The 'Pile In' on food projects

When I was a kid - whenever there was a fight between 2 cousins at a family reunion, there was nothing else for the remaining cousins to do but to 'pile-in' . Almost always we ended up smothering someone who called 'peace' and then we rolled off laughing and had a glass of Kool-Aid and laughed.

Such is not the case with Egypt, Jordan and potentially other unrest in the Middle East - affecting oil prices.

China's raising of their rate to combat inflation is going to raise rates globally. Watch. Think about how many of Developed and Emerging market industrial inputs are manufactured in China!

There is only so long that Bernanke can hold USA rates at virtually zero. Once again - the outsized impact of imported oil is going to hoist us on the petard of inflation. Mervyn King of UK has virtually thrown in the towel and Germany's dominance is once again clear in the Euro zone. So are we breaking into currency zones once again? Oceana, Asiana, Americana? Is it a 'Pile-On' or a rational response to the recent liquidity infusion? Probably a little of both.

OK so, as an Emerging Market Private Equity investor in food projects - what to do? 1) I would check your portfolio carefully - how much is invested in food, energy and industry, 2) You did the management due diligence, how able are they to cope with an increase in price of inputs.

What? - did you think food is grown with high yields without hybrid seed (imported), fertilizer (natural gas based and imported), weed killer (carbon based chemicals and imported) and transport to the warehouse (variable cost - petrol). Now, given the unrest right now - how easy do you think it will be to raise food prices on the back-end to counteract the rise in cost of inputs. Answer-not easy.

Now capital costs - pay attention, this could be the 'rear-end' saver. In the project structure, an investor doing due diligence obviously utilised every capital maximization tool possible. That would include Export Credit Agency equipment financing, Food for peace concessionary financing, and other hedges such as insurance and grant programs.

So the fact is clear - when everyone starts talking inflation, investments are endangered and apart from a good management team, you have to have a razor sharp capital allocation scheme. For example, why borrow to buy imported equipment locally at 27% when you can get Export Credit Agency funding at 3.1% for 8.5 years fixed. Today. Time to review those capital structures.

Lastly, if you are an investor in food projects in Emerging Markets - let me tell you - I am a management management management investor. Anyone can write an algorithm (a set of mechanical instructions) but it takes a certain management spirit to move company elements to maintain investment value and provide value to the shareholders as well as the social good for food protection.

Summary: Yes, the MSCI dropped on the back of Latin America trading, China's change of rates and Europe's continued weakness. If your management is sound and flexible to adjust, and you have a strong capital structure with strong DSCR and EBITDA, your investments should be sound. The macro elements are indicating an increase in demand in resources and that will only benefit Emerging Market industries.

Maurice Johnson

Post Road Advisors

+1 203 255 0226