Agriculture CANADA
3 February 2009
Inside
Pg Company Rating Target
17 Viterra Inc. Outperform C$13.00
31 Alliance Grain Traders Outperform C$14.00
Income Fund
42 Ag Growth Income Fund Outperform C$24.00
56 Cervus LP Outperform C$15.00
70 Rocky Mountain Dealerships Outperform C$11.00
David Pupo
(416) 848-3505 david.pupo@macquarie.com
Devin Kennealy
(416) 848-3533 devin.kennealy@macquarie.com
A shifting supply/demand relationship
We are initiating coverage of the Canadian agricultural sector with a focus on specialty
crop processors and grain traders, and agribusiness and equipment dealers: Viterra,
Alliance Grain Traders Income Fund, AG Growth Income Fund and Cervus LP.
You choose: liquidity, global exposure, income
These companies provide a mix of stock liquidity, global exposure, consistent
earnings growth and income—all which are expected to provide a defence in these
uncertain times.
Demand for crops grown in Canada will outstrip supply
The impact of the tightening global supply/demand situation for the basic crops
grown in Canada will, in the long term, benefit the companies that process and
move the grains, provide inputs to farmers, and deal in equipment.
Economies of scale in this industry are now more important than ever. Each one of
these companies has built a competitive advantage through growth, creating a
foundation for further profitable expansion.
Attractive valuations backstopped by solid financials
The stocks in this sector got pummelled. For this reason, along with positive macro
economic underpinnings, we see these stocks as particularly attractive. Solid
balance sheets, combined with good free cashflow, provide comfort.
Our picks
Crop processing
• Investors requiring larger market capitalization and stock liquidity should
focus on Viterra Inc. The company has built the mass and competitive
advantage to attract sizeable volumes of grains under any economic conditions.
This should provide consistent earnings in its grain trading business. Viterra has
also built the largest agriproducts retailing business in Canada. We are initiating
coverage of Viterra with an Outperform rating and C$13.00 target.
• Small cap investors should focus on the growth business in pulse crop
processing built by Alliance Grain Traders Income Fund over the last few
years. We are initiating coverage of Alliance Grain Traders with an Outperform
rating and C$14.00 target.
Equipment
• In the agricultural equipment space, our top pick is Ag Growth Income Fund,
due to its global growth potential. Short-line manufacturers (like Ag Growth),
are less susceptible to economic swings. We are initiating coverage of Ag Growth
with an Outperform rating and C$24.00 target.
• Cervus LP is consolidating John Deere agricultural equipment dealerships
in Western Canada. Trading at 2.4x forecast 2009 EBITDA, with a payout ratio
of 40% and a yield of 12%, we see Cervus as an attractive buy for incomeoriented
investors. We are initiating coverage of Cervus with an Outperform
rating and C$15.00 target.

Summary
(All figures in CAD unless otherwise noted)
The crop commodity price trend is, in our view, becoming more of a secular, bullish story.
Historically, crop price cycles originated with supply shocks that caused prices to escalate
and thus furnished producers with short-term profits. The incremental profit provided incentive
to expand production and boost supply, reducing prices and therefore completing the cycle.
Our research indicates rising demand rather than a change in supply is supporting a long-term
bullish outlook for prices and that in the long term prices will not revert to historical means.
We estimate that this time around grain prices will bottom above the lows of previous cycles.
The industrialization of emerging markets has contributed to the structural thirst for raw
materials and has thus increased demand for hard commodities. Build-out phases are
followed by rising income levels and improved standards of living.
Food is the first category to benefit from rising disposable incomes. For every 1% bump
in income levels, a 2% increase could be expected in spending on protein sources. In
emerging economies, meals are shifting from being heavily weighted in rice to a more
balanced diet of animal proteins, which require feed grains. Cows and hogs consume
roughly seven pounds of feed to produce one pound of meat. According to the Australian
Farm Institute and Rural Industries Research and Development Corporation, there will be
additional demand for 350–450m tonnes of feed grains by 2020, a 20–30% increase over
current global production levels.
Capacity constraints are adding fuel to the fire. The availability of farmland, scarcity of water,
and historically low commodity inventory levels are restricting the supply response to
increasing demand. The result is higher prices.
Keep in mind the potential for key crop producing countries to impose export bans as food
prices rise, which could lead to speculators inflating crop prices by stockpiling.
We have witnessed oil prices come full circle in this recession. Looking forward, rising oil prices
are expected to affect the supply/demand conditions for crops. The increasing use of biofuels in
mature economies makes growing corn more attractive to farmers than planting other
commodities. This supports prices of other grains, such as wheat, as crops fight for land.
Of course, annual crop substitution (as determined by individual farmers) will swing crop
prices annually as supplies increase and decrease. Long-term, however, as the growth rate of
consumption outpaces the growth of production, prices will have to increase.
In our view, a secular turn to the downside in crop commodity prices is unlikely
considering the forces supporting the long-term price trend.
Our research coverage will attempt to, in a sense, close the loop. Our coverage universe will
stretch from the farmer to the consumer and assess how companies that are exposed to crop
prices are affected by price cycles.
This report will concentrate on agribusiness (input service providers), agricultural equipment
dealers, specialty crop processors and grain traders (post-harvest service providers).