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Latin American Agribusiness Development Corporation S.A.

Latin American Agribusiness Development Corporation S.A.

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Letter to Shareholders - 2016

We are proud to once again present a very favorable report on LAAD’s 2015-16 fiscal year. The year was marked by continuing low commodity prices, unfavorable weather, and political changes in many of the countries where we operate. Despite this, your Company achieved noteworthy results by disbursing US$236 million to 266 new projects in 15 countries, creating over 9,600 jobs and generating almost US$200 million in foreign exchange for the region.

In its June 2016 article, “The Future of Agriculture”, The Economist magazine highlighted that between today and 2050, the world’s population could increase from 7.3 billion to 9.7 billion. Related to this, in October 2009, an expert forum of the United Nation’s Food and Agriculture Organization (FAO) predicted that this growth could require a 70% increase in agricultural production that must forcibly come from increases in average yields, since most arable land is already under production. Not only will this increased population need to eat, but it will be more demanding than current consumers in regards to the quality, safety and environmental impact of their food. The Economist poses the question: “How can the world be fed in the future without putting irreparable strain on the Earth’s soils and oceans?” The article responds that, to achieve this, farming will need to become more like manufacturing in order to minimize the effects of the “vagaries of nature” and guarantee reliable yields. This, in turn, is requiring greater development and application of technology in irrigation, genomics, and information management. Innovation, in essence, is becoming increasingly necessary for farmers to succeed.

From its position as an agricultural financier, LAAD has witnessed this trend firsthand as it has been developing over the past years. We have also seen that during 2016, Latin American agribusiness faced challenges from unfavorable weather that affected Brazil, Colombia and Central America. Aggravating this situation, several important commodities, such as soybeans and corn, faced severe price drops that affected producers in Brazil, Argentina, Paraguay and Uruguay.

This series of external factors have forced producers to strengthen their productive units via consolidation and vertical integration, trends that are expected to increase in the future as efficiency and lower production costs become necessities in order to succeed. In addition to this, LAAD has seen a trend among producers to innovate through new and improved plant varieties and even diversification into “new” fruits that have come into high demand. Farmers also continue to invest in improved irrigation and weather mitigation systems and the adoption of new technologies in greenhouse infrastructure, smart irrigation systems, and precision agriculture. They are also investing in new fruit and vegetable varieties, which are developing at a faster pace than in the past. These new technologies are helping farmers achieve greater yields and higher-quality crops, while new varieties are enabling them to enter key markets such as Japan, Korea, China, the United States and the European Union. LAAD has partnered with clients to develop several innovative projects throughout Latin America and some of the most noteworthy cases are highlighted in the following paragraphs.

In Chile, LAAD granted a US$1.8 million loan to Frutícola Montegiallo to establish a Jintao kiwifruit vineyard in the Curico Valley, 200 km south of the city of Santiago. The project is led by Mr. Christian Abud, a prestigious Chilean kiwifruit producer and the vineyard results have been published and shared with the local kiwifruit industry. The Jintao is a yellow-fleshed kiwifruit variety that is in great demand by the Asian markets. Thus, the Montegiallo project is pioneering the effort to renew Chile’s old green-fleshed kiwifruit vineyards with higher-priced yellow varieties. The project was carried out with innovative state–of-the-art technology, including a roof system in order to contend with unfavorable weather events and diseases, thus ensuring greater yields of high-quality fruit. The primary technology for the project was imported from Italy, improved in Chile, and is revitalizing the Chilean kiwifruit industry. Based on the favorable results obtained, this project has already had a great impact on the industry.

In the Dominican Republic, LAAD granted a US$3.5 million term loan to Dominican Tropical Fruits (DOT Fruits), SRL to complete the purchase of a 258-hectare mango farm. Dot Fruits is a Dominican company established in 2006 and with this acquisition has positioned itself as the Dominican Republic’s largest mango exporter, holding almost 80% of total export values. Dot Fruits exports its own production as well as fruit purchased from over 40 out-growers. Under this system, Dot Fruits has created over 200 direct jobs and almost 500 indirect jobs, significantly helping the country’s southern region.

Agricolombia is a Colombian palm oil company located in the Municipality of San Pablo, 300 kilometers northeast of Bogota. The company was granted a US$2.0 million working capital loan from LAAD that was used for working capital. San Pablo was a dangerous area in the nineties, with great insecurity and violence.   Agricolombia has been working in this region for the past 10 years and currently owns 1,255 hectares of plantations. The company generates over 160 permanent jobs, hiring most of its employees from vulnerable communities that previously had few employment opportunities. Thanks to the investments and operations of companies like Agricolombia, the San Pablo municipality has become very dynamic and focused on the sustainable economic and social development of its rural communities. The palm oil industry has generated permanent employment, brought in foreign currency with its exports and concurrently is friendly to the environment by preserving groundcover and protecting water resources. 

In Costa Rica, your Company expanded its support to Agroindustrial Las Mellizas, S.A., a fourth-generation coffee production/export company located in Sabalito de Coto Brus, Puntarenas, close to the Panamanian border. This region’s primary economic activity is agriculture, with ideal conditions for the cultivation of strictly hard bean coffee. Tourism is still negligible in the area and thus, Agroindustrial Las Mellizas’ 690-ha coffee farm is one of the greatest employers for local communities. With LAAD’s support, the company purchased a state-of-the-art full color optical sorter that incorporates advanced digital image processing software and automatic image adjustment functions. This enables Las Mellizas to not only improve its quality assurance program but also reduce rejection volumes by 10% to 15%.

LAAD’s Mexican office continues to support the expansion of the berry fruit industry. The healthy lifestyle trend in global markets is fueling demand for various berry fruits (such as blueberries, raspberries, strawberries and blackberries) that are recognized for their antioxidant benefits. From 2009 to 2015, the country’s berry production area had almost doubled from 22,000 to 42,000 hectares. The social impact of this growth is very significant in terms of employment generation, which helps reduce rural migration to urban areas. LAAD has financed a variety of berry projects, ranging from Greenfield projects to plantation expansion investments. Even clients that have been successful producing other fruits and/or vegetables are now entering the berry business for diversification. This is the case of Hassiba, S.A. de C.V., managed by Mr. Erick Ibañez. He is a large avocado grower who was granted a US$2.0 million loan to develop a 20-hectare blueberry plantation. Another example is Grupo Industrial Anguiano, S.A. de C.V. operated by Mr. Oscar Anguiano and his sons. They own 7 hectares of greenhouses to produce bell peppers and, with the support of LAAD, have established 5 and 25 hectares, respectively, of raspberry and blueberry plantations.

Throughout the years, LAAD has encountered two groups of farmers: those with a negative outlook on the future, who reject innovation and hang on to tried-and-true methods of the past, and those that see a bright future for agriculture, trying to innovate and incorporate as much new technology as possible. LAAD’s portfolio is made up of those forward-looking farmers who are driving the progress of Latin American agriculture. Within your Company, we combine both outlooks, being deeply rooted in our traditions and culture, but trying every year to implement new technologies that enable the Bank to reach greater heights and have an increased positive impact on the projects it finances. These efforts are reflected in LAAD’s 2016 results.

Despite the previously-mentioned external difficulties, LAAD surpassed the operating and financial results of 2015, establishing new records in several indicators. Disbursements for 2016 reached US$236.1 million, a 22% increase over 2015. These funds were granted to 266 projects in 15 countries and have driven our agribusiness portfolio to US$667 million, a 15.6% increase over 2015 and an all-time record. At this rate, LAAD is well on its way to achieve the target portfolio of US$1.0 billion by 2020.

With disbursements of US$36.3 million, Nicaragua broke through to become LAAD’s largest market. The 37 loans granted in Nicaragua were involved in coffee, cattle and peanuts. For the first time since initiating activities in the country, Brazil dropped to LAAD’s second-largest disbursement market with US$ 32.8 million granted to 29 loans. Ecuador continued to contribute significantly to LAAD’s portfolio growth with US$28.3 million granted to 31 clients. After several years of relatively slow growth, Chile became LAAD’s fourth largest market in 2016 with US$20.9 million granted to 32 projects. LAAD granted loans for almost $19.8 million in Costa Rica and US$18.4 in Mexico. These countries were followed by Peru (US$17.1 million), Guatemala (US$17.0 million), Colombia (US$13.2 million), the Dominican Republic (US$12.4 million) and Paraguay (US$11.9 million). Our cumulative financing over 46 years has risen to US$2.08 billion granted to 4,146 agribusiness projects in 28 countries.

Even under “normal” market conditions, LAAD’s 2016 operational results would be considered excellent. Given the hardships of the year, they should be qualified as outstanding. LAAD’s net income in 2016 reached US$19.5 million, an 11% increase over 2015. These earnings yield a 12.8% return on average net worth, slightly below the 12.9% achieved the previous year.

At 3.2:1, LAAD’s financial leverage continues to be extremely low for the industry. Write-offs for the year reached 0.38% of the agribusiness portfolio, slightly above the 0.35% of 2015 but still a measure of our loan portfolio quality. Over the years, LAAD’s write-off history has proven that it is possible to effectively finance agriculture as long as you thoroughly understand the business.

LAAD’s management continues to focus on developmental impact as its primary concern when analyzing new loan requests. However, we consider profitability is the most pragmatic measure of our operational effectiveness. This measure has continued to improve and in 2016 paid a dividend of US$9,190 per share, a 10.5% increase over the prior year and a record high. This dividend represented 25% of our net earnings.

This past year was one during which we feel a special recognition to our clients is necessary. Their hard work, positivity and tenacity have been an inspiration to all of us at LAAD and something we have tried to emulate. It has been an honor for us to stand with them and face the challenges of the year. In a similar manner, LAAD’s Board of Directors gave us the support and guidance we needed to hold the line and reach the excellent results achieved. Team effort is frequently touted at many companies, but we feel LAAD could compete favorably with any company on this measure. The commitment and dedication of LAAD’s staff make LAAD not only a highly effective company, but also a second home for all who work here.

Even though the IMF recently lowered the growth forecast for Latin America to 1.2% in 2017, we are confident that LAAD and its clients will continue to succeed in 2017, doing our part to increase Latin America’s agricultural production and contributing to feed the world’s growing population.

Finally, a significant milestone was reached toward the end of 2016, as LAAD carried out the transition of the Chief Executive Officer position from Mr. Benjamin Fernandez III to Mr. Gustavo Martinez, who started with LAAD in 1998 as a financial analyst, was later promoted to Regional Vice President, and then to Chief Financial Officer in 2009. This process was implemented after a four-year selection and training process in which LAAD’s Board of Directors and Senior Management participated actively. At the same time, Mr. Rafael Cestti was promoted to Chief Financial Officer and, together with Mr. Oscar Luzuriaga, they are the new members of LAAD’s Management Board. All parties should feel proud of this smooth transition during which LAAD never lost its “heading” toward continued growth and greater achievements in the future.

Ben Fernandez III

Benjamín Fernández III