 10, 2011, our board of directors voted in favor of a proposal to change the nominal value of the equity shares of the Company from the nominal value of $1 each to the nominal value of US$1.50 each (the “Reverse Stock Split”). This proposal was approved at a duly convened extraordinary general meeting of shareholders held on January 24, 2011, pursuant to Luxembourg law, which reduced our total shares outstanding from 119,999,997 shares to 79,999,985 shares. On February 2, 2011, the Company completed its IPO when it increased its total shares outstanding from 79,999,985 shares to 120,069,222, after giving effect to the exercise of the underwriters over-allotment option on February 11, 2011.

During 2011, we contributed the net proceeds of the IPO to increase our interest in IFH from 98% to 98.64%.

During March, 2012, we issued 696,618 shares to certain limited partners of IFH in exchange for their residual interest in IFH, totaling 0.57230%, thereby increasing our interest in IFH to 99.2%.

The consolidated financial statements as of December 31, 2011, 2010, and 2009 and for the years then ended included in this annual report have been prepared in accordance with International Financial Reporting Standards of the International Accounting Standards Board (“IASB”) and the interpretations of the International Financial Reporting Interpretations Committee (“IFRIC”), together IFRS. All IFRS issued by the IASB, effective at the time of preparing the consolidated financial statements have been applied. The consolidated financial statements as of December 31, 2011, 2010 and 2009 and for the years then ended are hereinafter referred to as the “consolidated financial statements”.

Non-IFRS Financial Measures

We present Adjusted Consolidated EBITDA, Adjusted Segment EBITDA, Adjusted Consolidated EBIT and Adjusted Segment EBIT in this annual report as supplemental measures of performance of our company and of each operating segment, respectively, that are not required by, or presented in accordance with IFRS. Our Adjusted Consolidated EBITDA equals the sum of our Adjusted Segment EBITDAs for each of our operating segments. We define “Adjusted Consolidated EBITDA” as consolidated net profit or loss for the year, as applicable, before interest expense, income taxes, depreciation and amortization, foreign exchange gains or losses, other net financial expenses and unrealized changes in fair value of our long-term biological assets, primarily our sugarcane and coffee plantations, and cattle stocks. We define “Adjusted Segment EBITDA” for each of our operating segments as the segment’s share of consolidated profit from operations before financing and taxation for the year, as applicable, before depreciation and amortization and unrealized changes in fair value of our long-term biological assets. We believe that Adjusted Consolidated EBITDA and Adjusted Segment EBITDA are important measures of operating performance for our company and each operating segment, respectively, because they allow investors and others to evaluate and compare our consolidated operating results and to evaluate and compare the operating performance of our segments, respectively, including our return on capital and operating efficiencies, from period to period by removing the impact of our capital structure (interest expense from our outstanding debt), asset base (depreciation and amortization), tax consequences (income taxes), unrealized changes in fair value of biological assets (a significant non-cash gain or loss to our consolidated statements of income following IAS 41 accounting), foreign exchange gains or losses and other financial expenses. Other companies may calculate Adjusted Consolidated EBITDA and Adjusted Segment EBITDA differently, and therefore our Adjusted Consolidated EBITDA and

 

iv


Table of Contents

Adjusted Segment EBITDA may not be comparable to similarly titled measures used by other companies. Adjusted Consolidated EBITDA and Adjusted Segment EBITDA are not measures of financial performance under IFRS, and should not be considered in isolation or as an alternative to consolidated net profit (loss), cash flows from operating activities, segment’s profit from operations before financing and taxation and other measures determined in accordance with IFRS. Items excluded from Adjusted Consolidated EBITDA and Adjusted Segment EBITDA are significant and necessary components to the operations of our business, and, therefore, Adjusted Consolidated EBITDA and Adjusted Segment EBITDA should only be used as a supplemental measure of our company’s operating performance, and of each of our operating segments, respectively. We also believe Adjusted Consolidated EBITDA and Adjusted Segment EBITDA are useful for securities analysts, investors and others to evaluate the financial performance of our company and other companies in the agricultural industry. These non-IFRS measures should be considered in addition to, but not as a substitute for or superior to, the information contained in either our statements of income or segment information.

Our Adjusted Consolidated EBIT equals the sum of our Adjusted Segment EBITs for each of our operating segments. We define “Adjusted Consolidated EBIT” as consolidated net profit or loss for the year, as applicable, before interest expense, income taxes, foreign exchange gains or losses, other net financial expenses and unrealized changes in fair value of our long-term biological assets, primarily our sugarcane and coffee plantations, and cattle stocks. We define “Adjusted Segment EBIT” for each of our operating segments as the segment’s share of consolidated profit from operations before financing and taxation for the year, as applicable, before unrealized changes in fair value of our long-term biological assets. We believe that Adjusted Consolidated EBIT and Adjusted Segment EBIT are important measures of operating performance, for our company and each operating segment, respectively, because they allow investors and others to evaluate and compare our consolidated operating results and to evaluate and compare the operating performance of our segments, from period to period by including the impact of depreciable fixed assets and removing the impact of our capital structure (interest expense from our outstanding debt), tax consequences (income taxes), unrealized changes in fair value of biological assets (a significant non-cash gain or loss to our consolidated statements of income following IAS 41 accounting), foreign exchange gains or losses and other financial expenses. Other companies may calculate Adjusted Consolidated EBIT and Adjusted Segment EBIT differently, and therefore our Adjusted Consolidated EBIT and Adjusted Segment EBIT may not be comparable to similarly titled measures used by other companies. Adjusted Consolidated EBIT and Adjusted Segment EBIT are not measures of financial performance under IFRS, and should not be considered in isolation or as an alternative to consolidated net profit (loss), cash flows from operating activities, segment’s profit from operations before financing and taxation and other measures determined in accordance with IFRS. Items excluded from Adjusted Consolidated EBIT and Adjusted Segment EBIT are significant and necessary components to the operations of our business, and, therefore, Adjusted Consolidated EBIT and Adjusted Segment EBIT should only be used as a supplemental measure of the operating performance of our company, and of each of our operating segments, respectively. We also believe Adjusted Consolidated EBIT and Adjusted Segment EBIT are useful for securities analysts, investors and others to evaluate the financial performance of our company and other companies in the agricultural industry.

Fiscal Year and Harvest Year

Our fiscal year begins on January 1 and ends on December 31 of each year. However, our production is based on the harvest year for each of our crops, rice and coffee. A harvest year varies according to the crop, rice or coffee plant and to the climate in which it is grown. Due to the geographic diversity of our farms, the planting period for a given crop, rice or coffee may start earlier on one farm than on another, causing differences in their respective harvesting periods. The presentation of production volume (tons) and product area (hectares) in this annual report, in respect of the harvest years for each of our crops, rice and coffee, starts with the first day of the planting period at the first farm to start planting that harvest year and continues to the last day of the harvesting period of the respective crop, rice or coffee on the last farm to finish harvesting that harvest year, as shown in the table below.

 

v


Table of Contents

 

LOGO

Product area for cattle is presented on a harvest year basis given that land utilized for cattle operations is linked to our farming operations and use of farmland during a harvest year. Production volumes for dairy and cattle operations are presented on a fiscal year basis. On the other hand, production volumes and product area in our sugar, ethanol and energy business are presented on a fiscal year basis.

The financial results for all of our products are presented on a fiscal year basis.

Certain Weight Units and Measures in the Agricultural Business

Weight units and measures used in agriculture vary according to the crop and producing country. In order to permit comparability of our operating data with operating data from the international markets, the following table sets forth key weight units and measures used in the agriculture industry:

 

Agricultural weight units and measures

     

1 metric ton

   1,000 kg    1.102 U.S. (short) tons

1 cubic meter

   1,000 liters   

1 kilogram (kg)

   2.20462 pounds   

1 pound

   0.45359 kg   

1 acre

   0.40469 hectares   

1 hectare (ha)

   2.47105 acres   

Soybean and Wheat

     

1 bushel of soybean

   60 pounds    27.2155 kg

1 bag of soybean

   60 kg    2.20462 bushels

1 bushel/acre

   67.25 kg/ha   

1.00 U.S. dollar/bushel

   2.2046 U.S. dollar/bag   

Corn

     

1 bushel of corn

   56 pounds    25.4012 kg

1 bag of corn

   60 kg    2.36210 bushels

1 bushel/acre

   62.77 kg/ha   

1.00 U.S. dollar/bushel

   2.3621 U.S. dollar/bag   

Cotton

     

1 bale

   480 pounds    217.72 kg

1 arroba

   14.68 kg   

Coffee

     

1 bag of coffee

   60 kg    132.28 pounds

1.00 US$ cents/pound

   1.3228 U.S. dollar/bag   

Dairy

     

1 liter

   0.264 gallons    2.273 pounds

1 gallon

   3.785 liters    8.604 pounds

1 lbs

   0.440 liters    0.116 gallons

 

vi


Table of Contents

1.00 U.S. dollar/liter

   43.995 U.S. dollar/cwt    3.785 U.S. dollar/gallon

1.00 U.S. dollar/cwt

   0.023 U.S. dollar/liter    0.086 U.S. dollar/gallon

1.00 U.S. dollar/gallon

   0.264 U.S. dollar/liter    11.622 U.S. dollar/cwt

Sugar & Ethanol

     

1 kg of TRS equivalent

   0.95 kg of VHP Sugar    0.59 liters of Hydrated Ethanol

1.00 US$ cents/pound

   22.04 U.S. dollar/ton   

Presentation of Information — Market Data and Forecasts

This annual report is based on information provided by us and by third-party sources that we believe are reliable, including data related to the economic conditions in the markets in which we operate. Unless otherwise indicated, information in this annual report concerning economic conditions is based on publicly available information from third-party sources which we believe to be reasonable. The economic conditions in the markets in which we operate may deteriorate, and those economies may not grow at the rates projected by market data, or at all. The deterioration of the economic conditions in the markets in which we operate may have a material adverse effect on our business, results of operations and financial condition and the market price of our common shares.

Rounding

We have made rounding adjustments to reach some of the figures included in this annual report. Accordingly, numerical figures shown as totals in some tables may not be an arithmetic aggregation of the figures that preceded them.

 

vii


Table of Contents

PART I

Item 1. Identity of Directors, Senior Management and Advisers

Not applicable.

Item 2. Offer Statistics and Expected Timetable

Not applicable.

Item 3. Key Information

A. SELECTED FINANCIAL DATA

The following tables present selected historical consolidated financial data of Adecoagro for the periods indicated below. We have derived the selected historical statement of income, cash flow and balance sheet data as of and for the years ended December 31, 2011, 2010 and 2009 from the consolidated financial statements included elsewhere in this annual report. The historical results for any prior period presented are not necessarily indicative of our results to be expected for any future period.

We have derived the summary historical statement of income, cash flow and balance sheet data as of and for the year ended December 31, 2008 and 2007 from the consolidated financial statements as of and for the year ended December 31, 2008 and 2007, which are not included in this annual report. Certain reclassifications have been made to the consolidated financial statements as of December 31, 2008 and 2007, and for the year then ended, to conform to the current presentation.

Certain reclassifications have been made to previously issued Financial Statements including, the Income Statements, Statements of Financial Position and the Statement of Cash Flow, which do not affect the net results or the equity of the Company. These reclassification are:

 

   

We changed the policy for presenting certain biological assets, mainly sugarcane and coffee plantations, from current assets to non-current assets. Current and non-current assets were retroactively restated as a result of this change. We consider that classification of these biological assets as non-current is more appropriate based on their nature, as capable of sustaining regular harvests in the long-term. Classification as non-current is also consistent with comparable from peer companies in the industry. This reclassification has not affected the total equity, statements of income, statements of cash flows. Comparative financial statements were revised as a result of such change, reducing current biological assets and increasing non-current biological assets in $ 29.3 million and $ 20.4 million as of December 31, 2010 and 2009, respectively.

 

   

In addition, in December 2011, as permitted under IAS 7, we changed the policy for presenting interest paid in the statement of cash flows, classifying it under financing activities instead of operating activities. We effected this reclassification in our statement of cash flows for the year ended December 31, 2011. Cash flows from financing and operating activities were retroactively adjusted. We consider that this presentation is more appropriate on the grounds that interest paid reflect the cost of obtaining sources of finance, which in turn are consistent with internal analysis purposes and comparable from peer companies in the industry. This change has not affected the statement of financial position, total equity, or the statement of income. In turn, cash flow from operating activities increased, and cash flow from financing activities decreased by $33.2 million, $25.8 million, $16.3 million and $5.6 million for the years ended December 31, 2010, 2009, 2008 and 2007.

 

   

Additionally, during the year ended December 31, 2011, we revised our consolidated statements of financial position for the years ended December 31, 2010 and 2009, to properly reflect the classification of deferred tax assets and deferred tax liabilities on a net basis, which were originally presented without offsetting of balances within the same tax jurisdiction. The impact of this revision was a reduction of total assets and total liabilities in an amount of $ 20.4 million and $ 29.5 million, respectively; which represents approximately 1.5% and 2.3% of total assets and 3.3% and 5.8% of total liabilities as of those dates.

 

1


Table of Contents

For further details, please see note 2.3 of our consolidated Financials Statements included in this Annual Report.

The consolidated financial statements are prepared in accordance with IFRS as issued by the IASB and the interpretations of the IFRIC. All IFRS issued by the IASB effective at the time of preparing the consolidated financial statements have been applied.

You should read the information contained in these tables in conjunction with “Item 5. Operating and Financial Review and Prospects,” “Item 8. Financial Information”, “Item 18. Financial Statements” and the consolidated financial statements and the accompanying notes included elsewhere in this annual report.

 

     For the Year Ended December 31,  
     2011     2010     2009     2008     2007  
     (In thousands of $)  

Statement of Income Data:

          

Sales of manufactured products and services rendered

     365,857        294,529        183,386        117,173        69,807   

Cost of manufactured products sold and services rendered

     (237,404     (219,201     (180,083     (105,583     (63,519

Gross profit from manufacturing activities

     128,453        75,328        3,303        11,590        6,288   

Sale of agricultural produce and biological assets

     182,227        131,738        130,217        127,036        72,696   

Cost of agricultural produce sold and direct agricultural selling expenses(l)

     (182,227     (131,738     (130,217     (127,036     (72,696

Initial recognition and changes in fair value of biological assets and agricultural produce

     86,811        (30,528     71,668        61,000        26,935   

Changes in net realizable value of agricultural produce after harvest

     10,523        7,999        12,787        1,261        12,746   

Gross profit/ (loss) from agricultural activities

     97,334        (22,529     84,455        62,261        39,681   

Margin on manufacturing and agricultural activities before operating expenses

     225,787        52,799        87,758        73,851        45,969   

General and administrative expenses

     (65,142     (56,562     (52,393     (45,633     (33,765

Selling expenses

     (59,404     (52,528     (31,169     (24,496     (14,762

Other operating income, net

     24,581        18,224        13,071        17,323        2,238   

Excess of fair value of net assets acquired over cost

     —          —          —          1,227        28,979   

Share of loss of joint ventures

     (1,034     (50     (294     (838     (553

Profit / (loss) from operations before financing and taxation

     124,788        (38,117     16,973        21,434        28,106   

Finance income

     9,132        16,559        11,553        2,552        12,925   

Finance costs

     (62,341     (39,496     (34,216     (50,860     (12,458

Financial results, net

     (53,209     (22,937     (22,663     (48,308     467   

Profit/ (loss) before income tax

     71,579        (61,054     (5,690     (26,874     28,573   

Income tax benefit/(expense)

     (14,662     16,263        5,415        10,449        59   

Profit/ (loss) for the year

     56,917        (44,791     (275     (16,425     28,632   

Attributable to: Equity holders of the parent

     56,018        (43,904     (260     (18,947     28,587   

Non-controlling interest

     899        (887     (15     2,522        45   

Earnings/ (Losses) per share for (loss)/profit attributable to the equity holders of the parent during the year:

          

Basic

     0.4787        (0.5488     (0.0033     (0.253     0. 449   

Diluted

     0.4753        (0.5488     (0.0033     (0.253     0.438   

 

     For the Year Ended December 31,  
     2011     2010     2009     2008     2007  

Cash Flow Data:

          

Net cash generated from/ (used in) operating activities (2)

     56,586        60,221        (20,010     (5,115     (44,206

Net cash used in investing activities

     (140,493     (111,725     (114,386     (188,515     (265,189

Net cash generated from financing activities

     360,792        46,545        130,250        196,888        286,802   

Other Financial Data:

          

Adjusted Segment EBITDA (unaudited)(3)

          

Crops

     42,563        33,613        21,12        34,04        27,216   

Rice

     6,639        7,121        13,244        13,966        2,014   

Dairy

     3,426        2,649        484        (2,159     1,051   

Coffee

     1,285        (2,854     (3,550     (1,693     (3,440

Cattle

     4,686        4,369        1,525        (761     (1,188

Farming subtotal

     58,599        44,898        32,823        43,393        25,653   

Ethanol, sugar and energy

     109,520        51,735        (26,903     (6,979     (10,146

Land transformation

     8,832        20,837        18,839        15,201        33,114   

Corporate

     (26,885     (22,353     (22,262     (23,077     (11,435

Adjusted Consolidated EBITDA

     150,066        95,117        2,497        28,539        37,186   

 

2


Table of Contents

 

(1) Consists of two components: (i) the cost of our agricultural produce and/or biological assets sold as appropriate plus (ii) in the case of agricultural produce, the direct costs of selling, including but not limited to, transportation costs, export taxes and other levies. The cost of our agricultural produce sold represents the recognition as an expense of our agricultural produce held in inventory valued at net realizable value. The cost of our biological assets and/or agricultural produce sold at the point of harvest represents the recognition as an expense of our biological assets and/or agricultural produce measured at fair value less costs to sell, generally representing the applicable quoted market price at the time of sale. Accordingly, the line item “Sales of agricultural produce and biological assets” is equal to the line item “Cost of agricultural produce plus direct agricultural selling expenses.” See “Item 5. Operating and Financial Review and Prospects—A. Operating Results—Critical Accounting Policies and Estimates—Biological Assets and Agricultural Produce.”
(2) For the years ended December 31, 2008 and 2007 , the retroactive reclassification of interest paid outflows from Net cash generated from/(used in) operating activities to Net cash generated from financing activities totaled $16,312 thousand and $5,551 thousand, respectively. For further information, please see Note 2.3 to the consolidated financial statements.
(3) See “Presentation of Financial and Other Information” for the definitions of Adjusted Segment EBITDA and Adjusted Consolidated EBITDA and reconciliation table below.

 

     As of December 31,  
     2011      2010      2009      2008      2007  
     (In thousands of $)  

Statement of Financial Position Data:

              

Biological assets

     239,600         186,757         230,454         125,948         102,562   

Inventories

     96,147         57,170         57,902         61,221         58,036   

Property, plant and equipment, net

     759,696         751,992         682,878         571,419         538,017   

Total assets

     1,700,695         1,320,444         1,239,717         1,028,105         944,991   

Non-current borrowings

     203,409         250,672         203,134         4,099         62,09   

Total borrowings

     360,705         389,472         306,781         228,313         159,925   

Equity attributable to equity holders of the parent

     1,079,876         708,532         741,934         581,159         556,321   

Non-controlling interest

     14,993         14,570         15,222         57,269         60,544   

Number of shares (1)

     120,533         80,000         80,000         74,947         63,663   

 

(1) After giving effect to the Reorganization and the Reserve Stock Split.

 

3


Table of Contents

The following tables show a reconciliation of our segments’ profit from operations before financing and taxation, the most directly comparable IFRS financial measure, to Adjusted Segment EBITDA, and a reconciliation of our net profit (loss) for the year, the most directly comparable IFRS financial measure, to Adjusted Consolidated EBITDA:

 

    As of December 31, 2011  
    Crops     Rice     Dairy     Coffee     Cattle     Farming
Subtotal
    Sugar,
Ethanol
and
Energy
    Land
Transformation
    Corporate     Total  
    (In thousands of $)  

Adjusted Segment EBITDA (unaudited)

                   

Profit/(Loss) from Operations Before Financing and Taxation

    41,094        3,547        4,329        (639     4,460        52,791        90,050        8,832        (26,885     124,788   

Initial recognition and changes in fair value of “long term” biological assets(l) (unrealized)

    —          —          (1,503     1,394        —          (109     (8,797     —          —          (8,906

Adjusted Segment EBIT (unaudited)(2)

    41,094        3,547                   

Depreciation and amortization

    1,469        3,105        600        530        226        5,930        28,254        —          —          34,184   

Adjusted Segment EBITDA (unaudited)(2)

    42,563        6,652        3,426        1,285        4,686        58,612        109,507        8,832        (26,885     150,066   

Reconciliation to Profit

                   

Profit for the year

                      56,917   

Initial recognition and changes in fair value of “long term” biological assets(l) (unrealized)

                      (8,906

Income tax(expense) / benefit

                      14,662   

Interest expense, net

                      25,998   

Foreign exchange, net

                      12,683   

Other financial results, net

                      14,528   

Adjusted Consolidated EBIT (unaudited)(2)

                      115,882   

Depreciation and amortization

                      34,184   

Adjusted Consolidated EBITDA (unaudited)(2)

                      150,066   

 

4


Table of Contents
    As of December 31, 2010  
    Crops     Rice     Dairy     Coffee     Cattle     Farming
Subtotal
    Sugar,
Ethanol
and
Energy
    Land
Transformation
    Corporate     Total  
    (In thousands of $)  

Adjusted Segment EBITDA (unaudited)

                   

Profit/(Loss) from Operations Before Financing and Taxation

    31,902        5,041        5,836        (5,753     4,000        41,026        (77,627     20,837        (22,353     (38,117

Initial recognition and changes in fair value of “long term” biological assets(l) (unrealized)

    —          —          (3,610     2,450        36        (1,124     96,795        —          —          95,671   

Adjusted Segment EBIT (unaudited)(2)

    31,902        5,041        2,226        (3,303     4,036        39,902        19,168        20,837        (22,353     57,554   

Depreciation and amortization

    1,711        2,080        423        449        333        4,996        32,567        —          —          37,563   

Adjusted Segment EBITDA (unaudited)(2)

    33,613        7,121        2,649        (2,854     4,369        44,898        51,735        20,837        (22,353     95,117   

Reconciliation to (Loss)

                   

(Loss) for the year

                      (44,791

Initial recognition and changes in fair value of “long term” biological assets(l) (unrealized)

                      95,671   

Income tax benefit

                      (16,263

Interest expense, net

                      33,028   

Foreign exchange, net

                      (7,324

Other financial results, net

                      (2,767

Adjusted Consolidated EBIT (unaudited)(2)

                      57,554   

Depreciation and amortization

                      37,563   

Adjusted Consolidated EBITDA (unaudited)(2)

                      95,117   

 

5


Table of Contents
    As of December 31, 2009  
    Crops     Rice     Dairy     Coffee     Cattle     Farming
Subtotal
    Sugar,
Ethanol
and
Energy
    Land
Transformation
    Corporate     Total  
    (In thousands of $)  

Adjusted Segment EBITDA (unaudited)

                   

Profit/(Loss) from Operations Before Financing and Taxation

    19,054        11,792        113        (16,782     1,299        15,476        4,920        18,839        (22,262     16,973   

Initial recognition and changes in fair value of “long term” biological assets(l)(unrealized)

    —          —          (32     12,662        (127     12,503        (57,335     —          —          (44,832

Adjusted Segment EBIT (unaudited)(2)

    19,054        11,792        81        (4,120     1,172        27,979        (52,415     18,839        (22,262     (27,859

Depreciation and amortization

    2,066        1,452        403        570        353        4,844        25,512        —          —          30,356   

Adjusted Segment EBITDA (unaudited)(2)

    21,120        13,244        484        (3,550     1,525        32,823        (26,903     18,839        (22,262     2,497   

Reconciliation to (Loss)

                   

(Loss) for the year

                      (275

Initial recognition and changes in fair value of “long term” biological assets(l) (unrealized)

                      (44,832

Income tax benefit

                      (5,415

Interest expense, net

                      27,750   

Foreign exchange, net

                      (10,903

Other financial results, net

                      5,816   

Adjusted Consolidated EBIT (unaudited)(2)

                      (27,859

Depreciation and amortization

                      30,356   

Adjusted Consolidated EBITDA (unaudited)(2)

                      2,497   

 

6


Table of Contents
    As of December 31, 2008  
    Crops     Rice   Dairy   Coffee     Cattle   Farming
Subtotal
  Sugar,
Ethanol
and
Energy
    Land
Transformation
    Corporate     Total  
    (In thousands of $)  

Adjusted Segment EBITDA (unaudited)

                 

Profit/(Loss) from Operations Before Financing and Taxation

    27,523        13,256      (667)     864        1,289      42,265     (12,955     15,201        (23,077     21,434   

Initial recognition and changes in fair value of “long term” biological assets(l) (unrealized)

    —          —        (1,840)     (3,355     (2,567   (7,762)     (13,448     —          —          (21,210

Adjusted Segment EBIT (unaudited)(2)

    27,523        13,256      (2,507)     (2,491     (1,278   34,503     (26,403     15,201        (23,077     224   

Depreciation and amortization

    6,517        710      348     798        517      8,890     19,424        —          —          28,314   

Adjusted Segment EBITDA (unaudited)(2)

    34,040        13,966      (2,159)     (1,693     (761   43,393     (6,979     15,201        (23,077     28,538   

Reconciliation to (Loss)

                 

(Loss) for the year

                    (16,425

Initial recognition and changes in fair value of “long term” biological assets(l) (unrealized)

                    (21,210

Income tax benefit

                    (10,449

Interest expense, net

                    21,830   

Foreign exchange, net

                    24,932   

Other financial results, net

                    1,546   

Adjusted Consolidated EBIT (unaudited)(2)

                    224   

Depreciation and amortization

                    28,314   

Adjusted Consolidated EBITDA (unaudited)(2)

                    28,538   

 

7


Table of Contents

Adjusted Segment EBITDA

(unaudited)

 

     As of December 31, 2007  
     Crops      Rice      Dairy     Coffee     Cattle     Farming
Subtotal
    Sugar,
Ethanol
and
Energy
    Land
Transformation
     Corporate     Total  
     (In thousands of $)  

Profit/(Loss) from Operations Before Financing and Taxation

     25,729         1,363         1,720        2,809        2,184        33,805        (27,378     33,114         (11,435     28,106   

Initial recognition and changes in fair value of “long term” biological assets(l) (unrealized)

     —           —           (1,009     (6,571     (3,814     (11,394     11,117        —           —          (277

Adjusted Segment EBIT (unaudited)(2)

     25,729         1,363         711        (3,762     (1,630     22,411        (16,261     33,114         (11,435     27,829   

Depreciation and amortization

     1,487         651         340        322        442        3,242        6,115        —           —          9,357   

Adjusted Segment EBITDA (unaudited)(2)

     27,216         2,014         1,051        (3,440     (1,188     25,653        (10,146     33,114         (11,435     37,186   

Reconciliation to Profit

                       

Profit for the year

                          28,632   

Initial recognition and changes in fair value of “long term” biological assets(l) (unrealized)

                          (277

Income tax benefit

                          (59

Interest expense, net

                          4,094   

Foreign exchange, net

                          (5,971

Other financial results, net

                          1,410   

Adjusted Consolidated EBIT (unaudited)(2)

                          27,829   

Depreciation and amortization

                          9,357   

Adjusted Consolidated EBITDA (unaudited)(2)

                          37,186   

 

(1) Long-term biological assets are sugarcane, coffee, dairy and cattle.
(2) See “Presentation of Financial and Other Information” for the definitions of Adjusted Segment EBIT, Adjusted Consolidated EBIT, Adjusted Segment EBITDA and Adjusted Consolidated EBITDA.

B. CAPITALIZATION AND INDEBTEDNESS

Not Applicable.

C. REASONS FOR THE OFFER AND USE OF PROCEEDS

Not Applicable.

 

8


Table of Contents

D. RISK FACTORS

Investing in our common shares involves a high degree of risk. Before making an investment decision, you should carefully consider the information contained in this annual report, particularly the risks described below, as well as in our consolidated financial statements and accompanying notes. Our business activities, cash flow, financial condition and results of operations could be materially and adversely affected by any of these risks. The market price of our common shares may decrease due to any of these risks or other factors, and you may lose all or part of your investment. The risks described below are those that we currently believe may materially affect us.

Risks Related to Our Business and Industries

Unpredictable weather conditions, pest infestations and diseases may have an adverse impact on agricultural production and may reduce the volume and sucrose content of sugarcane that we can cultivate and purchase in a given harvest.

The occurrence of severe adverse weather conditions, especially droughts, hail, floods or frost or diseases are unpredictable and may have a potentially devastating impact on agricultural production and may otherwise adversely affect the supply and price of the agricultural commodities that we sell and use in our business. Adverse weather conditions may be exacerbated by the effects of climate change. The effects of severe adverse weather conditions may reduce yields of our agricultural activities. Additionally, higher than average temperatures and rainfall can contribute to an increased presence of insects. Commencing during the middle of 2008 and lasting until the middle of 2009, the areas in which we operate suffered one of the worst droughts of the last 50 to 70 years, which resulted in a reduction of approximately 15% to 40% of our agricultural production per hectare, depending on the affected commodity, compared with our historical averages.

We experienced drought conditions during December 2011 affecting some of our farms in Argentina and Uruguay. As a result, the expected yield used in the Biological Asset model was reduced generating a negative impact in “Initial recognition and changes in fair value of biological assets and agricultural produce” of US$ 4.5 million. The final effects of this drought will be determined at harvest.

The occurrence and effects of disease and plagues can be unpredictable and devastating to agricultural products, potentially rendering all or a substantial portion of the affected harvests unsuitable for sale. Our agricultural products are also susceptible to fungus and bacteria that are associated with excessively moist conditions. Even when only a portion of the production is damaged, our results of operations could be adversely affected because all or a substantial portion of the production costs have been incurred. Although some diseases are treatable, the cost of treatment is high, and we cannot assure you that such events in the future will not adversely affect our operating results and financial condition. Furthermore, if we fail to control a given plague or disease and our production is threatened, we may be unable to supply our main customers, which could affect our results of operations and financial condition.

Our sugar production depends on the volume and sucrose content of the sugarcane that we cultivate or that is supplied to us by growers located in the vicinity of our mills. Both sugarcane yields and sucrose content depend primarily on weather conditions such as rainfall and temperature, which vary. Weather conditions have historically caused volatility in the ethanol and sugar industries. Future weather patterns may reduce the amount of sugarcane that we can harvest or purchase, or the sucrose content in such sugarcane, and, consequently, the amount of sugar we can recover in any given harvest. Any reduction in the volume of sugar recovered could have a material adverse effect on our operating results and financial condition.

As a result, we cannot assure you that future severe adverse weather conditions or pest infestations will not adversely affect our operating results and financial condition.

Fluctuation in market prices for our products could adversely affect our financial condition and results of operations.

Prices for agricultural products and by-products, including, among others, sugar, ethanol, grains and coffee, like those of other commodities, have historically been cyclical and sensitive to domestic and international changes in

 

9


Table of Contents

supply and demand and can be expected to fluctuate significantly. In addition, the agricultural products and by-products we produce are traded on commodities and futures exchanges and thus are subject to speculative trading, which may adversely affect us. The prices that we are able to obtain for our agricultural products and by-products depend on many factors beyond our control including:

 

   

prevailing world commodity prices, which historically have been subject to significant fluctuations over relatively short periods of time, depending on worldwide demand and supply;

 

   

changes in the agricultural subsidy levels of certain important producers (mainly the U.S. and the European Union (“E.U.”) and the adoption of other government policies affecting industry market conditions and prices;

 

   

changes to trade barriers of certain important consumer markets (including China, India, the U.S. and the E.U.) and the adoption of other governmental policies affecting industry market conditions and prices;

 

   

changes in government policies for biofuels;

 

   

world inventory levels, i.e., the supply of commodities carried over from year to year;

 

   

climatic conditions and natural disasters in areas where agricultural products are cultivated;

 

   

the production capacity of our competitors; and

 

   

demand for and supply of competing commodities and substitutes.

For example, we reported a loss of $96.8 million for the year ended December 31, 2010 compared to a gain of $57.3 million in the same period in 2009 for our sugarcane business segment in the line item “Initial recognition and Changes in Fair Value of Biological Assets and Agricultural produce.” This loss was generated mainly by a decrease in price estimates used in the discounted cash flow (“DCF”) model to determine the fair value of our sugarcane plantations. In the DCF model, the price of future harvested sugarcane is calculated based on estimates of sugar price derived from the No. 11 futures contract (“NY11”) quoted on the ICE-NY. Sugar price estimates decreased due to lower sugar market prices. See “Item 5. Operating and Financial Review and Prospects—A. Operating Results—Year ended December 31, 2010 as compared to year ended December 31, 2009.”

Further, because we intentionally do not hedge 100% of the price risk on our agricultural products, we are unable to have minimum price guarantees for all of our production and are, therefore, exposed to risks associated with the prices of agricultural products and their volatility. We are subject to fluctuations in prices of agricultural products that could result in our receiving lower prices for our agricultural products than our production costs.

In addition, there is a strong relationship between the value of our land holdings and market prices of the commodities we produce, which are affected by global economic conditions. A decline in the prices of grains, coffee, sugar, ethanol, or related by-products below their current levels for a sustained period of time could significantly reduce the value of our land holdings and materially and adversely affect our financial condition and results of operations.

Ethanol prices are correlated to the price of sugar and are becoming closely correlated to the price of oil, so that a decline in the price of sugar will adversely affect both our ethanol and sugar businesses, and a decline in the price of oil may adversely affect our ethanol business.

A vast majority of ethanol in Brazil is produced at sugarcane mills that produce both ethanol and sugar. Because sugarcane millers are able to alter their product mix in response to the relative prices of ethanol and sugar, this results in the prices of both products being directly correlated, and the correlation between ethanol and sugar may increase over time. In addition, sugar prices in Brazil are determined by prices in the world market, so that there is a strong correlation between Brazilian ethanol prices and world sugar prices.

 

10


Table of Contents

Because flex-fuel vehicles, which have become popular in Brazil, allow consumers to choose between gasoline and ethanol at the pump rather than in the showroom, ethanol prices are now becoming increasingly correlated to gasoline prices and, consequently, oil prices. We believe that the correlation among the three products will increase over time. Accordingly, a decline in sugar prices would have an adverse effect on the financial performance of our ethanol and sugar businesses, and a decline in oil prices might have an adverse effect on that of our ethanol business.

The expansion of our business through acquisitions poses risks that may reduce the benefits we anticipate from these transactions.

As part of our business strategy, we have grown primarily through acquisitions. We plan to continue growing by acquiring other farms and production facilities throughout South America. We believe that the agricultural industry and agricultural activity in Argentina and Brazil are highly fragmented and that our future consolidation opportunities will continue to be significant to our growth. However, our management is unable to predict whether or when any prospective acquisitions or strategic alliances will occur, or the likelihood of a certain transaction being completed on favorable terms and conditions. In addition, we are unable to predict the effect that changes in Argentine or Brazilian legislation regarding foreign ownership of rural properties could have in our business. See “—Risks Related to Argentina— Argentine law concerning foreign ownership of rural properties may adversely affect our results of operations and future investments in rural properties in Argentina” and “—Risks Related to Brazil— Recent changes in Brazilian rules concerning foreign investment in rural properties may adversely affect our investments.” Our ability to continue to expand our business successfully through acquisitions depends on many factors, including our ability to identify acquisitions or access capital markets at an acceptable cost and negotiate favorable transaction terms. Even if we are able to identify acquisition targets and obtain the necessary financing to make these acquisitions, we could financially overextend ourselves, especially if an acquisition is followed by a period of lower than projected prices for our products.

Acquisitions also expose us to the risk of successor liability relating to actions involving an acquired company, its management or contingent liabilities incurred before the acquisition. The due diligence we conduct in connection with an acquisition, and any contractual guarantees or indemnities that we receive from the sellers of acquired companies, may not be sufficient to protect us from, or compensate us for, actual liabilities. Any material liability associated with an acquisition could adversely affect our reputation and results of operations and reduce the benefits of the acquisition.

To support the acquisitions we hope to make, we may need to implement new or upgraded strategies, systems, procedures and controls for our operations and will face risks, including diversion of management time and focus and challenges associated with integrating new managers and employees. Our failure to integrate new businesses successfully could adversely affect our business and financial performance.

Adverse conditions may create delays in or the suspension of the construction of our Ivinhema mill and/or significantly increase the amount of our expected investments.

As part of our strategy to increase our production and increase our competitiveness through economies of scale, we are in the process of construction of the Ivinhema mill, which is expected to commence operations in 2013. See “Item 4. Information on the Company—B. Business Overview.” As of December 31, 2011 we have incurred $49.2 million in the acquisition and assembly of industrial equipment, manufacturing costs and sugarcane planting expenses. Furthermore, as of the date of this report, we have contracted the manufacturing of certain key equipment for an additional $27.0 million, including juice evaporator, substations, sugar warehouse, pipes metallic structures, steel plates, among other equipment. We estimate that we will need to invest an additional $711 million to complete the construction of the Ivinhema mill (of which $230 million were raised through the IPO). See “Item 4. Information on the Company—B. Business Overview.” We cannot assure you that we will be able to borrow the additional funds we will need to complete the project on acceptable terms, or at all.

The Ivinhema mill project involves various risks, including engineering, construction and regulatory risks, such as obtaining necessary permits and licenses as well as other significant challenges that can suspend the construction of the Ivinhema mill, hinder or delay the project’s scheduled completion date and successful operation or that can result in significant cost increases as well as foreign exchange risks associated with incurring costs in Brazilian Reais. In addition, the Ivinhema mill may not operate at projected capacity or may incur higher operating costs than estimated, and we may not be able to sell the ethanol and sugar produced by the Ivinhema mill at competitive prices.

 

11


Table of Contents

If (1) construction is delayed or suspended, (2) we are required to invest more than the budgeted amount to complete the project, (3) we are unable to borrow the funds needed to complete the project on acceptable terms, or at all, (4) we fail to operate the mill or operate it at a lower capacity than we anticipate or (5) we are unable to sell all of the ethanol and sugar produced by the mill, our results of operations and financial condition will be materially adversely affected.

A significant increase in the price of raw materials we use in our operations, or the shortage of such raw materials, could adversely affect our results of operations.

Our production process requires various raw materials, including fertilizer, pesticides and seeds, which we acquire from local and international suppliers. We do not have long-term supply contracts for most of these raw materials. A significant increase in the cost of these raw materials, especially fertilizer and agrochemicals, a shortage of raw materials or the unavailability of these raw materials entirely could reduce our profit margin, reduce our production and/or interrupt the production of some of our products, in all cases adversely affecting the results of our operations and our financial condition.

For example, we rely on fertilizers and agrochemicals, many of which are petro-chemical based. As of December 31, 2011, fertilizers and agrochemicals constituted approximately 20.1% of our cost of production for the 2010/2011 harvest. Worldwide production of agricultural products has increased significantly in recent years, increasing the demand for agrochemicals and fertilizers. This has resulted, among other things, in increased prices for agrochemicals and fertilizers.

Increased energy prices and frequent interruptions of energy supply could adversely affect our business.

We require substantial amounts of fuel oil and other resources for our harvest activities and transport of our agricultural products. Purchases of fuel constituted approximately 9.6% of our cost of production as of December 31, 2011. We rely upon third parties for our supply of energy resources used in our operations. The prices for and availability of energy resources may be subject to change or curtailment, respectively, due to, among other things, new laws or regulations, imposition of new taxes or tariffs, interruptions in production by suppliers, imposition of restrictions on energy supply by government, worldwide price levels and market conditions. Over the last few years, the Argentine government has taken certain measures in order to reduce the use of energy during peak months of the year by frequently cutting energy supply to industrial facilities and large consumers to ensure adequate supply for residential buildings. For example, certain of our industrial facilities have been subject to a quota system whereby electricity cuts occur on a work shift basis, resulting in our facilities being shut down during certain work shifts. While some of our facilities utilize different sources of energy, such as firewood and liquefied natural gas, and have attempted to stock their required supplies ahead of higher demand periods, we cannot assure you that we will be able to procure the required energy inputs at acceptable prices. If energy supply is cut for an extended period of time and we are unable to find replacement sources at comparable prices, or at all, our business and results of operations could be adversely affected.

We depend on international trade and economic and other conditions in key export markets for our products.

Our operating results depend largely on economic conditions and regulatory policies for our products in major export markets. The ability of our products to compete effectively in these export markets may be adversely affected by a number of factors that are beyond our control, including the deterioration of macroeconomic conditions, volatility of exchange rates, the imposition of greater tariffs or other trade barriers or other factors in those markets, such as regulations relating to chemical content of products and safety requirements. Due to the growing participation in the worldwide agricultural commodities markets by commodities produced in South America, South American growers, including us, are increasingly affected by the measures taken by importing countries in order to protect their local producers. Measures such as the limitation on imports adopted in a particular country or region may affect the sector’s export volume significantly and, consequently, our operating results.

Between April 1 and October 12, 2010, China implemented a ban on the import of soybean oil with exceeding amounts of hexane residue, a chemical used in the extraction of soybean oil from oilseeds. This ban effectively forced us and other Argentine soybean oil producers who utilize hexane out of the market for Chinese imports, impacting the price we could obtain for our soybean oil production. Similarly, the European Union has a zero tolerance policy with respect to the import of genetically modified organisms, or “GMOs”. See “Some of the

 

12


Table of Contents

agricultural commodities and food products that we produce contain genetically modified organisms.” While the recent drought in Europe has led to the relaxation of these restrictions for certain products, we cannot assure you that we will continue to be able to export any of our products with GMOs to the European Union. If the sale of our products into a particular importing country is adversely affected by trade barriers or by any of the factors mentioned above, the relocation of our products to other consumers on terms equally favorable could be impaired, and our business, financial condition and operating results may be adversely affected.

Impact of the worldwide economic downturn.

The demand for the products we sell may be affected by international, national and local economic conditions. Adverse changes in the perceived or actual economic climate, such as higher fuel prices, higher interest rates, stock and real estate market declines and/or volatility, more restrictive credit markets, higher taxes, and changes in governmental policies could reduce the level of demand or prices of the products we produce. We cannot predict the duration or magnitude of this downturn or the timing or strength of economic recovery. If the downturn continues for an extended period of time or worsens, we could experience a prolonged period of decreased demand and price. In addition, the economic downturn has and may continue to adversely impact our suppliers, which can result in disruptions in service and financial losses.

Our business is seasonal, and our revenues may fluctuate significantly depending on the growing cycle of our crops.

As with any agricultural business enterprise, our business operations are predominantly seasonal in nature. The harvest of corn, soybean and rice generally occurs from January to May. Wheat is harvested from December to January. Coffee and cotton are harvested from June to August, but require processing which takes approximately two to three months. Our operations and sales are affected by the growing cycle of the crops we process and the timing of our harvest sales. In addition, our sugar and ethanol business is subject to seasonal trends based on the sugarcane growing cycle in the center-south region of Brazil. The annual sugarcane harvesting period in the center-south region of Brazil begins in April and ends in November/December. This creates fluctuations in our inventory, usually peaking in December to cover sales between crop harvests (i.e., January through April), and a degree of seasonality in our gross profit. Seasonality could have a material adverse effect on our business and financial performance. In addition, our quarterly results may vary as a result of the effects of fluctuations in commodities prices, production yields and costs. Therefore, our results of operations have varied significantly from period to period and are likely to continue to vary, due to seasonal factors.

Our dairy and beef cattle are vulnerable to diseases.

Diseases among our cattle herds, such as mastitis, tuberculosis, brucellosis and foot-and-mouth disease, can have an adverse effect on the productivity of our dairy cows. Outbreaks of cattle diseases may also result in the closure of certain important markets to our cattle-derived products. Although we abide by national veterinary health guidelines, including laboratory analyses and vaccination, to control diseases among our herds, especially foot-and-mouth disease, we cannot assure you that future outbreaks of cattle diseases will not occur. A future outbreak of diseases among our cattle herds could adversely affect our milk sales and operating results and financial condition.

Our current insurance coverage may not be sufficient to cover our potential losses.

Our production is, in general, subject to different risks and hazards, including adverse weather conditions, fires, diseases and pest infestations, other natural phenomena, industrial accidents, labor disputes, changes in the legal and regulatory framework applicable to us, environmental contingencies and other natural phenomena. Our insurance currently covers only part of the losses we may incur and does not cover losses on crops due to hail storms, fires or similar risks. Furthermore, although we maintain insurance at levels that are customary in our industry, certain types of risks may not be covered by the policies we have for our industrial facilities. Additionally, we cannot guarantee that the indemnification paid by the insurer due to the occurrence of a casualty covered by our policies will be sufficient to entirely compensate us for the damages suffered. Moreover, we may not be able to maintain or obtain insurance of the type and amount desired at reasonable costs. If we were to incur significant liability for which we were not fully insured, it could have a materially adverse effect on our business, financial condition and results of operations.

 

13


Table of Contents

A reduction in market demand for ethanol or a change in governmental policies reducing the amount of ethanol required to be added to gasoline may adversely affect our business.

Government authorities of several countries, including Brazil and certain states of the United States, currently require the use of ethanol as an additive to gasoline. Since 1997, the Sugar and Alcohol Interministerial Council of Brazil (Conselho Interministerial do Açúcar e Álcool) has set the required blend of anhydrous ethanol to gasoline (currently 25% ethanol to 75% gasoline by volume).

Approximately 32% of all fuel ethanol in Brazil is used to fuel automobiles that run on a blend of anhydrous ethanol and gasoline; the remaining 68% of fuel ethanol is used in flex-fuel vehicles powered by hydrous ethanol alone. Five districts in China require the addition of 10% ethanol to gasoline. Japan is discussing requiring the addition of 3% of ethanol to gasoline and increasing the requirement to 20% by 2030, and nine states and four union territories in India require the addition of 5% of ethanol to gasoline. Other countries have similar governmental policies requiring various blends of anhydrous ethanol and gasoline. In addition, flex-fuel vehicles in Brazil are currently taxed at lower levels than gasoline-only vehicles, which has contributed to the increase in production and sale of flex-fuel vehicles. Many of these policies and incentives stem from, and are mostly driven by, climate change concerns and the positive perceptions regarding the use of ethanol as a solution to the climate change problem. If such concerns or perception were to change, the legal framework and incentive structure promoting the use of ethanol may be revised, leading to a reduction in the demand for ethanol. In addition, any reduction in the percentage of ethanol required in fuel blended with gasoline or increase in the levels at which flex-fuel vehicles are taxed in Brazil, or any growth in the demand for natural gas and other fuels as an alternative to ethanol, lower gasoline prices or an increase in gasoline consumption (versus ethanol), may cause demand for ethanol to decline and affect our business.

Growth in the sale and distribution of ethanol depends in part on infrastructure improvements, which may not occur on a timely basis, if at all.

In contrast to the well-established logistical operations and infrastructure supporting sugar exports, ethanol exports inherently demand much more complex preparation and means of distribution, including outlets from our facilities to ports and shipping to other countries. Substantial infrastructure development by persons and entities outside our control is required for our operations, and the ethanol industry generally, to grow. Areas requiring expansion include, but are not limited to, additional rail capacity, additional storage facilities for ethanol, increases in truck fleets capable of transporting ethanol within localized markets, expansion of refining and blending facilities to handle ethanol, growth in service stations equipped to handle ethanol fuels, and growth in the fleet of flex-fuel vehicles. Specifically, with respect to ethanol exports, improvements in consumer markets abroad are needed in the number and capacity of ethanol blending industrial plants, the distribution channels of gasoline-ethanol blends and the chains of distribution stations capable of handling fuel ethanol as an additive to gasoline. Substantial investments required for these infrastructure changes and expansions may not be made or they may not be made on a timely basis. Any delay or failure in making the changes in or expansion of infrastructure may hurt the demand for or prices of our products, prevent our products’ delivery, impose additional costs on us or otherwise have a serious adverse effect on our business, operating results or financial status. Our business relies on the continuing availability of infrastructure, and any infrastructure disruptions may have a material adverse effect on our business, financial condition and operating results.

We may be harmed by competition from alternative fuels, products and production methods.

Ethanol competes in the biofuel market with other, established fuels such as biodiesel, as well as fuels that are still in the development phase, including methanol and butanol from biomass. Alternative fuels could become more successful than ethanol in the biofuels market over the medium or long term due, for example, to lower production costs, greater environmental benefits or other more favorable product characteristics. In addition, alternative fuels may also benefit from tax incentives or other favorable governmental treatment, from which they may benefit at the expense of ethanol. Furthermore, our success depends on early identification of new developments relating to products and production methods and continuous expansion and preservation of our existing expertise in order to ensure that our product range keeps pace with technological change. Competitors may gain an advantage over us by, for example, developing or using new products and production methods, introducing new products to the market sooner than we do, or securing exclusive rights to new technologies, thereby significantly harming our competitive position.

 

14


Table of Contents

A substantial portion of our assets is farmland that is highly illiquid.

We have been successful in partially rotating and monetizing a portion of our investments in farmland. During the last nine years, we have executed transactions for the purchase and disposition of land for over $525 million. Owning of a significant portion of the land we operate is a key part of our business model. However, agricultural real estate is generally an illiquid asset. Moreover, the adoption of laws and regulations that impose limitations on ownership of rural land by foreigners in the jurisdictions in which we operate may also limit the liquidity of our farmland holdings. See “—Risks Related to Argentina—Argentine law concerning foreign ownership of rural properties may adversely affect our results of operations and future investments in rural properties in Argentina” and “—Risks Related to Brazil— Recent changes in Brazilian rules concerning foreign investment in rural properties may adversely affect our investments.” As a result, it is unlikely that we will be able to adjust our owned agricultural real estate portfolio promptly in response to changes in economic, business or regulatory conditions. Illiquidity in local market conditions may adversely affect our ability to complete dispositions, to receive proceeds generated from any such sales or to repatriate any such proceeds.

We lease or have agriculture partnerships relating to a significant portion of our sugarcane plantations.

As for December 31, 2011, approximately 86% of our area of sugarcane plantations were leased or were subject to agriculture partnership agreements, for periods of an average of six to twelve years. We cannot guarantee that these leases or agriculture partnerships will be renewed after their respective terms. Even if we are able to renew these agreements, we cannot guarantee that such renewals will be on terms and conditions satisfactory to us. Any failure to renew the leases or agriculture partnerships or obtain land suitable for sugarcane planting in sufficient quantity and at reasonable prices to develop our activities could adversely affect our results of operations, increase our costs or force us to seek alternative properties, which may not be available or be available only at higher prices.

We may be subject to labor disputes from time to time that may adversely affect us.

Our employees are represented by unions or equivalent bodies and are covered by collective bargaining or similar agreements which are subject to periodic renegotiation. We may not successfully conclude our labor negotiations on satisfactory terms, which may result in a significant increase in the cost of labor or may result in work stoppages or labor disturbances that disrupt our operations. For example, a short-lived strike at UMA in 2009 resulted in a plant stoppage which, when coupled with the adverse weather conditions during the harvest season, resulted in a reduction of 16,000 tons of sugarcane that otherwise would have been milled during the 2009 fiscal year, with an estimated impact of approximately $100,000 to our operating results. Cost increases, work stoppages or disturbances that result in substantial amounts of raw product not being processed could have a material and adverse effect on our business, results of operations and financial condition.

We are subject to extensive environmental regulation, and concerns regarding climate change may subject us to even stricter environmental regulations.

Our activities are subject to a broad set of laws and regulations relating to the protection of the environment. Such laws include compulsory maintenance of certain preserved areas within our properties, management of pesticides and associated hazardous waste and the acquisition of permits for water use and effluents disposal. In addition, the storage and processing of our products may create hazardous conditions. We could be exposed to criminal and administrative penalties in addition to the obligation to remedy the adverse affects of our operations on the environment and to indemnify third parties for damages. Environmental laws and their enforcement are becoming more stringent in Argentina and Brazil increasing the risk of and penalties associated with violations, which could impair or suspend our operations or projects (e.g., the Ivinhema mill licensing), and our operations expose us to potentially adverse environmental legislation and regulation. Failure to comply with past, present or future laws could result in the imposition of fines, third party claims, and investigation by the environmental authorities and competent public attorney office. For example, the perceived effects of climate change may result in additional legal and regulatory requirements to reduce or mitigate the effects of our industrial facilities’ emissions.

 

15


Table of Contents

Such requirements, if enacted, could increase our capital expenditures and expenses for environmental compliance in the future, which may have a material and adverse effect on our business, results of operations and financial condition. Moreover, the denial of any permit that we have requested, or the revocation of any of the permits that we have already obtained, may have an adverse effect on our results of operations.

Some of the agricultural commodities and food products that we produce contain genetically modified organisms.

Our soybean, corn and cotton products contain GMOs in varying proportions depending on the year and the country of production. The use of GMOs in food has been met with varying degrees of acceptance in the markets in which we operate. The United States, Argentina and Brazil, for example, have approved the use of GMOs in food products, and GMO and non-GMO grain in those countries is produced and frequently commingled during the grain origination process. Elsewhere, adverse publicity about genetically modified food has led to governmental regulation limiting sales of GMO products in some of the markets in which our customers sell our products, including the European Union. It is possible that new restrictions on GMO products will be imposed in major markets for some of our products or that our customers will decide to purchase fewer GMO products or not buy GMO products at all, which could have a material adverse effect on our business, results of operations, financial condition or prospects.

If our products become contaminated, we may be subject to product liability claims, product recalls and restrictions on exports that would adversely affect our business.

The sale of food products for human consumption involves the risk of injury to consumers. These injuries may result from tampering by third parties, bioterrorism, product contamination or spoilage, including the presence of bacteria, pathogens, foreign objects, substances, chemicals, other agents, or residues introduced during the growing, storage, handling or transportation phases.

We cannot be sure that consumption of our products will not cause a health-related illness in the future or that we will not be subject to claims or lawsuits relating to such matters. Even if a product liability claim is unsuccessful or is not fully pursued, the negative publicity surrounding any assertion that our products caused illness or injury could adversely affect our reputation with existing and potential customers and our corporate and brand image, and we could also incur significant legal expenses. Moreover, claims or liabilities of this nature might not be covered by any rights of indemnity or contribution that we may have against others, which could have a material adverse effect on our business, results of operations or financial condition.

Our principal shareholders have the ability to direct our business and affairs, and their interests could conflict with yours.

As of December 31, 2011, our principal shareholders are the beneficial owners of approximately 61.25% of our common shares. As a result of this significant influence over us, our principal shareholders may be able to elect a majority of the members of our board of directors, direct our management and determine the result of substantially all resolutions that require shareholders’ approval, including fundamental corporate transactions and the payment of dividends by us. The interests of our principal shareholders may differ from, and could conflict with, those of our other shareholders.

We maintain and regularly review our internal controls over financial reporting but these controls cannot eliminate the risk of errors or omissions in such reporting and our independent registered public accounting firm may not be able to certify as to their effectiveness, which could have a significant and adverse effect on our business and reputation.

We maintain and regularly review internal controls over financial reporting. However, internal control over financial reporting has inherent limitations. It is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures. Because of such limitations, there is a risk that material misstatements will not be prevented or detected on a timely basis by internal controls over financial reporting. A failure to detect or correct deficiencies and weaknesses in a timely manner could have an adverse effect on the accuracy of financial reporting.

 

16


Table of Contents

If we fail to maintain the adequacy of our internal controls, as such standards are modified, supplemented or amended from time to time, we may not be able to ensure that we can conclude on an ongoing basis that we have effective internal controls over financial reporting in accordance with Section 404. In the future we may discover areas of our internal controls that need improvement, particularly with respect to businesses that we may acquire in the future. We are not currently required to include an attestation report of our auditors on our assessment of internal controls over financial reporting pursuant to the SEC’s rules under Section 404. We expect that these rules will apply to us when we file our annual report on Form 20-F for our fiscal year ending in December 31, 2012, which we will be required to file by April 30, 2013. If our independent registered public accounting firm are not able to certify as to the effectiveness of our internal controls over financial reporting, we may be subject to sanctions, stock exchange delisting or investigation by regulatory authorities, such as the SEC. As a result, there could be a negative reaction in the financial markets due to a loss of confidence in the reliability of our financial statements. This could harm our reputation and cause us to lose existing customers or fail to gain new customers and otherwise negatively affect our financial condition, results of operations and cash flows. In addition, we may be required to incur costs in improving our internal control system and the hiring of additional personnel.

IFRS accounting standards require us to make numerous estimates in the compilation and preparation of our financial results and limit the comparability of our financial statements to similar issuers using U.S. GAAP.

IFRS accounting standards for agricultural companies require that we make assumptions and estimates relating to, among other things, future agricultural commodity yields, prices, and production costs extrapolated through a discounted cash flow method. For example, the value of our biological assets with a production cycle lasting more than one year (i.e., sugarcane, coffee, dairy and cattle) generated initial recognition and changes in fair value of biological assets amounting to $38.7 million gain in 2011, ($78.8) million loss in 2010 and $52.9 million gain in 2009. For 2011 an amount of $101.7 million gain (2010: $60.1 million loss; 2009: $29.8 million gain) was solely attributable to price changes (see Note 9 to our consolidated financial statements). In addition, the impact of price estimates on our results is evidenced most recently in our sugarcane business due to changes in the market price of sugar. These assumptions and estimates, and any changes to such prior estimates, directly affect our reported results of operations. If actual market conditions differ from our estimates and assumptions, there could be material adjustments to our results of operations. In addition, the use of such discounted cash flow method utilizing these future estimated metrics differs from generally accepted accounting principles in the United States (“U.S. GAAP”). As a result, our financial statements and reported earnings are not directly comparable to those of similar companies in the United States.

Certain of our subsidiaries have substantial indebtedness which could impair their financial condition and decrease the amount of dividends we receive.

Certain of our subsidiaries in Argentina and Brazil have a substantial amount of debt, which requires significant principal and interest payments. As of December 31, 2011, we had 360.7 million of debt outstanding on a consolidated basis, all of which was incurred by our subsidiaries and not guaranteed by Adecoagro. Such indebtedness could affect our subsidiaries’ future operations, for example, by requiring a substantial portion of their cash flow from operations to be dedicated to the payment of principal and interest on indebtedness instead of funding working capital and other business purposes, making it more difficult for them to satisfy all of their debt obligations, increasing their cost of borrowing to satisfy business needs and limiting their ability to obtain additional financing.

The substantial level of indebtedness borne by certain of our subsidiaries also affects the amount of cash available to them to pay as dividends, increasing our vulnerability to economic downturns or other adverse developments relative to competitors with less leverage; and limiting our ability to obtain additional financing on their behalf for working capital, capital expenditures, acquisitions or other corporate purposes in the future. See Item 5. – Operating and Financial Results and Prospects - Liquidity and Capital Resources—Indebtedness and Financial Instruments.”

The terms of the indebtedness of, and past breaches of financial ratio covenants by, certain of our subsidiaries impose significant restrictions on their operating and financial flexibility.

The debt instruments of certain of our subsidiaries contain customary covenants including limitations on their ability to, among other things, incur or guarantee additional indebtedness; make restricted payments, including

 

17


Table of Contents

dividends and prepaying indebtedness; create or permit certain liens; enter into business combinations and asset sale transactions; make investments, including capital expenditures; and enter into new businesses. Certain of these debt instruments are also secured by various collateral including mortgages on certain farms, pledges of subsidiary stock and liens on certain facilities, equipment and accounts. Certain of these debt instruments also contain cross-default provisions, where a default on one loan by one subsidiary could result in lenders of otherwise performing loans declaring a default on the otherwise performing loans. For more information regarding the covenants, collateral, and cross-default provisions of our subsidiaries’ indebtedness, see “Item 5. Operating and Financial Review and Prospects—B. Liquidity and Capital Resources—Indebtedness and Financial Instruments.” These restrictions could limit our subsidiaries’ ability to obtain future financing, withstand a future downturn in business or the economy in general, conduct operations or otherwise take advantage of business opportunities that may arise. Moreover, by reducing the level of dividends we may receive, such indebtedness places limits on our ability to make acquisitions or needed capital expenditures or to pay dividends to our shareholders.

The terms of certain of our subsidiaries’ debt instruments contain financial ratio covenants, limitations on their levels of debt and capital expenditures and requirements on maintaining various levels of EBITDA. During 2009 and 2010, certain of our operating subsidiaries in Argentina and Brazil breached certain financial ratio covenants under their debt instruments, and subsequently entered with the lenders into amendments to redefine the terms of such financial ratio covenants. The financial ratio covenants we are currently required to meet, some of which are measured on a combined basis aggregating results of the borrowing subsidiaries and others which are measured on an individual debtor basis, include, among others, debt service coverage, minimum liquidity and leverage ratios. For detailed information regarding the financial ratio covenants, limitations on levels of debt and capital expenditures and requirements on EBITDA, see “Item 5. Operating and Financial Review and Prospects—B. Liquidity and Capital Resources—Indebtedness and Financial Instruments.”

The failure by our subsidiaries to maintain applicable financial ratios, in certain circumstances, would prevent them from borrowing additional amounts and could result in a default under such indebtedness. If we or our subsidiaries are unable to repay those amounts, the affected lenders could initiate bankruptcy-related proceedings or enforce their rights to the collateral securing such indebtedness, which would have a material and adverse effect on our business, results of operations and financial condition. For detailed information regarding the terms of our subsidiaries’ indebtedness, see “Item 5. Operating and Financial Review and Prospects—B. Liquidity and Capital Resources—Indebtedness and Financial Instruments.”

Fluctuations in interest rates could have a significant impact on our results of operations, indebtedness and cash flow.

As of December 31, 2011, approximately 59.2% of our total debt was subject to variable interest rates and 40.8% was subject to fixed interest rates. As of December 31, 2011, the variable-rate interest bearing indebtedness of our Argentine subsidiaries had a rate of LIBOR plus 4.45%, and the variable-rate interest bearing indebtedness of our Brazilian subsidiaries had a rate of LIBOR or other country-specific rates such as the Taxa de Juros de Longo Prazo (TJLP) or Certificado de Depósito Interbancario (CDI) plus spreads ranging between 3.42% and 16.55% per annum. Significant interest rate increases can have an adverse effect on our profitability, liquidity and financial position. Currently, our variable interest rate exposure is mainly linked to the LIBOR rate plus specified spreads. If interest rates increase, whether because of an increase in market interest rates or an increase in our own cost of borrowing, our debt service obligations for our variable rate indebtedness would increase even though the amount of borrowings remained the same, and our net income could be adversely affected. See also “Item 11. Quantitative and Qualitative Disclosures About Market Risk.”

We occasionally use interest rate swaps and forward interest rate contracts to reduce interest rate volatility and funding costs associated with certain debt issues and to achieve a desired proportion of variable-versus fixed-rate debt, based on current and projected market conditions. We have not applied hedge accounting to these transactions and may not do so in the future. Therefore, changes in the fair value of these derivative instruments can result in a non-cash charge or gain being recognized in our financial results for a period preceding the period or periods in which settlement occurs under the derivative instruments and interest payments are made. Changes or shifts in interest rates can significantly impact the valuation of our derivatives and therefore could expose us to substantial mark-to-market losses or gains if interest rates fluctuate materially from the time when the derivatives were entered into. Accordingly, fluctuations in interest rates may impact our financial position, results of operations, and cash flows. See “Item 11. Quantitative and Qualitative Disclosures About Market Risk.”

 

18


Table of Contents

We may not be able to renew our credit lines when they mature, depriving us of needed liquidity.

Certain of our subsidiaries rely substantially on existing uncommitted credit lines to support their operations and business needs through the agricultural harvest cycle. If we are unable to renew these credit lines, or if we cannot replace such credit lines with other borrowing facilities, our financial condition and results of operations may be adversely affected.

There is a risk that we could be treated as a U.S. domestic corporation for U.S. federal income tax purposes, which could materially increase our U.S. federal income tax liability and subject any dividends we pay to U.S. federal withholding tax.

We acquired approximately 98% of IFH, a holding company which is a partnership for U.S. federal income tax purposes organized under the laws of Delaware, immediately prior to our IPO, in exchange for our stock. Under U.S. Internal Revenue Code section 7874(b), we would be treated as a U.S. domestic corporation if we were deemed to have acquired substantially all of the assets constituting the trade or business of a U.S. domestic partnership and former members of IFH were deemed to own at least 80% of our stock by reason of the transfer of those trade or business assets (ignoring stock issued in our IPO for purposes of the 80% threshold). Although we and our subsidiaries conduct no direct business activity in the United States and we believe that our acquisition of IFH should not be subject to the rules above, those rules are unclear in certain respects and there is limited guidance on the application of the rules to partnership acquisitions. Accordingly, we cannot assure you that the U.S. Internal Revenue Service (“IRS”) will not seek to assert that we are a U.S. domestic corporation, which assertion if successful could materially increase our U.S. federal income tax liability and require us to withhold tax from any dividends we pay. See “Item 10. Additional Information—E. Taxation.”

Risks associated with the Countries in which we operate

We operate our business in emerging markets. Our results of operations and financial condition are dependent upon economic conditions in those countries in which we operate, and any decline in economic conditions could harm our results of operations or financial condition.

All of our operations and/or development activities are in South America. As of December 31, 2011, based on the net book value of our combined investment property and property, plant and equipment, approximately 39.3% of our assets were located in Argentina, 59.3% in Brazil and 1.4% in Uruguay. During the year ended 2011, 56.4% of our combined sales of manufactured products and services rendered and sales of agricultural produce and biological assets were attributable to our Brazilian operations, 42% were attributable to our Argentine operations and 1.6% were attributable to our Uruguayan operations. We sell our products to a large base of customers. Type and class of customers differ among the various business segments. More than 67 % of our sales of crops are sold to ten well-known clients (both multinational or local) with good credit history with the Company. In the Sugar, Ethanol and Energy segment, sales of ethanol are concentrated in nine clients which represent the 61% of total sales of Ethanol during the year. Approximately 70% of our sales of sugar were directed through local and international commodity brokers with the remaining 30%, which mainly relates to “cristal sugar”, to a wide and diverse customer base. Energy sales are 91% concentrated in three major clients. In the dairy segment, 86% of the sales are to La Lacteo, our 50% owned joint venture. We expect that in the future we will have additional operations in the South American countries in which we now operate or in other countries with similar political, economic and social conditions. Many of these countries have a history of economic instability or crises (such as inflation or recession), government deadlock, political instability, civil strife, changes in laws and regulations, expropriation or nationalization of property, and exchange controls which could adversely affect our business, financial condition and results of operations.

In particular, fluctuations in the economies of Argentina and Brazil and actions adopted by the governments of those countries have had and may continue to have a significant impact on companies operating in those countries, including us. Specifically, we have been affected and may continue to be affected by inflation, increased interest rates, fluctuations in the value of the Argentine Peso and Brazilian Real against foreign currencies, price and foreign exchange controls, regulatory policies, business and tax regulations and in general by the political, social and economic scenarios in Argentina and Brazil and in other countries that may affect Argentina and Brazil.

 

19


Table of Contents

The economies of the countries in which we operate may be adversely affected by the deterioration of other global markets.

Financial and securities markets in the countries in which we operate are influenced, to different degrees, by the economic and market conditions in other countries, including other South American and emerging market countries and other global markets. Although economic conditions in these countries may differ significantly from economic conditions in the countries in which we operate, investors’ reactions to developments in these other countries, such as the recent developments in the global financial markets, may substantially affect the capital flows into, and the market value of securities of issuers with operations in, the countries in which we operate. A crisis in other emerging market countries could dampen investor enthusiasm for securities of issuers with South American operations, including our common shares. This could adversely affect the market price for our common shares, as well as make it difficult for us to access capital markets and obtain financing for our operations in the future, on acceptable terms or under any conditions.

A significant deterioration in the economic growth of any of the main trading partners of Brazil or Argentina could have a material impact on the trade balance of those countries and could adversely affect their economic growth.

In 2008, the global financial crisis had an adverse impact on global economic conditions. Even though by 2010 the world economies showed certain signs of recovery, the recent economic crisis in Europe, beginning with the financial crisis in Greece, has had a new adverse impact on global economic conditions. It is yet uncertain how the current financial crisis will impact the countries in which we operate, which could include a reduction in exports, a decline in tax revenues, recession and a reduced ability to access international capital markets.

Governments have a high degree of influence in the economies in which we operate, which could adversely affect our results of operations or financial condition.

Governments in many of the markets in which we currently, or may in the future operate frequently intervene in their respective economies and occasionally make significant changes in monetary, credit, industry and other policies and regulations. Government actions to control inflation and other policies and regulations have often involved, among other measures, price controls, currency devaluations, capital controls and limits on imports. We have no control over, and cannot predict what measures or policies governments may take in the future. The results of operations and financial condition of our businesses may be adversely affected by changes in governmental policy or regulations in the jurisdictions in which they operate that impact factors such as:

 

   

labor laws;

 

   

economic growth;

 

   

currency fluctuations;

 

   

inflation;

 

   

exchange and capital control policies;

 

   

interest rates;

 

   

liquidity of domestic capital and lending markets;

 

   

monetary policy;

 

   

liquidity and solvency of the financial system;

 

20


Table of Contents
   

limitations on ownership of rural land by foreigners;

 

   

developments in trade negotiations through the World Trade Organization or other international organizations;

 

   

environmental regulations;

 

   

tax laws, including royalties and the effect of tax laws on distributions from our subsidiaries;

 

   

restrictions on repatriation of investments and on the transfer of funds abroad;

 

   

expropriation or nationalization;

 

   

import/export restrictions or other laws and policies affecting foreign trade and investment;

 

   

price fixing regulations;

 

   

restrictions on land acquisition or use or agricultural commodity production; and

 

   

other political, social and economic developments, including political, social or economic instability, in or affecting the country where each business is based.

Uncertainty over whether governments will implement changes in policy or regulation affecting these or other factors in the future may contribute to economic uncertainty and heightened volatility in the securities markets, which may have a material and adverse effect on our business, results of operations and financial condition.

Currency exchange rate fluctuations relative to the U.S. dollar in the countries in which we operate our businesses may adversely impact our results of operations and financial condition.

We operate exclusively outside the United States, and our businesses may be impacted by significant fluctuations in foreign currency exchange rates. Our exposure to currency exchange rate fluctuations results from the translation exposure associated with the preparation of our consolidated financial statements, the transaction exposure associated with generating revenues and incurring expenses in different currencies and the devaluation of local currency revenues impairing the value of investments in U.S. dollars. While the consolidated financial statements presented herein are, and our future consolidated financial statements will be, presented in U.S. dollars, the financial statements of our subsidiaries are prepared using the local currency as the functional currency and translated into U.S. dollars by applying: (i) a year-end exchange rate for assets and liabilities; and (ii) an average exchange rate for the year for income and expenses. Resulting exchange differences arising from the translation to our presentation currency are recognized as a separate component of equity. Currencies in Argentina and Brazil have fluctuated significantly against the U.S. dollar in the past. Accordingly, fluctuations in exchange rates relative to the U.S. dollar could impair the comparability of our results from period to period and have a material adverse effect on our results of operations and financial condition.

After reaching a high of Ps.3.87 per $1 in June 2002, the exchange rate of the Argentine Peso to the dollar has remained relatively stable. However, the increasing level of inflation is generating pressure for further depreciation of the Peso. The Peso depreciated 2.27% against the U.S. dollar in 2007, 9.49% in 2008, 10.40% in 2009, 4.72% in 2010 and 5,89% in 2011. It is impossible to predict future fluctuations in the exchange rate of the Argentine Peso or whether the Argentine government will change its currency policy.

The Brazilian currency has historically suffered frequent fluctuations. As a consequence of inflationary pressures, in the past, the Brazilian government has implemented various economic plans and adopted a number of exchange rate policies, including sudden devaluations, periodic mini-devaluations during which the frequency of adjustments has ranged from daily to monthly, floating exchange rate systems, exchange controls and dual exchange rate markets. Currently, the value of the Real against foreign currencies is determined under a free-floating exchange rate regime. Periodically, there are significant fluctuations in the value of the Real against the U.S. dollar. The Real appreciated 16.9% against the U.S. dollar in 2007, depreciated 31.6% in 2008, appreciated 25.4% in 2009,

 

21


Table of Contents

appreciated 4.4% in 2010 and depreciated 12.6% in 2011. Against the euro, the Real appreciated 7.5% in 2007, depreciated 24.1% in 2008, appreciated 22.6% in 2009, appreciated 11.14% in 2010 and depreciated 8.74% in 2011. On December 31, 2011, the Real/U.S. dollar exchange rate was R$1.8758 per U.S. dollar, and the Real/euro exchange rate was R$2.4342 per euro, as reported by the Central Bank of Brazil. We cannot predict whether the Brazilian Central Bank will continue to let the Real float freely. Accordingly, it is not possible to predict what impact the Brazilian government’s exchange rate policies may have on us. We cannot assure you that the Brazilian government will not in the future impose a band within which the Real/U.S. dollar exchange rate could fluctuate or set a fixed exchange rate, nor can we predict what impact such an event might have on our financial condition or results of operations.

Future fluctuations in the value of the local currencies relative to the U.S. dollar in the countries in which we operate may occur, and if such fluctuations were to occur in one or a combination of the countries in which we operate, our results of operations or financial condition could be adversely affected.

Inflation in some of the countries in which we operate, along with governmental measures to combat inflation, may have a significant negative effect on the economies of those countries and, as a result, on our financial condition and results of operations.

In the past, high levels of inflation have adversely affected the economies and financial markets of some of the countries in which we operate, particularly Argentina and Brazil, and the ability of their governments to create conditions that stimulate or maintain economic growth. Moreover, governmental measures to curb inflation and speculation about possible future governmental measures have contributed to the negative economic impact of inflation and have created general economic uncertainty. A portion of our operating costs in Argentina are denominated in Argentine Pesos and most of our operating costs in Brazil are denominated in Brazilian Reais. Inflation in Argentina or Brazil, without a corresponding Peso or Real devaluation could result in an increase in our operating costs without a commensurate increase in our revenues, which could adversely affect our financial condition and our ability to pay our foreign denominated obligations.

After several years of price stability in Argentina, the devaluation of the Peso in January 2002 imposed pressures on the domestic price system that generated high inflation throughout 2002. In 2003, inflation decreased significantly and stabilized. However, since 2004, encouraged by the pace of economic growth, according to the Argentine Statistics and Census Agency (Instituto Nacional de Estadísticas y Censos, or “INDEC”), the consumer price index increased by 6.1% in 2004, 12.3% in 2005, 9.8% in 2006, 8.5% in 2007, 7.2% in 2008, 7.7% in 2009 , 10.9% in 2010, and 9.5% in 2011; while the wholesale price index went up 7.9% in 2004, 10.6% in 2005, 7.2% in 2006, 14.6% in 2007, 8.8% in 2008, 10.3% in 2009, 14.6% in 2010 and 12.7% in 2011. The accuracy of the measurements of the INDEC is in doubt, and the actual consumer price index and wholesale price index could be substantially higher than those indicated by the INDEC. For example, according to a research center of the University of Buenos Aires, School of Economics, the consumer price index increased by 10.7% (rather than 9.8%) in 2006, 25.7% (rather than 8.5%) in 2007, 23.0% (rather than 7.2%) in 2008, 15.0% (rather than 7.7%) in 2009 and 23.4% from January through November 2010.

During 2011 the Argentine Secretary of Commerce imposed fines on some private consulting firms for releasing inflation measurements. Since then, private inflation measurements have been released mainly by the Commission of Freedom of Expression of the Argentine Congress (the “Expression Commission”). After the change in the composition of the Argentine Congress on December 2011, the Argentine Congress may no longer release private inflation measurements According to the last information released by the Expression Commission and published in local newspapers, in 2011 the consumer price index increased by 22.8% (rather than 9.5%). See “—Risks Related to Argentina—There are concerns about the accuracy of the INDEC’s measurements.”

Brazil has historically experienced high rates of inflation. Inflation, as well as government efforts to curb inflation, had significant negative effects on the Brazilian economy, particularly prior to 1995. Inflation rates were 7.7% in 2007 and 9.8% in 2008, compared to deflation of 1.7% in 2009, inflation of 11.32% in 2010, and inflation of 5.1% in 2011 as measured by the General Market Price Index (Indice Geral de Preços Mercado), compiled by the Getúlio Vargas Foundation (Fundação Getúlio Vargas). A significant proportion of our cash costs and our operating expenses are denominated in Brazilian Reais and tend to increase with Brazilian inflation. The Brazilian government’s measures to control inflation have in the past included maintaining a tight monetary policy with high interest rates, thereby restricting the availability of credit and reducing economic growth. As a result, interest rates

 

22


Table of Contents

have fluctuated significantly. The Special System for Settlement and Custody (Sistema Especial de Liquidação e Custódia, or “SELIC”) interest rate in Brazil at year-end was 13.25% in 2006, 11.25% in 2007, 13.75% in 2008, 8.75% in 2009,10.75% in 2010, and 11.0% in 2011 as determined by the Comitê de Política Monetária, or COPOM. If inflation in Brazil increases, the Brazilian government may choose to increase the SELIC interest rate.

Argentina and/or Brazil may experience high levels of inflation in the future, which may impact domestic demand for our products. Inflationary pressures may also weaken investor confidence in Argentina and/or Brazil, curtail our ability to access foreign financial markets and lead to further government intervention in the economy, including interest rate increases, restrictions on tariff adjustments to offset inflation, intervention in foreign exchange markets and actions to adjust or fix currency values, which may trigger or exacerbate increases in inflation, and consequently have an adverse impact on us. In an inflationary environment, the value of uncollected accounts receivable, as well as of unpaid accounts payable, declines rapidly. If the countries in which we operate experience high levels of inflation in the future and price controls are imposed, we may not be able to adjust the rates we charge our customers to fully offset the impact of inflation on our cost structures, which could adversely affect our results of operations or financial condition.

Depreciations of the Peso or the Real relative to the U.S. dollar or the euro may also create additional inflationary pressures in Argentina or Brazil that may negatively affect us. Depreciations generally curtail access to foreign financial markets and may prompt government intervention, including recessionary governmental policies. Depreciations also reduce the U.S. dollar or euro value of dividends and other distributions on our shares and the U.S. dollar or euro equivalent of the market price of our shares. Any of the foregoing might adversely affect our business, operating results, and cash flow, as well as the market price of our common shares.

Conversely, in the short term, a significant increase in the value of the Peso or the Real against the U.S. dollar would adversely affect the respective Argentine and/or Brazilian government’s income from exports. This could have a negative effect on gross domestic product (“GDP”) growth and employment and could also reduce the public sector’s revenues in those countries by reducing tax collection in real terms, as a portion of public sector revenues are derived from the collection of export taxes.

Disruption of transportation and logistics services or insufficient investment in public infrastructure could adversely affect our operating results.

One of the principal disadvantages of the agricultural sector in the countries in which we operate is that key growing regions lie far from major ports. As a result, efficient access to transportation infrastructure and ports is critical to the growth of agriculture as a whole in the countries in which we operate and of our operations in particular. Improvements in transportation infrastructure are likely to be required to make more agricultural production accessible to export terminals at competitive prices. A substantial portion of agricultural production in the countries in which we operate is currently transported by truck, a means of transportation significantly more expensive than the rail transportation available to U.S. and other international producers. Our dependence on truck transportation may affect our position as a low-cost producer so that our ability to compete in the world markets may be impaired.

Even though road and rail improvement projects have been considered for some areas of Brazil, and in some cases implemented, substantial investments are required for road and rail improvement projects, which may not be completed on a timely basis, if at all. Any delay or failure in developing infrastructure systems could reduce the demand for our products, impede our products’ delivery or impose additional costs on us. We currently outsource the transportation and logistics services necessary to operate our business. Any disruption in these services could result in supply problems at our farms and processing facilities and impair our ability to deliver our products to our customers in a timely manner.

 

23


Table of Contents

Risks Related to Argentina

Argentine economic and political conditions and perceptions of these conditions in the international market may have a direct impact on our business and our access to international capital and debt markets, and could adversely affect our results of operations and financial condition.

A significant portion of our operations, properties and customers are located in Argentina. The Argentine economy has experienced significant volatility in recent decades, characterized by periods of low or negative growth, high and variable levels of inflation and currency devaluation. Between 2001 and 2003 Argentina experienced a period of severe political, economic and social crisis. In 2002, the enactment of Law No. 25,561 (the “Public Emergency Law”) ended more than a decade of uninterrupted Peso/dollar parity, and the value of the Peso against the U.S. dollar has fluctuated significantly since then.

Although general economic conditions in Argentina have recovered significantly during the past years, there is uncertainty as to whether this growth is sustainable. This is mainly because the economic growth was initially dependent on a significant devaluation of the Argentine Peso, a high excess production capacity resulting from a long period of deep recession and high commodity prices. The global economic crisis of 2008 has led to a sudden economic decline, accompanied by political and social unrest, inflationary and Peso depreciation pressures and lack of consumer and investor confidence. According to the INDEC, Argentina’s GDP, in real terms, grew by 8.7% in 2007, 6.8% in 2008, 0.9% in 2009, 9.2% in 2010 and 9.3% from January through September 2011. See “—There are concerns about the accuracy of the INDEC’s measurements” and “—Risks Associated with the Countries in which We Operate—Inflation in some of the countries in which we operate, along with governmental measures to combat inflation, may have a significant negative effect on the economies of those countries and, as a result, on our financial condition and results of operations” in this section. We cannot assure you that GDP will increase or remain stable in the future. The economic crisis in Europe, beginning with the financial crisis in Greece, Spain, Italy and Portugal, the international demand for Argentine products, the stability and competitiveness of the Peso against foreign currencies, confidence among consumers and foreign and domestic investors, a stable and relatively low rate of inflation and the future political uncertainties, among other factors, may affect the development of the Argentine economy.

In October 2011, Mrs. Cristina Fernandez de Kirchner was re-elected. During her presidential campaign Mrs. Fernandez de Kirchner did not announce any particular actions to be undertaken by her new administration. However, the prevailing economic conditions during 2011 and the beginning of 2012, including the rise of inflation, the continued demand for salary increases, the growth of the fiscal deficit (the highest since the first Kirchner administration despite the use of resources from the National Social Security System and the Central Bank), the required payments to be made on public debt in 2012 (including the Bonos del Gobierno Nacional en Dólares Estadounidenses Libor 2012), the reduction of the industrial growth and the increase of the capital flow out of Argentina have forced the Argentine government to adopt different measures, including the strength of foreign exchange controls, the elimination of subsidies to the private sector and the proposal for new taxes. See “Changes in the Argentine tax laws may adversely affect the results of our operations”.

On April 16, 2012, the Argentine government announced its intention to expropriate YPF, S.A. (“YPF”), the largest oil and gas company in Argentina, which is controlled by Repsol YPF, S.A., a Spanish integrated oil and gas company. The Argentine government submitted a bill to Congress to approve the expropriation of 51% of YPF’s capital stock. The nationalized capital stock would be distributed as follows: 49% to certain Argentine provinces and the remaining 51% to the national government. This particular measure has also sparked a strong international condemnation and could have a significant negative impact on future foreign direct investment in Argentina as well as potentially limit the country’s access to international capital and debt markets. In response to the nationalization of YPF by the Argentine government, the European Union Commission announced it may impose a partial suspension of the unilateral tariff preferences to Argentina. If sanctions by international trading blocks like the European Union are imposed on Argentina or on its agricultural exports, it may have a negative impact on our Argentine subsidiaries’ operations.

These conditions and measures could have a material adverse impact on our Argentine subsidiaries’ operations and financing.

The economy of Argentina may be affected by its government’s limited access to financing from international markets.

Argentina has very limited access to foreign financing. As of December 31, 2010, Argentina’s total public debt amounted to $144.5 billion. In 2002, Argentina defaulted on over $81.8 billion in external debt to bondholders. In addition, since 2002, Argentina suspended payments on over $15.7 billion in debt to multilateral financial

 

24


Table of Contents

institutions (e.g. International Monetary Fund and the Paris Club) and other financial institutions. In 2006, Argentina cancelled all its outstanding debt with the International Monetary Fund totaling approximately $9.5 billion, and through various exchange offers made to bondholders between 2004 and 2010, restructured over approximately $74.2 billion of the defaulted debt. As of December 31, 2010, the Argentine government was still in default with respect of over $6.8 billion of debt to bondholders. As of September 30, 2011, Argentina’s total public debt amounts to $175.324 billion (excluding the debt in default to bondholders).

In 2010, the Argentine government applied US$6.4 billion of the Argentine Central Bank’s reserves to the payment of public debt. In the first quarter of 2011, the Argentine government applied US$7.5 billion from the Central Bank’s reserves to repay indebtedness maturing in 2011. In March 2011, the Argentine government applied US$2.1 billion of the Argentine Central Bank’s reserves to the payment of public debt, cancelling the entire debt with international financial institutions. In addition, during 2012 the Argentine government faces the payment of approximately US$ 15 billion of public debt (including US$2.2 billion on the Bonos del Gobierno Nacional en Dólares Estadounidenses Libor 2012). Due to the lack of access to the international capital markets on March 28, 2012, the Argentine government approved a reform of the Argentine Central Bank’s Charter by which, among other things: (i) limited the availability of economic information (i.e. expected rate of inflation, amount and composition of reserves and of the monetary base); (ii) significantly increased the Argentine government’s access to financing from the Argentine Central Bank; (iii) granted the Board of Directors of the Argentine Central Bank the discretion to determine the required level of reserves; (iv) determined that any reserves above the required level fixed by the Board of Directors constitutes freely available reserves; and (v) provided that in addition to the payment of obligations with international financial institutions, the freely available reserves may also be applied to the payment of official bilateral external debt (i.e. Paris Club).

The reduction of the Argentine Central Bank’s reserves may weaken Argentina’s ability to overcome economic deterioration in the future. Without access to international private financing, Argentina may not be able to finance its obligations, and financing from multilateral financial institutions may be limited or not available. This could also inhibit the ability of the Argentine Central Bank to adopt measures to curb inflation and could adversely affect Argentina’s economic growth and public finances, which could, in turn, adversely affect our operations in Argentina, our financial condition or the results of our operations.

Argentine law concerning foreign ownership of rural properties may adversely affect our results of operations and future investments in rural properties in Argentina.

Law No. 26,737, recently passed by the Argentine congress, and its implementing regulation Decree No. 274/2012 of February 28, 2012, impose limits on the ownership or possession of rural land by foreign legal entities or foreign individuals (excluding foreign individuals who have resided in Argentina 10 years or more; who have Argentine children and also have resided at least 5-years in Argentina; or who have been married to Argentine citizens for at least 5 years prior to the transfer of the property rights over rural land and have resided in Argentina for at least 5 years).

Law 26,737 and its implementing regulation require that “foreign ownership” of rural land may not exceed 15% of the total amount of rural land in the Argentine territory calculated also in relation to the territory of the Province, Department or Municipality where the relevant lands are located. For purposes of the law, “foreign ownership” means the ownership (whether by acquisition, transfer, assignment of rights or otherwise) over rural land by: (i) foreign individuals, regardless of whether they are Argentine residents or not; (ii) legal entities where more than 51% of the stock is directly owned by foreign individuals or entities; (iii) legal entities which are indirectly linked to or controlled by foreign entities or individuals through ownership of (a) 25% or more of their stock or (b) a number of votes sufficient to prevail in the local entity’s decision-making process; (iv) any foreign legal entity or individual operating as de facto shareholder; (v) companies that issue bonds (a) convertible in stock representing 25% or more of the company’s stock and (b) whose holders are foreign individuals or entities; (vi) trusts whose beneficiaries are foreign individuals or entities, as defined pursuant to (ii), (iii), (iv) or (v) above; (vii) joint ventures in which foreign entities or individuals hold a participating interest higher than those set forth by the law (51% under (ii) or 25% under (iii), (iv), (v) or (vi) above); (viii) foreign public law-governed legal entities; and (ix) simple associations or de facto corporations in which foreigners hold shares in the percentage set forth by the new law in relation to corporations or which are controlled by foreigners. Any modification to the capital stock of companies that own or possess rural land, by public or private instrument, may be reported to the National Registry of Rural Land (Registro Nacional de Tierras Rurales) within 30 days from the date of such modification.

 

25


Table of Contents

In addition, foreign entities or individuals of the same nationality may not own more than 4.5% of rural land in Argentina and a single foreign entity or individual may not own more than 1,000 hectares in the “core area”, or the “equivalent surface”, as determined by the Interministerial Council of Rural Land (Consejo Interministerial de Tierras Rurales) in accordance with the provinces’ proposal, specifying districts, sub-regions or areas and taking into consideration the location of the land, the proportion of the land area in respect of the total territory of the relevant Province, Department or Municipality and, the quality of the land for use and exploitation. The “equivalent surface” regime may be modified by the Interministerial Council of Rural Lands (Consejo Interministerial de Tierras Rurales) taking into account possible changes in the quality of the land or the growth of urban populations. Pursuant to Decree No. 274/2012 the departments that comprise the “core area” are: Marcos Juarez and Union in the Province of Córdoba; Belgrano, San Martin, San Jeronimo, Iriondo, San Lorenzo, Rosario, Constitución, Caseros and General Lopez in the Province of Santa Fe; and the districts of Leandro N. Alem, General Viamonte, Bragado, General Arenales, Junin, Alberti, Rojas, Chivilcoy, Chacabuco, Colon, Salto, San Nicolas, Ramallo, San Pedro, Baradero, San Antonio de Areco, Exaltacion de La Cruz, Capitan Sarmiento and San Andres de Giles in the Province of Buenos Aires.

Foreign legal entities or individuals may not own rural land that comprise or are located beside permanent and significant bodies of water to be determined by the Interministerial Council of Rural Land (Consejo Interministerial de Tierras Rurales) and will include hydrological works and projects considered strategic and of public interest.

Law 26,787 creates a National Registry of Rural Land (Registro Nacional de Tierras Rurales) in charge of the enforcement of the provisions of the law and registry of rural land. Foreign owners will be required to report their ownership of rural land to the National Registry of Rural Land within the 180 days immediately following the issuance of the law’s implementing regulations.

Acquisition of rural land will not be deemed as an “investment” under bilateral investment treaties signed by the Argentine Republic, since rural land is deemed as “a non-renewable natural resource”.

Certain provisions of Law 26,787 and its implementing regulation raise questions over their precise meaning. Law 26,787 states that any act in violation of its provisions will be considered null and void, notwithstanding, the law expressly provides that it “does not affect any vested rights”. Hence, it should not have an adverse effect on the current rural land owned by our Argentine subsidiaries. However, our Argentine subsidiaries may be prevented from acquiring additional rural land in Argentina, which may adversely affect our financial condition and results of our operations.

The lack of financing for Argentine companies may have an adverse effect on the results of our operations in Argentina and on the market price of our common shares.

The prospects for Argentine companies accessing financial markets are limited in terms of the amount of the financing available and the conditions and costs of such financing. The default on the Argentine sovereign debt and the global economic crisis have significantly limited the ability of Argentine companies to access international financial markets.

In addition, in November 2008, the Argentine Congress passed a law eliminating the private pension fund system and transferring all retirement and pension funds held by the pension fund administrators (Administradoras de Fondos de Jubilaciones y Pensiones, or “AFJPs”) to the National Social Security Administrative Office (Administración Nacional de la Seguridad Social). Because the AFJPs had been the major institutional investors in the Argentine capital markets, the nationalization of the pension fund system has led to a reduction of the liquidity available in the local Argentine capital markets. As of December 31, 2011, our subsidiaries in Argentina have relied on local Argentine financing for 43% of our total indebtedness. Lack of access to international or domestic financial markets could affect the projected capital expenditures for our operations in Argentina and, therefore, may have an adverse effect on the results of our operations in Argentina and on the market price of our common shares.

 

26


Table of Contents

There are concerns about the accuracy of the INDEC’s measurements.

In January 2007, the INDEC modified its methodology used in calculating the consumer price index. At the same time, the Argentine government also replaced several key personnel at the INDEC, prompting complaints of government interference from the technical staff at the INDEC. In addition, the International Monetary Fund requested that the government clarify its inflation rates. In June 2008, the INDEC published a new consumer price index that eliminated nearly half of the items included in previous surveys and introduced adjustable weightings for fruit, vegetables and clothing, which have seasonal cost variations.

The new index has been criticized by economists and investors after its initial report found prices rising well below expectations. These events have affected the credibility of the consumer price index published by INDEC, as well as other indices published by INDEC that use the consumer price index in their calculation, including the poverty index, the unemployment index and real GDP. See “Risks Associated with the Countries in which We Operate—Inflation in some of the countries in which we operate, along with governmental measures to combat inflation, may have a significant negative effect on the economies of those countries and, as a result, on our financial condition and results of operations.”

If it is determined that it is necessary to correct the consumer price index and other INDEC indices, there could be a significant decrease in confidence in the Argentine economy, which could, in turn, have a materially adverse effect on our ability to access international credit markets at market rates to finance our operations.

Government intervention in Argentina may have a direct impact on our prices and sales.

The Argentine government has in the past set certain industry market conditions and prices. In March 2002, the Argentine government fixed the price for milk after a conflict among producers and the government. In 2005, the Argentine government adopted measures in order to increase the domestic availability of beef and reduce domestic prices. The export tax rate was increased and a minimum weight requirement for animals to be slaughtered was established. In March 2006, sales of beef products to foreign markets were temporarily suspended until prices decreased. Furthermore, in 2007 the Argentine government significantly increased export tax rates on exports of crops. A number of restrictions are also imposed on the grain and oilseed markets that essentially limit the access of traders to exports, resulting in a disparity between domestic and world prices. In March 2012, the Undersecretary of Transport created an “indicative price” for the transportation of grains by road which will be fixed on a quarterly basis. The actual price paid for the road transportation of grains should not be lower than 5% or higher than 15% of the “indicative price” fixed for the applicable period. In some cases, the imposition of this “indicative price” would produce increases in our transportation costs. We cannot assure you that the Argentine government will not interfere in other areas by setting prices or regulating other market conditions. Accordingly, we cannot assure you that we will be able to freely negotiate the prices of all our Argentine products in the future or that the prices or other market conditions that the Argentine government might impose will allow us to freely negotiate the prices of our products, which could have a material and adverse effect on our business, results of operations and financial condition.

Government measures to preempt or respond to social unrest may adversely affect the Argentine economy and our business.

During the Argentine economic crisis in 2001 and 2002, Argentina experienced significant social and political turmoil, including civil unrest, riots, looting, nationwide protests, strikes and street demonstrations. Despite Argentina’s economic recovery and relative stabilization, social and political tension and high levels of poverty and unemployment continue. In 2008, Argentina faced nationwide strikes and protests from farmers due to increased export taxes on agricultural products, which disrupted economic activity and have heightened political tensions. Future government policies to preempt, or in response to, social unrest may include expropriation, nationalization, forced renegotiation or modification of existing contracts, suspension of the enforcement of creditors’ rights, new taxation policies, including royalty and tax increases and retroactive tax claims, and changes in laws and policies affecting foreign trade and investment. Such policies could destabilize the country and adversely and materially affect the Argentine economy, and thereby our business, results of operations and financial condition.

 

27


Table of Contents

Disputes between the Argentine government and the agricultural sector may adversely affect the Argentine economy and our business.

In 2008, the Ministry of Economy and Public Finance issued a resolution which applied variable export tariffs (retenciones móviles) to the agricultural sector, thereby increasing the tariffs applicable to such exports. The resolution caused a strong reaction by organizations and individuals related to the agricultural sector, who considered the increase a direct confiscation of their private property. This reaction was publicly evidenced by large-scale demonstrations all over the country, resulting in the largest agricultural strike in Argentina’s history, which included road blocks by strikers to prevent traffic of any freight related to agricultural production. As a consequence, markets reacted adversely, causing a recession in local demand and a disruption in the local financial markets. After a serious institutional crisis between the Argentine congress and the executive branch, the Argentine government issued decrees limiting the effectiveness of the original resolution. However, we cannot assure you that the government’s dispute with the agricultural sector will not resume or whether a similar reaction or conflict with the same sector will not arise. Although, to date, the dispute has not materially affected us, we cannot assure you that a similar dispute will not arise and, if it were to arise, that it will not have a material and adverse effect on our business, results of operations and financial condition in the future.

The Argentine government may order salary increases to be paid to employees in the private sector, which would increase our operating costs.

In the past, the Argentine government has passed laws, regulations and decrees requiring companies in the private sector to maintain minimum wage levels and provide specified benefits to employees and may do so again in the future. In the aftermath of the Argentine economic crisis, employers both in the public and private sectors have experienced significant pressure from their employees and labor organizations to increase wages and to provide additional employee benefits. Due to the high levels of inflation, the employees and labor organizations have begun again demanding significant wage increases. It is possible that the Argentine government could adopt measures mandating salary increases and/or the provision of additional employee benefits in the future. Any such measures could have a material and adverse effect on our business, results of operations and financial condition.

An increase in export and import duties and controls may have an adverse impact on our sales.

Since 2002, the Argentine government has imposed duties on the exports of various primary and manufactured products, including some of our products. During the last eight years, such export taxes have undergone significant increases, reaching a maximum of 35%. We cannot assure you that there will not be further increases in the export taxes or that other new export taxes or quotas will not be imposed. Imposition of new export taxes or quotas or a significant increase in existing export taxes or the application of export quotas could adversely affect our financial condition or results of operations.

Pursuant to a recent resolution of the Argentine Federal Tax Authority (“Administración Federal de Ingresos Públicos—AFIP”) since February 2012, prior to the execution of any purchase order or similar document, Argentine importers are required to file before the AFIP a “Prior Import Statement” (Declaración Jurada Anticipada de Importación) providing information on future imports. Compliance with this requirement will be verified by the Argentine Customs upon arrival of the goods into Argentina and will be condition for the authorization of the payment of the purchase price by the Argentine financial entities. Even though this is intended merely as an information regime, it may be used for purposes of restricting imports into Argentina. A similar regime was also imposed in respect of the import and export of services, and could result in additional restrictions being imposed on the payments made by Argentine residents on services provided by foreign residents. The imposition of this regime may restrict the imports of goods and services of our Argentine subsidiaries which may adversely affect our financial conditions or results of operations.

Exchange controls could restrict the inflow and outflow of funds in Argentina.

In 2001 and 2002, the Argentine government implemented a number of monetary and currency exchange control measures that included restrictions on the withdrawal of funds deposited with banks and stringent restrictions on the outflow of foreign currency from Argentina, including for purposes of paying principal and interest on debt and distributing dividends.

Although most of these restrictions were eased in the past, as a consequence of the increase of the demand in Argentina for U. S. Dollars and the capital flows out of Argentina during 2011, the Argentine government recently

 

28


Table of Contents

imposed additional restrictions on the transfer of funds from Argentina (e.g., to make portfolio investments) and reduced the time required to comply with the mandatory transfer of funds into Argentina (e.g., the mandatory transfer into Argentina of the proceeds of loans disbursed outside of Argentina). Since January 2012, the term for mandatory transfer was reduced from 365 days to 30 days following disbursement. Accordingly, we may face problems in the payment of external debt obligations from Argentina, we may not be able to fund and/or finance our operations in Argentina, or we may not be able to distribute dividends from Argentina. Additionally, by means of Resolution 142/2012 issued by the Ministry of Economy on April 24, 2012, and Communication “A” 5300 issued by the Central Bank, on April 27, 2012 the term to comply with the mandatory transfer into Argentina of export proceeds was reduced to 15 days. These restrictions and requirements could adversely affect our financial condition and the results of our operations, or the market price of our common shares

Changes in the Argentine tax laws may adversely affect the results of our operations.

The Argentine government is currently developing a Bill to amend the Income Tax Law denominated “Anti-Evasion Plan III”. Pursuant to the proposed Bill, among other things, deductible losses (that can be deducted within the following five years) would be limited to a 30% of the gains earned in each fiscal year; capital gains obtained from foreign individuals or entities from the sale, exchange or disposition of shares and other securities would be subject to the income tax at a rate of 35%; and payments made to individuals or entities located or incorporated in countries with law or no taxation would be subject to withholding at a rate of 35% and would not be deductible. If these amendments are passed into law, the limitations on the deductions may adversely affect the results of our Argentine subsidiaries operations; and the taxation of the capital gains will adversely impact the results of the sale or disposition of our Argentine subsidiaries’ shares.

Risks Related to Brazil

Brazilian economic and political conditions and perceptions of these conditions in international markets have a direct impact on our business and our access to international capital and debt markets and could adversely affect our results of operations and financial condition.

A significant portion of our operations, properties and customers are located in Brazil. Accordingly, our financial condition and results of operations are substantially dependent on economic conditions in Brazil. The Brazilian economy has experienced significant volatility in recent decades, characterized by periods of low or negative growth, high and variable levels of inflation and currency devaluation. Brazil’s GDP, in real terms, grew by 6.1% in 2007, 5.1% in 2008, decreased 0.2% in 2009, increased by 7.5% in 2010, and increased 3.0% in 2011. We cannot assure you that GDP will increase or remain stable in the future. Future developments in the Brazilian economy may affect Brazil’s growth rates and, consequently, the consumption of sugar, ethanol, and our other products. As a result, these developments could impair our business strategies, results of operations and financial condition.

Historically, Brazil’s political situation has influenced the performance of the Brazilian economy, and political crises have affected the confidence of investors and the general public, which has resulted in economic deceleration and heightened volatility in the securities issued abroad by Brazilian companies. Future developments in policies of the Brazilian government and/or the uncertainty of whether and when such policies and regulations may be implemented, all of which are beyond our control, could have a material adverse effect on us.

Changes in Brazilian tax laws may increase our tax burden.

The Brazilian government frequently implements changes to the Brazilian tax regime that may affect us and our customers. These changes include changes in prevailing tax rates and, occasionally, imposition of temporary taxes, the proceeds of which are earmarked for designated government purposes. Some of these changes may result in increases in our tax payments, which could adversely affect industry profitability and increase the prices of our products, restrict our ability to do business in our existing and target markets and cause our financial results to suffer. For example, in July 2011, the Brazilian government introduced a tax on securities transactions or IOF/Securities-Derivatives at the rate of 1.0% on the notional adjusted value of financial derivatives. Also, the government changed twice the tax charged on consumer financial transactions in 2011: an increase of 1.5% per year. In April, and a reduction of 0.5% per year in December. On March 1, 2012, the Brazilian government issued new regulations effective immediately relating to new export prepayment financing, limiting the tenor of these financings to 360 days and excluding financial institutions as eligible lenders. Exporters may continue to obtain long-term

 

29


Table of Contents

financing from financial institutions, but these financings will not benefit from reduced foreign exchange tax IOF rate applicable to the conversion of foreign currency into raise related to borrowings under export prepayment financings and will no longer be subject to an exemption on withholding tax payable for interest. In addition, the Brazilian government implemented a 6% IOF/Exchange tax rate applicable to foreign exchange transactions related to financing from foreign financial institutions with an average life of less than five years and reduced the IOF/Exchange rate for foreign financings with an average life of more than five years to 0%. The effects of these changes and any other change that could result from the enactment of additional taxation cannot be quantified. . We cannot assure you that we will be able to maintain our projected cash flow and profitability following any increases in Brazilian taxes applicable to us and our operations.

Widespread corruption and fraud relating to ownership of real estate may adversely affect our business, especially our land transformation business.

Under Brazilian Legislation, real property ownership is normally transferred by means of a transfer deed, and subsequently registered at the appropriate Real Estate Registry Office under the corresponding real property record. There are uncertainties, corruption and fraud relating to title ownership of real estate in Brazil, mostly in rural areas. In certain cases, the Real Estate Registry Office may register deeds with errors, including duplicate and/or fraudulent entries, and, therefore, deed challenges frequently occur, leading to judicial actions. Property disputes over title ownership are frequent in Brazil, and, as a result, there is a risk that errors, fraud or challenges could adversely affect us.

Social movements and the possibility of expropriation may affect the normal use of, damage, or deprive us of the use of or fair value of, our properties.

Social movements, such as Movimento dos Trabalhadores Rurais Sem Terra and Comissão Pastoral da Terra, are active in Brazil and advocate land reform and mandatory property redistribution by the federal government. Land invasions and occupations of rural areas by a large number of individuals is common practice for these movements, and, in certain areas, including those in which we have invested or are likely to invest, police protection and effective eviction proceedings are not available to land owners. As a result, we cannot assure you that our properties will not be subject to invasion or occupation by these groups. In addition, our land may be subject to expropriation by the federal government. Under the Brazilian legal system, the federal government may expropriate land that is not in compliance with mandated local “social functions” for purposes of land reform. “Social function” is described in the Brazilian Constitution as rational and adequate exploitation of land, adequate use of natural resources available and preservation of the environment, compliance with labor laws, and exploitation of land to promote welfare of owners and employees. If the Brazilian government decides to expropriate any of our properties, our results of operations may be adversely affected, to the extent that potential compensation to be paid by the federal government may be less than the profit we could make from the sale or use of such land. Disputing the federal government’s expropriation of land is usually time-consuming and the outcomes at such challenges are uncertain. In addition, we may be forced to accept public debt bonds, which have limited liquidity, as compensation for expropriated land instead of cash. A land invasion or occupation also could materially impair the normal use of our lands or have a material adverse effect on our results of operations, financial condition or the value of our common shares.

Recent changes in Brazilian rules concerning foreign investment in rural properties may adversely affect our investments.

Brazilian federal law establishes certain restrictions on the acquisition of rural property by foreigners, including that (i) foreign investors may only acquire rural properties in which agricultural, cattle-raising, industrial or colonization projects are going to be developed as approved by the relevant authorities; (ii) the total rural area to be acquired by a foreign investor cannot exceed one quarter of the surface of the municipality in which it is located, and foreigners with the same nationality may not own, cumulatively, more than 10% of the surface of the municipality in which it is located; and (iii) the acquisition or possession (or any in rem right) by a foreigner of rural property situated in an area considered important to national security must be previously approved by the General Office of the National Security Council (Conselho de Defesa Nacional). The restrictions mentioned in items (i) and (ii) above are also applicable for rural lease agreements executed by foreigners. “Parcerias Rurales” (agriculture partnerships agreements) have not been subject to these restrictions. However, a broader interpretation construction of the existing regulations may also include these agreements within the limitations for foreigners. In addition, the acquisition or lease by a foreigner of a rural property exceeding 100 módulos de exploração indefinida (“MEI,” a

 

30


Table of Contents

measurement unit defined by the National Institute for Colonization and Agrarian Reform (Instituto Nacional de Colonização e Reforma Agraria, or “INCRA”) in hectares for each region of the country) must be previously approved by the Brazilian National Congress. Brazilian federal law enacted in 1971 also establishes that the same restrictions apply to Brazilian companies that are controlled by foreign investors. Any acquisition of rural property by foreigners in violation of these terms would be considered null and void under Brazilian law.

However, the Brazilian Constitution enacted in 1988 and its amendments, in particular Constitutional Amendment No. 6, of August 15, 1995, set forth that (i) no restrictions on the acquisition of rural land in Brazil should apply to Brazilian companies; and (ii) any company incorporated and headquartered in Brazil and controlled by foreign investors must receive the same treatment as any other company incorporated and headquartered in Brazil and controlled by Brazilian investors. Since the enactment of the Brazilian Constitution in 1988, the interpretation had been that the restrictions imposed by federal law on the acquisition or lease of rural property above-mentioned did not apply to Brazilian companies controlled by foreigners, pursuant to the legal opinion issued by the Federal General Attorney’s Office (the “AGU”) in 1994, which was ratified in 1998. However, the Brazilian Justice National Council issued an Official Letter on July 13, 2010 addressed to all the Brazilian local State Internal Affairs Bureaus in order for them to adopt procedures within 60 days and instruct the local State Notary and Real Estate Registry Offices to observe the restrictions of the Brazilian law on the acquisitions of rural land by Brazilian companies with foreign equity holders. Thereafter, on August 19, 2010, the AGU revised its prior opinion, and published a new opinion confirming that Brazilian entities controlled by foreigners should be subject to the restrictions described above, and the transactions entered into by foreigners in connection with rural properties shall be subject to the analysis and approval from INCRA, the Ministry of Agrarian Development and the Brazilian National Congress, when applicable. This revised opinion was ratified by the President of Brazil and published in the Official Gazette of the Federal Executive on August 23, 2010, becoming binding as of such date. We therefore believe that the acquisitions of rural properties by Brazilian companies controlled by foreigners registered in the appropriate real estate registry prior to August 23, 2010 will not be affected by this binding opinion. However, going forward, the acquisition and leasing of rural land in Brazil, including through corporate transactions, will be subject to the above-mentioned restrictions, and will require several additional layers of review and approvals which may be discretionary (including the approvals from INCRA, Ministry of Agrarian Development and the Brazilian National Congress, when applicable), burdensome and time consuming. While we conduct our operations in Brazil through local subsidiaries, we would be considered a foreign controlled entity within the meaning of the restrictions articulated above. Therefore, if we are not able to comply with these restrictions and obtain the required approvals in connection with future acquisitions, our business plan, contemplated expansion in Brazil and results of operations will be adversely affected.

Furthermore, there is currently proposed legislation under analysis in the Brazilian National Congress regarding the acquisition of rural land by Brazilian companies controlled by foreign holders, which if approved may further limit and restrict the investments of companies with foreign equity capital in rural land in Brazil. Such further restrictions may place more strain on our ability to expand our operations in Brazil.

The Brazilian government has exercised, and continues to exercise, significant influence over the Brazilian economy.

The Brazilian government frequently intervenes in the Brazilian economy and occasionally makes significant changes in policy and regulations. The Brazilian government’s actions to control inflation and other policies and regulations have often involved, among other measures, increases in interest rates, changes in tax policies, price controls, currency devaluations, capital controls and limits on exports and imports. We may be adversely affected by changes in policy or regulations involving or affecting factors such as:

 

   

interest rates;

 

   

monetary policy;

 

   

limitation on ownership of rural land by foreigners;

 

   

exchange controls and restrictions on remittances abroad;

 

31


Table of Contents
   

currency fluctuations;

 

   

inflation;

 

   

the liquidity of domestic capital and financial markets;

 

   

tax policy; and

 

   

other political, social and economic policies or developments in or affecting Brazil.

Uncertainty over whether the Brazilian government will implement changes in policy or regulations affecting these or other factors in the future may contribute to economic uncertainty in Brazil and to heightened volatility in the Brazilian securities markets and securities issued abroad that are supported by Brazilian issuers. As a result, these uncertainties and other future developments in the Brazilian economy may adversely affect our business, financial condition and results of operations and may adversely affect the price of our common shares.

Our business in Brazil is subject to governmental regulation.

Our Brazilian operations are subject to a variety of national, state, and local laws and regulations, including environmental, agricultural, health and safety and labor laws. We invest financial and managerial resources to comply with these laws and related permit requirements. Our failure to do so could subject us to fines or penalties, enforcement actions, claims for personal injury or property damages, or obligations to investigate and/or remediate damage or injury. Moreover, if applicable laws and regulations, or the interpretation or enforcement thereof, become more stringent in the future, our capital or operating costs could increase beyond what we currently anticipate, and the process of obtaining or renewing licenses for our activities could be hindered or even opposed by the competent authorities.

We are also subject to several laws and regulations, among others, imposed in Brazil by (i) the National Agency of Petroleum, Natural Gas and Biofuels (Agência Nacional do Petróleo, Gás Natural e Biocombustível) and by the Brazilian Electricity Regulatory Agency (Agência Nacional de Energia Elétrica) (“ANEEL”) due to our production of sugarcane and ethanol and (ii) the Ministry of Agriculture, Breeding Cattle and Supply (Ministerio da Agricultura, Pecuaria e Abastecimento), due to our agricultural, sugarcane and ethanol production activities. If an adverse final decision is issued in an administrative process, we could be exposed to penalties and sanctions derived from the violation of any of these laws and regulations, including the payment of fines, and, depending on the level of severity applied to the infraction, the closure of facilities and/or stoppage of activities and the cancellation or suspension of the registrations, authorizations and licenses, which may also result in temporary interruption or discontinuity of activities in our plants, and adversely affect our business, financial status, and operating results.

Government laws and regulations in Brazil governing the burning of sugarcane could have a material adverse impact on our business or financial performance.

In Brazil, approximately 54% of sugarcane is currently harvested by burning the crop, which removes leaves in addition to eliminating insects and other pests. The state of São Paulo and some local governments have established laws and regulations that limit and/or entirely prohibit the burning of sugarcane and there is a likelihood that increasingly stringent regulations will be imposed by the state of São Paulo and other governmental agencies in the near future. We currently make significant investments to comply with these laws and regulations. Although our plans for the implementation of mechanized harvesting are underway, with 87% of our sugarcane harvest mechanized during the 2010-2011 harvest, the strengthening of these laws and regulations or the total prohibition of sugarcane burning would require us to increase our planned investment in harvesting equipment, which, in turn, would limit our ability to fund other investments. In addition, the state of São Paulo has imposed an obligation on growers to dedicate a certain percentage of land used for sugarcane cultivation for native or reclaimed forest area. The cost of setting aside this land is difficult to predict and may increase costs for us or our sugarcane suppliers. As a result, the costs to comply with existing or new laws or regulations are likely to increase, and, in turn, our ability to operate our plants and harvest our sugarcane crops may be adversely affected.

 

32


Table of Contents

Any failure to comply with these laws and regulations may subject us to legal and administrative actions. These actions can result in civil or criminal penalties, including a requirement to pay penalties or fines, which may range from US$5 to US$50 million and can be doubled or tripled in case of recidivism, an obligation to make capital and other expenditures or an obligation to materially change or cease some operations.

Risks Related to a Luxembourg Company

We are a Luxembourg corporation (“société anonyme”) and it may be difficult for you to obtain or enforce judgments against us or our executive officers and directors in the United States.

We are organized under the laws of the Grand Duchy of Luxembourg. Most of our assets are located outside the United States. Furthermore, most of our directors and officers and the experts named in this annual report reside outside the United States, and most of their assets are located outside the United States. As a result, you may find it difficult to effect service of process within the United States upon these persons or to enforce outside the United States judgments obtained against us or these persons in U.S. courts, including judgments in actions predicated upon the civil liability provisions of the U.S. federal securities laws. Likewise, it may also be difficult for you to enforce in U.S. courts judgments obtained against us or these persons in courts located in jurisdictions outside the United States, including actions predicated upon the civil liability provisions of the U.S. federal securities laws. It may also be difficult for an investor to bring an action in a Luxembourg court predicated upon the civil liability provisions of the U.S. federal securities laws against us or these persons. Luxembourg law, furthermore, does not recognize a shareholder’s right to bring a derivative action on behalf of the company.

Service of process within Luxembourg upon the Company may be possible, provided that The Hague Convention on the Service Abroad of Judicial and Extrajudicial Documents in Civil or Commercial Matters of November 15, 1965 is complied with.

As there is no treaty in force on the reciprocal recognition and enforcement of judgments in civil and commercial matters between the United States and the Grand Duchy of Luxembourg, courts in Luxembourg will not automatically recognize and enforce a final judgment rendered by a U.S. court. The enforceability in Luxembourg courts of judgments entered by U.S. courts will be subject prior any enforcement in Luxembourg to the procedure and the conditions set forth in particular in the Luxembourg procedural code, which conditions may include the following (subject to court interpretation which may evolve):

 

   

the judgment of the U.S. court is final and duly enforceable (exécutoire) in the United States;

 

   

the U.S. court had jurisdiction over the subject matter leading to the judgment (that is, its jurisdiction was established in compliance both with Luxembourg private international law rules and with the applicable domestic U.S. federal or state jurisdictional rules);

 

   

the U.S. court has applied to the dispute the substantive law which would have been applied by Luxembourg courts;

 

   

the judgment was granted following proceedings where the counterparty had the opportunity to appear, and if it appeared, to present a defense;

 

   

the U.S. court has acted in accordance with its own procedural laws; and

 

   

the judgment of the U.S. court does not contravene Luxembourg international public policy.

Under our articles of incorporation, we indemnify and hold our directors harmless against all claims and suits brought against them, subject to limited exceptions. Under our articles of incorporation, to the extent allowed or required by law, the rights and obligations among or between us, any of our current or former directors, officers and company employees and any current or former shareholder will be governed exclusively by the laws of Luxembourg and subject to the jurisdiction of the Luxembourg courts, unless such rights or obligations do not relate to or arise out of their capacities as such. Although there is doubt as to whether U.S. courts would enforce such provision in an action brought in the United States under U.S. securities laws, such provision could make enforcing judgments obtained outside Luxembourg more difficult as to the enforcement against our assets in Luxembourg or jurisdictions that would apply Luxembourg law.

 

33


Table of Contents

You may have more difficulty protecting your interests than you would as a shareholder of a U.S. corporation.

Our corporate affairs are governed by our articles of incorporation and by the laws governing joint stock companies organized under the laws of the Grand Duchy of Luxembourg as well as such other applicable local law, rules and regulations. The rights of our shareholders and the responsibilities of our directors and officers under Luxembourg law are different from those applicable to a corporation incorporated in the United States. There may be less publicly available information about us than is regularly published by or about U.S. issuers. Also, Luxembourg regulations governing the securities of Luxembourg companies may not be as extensive as those in effect in the United States, and Luxembourg law and regulations in respect of corporate governance matters may not be as protective of minority shareholders as state corporation laws in the United States. Therefore, you may have more difficulty protecting your interests in connection with actions taken by our directors and officers or our principal shareholders than you would as a shareholder of a corporation incorporated in the United States.

You may not be able to participate in equity offerings, and you may not receive any value for rights that we may grant.

Pursuant to Luxembourg corporate law, existing shareholders are generally entitled to preemptive subscription rights in the event of capital increases and issues of shares against cash contributions. However, under our articles of incorporation, the board of directors has been authorized to waive, limit or suppress such preemptive subscription rights until the fifth anniversary of the publication of the authorization granted to the board in respect of such waiver by the general meeting of shareholders.

Item  4. Information on the Company

A. HISTORY AND DEVELOPMENT OF THE COMPANY

General Information

Adecoagro is a Luxembourg société anonyme (a public company limited by shares). The Company’s legal name is “Adecoagro S.A.” Adecoagro was incorporated on June 11, 2010 and on October 26, 2010 all the shares in issue in Adecoagro were acquired by IFH LLC.

On October 30, 2010, the members of IFH LLC transferred pro rata approximately 98% of their membership interests in IFH LLC to Adecoagro in exchange for common shares of Adecoagro.

On January 28, 2011, Adecoagro completed the IPO of its shares listed on the New York Stock Exchange (“NYSE”). The shares are traded under the symbol “AGRO.”

During 2011, we contributed net proceeds of the IPO to increase our interest in IFH from 98% to 98.64%.

Adecoagro is registered with the Luxembourg Registry of Trade and Companies under number B153681. Adecoagro has its registered office at 13-15 Avenue de la Liberté, L-1931, Luxembourg, Grand Duchy of Luxembourg. Our telephone number is (+352) 2689-8213.

History

Since our inception in 2002, we have optimized the use of our portfolio of land acquired from time to time and effectively worked towards reaching its productive potential. We replaced the production model used by former owners of our assets with one that is more efficient and sustainable at the same time. Every hectare of our land capable of growing crops, other than land subject to land reserve requirements, is allocated to growing crops or producing sugarcane, while our other land is used for raising dairy cows or leased for raising cattle.

 

34


Table of Contents

In September 2002, we commenced our operations with the acquisition of 100% of the equity interests of Pecom Agropecuaria S.A., an Argentine corporation (sociedad anónima), and we rapidly became one of the largest agricultural companies in Argentina. Involving more than 74,000 hectares of farmland, this acquisition represented one of the largest stock purchase transactions in South America in 2002. In connection with the acquisition, Pecom Agropecuaria S.A. changed its name to Adeco Agropecuaria S.A. (“Adeco Agropecuaria”).

Adeco Agropecuaria was the platform from which we executed our expansion plans, including the acquisition of additional land and the diversification of our business activities.

In 2004, we began our regional expansion and acquired our farm in Uruguay (approximately 5,000 hectares). In 2005, we continued the expansion of our crop business in Argentina with the acquisitions of La Agraria S.A. (approximately 4,857 hectares) and Establecimientos El Orden S.A. and Cavok S.A. (approximately 15,157 hectares).In 2005, we acquired our first sugar and ethanol mill, Usina Monte Alegre S.A., with a crushing capacity of 0.9 million tons of sugarcane per year at that time.

In 2006 and 2007, we continued our land portfolio expansion and vertical integration through the acquisitions of Pilagá S.A. (formerly Pilagá S.R.L. and before that, Pilagá S.A.G.), one of the largest and oldest agriculture companies in Argentina, with more than 88,000 hectares and two rice processing facilities, and one additional farm of approximately 2,400 hectares in Argentina and five farms of approximately 24,000 hectares in Brazil for the production of sugarcane and coffee. In 2007, we also acquired La Lácteo S.A., our Argentine dairy processing joint venture company, with two milk production facilities and an installed processing capacity of 150,000 liters of milk per day at that time. This joint-venture was entered with Agropur Cooperative, Canada’s second largest milk processing company.

Also, in December 2007, we acquired Bañado del Salado S.A. and Agro Invest S.A., with more than 43,000 hectares for crop production in Argentina, and one farm in Uruguay of approximately 3,177 hectares. In Brazil, we bought more than 13,000 hectares for the planting of sugarcane for our sugarcane cluster in Mato Grosso do Sul.

Additionally, in August 2010, we acquired Dinaluca S.A., an agricultural company consisting of a farm located in the province of Corrientes, Argentina, and with more than 14,000 hectares for crop production in Argentina.

On October 30, 2010, as part of the corporate reorganization, referred to herein as the Reorganization, AFI Ltd., a subsidiary of IFH LLC and the parent of Adecoagro LLC, distributed its interest in Adecoagro LLC to IFH LLC and commenced a process of dissolution, making IFH LLC the direct parent of Adecoagro LLC. Thereafter, our shareholders transferred pro rata 98% of their membership interests in IFH LLC to Adecoagro (a corporation organized under the laws of the Grand Duchy of Luxembourg with no prior holdings or operations, formed for the purpose, among others, of facilitating our IPO) in exchange for 100% of the common shares of Adecoagro.

In connection with the Reorganization, Adecoagro converted IFH LLC from a limited liability company to a limited liability partnership, IFH LP, a Delaware limited partnership. Following the Reorganization, IFH LP was owned 2% by our shareholders, approximately 98% by Adecoagro, in each case as limited partners, and the remainder by Ona Ltd., a newly formed Maltese corporation, as its general partner. IFH LLC also converted Adecoagro LLC to Adecoagro LP, a Delaware limited partnership. Following the Reorganization, Adecoagro LP was owned approximately 100% by IFH LP as limited partner, and the remainder by Toba Ltd., a newly formed Maltese corporation, as its general partner.

On January 28, 2011, we successfully completed the IPO of our shares listed on the NYSE. We issued 28,405,925 shares, at a price of US$11 per share. The shares trade under the symbol “AGRO.”

On January 28, 2011, we also issued and sold to Al Gharrafa Investment Company (“Al Gharrafa”), a wholly owned subsidiary of Qatar Holding LLC and one of our shareholders, 7,377,598 common shares at a purchase price of $10.65 per share, which is equal to the price per common share paid by the underwriters acting in the initial public offering of the Company, pursuant to an agreement entered into on January 6, 2011.

During 2011, we contributed net proceeds of the IPO to IFH and increased our interest in IFH from 98% to 98.64%.

 

35


Table of Contents

In addition, on February 11, 2011, we issued 4,285,714 shares when the over-allotment option was exercised by the underwriters in our IPO.

Furthermore, in August 2011, we acquired: (i) Compañía Agroforestal de Servicios y Mandatos S.A., an agricultural Argentine company owner of more than 4,900 hectares of land in the Argentine province of Santiago del Estero, and (ii) Simoneta S.A., an agricultural Argentine company owner of more than 4,600 hectares of land in the Argentine province of La Pampa.

Finally, in November 2011 we acquired 3,400 hectares of land for crop production in the province of San Luis.

During March, 2012, we issued 696,618 shares to certain limited partners of IFH in exchange for their residual interest in IFH, totaling 0.57230%, thereby increasing our interest in IFH to 99.2%.

The diagrams below illustrate our corporate structure as of December 31, 2011

 

LOGO

 

36


Table of Contents
* Private Shareholders refer to shareholders of record prior to our IPO and transferees.
** Does not account for an immaterial amount of shares required to be owned by other persons pursuant to Maltese law.

Principal Capital Expenditures

Capital expenditures totaled $165.3 million, $130.6 million and $138.6 million for the years ended December 31, 2011, 2010 and 2009, respectively.

For a discussion of our capital expenditures and future projections, see “Item 5. Operating and Financial Review and Prospects—B. Liquidity and Capital Resources—Capital Expenditure Commitments.”

B. BUSINESS OVERVIEW

Our Company

We are a leading agricultural company in South America, with operations in Argentina, Brazil and Uruguay. We are currently involved in a broad range of businesses, including farming crops and other agricultural products, cattle and dairy operations, sugar, ethanol and energy production and land transformation. Our sustainable business model is focused on (i) a low-cost production model that leverages growing or producing each of our agricultural products in regions where we believe we have competitive advantages, (ii) reducing the volatility of our returns through product and geographic diversification and use of advanced technology, (iii) benefiting from vertical integration in key segments of the agro-industrial chain, (iv) acquiring and transforming land to improve its productivity and realizing land appreciation through strategic dispositions; and (v) promoting sustainable agricultural production and development.

As of December 31, 2011, we owned a total of 293,423 hectares, comprised of 23 farms in Argentina, 13 farms in Brazil and 1 farm in Uruguay. In addition we own and operate several agro-industrial production facilities including four rice processing facilities in Argentina, a dairy operation with approximately 4603 milking cows in Argentina, two coffee processing plants in Brazil, twelve grain and rice conditioning and storage plants in Argentina and two sugar and ethanol mills in Brazil with a sugarcane crushing capacity of 5.2 million tons as of December 31, 2011.

We believe that we are:

 

   

one of the largest owners of productive farmland in South America, with more than 230,549 owned hectares as of December 31, 2011 used in productive activities (excluding legal land reserves pursuant to local regulations and other land reserves) located in Argentina, Brazil and Uruguay, producing a wide range of agricultural products.

 

   

a leading producer of agricultural commodities in South America. During the 2010/2011 harvest year, we harvested 167,104 hectares (including 37,694 leased hectares) and produced 491,533 tons of grains, including soybeans, corn, wheat, sunflower and cotton.

 

   

one of the largest producers of rough (unprocessed) rice in the world, planting 27,542 hectares (including 4,568 leased hectares) and producing 172,034 tons during the 2010/2011 harvest year, which accounted for 10% of the total Argentine production according to the Confederacion de Molinos Arroceros del Mercosur (“Conmasur”). We are also a large processor and exporter of white rice in Argentina, accounting for 13% of total white rice production capacity in Argentina and 16% of total Argentine white rice exports during 2011, according to Aduana Argentina and the Federacion de Entidades Arroceras, respectively.

 

37


Table of Contents
   

a leading dairy producer in South America in terms of our cutting-edge technology, productivity per cow and grain conversion efficiencies, producing over 51.2 million liters of raw milk during 2011.

 

   

one of the largest producers of green bean coffee in the world, with 1,632 fully integrated and mechanized hectares devoted to coffee production as of December 31, 2011.

 

   

a growing producer of sugar and ethanol in Brazil, where we are in the process of building what we expect will be one of the most cost-efficient sugarcane crushing clusters in Brazil. In the sugar and ethanol area:

 

   

we currently own two sugar and ethanol mills in Brazil with an aggregate installed crushing capacity of 5.2 million tons per year and cogeneration (the generation of electricity from sugarcane bagasse, the fiber portion of sugarcane that remains after the extraction of sugarcane juice) capacity of 112 MW as of December 31, 2011;

 

   

we are currently building our third sugar and ethanol mill in Brazil, which, when combined with our existing Angélica mill (“Angélica”), will form a cluster that we believe will allow us to become one of the lowest-cost producers of sugar, ethanol and energy from sugarcane in Brazil; and

 

   

we expect our planned cluster to have a total installed sugarcane crushing capacity of 10.3 million tons per year and a cogeneration capacity of 296 MW once it reaches full capacity in 2017, resulting in a total sugarcane crushing capacity of 11.5 million tons per year for our three mills together at that time.

 

   

one of the leading companies in South America involved in the acquisition and transformation of undermanaged land to more productive uses, generating higher cash yields. During the last six fiscal years, we sold over 29,608 hectares of developed land, generating capital gains of approximately $104 million.

We are engaged in three main businesses:

Farming Business: We believe we are one of the largest owners of productive farmland in South America. As of December 31, 2011 we owned 280,142 hectares (excluding sugarcane farms) of farmland in Argentina, Brazil and Uruguay, of which 130,344 hectares are croppable, 18,210 hectares are being evaluated for transformation, 72,219 hectares are suitable for raising beef cattle and are mostly leased to a third party beef processor, constituting a total of 220,773 productive hectares, and 63,503 hectares are legal land reserves pursuant to local regulations or other land reserves. During 2011/2012 harvest year we held leases or have entered into agriculture partnerships for an additional 61,417 croppable hectares. We own the facilities and have the resources to store and condition 100% of our crop and rice production. We do not depend on third parties to condition our production for sale. Our farming business is subdivided into five business areas:

 

   

Crop business: We produce a wide range of agricultural commodities including soybeans, corn, wheat, sunflower and cotton, among others. In Argentina, our farming activities are conducted mainly in the Argentine humid pampas region, where agro-ecological conditions are optimal for low-cost production. Since 2004, we have expanded our operations throughout the center-west region of Uruguay and the western part of the state of Bahia, Brazil, as well as in the northern region of Argentina. During the 2010/2011 harvest year, we planted approximately 163,033 hectares of crops, including second harvests, producing 491,813 tons of grains, including soybeans, wheat and corn, sunflower and cotton. We also planted an additional 4,071 hectares where we produced over 44,158 tons of forage that we used for cow feed in our dairy operation. During the 2011/12 harvest year, we planted approximately 199,465 hectares of crops, including second harvest, and also planted an additional 4,889 hectares of forage.

 

38


Table of Contents
   

Rice business: We own a fully-integrated rice operation in Argentina. We produce irrigated rice in the northeast provinces of Argentina, where the availability of water, sunlight, and fertile soil results in one of the most ideal regions in the world for producing rice at low cost. We believe that we are one of the largest producers of rough (unprocessed) rice in Argentina, producing 172,034 tons during the 2010/2011 harvest year, which accounted for 10% of the total Argentine production according to Conmasur. We own four rice mills that process our own production, as well as rice purchased from third parties. We produce different types of white and brown rice that are both sold in the domestic Argentine retail market and exported. During the 2011/12 harvest year, we planted 31,497 hectares of rice.

 

   

Coffee business: Our integrated coffee operation is located in the western part of the state of Bahia, Brazil, where conditions are well-suited for producing “specialty coffee” due to the availability of water for irrigation, the absence of frosts and the flat topography that allows for a fully mechanized harvest. We grow coffee on 1,632 owned hectares and have available land and water to expand our operations to 2,700 hectares.

 

   

Dairy business: We believe that we are a leading dairy producer in South America in terms of our utilization of cutting-edge technology, productivity per cow and grain conversion efficiencies, producing over 51.2 million liters of raw milk during 2011, with an average of 4,603 milking cows, delivering an average of 30.5 liters of milk per cow per day. Through the production of raw milk, we are able to transform forage and grains into value-added animal protein. We believe that our “free-stall” dairy in Argentina is the first of its kind in South America and allows us to optimize our use of resources (land, dairy cow feed and capital), increase our productivity and maximize the conversion of forage and grain into raw milk.

 

   

Cattle business: Until December 2009, we owned 58,348 head of cattle, which we fattened for sale to meat processors and in Argentina’s livestock auction markets. In December 2009, we sold 55,543 head of cattle from our herd, not including cattle used in our dairy business, to a meat processor for a total price of $14.2 million. Additionally, we entered into a long-term lease agreement pursuant to which the meat processor leases over 72,219 hectares of grazing land from us to raise and fatten the purchased cattle. The lease agreement is tied to the market price of beef at the end of each quarter.

The following table sets forth, for the periods indicated, certain data relating to our farming business:

 

     Year Ended December 31,  
     2011      2010      2009  

Sales

   (In thousands of $)  

Crops(l)

     147,946         108,162         92,029   

Rice(2)

     83,244         61,585         69,350   

Coffee

     14,170         7,572         14,265   

Dairy

     19,697         14,297         11,894   

Cattle(3)

     5,709         6,125         28,478   

Total

     270,766         197,741         216,016   

 

Production

   2011/2012
Harvest
Year
     2010/2011
Harvest
Year
     2009/2010
Harvest
Year
     2008/2009
Harvest
Year
 

Crops (tons)(5)

     98,403         491,813         524,890         317,582   

Rice (tons)(6)

     NA         172,034         91,723         94,968   

Coffee (tons)

     NA         2,742         2,221         2,412   

Total

     NA         666,589         618,723         414,962   

 

     Year Ended December 31,  
     2011      2010      2009  

Dairy (thousands of liters)(7)

     51,239         41,597         47,479   

Cattle (tons)(3)(8)

     108         359         4,149   

 

39


Table of Contents
     2011/2012
Harvest
Year
     2010/2011
Harvest
Year
     2009/2010
Harvest
Year
     2008/2009
Harvest
Year
 

Planted Area

   (In hectares, including second harvest)  

Crops (9)

     204,354         167,104         168,241         139,518   

Rice

     31,497         27,542         18,142         17,258   

Coffee (10)

     1,632         1,632         1,632         1,632   

Cattle (11)

     72,219         76,245         87,392         106,375   

 

(1) Includes soybeans, corn, wheat, sunflower and cotton, among others.
(2) Sales of processed rice, including rough rice purchased from third parties and processed in our facilities.
(3) In December 2009, we sold 55,543 head of cattle to a third party. The third party currently leases grazing land from us to raise and fatten the cattle, and our payments under the lease are tied to the market price of beef. See “—Operations and Principal Activities—Farming—Cattle Business.”
(4) As the date of this annual report, the 2011/2012 harvest years crops were not fully harvested. Harvested tons corresponds to wheat harvest, which had been harvested until the 31st of December.
(5) Crop production does not include 44,158 tons 52,482 tons and 52,960 tons of forage produced in the 2010/2011, 2009/2010, and 2008/2009 harvest years, respectively
(6) Expressed in tons of rough rice produced on owned and leased farms. As the date of this annual report, the 2011/2012 harvest year of rice harvest had not began.
(7) Raw milk produced at our dairy farms.
(8) Measured in tons of live weight. Production is the sum of the net increases (or decreases) during a given period in “live weight” of each head of beef cattle.
(9) Include 4,889 hectares, 3,841 hectares, 3,653 hectares and 4,561 hectares used for the production of forage during the 2011/2012, 2010/2011, 2010/2009 and 2008/2009 harvest years, respectively.
(10) Reflects the size of our coffee plantations, which are planted only once every 18 to 20 years.
(11) Comprised of land devoted to raising beef cattle, which, since December 2009, is mostly leased to a third party. See “—Operations and Principal Activities—Farming—Cattle Business.”

Sugar, Ethanol and Energy Business: We believe we are a growing and efficient producer of sugar and ethanol in Brazil. We cultivate and harvest sugarcane which is then processed in our own mills to produce sugar, ethanol and energy. As of December 31, 2011, our total sugarcane plantation consisted of 65,308 hectares, planted over both own and leased land. We currently own and operate two sugar and ethanol mills, UMA and Angélica, with a total crushing capacity of 5.2 million tons of sugarcane per year. UMA is a small but efficient mill with over 75 years of history which is located in the state of Minas Gerais, Brazil, with a sugarcane crushing capacity of 1.2 million tons per year, full cogeneration capacity and an associated sugar brand with strong presence in the regional retail market (Açúcar Monte Alegre). We plant and harvest 99% of the sugarcane milled at UMA, with the remaining 1% acquired from third parties. Angélica is a new, advanced mill, which we built in the state of Mato Grosso do Sul, Brazil, with a current sugarcane crushing capacity of 4 million tons per year, highly mechanized harvest, two high pressure boilers and three turbo-generators with the capacity to use all the sugarcane bagasse by-product to generate electricity that is used to power the mill, with excess electricity being sold to the grid, resulting in the mill having full cogeneration capacity. We plant and harvest over 91% of the sugarcane milled at Angélica and are able to vary the product slate between ethanol and sugar with a 60%/40% production ratio for both sugar and ethanol.

We have started the construction of our third mill, Ivinhema, in the state of Mato Grosso do Sul, Brazil, 45 km from our Angélica mill, in order to complete our planned sugarcane cluster (consisting of Angélica and Ivinhema) in that region. We plan to fund part of the construction costs of the Ivinhema mill using $230 million from the proceeds of our IPO. Subject to procuring the necessary licenses and the remainder of the required funding, we anticipate

 

40


Table of Contents

completing the construction of the Ivinhema mill in 2017. See “—Sugar, Ethanol and Energy—Our Mills” and “Item 3. Key Information—D. Risk Factors—Risks Related to Our Business and Industries—Adverse conditions may create delays in or the suspension of the construction of our Ivinhema mill and/or significantly increase the amount of our expected investments.” We expect the Ivinhema mill to begin operating during the first half of 2013, reaching 2.0 million tons of nominal crushing capacity during that year, and gradually increasing its milling capacity until it reaches a full milling capacity of 6.3 million tons of sugarcane per year by 2017.

In the year ended December 31, 2011, we crushed 4.17 million tons of sugarcane. Our mills produce both sugar and ethanol, and accordingly, we have some flexibility to adjust our production (within certain capacity limits that generally vary between 40% and 60%) between sugar and ethanol, to take advantage of more favorable market demand and prices at given points in time. In the year ended December 31, 2009, we produced 52,968 tons of sugar and 132,492 cubic meters of ethanol. During the first half of 2010, we completed the construction of our Angélica mill in Mato Grosso do Sul with the sugar factory commencing the production of sugar in July 2010. As a result, in the year ended December 31, 2010, sugar production increased to 235,690 tons while ethanol production reached 174,303 cubic meters. In the year ended December 31, 2011 we produced 247,805 tons of sugar and 161,385 cubic meter of ethanol.

As of December 31, 2011, our overall sugarcane plantation consisted of 65,308 hectares of sugarcane in the states of Mato Grosso do Sul and Minas Gerais, Brazil, of which 9,145 hectares of sugarcane were planted on owned land, and 56,163 hectares were planted on land leased from third parties under long term agreements.

The following table sets forth, for the periods indicated, certain data relating to our sugar, ethanol and energy business:

 

     Year Ended December 31,  
     2011      2010      2009      2008  

Sales

   (In thousands of $)  

Sugar

     130,348         98,385         26,143         20,495   

Ethanol

     116,599         114,793         62,811         29,385   

Energy

     24,393         15,040         8,216         —     

Other

     5,978         308         417         1,291   

Total(1)

     277,318         228,526         97,587         51,171   

 

(1) Includes sales of sugarcane and other miscellaneous items to third parties.

 

     Year Ended December 31,  

Production

   2011      2010      2009  

Sugar (tons)

     247,805         235,690         52,968   

Ethanol (cubic meters)

     161,385         174,303         132,492   

Energy (MWh exported)

     245,389         168,644         128,291   

 

     Year Ended December 31,  

Other Metrics

   2011     2010     2009  

Sugarcane milled (% owned)

     93     95     94

Sugarcane crushing capacity (millions of tons)

     5.2        5.2        3.3   

% Mechanized harvesting operations — Consolidated

     87     80     66

% Mechanized /harvesting operations — Angélica mill

     100     100     99

Land Transformation Business: We believe we are one of the leading companies in South America involved in the acquisition and transformation of land. We acquire farmlands we believe are underdeveloped or underutilized and, by implementing cutting-edge production technology and agricultural best practices, transform the land to be suitable for more productive uses, enhance yields and increase the value of the land. During the eight-year period since our inception, we have effectively put into production 96,906 hectares of land that was previously undeveloped or undermanaged. During 2011, we put into production 13,676 hectares and in addition continued the transformation process of over 120,460 hectares we own. We realize and capture land transformation value through the strategic disposition of assets that have reached full development potential. We believe that the rotation of our land portfolio allows us to re-allocate capital efficiently, maximizing our return on invested capital. Our current owned land portfolio consists of 293,423 hectares, distributed throughout our operating regions as follows: 86% in Argentina, 13% in Brazil, and 1% in Uruguay. During the last six years, we have traded 29,608 hectares of developed land, generating capital gains of approximately $ 104,446

 

41


Table of Contents

We promote sustainable land use through our land transformation activities, which seek to promote environmentally responsible agricultural production and a balance between production and ecosystem preservation. We do not operate in heavily wooded areas or primarily wetland areas.

From time to time, the company seeks to recycle its capital by disposing of a portion of its fully developed mature farms in order to acquire farms with higher potential for transformation. This allows the company to monetize the capital gains generated by its fully transformed farms and allocate its capital to acquire land with higher transformation potential, thereby enhancing the return on invested capital. Please see also “—Risks Related to Argentina—Recent Changes in Argentine law concerning foreign ownership of rural properties may adversely affect our results of operations and future investments in rural properties in Argentina” and “—Risks Related to Brazil— Recent changes in Brazilian rules concerning foreign investment in rural properties may adversely affect our investments.”

The following table sets forth, for the periods indicated, certain data relating to our land transformation business:

 

     Year Ended December 31,  
     2011     2010      2009  

Undeveloped/Undermanaged land put into production (hectares)

     13,676        6,490         11,255   

Ongoing transformation of croppable land (hectares)

     120,460        120,738         110,751   

Number of farms sold

     1 (*)      1         1   

Hectares sold

     2,439        5,086         5,005   

Capital gains from the sale of land ($ thousands)

     8,832        20,837         18,839   

 

* On November 30, 2011, we completed the sale of La Alegria, a 2,439 hectare farm located in Villegas, Buenos Aires province, for US$ 13.7 million, 23% over the Cushman & Wakefield independent appraisal dated September 30, 2011.

Our Strengths

We believe the following are our competitive strengths:

 

   

Unique and strategic asset base. We own strategically located farmland and agro-industrial assets in Argentina, Brazil and Uruguay. We engage in continued improvement of our operations and practices, resulting in the reduction of operating costs and an increase in productivity, ultimately enhancing the value of our properties and generating capital gains. Our operations also benefit from strategically located industrial facilities throughout Argentina and Brazil, increasing operating efficiencies and reducing operating and logistical costs. We are vertically integrated where economics and returns are attractive, where the efficiency of our primary operation is significantly enhanced, or where lack of a competitive market results in the absence of a transparent price determination mechanism. Our diversified asset base creates valuable synergies and economies of scale, including (i) the ability to transfer the technologies and best practices that we have developed across our business lines, (ii) the ability to apply value-adding land transformation strategies to farmland in connection with our farming and sugarcane operations, and (iii) a greater ability to negotiate more favorable terms with our suppliers and customers.

Owning a significant portion of the land on which we operate is a key element of our business model.

 

   

Low-cost production leveraging agro-ecological competitive advantages. Each of the commodity products we grow is produced in regions where agro-ecological conditions provide competitive advantages and which, through the implementation of our efficient and sustainable production model, allow us to become one of the lowest cost producers.

 

   

Our grain and oilseed production is based in the Argentine humid pampas region where soil fertility, regular rainfalls, temperate climate, availability of land and proximity to ports contribute to the reduced use of fertilizers and agrochemicals, high productivity and stable yields and efficient logistics, ultimately resulting in one of the lowest costs per ton of grain produced and delivered.

 

42


Table of Contents
   

Our cotton and coffee production is focused in western Bahia, Brazil. This region is excellent for producing high quality cotton fiber and specialty coffee at a low cost due to its ideal climate, well drained soils, high altitude, availability of water for irrigation, and absence of frosts.

 

   

Our rice operation is located in the northeast provinces of Argentina, one of the best rice farming regions in the world due to plentiful sunlight, abundant availability of water for low cost irrigation and large potential for expansion.

 

   

Our dairy operation is situated in the Argentine humid pampas region, where cow feed (grains, oilseeds and forage) is efficiently and abundantly produced at a low cost and climate and sanitary conditions are optimal for cow comfort, which enhances productivity, cow reproduction rates and milk quality.

 

   

We produce sugarcane in the center-south region of Brazil, which has the lowest production costs in the world, significantly lower than other major sugar producing regions, including India, China, the United States, the United Kingdom, France and Germany.

 

   

Standardized and scalable agribusiness model applying technological innovation. We have consistently used innovative production techniques to ensure that we are at the forefront of technological improvements and environmental sustainability standards in our industry. We are implementing an agribusiness model that consists of specializing our workforce and defining standard protocols to track crop development and control production variables, thereby enhancing management decision-making. We further optimize our agribusiness model through the effective implementation and constant adaptation of a portfolio of advanced agricultural and information technologies and best practices tailored to each region in which we operate and commodity we produce, allowing us to improve our crop yields, reduce operating costs and maximize margins in a sustainable manner.

 

   

In our farming business, we use “no-till” technology as the cornerstone of our crop production and have been able to implement this technique in areas within our production regions where it had not been used before. Furthermore, we also utilize crop rotation, second harvests, integrated pest management, balanced fertilization, water management and mechanization. Additionally, we use the innovative silo bag storage method, utilizing large polyethylene bags with a capacity of 180-200 tons which can be left on the field for 12 months, resulting in low-cost, scalable and flexible storage on the field during harvest, which we believe allows us to expand our crop storage capacity at a low cost, generate important logistic and freight savings by moving our production in the off-season when freight fares are lower, and time the entry of our production into the market at optimal price points. See “—Operations and Principal Activities—Farming—Storage and Conditioning.”

 

   

In our dairy business, we believe that we were the first company in South America to implement the “free-stall” infrastructure in dairy operations, resulting in more efficient conversion of feed to raw milk and higher production rates per cow compared to our peers in the region.

 

   

In our sugar, ethanol and energy business, our Angélica mill (i) has a highly mechanized planting and harvesting operation, which has increased our sugarcane production, reduced our operating costs and contributed to environmental sustainability by eliminating the need to burn the sugarcane before harvest; (ii) has the capacity to use all the bagasse (a by-product of the sugar and ethanol production process) that is produced, with no incremental cost, to cogenerate 96 MW of clean and renewable electricity; (iii) is what we believe to be one of the largest continuously operating sugar plants in Brazil designed for enhanced efficiency and non-stop processing, with a production capacity of 1,800 tons of sugar per day; and (iv) has the ability to recycle by-products such as filter cake and vinasse by using them as fertilizers in our sugarcane fields, as well as recycling water and other effluents, generating important savings in input costs and protecting the environment.

 

   

Unique diversification model to mitigate cash flow volatility. We pursue a unique multi-tier diversification strategy to reduce our exposure to production and market fluctuations that may impact our cash flow and operating results. We seek geographic diversification by spreading our portfolio of farmland and agro-industrial assets across different regions of Argentina, Brazil and Uruguay, thereby lowering our risk exposure to weather-related losses and contributing to stable cash flows. Additionally, we produce a variety

 

43


Table of Contents
 

of products, including cotton, coffee, soybeans, corn, wheat, sunflower, rice, barley, sorghum, raw milk, sugar, ethanol and energy, which lowers our risk exposure to potentially depressed market conditions of any specific product. Moreover, through vertical integration in the rice, dairy, sugar, ethanol and energy businesses, and to a lesser extent in our coffee business, we process and transform a portion of our agricultural commodities into branded retail products, reducing our commodity price risk and our reliance on the standard market distribution channels for unprocessed products. Finally, our commercial committee defines our commercial policies based on market fundamentals and the consideration of logistical and production data to develop a customized sale/hedge risk management strategy for each product.

 

   

Expertise in acquiring farmland with transformation and appreciation potential. During the last eight fiscal years, we have executed transactions for the purchase and disposition of land for over $521 million and sold 29,608 hectares of developed land, generating capital gains of approximately $104.4 million. We believe we have a superior track record and have positioned ourselves as a key player in the land business in South America. Our business development team has gained extensive expertise in evaluating and acquiring farmland throughout South America and has a solid understanding of the productivity potential of each region and of the potential for land transformation and appreciation. To date, we have analyzed over 9.7 million hectares of farmland spread throughout the regions in which we operate and other productive regions in the world. We have developed a methodology to assess farmland and to appraise its potential value with a high degree of accuracy and efficiency by using information generated through sophisticated technology, including satellite images, rain and temperature records, soil analyses, and topography and drainage maps. Our management team has gained extensive experience in transforming and maximizing the appreciation potential of our land portfolio through the implementation of our agribusiness techniques described above. We also have an extensive track record rotating our asset portfolio to generate capital gains and monetize the transformation and appreciation generated through our operations.

 

   

Experienced management team, knowledgeable employees. Our people are our most important asset. We have an experienced senior management team with an average of more than 20 years of experience working in our sector and a solid track record of implementing and executing large scale growth projects such as land transformations, greenfield developments of industrial plants, and integrating acquisitions within our organization. Recruiting technically qualified employees at each of our farms and operating sites is a main focus of our senior management and a key to our success.

Our Business Strategy

We intend to maintain our position as a leading agricultural company in South America by expanding and consolidating each of our business lines, creating value for our shareholders. The key elements of our business strategy are:

 

   

Expand our farming business through organic growth, leasing and strategic acquisitions. We will continue to seek opportunities for organic growth, target attractive acquisition and leasing opportunities and strive to maximize operating synergies and achieve economies of scale in each of our four main farming business areas (crops, rice, dairy and coffee). We plan to continue expanding and consolidating our crop production throughout South America. We also intend to continue expanding our rice segment in terms of production and processing capacity, consolidating our leading position in Argentina and increasing our presence throughout Brazil, Uruguay and other regions, to become a leading regional player. We plan to expand our current dairy production capacity using the “free-stall” model. We are currently building our second free-stall in Argentina, which will start operating during 2012 and will reach its full capacity by 2013. We believe that the know-how and skills gained from the construction of our first “free-stall” module can be easily replicated, allowing us to scale-up our production efficiently and at a fast rate.

 

   

Consolidate our sugar and ethanol cluster in the state of Mato Grosso do Sul, Brazil. Our main strategy for our sugar and ethanol business is to build our cluster in Mato Grosso do Sul, Brazil, through the construction of the Ivinhema mill, our second greenfield project, which we expect to reach a full crushing capacity of 6.3 million tons per year by 2017. See “—Sugar, Ethanol and Energy—Our Mills.” Completion of the Ivinhema mill will allow us to complete our advanced cluster with a planned total crushing capacity of 10.3 million tons per year. The consolidation of the cluster will generate important synergies, operating efficiencies and economies of scale such as (i) one centralized management team, reducing total administration cost per ton of sugarcane milled; (ii) a large sugarcane plantation supplying two mills, allowing for non-stop harvesting; and (iii) a reduction in the average distance from the sugarcane fields to the mills, generating important savings in sugarcane transportation expenses. We believe that the Ivinhema mill will allow us to become one of the

 

44


Table of Contents
 

most efficient and low cost producers of sugar, ethanol and energy in Brazil. Additionally, we plan to continue to monitor closely the Brazilian sugar and ethanol industries and may pursue selective acquisitions that provide opportunities to increase our economies of scale, operating synergies and profitability.

 

   

Further increase our operating efficiencies while maintaining a diversified portfolio. We intend to continue to focus on improving the efficiency of our operations and maintaining a low-cost structure to increase our profitability and protect our cash flows from commodity price cycle risk. We seek to maintain our low-cost platform by (i) making additional investments in advanced technologies, including those related to agricultural, industrial and logistical processes and information technology, (ii) improving our economies of scale through organic growth, strategic acquisitions, and more efficient production methods, and (iii) fully utilizing our resources to increase our production margins. In addition, we intend to mitigate commodity price cycle risk and minimize our exposure to weather related losses by (i) maintaining a diversified product mix and vertically integrating production of certain commodities and (ii) geographically diversifying the locations of our farms.

 

   

Continue to implement our land transformation strategy. We plan to continue to enhance the value of our owned farmland and future land acquisitions by making them suitable for more profitable agricultural activities, thereby seeking to maximize the return on our invested capital in our land assets. In addition, we expect to continue rotating our land portfolio through strategic dispositions of certain properties in order to realize and monetize the transformation and appreciation value created by our land transformation activities. We also plan to leverage our knowledge and experience in land asset- management to identify superior buying and selling opportunities.

Operations and Principal Activities

Farming

Our Farming business line is divided into five main reportable operating businesses, namely crops, rice, coffee, dairy and cattle. We conduct our farming operations primarily on our own land and, to a lesser extent, on land leased from third parties. During harvest year 2010/11 our farming operations were conducted on a total of 317,836 hectares of land, of which we own 280,142 hectares (excluding sugarcane farms) and we lease the remaining 37,694 hectares from third parties. Some of the farms we own are used for more than one production activity at a time. The following table sets forth our production volumes for each of our farming business lines.

 

     Harvest Year  
     2011/2012(1)      2010/2011      2009/2010      2008/2009  

Crops (thousands of tons)(2)

     98,403         491,813         524,890         317,582   

Rice(3) (thousands of tons)

     N/A         172,034         91,723         94,968   

Coffee (thousands of tons)

     N/A         2,742         2,220         2,412   

 

     Year Ended December 31,  
     2011      2010      2009  

Dairy(4) (thousands of liters)

     51,239         41,597         47,479   

Cattle (thousands of tons)(5)(6)

     118         359         4,149   

 

(1) As of the date of this annual report, the harvest of soybean, corn, sunflower and cotton, rice and coffee pertaining to the 2011/12 harvest year is ongoing. The only crop which has been fully harvested is wheat, with a total production of 98,403 tons.
(2) Crop production does not include 44,158 tons, 52,482 tons and 52,960 tons of forage produced in the 2010/2011, 2009/2010, and 2008/2009 harvest years respectively.
(3) Expressed in tons of rough rice.
(4) Raw milk produced.
(5) Measured in tons of live weight. Production is the sum of the net increases (or decreases) during a given period in live weight of each head of beef cattle we own.
(6) In December 2009, we sold 55,543 heads of cattle to a third party. The third party currently leases most of our grazing land to raise and fatten the cattle. Lease prices under the lease agreements are tied to the market price of cattle. See “—Cattle Business”.

 

45


Table of Contents

Crops Business (Grains, Oilseeds and Cotton)

Our agricultural production is mainly based on planting, growing and harvesting crops over our owned croppable area. During the 2010/11 harvest year, we planted crops over a total area of approximately 167,104, including our owned land, land leased from third parties and hectares planted in second harvests. During mid 2011 we began the planting of crops pertaining to the 2011/12 harvest year, which was concluded during the first quarter of 2012, increasing total planted area to 204,354 hectares. Our main products include soybean, corn, wheat, sunflower, and cotton. Other products, such as sorghum and barley, among others, are sown occasionally and represent only a small percentage of total sown land.

The following table sets forth, for the harvest years indicated, the planted hectares for our main products:

 

     Harvest Year  
     2011/2012      2010/2011      2009/2010      2008/2009  

Product Area

   (In hectares)  

Soybeans(l)

     92,922         90,126         87,522         63,973   

Corn(l)

     45,263         30,480         27,720         20,200   

Wheat

     39,640         26,361         21,728         18,917   

Sunflower

     9,598         9,943         14,784         16,539   

Cotton

     6,372         3,242         425         3,159   

Other crops(2)

     5,670         3,111         11,501         11,348   

Forage(3)

     4,889         3,841         4,561         5,382   

Total

     204,354         167,104         168,241         139,518   

 

(1)

Includes hectares planted until the 29th of February.

(2) Includes barley and sorghum crop.
(3) Forage includes corn silage, wheat silage and alfalfa used for cow feed in our dairy operation.

The following table sets forth, for the harvest years indicated, the production volumes for our main products

 

     Harvest Year  
     2011/2012(1)      2010/2011      2009/2010      2008/2009  

Crop Production

   (In thousands of tons)  

Soybeans

     N/A         199,533         241,848         96,982   

Corn

     N/A         165,679         180,613         115,900   

Wheat

     98,403         87,445         49,592         41,556   

Sunflower

     N/A         20,916         17,193         22,128   

Cotton

     N/A         8,746         1,068         9,218   

Other crops

     N/A         9,495         34,576         31,799   

Total

     98,403         491,813         524,890         317,582   

 

(2) As of the date of this annual report, the harvest of soybean, corn, sunflower and cotton pertaining to the 2011/12 harvest year is ongoing. The only crop which has been fully harvested is wheat.

The following table below sets forth, for the periods indicated, the sales for our main products:

 

     Year Ended December 31,  
     2011      2010      2009  

Sales

   (In thousands of $)  

Soybeans(l)

     61,385         64,890         44,116   

Corn

     42,959         23,968         14,654   

Wheat

     24,232         7,939         10,218   

Sunflower

     7,413         4,880         5,517   

Cotton

     9,101         2,395         11,905   

Other crops(2)

     2,856         4,090         5,619   

Total

     147,946         108,162         92,029   

 

 

46


Table of Contents
(1) Includes sales of soybean oil and soybean meal accounting for $8,420 thousand and $1,692 thousand for the years ended December 31, 2009 and 2008, respectively.
(2) Includes other crops and farming services.

Soybeans

Soybeans are an annual legume widely grown due to their high content of protein (40%) and oil (20%). They have been grown for over 3,000 years in Asia and, more recently, have been successfully cultivated around the world. Today, the world’s top producers of soybeans are the United States, Brazil, Argentina, China and India. Soybeans are one of the few plants that provide a complete protein supply as they contain all eight essential amino acids. About 85% of the world’s soybeans are processed, or “crushed,” annually into soybean meal and oil. Approximately 98% of soybean meal is further processed into animal feed, with the balance used to make soy flour and proteins. Of the oil content, 85% is consumed as edible oil and the rest is used for industrial products such as fatty acids, soaps and biodiesel. We sell our soybeans mainly to crushing and processing industries, which produce soybean oil and soybean meal used in the food, animal feed and biofuel industries.

We grow soybeans in Argentina, Brazil and Uruguay. In the 2008/2009 harvest year, our total soybean production was 96,982 tons, representing 31% of our total crop production and 48% of our total planted area. In the 2009/2010 harvest year, we planted a total area of 87,522 hectares of soybeans, producing a total of 241,848 tons representing 54% of our total planted area that year, and 46% of our total crop production. In the 2010/2011 harvest year, we planted a total area of 90,126 hectares of soybeans. Soybeans comprised 16% of our total sales in 2008, 14% of our total sales in 2009, 15% of our total sales in 2010 and 11 % of our sales in 2011

Corn

Corn is a cereal grown around the world and is one of the world’s most widely consumed foods. The main component of corn grain is starch (72% to 73% of grain weight), followed by proteins (8% to 11%). Corn grain is directly used for food and animal feed (beef, swine and poultry meat production and dairy). Corn is also processed to make food and feed ingredients (such as high fructose corn syrup, corn starch and lysine), or industrial products such as ethanol and polylactic acid (PLA). Oil, flour and sugar are also extracted from corn, with several uses in the food, medicine and cosmetic industries. Additionally, there are specific corn types used for direct human consumption such as popcorn and sweet corn.

We grow corn in Argentina, Brazil and Uruguay. In the 2008/2009 harvest year, our total corn production was 115,900 tons, representing 36% of our total crop production and 15% of our total planted area. In the 2009/2010 harvest year, we planted a total area of approximately 27,720 hectares of corn, including the second harvest, producing a total of 180,613 tons of corn representing 17% of our total planted area that year, and 34% of our total crop production. In the 2010/2011 harvest year, we planted a total area of approximately 30,480 hectares of corn, including the second harvest, producing a total of 165,679 tons representing 18% of our total planted area that season and 34% of our total production.

Corn comprised 9% of our total sales in 2008, 5% of our total sales in 2009, 6% of our total sales in 2010 and 8% of our total sales in 2011.

Wheat

Wheat is the world’s largest cereal-grass crop. Unlike other cereals, wheat grain contains a high amount of gluten, the protein that provides the elasticity necessary for excellent bread making. Although most wheat is grown for human consumption, other industries use small quantities to produce starch, paste, malt, dextrose, gluten, alcohol, and other products. Inferior and surplus wheat and various milling byproducts are used for livestock feed. We sell wheat to exporters and to local mills that produce flour for the food industry.

We grow wheat in Argentina and Uruguay. In the 2008/2009 harvest year, our total wheat production was 41,556 tons, representing 13% of our total crop production and 14% of our total planted area. In the 2009/2010 harvest year, we planted a total area of approximately 21,728 hectares of wheat, producing a total of 49,592 tons of wheat representing 13% of our total planted area that year, and 10% of our total crop production. In the 2010/2011 harvest year, we planted a total area of approximately 26,361 hectares of wheat, producing a total of 87,445 tons of wheat representing 16% of our total planted area that year, and 18% of our total crop production.

 

47


Table of Contents

Wheat comprised 6% of our total sales in 2008, 3% of our total sales in 2009, 2% of our total sales in 2010 and 4% of our total sales in 2011.

Sunflower

There are two types of sunflower, the most important in terms of volume being the oilseed sunflower, which is primarily grown for the oil extracted from the seed. Sunflower oil is considered one of the top three oils for human consumption, due to its high oil content (39-49%) and its oil composition (90% of oleic and linoleic oil). The other type of sunflower is the confectionary sunflower, which is used for direct human consumption. Sunflower seeds are an exceptional source of vitamin E, omega-6 fatty acids, dietary fiber and minerals. We grow both types of sunflower.

We grow sunflower in Argentina and Uruguay. In the 2008/2009 harvest year, our total sunflower production was 22,128 tons, representing 7% of our total crop production and 7% of our total planted area. In the 2009/2010 harvest year, we planted a total area of approximately 14,784 hectares of sunflower, producing a total of 17,193 tons of sunflower, representing 9% of our total planted area that year, and 3% of our total crop production. In the 2010/2011 harvest year, we planted a total area of approximately 9,943 hectares of sunflower producing a total of 20,916 tons of sunflower representing 6% of our total planted area that year, and 4% of our total crop production. Sunflower comprised 2% of our total sales in 2008, 2% of our total sales in 2009,1% of our total sales in 2010 and 1% in 2011.

Cotton

Cotton is the world’s most popular natural fiber. The cotton fiber is made primarily into yarns and threads for use in the textile and apparel sectors. Clothing accounts for approximately 60% of cotton consumption. Cotton is also used to make home furnishings, such as draperies (the third major end use), or professional garments (about 5% of cotton fiber demand). The cottonseed is used in animal feeding or crushed in order to separate its three products — oil, meal and hulls. Cottonseed oil is used primarily for cooking oil and salad dressing. In recent years, there has been a growing demand for cotton oil for biodiesel production.

We plant upland cotton, the most common type of cotton planted and processed around the world. We produce and sell cotton lint and cotton seed.

We grow cotton in northern Argentina and in the western part of Bahia, Brazil. In the 2008/2009 harvest year, our total cotton production was 9,218 tons, representing 3% of our total crop production and 2% of our total planted area. In the 2009/2010 harvest year, we planted a total area of approximately 425 hectares of cotton, including the second harvest, producing a total of 1,068 tons of cotton, representing 1% of our total planted area that year, and 1% of our total crop production. In the 2010/2011 harvest year, we planted a total area of approximately 3,242 hectares of cotton producing a total of 8,746 tons of cotton, representing 2% of our total planted area that year, and 2% of our total crop production. Cotton comprised 2% of our total sales in 2008, 4% of our total sales in 2009, 0.6% of our total sales in 2010 and 2% of our sales in 2011.

Other Crops

In addition to wheat, sunflower, corn, soybeans, and cotton, we produce barley and sorghum on approximately 3,111 hectares in certain farms located in Argentina and Uruguay. In addition, we also provide farming services.

In the 2008/2009 harvest year, our total production from these crops was 31,799 tons, representing 10% of our total crop production and 8% of our total planted area. In the 2009/2010 harvest year, we planted a total area of approximately 11,501 hectares of other crops, producing a total of 34,576 tons, representing 7% of our total planted area that year, and 7% of our total crop production. In the 2010/2011 harvest year, we planted a total area of approximately 3,111 hectares of other crops producing a total of 9,495 tons, representing 2% of our total planted area that year, and 2% of our total crop production. Other crops comprised 3% of our total sales in 2008, 2% of our total sales in 2009,1.0% of our total sales in 2010 and 0.3% of our sales in 2011.

 

48


Table of Contents

Forages

In addition to the above mentioned crops, we are engaged in the production of forage in Argentina, including corn silage, wheat silage, soybean silage and alfalfa silage. We use forage as cow feed in our dairy operation. During the 2009/2010 harvest year, we planted 4,561 hectares and produced 52,482 tons of forage. During the 2010/2011 harvest year, we planted 3,841 hectares of forage and produced 44,158 tons of forage.

Crop Production Process

Our crop production process is directly linked to the geo-climatic conditions of our farms and our crop cycles, which define the periods for planting and harvesting our various products. Our crop diversification and the location of our farms in various regions of South America enable us to implement an efficient planting and harvesting system throughout the year, which includes second harvests in many cases. Our production process begins with the planting of each crop. After harvesting, crops may go through a processing phase where the grain or seeds are cleaned and dried to reach the required market standards.

For additional discussion of our harvest years and the presentation of production and product area information in this annual report, see “Presentation of Financial and Other Information—Fiscal Year and Harvest Year.”

Rice Business

Rice is the main food staple for about half of the world’s population. Although it is cultivated in over 100 countries and on almost every continent, 90% of the world’s rice is grown and consumed in Asia. Globally, rice is the most important crop in terms of its contribution to human diets and production value. There are three main types of rice: short grain, medium grain and long grain rice. Each one has a different taste and texture. We produce long grain rice and Carolina double rice, a variety of medium grain rice.

We conduct our rice operation in the northeast of Argentina, which is one of the most efficient locations in the world for producing rice at a low cost. This is a result of optimum natural agronomic conditions, including plentiful sunlight, abundant availability of water for low cost irrigation and large quantities of land. The use of public water for artificial irrigation is governed by provincial regulations and is subject to the granting of governmental permits. We have current permits for our use of water in our production of rice in the provinces of Corrientes and Santa Fe. Maintenance of our permits is subject to our compliance with applicable laws and regulations, which is supervised by the corresponding governmental authority (e.g., the Ministry of Water, Public Services and Environment (Ministerio de Agua, Servicios Publicos y Medio Ambiente), in the province of Santa Fe, and the Water Institute of the Province of Corrientes (Instituto Correntino del Agua).

The following table sets forth, for the harvest years indicated, the total number of planted rice hectares we owned and leased as well as the overall rough rice we produced:

 

     Harvest Year  

Rice Product Area & Production

   2011/2012      2010/2011      2009/2010      2008/2009  

Owned planted area (hectares)

     27,242         22,973         10,831         13,417   

Leased planted area (hectares)

     4,255         4,568         7,311         3,840   

Total rice planted (hectares)

     31,497         27,542         18,142         17,258   

Rough rice production (thousands of tons) (1)

     NA         172,542         91,723         94,968   

 

(1) As of the date of this annual report, the harvest of rice pertaining to the 2011/2012 is ongoing.

We grow rice on 5 farms we own and 4 farms we lease, all located in Argentina. In the 2008/2009 harvest year, our total rice production was 94,968 tons, representing 23% of our total farming production and 11% of our total planted area. In the 2009/2010 harvest year, our total rice production was 94,968 tons, representing 23% of our total farming production and 11% of our total planted area. In the 2009/2010 harvest year, we planted a total area of approximately 18,142 hectares of rice, producing a total of 91,723 tons, representing 10% of our total planted area that year, and 15% of our total farming production. In the 2010/2011 harvest year, we planted a total area of approximately 27,542 hectares of rice, producing a total of 172,542 tons, representing 14% of our total planted area that year, and 26% of our total farming production.

 

49


Table of Contents

During mid 2010, we began the construction of our fourth rice mill. The new mill is located in Franck, Santa Fe province, Argentina. The mill has already began operating and has a current processing capacity of 72,000 tons. We expect the facility to reach its full processing capacity of 110,000 tons during the second half of 2012.

Production Process

The rice production year lasts approximately five to six months, beginning in September of each year and ending in April of the following year. Rice planting continues until November, followed by treatment of the rice, which lasts approximately three months, until January. In February we begin harvesting, which lasts until April. After harvesting, the rice is ready for processing.

We process rice in our 4 rice mills in Argentina, where we are able to process our entire rice crop and utilize our excess milling capacity to process rough rice we purchase from third party growers.

At the mill, we clean the rice to remove all impurities. We then put it through a dryer to remove excess moisture from the grains. Proper drying results in increased storage life, prevents deterioration in quality and leads to optimum milling. Once dried, the rice grain, now known as rough rice or paddy rice, is ready for storage. We store rice in elevators or in silo bags until milling. During the milling process, the rough rice goes through a de-husking machine that removes the husk from the kernel. The rice that is obtained after this process is known as brown rice and is ready for human consumption. Brown rice is then polished to remove the excess bran, thereby creating white rice.

The main objective of the milling process is to remove the husk and the bran, preserving the quality of the whole grain. Although the process is highly automated and uses advanced technology, some rice grains are broken in the process. The percentage of broken rice depends on a number of factors such as the crop development cycle at the farm, the variety of the grain, the handling and the industrial process. Average processing of rough rice results in 58% white rice, 11% broken rice and 31% rice husk and bran which is sold for use as cattle feed or floor bedding in the poultry business.

 

     Year Ended December 31,  
     2011      2010      2009  

Processed Rice Production

   (In thousands of tons)  

Rough rice processed — own

     163,033         75,752         94,968   

Rough rice processed — third party

     58,720         52,957         62,083   

Total rough rice processed

     221,753         128,709         157,051   

White rice

     91,176         66,035         77,440   

Brown rice

     33,166         6,699         11,559   

Broken rice

     23,880         14,792         19,859   

Total processed rice

     148,223         87,526         108,858   

 

     Year Ended December 31,  
     2011      2010      2009  

Processed Rice Sales

   (In thousand of $)  

Total Sales

     83,244         61,585         69,350   

Rice comprised 19% of our total sales in 2007, 23% of our total sales in 2008, 22% of our total sales in 2009, 14% of our total sales 2010 and 15% of our sales in 2011.

Rice Seed Production

In our rice seed facility in Argentina, we are involved in the genetic development of new rice varieties adapted to local conditions to increase rice productivity and quality to improve both farm production as well as the manufacturing process. In connection with these efforts, we have entered into agreements with selected research and development institutions such as the National Institute of Agriculture Technology (Institute Nacional de Tecnología

 

50


Table of Contents

Agropecuaria, or “INTA”) in Argentina, the Latin American Fund for Irrigated Rice (Fondo Latinoamericano para Arroz de Riego, or “FLAR”) in Colombia, the Santa Catarina State Agricultural Research and Rural Extension Agency (Empresa de pesquisa Agropecuária e Extensão Rural de Santa Catarina, or “EPAGRI”) in Brazil and Badische Anilin- und Soda-Fabrik (“Basf”) in Germany. Our own technical team is continuously testing and developing new rice varieties. Our first rice seed variety was released to the market in 2008, and we are currently in the final stages of releasing three new varieties. These seeds are both used at our farms and sold to rice farmers in Argentina, Brazil, Uruguay and Paraguay. We are also developing, alongside Basf, a herbicide-tolerant rice variety to assist in the control of harmful weeds.

Coffee Business

The coffee plant is a woody perennial evergreen. Brazil is the biggest coffee producing country in the world, followed by Vietnam and Colombia. Coffee is exported as a green bean and is then processed depending on the market. While there are several different coffee species, two main species of coffee are cultivated today. Arabica coffee accounts for approximately 60% of the world’s production, and Robusta coffee accounts for about 40% and differs from the Arabica coffees in terms of quality and taste. We produce Arabica coffee, distinguished by its high quality, that is considered to be an “estate coffee,” which, according to international markets standards, is coffee produced and processed on a specific farm and thus not mixed with coffee from other farms or farmers.

Our Mimoso farm produces world renowned “specialty coffee,” which is sold to the best roasters in Europe, the U.S. and Japan. Coffee quality experts consistently select our coffee as a top quality estate coffee. It is certified according to the rigorous sustainability standards of the Rainforest Alliance, Utz and the Brazil Specialty Coffee Association — BSCA. We are equally concerned with the quality of our coffee and with bridging the gap between the consumer and the producer to assure the sustainable quality demanded in the specialty market. We strive to develop long-term relationships with our clients to guarantee consistent supply.

We grow mainly high quality coffee varieties, using center pivot and drip irrigation, adopting a stress period to induce flowering, which guarantees a gradual and uniform maturation.

The following table sets forth, for the harvest years indicated, the production and sales volumes for our coffee business:

 

     Harvest Year  

Coffee Production & Sales

   2011/2012      2010/2011      2009/2010      2008/2009  

Coffee plantation (hectares)

     1,632         1,632         1,632         1,632   

Coffee pruning area (hectares)

     62         227         406         241   

Coffee production (thousands of tons) (1)

     NA         2,742         2,220         2,412   

 

   

As the date of this annual report, the 2011/2012 harvest year coffee were not harvested

 

     Year Ended December 31,  
     2011      2010      2009  
     (In thousands of $)  

Coffee sales

     14,170         7,572         14,265   

We grow coffee in western Bahia, Brazil, where agro-ecological conditions are well-suited for producing “specialty coffee” due to the availability of water for irrigation, the absence of frosts, and the possibility of having a fully mechanized harvest due to flat topography. These conditions allow us to obtain a stable bean quality and to reduce yield volatility. We grow coffee on 3 farms and have 1,632 hectares of planted coffee trees and have available land and water to expand our operations to 2,700 hectares. . In the 2008/2009 harvest year, our total coffee production was 2,412 tons. In the 2009/2010 harvest year, we produced 2,412 tons of coffee. In the 2010/11 harvest year, we produced 2,742 tons of coffee. Coffee comprised 7% of our total sales in 2008, 5% of our total sales in 2009, 2% of our total sales 2010 and 3% of our sales in 2011.

 

51


Table of Contents

Coffee Production Process

Coffee seeds are initially planted in nursery beds where they are raised and nurtured in a protected environment until they reach a height of approximately 50 to 60 cm, which takes between 8 to 12 months. Coffee plants are then transplanted to the coffee fields where they grow for about two years, after which the coffee tree is harvested for the first time and begins its productive cycle. Productive maturity is achieved during the fifth year, and coffee trees remain productive until the tree reaches 15 to 20 years of age, at which point the tree must be replaced. Coffee trees require annual maintenance consisting of fertilization, pest and disease control and irrigation if necessary. Additionally, coffee trees must undergo a pruning program every 4 to 5 years to maintain the shape of the tree adequate for mechanized harvesting, which usually results in higher yields.

The coffee harvest year lasts from August of each year to August of the following year. The plantation is treated for approximately nine months, from August of each year until May of the following year. In late May or early June, the harvest begins, which lasts until September. After harvesting, we begin the processing process, which lasts until the end of October.

We process coffee at our facilities. The three processing stages coffee undergoes prior to commercialization are pulping, drying and sorting into various types according to world market demand.

Dairy Business

We conduct our dairy operation in two of our farms located in the Argentine humid pampas region. This region is one of the best places in the world for producing raw milk at a low cost, due to the availability of grains, forage and grass produced efficiently and at low cost, and the favorable weather for cow comfort.

The following table sets forth, for the periods indicated below, the total number of our dairy cows, average daily liter production per cow and our total milk production:

 

     Year Ended December 31,  

Dairy Herd & Production

   2011      2010      2009      2008  

Total dairy herd (head)

     10,803         9,178         9,743         9,587   

Average milking cows

     4,603         4,225         4,594         4,377   

Average daily production (liters per cow)

     30.5         27.0         28.3         26.9   

Total production (thousands of liters)

     51,239         41,597         47,479         43,110   

 

     Year Ended December 31,  
     2011      2010      2009  
     (In thousands of $)  

Sales (thousands of $)

     19,697         14,297         11,894   

As of December 31, 2010, we owned a dairy herd of 9,178 head, including 4,225 cows and heifers in milk. In 2010, our cows produced an average of 27.0 liters of milk per cow per day compared to approximately 28.3 liters per cow per day in 2009. Our facilities allow us to milk 5,000 cows per day. As of December 31, 2011, we owned a dairy herd of 10,803 head, including 4,603 milking cows with an average production of 32.52 liters per cow per day. Our dairy operation consists of three dairy facilities — two traditional grazing dairies and one advanced “free-stall” dairy. About the end of 2011, we began the construction of a new free stall which will have a final capacity of 3,500 milking cows. This operation will start in July 2012 with the gradual incorporation of cows. It is expected to finish in December 2012 with 1,500 milking cows, December 2013 with 3,200 and go on filling the barns to reach full capacity in March 2014.

Dairy comprised 3% of our total sales in 2007, 6% of our total sales in 2008, 4% of our total sales in 2009, 3% of our total sales 2010 and 4% of our sales in 2011.

Production Process

We have genetically improved our Holando Argentine Holstein dairy herd through the use of imported semen from North American Holstein bulls. We wean calves during the 24 hours subsequent to birth and during the next 60 days raise them on pasteurized milk and high protein meal. Male calves are fed concentrates and hay for an

 

52


Table of Contents

additional 30 days in the farm before they are sent to our feedlot to be fattened for sale. Young heifers remain in open corrals during the next 13 months where they are fed with concentrates and forage until they are ready for breeding. Calving occurs nine months later. Heifers are subsequently milked for an average of 320 days. Dairy cows are once again inseminated during the 60- to 90-day period following calving. This process is repeated once a year for a period of six or seven years. The pregnancy rate for our herd is between 85% and 90% per year.

Each cow in our dairy herd is mechanically milked two or three times a day depending on the production system. The milk obtained is cooled to less than four degrees centigrade in order to preserve its quality and is then stored in a tank. Milk is delivered to our joint venture, “La Lácteo,” on a daily basis by tank trucks. We feed our dairy cows mainly with corn and alfalfa silages, some grass and corn grain, supplemented as needed with soybean by-products, hay, vitamins and minerals.

We have invested in technology to improve the genetics of our cows, animal health and feeding in order to enhance our milk production. These investments include top quality semen from genetically improved North American Holstein bulls, agricultural machinery and devices, use of dietary supplements and modern equipment to control individual milk production and cooling. Our feeding program is focused on high conversion of feed into milk, while maintaining cows in good health and comfort. We have also invested in technology and know-how so as to increase our forage production and utilization.

In 2007, we began the construction of an advanced “free-stall” dairy in Argentina, which we believe was the first of its kind in South America, and started operating in March 2008. This new technology allows large- scale milk production at increased efficiency levels. Our free-stall dairy model consists of 3,000 cows confined inside a large barn where they are free to move within the indoor corrals. We feed our cows specific protein rich diets composed of corn grain and silage and milk them three times a day, using a milking mechanism consisting of an 80-cow rotary platform, which milks an average of 400 cows per hour. In 2011, we started the construction of the first phase of the second free stall, which will start operating during 2012. It will reach its full capacity (of 3,500 milking cows) by March 2014.

Implementation of the free-stall system allows us to position ourselves as a key player in the dairy industry and will boost our agricultural and industrial integration presence in the South American agricultural sector. By eliminating cow grazing, we reduce the amount of land utilized for milk production and free up more land for our agricultural and land development activities. Cow productivity (measured in liters of milk produced per day) using the free-stall system increases by up to 40% compared to traditional grazing systems. These productivity gains are because the free-stall system significantly improves the conversion rate of animal feed to milk, resulting in an approximate 40% increase in the conversion ratio, or the production of 1.4 liters of milk for each 1 kg of animal feed as compared to the average of 1 liter of milk for each 1 kg of feed associated with the usual grazing model.

This increased productivity and conversion rate are mainly due to improved cow comfort and an enhanced diet quality. We assess cow comfort through the engagement of expert consultants, who recommended designing beds covered with sand. The sand plays a significant role in helping cows to rest comfortably. Additionally, we installed a cooling system to increase cow comfort as well. This system relies on water sprinklers and ventilation fans located all over the facility to create a controlled, cool atmosphere, which improves cow comfort since the Holstein herd is originally adapted to cold regions. Additionally, we manage diet quality by adapting our feeding regimen based on the various feeding stages in the lifetime of each cow. The actual feeding is fully mechanized, and we carefully control the harvesting and storage of feed. The control of all productivity variables, such as reproduction, health and operations, supports efficiency gains through standardized processes. Finally, the physical concentration of the animals facilitates efficient overall management of the dairy business as a whole. In terms of the environment, the free-stall model allows for a better effluent treatment, which includes a sand-manure separator stage, a decantation pool and an anaerobic lagoon. All these processes help to decrease the organic matter content of the effluent and deliver a cleaner output. The final treated effluent is used to fert-irrigate crops adjacent to the dairy operation. Accordingly, we transform dairy waste into a high value-added by-product, which reduces fertilizer usage.

The free-stall dairy is expected to allow us to become an efficient large-scale milk producer and optimize the use of our resources (land, cattle and capital) through the standardization of processes. Process standardization provides high operational control and allows us to scale-up our production efficiently and quickly.

 

53


Table of Contents

La Lácteo Joint Venture

In 2007, Adecoagro entered into an agreement with Agropur Cooperative, a Canadian-based dairy cooperative, to form a joint venture named Grupo La Lácteo. In this transaction, we contributed our wholly owned subsidiary La Lácteo S.A., an entity engaged in the processing and sale of milk and milk-related products (previously acquired in August 2007), while Agropur Cooperative contributed cash. Each of us and Agropur Cooperative owns 50% of the joint venture, and the joint venture agreement in place creates joint control over Grupo La Lácteo. The formation of this joint venture was completed in December 2007. As of December 31, 2011, La Lácteo manages approximately 214,000 liters of milk per day, producing a broad variety of dairy products including fluid milk, yogurt, butter, cheese, and others.

On November 7, 2007, Adeco Agropecuaria S.A. entered into a Milk Supply Offer Agreement with La Lácteo S.A. (as amended on February 1, 2010), pursuant to which we committed to sell and La Lácteo S.A. committed to purchase, approximately 80,000 liters of Adeco Agropecuaria S.A.’s milk production per day. See “Item 7. Major Shareholders and Related Party Transactions—B. Related Party Transactions—Milk Supply Agreement.” All of our production for the domestic market is industrialized at La Lácteo S.A., while our export volumes of powdered milk are industrialized in plants operated by third parties.

Cattle Business

Until December 2009, we owned approximately 58,348 head of cattle — other than our cows used for the production of raw milk — which we fattened for sale to meat processors and in local livestock auction markets. Our cattle business primarily consisted of beef breeding and fattening activities during the years ended December 31, 2009, 2008 and 2007. In December 2009, we strategically decided to sell almost all of our cattle herd — other than our dairy cows — to Quickfood S.A. (“Quickfood”), an Argentine company listed on the Buenos Aires Stock Exchange and a subsidiary of the Brazilian company Marfrig Alimentos S.A. (“Marfrig”), for a purchase price of $14.2 million. Additionally, we entered into a lease agreement under which Quickfood leases grazing land from us to raise and fatten the purchased cattle. As required by antitrust law, we reported this transaction to Argentina’s National Commission for the Defence of Competition (Comision Nacional de Defensa de de la Competencia, or “CNDC”). The CNDC’s administrative approval of the transaction is pending. We do not believe that the CNDC will object to the form and substance of the transaction. See “—Material Agreements—Argentina—Agreement with Quickfood S.A.”

After this sale, our cattle business primarily consists of leasing (i) approximately 72,800 hectares of grazing land located in the Argentine provinces of Corrientes, Formosa, Santa Fe and Santiago del Estero, for an annual price equal to the equivalent in Argentine Pesos of 30 kilograms of meat per hectare, calculated in accordance with the Steer Index of the Liniers Market (INML), for a period of 10 years, renewable by the parties and (ii) two feed lots located in the Argentine provinces of Corrientes and Santa Fe, for an annual price of $25,000 each. Additionally, as of December 31, 2011, we owned approximately 2,039 head of cattle. We may purchase additional cattle in the future.

The following table indicates, for the periods set forth below, the number of cattle (other than dairy cows) for each activity we pursued:

 

     Year Ended December 31,  
     2011      2010      2009  
     (Head of cattle)  

Breeding(l)

     2,039         —           79,784   

Fattening

     —           1,254         2,804   

Total

     2,039         1,254         2,804   

 

(1) For classification purposes, upon birth, all calves are considered to be in the breeding process.

The cattle business comprised 4% of our total sales in 2008, 9% of our total sales in 2009, 1% of our total sales 2010 and 1% of our sales in 2011.

 

54


Table of Contents

Storage and Conditioning

Our storage and conditioning facilities for our farming line of business allow us to condition, store and deliver our products with no third-party involvement. All our crop storage facilities are located close to our farms, allowing us to (i) reduce storage and conditioning costs; (ii) reduce freight costs since we only commence moving the product once the final destination is determined, whether locally or to a port, (iii) capitalize on fluctuations in the prices of commodities; and (iv) improve commercial performance by mixing grains to avoid discounts due to sub-standard quality.

We own five conditioning and storage facilities for grains and oilseeds, with a total built storage capacity of 28,800 tons. Our largest storage facility, with a capacity of 18,700 tons, is located in the province of Santa Fe, Argentina, in the town of Christophersen. It has a railway loading terminal, providing logistical flexibility and savings. We also own in Argentina four rice mills, which account for over 135,919 tons of total storage capacity, and two additional storage and conditioning facilities for rice handling, with a total storage capacity of 5,700 tons.

Set forth below is our storage capacity as of December 31, 2011:

 

Storage Capacity

   Nominal  

Crops (tons)

     28,800   

Rice (tons)

     135,919   

In addition, we use silo bags to increase our storage capacity at low cost. Silo bags are a revolutionary and efficient low-cost method for grain storage. As crops are harvested, they are placed inside large polyethylene bags that can be left in the fields for approximately 12 months without damaging the grain. Each silo bag can hold up to 180 to 200 tons of product, depending on the type of grain. During the 2010/2011 harvest year, we stored approximately 40% of our grain production through silo bags.

Silo bags offer important operational and logistic advantages, such as (i) low cost storage; (ii) flexible and scalable capacity that is adapted based on production and commercial strategy; (iii) harvest efficiencies since the bags are filled on the field allowing for a non-stop harvest operation regardless of any logistical setbacks; (iv) logistic efficiencies leading to lower freight since grains are transported during the off-season when truck fares are lower; (v) increased ability to monitor quality and identify different grain qualities, since grains are stored in relatively small amounts (200 tons) and easily monitored, maximizing our commercial performance; and (vi) better use of our drying capacity throughout the year. Silo bags are commercially accepted. Grains stored in silo bags can be sold in the market, and if such grains are to be delivered post harvest, we charge storage costs. Additionally, we can store grains to be used as seed during the following season (soybeans, rice and wheat), achieving quality seed management. We have expanded the use of silo bags from Argentina to our operations in Brazil and Uruguay. Currently, we are extending the usage of silo bags to store fertilizers and are developing their use with respect to coffee beans.

Grain conditioning facilities at our farms allow our trade desk to optimize commercialization costs and to achieve commercial quality standards and avoid price discounts. These facilities are operated to dry, clean, mix and separate different qualities of each grain in order to achieve commercial standards. By mixing different batches of a same grain type, differentiated by quality parameters such as moisture, percentage broken, and percentage damaged, among others, we can achieve commercial standards without having to discount a lower-quality stand-alone batch. Efficient management of these facilities results in a lower cost for grain conditioning and a better achievable price. In order to maximize this situation, our conditioning facilities trend to process as much grain as possible, which is roughly more than four times their storage capacity.

Set forth below is our drying capacity as of December 31, 2011:

 

Drying Capacity

   Nominal  

Crops (tons/day)

     2,400   

Rice (tons/day)

     6,600   

Some grains such as soybeans, wheat and rice, can be used for seed during the next planting season. We produce almost 97% of the seed used for planting these crops in our fields. The seed is stored in silo bags and/or grain facilities, where it can be processed, classified, and prepared for planting during next crop season. A deep survey and monitoring process is carried out in order to evaluate, control and deliver high quality seed to our farms.

 

55


Table of Contents

The rest of our seed requirements are purchased from seed suppliers in order to incorporate new enhanced varieties into our planting plan.

Additionally, as of December 31, 2011, we owned two coffee processing facilities in Brazil, where we clean, dry and classify different types of commercial coffee beans. Apart from processing, those facilities have a storage capacity of 30,400 bags, or 1,800 tons of processed coffee.

Marketing, Sales and Distribution

Crops

In Argentina, grain prices are based on the market prices quoted on Argentine grain exchanges, such as the Bolsa de Cereales de Buenos Aires and the Bolsa de Cereales de Rosario, which use as a reference the prevailing prices in international grain exchanges (including CBOT and ICE-NY). In Uruguay, local prices are based on an export parity (during harvest) or import parity in the case of post-harvest sales, which, in each case, take into account the prices and costs associated with each market. In Brazil, the grain market includes the Bolsa de Mercadorias e Futuros (Brazilian Grain Exchange), which, as in Argentina, uses as a price reference the international grain exchanges (including CBOT and ICE-NY). Prices are quoted in relation to the month of delivery and the port in which the product is to be delivered. Different conditions in price, such as terms of storage and shipment, are negotiated between us and the end buyer. We negotiate sales with the top traders and industrial companies in our markets. We also engage in hedging positions by buying and selling futures and options in commodities exchanges, including the Chicago Board of Trade, the New York Board of Trade, BM&FBOVESPA and the Mercado a Término de Buenos Aires (MATBA).

Soybeans: Our soybean crop is sold to local companies and is ultimately exported or diverted to the crushing industry. Approximately 72% of the soybean crop is hedged pre-harvest, by forward sales, sales in the futures markets, and production agreements. Post-harvest sales are a function of the export market versus local premiums paid by crushers (oil, meal and biodiesel). Our largest customers are Bunge International Commerce Ltd. (“Bunge”), Molinos Rio de la Plata S.A, Noble Americas Corp. (“Noble”), , and Alfred C. Toepfer International, comprising approximately 64% of our sales in the year ended December 31, 2011. In Argentina, the applicable export tax rate on soybeans is 35%.

Corn: Approximately 84% and 52% of our Argentine and Uruguayan production, respectively, is exported, with the remainder destined for domestic use in feedlots, the poultry industry and in our dairy operations. All of our Brazilian production is sold domestically for regional consumption. We typically sell about 55% of our corn pre-harvest due to logistical issues. We sell approximately 5% of our corn production for special products such as corn seed. Our largest customers are Louis Dreyfus Commodities Suisse S.A. (“LDC”), Noble, Alfred C. Toepfer International, Crossland Marketing Pte. Ltd. and Leiva Chavés María Luz (poultry industry), comprising approximately 62% of our sales in the year ended December 31, 2011. In Argentina, the applicable export tax rate on corn is 20%.

Wheat: Approximately 84% and 77% of our Argentine and Uruguayan production is exported with the remainder destined for domestic use. Brazil is the main importer of Argentine wheat. Due to logistics, we sell to the export market during harvest time and store the higher quality wheat to sell later in the year to local millers. We typically sell half of our wheat production pre-harvest. Our largest customers are LDC, Nidera S.A. and Asociación de Cooperativas Argentinas Coop. Ltda. , comprising approximately 63% of our sales in the year ended December 31, 2011. In Argentina, the applicable export tax rate on wheat is 23%.

Sunflower: Our sunflower production from Argentina and Uruguay is sold to local companies. Sales are made pursuant to forward sales, spot sales and production agreements (as sunflower for confectionary, high oil content sunflower and seed). Our largest customers are Dow Agrosciencies Argentina S.A., Argensun S.A. and Molinos Río de la Plata S.A., comprising approximately 85% of our sales in the year ended December 31, 2011. In Argentina, the applicable export tax rate is 32%.

 

56


Table of Contents

Cotton: We typically make pre-harvest sales of cotton fiber produced in Brazil into the export market. Sales for the textile industry are based on domestic demand and premiums. During 2011 we started producing in Argentina, and due the small amounts, we sold 100% to local textile industry. Our largest customers are LDC, Noble and Coopernorpi Cooperativa Agricola do Norte Pioneiro and Algodonera Avellaneda SA, comprising approximately 68% of our sales in the year ended December 31, 2011. Cottonseed is sold in the domestic market to meet feed demand.

Rice: Rough rice is available for sale commencing after the harvest of each year. White rice availability is based on our milling capacity. 73% of our total rice production is sold into the export market, with the remainder sold in Argentina in the retail market. Europe is the largest importer of our rice with 31% of our exported volume, followed by Brazil with 25%, Angola with 21%, Irak with 17% and the remainder sold to the Brazilian retail market, promoted by our Monte Alegre brand of sugar. Argentina’s retail market is comprised of four types of rice and four brands that have a 16.8% market share. Rice prices are based on regional supply demand and exchange rate in Brazil.

Our largest customers for rice are Webcor S.A., Companhia de Distribuicao Araguaia, LDC Argentina S.A., Josapar Joaquim Oliveira S.A. Participacoes, Euricom S.P.A. and Ameropa AG, comprising approximately 41% of our sales in the year ended December 31, 2011. In Argentina, the applicable export tax rate is 10% for rough rice and 5% for white rice.

Coffee: Coffee is available for sale commencing after it is harvested and processed since July of each year. We export our own high quality coffee to the European, U.S. and Japanese markets, where our “specialty coffee” grade product is received by the gourmet segment. Our coffee is certified by the most respected organizations in the sector such as UTZ and Rainforest Alliance. Our largest importer is the is the European Union with 49%, followed by Japan with 38% and the United States with 13% of our sales. 73% of our coffee production is sold in the domestic Brazilian market. Coffee prices are based on international grain exchanges (ICE-NY) and have a local reference in BM&FBOVESPA. We negotiate quality premiums or discounts and delivery conditions to the end buyer. Our largest customers for coffee are Outspan Brasil Importacao e Exportacao LTDA (“Olam”), Mitsui Foods Inc., Paragon Coffee Trading Company L.P. and Empresa Interagricola S.A. (Eisa), comprising approximately 63% of our net sales in the year ended December 31, 2011.

Dairy

During most of 2007, we sold our entire raw milk production to top Argentine dairy companies such as Groupe Danone, Nestlé Dairy Partners Americas and Mastellone Hermanos S.A. These companies manufacture a range of consumer products sold in Argentina and abroad. On November 7, 2007, we entered into a Milk Supply Agreement with La Lácteo S.A., pursuant to which we committed to sell to La Lácteo S.A. approximately 80,000 liters of our milk production per day subject to certain conditions. See “Material Agreements—Argentina—Milk Supply Agreement” and “Item 7. Major Shareholders and Related Party Transactions—B. Related Party Transactions.” We negotiate the price of raw milk on a monthly basis in accordance with domestic supply and demand with these companies, including La Lácteo S.A. The price of the milk we sell is mainly based on the percentage of fat and protein that it contains and the temperature at which it is cooled. The price we obtain for our milk also rises or falls based on the content of bacteria and somatic cells.

Sugar, Ethanol and Energy

Sugarcane

Sugarcane is the most efficient agricultural raw material used in the production of sugar and ethanol. Ethanol produced from sugarcane is highly regarded as an environmentally friendly biofuel with the following characteristics.

 

   

Renewable: Sugarcane ethanol, unlike coal or oil, which can be depleted, is produced from sugarcane plants that grow back year after year, provided that they are replanted every six to eight years.

 

57


Table of Contents
   

Sustainable: Sugarcane only needs to be replanted every five to seven years, as a semi-perennial crop. It can be harvested without uprooting the plant, and therefore its cultivation has less of an impact on the soil and the surrounding environment. The mechanization of the harvesting and planting process further improves sustainable agricultural management.

 

   

Energy Efficient: Sugarcane is highly efficient in converting sunlight, water and carbon dioxide into stored energy. The energy output of sugarcane is equal to nine times the energy input used in the production process, whereas the energy output of corn ethanol is only about 1.9 to 2.3 times the energy input used in its production process. Sugarcane produces seven times more energy compared to corn in ethanol production.

 

   

Low Carbon Emissions: Compared to gasoline, sugarcane ethanol reduces greenhouse gases by more than 61%, which is the greatest reduction of any other liquid biofuel produced today in large quantities. Ethanol made from sugarcane is deemed an advanced biofuel by the United States EPA.

 

   

Synergies: The main raw material used in the production of electricity in sugar mills is bagasse, which is a by-product of the sugarcane milling process, allowing for a renewable source of co- generated electricity.

Sugarcane is a tropical grass that grows best in locations with stable, warm temperatures and high humidity, although cold and dry winters are an important factor for the sucrose concentration of sugarcane. The climate and topography of the center-south region of Brazil is ideal for the cultivation of sugarcane and accounts for approximately 85% of Brazil’s sugarcane production.

We grow sugarcane in the center-south region of Brazil on 9,145 hectares of our own land and 56,163 hectares of land leased through agriculture partnerships. Under these agreements, our partners lease land to us for periods of between one and two sugarcane cycles, equivalent to periods of between 10 to 12 years, on which we cultivate sugarcane. Lease payments are based on the market value of the sugarcane set forth by the regulations of the State of Sao Paulo Sugarcane, Sugar and Alcohol Growers Counsel (Conselho dos Produtores de Cana-de-Açúcar, Açúcar e Álcool do Estado de Sao Paulo, or “Consecana”). We planted and harvested approximately 93% of the total sugarcane we milled during 2011, with the remaining 7% purchased directly from third parties at prices set forth by the Consecana system, based on the sucrose content of the cane and the prices of sugar and ethanol. The following table sets forth a breakdown during the time periods indicated of the amount of sugarcane we milled that was grown on our owned and leased land or purchased from third parties:

 

     Year Ended December 31,  
     2011      2010      2009  

Grown on our owned and leased land (tons)

     3,891,125         3,869,283         2,075,531   

Purchased from third parties (tons)

     276,957         196,833         139,498   
  

 

 

    

 

 

    

 

 

 

Total (tons)

     4,168,081         4,066,115         2,215,029   

Sugarcane Harvesting Cycle

The annual sugarcane harvesting period in the center-south region of Brazil begins in April and ends in November/December of each year. We plant several sugarcane varieties, depending on the quality of the soil, the local microclimate and the estimated date of harvest of such area. Once planted, sugarcane can be harvested, once a year, up to six to eight consecutive years. With each subsequent harvest, agricultural yields decrease. The plantations must be carefully managed and treated during the year in order to continue to attain sugar yields similar to a newly-planted crop.

We believe we own one of the most mechanized harvesting operations in Brazil. Our sugarcane harvesting process is currently 87% mechanized (100% at Angélica mill and 49% at UMA mill) and the remaining 13% is harvested manually. Mechanized harvesting does not require burning prior to harvesting, significantly reducing environmental impact when compared to manual harvesting. In addition, the leaves that remain on the fields after the sugarcane has been harvested mechanically create a protective cover for the soil, reducing evaporation and protecting it from sunlight and erosion. This protective cover of leaves decomposes into organic material over time, which increases the fertility of the soil. Mechanized harvesting is more time efficient and has lower costs when compared to manual harvesting. Sugarcane is ready for harvesting when the crop’s sucrose content is at its highest

 

58


Table of Contents

level. Sucrose content and sugarcane yield (tons of cane per hectare) are important measures of productivity for our harvesting operations. Geographical factors, such as soil quality, topography and climate, as well as agricultural techniques that we implement, affect our productivity. Since most sugar mills produce both sugar and ethanol in variable mixes, the industry has adopted a conversion index for measuring sugar and ethanol production capacity, the Total Recoverable Sugar (“TRS”) index, which measures the amount of kilograms of sugar per ton of sugarcane.

During the 2011 harvest, UMA harvested sugarcane with a TRS of 139, compared to an average of 138 in the center-south region of Brazil generally. Angélica’s TRS for the same period reached 125, due to the effect of a frost in January 2011. In addition, during the 2011 harvest, we harvested an average of 75.6 tons of sugarcane per hectare of our own and leased land.

Once the sugarcane is harvested, it is transported to our mills for inspection and weighing. We utilize our own trucks and trailers for transportation purposes. The average transportation distance from the sugarcane fields to the mills is approximately 26 kilometers at UMA and 35 kilometers at Angélica. The construction of our new mill at Ivinhema is expected to halve the average transportation distance for Angélica, significantly reducing our transportation costs, as 42% of the cane currently processed at Angélica has been planted closer to the site where the Ivinhema mill is being built.

Our Mills

We currently own and operate two sugar mills in Brazil, Angélica and UMA, and are in the process of construction of our third sugar mill, Ivinhema, to complete our sugarcane crushing cluster in Mato Grosso do Sul. Our mills produce sugar, ethanol and energy, and accordingly, we have some flexibility to adjust our production between sugar and ethanol, to take advantage of more favorable market demand and prices at given points in time. As of December 31, 2011, our sugar mills had a total installed crushing capacity of 5.2 million tons of sugarcane. As of the date of this annual report, we have concluded the 2011 harvest at both mills, crushing an aggregate volume of 4.16 million tons of sugarcane.

The Usina Monte Alegre mill (“UMA”) is located in the state of Minas Gerais, Brazil, and has a sugarcane crushing capacity of 1.2 million tons per year, full cogeneration capacity and an associated sugar brand with strong presence in the regional retail market (Açúcar Monte Alegre). We plant and harvest 99.7% of the sugarcane milled at UMA, with the remaining 0.3% acquired from third parties. On December 31, 2011, UMA concluded its harvest operations for the 2011 season, crushing 1.01 million tons of sugarcane.

Angélica is a new, advanced mill, which we built in the state of Mato Grosso do Sul, Brazil, with a total sugarcane crushing capacity of 4.0 million tons per year. Angélica has been equipped with two modern high pressure boilers and three turbo-generators with the capacity to use all the sugarcane bagasse by-product to generate approximately 96 MW of electricity that is used to power the mill with an excess of 64MW available for sale to the power grid. During the first half of 2010, we concluded the construction of the sugar factory commencing the production of sugar in July 2010. Angélica now has the flexibility to vary the product slate between 60% to 40% for either product. During the 2010/2011 harvest, we grew and harvested over 91% of the sugarcane milled at Angélica, allowing us to have a stable supply and superior quality control of our raw material. On December 31, 2011, Angélica concluded its harvest operations for the 2011/2012 season, crushing a total of 3.15 million tons of sugarcane. Although construction of the mill and industrial equipment has been concluded, Angélica will not mill at full capacity until 2013, when the size of our sugarcane plantations are expected to support the capacity of the mill.

As of December 31, 2011, accumulated capital expenditures in Angélica, including cost expensed in cane planting and excluding investments in land and working capital, reached R$1,013 million, or approximately $134.7 per ton of crushing capacity. The table below shows our investment breakdown:

 

Capital Expenditures

   R$ millions      US$ per ton(l)  

Industrial equipment

     541         72   

Agricultural equipment

     144         19   

Sugarcane planting cost

     327         44   

Total

     1,013         135   

 

(1) Considers an average R$/US$ exchange rate of 1.876.

 

59


Table of Contents

During mid 2011, we started the construction of our third mill, Ivinhema, located in the state of Mato Grosso do Sul, approximately 45 kilometers south of our existing Angelica mill, in order to complete our planned sugarcane cluster in that region. The Ivinhema mill is expected to have a crushing capacity of 6.3 million tons of sugarcane per year when it reaches full capacity in 2017, increasing our total sugarcane crushing capacity to 11.5 million tons per year. We expect Angelica and Ivinhema mills to form a cluster of 10.3 million tons of crushing capacity, which we expect will generate operational synergies and economies of scale that will result from a large-scale sugarcane production and industrial operation, including centralized management of both mills, harvesting efficiencies due to the ability to conduct non-stop harvesting and a reduction in sugarcane transportation costs. Ivinhema mill will be equipped with state-of-the-art technology including full cogeneration capacity, flexibility to produce sugar and ethanol and fully mechanized agricultural operations. We expect to source a majority of sugarcane for the Invinhema mill from our own supply and expand our cluster’s plantation to over 120,000 hectares.

As of the date of this report, the construction of Ivinhema mill is well advanced and on schedule. The boiler has already been delivered on-site and is currently being assembled. The foundations and buildings of the sugarcane reception and milling processes have been completed and we expect to begin their assembly in May 2012. Construction of the powerhouse and the foundations for the first generator, as well as the assembly of other parts of the sugar and ethanol processes are also progressing according to plan. We expect the Ivinhema mill to begin operating during the first half of 2013, reaching 2.0 million tons of sugarcane nominal crushing capacity during that year, and increasing its milling capacity to 4.0 million tons in 2015 and finally reaching full capacity of 6.3 million tons by 2017.

We plan to fund part of the construction costs of the Ivinhema mill using $230 million from the proceeds of our IPO. As of December 31, 2011, we have incurred $49.2 million in the acquisition and assembly of equipment, manufacturing costs and sugarcane planting expenses (45% of the first phase). Furthermore, as of the date of this report, we have contracted the manufacturing of certain key equipment for an additional $27.0 million, including juice evaporator, substations, sugar warehouse, pipes metallic structures, steel plates, among other equipment. We estimate that we will need to invest an additional $711 million to complete the construction of the Ivinhema mill. See “Item 3. Key Information—D. Risk Factors—Risks Related to Our Business and Industries—Adverse conditions may create delays in or the suspension of the construction of our Ivinhema mill and/or significantly increase the amount of our expected investments.”

The construction and operation of the Ivinhema mill is subject to environmental licensing. Generally, the environmental agencies of each state are responsible for issuing environmental permits. The criteria for environmental licensing is defined and regulated by the National Council of the Environment (CONAMA), under Resolution No. 237 of December 19, 1997. On June 27, 2011, we obtained the installation license (licença de instalaçâo) from Instituto de Meio Ambiente de Mato Grosso do Sul (“IMASUL”) for the commencement of the construction and assembly of the first and second phase of the Ivinhema mill, for a nominal crushing capacity of up to 3.6 million tons of sugarcane.

In addition to the installation license, the Ivinhema mill must obtain operational licenses and other permits including licenses for water capture and use of controlled products, among others. Failure to obtain the necessary environmental licenses may prevent us from operating the Ivinhema mill or may subject us to sanctions.

Our Main Products

The following table sets forth a breakdown of our production volumes by product for the years indicated:

 

     Year Ended December 31,  
     2011      2010      2009  

Sugar

     247,805         235,690         52,968   

Ethanol

     161,385         174,303         132,492   

Energy

     245,389         168,644         128,291   

Note: Sugar volumes are measured in thousands of tons (raw value), ethanol volumes are measured in thousand cubic meters and electricity is measured in MWh.

 

60


Table of Contents

The following table sets forth our sales for each of the sugarcane by-products we produce for the years indicated:

 

     Year Ended December 31,  
     2011      2010      2009  
     (In thousands of $)  

Sugar

     130,348         98,385         26,143   

Ethanol

     116,599         114,793         62,811   

Energy

     24,393         15,040         8,216   

Other(1)

     5,978         308         417   

Total

     277,318         228,526         97,587   

 

(1) Includes sales of sugarcane and other miscellaneous items to third parties.

Sugar

Our current maximum sugar production capacity is 2,400 tons per day which, in a normal year of 4,400 hours of milling, results in an annual sugar maximum production capacity of over 455,000 tons of sugar. Angélica’s sugar factory started operations during 2010 and has a production capacity of 1,800 tons per day. UMA’s capacity was increased last year to 600 tons per day when cogeneration was installed. In 2009, we produced 52,968 tons of sugar at the UMA mill compared to 87,388 tons of sugar in 2010 and 77,793 tons of sugar in 2011.

We produce two types of sugar: very high polarization (“VHP”) standard draw sugar and white crystal sugar. VHP sugar, a raw sugar with a 99.3% or higher sucrose content, is similar to the type of sugar traded in major commodities exchanges, including the standard NY11 contract. The main difference between VHP sugar and NY11 raw sugar is the sugar content of VHP sugar, and it therefore commands a price premium over NY11 raw sugar. Crystal sugar is a non-refined white sugar (color 150 ICUMSA) produced directly from sugarcane juice.

Sugar sales comprised 8% of our total sales in 2008, 8% of our total sales in 2009 , 23% of our total sales in 2010 and 24% of our total sales in 2011.

Ethanol

Our current maximum ethanol production capacity is of 1,400 cubic meters per day which, in a normal year of 4,400 hours of milling, results in an annual ethanol maximum production capacity of over 263,000 cubic meters of ethanol. In 2010, we produced 174,303 cubic meters of ethanol compared to 161,385 cubic meters of ethanol in 2011.

We produce and sell two different types of ethanol: hydrous ethanol and anhydrous ethanol (as further described in “—Production Process—Ethanol”). Ethanol sales comprised 5% of our total sales in 2007, 12% of our total sales in 2008, 20% of our total sales in 2009 and 23% of our total sales in 2010 and 21% or our total sales un 2011.

Cogeneration

We generate electricity from sugarcane bagasse (the fiber portion of sugarcane that remains after the extraction of sugarcane juice) in our two mills located in Brazil. Our total installed cogeneration capacity is approximately 112 MW, and 75 MW are available for resale to third parties after supplying our mills’ energy requirements. Having this ability to generate electricity from the by-product of the sugarcane crushing process on a large enough scale to fully power a mill with excess electricity being available is referred to as having full cogeneration capacity. Our two mills are duly licensed by ANEEL to generate and sell electricity. During the year ended December 31, 2011 we sold 245,389 MWh to the local electricity market, comprising 4% of our total sales in 2011. During the year ended December 31, 2010 we sold 178,914 MWh to the local electricity market, comprising 3.1% of our total sales in 2010. During the year ended December 31, 2009, we sold 128,291 MWh to the local electricity market, comprising 3% of our total sales in 2009. We did not sell electricity in 2008.

 

61


Table of Contents

Production Process

Sugar. There are essentially five steps in the sugar manufacturing process. First, we crush the sugarcane to extract the sugarcane juice. We then treat the juice to remove impurities. The residue is used to make an organic compost used as fertilizer in our sugarcane fields. The juice is then boiled until the sugar crystallizes, and sugar is then separated from the molasses (glucose which does not crystallize) by centrifugation. The resulting sugar is dried and sent to storage and/or packaging. We use the molasses in our production of ethanol.

Ethanol. Ethanol is produced through the fermentation of sugarcane juice or diluted molasses. Initially, we process the sugarcane used in ethanol production the same way that we process it for sugar production. The molasses resulting from this process is mixed with clear juice and then with yeast in fermentation vats, and the resulting wine has an ethanol content of approximately 8% to 10%. After the fermentation is complete, the yeast is separated for recycling in the ethanol production process. We distill the wine to obtain hydrous ethanol. In order to produce anhydrous ethanol, hydrous ethanol undergoes a dehydration process in a molecular sieve. The liquid remaining after these processes is called vinasse, which we further process to make liquid organic fertilizer that we use in our sugarcane plantations.

Cogeneration. Sugarcane is composed of water, fibers, sucrose and other sugars and minerals. When the sugarcane goes through the milling process, we separate the water, sugar and minerals from the fibers or sugarcane bagasse. Bagasse is an important sub-product of sugarcane, and it is used as fuel for the boilers in our mills. Sugarcane bagasse is burned in our state-of-the-art boilers to produce high pressure steam (67 atm) which is used in our high-efficiency turbo-generators to generate electricity to power our mills. The excess electricity, about 67% of production, is sold to the national power grid.

The following flow chart demonstrates the sugar, ethanol and cogeneration production process:

 

LOGO

Historically, the energy produced by Brazilian mills has not been price competitive when compared to the low-cost Brazilian hydro-electricity, which accounts for almost 90% of the country’s electricity matrix. Consequently, the majority of the groups in the sugar and ethanol sector have not invested in expanding their energy generation for sale, and the majority of the mills were constructed with less efficient, low-pressure boilers. Since 2000, the Brazilian economy has experienced significant growth, which in turn has resulted in increased demand for energy.

However, hydro- and thermo-electricity have not been able to keep pace for the following reasons: (1) new hydro-electric plants are located in regions (such as the Amazon) distant from consumption centers; (2) significant lead-time is required to construct new hydro- and thermo-electric plants; (3) significant investments are required for transmission lines, pipelines (for natural gas used in thermo-electric plants) and barges; (4) significant environmental costs are associated with both types of electricity generation; and (5) prices for fuel (natural gas) used in the generation of thermo-electricity have increased resulting in greater dependence on Bolivia (Brazil’s principal natural gas supplier). As a result, energy prices in Brazil have been increasing, and alternative sources, such as the

 

62


Table of Contents

electricity from the cogeneration of sugarcane bagasse, have become increasingly competitive and viable options to satisfy the increasing energy demands. Sugarcane bagasse cogeneration is particularly competitive since sugarcane-based electricity is generated following the sugarcane harvest and milling which occurs during the dry season in Brazil, when hydroelectric generation is at its lowest levels.

The main advantages of energy generated by sugarcane bagasse are:

 

   

It is a clean and renewable energy;

 

   

It complements hydropower, the main source of Brazilian energy, as it is generated during the sugarcane harvest period (April to December) when water reservoirs are at their lowest level;

 

   

It requires a short period of time to start operations; and

 

   

It requires only a small investment in transmission lines when plants are located close to consumer centers.

Our total installed cogeneration capacity at the Angélica and UMA mills together is 112 MW, of which 75 MW are available for sale to the market. The Ivinhema mill is planned to have full cogeneration capacity as well and is expected to generate 184 MW by 2017, of which 131 MW are expected to be available for sale to the market.

We believe that there is a high potential for growth in the generation of electricity, and we are prepared to make investments to the extent that prices of Brazilian energy justify making such investments. We are currently investing $7.2 million in a “trash separation” system at Angélica, which will allow us to increase our energy output by over 50%.

Storage and Conditioning

Our sugar and ethanol storage and conditioning facilities are located at our mill sites and allow us to deliver our products when they are ready to be commercialized with no third-party involvement. Having such facilities at mill sites allows us to (i) reduce storage and conditioning costs; (ii) reduce freight costs since we only commence moving the product once the final destination is determined, whether locally or to a port; and (iii) capitalize on fluctuations in the prices of sugar and ethanol.

 

Nominal Storage Capacity

   Angélica      UMA      Total  

Ethanol (cubic meters)

     120,800         27,000         147,800   

Sugar (tons)

     90,000         36,400         126,400   

Marketing, Sales and Distribution

Sugar: We sell sugar both in the domestic and the international markets at prices that depend on our price parity calculation, which considers each market’s price and the associated costs. Prices for the sugar we sell in Brazil are set, using an index calculated by the Agriculture College of the University of São Paulo (Escola Superior de Agricultura Luiz de Queiroz, or “ESALQ”), with a premium in the state of Minas Gerais due to the use of our regional brand, “Monte Alegre,” the market leader in the southern part of that state. Prices for the sugar we export are set in accordance with international market prices. International prices for raw sugar are established in accordance with the NY11 futures contracts. Our largest customers for sugar are Dreyfus., Bunge, Noble and Copersucar Trading AVV, comprising approximately 96% of our sales in the period ended December 31, 2011.

Ethanol: Almost all of our ethanol sales are in the domestic Brazilian market given the increasing demand generated from the increase in flex-fuel vehicles in Brazil. Our ethanol sales are not made through the execution of formal agreements. Instead, sales are made through daily sale orders intermediated by specialized brokerage firms that act in the ethanol domestic market, whose role is to intermediate the sale of ethanol between the ethanol producers and the domestic ethanol distribution companies, and prices are set using the ESALQ and the futures and commodity exchange of the BM&FBOVESPA indices for ethanol as a reference. Our largest customers by volume were Petrobras Distribuidora S/A, Raizen Combustives, GavilonShipping and Trading LLC, Ipiranga Produtos de Petróleo S/A and Shell Brasil Ltda., comprising approximately 76% of our sales in the period ended December 31, 2011.

 

63


Table of Contents

Cogeneration: We also sell electricity co-generated at our sugar and ethanol mills to local electricity commercialization companies and directly to the spot market. Sales are made in the spot market with brokers, through government auctions, to distributors and through long-term contracts. Our largest customers are Cemig Geração e Transmissão S/A, Câmara de Comercialização de Energia Elétrica and Nova Energia Comercializadora Ltda., comprising approximately 92% of our sales in the period ended December 31, 2011.

The Brazilian energy agency, ANEEL, has organized yearly auctions for alternative energy and for renewable sources at favored rates. As a hedging strategy, we sell the electricity production of our mills through long-term contracts adjusted for inflation by reference to the national index of consumer prices (“IPCA”)

In 2009, UMA entered into a 10-year agreement with CEMIG, a state distribution company, for the sale of 9 MW (approximately 52,704 MWh) during the harvest periods each year (May to November of each year) at a rate of R$184,15 per megawatt hour. In 2009, Angélica sold energy in a public auction carried out by Camara de Comercialização de Energia Elétrica (“CCEE”), whereupon Angélica entered into a 15-year agreement with CCEE for the sale of 87,600 MWh per year at a rate of R$180,26 per megawatt hour. In August 2010, Angélica participated in a public auction, whereupon Angélica entered into a second 15-year agreement with CCEE starting in 2011, for the sale of 131,400 MWh per year at a rate of R$154.25/MWh. The delivery period for both agreements starts in May and ends in November of each year. The rates under both agreements are adjusted annually for inflation by reference to the National Index of Consumer Prices (“IPCA”).

Land Transformation

Land transformation is an important element of our business model and a driver of value creation. Through land transformation, we optimize land use and increase the productive potential and value of our farmland. Our land transformation model consists of changing the use of underutilized or undermanaged agricultural land to more profitable cash generating agricultural activities, such as turning low cash-yielding cattle pasture land into high cash-yielding croppable land, allowing profitable agricultural activities, such as crop, rice and sugarcane production.

Since our inception, we have successfully identified multiple opportunities for the acquisition of undeveloped or undermanaged farmland with high potential for transformation. During the ten-year period since our inception, we have effectively put into production over 154,248 and that were previously undeveloped or inefficiently managed and are undergoing the transformation process.

The land transformation process begins by determining the productive potential of each plot of land. This will vary according to soil properties, climate, productive risks, and the available technology in each specific region. Before commencing the transformation process, we perform environmental impact studies to evaluate the potential impact on the local ecosystem, with the goal of promoting environmentally responsible agricultural production and ecosystem preservation, thereby supporting sustainable land use. We do not operate in heavily wooded areas or primarily wetland areas.

The transformation process for underdeveloped and undermanaged land requires us to make initial investments during a period of one to up to three years, and the land reaches stable productive capability the third to seventh year following commencement of the land transformation activities.

We are engaged in three different categories of the land transformation process, which are defined by the previous use of the land:

(i) Undeveloped land (savannahs and natural grasslands): This is the most drastic transformation phase since it demands both physical and chemical transformation of the soil. First, the land is mechanically cleared to remove native vegetation. The soil is then mechanically leveled for agricultural operations: in the case of land being transformed for rice production, this process involves heavy land movements and systematization required for irrigation and drainage channels, roads and bridges. In the case of land destined for sugarcane plantations, land movements will also be necessary for the construction of terraces to prevent the excess of water runoff.

 

64


Table of Contents

Certain soils must be chemically treated and corrected by incorporating nutrients such as limestone, gypsum and phosphorous, as is the case of the Brazilian ‘Cerrado’. Soil correction is not required in Argentina or Uruguay due to the natural fertility of the soil. Pesticides and fertilizers are then applied to the soil in preparation for planting. In the case of land destined for crop production (grains and oilseeds), soybean, which is sometimes referred to as a colonizing crop, is usually planted during the first years due to its resistance to pests, weeds and extreme weather and soil conditions. Thereafter, the land will enter into a crop rotation scheme to reduce the incidence of plague and disease and to balance soil nutrients. In the case of rice and sugar cane, which are produced in a monoculture system, there is no colonizing crop or rotation involved. Intensive plague and weed controls and additional soil correction will take place during these first three to five years. Land productivity or yields, measured in tons of soybean or other crops per hectare, will be initially low and will gradually increase year by year. During the first five to seven years, the yields will increase at high and sustained rates. After the seventh year we consider the land developed as yield volatility is reduced and growth is only achievable at marginal rates. Since our inception we have put into production 57,341 hectares of undeveloped land into productive croppable land.

(ii) Undermanaged or underutilized farmland (cultivated pastures and poorly managed agriculture): This transformation process is lighter than the one described above since it does not require the initial mechanical clearing of vegetation or land leveling. Only in the case of land being prepared for rice production will leveling be required for efficient flood-irrigation. The transformation of cattle pastures or poor agriculture in the Brazilian ‘Cerrado’ will begin with soil correction and soil tillage in preparation for planting of the first soybean or sugarcane crop. The process will then continue as described in the case above. Land productivity or crop yields will grow at high rates during the first three to five years of the transformation process and will then commence to stabilize and grow at marginal rates, at which point we consider the land developed. Since our inception we have put into production 96,906 hectares of undermanaged or underutilized farmland into croppable land.

(iii) Ongoing transformation of croppable land: The application of efficient and sustainable crop production technologies and best practices such as “no-till”, crop rotations, integrated pest and weed management and balanced fertilization, among others, incrementally increases soil quality and land productivity over time, maximizing return on invested capital and increasing the land value of our properties. Our entire farmland portfolio is constantly undergoing this phase of land transformation. During the 2010/2011 harvest year, we operated 120,460 hectares of developed farmland which were enhanced by the use of best productive practices and technology.

In each of these categories of transformation, the metric the company uses to track the level and analyze the progress of the transformation process is the level and tendency of crop yields and the number of years the land has been under crop production. Consequently, the process of land transformation is evidenced by the results of the activities within our other business segments, primarily our crops, rice and sugarcane segments. Accordingly the costs associated to the transformation process described above are allocated within these other business segments. As a result, there may be variations in our results from one season to the next according to the amount of farmland undergoing transformation and the amount of land sold and our ability to identify and acquire new farmland.

Our land transformation segment seeks not only to profit from crop and rice cultivation, but also from the opportunistic disposition of successfully transformed farmland. We strategically sell farms that have reached productive maturity with marginal potential for further productivity increases (years three to seven after commencing the land transformation process) to realize and monetize the capital gains arising from the land transformation process. Land transformation proceeds are in turn reinvested in the purchase of strategic farmland with potential for transformation and appreciation. The rotation of our land portfolio allows us to allocate capital efficiently. Since 2006 we have had a solid track record of selling farmland for highly profitable returns. During the last six years, we have sold 29,608 hectares of farm land, generating capital gains of approximately $104 million.

These capital gains are generated by three main factors:

(i) the acquisition of land at opportunistic prices below the market value or fair value of the land;

(ii) the land transformation and ongoing land transformation process described above enhances the productivity and profitability of land, ultimately increasing the value of the land; and

 

65


Table of Contents

(iii) general market appreciation of land driven by increase in commodity prices and supply and demand dynamics in the land market. In this regard, during the last 30 years, since 1982, farmland prices in Argentina’s core production region have increased an average of 9.1% per year according to data published by Margenes Agropecuarios. The value of the farms we sold between 2006 and 2011, as well as our overall land portfolio, has been positively impacted by this external factor.

We believe we are one of the most active players in the land business in South America. During the last nine years, we have executed transactions for the purchase and sale of land for over $521 million. Our business development team is responsible for analyzing, selecting, acquiring and selling land. The team has gained extensive expertise in evaluating and acquiring farmland throughout South America, and has a solid understanding of the productivity potential of each region and of the potential for land transformation and appreciation. To date, the team has analyzed over 9.7 million hectares of farmland with a total value of approximately $13 billion. We have developed a methodology to analyze investment opportunities, taking into account price, transformation potential, productive model, financial projections, and investment requirements, among others. Our analysis also employs advanced information technology, including the use of satellite images, rain and temperature records, soil analyses, and topography and drainage maps. From time to time, we may leverage our favorable position in and knowledge of the land market to engage in opportunistic buying and selling transactions.

The following table sets forth our acquisitions and divestitures since our inception:

 

     Acquisition      Divestitures      Total Land Holdings  

Year Ended December 31,

   (In hectares)  

2002

     74,924         —           74,924   

2003

     —           —           74,924   

2004

     34,659         —           109,583   

2005

     22,103         —           131,686   

2006

     5,759         3,507         133,938   

2007

     113,893         8,714         239,117   

2008

     43,940         4,857         278,200   

2009

     —           5,005         273,195   

2010

     14,749         5,086         282,858   

2011

     13,003         2,439         293,423   

Our Farms

Appraisal of Farms. In September 2011, in order to assess the market value of rural properties in Brazil, Argentina and Uruguay, we requested an appraisal by Cushman & Wakefield Argentina S.A., independent real estate valuation firm knowledgeable about the agriculture industry and the local real estate market. As part of these appraisals, the value of each of our properties was determined using the sales comparison approach taking into account current offerings and analyzed prices buyers had recently paid for comparable sites, adjusted for the differences between comparable properties and the subject property to arrive at an estimate of the value of the subject property. The major elements of comparison used to value the properties included the property rights conveyed, the financial terms incorporated into the transaction, the conditions or motivations surrounding the sale, changes in market conditions since the sale, the location of the real estate and the physical characteristics of the property.