CF ECLECTICA AGRICULTURE FUND
MONTHLY REPORT
31 December 2008
December saw something of a rebound in financial markets,
with the MSCI World equity index gaining 9.3% and agricultural
commodities 4.7%. The fund also performed well, returning
8.9% in sterling terms. The main contributors to this
performance were Syngenta (1.0%), Bunge (0.9%) and Viterra
(0.7%). Laggards included Monsanto (0.6%) and AGCO (0.3%).
The main news in the soft commodity markets was the Chinese
announcement that their corn harvest had been much better
than previously thought in 2008, with production higher by
around 3%. As China is 20% of global supply, this alone is
sufficient to add 4% to global inventories. Furthermore, with
economics for the US protein and ethanol industry poor,
demand growth from these consumers has been revised
downwards, with the USDA now expecting global grain
demand to grow 3% rather than 3.3% in the 2008/09 crop
year. Offsetting these two negatives to some extent is the news
that a moderate La Nina weather pattern is causing very hot
and dry conditions in Latin America, with the Brazilian harvest
for corn expected to be down by 10%, soybeans by 5% and
Argentine wheat by almost 40%.
The supply picture for the 2009/10 crop year is beginning to
look more interesting. Following on from the announcement
that FSU countries have seen declines of 7-8% in winter wheat
planting, we have learned that sowing in the US was also down
9% on last year’s level. This is partly due to the late harvest,
which gave farmers limited time to turn the land round before
the cold weather came in, but also due to the less attractive
market price of wheat. These two major wheat producers
accounted for over 25% of global wheat production in 2008,
and with winter wheat accounting for over two-thirds of their
combined production, total wheat acreage for 2009 is already
down by nearly 2%.
Fertiliser markets have been frozen since autumn. Data from
the Brazilian fertiliser agency ANDA showed consumption in
October and November down as much as 35% compared with
last year’s figures. With customers at the farm and distribution
level both unwilling to buy and limited on-site storage,
producers have been forced to cut back on production. For
example, Yara has temporarily shut down as much as 30% of
ammonia capacity. Supply is also facing disruption caused by
strikes at plants in India and the impact of the annual Russia-
Ukraine gas price dispute, which has forced a further 3% of
global supply out of the market owing to a lack of raw materials.
With limited inventory held in the supply chain, prices may
respond surprisingly quickly when farmers return to the market
in spring.
Although farmers can to some extent play catch-up with
fertiliser application later in the season, the industry will face a
logistical challenge getting product to the farm. Fluctuations in
regional gas prices have meant that upstream nitrogen
producers have migrated to low cost gas regions such as
Qatar, far away from key agricultural economies such as the
US and Europe who now import 25% and 40% respectively of
their fertiliser requirements. Taking into account the non-
existent start to the season and this logistical bottleneck, it
looks like consumption of nitrogen fertiliser globally might be
down as much as 10% in 2009. The yield implications of this
will depend to some extent on who bears the brunt of this
lower consumption. A marginal Brazilian farmer who uses 40%
less fertiliser will see his yields fall much more than an Iowa
corn farmer who decides to hold off on the last 10% of his
optimal application pattern. But historical data suggests that a
10% global reduction in use of nitrogen fertiliser could reduce
yields by as much as 4-5%.
Stock Insight: Monsanto
We have recently increased the fund’s holding in Monsanto
substantially to 9.5% of NAV. Over time, one would expect
seed companies to be at the forefront of agricultural
productivity growth: if the total area of land cannot grow to keep
pace with demand growth, it is imperative that we find ways of
increasing yields on our existing farmland. Back in the 50s and
60s, great advances were made in yields of crops like rice.
Some of this increase came from the introduction of artificial
fertiliser, but higher-yielding seed varieties were also vital.
However, since the Green Revolution, with surplus food stocks
giving the perception that there will always be enough food to
go round, the world has neglected to continue research in this
area. Much of the money available to charities and state-
funded research organisations was diverted to other, seemingly
more pressing, causes such as AIDS and cancer. As the
research tailed off, so did the yield improvement, and yields in
areas such as rice in Asia and wheat in Europe have noticeably
flattened out over the last twenty years.
Research in areas such as chemicals and healthcare has
always gone in cycles. Large pharmaceutical companies like
Glaxo and AstraZeneca produced a succession of blockbuster
drugs through the 1990s using what could broadly be called
small molecule chemistry. But once the big opportunities
opened up by that particular technology have been found, the
industry tends to stagnate, as big pharma has done over the
last decade. In a similar vein, agricultural chemical companies
had their last run of incredible return on R&D in the 1970s with
killer products like glyphosate, an all-purpose herbicide. By the
1990s, companies like Monsanto were on the verge of giving
up on what appeared to have become a commoditised, capital
-intensive business.
However, research into genetics has opened up a platform for
the next cycle of commercial discoveries. Unfortunately for the
pharma companies, concerns about genetic engineering of
human beings have made the application of this new
CF ECLECTICA AGRICULTURE FUND
MONTHLY REPORT

technology to human healthcare complicated. New drugs have

generally come from proteins rather than direct genetic
manipulation. However, back in the 1980s a small group of
companies, led by Monsanto, began to invest in genetic NET ASSET VALUES
research on plants. This was a long and expensive process £p €¢
which only really began to bear fruit around the turn of the 'A' Shares 74.66 77.98
century. However, since these GM seeds came on to the 'C' Shares 74.85 78.09
market, it is clear that yields in regions which allow GM crops
(basically the Americas) have begun to outstrip yields in those
opposed to GM technology (most notably Europe and Africa). FUND PERFORMANCE
The rapid growth of this new market for GM seeds has allowed
Monsanto to grow earnings per share at 30% compound over
the last five years.
Crucially, this growth progression looks set to continue. There
are two main issues here: the affordability of the product in a
financial meltdown, and the strength of Monsanto’s pipeline
over the next five years. Unlike fertiliser, or a $250,000 John
Deere tractor, seeds make up a relatively small part of a
farmer’s cost base. The super-premium Monsanto corn seed
would cost $35 per acre, around 5% of sales for a typical Mid-
West farmer, and only an eighth of his fertiliser bill last year. As
well as being relatively inexpensive in absolute terms, the return
on investing in a high quality seed should be positive for the
farmer even in a $2.50 corn price environment. Farmers will cut
back on fertiliser and capex long before they cut back on seed
PERFORMANCE SUMMARY
expenditure. This was confirmed in the recently announced Q1
figures, which showed seed revenues up over 30% on the % EAGF Relative MSCI
World
same quarter last year.
Month to date +8.9 -0.4 +9.3
The pipeline of new products is strong, with key products One year -34.6 -14.7 -19.9
including corn which can grow under drought conditions, corn Year to date -34.6 -14.7 -19.9
which can absorb nitrogen more efficiently than existing 2007 (from June) +14.2 +9.3 +4.9
varieties (which should reduce a farmer’s fertiliser bill) and
Since launch -25.3 -9.3 -16.0
higher yielding soybeans. These new traits will be the basis for
C.A.R. since inception -17.0 -6.5 -10.5
continuing earnings growth of 20% per annum over the next
five years.
The most exciting thing about Monsanto now is the valuation. ASSETS UNDER MANAGEMENT
The opportunities presented by their biotech pipeline should AUM £96.2m
mean that this business trades at a significant premium to
pharmaceutical companies, who are burdened with a large and
ASSET ALLOCATION
declining legacy revenue stream. Even ‘superior’ pharma
assets like Roche, trading on 13x earnings, only manage Cash +11.8
earnings growth of just over 10% per annum. The smaller Equity +88.2
biotech outfits with the potential to grow earnings strongly tend Total +100.0
to trade on more like 25x earnings. Historically, the market has
recognised this similarity and valued Monsanto richly, often on
TOTAL POSITIONS
a P/E ratio as high as 30 or 40x. But the broad sell-off in
anything related to agriculture has meant that a business which Total Positions 74
should make earnings per share of around $4.50 in 2009 was
trading at $69 per share, only 15x earnings.
CF ECLECTICA AGRICULTURE FUND
MONTHLY REPORT

TOP EQUITY HOLDINGS

1 SYNGENTA AG (VX*) Long +9.4
2 MONSANTO CO (UN*) Long +8.4
3 ARCHER-DANIELS-MIDLAND CO (UN*) Long +5.2
4 BUNGE LIMITED (UN*) Long +3.7
5 POTASH CORP OF SASKATCHEWAN Long +3.4
(CT*)
6 KWS SAAT AG (GY*) Long +2.9
7 TERRA NITROGEN COMPANY LP (UN*) Long +2.8
8 VITERRA INC (CT*) Long +2.6
9 CORN PRODUCTS INTL INC (UN*) Long +2.6
10 K+S AG (GF) Long +2.4

COUNTRY BREAKDOWN
CF ECLECTICA AGRICULTURE FUND
MONTHLY REPORT

Investment Objective Price Reporting

The investment objective of the fund is to achieve long-term NAVs are published daily in the Financial Times (Managed
capital growth through investment in a diversified portfolio of Funds Service under Eclectica Asset Management LLP);
global quoted equity investments that are involved in, related to,
Class A: SEDOL and ISIN identifiers are B1XGDS0 and
concerned with or affected by agriculture and farming related
GB00B1XGDS05 for £ Shares, B1XGDP7 and
issues. The fund may also invest in collective investment
GB00B1XGDP73 for € Shares respectively.
schemes and cash and near cash in the interests of achieving
its objective of capital growth. The fund may utilise currency Class C: SEDOL and ISIN identifiers are B3B02F8 and
hedging in the interests of achieving that objective. GB00B3B02F88 for £ Shares, B3B02P8 and GB00B3B02P86
for € Shares respectively.
Comparative
Authorised Corporate Director
MSCI World Total Return (NET) index.
Capita Financial Managers Ltd.
Structure
Investment Manager
The fund is a sub-fund of CF Eclectica Funds which is an
investment company with variable capital established pursuant Eclectica Asset Management LLP.
to an authorisation order of the Financial Services Authority
("FSA") on 24 March 2006 and falls in the category of being a Administrator
"UCITS scheme" and which is also an umbrella company for Capita Financial Administrators Limited. Dealing line 08459 22
the purposes of the Open-Ended Investment Companies 00 44.
Regulations 2001.
Depositary
Accounts Date
Bank of New York.
Financial year end 31st December.
Auditors
Dealing
Ernst & Young.
Class A and Class C £ accumulation shares and Class A and
Class C € accumulation shares are available for subscription
daily at 12pm based on applications received before 12pm.
Pricing
In order to protect the interests of existing shareholders the
fund applies an anti-dilution levy of 0.5% to subscriptions or
redemptions over 1% of the fund's value.
Launch date
8th June 2007.
Dividends
Income is accumulated within the fund.
Charges
Management fee: 1.75% for Class A Shares; 1.25% for Class
C Shares. Subscription Charge: 5% (3% of which may be paid
to qualifying intermediaries).
Subscription
Minimum of £5,000 and its equivalent in Euros for Class A
Shares and £2m and its equivalent in Euros for Class C
Shares.
CF ECLECTICA AGRICULTURE FUND
MONTHLY REPORT

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