20-F 1 t1601026_20f.htm FORM 20-F

 

 

 

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  
þ ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED ON DECEMBER 31, 2015
  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)

Vertigo Naos Building, 6, Rue Eugène Ruppert,

L - 2453 Luxembourg

Tel: +352.2644.9372

(Address of principal executive offices)

Abdelhakim Chagaar

Vertigo Naos Building, 6, Rue Eugène Ruppert,

L - 2453 Luxembourg

Email: abdelhakim.chagaar@intertrustgroup.com

Tel: +352.2644.9372

(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, 2015:

121,092,012 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 þ No ¨

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 þ

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 þ 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 ¨

 

(*) This requirement does not apply to the registrant in respect of this filing.

 

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 þ Accelerated filer ¨ Non-accelerated filer ¨

 

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 þ 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 þ

 

 

 

 

 

 

TABLE OF CONTENTS

 

FORWARD-LOOKING STATEMENTS iv
   
PRESENTATION OF FINANCIAL AND OTHER INFORMATION v
   
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 9
  C. REASONS FOR THE OFFER AND USE OF PROCEEDS 9
  D. RISK FACTORS 9
       
Item 4. Information on the Company 42
  A. HISTORY AND DEVELOPMENT OF THE COMPANY 42
  B. BUSINESS OVERVIEW 46
  C. ORGANIZATIONAL STRUCTURE 86
  D. PROPERTY, PLANTS AND EQUIPMENT 86
       
Item 4B. Unresolved Staff Comments 86
       
Item 5. Operating and Financial Review and Prospects 87
  A. OPERATING RESULTS 88
  B. LIQUIDITY AND CAPITAL RESOURCES 118
  C. RESEARCH AND DEVELOPMENT, PATENTS AND LICENSES, ETC. 123
  D. TREND INFORMATION 123
  E. OFF-BALANCE SHEET ARRANGEMENTS 124
  F. TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS 124
  G. SAFE HARBOR 124
       
Item 6. Directors, Senior Management and Employees 124
  A. DIRECTORS AND SENIOR MANAGEMENT (traer de Annual Report) 124
  B. COMPENSATION 128
  C. BOARD PRACTICES 129
  D. EMPLOYEES 131
  E. SHARE OWNERSHIP 132
       
Item 7. Major Shareholders and Related Party Transactions 135
  A. MAJOR SHAREHOLDERS 135
  B. RELATED PARTY TRANSACTIONS 136
  C. INTERESTS OF EXPERTS AND COUNSEL 137

 

 i

 

 

Item 8. Financial Information 138
  A. CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION 138
  B. SIGNIFICANT CHANGES 139
       
Item 9. The Offer and Listing 139
  A. OFFER AND LISTING DETAILS 139
  B. PLAN OF DISTRIBUTION 140
  C. MARKETS 140
  D. SELLING SHAREHOLDERS 140
  E. DILUTION 140
  F. EXPENSES OF THE ISSUE 140
       
Item 10. Additional Information 140
  A. SHARE CAPITAL 140
  B. MEMORANDUM AND ARTICLES OF ASSOCIATION 140
  C. MATERIAL CONTRACTS 149
  D. EXCHANGE CONTROLS 149
  E. TAXATION 152
  F. DIVIDENDS AND PAYING AGENTS 157
  G. STATEMENT BY EXPERTS 157
  H. DOCUMENTS ON DISPLAY 158
  I. SUBSIDIARY INFORMATION 158
       
Item 11. Quantitative and Qualitative Disclosures About Market Risk 158
     
Item 12. Description of Securities Other than Equity Securities 158
  A. DEBT SECURITIES 158
  B. WARRANTS AND RIGHTS 158
  C. OTHER SECURITIES 158
  D. AMERICAN DEPOSITORY SHARES 158
     
PART II   158
   
Item 13. Defaults, Dividend Arrearages and Delinquencies 158
     
Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds 158
     
Item 15. Controls and Procedures 159
     
Item 16.   160
Item 16A. Audit Committee Financial Expert 160
Item 16B. Code of Ethics 160
Item 16C. Principal Accountant Fees and Services 160
Item 16D. Exemptions from the Listing Standards for Audit Committees 161
Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers 161
Item 16F. Change in Registrant’s Certifying Accountant 161
Item 16G. Corporate Governance 162

 

 ii

 

 

Item 16H. Mine Safety Disclosure 164
     
PART III   164
     
Item 17. Financial Statements 164
     
Item 18. Financial Statements 164
     
Item 19. Exhibits 164

 

 iii

 

 

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;

 

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;

 

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, including, 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.

 

 iv

 

 

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.

 

References to “IFH” and “IFH LP” mean the former International Farmland Holdings, LP, a limited partnership (previously IFH LP and International Farmland Holdings, LLC, or IFH LLC).

 

References to “Adecoagro LP” mean Adecoagro, LP SCS, a limited partnership organized under the form of a société comandite simple under the laws of the Grand Duchy of Luxembourg (previously Adecoagro LP (Delaware) and Adecoagro, LLC).

 

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 consolidated sales of manufactured products and services rendered plus sales of agricultural produce and biological assets.

 

References to “IFRS” are International Financial Reporting Standards issued by the International Accounting Standards Board (“IASB”) and the interpretations of the International Financial Reporting Interpretations Committee (“IFRIC”), together “IFRS.”

 

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 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 on the Company—A. History and Development of the Company—History.”

 

During 2011, we contributed the net proceeds of the IPO to increase our interest in IFH from 98% to 98.64%. During 2012, we issued, in a series of transactions, 1,654,752 shares to certain limited partners of IFH in exchange for their residual interest in IFH, totaling 1.3595%, thereby increasing our interest in IFH to approximately 100%.

 

On March 27, 2015, Adecoagro commenced a series of transactions for the purpose of transfering the domicile of Adecoagro LP to Luxembourg. In connection with the Adecoagro LP redomiciliation, Adecoagro merged IFH LP into Adecoagro LP (Delaware) being Adecoagro LP (Delaware) the surviving entity and Adecoagro GP S.a.r.l., a societe responsibilitie limitee organized under the laws of Luxembourg, the general partner of Adecoagro LP (Delaware) on April 1, 2015. Also on April 1, 2015, Adecoagro completed the redomiciliation of Adecoagro LP (Delaware) out of Delaware to Luxembourg and Adecoagro LP (Delaware), without dissolution or liquidation, continued its corporate existence as Adecoagro LP S.C.S., a societe en commandite simple organized under Luxembourg law, effective April 2, 2015. For a detailed description of the Adecoagro LP redomiciliation please see “Item 4. Information on the Company—A. History and Development of the Company—History.

 

 v

 

 

The consolidated financial statements as of December 31, 2015 and 2014, and for the years then ended (hereinafter, the “Consolidated Financial Statements”) included in this annual report have been prepared in accordance with IFRS. All IFRS effective at the time of preparing the consolidated financial statements have been applied.

 

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 EBITDA for each of our operating segments. We define “Adjusted Consolidated EBITDA” as (i) consolidated net profit (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; and (ii) adjusted by profit or loss from discontinued operations; and (iii) by gains or losses from disposals of non-controlling interests in subsidiaries whose main underlying asset is farmland which are reflected in our Shareholders Equity under the line item ”Reserve from the sale of non-controlling interests in subsidiaries.” We define “Adjusted Segment EBITDA” for each of our operating segments as (i) the segment’s share of consolidated profit (loss) 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; and (ii) adjusted by profit or loss from discontinued operations; and adjusted by gains or losses from disposals of non-controlling interests in subsidiaries whose main underlying asset is farmland, which are reflected in our Shareholders Equity under the line item: “Reserve from the sale of non-controlling interests in subsidiaries.” 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 under IAS 41 accounting), foreign exchange gains or losses and other financial expenses. In addition, by including the gains or losses from disposals of non-controlling interests in subsidiaries whose main underlying asset is farmland, investors can also evaluate the full value and returns generated by our land transformation activities. Other companies may calculate Adjusted Consolidated EBITDA and Adjusted Segment EBITDA differently, and therefore our Adjusted Consolidated EBITDA and 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.

 

 vi

 

 

Our Adjusted Consolidated EBIT equals the sum of our Adjusted Segment EBITs for each of our operating segments. We define “Adjusted Consolidated EBIT” as (i) consolidated net profit (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; and (ii) adjusted by profit or loss from discontinued operations; and adjusted by gains or losses from disposals of non controlling interests in subsidiaries whose main underlying asset farmland. We define “Adjusted Segment EBIT” for each of our operating segments as the segment’s share of (i) consolidated profit (loss) from operations before financing and taxation for the year, as applicable, before unrealized changes in fair value of our long-term biological assets; and (ii) adjusted by profit or loss from discontinued operations; and (iii) adjusted by gains or losses from disposals of non-controlling interests in subsidiaries whose main underlying asset is farmland, which are reflected in our Shareholders Equity under the line item: “Reserve from the sale of non-controlling interests in subsidiaries.” 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 under IAS 41 accounting), foreign exchange gains or losses and other financial expenses. In addition, by including the gains or losses from disposals of non-controlling interests in subsidiaries whose main underlying asset is farmland, investors can evaluate the full value and returns generated by our land transformation activities. 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 and rice. A harvest year varies according to the crop or rice and to the climate in which it is grown. Due to the geographic diversity of our farms, the planting period for a given crop or rice 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 and rice, starts with the first day of the planting period at the first farm to start planting on that harvest year and continues to the last day of the harvesting period of the respective crop or rice on the last farm to finish harvesting that harvest year, as shown in the table below.

 

 

 

 vii

 

 

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
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    

 

 viii

 

 

Presentation of Information — Market Data and Forecasts

 

This annual report includes 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.

 

 ix

 

 

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 data, insofar as it relates to each of the years 2011-2015, has been derived from our annual consolidated financial statements, including the consolidated statements of financial position at December 31, 2015 and 2014 and the related consolidated statements of income, comprehensive income and cash flows for each of the three years in the period ended December 31, 2015, and the notes thereto included elsewhere in this annual report (the “Consolidated Financial Statements”).

 

The financial statements are prepared in accordance with IFRS. All IFRS effective at the time of preparing the Consolidated Financial Statements have been applied.

 

You should read the information contained in the following 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.

 

 1 

 

 

   As of December, 
   2015   2014   2013   2012   2011 
   (In thousands of $) 
Statement of Income Data:                         
Sales of manufactured products and services rendered   490,619    513,127    425,307    379,526    365,857 
Cost of manufactured products sold and services rendered   (321,998)   (335,442)   (272,261)   (263,978)   (237,404)
Gross profit from manufacturing activities   168,621    177,685    153,046    115,548    128,453 
Sale of agricultural produce and biological assets   183,695    209,839    219,317    225,174    182,227 
Cost of agricultural produce sold and direct agricultural selling expenses (l)   (183,695)   (209,839)   (219,317)   (225,174)   (182,227)
Initial recognition and changes in fair value of biological assets and agricultural produce   36,869    27,145    (39,123)   16,643    86,811 
Changes in net realizable value of agricultural produce after harvest   14,691    3,401    12,875    16,004    10,523 
Gross profit/(loss) from agricultural activities   51,560    30,546    (26,248)   32,647    97,334 
Margin on manufacturing and agricultural activities before operating expenses   220,181    208,231    126,798    148,195    225,787 
General and administrative expenses   (48,425)   (52,695)   (53,352)   (57,691)   (65,142)
Selling expenses   (70,268)   (78,864)   (68,069)   (58,602)   (59,404)
Other operating income, net   31,066    11,977    49,650    31,097    24,581 
Share of loss of joint ventures   (2,685)   (924)   (219)   -    - 
Profit from operations before financing and taxation   129,869    87,725    54,808    62,999    125,822 
Finance income   9,150    7,291    7,234    11,538    9,132 
Finance costs   (116,890)   (86,472)   (98,916)   (66,654)   (62,341)
Financial results, net   (107,740)   (79,181)   (91,682)   (55,116)   (53,209)
Profit / (Loss) before income tax   22,129    8,544    (36,874)   7,883    72,613 
Income tax (expense) / benefit   (3,754)   (6,106)   9,277    5,436    (14,662)
Profit / (Loss) for the year from continuing operations   18,375    2,438    (27,597)   13,319    57,951 
Profit / (Loss) for the year from discontinued operations (2)   -    -    1,767    (4,040)   (1,034)
Profit / (Loss) for the year   18,375    2,438    (25,830)   9,279    56,917 
                          
Attributable to:
Equity holders of the parent
   17,133    2,518    (25,828)   9,397    56,018 
Non-controlling interest   1,242    (80)   (2)   (118)   899 
Earnings/(Loss) per share from continuing and discontinued operations attributable to the equity holders of the parent during the year:                         
Basic earnings/(loss) per share                         
From continuing operations   0.142    0.021    (0.226)   0.111    0.488 
From discontinued operations   -    -    0.014    0.034    (0.009)
Diluted earnings/(loss) per share                         
From continuing operations   0.140    0.021    (0.226)   0.111    0.488 
From discontinued operations   -    -    0.014    0.034    (0.009)

 

(1)Consists of two components: (i) the cost of our agricultural produce and/or biological assets sold as the case may be 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)Our joint venture (equity method) investment in La Lacteo, was disposed on June 2013 and it was reflected as Discontinued operations.

 

 2 

 

 

   For the Year Ended December 31, 
   2015   2014    2013    2012    2011 
Cash Flow Data:                         
Net cash generated from operating activities   153,914    133,133    102,080    67,823    56,586 
Net cash used in investing activities   (133,779)   (313,454)   (161,536)   (300,215)   (140,493)
Net cash generated from financing activities   92,413    73,289    104,671    133,508    360,792 
Other Financial Data:                         
Adjusted Segment EBITDA (unaudited)(1)                         
Crops   33,211    36,671    36,720    34,313    42,563 
Rice   6,274    14,198    12,902    4,943    6,652 
Dairy   6,356    8,536    9,801    (2,402)   3,426 
All Other segments   461    333    1,347    4,280    5,971 
Farming subtotal   46,302    59,738    60,770    41,134    58,612 
Ethanol, sugar and energy   154,565    153,532    115,239    97,505    109,507 
Land transformation   23,980    25,508    28,172    27,513    8,832 
Corporate   (21,776)   (23,233)   (23,478)   (25,442)   (26,885)
Adjusted Consolidated EBITDA (unaudited)(1)   203,071    215,545    180,703    140,710    150,066 

 

____________

 

(1)See “Presentation of Financial and Other Information” for the definitions of Adjusted Segment EBITDA and Adjusted Consolidated EBITDA and the reconciliation in the table below.

 

   As of December 31, 
   2015   2014   2013   2012   2011 
   (In thousands of $) 
Statement of Financial Position Data:                         
Biological assets   299,270    341,232    292,144    298,136    239,600 
Inventories   77,703    104,919    108,389    95,321    96,147 
Property, plant and equipment, net   540,218    776,905    790,520    880,897    759,696 
Total assets   1,370,705    1,639,322    1,711,476    1,777,955    1,700,695 
Non-current borrowings   483,651    491,324    512,164    354,249    203,409 
Total borrowings   723,339    698,506    660,131    539,133    360,705 
Share Capital   183,573    183,573    183,573    183,331    180,800 
Equity attributable to equity holders of the parent   535,395    762,796    854,304    1,025,978    1,079,876 
Non-controlling interest   7,335    7,589    45    65    14,993 
Number of shares   122,382    122,382    122,382    122,221    120,533 
                          

 

 3 

 

 

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

 

   As of December 31, 2015 
   Crops   Rice   Dairy   All other
segments
   Farming
Subtotal
   Sugar,
Ethanol
and
Energy
   Land
Trans-
formation
   Corporate   Total 
   (In thousands of $) 
Adjusted Segment EBITDA (unaudited)                                             

Profit/(Loss) from

                                             
Operations Before Financing and Taxation   30,784    3,287    4,900    1,717    40,688    103,043    7,914    (21,776)   129,869 
Profit from discontinued operations   -    -    -    -    -    -    -    -    - 
Initial recognition and changes in fair value of “long term” biological assets (l) (unrealized)   -    -    -    (1,532)   (1,532)   (12,599)   -    -    (14,131)
Adjusted Segment EBIT (unaudited)(2)   30,784    3,287    4,900    185    39,156    90,444    7,914    (21,776)   115,738 
Depreciation and amortization   2,427    2,987    1,456    276    7,146    64,121    -    -    71.267 
Reserve from the sale of non-controlling interests in subsidiaries (3)   -    -    -    -    -    -    16,066    -    16,066 
Adjusted Segment EBITDA (unaudited)(2)   33,211    6,274    6,356    461    46,302    154,565    23,980    (21,776)   203,071 
Reconciliation to Profit                                             

Profit for the year

                                           18,375 
Initial recognition and changes in fair value of “long term” biological assets(l) (unrealized)                                           (14,131)
Income tax expense                                           3,754 
Interest expense, net                                           49,491 
Foreign exchange, net                                           23,423 
Other financial results, net                                           34,826 
Reserve from the sale of non-controlling interests in subsidiaries (3)                                           16,066 
Adjusted Consolidated EBIT (unaudited)(2)                                           131,804 
Depreciation and amortization                                           71.267 
Adjusted Consolidated EBITDA (unaudited)(2)                                           203,071 

 

(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.

 

(3)This corresponds to an equity line item in our balance sheet. See “Presentation of Financial and Other Information” for the definitions of Adjusted Segment EBIT, Adjusted Consolidated EBIT, Adjusted Segment EBITDA and Adjusted Consolidated EBITDA.

 

 4 

 

 

   As of December 31, 2014 
   Crops   Rice   Dairy   All other
segments
   Farming
Subtotal
   Sugar,
Ethanol
and
Energy
   Land
Trans-
formation
   Corporate   Total 
   (In thousands of $) 
Adjusted Segment EBITDA (unaudited)                                             

Profit/(Loss) from

                                             
Operations Before Financing and Taxation   34,745    10,937    8,112    477    54,271    56,687    -    (23,233)   87,725 
Profit from discontinued operations   -    -    -    -    -    -    -    -    - 
Initial recognition and changes in fair value of “long term” biological assets(l) (unrealized)   -    -    (1,127)   (542)   (1,669)   14,325    -    -    12,656 
Adjusted Segment EBIT (unaudited)(2)   34,745    10,937    6,985    -65    52,602    71,012    -    -23,233    100,381 
Depreciation and amortization   1,926    3,261    1,551    398    7,136    82,520    -    -    89,656 
Reserve from the sale of non-controlling interests in subsidiaries (3)   -    -    -    -    -    -    25,508    -    25,508 
Adjusted Segment EBITDA (unaudited)(2)   36,671    14,198    8,536    333    59,738    153,532    25,508    (23,233)   215,545 
Reconciliation to Profit                                             

Profit for the year

                                           2,438 
Initial recognition and changes in fair value of “long term” biological assets(l) (unrealized)                                           12,656 
Income tax expense                                           6,106 
Interest expense, net                                           47,847 
Foreign exchange, net                                           9,246 
Other financial results, net                                           22,088 
Reserve from the sale of non-controlling interests in subsidiaries (3)                                           25,508 
Adjusted Consolidated EBIT (unaudited)(2)                                           125,889 
Depreciation and amortization                                           89,656 
Adjusted Consolidated EBITDA (unaudited)(2)                                           215,545 

 

(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.

 

(3)This corresponds to an equity line item in our balance sheet. See “Presentation of Financial and Other Information” for the definitions of Adjusted Segment EBIT, Adjusted Consolidated EBIT, Adjusted Segment EBITDA and Adjusted Consolidated EBITDA.

 

 5 

 

 

   As of December 31, 2013 
   Crops   Rice   Dairy   All other
segment
   Farming
Subtotal
   Sugar,
Ethanol
and
Energy
   Land
Trans-
formation
   Corporate   Total 
   (In thousands of $) 
Adjusted Segment EBITDA (unaudited)                                             

Profit/(Loss) from

                                             
Operations Before Financing and Taxation   34,549    8,171    6,714    (7,238)   42,196    7,918    28,172    (23,478)   54,808 
Profit from discontinued operations   -    -    1,767    -    1,767    -    -    -    1,767 
Initial recognition and changes in fair value of “long term” biological assets(l) (unrealized)   -    -    234    8,121    8,355    47,341    -    -    55,696 
Adjusted Segment EBIT (unaudited)(2)   34,549    8,171    8,715    883    52,318    55,259    28,172    (23,478)   112,271 
Depreciation and amortization   2,171    4,731    1,086    464    8,452    59,980    -    -    68,432 
Adjusted Segment EBITDA (unaudited)(2)   36,720    12,902    9,801    1,347    60,770    115,239    28,172    (23,478)   180,703 
Reconciliation to Profit                                             

Loss for the year

                                           

(25,830

)
Initial recognition and changes in fair value of “long term” biological assets(l) (unrealized)                                           55,696 
Income tax benefit                                           (9,277)
Interest expense, net                                           42,367 
Foreign exchange, net                                           21,087 
Other financial results, net                                           28,228 
Adjusted Consolidated EBIT (unaudited)(2)                                           112,271 
Depreciation and amortization                                           68,432 
Adjusted Consolidated EBITDA (unaudited)(2)                                           180,703 

 

(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.

 

 6 

 

 

   As of December 31, 2012 
   Crops   Rice   Dairy   All other
segments
   Farming
Subtotal
   Sugar,
Ethanol
and
Energy
   Land
Trans-
formation
   Corporate   Total 
   (In thousands of $) 
Adjusted Segment EBITDA (unaudited)                                             

Profit/(Loss) from

                                             
Operations Before Financing and Taxation   32,240    1,120    857    889    35,106    25,822    27,513    (25,442)   62,999 
Loss from discontinued operations   -    -    (4,040)   -    (4,040)   -    -    -    (4,040)
Initial recognition and changes in fair value of “long term” biological assets(l) (unrealized)   -    -    (115)   2,615    2,500    24,783    -    -    27,283 
Adjusted Segment EBIT (unaudited)(2)   32,240    1,120    (3,298)   3,504    33,566    50,605    27,513    (25,442)   86,242 
Depreciation and amortization   2,073    3,823    896    776    7,568    46,900              54,468 
Adjusted Segment EBITDA (unaudited)(2)   34,313    4,943    (2,402)   4,280    41,134    97,505    27,513    (25,442)   140,710 
Reconciliation to Profit                                             

Profit for the year

                                           9,279 
Initial recognition and changes in fair value of “long term” biological assets(l) (unrealized)                                           27,283 
Income tax benefit                                           (5,436)
Interest expense, net                                           16,423 
Foreign exchange losses, net                                           26,080 
Other financial results, net                                           12,613 
Adjusted Consolidated EBIT (unaudited)(2)                                           86,242 
Depreciation and amortization                                           54,468 
Adjusted Consolidated EBITDA (unaudited)(2)                                           140,710 

 

(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.

 

 7 

 

 

   As of December 31, 2011 
   Crops   Rice   Dairy   All other
segments
   Farming
Subtotal
   Sugar,
Ethanol
and
Energy
   Land
Trans-
formation
   Corporate   Total 
   (In thousands of $) 
Adjusted Segment EBITDA (unaudited)                                             

Profit/(Loss) from

                                             
Operations Before Financing and Taxation   41,094    3,547    5,363    3,821    53,825    90,050    8,832    (26,885)   125,822 
Loss from discontinued operations           (1,034)       (1,034)               (1,034)
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    2,826    5,215    52,682    81,253    8,832    (26,885)   115,882 
Depreciation and amortization   1,469    3,105    600    756    5,930    28,254            34,184 
Adjusted Segment EBITDA (unaudited)(2)   42,563    6,652    3,426    5,971    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                                           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 

 

(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.

 

 8 

 

 

B.CAPITALIZATION AND INDEBTEDNESS

 

Not Applicable.

 

C.REASONS FOR THE OFFER AND USE OF PROCEEDS

 

Not Applicable.

 

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 and uncertainties not presently known to us or that we currently deem immaterial may also affect our business operations.

 

Risks Related to Our Business and Industries

 

Unpredictable weather conditions, pest infestations and diseases may have an adverse impact on agricultural production.

 

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 pest and insects that may adversely impact our agricultural production.

 

We experienced drought conditions during the first half of 2013 in the countries where we operate, which resulted in a reduction of approximately 21% to 31% in our yields for the 2012/2013 harvest, for corn and soybean, compared with our historical averages. The actual yields following the drought generated a decrease in Initial Recognition and Changes in Fair Value of Biological Assets and Agricultural Produce in respect of corn, soybean and the remaining crops of $5.9 million, $16.6 million and $2.7 million, respectively, for the year ended December 31, 2013. See “Item 5.—Operating and Financial Review and Prospects—Trends and Factors Affecting Our Results of Operations—(i) Effects of Yield Fluctuations”.

 

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 and ethanol we can produce in any given harvest. Any reduction in production volumes 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.

 

 9 

 

 

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, and grains, like those of other commodities, have historically been cyclical and sensitive to domestic and international changes in 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.

 

Further, because we may not hedge 100% of the price risk of our agricultural products, we may be 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, 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, resulting in a correlation between Brazilian ethanol prices and world sugar prices. Accordingly, a decline in sugar prices would have an adverse effect on the financial performance of our ethanol and sugar businesses.

 

Currently, gasoline prices in Brazil are set by the Brazilian government through Petrobras. 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. Therefore, a decline in oil prices or a decision by Petrobras to lower gasoline prices would have an adverse effect on the financial performance of our ethanol and sugar business.

 

 10 

 

 

 

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 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 the region 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.

 

We may be unable to realize synergies and efficiency gains from our recent acquisitions in the timeframe we anticipate or at all, because of integration or other challenges. In addition, we may be unable to identify, negotiate or finance future acquisitions, particularly as part of our international growth strategy, successfully or at favorable valuations, or to effectively integrate these acquisitions or joint venture businesses with our current businesses. Any future joint ventures or acquisitions of businesses, technologies, services or products might require us to obtain additional equity or debt financing, which may not be available on favorable terms, or at all. Future acquisitions and joint ventures may also results in unforeseen operating difficulties and expenditures, as well as strain on our organizational culture.

 

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 primarily 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. In our Farming business, fertilizers and agrochemicals constituted approximately 22% of our cost of production for the 2014/2015 harvest year. In our Sugar, Ethanol and Energy business, fertilizers and agrochemicals constituted 6% of our cost of production for 2015. On a consolidated basis, fertilizers and agrochemicals constituted approximately 13% of our cost of production for 2015. 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.

 

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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. During the 2014/15 harvest year, fuel constituted 10% of the cost of production of our Farming business. In our Sugar, Ethanol and Energy business, fuel constituted 11% of our cost of production for the 2015/16 harvest year. On a consolidated basis, fuel constitutes approximately 11% of our cost of production. 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. Also, the newly elected government in Argentina has declared a state of emergency with respect to the national energy system until December 31, 2017. The state of emergency will allow the newly elected government to take any action to ensure a supply of energy. A revision to the current subsidy policies has also been announced by the newly elected government. 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. The European Union limits the import of genetically modified organisms, or “GMOs.” See “Some of the agricultural commodities and food products that we produce contain genetically modified organisms.”

 

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.

 

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.

 

A worldwide economic downturn could weaken demand for our products or lower prices.

 

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 goods and services and financial losses.

 

Our business is seasonal, and our results 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. Cotton is harvested from June to August, but requires processing which takes approximately two to three months. Our operations and sales are affected by the growing cycle of our crops 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 March/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.

 

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Our dairy cattle are vulnerable to diseases.

 

Diseases among our dairy 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 will not occur. A future outbreak of diseases among our cattle herds could adversely affect our milk sales and operating results and financial condition.

 

Furthermore, outbreaks, or fears of outbreaks, of any of these or other animal diseases may lead to cancellation of orders by our customers and, particularly if the disease has the potential to affect humans, or create adverse publicity that may have a material adverse effect on consumer demand for our products. Moreover, outbreaks of animal disease may result in foreign governmental action to close export markets to some or all of our products, which may result in the destruction of some or all of these animals.

 

We face significant competition from Brazilian and foreign producers, which could adversely affect our financial performance.

 

We face strong competition from other producers in our domestic market and from foreign producers in our export markets. The market for commodities is highly fragmented. Small producers can also be important competitors, some of which operate in the informal economy and are able to offer lower prices by meeting lower quality standards. Competition from other producers is a barrier to expanding our sales in the domestic/foreign market. With respect to exports, we compete with other large, vertically integrated producers that have the ability to produce quality products at low cost, as well as with foreign producers.

 

In addition, the potential growth of the Brazilian market for agricultural commodities and Brazil’s low production costs are attractive to international competitors. Although the main barrier to these companies has been the need to build a comprehensive distribution network and a network of outgrowers, international competitors with significant resources could undertake to build these networks or acquire and expand existing networks.

 

The Brazilian markets, in particular, are highly price-competitive and sensitive to product substitution. Even if we remain a low-cost producer, customers may seek to diversify their sources of supply by purchasing a portion of the products they need from producers in other countries, as some of our customers in key export markets have begun to do. We expect that we will continue to face strong competition in all of our markets and anticipate that existing or new competitors may broaden their product lines and extend their geographic scope. Any failure by us to respond to product, pricing and other moves by competitors may negatively affect our financial performance.

 

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.

 

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In addition, even where we incur losses that are ultimately covered by insurance, we may incur additional expenses to mitigate the loss, such as shifting production to another facility. These costs may not be fully covered by our insurance.

 

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. Commencing in March 2015, the Brazilian Government increased the required blend of anhydrous ethanol to gasoline from 25% to 27%. The increase in the ethanol blend rate is expected to create an additional demand for anhydrous ethanol in the order of approximately 800 thousand cubic meters of anhydrous per year.

 

Approximately 40% of all fuel ethanol in Brazil is consumed in the form of anhydrous ethanol blended with gasoline; the remaining 60% of fuel ethanol is consumed in the form of hydrous ethanol, which is mostly used to power flex-fuel vehicles. Flex-fuel vehicles have the flexibility to run either on gasoline (blended with anhydrous ethanol) or hydrous ethanol. In the United States, almost all gasoline sold contains 10% ethanol. The European Union aims for 10% of the energy used in the transport sector to derive from renewable energy sources by 2020, without specific targets for certain renewable energy sources and without intermediate targets, to be determined by each Member State. As an example, in Sweden the ethanol blending ratio is 5%, which is the same mandate for other non-European countries, such as Argentina, Canada and India. Other countries such as Colombia, South Africa, Thailand and China have a 10% biofuel blending mandate. In addition, flex-fuel vehicles in Brazil are entitled to a tax benefit in the form of a lower tax rate on manufactured products (Imposto sobre Produtos Industrializados) and therefore 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 change, 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 for ethanol production, storage and distribution, 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 to, for example, lower production costs, greater environmental benefits or other more favorable product characteristics. In addition, alternative fuels may also benefit from tax incentives or other more favorable governmental policies than those that apply to ethanol. Furthermore, our success depends on early identification of new developments relating to products and production methods and continuous improvement of 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.

 

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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 thirteen years, we have executed transactions for the purchase and disposition of land for over $688 million. Ownership 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 have entered into agriculture partnership agreements in respect of a significant portion of our sugarcane plantations.

 

As of December 31, 2015, approximately 93% of our sugarcane plantations were leased through agriculture partnership agreements, for periods of an average of six to twelve years. We cannot guarantee that these 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 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. 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 may not possess all of the permits and licenses required to operate our business, or we may fail to renew or maintain the licenses and permits we currently hold. This could subject us to fines and other penalties, which could materially adversely affect our results of operations.

 

We are required to hold a variety of permits and licenses to conduct our farming and industrial operations, including but not limited to permits and licenses concerning land development, agricultural and harvesting activities, seed production, labor standards, occupational health and safety, land use, water use and other matters. We may not possess all of the permits and licenses required for each of our business segments. In addition, the approvals, permits or licenses required by governmental agencies may change without substantial advance notice, and we could fail to obtain the approvals, permits or licenses required to expand our business. If we fail to obtain or to maintain such permits or licenses, or if renewals are granted with onerous conditions, we could be subject to fines and other penalties and be limited in the number or the quality of the products that we could offer. As a result, our business, results of operations and financial condition could be adversely affected.

 

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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 effects of our operations on the environment and to indemnify third parties for damages.

 

In addition, pursuant to Brazilian environmental legislation, the corporate entity of a company will be disregarded (such that the owners of the company will be liable for its debts) if necessary to guarantee the payment of costs related to the recovery of environmental damages, whenever the legal entity is deemed by a court to be an obstacle to reimbursement of damages caused to the quality of the environment. We have incurred, and will continue to incur, capital and operating expenditures to comply with these laws and regulations. Because of the possibility of unanticipated regulatory measures or other developments, particularly as environmental laws become more stringent, the amount and timing of future expenditures required to maintain compliance could increase from current levels and could adversely affect the availability of funds for capital expenditures and other purposes. Compliance with existing or new environmental laws and regulations, as well as obligations in agreements with public entities, could result in increased costs and expenses.

 

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 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 environmental authorities and the relevant 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. 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.

 

Increased regulation of food safety could increase our costs and adversely affect our results of operations.

 

Our manufacturing facilities and products are subject to regular local, as well as foreign, governmental inspections and extensive regulation in the food safety area, including governmental food processing controls. We currently comply with all food safety requirements in the markets where we conduct our business. We already incur significant costs in connection with such compliance and changes in government regulations relating to food safety could require us to make additional investments or incur additional costs to meet the necessary specifications for our products. Our products are often inspected by foreign food safety officials, and any failure to pass those inspections can result in our being required to return all or part of a shipment, destroy all or part of a shipment or incur costs because of delays in delivering products to our customers. Any tightening of food safety regulations could result in increased costs and could have an adverse effect on our business and results of operations.

 

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.

 

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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 the date of this annual report, our principal shareholders were the beneficial owners of approximately 37.4% of our total common shares outstanding. 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.

 

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

 

IAS 41 “Biological Assets” requires that we measure our biological assets and agriculture produce at the point of harvest at fair value less costs to sell. Therefore, we are required to 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, dairy and our all other segment) generated initial recognition and changes in fair value of biological assets amounting to a $22.4 million gain in 2015, $21.7 million loss in 2014 and a $71.8 million loss in 2013. The assumptions and estimates used to determine the fair value of biological assets, 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.

 

In June 2014, the IASB amended IAS 16 Property, Plant and Equipment and IAS 41 Agriculture. These amendments define a bearer plant and include bearer plants within the scope of IAS 16. Previously bearer plants were not defined, and bearer plants related to agricultural activity were included within the scope of IAS 41. The amendments are required to be applied for annual periods beginning on or after January 1, 2016, with earlier application permitted. The amendments to IAS 16 and IAS 41 impact accounting for our sugarcane operations and to a lesser extent our coffee plantations. As a result, we will reclassify our sugarcane and coffee plantations to property, plant and equipment, and measure them at amortized cost and depreciate them over their useful life, effective January 1, 2016 and we will restate the comparative figures accordingly. The produce derived from the sugarcane and coffee plantations are still deemed to be biological assets for purposes of IAS 41 and will continue to be measured at fair value less cost to sell. We will adopt the transitional rule in the amendment which allows companies to apply the fair value less costs to sell of bearer plants as their deemed cost at the beginning of the earliest period presented. Please see note 2.1(b) to our Consolidated Financial Statements as of and for the year ended December 31, 2015.

 

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, 2015, we had $723.3 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 flows from operations to be dedicated to the payment of principal and interest on indebtedness instead of funding working capital and capital improvements and other investments. The substantial amount of debt incurred by our subsidiaries also imposes significant debt obligations, increasing their cost of borrowing to satisfy business needs and limiting their ability to obtain additional financing.

 

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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. 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 the indebtedness of certain of our subsidiaries impose significant restrictions on their operating and financial flexibility.

 

The debt instruments of some of our subsidiaries contain customary covenants including limitations on their ability to, among other things, incur or guarantee additional indebtedness; make restricted payments, including dividends and prepaying indebtedness; create or permit liens; enter into business combinations and asset sale transactions; make investments, including capital expenditures; and enter into new businesses. Some of these debt instruments are also secured by various collateral including mortgages on farms, pledges of subsidiary stock and liens on certain facilities, equipment and accounts. Some 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. 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, this indebtedness places limits on our ability to make acquisitions or needed capital expenditures or to pay dividends to our shareholders.

 

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.

 

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.

 

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

 

As of December 31, 2015, approximately 31.4% of our total debt on a consolidated basis was subject to fixed interest rates and 68.6% was subject to variable interest rates. As of December 31, 2015, borrowings incurred by the Company’s subsidiaries in Brazil were repayable at various dates between January 2016 and April 2024 and bear either fixed interest rates ranging from 2.13% to 18.76% per annum or variable rates based on LIBOR or other specific base-rates plus spreads ranging from 4.81% to 17.79% per annum. At December 31, 2015, LIBOR (six months) was 0.85%. Borrowings incurred by the Company´s subsidiaries in Argentina are repayable at various dates between January 2016 and November 2019 and bear either fixed interest rates ranging from 0.10% and 7.00% 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 remains the same, and our net income could be adversely affected.

 

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” on our Form 20-F incorporated herein by reference.

 

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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 was a partnership for U.S. federal income tax purposes organized under the laws of Delaware, immediately prior to our IPO, in exchange for our common shares. 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 common shares by reason of the transfer of those trade or business assets (ignoring common shares 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 to holders of our common shares who are not United States persons within the meaning of U.S. Internal Revenue Code section 7701(a)(30). See “Item 10. Additional Information—E. Taxation” .

 

We may be classified by the Internal Revenue Service as a “passive foreign investment company” (a “PFIC”), which may result in adverse tax consequences for U.S. investors.

 

We believe that we will not be a PFIC for U.S. federal income tax purposes for our current taxable year and do not expect to become one in the foreseeable future. Whether the Company’s will be a PFIC for the current or future tax year will depend on the Company’s assets and income over the course of each such tax year and, as a result, cannot be predicted with certainty as of the date of this Form 20-F. Under circumstances where the cash is not deployed for active purposes, our risk of becoming a PFIC may increase. If we were treated as a PFIC for any taxable year during which a U.S. investor held common shares, certain adverse tax consequences could apply to such U.S. investor. A U.S. taxpayer who holds stock in a foreign corporation during any year in which such corporation qualifies as a PFIC may mitigate such negative tax consequences by making certain U.S. federal income tax elections, which are subject to numerous restrictions and limitations. Holders of the Company’s common shares are urged to consult their own tax advisors regarding the acquisition, ownership, and disposition of the Company’s common shares. See “Material U.S. Federal Income Tax Considerations for U.S. Holders—Passive Foreign Investment Company (“PFIC”) Rules”.

 

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, 2015, based on the net book value of our consolidated investment property and property, plant and equipment, approximately 21.1% of our assets were located in Argentina, 77.6% in Brazil and 1.3% in Uruguay. Adjusting our farmland book value by the market value derived from the Cushman and Wakefield independent farmland appraisal , the allocation would result in a 83.5% book value attributable to Argentina, a 14.5% book value attributable to Brazil and a 2.0% book value attributable to Uruguay. During the year ended December 31, 2015, 43.8% of our consolidated sales of manufactured products and services rendered and sales of agricultural produce and biological assets were attributable to our Brazilian operations, 24.7% were attributable to our Argentine operations and 31.5% were attributable to our Uruguayan operations. In the future we expect to 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.

 

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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.

 

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 and that of other countries in the region.

 

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;

 

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;

 

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expropriation or nationalization;

 

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

 

price controls or 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 currency translation adjustments required in connection with the preparation of our Consolidated Financial Statements. The currency exchange exposure stems from the generation of revenues and incurrence of 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.

 

The Argentine Peso depreciated 8.08% against the U.S. dollar in 2011, 14.31% in 2012, 32.64% in 2013, 29.84% in 2014 and 52.76% in 2015. During 2011 and through the end of 2015, the Argentine government imposed restrictions on the purchase of foreign currency (see “—Risks Related to Argentina—Exchange controls could restrict the inflow and outflow of funds in Argentina.”) which measures gave rise to an unofficial market where the U.S. dollar traded at a different market value than reflected in the official Argentine Peso – U.S. Dollar exchange rate. Following elections in Argentina in 2015, the newly elected government changed the currency policy and lifted almost all of the restrictions on the purchase of foreign currency while at the same time officially depreciating the Argentine Peso, practically eliminating the gap between the official and unofficial exchange rates that coexisted during the previous years. We cannot 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. Formally the value of the Real against foreign currencies is determined under a free-floating exchange rate regime, but in fact the Brazilian government is currently intervening in the market, through currency swaps and trading in the spot market, among other measures, every time the currency exchange rate is above or below the levels that the Brazilian government considers appropriate, taking into account, inflation, growth, the performance of the Real against the U.S dollar in comparison with other currencies and other economic factors. Periodically, there are significant fluctuations in the value of the Real against the U.S. dollar. The Real depreciated 12.37% against the U.S. dollar in 2011, 9.90% in 2012, 15.13% in 2013, 12.52% in 2014 and 49.04% in 2015.

 

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.

 

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Inflation in some of the countries in which we operate, along with governmental measures to curb 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. As part of these measures, governments have at times maintained a restrictive monetary policy and high interest rates that has limited the availability of credit and economic growth.

 

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, in recent years, encouraged by the pace of economic growth, according to the Instituto Nacional de Estadísticas y Censos, or “INDEC” (Argentine Statistics and Census Agency), the consumer price index increased by 9.5% in 2011, 10.8% in 2012, and 10.9% in 2013; while the wholesale price index increased 10.3% in 2009, 14.6% in 2010, 12.7% in 2011, 13.1% in 2012, 14.7% in 2013 and 28.3% in 2014. The accuracy of the measurements of the INDEC has been questioned in the past, 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 and 15.0% (rather than 7.7%) in 2009 (last published information). Moreover, according to InflacionVerdadera.com, an initiative that is part of the Billion Prices Project at the Massachusetts Institute of Technology, the consumer price index increased by 25.77% (rather than 10.9%) in 2010, by 30.18% (rather than 9.5%) in 2011, by 25.9% (rather than 10.8%) in 2012, 24.3% (rather than 10.9%) in 2013.        

 

According to private inflation measurements released mainly by the Commission of Freedom of Expression of the Argentine Congress (the “Expression Commission”) and published in local newspapers, in 2011 the consumer price index increased by 22.8% (rather than 9.5%), by 25.6% (rather than 10.8%) in 2012 and by 28.38% (rather than 10.9%) in 2013. See “—Risks Related to Argentina—Official data regarding inflation may be unreliable.”

 

In February 2014 the INDEC modified the methodology for the calculation of the consumer price index and the gross domestic product. Under the new calculation methodology, the consumer price index increased by 23.9% in 2014. However, according to InflacionVerdadera.com and the Expression Commission the consumer price index increased by 38.82% and by 40.53%, respectively. In December 2015, the newly elected government appointed a former director of a private consulting firm to manage the INDEC. The new director has suspended the publication of any official data prepared by INDEC and is expected to implement certain methodological reforms and adjust certain indices based on those reforms. In January 25, 2016, INDEC published two alternative measures of the consumer price index for the year 2015, 26.9% and 31.6%, respectively, which were prepared by two different independent entities.

 

Brazil has historically experienced high rates of inflation. Inflation, as well as government efforts to curb inflation, has had significant negative effects on the Brazilian economy, particularly prior to 1995. Inflation rates were 7.8% in 2007 and 9.8% in 2008, compared to deflation of 1.7% in 2009, inflation of 11.3% in 2010, inflation of 5.1% in 2011, inflation of 7.8% in 2012, inflation of 5.5% in 2013, inflation of 3.7% in 2014, and inflation of 10.5% accumulated in the year ended on December 31, 2015, 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. This policy has changed in the last two years, when the Brazilian government decreased the interest rate by 525 basis points. Subsequently, the high inflation, arising from the lower interest rate, and the intention to maintain this rate at low levels, led the Brazilian government to adopt other measures to control inflation, such as tax relief for several sectors of the economy and tax cuts for the products included in the basic food basket. These measures were not sufficient to control the inflation, which led the Brazilian government to reinstate a tighter monetary policy. As a result, interest rates 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, 11.0% in 2011, and 7.25% in 2012, 10.0% in 2013 and 11.75% in 2014 as determined by the Comitê de Política Monetária, or COPOM. In the quarter ended on December 31, 2015, the SELIC was 14.25%.

 

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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.

 

Depreciation 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. Depreciation generally curtails access to foreign financial markets and may prompt government intervention, including recessionary governmental policies. Depreciation also reduces the U.S. Dollar or Euro value of dividends and other distributions on our common shares and the U.S. Dollar or Euro equivalent of the market price of our common 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.

 

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.

 

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Although general economic conditions in Argentina recovered after the 2001-2003 period of severe economic crisis, a period of significant economic uncertainty followed. 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 rise in these prices has contributed to the increase in Argentine exports since the third quarter of 2002 and to high government tax revenues from export taxes. However, the reliance on the export of certain commodities has caused the Argentine economy to be more vulnerable to price fluctuations. The global economic crisis of 2008 led to a period of economic decline, accompanied by political and social unrest, inflationary and Peso depreciation pressures and lack of consumer and investor confidence. The lingering economic crises in Europe, including 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, the stability and level of inflation and the future political uncertainties, among other factors, may also affect the development of the Argentine economy.

 

Since 2011, the economic conditions have continued to deteriorate, due to, among other things, the rise of inflation, the continued demand for salary increases, the growth of the fiscal deficit, the required payments to be made on public debt, the reduction of industrial growth, the recession and the increase of the capital outflows from Argentina. The foregoing prevailing economic conditions forced the Argentine government to adopt different measures, including the tightening of foreign exchange controls, the elimination of subsidies to the private sector and the proposals for new taxes. See “—Changes in the Argentine tax laws may adversely affect the results of our operations”.

 

Since the beginning of 2015, international commodity prices for Argentina’s primary commodity exports have declined, which has had an adverse effect on Argentina’s economic growth. A continued decline in the international prices for Argentina’s main commodity exports could have a direct negative effect on our business, results of operation and financial condition, as well as on Argentina’s economy.

 

According to the INDEC, Argentina’s GDP, in real terms, grew by 9.2% in 2010, 8.9% in 2011, 1.9% in 2012, 5.6% in 2013 and 0.5% in 2014. The GDP for the first two quarters of 2015 grew by 1.1% and 2.3%, respectively, compared to the same periods in 2014. See “—Risks related to Argentina—Official data regarding inflation may be unreliable” 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”. The INDEC originally reported a GDP for 2013 equal to 5.6%. However, in February 2014 the INDEC modified the methodology for the calculation of the GDP and released a new GDP index for 2013, equal to 3.00%. According to a preliminary estimates, the GDP reported by INDEC for 2014 is equal to 0.5%. We cannot assure you that GDP will increase or remain stable in the future.

 

In the recent past, social and political tension and high levels of poverty and unemployment have persisted and in recent months industrial activity and consumption has diminished considerably. The deterioration of the economy significantly increased the social and political turmoil, including civil unrest, riots, looting, nationwide protests, strikes and street demonstrations. Due to the high levels of inflation and devaluation, employers both in the public and private sectors are experiencing significant pressure from organized labor unions and their employees to further increase salaries. See “—Risks related to Argentina—The Argentine government may order salary increases to be paid to employees in the private sector, which would increase our operating costs”.

 

In addition, during the recent past the Argentine Central Bank’s reserves have suffered a substantial decrease mainly as a consequence of the increasing need to import energy and payments of sovereign debt. The reduction of the Argentine Central Bank’s reserves may weaken Argentina’s ability to overcome economic deterioration. This could 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.

 

Presidential, congressional and state government elections were held during 2015 (with the majority of such elections occuring in October 2015). Presidential elections were won by the opposing political party, led by Mauricio Macri, after conducting the first run-off in Argentine history. The newly elected government, in office since December 10, 2015, has announced and adopted several significant economic and policy reforms:

 

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·INDEC Reforms: The newly elected government has appointed a former director of a private consulting firm to manage the INDEC. It is expected that the INDEC will implement certain methodological reforms and adjust certain indices based on these reforms. However, we cannot make assurances that official data will be corrected and accurate or predict the time in which such data will be corrected. There is uncertainty about the effects that these reforms will have on the Argentine economy. See “—Risks related to Argentina—Official data regarding inflation may be unreliable”.

 

·Foreign Exchange Reforms: The newly elected government has also introduced substantial changes to the foreign exchange restrictions, reversing most of the restrictions adopted since 2011, thus providing greater flexibility and access to the foreign exchange market. See “—Risks related to Argentina—Exchange controls could restrict the inflow and outflow of funds in Argentina”. As of the date of this annual report, the main measures adopted include (i) eliminating AFIP´s official approval to buy U.S. dollars, which approval was contingent on previous tax declarations proving the necessary income, (ii) eliminating the requirement to transfer and settle through the foreign exchange market the proceeds of new foreign financial indebtedness and reducing to 120 days the minimum term for keeping in Argentina the proceeds of new financial indebtedness when transferred and settled through the foreign exchange market, (iii) reducing to 0% the non-interest bearing deposit, formerly 30%, for certain foreign exchange transactions, (iv) reestablishing a $2 million monthly limit for the creation of foreign assets and (v) eliminating the minimum holding period for purchase and subsequent sales of securities.

 

·Foreign trade reforms. The Argentine government eliminated export duties on wheat, corn, beef and regional products, and reduced the duty on soybeans from 35% to 30%. Further, the 5% export duty on most industrial exports was eliminated. With respect to payments for imports and services to be performed abroad, the Macri administration announced the gradual elimination of amount limitations for access to the MULC for any transactions originated before December 17, 2016 (“Stock Debt”). For transactions executed after December 17, 2016, no amount limitation will be applicable. Pursuant to Communication “A” 5850, as amended, the amount limitations for Stock Debt is scheduled to gradually decrease and be eliminated in June 2016.

 

·Primary Balance. The Argentine government announced its intention to reduce the primary deficit in part by eliminating public services subsidies currently in effect.

 

·Infrastructure state of emergency and reforms. The Argentine government issued Resolution No. 6/2016 of the Ministerio de Energía y Minería de la Nación (National Ministry of Energy and Mining) and Resolution No. 1/2016 of the Ente Nacional Regulador de la Electricidad (National Electricity Regulatory Agency), through which the Macri administration announced the elimination of some energy subsidies currently in effect and a substantial increase in electricity rates.

 

We cannot predict the impact that these policies or any future polices implemented by the newly elected government will have on the Argentine economy as a whole or on our business, results of operation or financial condition, in particular. Moreover, there is uncertainty as to when and if other measures announced during the presidential campaign will be implemented. Some of the measures proposed by the newly elected government may also generate political and social opposition, which may in turn prevent the new government from adopting such measures as proposed. In addition, political parties opposed to the new government retained a majority of the seats in the Argentine Congress in the recent elections, which will require the new government to seek political support from the opposition for its economic proposals and creates further uncertainty in the ability of the new government to pass measures. Political uncertainty in Argentina relating to the measures to be taken by the newly elected government in respect of the Argentine economy could lead to volatility in the market prices of securities of Argentine companies.

 

A continued deterioration of the economic, social and/or political conditions may adversely affect the development of the Argentine economy and force the newly elected government to adopt future policies including 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 and salary increases, and/or the provision of additional employee benefits. Any such economic, social and/or political conditions and/or measures could materially affect our business, results of operations and financial condition.

 

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

 

The Argentine economy has experienced significant instability in the past decades, including devaluations, high inflation, and prolonged periods of reduced economic growth, which have led to payment defaults on Argentina’s foreign debt and multiple downgrades in Argentina’s foreign debt rating with attendant restrictions on Argentina’s ability to obtain financing in the international markets.

 

As of December 31, 2001, Argentina’s total public debt amounted to $144.5 billion (including $6.6 billion owed to the Paris Club, an informal group of financial officials from 19 creditor nations entrusted with the negotiation of sovereign debt defaults). In December 2001, 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 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 two exchange offers made to bondholders in 2005 and 2010, restructured over approximately $74.2 billion of the defaulted debt to bondholders. Law No. 26,017 set the main conditions of the exchange offers and expressly determined that the Argentine government could not re-open such negotiations, as a way of motivating creditors to reach a settlement. . As of September 30, 2015, Argentina’s total public debt amounted to $239.9 billion (excluding over $11.5 billion of debt that remained in default to bondholders who did not participate in the exchange offers in 2005 and 2010).

 

Since 2010, the Argentine government has applied the Argentine Central Bank’s reserves to the payment of public debt in the amount of $6.4 billion in 2010, $9.6 billion in 2011 and $6.5 billion in 2013. In 2013, the Argentine government refinanced approximately $8 billion of public debt with local public entities (i.e. Argentine Central Bank and the Administración Nacional de la Seguridad Social or ANSES –the social security authority). On May 29, 2014, the Paris Club announced that it had reached an agreement to clear Argentina´s debt in arrears in the amount of $9.7 billion, as of April 30, 2014. The agreement provides for repayment of the debt within five years, including a minimum of $1.2 billion which was paid during May 2015 and an additional payment to be made in May 2016. During 2015 the Argentine government made payments of approximately $14 billion of public debt, including the Bonos del Gobierno Nacional en Dólares Estadounidenses (BODEN 2015). After all these payments, the Argentine Central Bank’s reserves were significantly reduced, very close to the amount of the reserves during the crisis of 2001 when the reserves were reduced to approximately $15 billion on December 31, 2001.

 

The Argentine government has had to respond to claims in respect of payment defaults at the World Bank’s International Centre for Settlement of Investment Disputes (“ICSID”) for approximately $65 billion (some of which have been settled or ruled against Argentina).

 

Among the more publicized disputes is the on-going litigation in re: “NML Capital, Ltd. v. Republic of Argentina”, brought in U.S. federal courts by the bondholders who did not participate in the exchange offers made in 2005 and 2010. During 2012 the United States District Court for the Southern District of New York granted an injunction requiring Argentina to make a “ratable payment” to the litigating bondholders as a condition to making any payment under the restructured debt. On August 23, 2013, the United States Court of Appeals for the Second Circuit affirmed the District Court’s orders but stayed enforcement pending resolution of a petition to the Supreme Court for a writ of certiorari, which was rejected by the Supreme Court on June 16, 2014. Subsequently, the District Court lifted the stay on enforcement of the injunction and, therefore, Argentina’s obligation to pay the amounts due to the plaintiffs (approximately $1.33 billion as of such date) simultaneously with the next payment due under the exchange bonds became enforceable. In addition, as a result of the order issued by the courts being mandatory to the third parties involved in the payment process of the exchange bonds, certain exchange bondholders have not yet received the amounts due under such bonds. The District Court also appointed Mr. Daniel A. Pollack as mediator to settle negotiations between Argentina and the litigating bondholders. As of July 30, 2014, Argentina and the litigating bondholders had not reached an agreement through negotiations as ordered by the District Judge, which resulted in a portion of Argentina’s sovereign debt being deemed in ‘‘technical default’’ under the terms of the indebtedness. Following these events, Standard & Poor’s reduced its credit rating on Argentina’s sovereign debt in foreign currency to ‘‘selective default’’.

 

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On September 12, 2014, the Argentine Congress passed Law No. 26,984 to enable the replacement of The Bank of New York Mellon by Nación Fideicomisos S.A. as trustee under the restructured bonds and the change of the place of payment under the exchange bonds into Argentina. This law also approved the launch of an offer for the exchange of the restructured bonds for new bonds governed by Argentine and French law. However, the exchange offer has not yet been implemented. On September 29, 2014, the District Court held Argentina in contempt of court as a result of passing this law. The District Court found that the new law provided for a change of the payment mechanism of the exchange bonds and therefore represented a violation of the “ratable payment” injunction. The District Court authorized limited exceptions to the injunction allowing certain paying agents of Argentine law-governed bonds denominated in foreign currency to process payments in August 2014, September 2014, December 2014, March 2015 and June 2015. Payments on the remaining restructured bonds governed by foreign law have not been processed as a consequence of the injunction and various restructured bondholders have been seeking the release of such payments in court. On May 11, 2015, the plaintiffs in this case that obtained pari passu injunctions requested the District Court to amend their complaints to include claims alleging that Argentina’s issuance and servicing of its 2024 dollar-denominated bonds (BONAR 2024), and all its external indebtedness to be issued in the future, would violate the pari passu clause. The plaintiffs also requested to extend the ratable payment injunction (which only applied to the exchange bonds) to the BONAR 2024. On June 16, 2015, the District Court granted the order to amend the plaintiffs’ complaints, and the final resolution is still pending before the U.S. courts. In addition, on June 5, 2015, the Second Circuit granted partial summary judgment to a group of 526 ‘‘me-too’’ plaintiffs in 36 separate lawsuits, finding that, consistent with the previous ruling of such court, Argentina violated the pari passu clause in bonds issued to the ‘‘me-too’’ bondholders.

 

The newly elected government re-opened negotiations with the plaintiffs conducted by Special Master Daniel Pollack. On February 5, 2016, Argentina filed a proposal to settle the claims of all holders of Argentina’s defaulted debt that, if accepted by plaintiffs, would result in a total payment to plaintiffs of approximately $6.5 billion in cash. On February 19, 2016, the District Court issued an indicative ruling vacating the injunctions upon the occurrence of the following conditions precedent: (i) that Argentina takes action necessary to repeal Law 26,017 and Law 26,984 and (ii) that any payment is made to the plaintiffs as well as to the “me-too” plaintiffs by virtue of a settlement agreement entered into between the parties on or before February 29, 2016.  In order to comply with these conditions, on March 31, 2016 the Argentine Congress passed Law 27,249 which, among other things, abrogated Law 26,017 and Law 26,984 and approved the issuance of national bonds for a maximum amount of $12.5 billion to finance the execution of the settlement agreements entered into between the parties. On April 13, 2016 the Court of Appeals for the Second Circuit confirmed Judge Griesa’s indicative ruling of February 19, 2016 and on April 22, 2016, Judge Griesa vacated the injunctions after Argentina provided evidence that all conditions had been met. According to the last information provided by the government, Argentina has reached agreements with 93% of the litigating bondholders, including some of the “me-too” plaintiffs.  However, certain claims are still on-going in several jurisdictions by those bondholders that have not accepted Argentina’s settlement proposal.

 

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. As a result of this economic instability, the foreign debt rating of Argentina has been downgraded on multiple occasions based upon concerns regarding economic conditions and rising fears of increased inflationary pressures. This uncertainty may also adversely impact Argentina’s ability to attract capital. 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, passed by the Argentine Congress in December 2011, 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 ten years or more; who have Argentine children and also have resided at least five-years in Argentina; or who have been married to Argentine citizens for at least five years prior to the transfer of the property rights over rural land and have resided in Argentina for at least five years).

 

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Law No. 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.

 

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 No. 26,737 created 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 were 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”.

 

On April 25, 2013, the regulation of Law No. 26,737 provided that no authorization certificate would be required for the transfer of the property or possession rights over real estate properties that were located in an “Industrial Area” or an “Industrial Park” duly registered before the National Registry of Industrial Parks and created before the transaction took place, independently from the acquirer’s nationality.

 

Even though certain provisions raise questions over their precise meaning, Law No. 26,737 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.

 

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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 has 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, 2015, our subsidiaries in Argentina have relied on local Argentine financing for 42.7% 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.

 

Official data regarding inflation may be unreliable.

 

Since 2007, the INDEC has experienced a process of institutional and methodological reforms that have given rise to controversy with respect to the reliability of the information produced by the INDEC. The intervention of the Argentine government in the INDEC and the change in the way the inflation index is measured has resulted in disagreements between the Argentine government and private consultants as to the country’s actual annual inflation rate. Members of the political opposition in the House of Representatives of the Argentine Congress periodically disseminate inflation data produced by certain private analysts and non-governmental sources which differ significantly from, and which present higher estimates of inflation than those published by the INDEC. According to the INDEC inflation was approximately 8.5% for 2007, 7.2% for 2008, 7.7% for 2009, 10.9% for 2010, 9.5% for 2011, 10.8% for 2012, 10.9% for 2013, 23.9% for 2014 and 11.9% accumulated as of October 31, 2015. Uncertainty surrounding future inflation rates has slowed the rebound in the long-term credit market. Private estimates, on average, refer to annual rates of inflation substantially in excess of those published by the INDEC. In the past, inflation has materially undermined the Argentine economy and the government’s ability to create conditions that would permit stable growth. High inflation may also undermine Argentina’s foreign competitiveness in international markets and adversely affect economic activity and employment, as well as our business and results of operations. In June 2008, the INDEC published a new consumer price index, which has been criticized by economists and investors after its initial report found prices rising below expectations. These events have affected the credibility of the consumer price index published by the INDEC, as well as other indices published by the INDEC that use the consumer price index in their calculation, including the poverty index, the unemployment index and real GDP. Beginning November 23, 2010, the Argentine government consulted with the IMF for technical assistance in order to prepare a new national consumer price index with the aim of modernizing the current statistical system. During the first quarter of 2011, a team from the IMF started working in conjunction with the INDEC to create a new national consumer price index. Reports published by the IMF state that their staff also uses alternative measures of inflation for macroeconomic surveillance, including data produced by private sources, which have shown inflation rates considerably higher than those issued by the INDEC since 2007, and the IMF has called on Argentina to adopt remedial measures to address the quality of official data. In its meeting held on February 1, 2013, the Executive Board of the IMF found that Argentina’s progress in implementing remedial measures since September 2012 has not been sufficient, and as a result, the IMF issued a declaration of censure against Argentina in connection with its breach of its related obligations to the IMF under the Articles of Agreement, and called on Argentina to adopt remedial measures to address the inaccuracy of inflation and GDP data without further delay.

 

In February 2014, the INDEC modified the methodology for the calculation of the consumer price index and the gross domestic product and released a new GDP index for 2013, equal to 3.003% which differs from GDP of 5.6% originally reported by INDEC for the same period. In addition, the INDEC reported GDP for 2014 equal to 0.5% and GDP accumulated up to June 30, 2015 equal to 1.2%.

 

As of December 2015, the newly elected government appointed Mr. Jorge Todesca, a former director of a private consulting firm, to manage the INDEC. Mr. Todesca’s first measure was to suspend the publication of any official data prepared by the INDEC. It is expected that the INDEC will implement certain methodological reforms and adjust certain indices based on these reforms and will probably issue the new index in June 2016. However, we cannot make assurances that official data will be sufficiently corrected and accurate or predict the time in which such data will be corrected. The lack of accuracy in the INDEC’s indices could result in a further decrease in confidence in Argentina’s economy, which could, in turn, have an adverse effect on our ability to access the international credit markets at market rates to finance our operations and growth. There is also uncertainty regarding the effects that these reforms will have on the Argentine economy as a whole or on our business, results of operation or financial condition, in particular.

 

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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 fixed on a quarterly basis. The actual price paid for the road transportation of grains cannot 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. In addition, on April 9, 2013, the Secretary of Commerce issued a resolution that established a fixed price for selling liquid hydrocarbons for a six months period. The fixed price would be the highest selling price on the date of issuance of the resolution, in certain regions of the country. Notwithstanding the April 9 resolution, YPF (the Argentine government-controlled oil and gas company) implemented gas price increases that were matched by other oil companies. Due to the increase in the price of the wheat, on July 4, 2013, the Secretary of Commerce issued a resolution mandating wheat producers and distributors to sell their stocks to satisfy the domestic demand, seeking to reduce the wheat price. On January 2014, the Secretary of Commerce launched a new program of price controls called Precios Cuidados. Producers and suppliers committed to fixed prices for more than 300 basic products subject to review on a quarterly basis. As of the date hereof, one of our rice products sold under the trademark “Molinos Ala” is subject to this program. Violation of the program may result in sanctions, including fines of up to AR$5,000,000.

 

The Argentine government may pursue other expropriations or similar interventions such as the one relating to YPF. See “—Risks related to Argentina—The economy of Argentina may be affected by its government’s limited access to financing from international markets.” On December 27, 2012 the Argentine Congress passed Law N° 26,831, known as the new Capital Markets Law, which modifies the public offer regime set forth by Law No. 17,811 as amended. On August 1, 2013 Decree No. 1023/2013, which regulates the Capital Markets Law, was enacted.

 

The Capital Markets Law modifies the applicable regime of the Exchange Markets, including local Stock Exchange and commodities markets, and of the agents and also the powers conferred to the Argentine Securities Commission (Comisión Nacional de Valores) (“CNV”). The main amendments introduced refer to the increase in the power of intervention by the CNV over the Exchange Markets and agents entitling the CNV to appoint supervisors with the ability to veto listed companies´ board decisions, and even disband the board of directors for a period of 180 days; and suspend the activities of agents and markets, without prior notice, when the CNV determines that a breach of applicable regulations has occurred. Also the new Capital Markets Law introduces new and more stringent requirements for agents to obtain authorization to operate in the markets which may result in a reduction of the current number of authorized agents operating in the grain markets.

 

Moreover, the Argentine government may increase its level of intervention in certain areas of the economy. For example, on May 3, 2012 the Argentine Congress passed Law No. 26,741 providing for the expropriation of 51% of the share capital of YPF, S.A. (“YPF”), the largest Argentine oil and gas company in Argentina, represented by an identical stake of Class D shares owned, directly or indirectly, by Repsol S.A., a Spanish integrated oil and gas company. This particular measure also sparked a strong international condemnation and had a significant negative impact on foreign direct investment in Argentina as well as further impaired the already limited access to international capital and debt markets. In response to the nationalization of YPF by the Argentine government, the European Union Commission threatened with the imposition of commercial sanctions (i.e. unilateral tariff preferences to Argentina). However, during February 2014, the Argentine government and Repsol S.A. agreed to a compensation of $5,000 million payable in Argentine sovereign bonds to compensate Repsol S.A. for the seizure of the YPF shares.

 

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In addition, on November 28, 2012, the Argentine government, through YPF Inversora Energética S.A., an affiliate of YPF, exercised an option for the purchase of the shares of BG Inversiones Argentinas S.A. in Gas Argentino S.A. (the controlling company of Metrogas S.A., the major gas distributor in Argentina). Through this transaction, the Argentine government indirectly acquired control of Metrogas S.A.

 

Furthermore, on April 1, 2014 (i) the Argentine Tax Federal Authority (“Administración Federal de Ingresos Públicos – AFIP”) issued Resolution No. 3,593/14 which established a “Systematic Registration of Movements and Grains Stocks Regime” (“Régimen de Registración Sistemática de Movimientos y Existencias de Granos”) pursuant to which all persons involved in the commercialization and manufacturing of grains and dairy products registered with the National Registry of Operators of the Commercial Agri-Food Chain (Registro Unico de Operadores de la Cadena Comercial Agropecuaria Alimentaria) must report the stock and stock variations (including locations, transport between the producer´s facilities, etc.) of all grains and other agricultural products (other than those to be applied to sowing) held in inventory or through third parties; and (ii) the Secretary of Commerce enacted Resolution No. 29 by which all producers and suppliers of goods and services with annual sales greater than AR$183 million must report to the Secretary of Commerce the prices of all their products on a monthly basis. Violations of these regimes may be subject to fines, among and other sanctions.

 

On April 16, 2015, the Argentine Congress passed a law approving the government takeover of the passenger and cargo railways, which will be owned by a State-owned company called Ferrocarriles Argentinos Sociedad del Estado. This law is another example of intervention by the Argentine government and may result in higher transportation costs for our products and operations.

 

Expropriations and other interventions by the Argentine government such as the one relating to YPF can have an adverse impact on the level of foreign investment in Argentina, the access of Argentine companies to the international capital markets and Argentina’s commercial and diplomatic relations with other countries. In the future, the level of governmental intervention in the economy may continue, which may have adverse effects on Argentina’s economy and, in turn, our business, results of operations and financial condition.

 

Although many of the above measures were adopted or announced by the former Argentine government, we cannot assure you that the newly elected Argentine government will not continue to interfere or increase its intervention 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.

 

Recent legislative reforms could adversely affect the operation of our business.

 

On April 8 2013, the Argentine government submitted to the Argentine Congress three bills: (a) the creation of three courts of cassation and the amendment to the Civil and Commercial Procedure Code, which was passed by the Argentine Congress on April 2, 2013 (“Courts of Cassation Law”); (b) the amendment to the Law which regulates the Council of the Judiciary No. 24,937, which was passed by the Argentine Congress on May 8, 2013 (“Council of the Judiciary Law”); and (c) a new regulation of precautionary measures in proceedings involving the federal government or any of its decentralized entities, which was passed by the Argentine Congress on April 24, 2013 (“Precautionary Proceedings Law”).

 

The Court of Cassation Law created (i) a federal court of cassation on Administrative Law matters; (ii) a federal and national court of cassation on Labor and Social Security law matters; and (iii) a federal and national court of cassation on Civil and Commercial law matters, which has jurisdiction to decide the cassation, unconstitutionality and to review appeals against the decisions rendered by the Federal and National Court of Appeals on Administrative Law, Labor and Social Security and Civil and Commercial matters, respectively. The law sets forth that the judges of the Cassation Courts are required to be selected in the same manner and meet the same conditions as a Supreme Court judge. Finally, such law reduces the members of the Supreme Court of Argentina from seven to five. The Court of Cassation Law provides for additional judicial review before having access to the Federal Supreme Court. Accordingly, judicial proceedings before federal and national courts may require additional time and will likely result in higher legal costs.

 

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The Council of the Judiciary Law increased the number of members of the Council of the Judiciary from thirteen to nineteen, including three judges, three lawyer’s representatives, six representatives from academia, six congressmen (four selected by the majority in the Argentine Congress and two selected by the minority) and a Federal Executive Branch representative. The law changed the method for appointing the Members of the Council. Prior to the adoption of the Council of the Judiciary Law, Members of the Council were appointed by their peers. According to the new law, they will be appointed by means of open, compulsory and simultaneous primary elections. The Council of the Judiciary is entrusted with broad powers to organize and run the system to train, appoint and remove judges; approve the draft proposal for the annual budget, establish the system of compensation of all the judicial system and provide for the administration of all the judicial personnel; sanction judges and retired judges; and amend the regime applicable to the judiciary system. As a result, the election of the members of the Council of the Judiciary would be politically based influenced and the majorities for the removal of judges would be limited.

 

According to the Precautionary Proceedings Law, when granting a precautionary measure against the Argentine government and its agencies, judges will have to establish, under penalty of nullity, a period of effectiveness of such measure of no longer than six months in normal proceedings and three months in abbreviated proceedings and in the case of “an amparo (“injuction relief”).” The term can be extended for six months considering if it is in the public interest. Special consideration will be given to the dilatory tactics or proactive measures taken by the party that was awarded the measure. In addition, under such legislation, Judges are not allowed to grant precautionary measures that will affect or detract from its purposes or in any way disrupt the property or revenues of the Federal Government, nor impose personal monetary charges to public officers. Moreover, the law establishes that the precautionary measures against the Federal Government or its decentralized entities will be effective once the requesting party places an injunction bond for the expenditures or damages that the measure may cause. The injunction bond will not be required when the precautionary measure is granted in favor of the Federal Government or any of its decentralized entities.

 

On June 18, 2013, the Supreme Court declared certain sections of the Council of the Judiciary Law unconstitutional, in particular those referring to the increase in the number of members and the method for appointing such members. On July 7, 2013, the Federal Court on Administrative Law suspended the implementation of the Court of Cassation Law and declared the precautionary proceedings limitations provided for in the law to be unconstitutional. This law if implemented or other laws approving reforms to the Argentine judicial system may have a negative impact on our business and operations as such legislation could make a timely and impartial administrative process more difficult.

 

On October 8, 2014 the Argentine Congress passed Law No. 26,994, which approved the new Argentine consolidated Civil and Commercial Code, which came into force on August 1, 2015. Among others, the new Argentine consolidated Civil and Commercial Code introduced significant amendments with respect to the obligations to pay sums of money denominated in foreign currency, where the obligation to deliver foreign currency must be deemed as an obligation to deliver amounts of goods and debtor may comply by delivering an equivalent amount in legal tender, without clarifying how such equivalent amount will be determined. However, a different section of the same law provides that where debtor is obligated to make a payment in foreign currency it must satisfy the obligation in the same currency. It is expected that this contradiction in the law may result in potential litigation.

 

The new Argentine consolidated Civil and Commercial Code and other laws that the Argentine government may introduce for approval by the Argentine Congress may have an adverse and material effect on the Argentine economy, and thereby 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.

 

Argentina has 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. Currently, Argentina is facing national protests from the Argentine population, reflected by a general massive strike on April 10, 2014, protests in February 2015 and a general strike on March 31, 2015.

 

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.

 

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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. Recently, the newly elected government has eliminated farm export taxes on corn, wheat and local products, while soy export taxes will be reduced 5%. Notwithstanding these new measures, 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.

 

The Argentine government increased the minimum salary from 3,300 Argentine Pesos to 3,600 Argentine Pesos in January 2014, to 4,400 in September 2014 and to 4,716 in January 2015 (equivalent to aggregate increase of 30% during 2014). Due to the high levels of inflation, employers both in the public and private sectors are experiencing significant pressure from organized labor and their employees to further increase salaries. During 2013 organized labor unions agreed with employers’ associations on salary increases between 22% and 25%. Due to the acceleration of the devaluation and inflation during 2014 labor unions have agreed on salary increases of up to 32%. During 2015, labor unions demanded salary increases of up to 30% provided that the Argentine government agreed to pass an amendment increasing the minimum amount subject to the income tax and grant other non-remunerative benefits. Finally, various unions agreed on salary increases between 27% and 32% and an increase of 28.5% for the minimum salary. As of December 2015, several unions have been demanding salary increases of 35% in order to cope with inflation. So far, this demand has not met a positive response from the newly elected government. However, discussions are still on-going and it is possible that the newly elected government could adopt measures establishing new salary increases, further minimum 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. Headcount in Argentina represents the 15.6% of the total headcount of the Company,

 

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 ten years, such export taxes have undergone significant increases, reaching a maximum of 35% in the case of soybean. 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.

 

As of December 2015, the newly elected government has eliminated farm export taxes on corn, wheat and local products, while soy export taxes will be reduced 5%. Notwithstanding these measures, we cannot make assurances or predictions as to the impact this measure will have on our business, results of operations and financial condition.

 

Pursuant to a resolution of the 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 would be verified by the Argentine Customs upon arrival of the goods into Argentina and it would be condition for the authorization of the payment of the purchase price by the Argentine financial entities. Even though this was intended merely as an information regime, it was considered to 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 newly elected government has recently promoted certain changes to this mechanism, including the replacement of the Prior Import Statement system by the Import Monitoring System (Sistema Integral de Monitoreo de Importaciones or “SIMI”). Under this new system, importers are required to submit certain information electronically through the SIMI application which, once approved, will be valid for 180 calendar days. The imposition of this regime may restrict the imports of goods and the import and export of services of our Argentine subsidiaries which may adversely affect our financial conditions or results of operations.

 

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On November 5, 2013, the Central Bank issued Communication “A” 5493 restricting lending by domestic bank to large export companies (“Grandes Empresas Exportadoras”) with the stated aim of increasing the flow of U.S. Dollars into Argentina. The objective of the new law is to cause large export companies to seek financing from foreign institutions. We believe that the Company’s subsidiaries in Argentina should not be deemed to be Grandes Empresas Exportadoras and therefore should not be subject to these limitations on borrowing from domestic banks. However, if the Company´s subsidiaries in Argentina become subject to these limitations in the future, the lack of access to financing in the domestic and foreign markets may have an adverse effect on the results of our operations in Argentina and on the market price of our common shares.

 

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 imposed additional restrictions on the purchase of foreign currency and 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 or the mandatory repatriation of export receivables).

 

In October 2011 and during 2012 and 2013, the Government of Argentina adopted informal restrictions on certain local companies and individuals for purchasing foreign currency in response to the decrease in availability of U.S. dollars in Argentina. These restrictions consisted of de facto measures restricting local residents and companies from purchasing foreign currency through the Argentine Single Free Foreign Exchange Market (Mercado Único y Libre de Cambios) for the purpose of making payments abroad, such as dividends, capital reductions, and payment for importation of goods and services.

 

Since January 2012, the term for mandatory transfer of foreign currency denominated indebtedness in Argentine pesos was reduced from 365 days to 30 or 10 days following disbursement depending on the indebtedness. Accordingly, we may face difficulties 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 and Public Finance 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 following shipment. This last term was increased to 30 days pursuant to Resolution 231/2012 issued by the Ministry of Economy and Public Finance on May 24, 2012.

 

The newly elected government has introduced substantial changes to the foreign exchange restrictions, reversing most of the measures adopted since 2011 and providing greater flexibility and access to the foreign exchange market. See “—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” in this section.

 

Notwithstanding these measures, other exchange control restrictions, such as transfer and settlement through the Foreign Exchange Market of proceeds collected from exports of goods and services and general requirements for the purchase of foreign currency for payments of imports of goods and services, remain in full force and effect.

 

These restrictions and requirements, and any additional exchange controls and transfer restrictions in the future that may be adopted by the Argentine government in response to capital flight or a depreciation of the Argentine peso, could adversely affect our financial condition and the results of our operations, or the market price of our common shares. In addition, other exchange controls could in the future impair or prevent the conversion of anticipated dividends, distributions, or the proceeds from any sale of equity holdings in Argentina, as the case may be, from Argentine pesos into U.S. dollars and the remittance of the U.S. dollars abroad. These restrictions and controls could interfere with the ability of our Argentine subsidiaries to make distributions in U.S. dollars to us and thus our ability to pay dividends in the future.

 

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

 

On September 23, 2013, Law No. 26,893 amending the Income Tax Law was enacted. According to the amendments the distribution of dividends is subject to income tax at a rate of 10% and the sale, exchange or disposition of shares and other securities not trading in or listed in capital markets and securities exchanges is subject to income tax at a rate of 15%. These amendments may adversely affect the results of our Argentine subsidiaries’ operations; and 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, which 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 nominal terms, grew by 6.1% in 2007, 5.1% in 2008, decreased 0.1% in 2009, increased 7.5% in 2010, increased 3.9% in 2011, increased 1.9% in 2012, increased 3.0% in 2013, increased 0.1% in 2014 and decreased 3.8% in 2015. 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 crisis 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.

 

Changes in Brazilian tax laws may have a material adverse impact on the taxes applicable to our business and may increase our tax burden.

 

The Brazilian government frequently implements changes to the Brazilian tax regime that may affect us and our clients. These changes include changes in prevailing tax rates and, occasionally, imposition of temporary taxes, the proceeds of which are earmarked for designated Brazilian 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 September 2011, the Brazilian government introduced a tax on currency derivative securities transactions (“IOF/Securities”) (where the underlying asset is linked to fluctuations in foreign currency exchange rates relative to the Reais) that are executed through the Brazilian markets at the time of the acquisition, sale or maturity of IOF/Securities. The tax is calculated at the rate of 1.0% on the notional adjusted value of the financial derivative transaction. 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. In addition, the Brazilian government implemented a 6% IOF/Exchange tax rate applicable to foreign exchange transactions related to financing from foreign financial institutions (“IOF/Exchange”) on loan transactions with an average maturity of less than five years and reduced the IOF/Exchange rate for 360 days. In December 2012, the Brazilian government modified the regulation, allowing early receipt of resources for Brazilian exporters, for prepayment export facilities by importers or any corporate entity operating abroad, including financial institutions, without any incidence of taxes in certain cases. In June 2013, the Brazilian Government revoked those measures, and reduced the IOF tax to 0% on inflows of investment capital destined to investments in fixed income as well in derivative securities transactions. The effects of these changes and any other change that could result from the enactment of additional legislation 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.

 

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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.

 

As an example, the Instituto Nacional de Colonização e Reforma Agrária (“INCRA”) conducted an investigation to determine the falsehood of the Certificado de Cadastro do Imóvel Rural (“CCIR”) delivered to us by the former owner of Rio de Janeiro Farm (the “Farm”) in January 2005 when we acquired the Farm. The INCRA also conducted another investigation related to the cadeia dominial of the Farm to determine the correct chain of ownership through the successive transfers of ownership of the Farm, for the purpose of confirming that the destaque publico occurred, which refers to the transfer of land ownership from the State to a private owner, or that the State does not have an interest in claiming the ownership of the Farm. While the INCRA found no irregularity that could jeopardize the acquisition deed or affect the ownership of Rio de Janeiro Farm, we are currently waiting for the INCRA to close such records.

 

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 Brazilian 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. A land invasion or occupation 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. In addition, our land may be subject to expropriation by the Brazilian government. Under Article 184 of the Brazilian Constitution, the Brazilian government may expropriate land that is not in compliance with mandated local “social functions”. A “social function” is defined in Article 186 of the Brazilian Constitution as (i) rational and adequate exploitation of land; (ii) adequate use of natural resources available and preservation of the environment; (iii) compliance with labor laws; and (iv) 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 Brazilian government may be less than the profit we could make from the sale or use of such land. Disputing the Brazilian government’s expropriation of land is usually time-consuming and the outcomes at of 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.

 

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

 

Brazilian Federal Law No. 5,709, effective October 7, 1971 (“Law 5709”) established 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 where 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 (i.e. land located at or near the Brazilian border) must be previously approved by the General Office of the National Security Council (Secretaria-Geral do Conselho de Segurança Nacional). Pursuant to Article 23 of Law No. 8,629, of February 25, 1993 (“Law 8629”), the restrictions mentioned in items (i) and (ii) above established by Law 5709 are also applicable for rural lease agreements executed by foreigners. “Parcerias Agrícolas” (agriculture partnerships agreements) have not been subject to these restrictions. Although, a broader interpretation of the existing regulations could have also included these agreements within the limitations for foreigners, the Federal General Attorney’s Office (“AGU”) on October 8, 2012 issued a legal opinion 005/2012, pursuant to which the AGU confirmed the understanding that the “Parcerias Rurais” are not subject to the restrictions or limitations of Law 5709. In addition, pursuant to Law 8629, the acquisition or lease by a foreigner of a rural property exceeding 100 módulos de exploração indefinida – “MEI,” a measurement unit defined by the Regional Superintendence of the National Institute of Colonization and Land Reform (Superintendencia Regional do Instituto Nacional de Colonizaçao e Reforma Agrária – “INCRA”) must be previously approved by the Brazilian National Congress. Law 5709 also establishes that the same restrictions apply to Brazilian companies that are directly or indirectly controlled by foreign investors. Any acquisition or lease of rural property by foreigners in violation of the terms of Law 5709 would be considered null and void under Brazilian law.

 

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However, the Brazilian Constitution enacted in 1988 and its amendments, in particular Constitutional Amendment No. 6, of August 15, 1995, provides 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 5709 on the acquisition or lease of rural property above-mentioned did not apply to Brazilian companies controlled by foreigners, pursuant to legal opinion No. GQ-22, issued by the AGU in 1994, which was ratified by legal opinion No. GQ-181, also issued by the AGU 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 sixty (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 legal opinion which: (i) revoked the AGU’s legal opinions No. GQ-22 and GQ-181; and (ii) confirmed that Brazilian entities controlled by foreigners should be subject to the restrictions described above, and transactions entered into by foreigners in connection with the acquisition of rural properties would be subject to 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 effective as of such date. We believe that the acquisitions of rural properties by Brazilian companies directly or indirectly controlled by foreigners registered in the appropriate real estate registry prior to August 23, 2010 are not affected by the AGU’s legal opinion. As a confirmation of such understanding, pursuant to the Joint Normative Ruling N. 1 issued on September 27, 2012 by the Ministries of: (i) Agricultural Development; (ii) Agriculture, Cattle-raising and Supply; (iii) Industry Development and Foreign Commerce; and (iv) Tourism (the “Joint Normative Ruling N. 1”); and the Normative Ruling/IN INCRA No.76, issued on August 23, 2013, a Brazilian company controlled by foreign individuals or companies which acquired or leased rural properties, by means of an act or agreement entered into from June 7, 1994 and August 22, 2010, may register such property before the National System of Rural Registry (Sistema Nacional de Catastro Rural-SNCR), without any administrative sanction. However, as of said date, 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. Additionally, the Joint Normative Ruling N. 1 sets forth the administrative procedures applicable to requests for authorization for the acquisition or lease of rural properties by foreign investors pursuant to Law 5709. Under the Joint Normative Ruling, in order to obtain the authorization for the acquisition or lease of rural properties, foreign investors must present a project proposal to the INCRA, containing: (i) the rationale for the relationship between the property to be acquired or leased and the project size; (ii) physical and financial schedule of the investment and implementation of the project; (iii) use of official credit (governmental funds) for the total or partial finance of the project; (iv) logistic viability of the execution of the project and, in case of an industrial project, proof of compatibility between the local industrial sites and the geographic location of the lands; and (v) proof of compatibility with the criteria established by the Brazilian Ecological and Economical Zoning (Zoneamento Ecológico Económico do Brasil – ZEE), relating to the location of the property.

 

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 or lease transactions, our business plan, contemplated expansion in Brazil and results of operations will be adversely affected.

 

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Furthermore, there is currently proposed legislation under review 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, if adopted, 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, which, combined with Brazilian political and economic conditions, may adversely affect us.

 

We may be adversely affected by the following factors, as well as the Brazilian government’s response to these factors:

 

economic and social instability;

 

increase in interest rates;

 

exchange controls and restrictions on remittances abroad;

 

restrictions and taxes on agricultural exports;

 

exchange rate fluctuations;

 

inflation;

 

volatility and liquidity in domestic capital and credit markets;

 

expansion or contraction of the Brazilian economy, as measured by GDP growth rates;

 

allegations of corruption against political parties, elected officials or other public officials, including allegations made in relation to the Lava Jato investigation;

 

government policies related to our sector;

 

fiscal or monetary policy and amendments to tax legislation; and

 

other political, diplomatic, social or economic developments in or affecting Brazil.

 

Historically, the Brazilian government has frequently intervened in the Brazilian economy and has occasionally made significant changes in economic policies and regulations, including, among others, the imposition of a tax on foreign capital entering Brazil (IOF tax), changes in monetary, fiscal and tax policies, currency devaluations, capital controls and limits on imports. The administration is currently facing domestic pressure to retreat from the current macroeconomic policies in an attempt to achieve higher rates of economic growth. In addition, the Brazilian government is proposing the creation of a tax on financial transactions, including wire transfers, (the so-called “CPMF”) in order to improve the fiscal situation of the country. We cannot predict which policies will be adopted by the Brazilian government and whether these policies will negatively affect the economy or our business or financial performance.

 

The Brazilian economy has been experiencing a slowdown – GDP growth rates were 7.5%, 3.9%, 1.9%, 2.7%, and 0.1% in 2010, 2011, 2012, 2013 and 2014, respectively and GDP decreased 3.8% in 2015. Inflation, unemployment and interest rates have increased more recently and the Brazilian Real has weakened significantly in comparison to the U.S. dollar. The market expectations for the years 2016 and 2017 is that the Brazilian economy will continue to slow down and GDP will decrease. Our results of operations and financial condition may be adversely affected by the economic conditions in Brazil.

 

Allegations of political corruption against the Brazilian government and the Brazilian legislative branch could create economic and political instability.

 

In the past, members of the Brazilian government and of the Brazilian legislative branch have faced allegations of political corruption. As a result, a number of politicians, including senior federal officials and congressmen, resigned and/or have been arrested. Currently, several members of the Brazilian executive and legislative branches of government are being investigated as a result of allegations of unethical and illegal conduct identified by the Car Wash Operation (Operação Lava-Jato) being conducted by the Office of the Brazilian Federal Prosecutor. There is strong popular pressure and several legal and administrative proceedings for the impeachment of the Brazilian President and/or revocation of the mandates or resignation of the Brazilian President and/or the Head of the House of Representatives. On April 17th, 2016 the impeachment process of the Brazilian President was approved by the House of Representatives and submitted for the final approval of the Senate. The potential outcome of these investigations and proceedings is unknown, but they have already had an adverse impact on the general market perception of the Brazilian economy and the conclusion of these proceedings or further allegations of illicit conduct could have additional adverse effects in the Brazilian economy. In this sense, the political crisis could worsen the economic conditions in Brazil, which may adversely affect our results of operations and financial condition.

 

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Moreover, the economic and political crisis have resulted in the downgrading of the country’s long-term credit rating from Standard & Poor's rating agency to BB with a negative outlook, placing Brazil back in speculative investment grade level ("junk"). Fitch Ratings downgraded Brazil to BB+ with a negative outlook, while Moody's downgraded Brazil to Ba2 and changed the stable perspective to negative. After Moody’s downgrade, Brazil lost its investment grade by the three major rating companies. The Brazilian administration may face domestic pressure to retreat from the current macroeconomic policies in an attempt to achieve higher rates of economic growth. We cannot predict what policies will be adopted by the Brazilian government and whether these policies will negatively affect the economy or our business or financial performance.

 

Restrictions on the movement of capital out of Brazil may impair our abilityto receive payments from our Brazilian Subsidiaries and restrict their ability to make payments in U.S. dollars.

 

In the past, the Brazilian economy has experienced balance of payment deficits and shortages in foreign exchange reserves, and the Brazilian government has responded by restricting the ability of Brazilian or foreign persons or entities to convert reais into foreign currencies. The Brazilian government may institute a restrictive exchange control policy in the future. Any restrictive exchange control policy could prevent or restrict our Brazilian Subsidiaires’ access to U.S. dollars, and consequently their ability to meet their U.S. dollar obligations and may adversely affect our financial condition and results of operations.

 

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(“ANP”)) and by the Brazilian Electricity Regulatory Agency (Agência Nacional de Energia Elétrica) (“ANEEL”) due to our production of sugarcane, ethanol and electric energy (ii) the Ministry of Agriculture, Breeding Cattle and Supply (Ministerio da Agricultura, Pecuaria e Abastecimento(“MAPA”)), 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, a relevant percentage of sugarcane is currently harvested by burning the crop, which removes leaves in addition to eliminating insects and other pests. The states of São Paulo, Minas Gerais and Mato Grosso do Sul, among others, 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 those states and other governmental agencies in the near future.

 

Such limitations arise from a Brazilian Federal Decree that set forth the complete elimination of the harvest by burning the crop until 2018 in areas where it is possible to carry out mechanized harvest. In the state of Minas Gerais, the deadline imposed by the State Government for the elimination of the harvest by burning the crop is 2014, for areas with declivity lower than 12%, and for areas with declivity higher than 12%, they are subject to an additional term at the discretion of the State Environmental Agency, on a case by case basis. Nevertheless, in the state of Mato Grosso do Sul, the current deadline is 2018 for the elimination of harvest by burning the crop for areas where mechanized harvest can be carried out, as per the Brazilian Federal Decree.

 

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We currently make significant investments to comply with these laws and regulations. Although our plans for the implementation of mechanized harvesting are underway, with 97.7% of our sugarcane harvest mechanized during the 2015-2016 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.

 

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 experts 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 the enforcement of judgments obtained outside Luxembourg more difficult as to the enforcement against our assets in Luxembourg or jurisdictions that would apply Luxembourg law.

 

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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. The authorization was originally valid until April 22, 2016 but was renewed by the resolution adopted at the shareholder meeting held on April 20, 2016 and extended for an additional period of five years.

 

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Item 4. Information on the Company

 

A.HISTORY AND DEVELOPMENT OF THE COMPANY

 

General Information

 

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

 

On October 30, 2010, the members of IFH transferred pro rata approximately 98% of their membership interests in IFH 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.” In a series of transactions during 2012, we transferred shares of Adecoagro to certain limited partners of IFH in exchange for their residual interest in IFH increasing our interest in IFH to approximately 100%.

 

On March 27, 2015, Adecoagro commenced a series of transactions for the purpose of transfering the domicile of Adecoagro LP to Luxembourg. In connection with the Adecoagro LP redomiciliation, Adecoagro merged IFH into Adecoagro LP (Delaware) with Adecoagro LP (Delaware) as the surviving entity and Adecoagro GP S.à r.l., a société à responsibilitié limitée organized under the laws of Luxembourg, became he general partner of Adecoagro LP on April 1, 2015. Also on April 1, 2015, Adecoagro completed the redomiciliation of Adecoagro LP (Delaware) out of Delaware to Luxembourg and Adecoagro LP without dissolution or liquidation, continued its corporate existence as Adecoagro LP S.C.S., a société en commandite simple organized under Luxembourg law, effective April 2, 2015. For a detailed description of the Adecoagro LP redomiciliation please see “Corporate Development” below.

 

Adecoagro is registered with the Luxembourg Registry of Trade and Companies under number B153681. Adecoagro has its registered office at 6, Rue Eugène Ruppert, L-2453, Luxembourg, Grand Duchy of Luxembourg. Our telephone number is (+352) 264491.

 

History

 

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 5,086 hectares) and three farms in Western Bahia Brazil (20,419 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) and Las Horquetas farm (2,086 hectares).

 

In 2005, we acquired our first sugar and ethanol mill, Usina Monte Alegre S.A. (“UMA”), with a crushing capacity of 0.9 million tons of sugarcane per year at that time. UMA became our platform for expansion in the Brazilian sugar and ethanol sector.

 

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 two farms of approximately 4,000 hectares in Brazil for the production of crops. Also, in December 2007, we acquired Bañado del Salado S.A., Agro Invest S.A. and Forsalta S.A., with more than 43,000 hectares for crop production in Argentina, and one farm in Uruguay of approximately 3,177 hectares.

 

During 2007, we also began the expansion of our dairy business in Argentina. After five years of research, we began the construction of a “free-stall” dairy facility with a capacity to milk 3,000 cows.

 

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In Brazil, during 2007, we began the construction of a sugarcane cluster in Mato Grosso do Sul with a projected 10.0 million tons of sugarcane crushing capacity. Angelica was the first greenfield mill we built from inception, with a nominal crushing capacity of 4.0 million tons. We also bought approximately 13,000 hectares of farmland for the planting of sugarcane to supply the mill. Angelica began operating during August 2008, and reached full operational capacity during April 2010.

 

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. Further, between August and November 2011, we acquired: (i) Compañía Agroforestal de Servicios y Mandatos S.A., an agricultural Argentine company owning more than 4,900 hectares of land in the province of Santiago del Estero, (ii) Simoneta S.A., an agricultural Argentine company owner of more than 4,600 hectares of land in the province of La Pampa, and (iii) 3,400 hectares of land for crop production in the province of San Luis, Argentina.

 

During 2012, we began the construction of our second free stall dairy facility in Argentina, with a capacity of 3,500 milking cows.

 

On Februrary 26, 2013, Adecoagro formed CHS Agro S.A., a joint venture with a leading farmer-owned energy, grains and foods company based in the United States. We hold 50% interest in CHS Agro. CHS Agro will build a sunflower processing facility located in the city of Pehuajo, Province of Buenos Aires, Argentina. The facility will process blackoil and confectionary sunflower into speciatly products such as in-shell seeds and oil seeds, which will be entirely exported to markets in Europe and the Middle East. The joint venture will grow confectionary sunflower on leased farms, while blackoil sunflower will be originated from third parties. As of December 31, 2014 We and CHS Inc. have made individual capital contributions to CHS Agro of approximately US$ 4 million each.

 

During March 2013, we began the construction of the second greenfield project in our sugarcane cluster in Mato Grosso do Sul. The Ivinhema mill, with 5.0 million tons of sugarcane crushing capacity and located 45 km south of Angelica, would consolidate our cluster, generating important synergies and economies of scale, improving operational margins and free cash flow. Ivinhema was built in two phases: the first phase with 2.0 million tons of capacity was completed during April 2012 and the second phase, with 3.0 million tons of crushing capacity was completed during mid 2015.

 

Corporate Development

 

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 IFH LP, a Delaware limited partnership. 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. Adecoagro LLC was also converted to Adecoagro LP, a Delaware limited partnership, 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 our initial public offering of our shares listed on the NYSE and on February 2, 2011 we issued 28,405,925 shares, at a price of US$11 per share. The shares trade under the symbol “AGRO.”

 

On February 2, 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 of our initial public offering of the Company, pursuant to an agreement entered into on January 6, 2011. 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.

 

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During 2012, the Company issued in a series of transactions 1,654,752 shares to certain limited partners of IFH in exchange for their residual interest in IFH increasing Adecoagro’s interest in IFHto approximately 100%.

 

On February 26, 2013, Adecoagro formed CHS Agro S.A., a joint venture with CHS Inc. (www.chsinc.com) a leading farmer-owned energy, grains and foods company based in the United States. We hold 50% interest in CHS Agro. CHS Agro will build a sunflower processing facility located in the city of Pehuajo, Province of Buenos Aires, Argentina. The facility will process blackoil and confectionary sunflower into specialty products such as in-shell seeds and oil seeds, which will be entirely exported to markets in Europe and the Middle East. The joint venture will grow confectionary sunflower on leased farms, while blackoil sunflower will be originated from third parties. As of December 31, 2014 We and CHS Inc. have made a capital contribution to CHS Agro of approximately US$ 4 million each.

 

On February 5, 2013, we completed an underwritten secondary offering of 13.9 million common shares of Adecoagro offered by our shareholder, HBK Master Fund LP at a price per share to the public of $8.00 pursuant to an effective shelf registration statement on Form F-3 filed with the SEC. On February 13, 2013, HBK Master Fund LP sold an additional 2,1 million common shares of Adecoagro pursuant to the overallotment option it granted to the underwriter in the secondary offering.

 

On March 27, 2015, Adecoagro commenced a series of transactions for the purpose of transfering the domicile of Adecoagro LP to Luxembourg. In connection with the Adecoagro LP redomiciliation, Adecoagro merged IFH LP into Adecoagro LP with Adecoagro LP (Delaware) as the surviving entity. In connection with this merger, all of the assets and liabilities of IFH L.P. vested in Adecoagro LP (Delaware), Ona Ltd became its general partner and Toba Ltd became a wholly owned subsidiary of Adecoagro LP (Delaware). In connection with the transactions completed on March 27, 2015, Ona Ltd. assigned its general partnership interest in Adecoagro LP to Adecoagro GP S.a.r.l., a societe responsibilitie limitee organized under the laws of Luxembourg, on April 1, 2015. Also on April 1, 2015, Adecoagro completed the redomiciliation of Adecoagro LP (Delaware) out of Delaware to Luxembourg and Adecoagro LP, without dissolution or liquidation, continued its corporate existence as Adecoagro LP S.C.S., a societe en commandite simple organized under Luxembourg law, effective April 2, 2015. Since that date the affairs of Adecoagro LP S.C.S. have been governed by its by-laws and Luxembourg law.

 

On March 21, 2016, we completed an underwritten secondary offering of 12.0 million shares of Adecoagro offer by our shareholders, Quantum Partner LP and Geosor Corporation, at a price per share to the public of $11.7 pursuant to an effective shelf registration statement on Form F-3 filed with the SEC. In connection with the offering, the selling shareholders granted the underwriter the right to purchase up to 1,800,000 additional common shares exercisable once at any time within 30 days after March 21, 2016. On April 20, 2016, the underwriter elected to purchase an additional 350,000 common shares at a price of U.S.$13.40 per common share.

 

Set forth below is a corporate structure as of April 2, 2015.

 

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Principal Capital Expenditures

 

Capital expenditures totaled $155.9 million, $322.9 million and $232.3 million for the years ended December 31, 2015, 2014 and 2013, 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.”

 

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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, 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) implementing sustainable production practices and technologies focused on long-term profitability.

 

As of December 31, 2015, we owned a total of 246,139 hectares, comprised of 19 farms in Argentina, 11 farms in Brazil and one farm in Uruguay. In addition we own and operate several agro-industrial production facilities including three rice processing facilities in Argentina, two dairy facilities with approximately 6,752 milking cows in Argentina, 11 grain and rice conditioning and storage plants in Argentina, and three sugar and ethanol mills in Brazil with a sugarcane crushing capacity of 10.2 million tons.

 

We believe that we are:

 

one of the largest owners of productive farmland in South America, with more than 203,520 owned productive hectares as of December 31, 2015 (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 grains and oilseeds in South America. During the 2014/2015 harvest year, we harvested 189,014 hectares (including 60,056 leased hectares and 40,115 second crop hectares) and produced 627,385 tons of grains, including soybeans, corn, wheat, sunflower and cotton;

 

one of the largest producers of rough (unprocessed) rice in the world, planting 35,328 hectares (including 3,225 leased hectares) and producing 180,149 tons during the 2014/2015 harvest year, which accounted for 13% 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 (processed) in Argentina, accounting for 19% of total white rice production capacity in Argentina and 22% of total Argentine white rice exports during 2014, according to Camara de Industriales Arroceros de Entre Ríos (Federacion de Entidades Arroceras).

 

a leading dairy producer in South America in terms of our cutting-edge technology, productivity per cow and grain conversion efficiencies, producing approximately 88.6 million liters of raw milk during 2015.

 

a growing producer of sugar and ethanol in Brazil, where we currently own three sugar and ethanol mills, with an aggregate installed capacity of 10.2 million tons per year and full cogeneration capacity (the generation of electricity from sugarcane bagasse, the fiber portion of sugarcane that remains after the extraction of sugarcane juice) of 232 MW as of December 31, 2015. Our operation is highly integrated, meaning that 89% of the sugarcane crushed at our mills is supplied from our own plantations. As of December 31, 2015, our sugarcane plantation consisted of 125,669 hectares; and.

 

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 ten fiscal years, we have consistently sold a portion of our fully mature farmland every year. In aggregate, we have sold over 77,000 hectares generating capital gains of approximately $204 million.

 

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We are engaged in three main businesses:

 

Farming Business: As of December 31, 2015 we owned 232,848 hectares (excluding sugarcane farms) of farmland in Argentina, Brazil and Uruguay, of which 117,680 hectares are croppable, 14,912 hectares are being evaluated for transformation, 60,863 hectares are suitable for raising beef cattle and are mostly leased to third party cattle farmers, constituting a total of 193,455 productive hectares, and 60,863 hectares are legal land reserves pursuant to local regulations or other land reserves. During the 2014/2015 harvest year we held leases or have entered into agriculture partnerships for an additional 60,056 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 four main businesses:

 

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 2014/2015 harvest year, we planted approximately 189,014 hectares of crops, including second harvests, producing 627,824 tons of grains, including soybeans, wheat and corn, sunflower and cotton. We also planted an additional 4,999 hectares where we produced over 102,527 tons of forage that we used for cow feed in our dairy operation. During the current 2015/16 harvest year, we planted approximately 173,210 hectares of crops, including second harvest, and also planted an additional 4,968 hectares of forage.

 

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 180,149 tons during the 2014/2015 harvest year, which accounted for 13% of the total Argentine production according to Conmasur. We own three 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 sold both in the domestic Argentine retail market and exported. During the current 2015/16 harvest year, we planted 37,565 hectares of rice.

 

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. 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” dairies in Argentina are the first of their 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. We produced approximately 88.6 million liters of raw milk during 2015, with a daily average of 6,658 milking cows, delivering an average of 36.4 liters of milk per cow per day.

 

All Other Segments business: Our all other segments business consists of leasing pasture land to cattle farmers in Argentina and leasing our coffee plantation in the Rio de Janeiro farm, located in Western Bahia, Brazil, to a third party. We lease over 33,300 hectares of pasture land which is not suitable for crop production to third party cattle farmers.

 

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

 

   Year Ended December 31, 
   2015   2014   2013 
Sales  (In thousands of $) 
Crops(l)   154,741    177,662    185,117 
Rice(2)   84,668    103,682    107,093 
Dairy   32,981    32,968    30,661 
All Other Segments (3)   1,302    1,525    4,293 
Total   273,692    315,837    327,163 

 

Production 

2014/2015

Harvest

Year

  

2013/2014

Harvest

Year

  

2012/2013

Harvest

Year

 
Crops (tons)(4)   627,824    643,354    496,590 
Rice (tons)(5)   180,149    205,489    202,589 

Total

   807,973    848,843    699,179 

 

   Year Ended December 31 
   2015   2014   2013 
Dairy (thousands of liters)(6)   88,556    79,468    72,984 

 

  

2015/2016

Harvest

Year

  

2014/2015

Harvest

Year

  

2013/2014

Harvest

Year

  

2012/2013

Harvest

Year

 
Planted Area  (In hectares, including second harvest) 
Crops (7)   178,178    194,271    185,954    187,220 
Rice   37,565    35,328    36,604    35,249 

 

 
(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)All Other Segments encompasses our remaining interests in the beef Cattle and Coffee businesses. Our beef cattle business consists of over 63 thousand hectares of pasture land that is not suitable for crop production and as a result is leased to third parties for cattle grazing activities. We lease the coffee production rights with respect to our Rio de Janeiro coffee plantation.

 

(4)Crop production does not include 102,527 tons, 89,081 tons, and 30,628 tons of forage produced in the 2014/2015, 2013/2014 and2012/2013 harvest years, respectively.

 

(5)Expressed in tons of rough rice produced on owned and leased farms. As of December 31, 2014, the 2014/15 harvest year of rice harvest had not began.

 

(6)Raw milk produced at our dairy farms.

 

(7)Includes 4,968 4,999 hectares, 3,141 hectares, and 5,172 hectares, used for the production of forage during the 2015/16, 2014/2015, 2013/2014 and 2012/2013 harvest years, respectively.

 

Sugar, Ethanol and Energy Business: We cultivate and harvest sugarcane which is then processed in our own mills to produce sugar, ethanol and energy. As of December 31, 2015, our total sugarcane plantation consisted of 125,669 hectares, planted over both owned and leased land. We currently own and operate three sugar and ethanol mills, UMA, Angélica and Ivinhema, with a total crushing capacity of 10.2 million tons of sugarcane per year as of December 31, 2015. UMA is a small but efficient mill 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 99.6% of the sugarcane milled at UMA, with the remaining 0.4% acquired from third parties. Angélica and Ivinhema are two new, modern mills, which we built in the state of Mato Grosso do Sul, Brazil, with current sugarcane crushing capacities of 4.7 and 5.3 million tons per year, respectively. Both mills are located 45 km apart, and form a cluster surrounded by one large sugarcane plantation. Angelica and Ivinhema are equipped with high pressure steam boilers and turbo-generators with the capacity to use all the sugarcane bagasse by-product to generate electricity. Approximately 33% of the electricity generated is used to power the mill and the excess electricity is sold to the local power grid, resulting in the mills having full cogeneration capacity.

 

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For the year ended December 31, 2015, we crushed 8.3 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. For the year ended December 31, 2015 we produced 464,929 tons of sugar and 361,000 cubic meters of ethanol.

 

As of December 31, 2015, our overall sugarcane plantation consisted of 125,669 hectares of sugarcane in the states of Mato Grosso do Sul and Minas Gerais, Brazil, of which 9,748 hectares of sugarcane were planted on owned land, and 116,524 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:

 

Sales  Year Ended December 31, 
   2015   2014   2013 
   (In thousands of $) 
Sugar   177,801    174,459    133,597 
Ethanol   176,150    165,870    150,382 
Energy   46,671    66,800    32,463 
Other   -    -    1,019 
Total   400,622    407,129    317,461 

 

   Year Ended December 31 
Production  2015   2014   2013 
Sugar (tons)   464,929    413,687    335,643 
Ethanol (cubic meters)   361,001    299,810    268,053 
Energy (MWh exported)   553,090    445,705    300,208 

 

   Year Ended December 31 
Other Metrics  2015   2014   2013 
Sugarcane milled (% owned)   89%   89%   87%
Sugarcane crushing capacity (millions of tons)   10.2    7.2    7.2 
% Mechanized harvesting operations — Consolidated   98%   97%   94%
% Mechanized /harvesting operations — Cluster   100%   100%   100%

 

Land Transformation Business: 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 fourteen-year period since our inception, we have effectively put into production 169,317 hectares of land that was previously undeveloped or undermanaged. During 2015, we put into production 2,790 hectares and in addition continued the transformation process of over 127,428 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 249,508 hectares, distributed throughout our operating regions as follows: 85% in Argentina, 14% in Brazil, and 1% in Uruguay. During the last seven years, we sold 20 of our fully mature farms, generating capital gains of approximately $210 million.

 

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 wetland areas.

 

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From time to time, the company seeks to recycle its capital by disposing of a portion of its fully developed farms. This allows the company to monetize the capital gains generated by its land transformation activities and allocate its capital to acquire land with higher transformation potential or to deploy it in other businesses, 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, 
   2015   2014   2013 
Undeveloped/Undermanaged land put into production (hectares)   2,790    2,580    1,389 
Ongoing transformation of croppable land (hectares)   127,428    122,041    133,568 
Number of farms sold   3(1)   2(1)   4 
Hectares sold   10,905    12,887    14,176 
Capital gains from the sale of land ($ thousands)   23.9    25,600    28,172 

 

(1) Sold minority interests in farmland companie

 

Sale of 49% of interest in El Orden and La Carolina Farms

 

In December 2015, we completed the sale of a 49% interest in Global Acamante S.L.U., Global Calidon S.L.U., Global Carelio S.L.U. and Global Mirabilis S.L.U., whose main underlying assets are El Orden and La Carolina farms, for an aggregate sale price of $22.05 million. The selling price was 48% above Cushman and Wakefield´s independent appraisal dated September 2015. Under IFRS, the sale of a non-controlling interest in a subsidiary is treated as an equity transaction, with no gain or loss recognized in the consolidated Statement of Income. The difference between the selling price and the book value was recognized in the Statement of Changes in Shareholders’ Equity under the line item “Reserve from the sale of non-controlling interests in subsidiaries”. Therefore this transaction resulted in an increase of $16.1 million to our equity.

 

El Orden and La Carolina farms are located in the province of Santa Fe, Argentina and were acquired by Adecoagro in 2005. The farms have a total of 15,319 hectares, of which 5,835 were used for crop production.

 

Sale of La Cañada Farm

 

During November 2015, we also completed the sale of La Cañada farm for a total price of $12.6 million, which was 57% above Cushman and Wakefield´s independent appraisal dated September 2015. This transaction resulted in a gain of $7.9 million included under “Other operating income, net”.

 

La Cañada is a 3,399 hectare farm located in the province of San Luis, Argentina and was acquired by Adecoagro in 2011 to produce irrigated crops.

 

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 continuous 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.

 

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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.

 

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 cotton production is focused in western Bahia, Brazil. This region is excellent for producing high quality cotton fiber due to its ideal climate, well drained soils and high altitude.

 

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, where the combination of soil and climate result in high sugarcane productivity and quality, resulting in one of 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” production system, 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 sugarcane cluster, constituted by the Ivinhema and Angélica mills (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 almost no incremental cost, to cogenerate 232 MW of clean and renewable electricity; (iii) has the capacity of processing 51,600 tons of sugarcane 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.

 

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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 of products, including soybeans, corn, wheat, sunflower, cotton, barley, sorghum, rice, 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, 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. Since our inception in 2002, we have executed transactions for the purchase and disposition of land for over $652 million and sold over 77,000 hectares of developed land, generating capital gains of approximately $210 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 11 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 of rotating our asset portfolio to generate capital gains and monetize the transformation and appreciation generated through our land transformation activities and agricultural 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 three main farming business areas (crops, rice and dairy). 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 also plan to increase our current milk production using the “free-stall” model.

 

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 consolidate our cluster in Mato Grosso do Sul, Brazil, through the ramping up of our Ivinhema and Angelica mills, which as of December 2015 reached a nominal capacity of 9.0 million tons per year and are expected to reach 10.2 million tons by 2017. See “—Sugar, Ethanol and Energy—Our Mills.” The consolidation of the cluster will generate important synergies, operating efficiencies and economies of scale such as (i) a reduction in the average distance from the sugarcane fields to the mills, generating important savings in sugarcane transportation expenses; (ii) one centralized management team, reducing total administration cost per ton of sugarcane milled; and (iii) a large sugarcane plantation supplying two mills, allowing for non-stop harvesting. We believe that our sugarcane cluster in Mato Grosso do Sul will allow us to become one of the 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.

 

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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 three main reportable operating businesses, namely crops, rice and dairy. We conduct our farming operations primarily on our own land and, to a lesser extent, on land leased from third parties. During harvest year 2014/2015 our farming operations were conducted on a total of 224,343 hectares of land, of which we own 155,804 hectares (excluding sugarcane farms) and we leased the remaining 68,538 hectares from third parties. The following table sets forth our production volumes for each of our farming business lines.

 

   Harvest Year 
   2014/2015   2013/2014   2012/2013 
Crops (thousands of tons)(1)   627,824    643,354    496,590 
Rice (thousands of tons)(2)   180,149    205,489    202,589 

 

   Year Ended December 31, 
   2015   2014   2013 
Dairy (thousands of liters)(3)   88,556    79,468    72,984 

 

 
(1)As of the date of this annual report, the harvest of soybean, corn, sunflower, cotton and rice pertaining to the 2015/2016 harvest year is ongoing. The only crop which has been fully harvested in the current 2015/16 harvest year is wheat, with a total production of 64,686 tons.
(2)Expressed in tons of rough rice.
(3)Raw milk produced.

 

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 2014/2015 harvest year, we planted crops over a total area of approximately 189,014 hectares, including our owned land, land leased from third parties and hectares planted in second harvests. During mid 2015 we began the planting of crops pertaining to the 2015/16 harvest year, which was concluded during the first quarter of 2015, with a total planted area of 173,310 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.

 

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

 

   Harvest Year 
   2014/15 (5)   2013/2014   2012/2013 
Product Area  (In hectares) 
Soybeans(l)   96,476    82,980    92,103 
Corn(2)   40,044    51,324    45,795 
Wheat(3)   37,020    29,412    28,574 
Sunflower   12,314    12,880    12,478 
Cotton   3,160    6,217    3,098 
Forage(4)   4,999    3,141    5,172 
Total   194,013    185,954    187,220 

 

 

(1) Includes soybean first crop and second crop planted area.

(2) Includes sorghum crop and peanut.

(3) Includes barley crop.

(4) Forage includes corn silage, wheat silage and alfafa used for cow feed in our dairy operation.

(5) As of December, 2015.

 

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

 

   Harvest Year 
   2015/16   2014/2015   2013/2014   2012/2013 
Crop Production(1)  (In thousands of tons) 
Soybeans(2)   -    285,914    218,608    175,478 
Corn(2)   -    233,194    318,381    242,246 
Wheat   82,156    84,610    77,086    52,308 
Sunflower(2)   -    21,762    23,161    24,076 
Cotton lint(2)   -    2,344    6,118    2,482 
Total(2)   82,156    627,824    643,354    496,590 

  

 

(1)Does not include 102,527, 89,081, and 30,628 tons of forage produced in the 2014/2015, 2013/2014, and 2012/2013 harvest years respectively.
(2)As of the date of this annual report, the harvest of soybean, corn, sunflower and cotton pertaining to the 2015/16 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, 
   2015   2014   2013 
Sales  (In thousands of $) 
Soybeans   75,361    79,515    68,850 
Corn (l)   41,924    69,720    79,423 
Wheat (2)   16,750    8,849    21,798 
Sunflower   12,659    10,016    8,030 
Cotton   3,317    9,081    6,119 
Other crops (3)   4,721    481    897 
Total   154,741    177,662    185,117 

 

 

(1) Includes sorghum.

(2) Includes barley.

(3) 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. The world’s top producers of soybeans currently 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 2012/2013 harvest year, we planted a total area of 92,103 hectares of soybeans, producing a total of 175,478 tons representing 51% of our total planted area that year, and 35% of our total crop production. In the 2013/2014 harvest year, we planted a total area of 82,980 hectares of soybeans, producing a total of 218,608 tons representing 45% of our total crop planted area that year, and 34% of our total crop production. In the 2014/15 harvest year, we planted a total area of 96,476 hectares of soybeans, producing a total of 285,914 tons representing 51% of our total crop planted area that year, and 46% of our total crop production.

 

Soybeans comprised 11%, 11% and 11% of our total consolidated sales in 2013, 2014 and 2015, respectively

 

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