20-F 1 t1701194_20f.htm 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, 2016
  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)

Gorka Fernandez Matute

Vertigo Naos Building, 6, Rue Eugène Ruppert,

L - 2453 Luxembourg

Email: gorka.fernandezmatute@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, 2016:

121,143,497 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, a non-accelerated filer, or an emerging growth company. See definition of “large accelerated filer," accelerated filer,” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer þ Accelerated filer ¨ Non-accelerated filer ¨
    Emerging growth company ¨

 

If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

 

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 10
  C. REASONS FOR THE OFFER AND USE OF PROCEEDS 10
  D. RISK FACTORS 10
       
Item 4. Information on the Company 43
  A. HISTORY AND DEVELOPMENT OF THE COMPANY 43
  B. BUSINESS OVERVIEW 47
  C. ORGANIZATIONAL STRUCTURE 86
  D. PROPERTY, PLANTS AND EQUIPMENT 86
       
Item 4B. Unresolved Staff Comments 86
       
Item 5. Operating and Financial Review and Prospects 86
  A. OPERATING RESULTS 88
  B. LIQUIDITY AND CAPITAL RESOURCES 117
  C. RESEARCH AND DEVELOPMENT, PATENTS AND LICENSES, ETC. 122
  D. TREND INFORMATION 123
  E. OFF-BALANCE SHEET ARRANGEMENTS 123
  F. TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS 123
  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 128
  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

 

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Item 8. Financial Information 137
  A. CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION 137
  B. SIGNIFICANT CHANGES 138
       
Item 9. The Offer and Listing 139
  A. OFFER AND LISTING DETAILS 139
  B. PLAN OF DISTRIBUTION 139
  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 151
  F. DIVIDENDS AND PAYING AGENTS 156
  G. STATEMENT BY EXPERTS 156
  H. DOCUMENTS ON DISPLAY 157
  I. SUBSIDIARY INFORMATION 157
       
Item 11. Quantitative and Qualitative Disclosures About Market Risk 157
     
Item 12. Description of Securities Other than Equity Securities 157
  A. DEBT SECURITIES 157
  B. WARRANTS AND RIGHTS 157
  C. OTHER SECURITIES 157
  D. AMERICAN DEPOSITORY SHARES 157
       
PART II     157
       
Item 13. Defaults, Dividend Arrearages and Delinquencies 157
     
Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds 157
     
Item 15. Controls and Procedures 158
       
Item 16.     158
       
  A. Audit Committee Financial Expert 158
  B. Code of Ethics 159
  C. Principal Accountant Fees and Services 159
  D. Exemptions from the Listing Standards for Audit Committees 160
  E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers 160
  F. Change in Registrant’s Certifying Accountant 161

 

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  G. Corporate Governance 161
  H. Mine Safety Disclosure 163
       
PART III     163
       
Item 17. Financial Statements 163
     
Item 18. Financial Statements 163
     
Item 19. Exhibits 163

 

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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.

 

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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 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%.

 

The consolidated financial statements as of December 31, 2016, 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.

 

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Financial Statements

Non-IFRS Financial Measures

 

To supplement our Consolidated Financial Statements, which are prepared and presented in accordance with IFRS, we use the following non-IFRS financial measures in this annual report:

 

·Adjusted Consolidated EBITDA
·Adjusted Segment EBITDA
·Adjusted Consolidated EBIT
·Adjusted Segment EBIT
·Adjusted Free Cash Flow
·Adjusted Free Cash Flow from Operations
·Net Debt
·Net Debt to Adjusted Consolidated EBITDA

 

In this section, we provide an explanation and a reconciliation of each of our non-IFRS financial measures to their most directly comparable IFRS measures of each non-IFRS measure. The presentation of these financial measures is not intended to be considered in isolation or as a substitute for, or superior to, financial information prepared and presented in accordance with IFRS.

 

We use non-IFRS measures to internally evaluate and analyze financial results. We believe these non-IFRS financial measures provide investors with useful supplemental information about the liquidity and financial performance of our business, enable comparison of financial results between periods where certain items may vary independent of business performance, and enable comparison of our financial results with other public companies, many of which present similar non-IFRS financial measures.

 

There are limitations associated with the use of non-IFRS financial measures as an analytical tool. In particular, many of the adjustments to our IFRS financial measures reflect the exclusion of items, such as depreciation and amortization, changes in fair value and the related income tax effects of the aforementioned exclusions, that are recurring and will be reflected in our financial results for the foreseeable future. In addition, these measures may be different from non-IFRS financial measures used by other companies, limiting their usefulness for comparison purposes.

 

Adjusted Consolidated EBITDA, Adjusted Segment EBITDA, Adjusted Consolidated EBIT and Adjusted Segment EBIT

 

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 (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 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 (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.” 

 

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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), 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.

 

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 and other net financial expenses; 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 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; 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), 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.

 

Adjusted Free Cash Flow and Adjusted Free Cash Flow from Operations

 

We define Adjusted Free Cash Flow as (i) net cash generated from operating activities, less (ii) net cash used in investing activities, less (iii) interest paid, plus (iv) proceeds from the sale of non-controlling interest in subsidiaries. We define Adjusted Free Cash Flow from Operations as (i) net cash generated from operating activities less (ii) net cash used in investing activities, less (iii) interest paid, plus (iv) proceeds from the sale of non-controlling interest in subsidiaries; plus (v) expansion capital expenditures.

 

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Expansion capital expenditures is defined as the required investment to expand current production capacity. We define maintenance capital expenditures as the necessary investments in order to maintain the current level of productivity both at an agricultural and industrial level.

 

We believe Adjusted Free Cash Flow is an important liquidity measure for the Company because it allows investors and others to evaluate and compare the amount of cash generated by the Company to undertake growth investments, to fund acquisitions, to reduce outstanding financial debt, and to provide a return to shareholders in the form of dividends and/or share repurchases, among other things.

 

We believe Adjusted Free Cash Flow from Operations is an important liquidity metric for the Company because it allows investors and others to evaluate and compare the amount of cash generated by the Company’s operations after paying for interests, taxes and maintenance capital expenses. We believe this metric is relevant in evaluating the overall performance of our business.

 

Other companies may calculate Adjusted Free Cash Flow and Adjusted Free Cash Flow from Operations differently, and therefore our formulation may not be comparable to similarly titled measures used by other companies. Adjusted Free Cash Flow and Adjusted Free Cash Flow from Operations are not measures of liquidity under IFRS, and should not be considered in isolation or as an alternative to consolidated, cash flows from operating activities, net increase, (decrease) in cash and cash equivalents and other measures determined in accordance with IFRS

 

Net Debt and Net Debt to Adjusted Consolidated EBITDA

 

Net debt is defined as the sum of non-current and current borrowings less cash and cash equivalents. This measure is widely used by management.

 

Management is consistently tracking our leverage position and our ability to repay and service our debt obligations over time. We have therefore set a leverage ratio target that is measured by net debt divided by Adjusted Consolidated EBITDA.

 

We believe that the ratio net debt to Adjusted Consolidated EBITDA provides useful information to investors because management uses it to manage our debt-equity ratio in order to promote access to capital markets and our ability to meet scheduled debt service obligations.

 

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.

 

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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:

 

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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    

 

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.

 

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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 selected financial data as of December 31, 2016, 2015 and 2014 and for the three years in the period ended December 31, 2016 have been derived from our Consolidated Financial Statements appearing elsewhere in this annual report on Form 20-F. The selected financial data as of December 31, 2013 and 2012 and for the years ended December 31, 2013 and 2012 have been derived from our annual consolidated financial statements as of December 31, 2014, 2013 and 2012 and for the three years in the period ended December 31, 2014, which are not included herein. The Consolidated Financial Statements are prepared in accordance with IFRS. All IFRS effective at the time of preparing the Consolidated Financial Statements have been applied.

 

The Consolidated 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.

 

§Effects of the adoption of the amendments to IAS 41 and IAS 16

 

IASB amended IAS 16 “Property, Plant and Equipment” and IAS 41 “Agriculture,” which distinguish bearer plants from other biological assets. Bearer plants are used solely to grow produce over their productive lives and are considered to bear more resemblance to machinery and equipment (IAS 16) than other biological assets (under IAS 41). Accordingly, they are now accounted for under IAS 16. However, the agricultural produce growing on bearer plants remains within the scope of IAS 41 and is measured at fair value less cost to sell. The amendments were applicable for our fiscal year ended December 31, 2016.

 

Our sugarcane and coffee plantations qualify as bearer plants under the new definition in IAS 41. As required under IAS 8, “Accounting Policies, Changes in Accounting Estimates and Errors”, we effected the change in accounting policy retrospectively. Consequently, effective January 1, 2016, our sugarcane and coffee plantations were reclassified to property, plant and equipment, measured at amortized cost and depreciated over their useful life on a straight-line basis. We adopted the transitional rule provided for in the amendment, which allowed us to apply the fair value of bearer plants as their deemed cost as of January 1, 2014. Accordingly, we revised the comparative amounts financial data for the years ended December 31, 2015 and 2014. Financial data for the years ended December 31, 2013 and 2012 have not been revised, and are not comparable to financial data for the years 2016, 2015 and 2014.

 

For further information, and an analysis of the impact of the adoption of IAS 41 and IAS 16 to our Consolidated Financial Statements please see Note 32.1 to our Consolidated Financial Statements.

 

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   As of December 31, 
   2016   2015   2014   2013(*)   2012(*) 
   (In thousands of $) 
Statements of Income Data:                         
Sale of goods and services rendered   869,235    674,314    722,966    644,624    604,700 
Cost of goods sold and services rendered   (678,581)   (557,786)   (605,325)   (491,578)   (489,152)
Initial recognition and changes in fair value of biological assets and agricultural produce   125,456    54,528    100,216    (39,123)   16,643 
Changes in net realizable value of agricultural produce after harvest   (5,841)   14,691    3,401    12,875    16,004 
Margin on manufacturing and agricultural activities before operating expenses   310,269    185,747    221,258    126,798    148,195 
General and administrative expenses   (50,750)   (48,425)   (52,695)   (53,352)   (57,691)
Selling expenses   (80,673)   (70,268)   (78,864)   (68,069)   (58,602)
Other operating income, net   (8,297)   31,066    11,977    49,650    31,097 
Share of loss of joint ventures   -    (2,685)   (924)   (219)   - 
Profit from operations before financing and taxation   170,549    95,435    100,752    54,808    62,999 
Finance income   7,957    9,150    7,291    7,234    11,538 
Finance costs   (165,380)   (116,890)   (86,472)   (98,916)   (66,654)
Financial results, net   (157,423)   (107,740)   (79,181)   (91,682)   (55,116)
Profit / (Loss) before income tax   13,126    (12,305)   21,571    (36,874)   7,883 
Income tax (expense) / benefit   (9,387)   7,954    (10,535)   9,277    5,436 
Profit / (Loss) for the year from continuing operations   3,739    (4,351)   11,036    (27,597)   13,319 
Profit / (Loss) for the year from discontinued operations (1)   -    -    -    1,767    (4,040)
Profit / (Loss) for the year   3,739    (4,351)   11,036    (25,830)   9,279 
                          
Attributable to:                         
Equity holders of the parent   2,039    (5,593)   11,116    (25,828)   9,397 
Non-controlling interest   1,700    1,242    (80)   (2)   (118)
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   0.017    (0.046)   0.092    (0.226)   0.111 
From discontinued operations   -    -    -    0.014    0.034 
Diluted earnings/(loss) per share                         
From continuing operations   0.017    (0.046)   0.091    (0.226)   0.111 
From discontinued operations   -    -    -    0.014    0.034 

 

(1) Our joint venture (equity method) investment in La Lacteo, was disposed on June 2013 and it was reflected as discontinued operations.

 

(*) 2013 and 2012 figures have not been revised (to give effect to the adoption of the amendments of IAS 41 and IAS 16 See “Effects of the adoption of the amendments to IAS 41 and IAS 16.”

 

 

 2 

 

  

   For the Year Ended December 31, 
   2016   2015   2014   2013(*)   2012(*) 
Cash Flow Data:                         
Net cash generated from operating activities   255,401    145,186    120,151    102,080    67,823 
Net cash used in investing activities   (122,014)   (125,051)   (300,472)   (161,536)   (300,215)
Net cash generated from financing activities   (181,682)   92,413    73,289    104,671    133,508 
Other Financial Data:                         
Adjusted Segment EBITDA (unaudited)(1)                         
Crops   27,462    33,211    36,671    36,720    34,313 
Rice   11,698    6,274    14,198    12,902    4,943 
Dairy   5,717    6,356    9,663    9,801    (2,402)
All Other segments   9,085    677    686    1,347    4,280 
Farming subtotal   53,962    46,518    61,218    60,770    41,134 
Ethanol, sugar and energy   265,044    167,180    200,441    115,239    97,505 
Land transformation   -    23,980    25,508    28,172    27,513 
Corporate   (20,957)   (21,776)   (23,233)   (23,478)   (25,442)
Adjusted Consolidated EBITDA (unaudited)(1)   298,049    215,902    263,934    180,703    140,710 

 

 

 

(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, 
   2016   2015   2014   2013 (*)   2012(*) 
   (In thousands of $) 
Statement of Financial Position Data:                         
Biological assets   145,404    111,818    124,736    292,144    298,136 
Inventories   111,754    85,286    117,106    108,389    95,321 
Property, plant and equipment, net   802,608    696,889    991,581    790,520    880,897 
Total assets   1,455,766    1,355,394    1,646,164    1,711,476    1,777,955 
Non-current borrowings   430,304    483,651    491,324    512,164    354,249 
Total borrowings   635,396    723,339    698,506    660,131    539,133 
Share Capital   183,573    183,573    183,573    183,573    183,331 
Equity attributable to equity holders of the parent   664,091    520,084    769,638    854,304    1,025,978 
Non-controlling interest   7,582    7,335    7,589    45    65 
Number of shares   122,382    122,382    122,382    122,382    122,221 

 

(*) 2013 and 2012 figures have not been revised to give effect to the adoption of the amendments of IAS 41 and IAS 16 See”Effects of the adoption of the amendments to IAS 41 and IAS 16.”

 

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.

 

 3 

 

  

   As of December 31, 2016 
   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   26,093    8,932    4,753    8,893    48,671    142,835    -    (20,957)   170,549 
Adjusted Segment EBIT (unaudited)(1)   26,093    8,932    4,753    8,893    48,671    142,835    -    (20,957)   170,549 
Depreciation and amortization   1,369    2,766    964    192    5,291    122,209    -    -    127,500 
Adjusted Segment EBITDA (unaudited)(1)   27,462    11,698    5,717    9,085    53,962    265,044    -    (20,957)   298,049 
Reconciliation to Profit                                            
Profit for the year                                           3,739 
Income tax expense                                           9,387 
Interest expense, net                                           40,527 
Foreign exchange, net                                           19,062 
Other financial results, net                                           97,834 
Adjusted Consolidated EBIT (unaudited)(1)                                           170,549 
Depreciation and amortization                                           127,500 
Adjusted Consolidated EBITDA (unaudited)(1)                                           298,049 

 

(1)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, 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    401    39,372    69,925    7,914    (21,776)   95,435 
Adjusted Segment EBIT (unaudited)(1)   30,784    3,287    4,900    401    39,372    69,925    7,914    (21,776)   95,435 
Depreciation and amortization   2,427    2,987    1,456    276    7,146    97,255    -    -    104,401 
Reserve from the sale of non-controlling interests in subsidiaries (2)   -    -    -    -    -    -    16,066    -    16,066 
Adjusted Segment EBITDA (unaudited)(1)   33,211    6,274    6,356    677    46,518    167,180    23,980    (21,776)   215,902 
Reconciliation to Profit                                           
Loss for the year                                           (4,351)
Income tax (benefit)                                           (7,954)
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 (2)                                           16,066 
Adjusted Consolidated EBIT (unaudited)(1)                                           111,501 
Depreciation and amortization                                           104.401 
Adjusted Consolidated EBITDA (unaudited)(1)                                           215,902 

 

(1)See “Presentation of Financial and Other Information” for the definitions of Adjusted Segment EBIT, Adjusted Consolidated EBIT, Adjusted Segment EBITDA and Adjusted Consolidated EBITDA.

 

(2)This corresponds to an equity line item in our consolidated statements of financial position. 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, 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    288    54,082    69,903    -    (23,233)   100,752 
Adjusted Segment EBIT (unaudited)(1)   34,745    10,937    8,112    288    54,082    69,903    -    (23,233)   100,752 
Depreciation and amortization   1,926    3,261    1,551    398    7,136    130,538    -    -    137,674 
Reserve from the sale of non-controlling interests in subsidiaries (2)   -    -    -    -    -    -    25,508    -    25,508 
Adjusted Segment EBITDA (unaudited)(1)   36,671    14,198    9,663    686    61,218    200,441    25,508    (23,233)   263,934 
Reconciliation to Profit                                            
Profit for the year                                           11,036 
Income tax expense                                           10,535 
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 (2)                                           25,508 
Adjusted Consolidated EBIT (unaudited)(1)                                           126,260 
Depreciation and amortization                                           137,674 
Adjusted Consolidated EBITDA (unaudited)(1)                                           263,934 

 

(1)See “Presentation of Financial and Other Information” for the definitions of Adjusted Segment EBIT, Adjusted Consolidated EBIT, Adjusted Segment EBITDA and Adjusted Consolidated EBITDA.

 

(2)This corresponds to an equity line item in our consolidated statements of financial position. 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, 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.

 

(*) 2013 and 2012 figures have not been revised to give effect to the adoption of the amendments of IAS 41 and IAS 16 See”Effects of the adoption of the amendments to IAS 41 and IAS 16.”

 

 7 

 

  

   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.

 

(*) 2013 and 2012 figures have not been revised to give effect to the adoption of the amendments of IAS 41 and IAS 16 See”Effects of the adoption of the amendments to IAS 41 and IAS 16.”

 

 8 

 

  

Adjusted Free Cash Flow  2016   2015   2014   2013 (*)   2012(*) 
Net cash generated from operating activities   255,401    145,186    120,151    102,080    67,823 
Net cash used in investing activities   (122,014)   (125,051)   (300,472)   (161,536)   (300,215)
Interest paid   (48,400)   (48,438)   (48,899)   (45,972)   (34,587)
Proceeds from the sale of non-controlling interest in subsidiaries   -    21,964    49,343    -    - 
Expansion Capital expenditures reversal (unaudited)   48,295    87,956    237,277    166,494    294,586 
Adjusted Free Cash Flow from Operations (unaudited)   133,282    81,617    57,400    61,066    27,607 
Expansion Capital expenditures (unaudited)   (48,295)   (87,956)   (237,277)   (166,494)   (294,586)
Adjusted Free Cash Flow (unaudited)   84,987    (6,339)   (179,877)   (105,428)   (266,979)

 

Indebtedness  2016   2015   2014   2013 (*)   2012(*) 
Net Debt (unaudited)   476,828    524,445    584,711    427,984    320,324 
Net Debt / Adjusted Consolidated EBITDA (unaudited)   1.60x   2.43x   2.22x   2.37x   2.28x

 

Reconciliation - Net Debt  2016   2015   2014   2013 (*)   2012(*) 
Net Debt (unaudited)   476,828    524,445    584,711    427,245    320,324 
Cash and cash equivalents   158,568    198,894    113,795    232,147    218,809 
Total  Borrowings   635,396    723,339    698,506    659,392    539,133 

 

(*) 2013 and 2012 figures have not been adjusted to give effect to the adoption of the amendments of of IAS 41 and IAS 16. Please see Note 32.1 to our Consolidated Financial Statements.

 

Reconciliation of Adjusted Free Cash Flow to Net (decrease)/increase in Cash and Cash Equivalents

 

   2016   2015   2014   2013   2012 
Adjusted Free Cash Flow (unaudited)   84,987    (6,339)   (179,877)   (105,428)   (266,979)
Net cash generated from financing activities   (181,682)   92,413    73,289    104,671    133,508 
Interest Paid   48,400    48,438    48,899    45,972    34,587 
Proceeds from the sale of minority interest in subsidiaries   -    (21,964)   (49,343)   -    - 
Net (decrease)/increase in cash and cash equivalents   (48,295)   112,548    (107,032)   45,215    (98,884)

 

Reconciliation of Adjusted Free Cash Flow from operations to Net (decrease)/increase in Cash and Cash Equivalents

 

   2016   2015   2014   2013   2012 
Adjusted Free Cash Flow from operations (unaudited)   133,282    81,617    57,400    61,066    27,607 
Net cash generated from financing activities   (181,682)   92,413    73,289    104,671    133,508 
Interest Paid   48,400    48,438    48,899    45,972    34,587 
Proceeds from the sale of minority interest in subsidiaries   -    (21,964)   (49,343)   -    - 
Expansion Capital Expenditures (unaudited)   (48,295)   (87,956)   (237,277)   (166,494)   (294,586)
Net (decrease)/increase in cash and cash equivalents   (48,295)   112,548    (107,032)   45,215    (98,884)

 

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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.

 

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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.

 

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.

 

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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 represented approximately 30% of our total cost of production (including manufacturing and administrative expenses) for the 2015/2016 harvest year. In our Sugar, Ethanol and Energy business, fertilizers and agrochemicals represented 11% of our cost of production (including manufacturing and administrative expenses) for 2016. 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 2015/16 harvest year, fuel represented 9% of the cost of production (including manufacturing and administrative expenses) of our Farming business. In our Sugar, Ethanol and Energy business, fuel represented 8% of our cost of production (including manufacturing and administrative expenses) for the 2015/16 harvest year. 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 Macri administration 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 Macri administration to take any action to ensure the supply of energy. A revision to the current subsidy policies has also been announced by the Macri administration. 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 protectionist policies 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, for example, 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 that are beyond our control. 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 a downturn were to continue for an extended period of time or worsen, we could experience a prolonged period of decreased demand and prices. In addition, economic downturns have and may adversely impact our suppliers, which can result in disruptions in goods and services and financial losses.

 

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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. Although, we operate under a “non-stop” or “continuous” harvest model which allows us to crush sugarcane year round, the annual sugarcane harvesting period in the center-south region of Brazil begins in March/April and ends in November/December. This creates price fluctuations which result in fluctuations in our sugar and ethanol inventories, usually peaking in December to take advantage of higher prices during the traditional off-season (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.

 

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.

 

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.

 

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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.

 

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, 2016, 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.

 

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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.

 

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.

 

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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.

 

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.

 

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 generated initial recognition and changes in fair value of biological assets amounting to a $125,4 million gain in 2016; $54.5 million gain in 2015 and a $100.2 million gain in 2014. 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.

 

IASB amended IAS 16 “Property, Plant and Equipment” and IAS 41 “Agriculture,” which distinguish bearer plants from other biological assets. Bearer plants are used solely to grow produce over their productive lives and are considered to bear more resemblance to machinery and equipment (IAS 16) than other biological assets (under IAS 41). Accordingly, they are now accounted for under IAS 16. However, the agricultural produce growing on bearer plants remains within the scope of IAS 41 and is measured at fair value less cost to sell. The amendments were applicable for our fiscal year ended December 31, 2016. 

 

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Our sugarcane and coffee plantations qualify as bearer plants under the new definition in IAS 41. As required under IAS 8, “Accounting Policies, Changes in Accounting Estimates and Errors”, we effected the change in accounting policy retrospectively. Consequently, effective January 1, 2016, our sugarcane and coffee plantations were reclassified to property, plant and equipment, measured at amortized cost and depreciated over their useful life on a straight-line basis. We adopted the transitional rule provided for in the amendment, which allowed us to apply the fair value of bearer plants as their deemed cost as of January 1, 2014. Accordingly, we revised the comparative amounts financial data for the years ended December 31, 2015 and 2014. Financial data for the years ended December 31, 2013 and 2012 have not been revised, and is not comparable to financial data for the years 2016, 2015 and 2014.

 

For further information, and an analysis of the impact of the adoption of IAS 41 and IAS 16 to our Consolidated Financial Statements please see Note 32.1 to our Consolidated Financial Statements.

 

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, 2016, we had $635.4 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.

 

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.

 

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

 

As of December 31, 2016, approximately 33.8% of our total debt on a consolidated basis was subject to fixed interest rates and 66.2% was subject to variable interest rates. As of December 31, 2016, borrowings incurred by the Company’s subsidiaries in Brazil were repayable at various dates between January 2017 and April 2024 and bear either fixed interest rates ranging from 2.5% to 9.0% per annum or variable rates based on LIBOR or other specific base-rates plus spreads ranging from 4.13% to 17.52% per annum. At December 31, 2016, LIBOR (six months) was 1.32%. Borrowings incurred by the Company´s subsidiaries in Argentina are repayable at various dates between January 2017 and November 2023 and bear either fixed interest rates ranging from 6.11% to 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”.

 

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 IRS 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 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”.

 

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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, 2016, based on total asset value, 26.9% of our assets were located in Argentina, 69.2% in Brazil and 3.8% 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 50.3% value attributable to Argentina, a 47.0% value attributable to Brazil and a 2.7% value attributable to Uruguay. During the year ended December 31, 2016, 49.8% of our consolidated sales of goods and services rendered were attributable to our Brazilian operations, 18.9% were attributable to our Argentine operations and 31.4% 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.

 

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.

 

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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;
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, 14.4% in 2012, 32.5% in 2013, 31.2% in 2014, 52.1% in 2015 and 21.9% in 2016, based on the official exchange rates published by the Argentine Central Bank. In the past years, 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 national elections in Argentina in 2015, the newly elected Macri administration (the “Macri Administration”) 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.

 

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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, 49.04% in 2015, and in 2016 the Real appreciated 16,54% against U.S. dollar.

 

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.

 

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 currency 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 Estadisticas 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. 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 (“CPI”) and the gross domestic product. Under the new calculation methodology, the CPI increased by 23.9% in 2014 and 11.9% as of October 2015 (for the first nine months of 2015). However, opposition lawmakers reported an inflation rate of 38.5% and 27.5%, respectively. In December 2015, the Macri administration appointed a former director of a private consulting firm to manage the INDEC. The new director initially suspended the publication of any official data prepared by INDEC and implemented certain methodological reforms and adjusted certain indices based on those reforms. In January 25, 2016, INDEC published two alternative measures of the CPI for the year 2015, 29.6% and 31.6%, which were based on data from the City of Buenos Aires and the Province of San Luis. After implementing these methodological reforms in June 2016, the INDEC resumed its publication of the consumer price index. According to INDEC, Argentina´s rate of inflation for May, June, July, August, September, October, November and December 2016 was 4.2%, 3.1%, 2%, 0.2%, 1.1%, 2.4%, 1.6% and 1.2%, respectively.

 

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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, inflation of 10.5% in 2015, and 7.2% accumulated in the year ended on December 31, 2016, 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, 11.75% in 2014, 14.25% in 2015 as determined by the Comitê de Política Monetária, or COPOM. In the quarter ended on December 31, 2016, the SELIC was 13.75%.

 

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.

 

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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.

 

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 “—Risks Related to Argentina—Changes in the Argentine tax laws may adversely affect the results of our operations”.

 

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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% and 0.5% for 2014. Because of the implementation of certain methodological reforms by the Macri administration and the adjustment of certain indices based on these reforms, the INDEC also revised the GDP data from 2004 through 2015. Among other adjustments, in calculating GDP for 2004, the INDEC made changes to the composition of GDP that resulted in a negative adjustment of approximately 12% for that year. To calculate real GDP for subsequent years based on the revised 2004 GDP, the INDEC used deflators that are consistent with its revised methodology to calculate inflation. By previously understating inflation, the INDEC had overstated economic growth in real terms. The adjustments made by the INDEC lead to a determination of real GDP growth of 48.6% for the period of 2004 to 2015, as opposed to 65% growth in real terms for the same period resulting from the information used prior to June 2016. We cannot assure you that any future official information regarding GDP will be reliable or whether the 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 occurring 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 elected government, in office since December 10, 2015, has announced and adopted several significant economic and policy reforms:

 

·INDEC Reforms: On January 8, 2016, based on the determination that the INDEC has failed to produce reliable statistical information, particularly with respect to the CPI, GDP, poverty and foreign trade data, the Macri administration declared the national statistical system and the INDEC in a state of administrative emergency. As a result, the INDEC ceased publishing certain key statistical data until a rearrangement of its technical and administrative structure is finalized. In June 2016, the INDEC resumed its publication of the CPI. As of the date of this annual report, the INDEC has begun publishing certain revised data, including GDP, foreign trade and balance of payment statistics, although it remains in a state of administrative emergency. See “—Risks related to Argentina—Official data regarding inflation may be unreliable”.

 

·Foreign Exchange Reforms: The 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”.

 

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·Foreign trade reforms. The Macri administration 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 and mining exports was eliminated.

 

·Primary Balance. The Macri administration 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 Macri administration 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. Additionally, the government declared a state of emergency with respect to the national electrical system, which is expected to remain effective until December 31, 2017. Under this state of emergency, the Macri administration will be permitted to take actions designed to guarantee the supply of electricity.

 

We cannot predict the impact that these policies or any future polices implemented by the Macri administration or any other national 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 Macri administration 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 Macri administration 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 Macri administration 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.

 

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.

 

Argentina’s 2001 sovereign default and its failure to fully restructure its sovereign debt and negotiate with the holdout creditors has limited and may continue to limit Argentina’s ability to access international financing. In 2005, Argentina completed the restructuring of a substantial portion of its indebtedness and settled all of its debt with the IMF. Additionally, in June 2010, Argentina completed the restructuring of a significant portion of the defaulted bonds that were not exchanged in the 2005 restructuring. As a result of debt exchanges carried out in 2005 and 2010, Argentina restructured approximately 93% of its defaulted debt that was eligible for restructuring. However, holdout bondholders that declined to participate in the restructuring, filed lawsuits against Argentina in several countries, including the United States. Since late 2012, rulings from courts in the United States favorable to holdout bondholders aggravated investors’ concerns regarding investment in the country. 

 

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In November 2012, the United States District Court for the Southern District of New York in re: “NML Capital, Ltd. v. Republic of Argentina”, ratified and amended the injunction order issued in February 2012, which held that Argentina violated the pari passu clause with respect to the bondholders that had not participated in the sovereign debt restructuring in 2005 and 2010. Pursuant to such ruling, Argentina was required to pay 100% of the amounts due to the plaintiffs, simultaneously with the payment of the amounts due on the next maturity date of the bonds to the bondholders who participated in the debt restructuring. In June 2014, the U.S. Supreme Court denied Argentina’s petition for a writ of certiorari of the U.S. Second Circuit Court of Appeals’ ruling affirming the U.S. District Court’s judgment. Later that month, the U.S. District Court ruled that funds deposited with the Bank of New York Mellon, the trustee which manages payments for Argentina's bonds issued in the 2005 and 2010 debt restructuring, could not be delivered to the holders of restructured debt in the absence of a prior agreement with the holdout bondholders. In June 2015, the U.S. District Court granted partial summary judgment to a group of “me-too” plaintiffs in 36 separate lawsuits, finding that, consistent with the previous ruling of such court, Argentina violated the pari passu clause in the bonds issued to the “me-too” bondholders.

 

In February 2016, the Macri administration entered into settlement agreements with certain holdout bondholders to settle these claims, which were subject to the approval of the Argentine Congress and the lifting of the pari passu injunctions. In March 2016, after the U.S. District Court agreed to vacate the pari passu injunctions subject to certain conditions, the Argentine Congress ratified these settlement agreements through Law No. 27,249 and repealed the provisions of the so called Lock Law No. 26,017 and the Sovereign Payment Law No. 26,984, which prohibited Argentina from offering holdout bondholders more favorable terms than those offered in the 2005 and 2010 debt restructuring. In recent months, the Argentine national government has reached settlement agreements with holders of a significant portion of the defaulted bonds and has repaid the majority of the holdout creditors with the proceeds of a US$16.5 billion international offering of 3-year, 5-year, 10-year and 30-year bonds on April 22, 2016. Although the size of the claims involved has decreased significantly, litigation initiated by bondholders that have not accepted Argentina’s settlement offer continues in several jurisdictions.

 

Additionally, foreign shareholders of several Argentine companies have filed claims with the ICSID alleging that the emergency measures adopted by the Argentine national government since the crisis in 2001 and 2002 differ from the just and equal treatment standards set forth in several bilateral investment treaties to which Argentina is a party. ICSID has ruled against Argentina with respect to many of these claims.

 

Litigation involving holdout creditors, claims with ICSID and other claims against the Argentine national government, resulted and may result in material judgments against the government, lead to attachments of or injunctions relating to Argentina’s assets, or could cause Argentina to default under its other obligations, and such events may prevent Argentina from obtaining favorable terms or interest rates when accessing international capital markets or from accessing international financing at all. Our ability to obtain U.S. dollar-denominated financing has been adversely impacted by these factors. During 2014, 2015 and 2016, it became increasingly difficult for Argentine companies to obtain financing in U.S. dollars, and loans in local currencies carry significantly higher interest rates. The termination of the injunctions issued by the United States courts preventing bondholders from receiving their interest payments on the bonds issued pursuant to the 2005 and 2010 exchange offers, and the related subsequent events, have paved the way for the Argentine national government to regain access to the international capital markets. Nonetheless, Argentina’s ability to obtain international or multilateral private financing or direct foreign investment may be limited, which may in turn impair its ability to implement reforms and public policies to foster economic growth. In addition, Argentina’s ongoing litigation with the remaining holdout creditors as well as ICSID and other claims against the Argentine national government, or any future defaults of its financial obligations, may prevent us from accessing the international capital markets or cause the terms of any such transactions less favorable than those provided to companies in other countries in the region, potentially impacting our financial condition.

 

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.

 

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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, 2016, our subsidiaries in Argentina have relied on local Argentine financing for 28.5% 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.

 

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, as amended and supplemented by Decree No. 820/2016 dated as of February 28, 2012 and of June 30, 2016, respectively, impose limits on the ownership or possession of rural land by foreign legal entities or certain foreign individuals.

 

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 foreign individuals or entities own, whether directly or indirectly, a number of votes sufficient to prevail in the local entity´s decision-making process. It is presumed that foreign legal entities where more than 51% of the stock is directly or indirectly owned by foreign individuals or entities are subject to Law No. 26,737; (iii) companies that issue bonds (a) convertible in stock representing 51% or more of the company’s stock upon conversion and (b) whose holders are foreign individuals or entities; (iv) trusts whose beneficiaries are foreign individuals or entities, as defined pursuant to (i) and (ii) above; (v) joint ventures in which foreign entities or individuals hold a participating interest higher than those set forth by the law; (vi) foreign public law-governed legal entities; and (vii) 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.

 

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.

 

Any modification to the capital stock of companies that own or possess rural land, by public or private instrument, that implies a direct or indirect change of control, must be reported to the National Registry of Rural Land 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, as amended and supplemented by Decree No. 820/2016 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, San Andres de Giles, Pergamino, Arrecifes and Carmen de Areco in the Province of Buenos Aires.

 

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Foreign legal entities or individuals may not own rural land that contain or are located beside permanent and significant bodies of water to be determined by the Federal Hydrological Council (Consejo Hídrico Federal) and may also include hydrological works and projects considered strategic and of public interest.

 

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”.

 

The regulatory decrees of Law No. 26,737 provide that no previous authorization certificate is required for certain operations such as (i) the transfer of the property or possession rights over real estate properties that were located in an “Industrial Area” or an “Industrial Park”, independently from the acquirer’s nationality, (ii) any modification to the capital stock of companies that own or possess rural land, by public or private instrument, when such modification implies a direct or indirect change of control, provided that such change of control is not made in favor of a new foreign legal entity or individual; and (iii) creation of certain real property rights over the rural land, such as easements.

 

Upon the issue of Decree No. 820/2016, the effects of Law No. 26,737 have been somewhat mitigated, by setting forth a term of 90 days during which the foreign legal entity or individual that has exceeded the allowed limit of ownership of rural land must reduce their current ownership to the legal limit by (i) transferring or causing any of its controlled legal entities to transfer the amount of rural land that exceeds the legal limit, or (ii) modifying or causing any of its controlled legal entities to modify the type of exploitation awarded to rural lands owned by such foreign legal entity, or (iii) transferring its participation to legal entities that are considered compliant pursuant to the terms of Law No. 26,737.

 

Law No. 26,737 initially stated that, even though no vested rights could be affected as a result of the application of such law, any act in violation of its provisions would be considered null and void. Decree No. 820/2016 clarified this situation and established that the foreign entities or individuals who owned rural land in excess to the allowed limit of ownership when the Law No. 26,737 came into effect (i) are not obliged to transfer such rural land in excess, and (ii) in the event of transfer of rural lands acquired before Law No. 26,737 was in force, they can acquire the equivalent to such transferred rural land, provided the legal limits established to the type of exploitation and location. Hence, the application of laws regarding foreign ownership of rural lands does 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.

 

Our results of operations may be adversely affected by high and possibly increasing inflation in Argentina.

 

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 operation. In particular, the profit margin on our services is impacted by the increase in our costs in providing those services, which is influenced by wage inflation in Argentina, as well as other factors.

 

According to data published by the INDEC, the CPI increased 23.9% in 2014 and 11.9% as of October 2015 (for the first nine months of year 2015). In November 2015, the INDEC suspended the publication of the CPI. According to the most recent publicly available information based on data from the Province of San Luis, the CPI grew by 31.6% in 2015 and by 31.4% in 2016. According to the most recent publicly available information based on data from the City of Buenos Aires, the CPI grew by 29.6% in 2015 and by 41.0% in 2016. After implementing certain methodological reforms and adjusting certain macroeconomic statistics based on these reforms, in June 2016 the INDEC resumed its publication of the CPI. According to the INDEC, Argentina’s rate of inflation for May, June, July, August, September, October, November and December 2016 was 4.2%, 3.2%, 2.2%, 0.2%, 1.3%, 2.6%, 1.8% and 1.2%, respectively. Private estimates, on average, refer to annual rates of inflation substantially in excess of those published by the INDEC. For example, opposition lawmakers in Argentina reported an inflation rate of 41%, 25.0% and 38.5% for the years ended December 31, 2016, 2015 and 2014, respectively.

 

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Uncertainty surrounding future inflation rates may have an adverse impact for Argentina in the long-term credit market.

 

The INDEC implemented certain methodological reforms and adjusted certain indexes based on these reforms The lack of accuracy in the INDEC’s indexes 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 acceptable market rates to be able to finance our operations and growth. See “—Risks Related to Argentina—Official data regarding inflation may be unreliable” and — “The economy of Argentina may be affected by its government’s limited access to financing from international markets” —.

 

Inflation rates could escalate, and there is uncertainty regarding the effects that the measures taken, or that may be taken, by the Macri administration to control inflation could have. If inflation remains high or continues to increase, Argentina’s economy may be negatively impacted and our results of operations could be materially adeversely affected.

 

Official data regarding inflation may be unreliable.

 

Since 2007, the inflation index determined by INDEC has been the subject of widespread criticism and extensive discussions in connection with analysis of the Argentine economy. The intervention of the former Argentine government in the INDEC in 2007 and the change in the way the inflation index was measured have resulted in disagreements between the former Argentine government and private consultants as to the actual annual inflation rate. The former Argentine government imposed fines on private consultants reporting inflation rates higher than the INDEC data. As a result, private consultants typically shared their data with Argentine lawmakers who opposed the previous government, and who released such data from time to time. The widespread disagreements had the negative effect of eroding public confidence in Argentina’s economy.

 

Reports published by the International Monetary Fund (“IMF”) in the past state that their staff uses alternative measures of inflation for macroeconomic surveillance, including data produced by private sources, which have shown considerably higher inflation rates than those published by the INDEC since 2007. The IMF has also criticized Argentina for not taking sufficient remedial measures to address the quality of its official data, including inflation and GDP data, as required under the Articles of Agreement of the IMF.

 

In February 2014, the INDEC released a new inflation index, known as National Urban Consumer Price Index (Índice de Precios al Consumidor Nacional Urbano) that measured the prices of goods across the country and replaced the previous index that only measured inflation in the urban sprawl of the City of Buenos Aires. Pursuant to these calculations, such new consumer price index rose 23.9% in 2014 and 11.9% during the ten-month period ended October 31, 2015. Even though the new methodology brought inflation statistics closer to those estimated by private sources, material differences between recent official inflation data and private estimates remained during 2015. 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.

 

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 were also imposed on the grain and oilseed markets that essentially limited 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.

 

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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 Capital 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. In November, 2016, the Argentine executive branch sent a bill to the Argentine Congress to reform the current Capital Markets Law No. 26,831 which, among other changes, proposes the abrogation of these interventionist powers granted to the CNV and generally seeks to modernize the entire regulatory framework applicable to the Argentine Capital Markets, incorporating current international practices to further its development. However, as of the date of this annual report, such bill has not yet been passed.

 

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.

 

Furthermore, on April 1, 2014 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 Registro Único de Operadores de la Cadena Agroindustrial (“RUCA” for its acronym in Spanish) 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.

 

On April 16, 2015, the Argentine Congress passed a law approving the government takeover of the passenger and cargo railways, which became 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.

 

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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 Macri administration will not 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 Macri administration 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.

 

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, including a general massive strike and several protests during 2017.

 

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.

 

The Argentine government may order salary increases to be paid to employees in the private sector, which would increase our operating costs.

 

In the past, the Argentine government has passed laws, regulations and decrees requiring companies in the private sector to increase wages and provide specified benefits to employees, and may do so again in the future. Argentine employers, both in the public and private sectors, have experienced significant pressure from their employees and labor organizations to increase wages and to provide additional employee benefits. Due to the high levels of inflation, employees and labor organizations are demanding significant wage increases. In August 2012, the Argentine government established a 25% increase in minimum monthly salary to 2,875 Argentine pesos, effective as of February 2013. The Argentine government increased the minimum salary to 3,300 Argentine pesos in August 2013, to 3,600 Argentine pesos in January 2014, to 4,400 Argentine pesos in September 2014, to 4,716 in January 2015, to 5,588 Argentine pesos in August 2015, to 6,060 Argentine pesos in January 2016, to 6,810 Argentine pesos in June 2016 and 7,560 Argentine pesos in September 2016. Recently, the INDEC published data regarding the evolution of salaries in the private and public sectors, which reflects approximately 32.91% and 32.58% salary increases in the private and public sectors, respectively, for the period from November 2015 through December 2016. 

 

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 2016 organized labor unions agreed with employers’ associations on salary increases between 27% and 37%. Headcount in Argentina represents the 15.4% of the total headcount of the Company, Accordingly, if, as a result of such measures, future salary increases in Argentine peso exceed the pace of the devaluation of the Argentine pesos, they could have a material and adverse effect on our expenses and business, results of operations and financial condition.

 

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. As of December 2015, the Macri administration eliminated farm export duties on corn, wheat and local products, while soy export taxes were reduced by 5% to 30% and 27% for most soybean products. Notwithstanding these measures, we cannot provide assurances or make predictions as to the impact this measure will have on our business, results of operations and financial condition.

 

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On January 2, 2017, the Macri administration enacted a further reduction of the export duties on soybean and soybean products, including a monthly 0.5% cut on the export duties rate starting on January 2018 and until December 2019 has been set.

 

Pursuant to a resolution of the AFIP since February 2012, prior to the execution of any purchase order or similar document, Argentine importers were 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 was mandatory 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. The Macri administration has adopted a similar regime that replaced the former 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.

 

The Macri administration has also enacted an import licensing regime that includes automatic and non-automatic licensing for imports. Automatic import licensing provides that the importer is only required to submit information through the SIMI as well as provide other certification related to the imported goods. Non-automatic licensing provides that the authorities have a 10-day period to either approve or reasonably reject the import license requested based on its effect on local businesses, in addition to the other import requirements that the goods be subject to (SIMI, certifications, etc). The prior administration had imposed a similar regime regarding the “import” and “export” of service (Declaración Jurada Anticipada de Servicios or “DJAS” for its acronym in Spanish) in order to control and restrict payments made by Argentine residents on services provided by foreign services, but it was deregulated recently by the Macri administration.

 

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 or burdensome licensing requirements could adversely affect our financial condition or results of operations.

 

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 as well as the purchase of foreign currency and on the transfer of funds from Argentina.

 

Although some of these restrictions were subsequently eased, in June 2005, the Argentine government issued Decree No. 616/2005, which established new controls on capital inflows that could result in reduced availability of international credit, including the requirement, subject to certain exceptions, that 30% of all funds remitted to Argentina remain deposited in a domestic financial institution for 365 days in a non-interest bearing account. In addition, since the second half of 2011, the Argentine government increased certain controls on the incurrence of foreign currency-denominated indebtedness, the acquisition of foreign currency and foreign assets by local residents. For example, the Argentine Central Bank adopted regulations that (i) shortened the period for a borrower to convert foreign currency-denominated indebtedness into Argentine pesos, (ii) shortened a borrower’s window of access to the local foreign exchange market in connection with a prepayment of scheduled interest payments in respect of foreign currency-denominated indebtedness and (iii) suspended the ability of local residents to access the local exchange market for the acquisition of foreign currency.

 

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In December 2015, the Macri administration 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 the measures, adopted by the Macri administration, which lifted virtually all exchange and capital controls (except for the obligation of Argentine exporters of goods to repatriate to the FX Market foreign currency proceeds from export transactions, such as receivables relating to the exportation of goods, which are required to be settled through the foreign exchange Market), the Argentine government may impose or increase exchange controls or transfer restrictions in the future in response to capital flight or a significant depreciation of the Argentine peso. These restrictions and requirements, and any additional exchange controls and transfer restrictions in the future that may be adopted by the Argentine government, 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.

 

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 became subject to withholding income tax at a rate of 10% unless dividends were distributed to Argentine corporate entities and the income derived from 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% provided the gains are recognized by Argentine resident individuals. The withholding tax rate for the sale, exchange or disposition of shares and other securities when gains are recognized by a foreign beneficiary is, at the option of the non-Argentine resident seller, 13.5% on the gross amount or 15% on the net amount derived from the transaction. However, as of the date of this report, regulations that define the calculation methodology for the 15% rate on the net amount have not been enacted. Accordingly, the 13.5% rate is normally applied.

 

On July 22, 2016, Argentina published Law No. 27,260 in the Argentine Official Gazette, which makes significant changes to the Argentine tax laws and establishes new tax regimes as the “Voluntary and extraordinary disclosure regime of national and foreign currency holding and other assets, within Argentina and abroad” (Tax Amnesty) and a moratorium for tax, social security and customs obligations.

 

In addition, the 10% withholding tax established by Law No. 26,893 that was applied by companies on the distribution of dividends and profits was abrogated. Therefore, dividend distributions are not subject to income tax withholding apart from the so-called “equalization tax” which applies if the dividends distributed exceed the net accumulated taxable income of the distributing corporation.

 

Furthermore, compliant taxpayers are able to obtain an exemption from Personal Assets Tax payable by Argentine resident companies as substitute taxpayers on the participation held by their foreign shareholders and Argentine individual shareholders until fiscal year 2018 inclusive. The applicable tax on shares and other equity participations in Argentine companies is 0.25% on the net worth value of the company. Regarding the other tax on wealth, the Minimum Presumed Income Tax for fiscal years to be initiated as from January 1, 2019 has been abrogated.

 

On December 27, 2016 the Argentine Official Gazette published Law No. 27,346 that introduced important amendments to the Income Tax Law. The law creates a new tax levied on financial speculation trades (commonly known as “USD Futures Market Trades”) to be applied one-time only on the profits obtained by any person. Thus, gross income derived from “positive price differences” arising from the buying or selling of USD Futures Market Trades will be taxed at an additional 15% tax rate.

 

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In addition, Law No. 27,346 also modifies the Value Added Tax Law and creates the figure of substitute taxpayer for the payment of the tax corresponding to foreign residents who render services in Argentina. Substitute taxpayers will assess and pay for value-added tax corresponding to the act, even in the cases in which it is impossible to withhold that tax from the foreign resident. Also, the tax paid will be considered as a tax credit if in favor of the substitute taxpayer.

 

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.

 

Currently Brazil is tackling an economic recession and the Government is adopting fiscal adjustment measures. Any fiscal adjustment is complex and involves radical and unpopular measures. The Minister of Finance has also been raising the possibility of increasing or creating new taxes. For example, the Brazilian government may reduce or increase at any time through a presidential decree the rates of the tax levied on financial operations, such as credit transactions (“IOF/Credit”), foreign exchange transactions (“IOF/Exchange”), derivative securities transactions (“IOF/Securities”), among other taxable events. On March, 30, 2017, a presidential decree was published in order to introduce a 0,38% rate of the IOF/Credit on some loan transactions, such as credits provided by cooperatives, which were previously subject to a zero percent rate.

 

It is also common for taxpayers to file suits for the declaration that a certain tax is illegal or unconstitutional. casein such cases where the final decision is favorable to taxpayers, a situation that occurs very frequently. Accordingly, the Brazilian Government may propose changes in the tax legislation in order to increase rates or to create new taxes..

 

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. INCRA found no irregularity that could jeopardize the acquisition deed or affect the ownership of Rio de Janeiro Farm.

 

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 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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Since the enactment of the Brazilian Constitution in 1988, the consensus view was 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. The Brazilian Constitution 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. 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 described 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 ”Car Wash Operation” (Operação 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. . On April 17th, 2016 the impeachment process of the Brazilian President was approved by the House of Representatives and, on August 31st, 2016 the process was approved by Senate. The Brazilian President was replaced by the Vice-President until a new election is held in 2018. The new President has been trying to implement political and economic reforms related to labor and social security matters, and other measures targeting higher economic rates of growth and employment. We cannot predict which policies will be adopted by the new Brazilian government and whether these policies will negatively affect the economy and our business or results of operations.

 

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Additionally, the potential outcome of investigations and proceedings related to the Car Wash Operation (Operação Lava-Jato) 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.

 

Moreover, the economic and political crisis have resulted in the downgrading of the country’s long-term credit rating from the three major rating companies, placing Brazil back in speculative investment grade level (“junk”). Standard & Poor's downgraded Brazil to BB with a negative outlook in February 2016; , Fitch Ratings downgraded to BB with a negative outlook, in May 2016 , while Moody’s maintained its Ba2 rating, changing its outlook from negative to stable in March 2017. According to Moody’s, this improvement is based on a more stabilized and predicted macroeconomic environment. However, the new Brazilian administration is still facing domestic pressure to repair the economy and achieve higher rates of economic growth. 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..

 

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 laws and regulations imposed in Brazil and its agencies, including (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”) on account of our production of sugarcane, ethanol and electric energy (ii) the Ministry of Agriculture, Breeding Cattle and Supply (Ministerio da Agricultura, Pecuaria e Abastecimento(“MAPA”)), on account of 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.

 

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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.

 

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 provides shareholders the right to bring a derivative action on behalf of the Company only in limited circumstances and subject to conditions only admit, shareholders’ 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;

 

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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.

 

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 current authorization was renewed by decision of the shareholder meeting held on April 20, 2016 and is valid until April 20, 2021.

 

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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 on April 1, 2015 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. Totaling 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 a 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.

 

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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.

 

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 February 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 Adjusted 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 IFH to approximately 100%.

 

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 transferring 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 offered 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 this 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 11.40 per common share.

 

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Set forth below is a corporate structure as of April 20, 2017.

 

 

Principal Capital Expenditures

 

Capital expenditures totaled $133.2 million, $149.8 million and $306.8 million for the years ended December 31, 2016, 2015 and 2014, 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, 2016, 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 6,880 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 11.2 million tons.

 

We believe that we are:

 

one of the largest owners of productive farmland in South America, with more than 203,620 owned productive hectares as of December 31, 2016 (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 2015/2016 harvest year, we harvested 172,976 hectares (including 55,895 leased hectares and 32,896 second crop hectares) and produced 586,556 tons of grains, including soybeans, corn, wheat, sunflower and cotton;

 

one of the largest producers of rough (unprocessed) rice in the world, planting 37,580 hectares (including 1,700 leased hectares) and producing 220,758 tons during the 2015/2016 harvest year, which accounted for 21% 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 2016, 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 92.4 million liters of fluid milk during 2016.

 

a growing producer of sugar and ethanol in Brazil, where we currently own three sugar and ethanol mills, with an aggregate installed capacity of 11.2 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, 2016. Our operation is highly integrated, meaning that 91% of the sugarcane crushed at our mills is supplied from our own plantations. As of December 31, 2016, our sugarcane plantation consisted of 134,591 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. Between 2006 and 2015 we 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 $205 million.

 

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We are engaged in three main businesses:

 

Farming Business: As of December 31, 2016 we owned 232,848 hectares (excluding sugarcane farms) of farmland in Argentina, Brazil and Uruguay, of which 121,615 hectares are croppable, 11,227 hectares are being evaluated for transformation, 60,713 hectares are suitable for raising beef cattle and are mostly leased to third party cattle farmers, constituting a total of 193,555 productive hectares, and 39,293 hectares are legal land reserves pursuant to local regulations or other land reserves. During the 2015/2016 harvest year we held leases or have entered into agriculture partnerships for an additional 57,595 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 2015/2016 harvest year, we planted approximately 172,976 hectares of crops, including second harvests, producing 586,772 tons of grains, including soybeans, wheat, corn, sunflower and cotton. We also planted an additional 4,718 hectares where we produced over 136,797 tons of forage that we used for cow feed in our dairy operation. During the current 2016/17 harvest year, we planted approximately 184,988 hectares of crops, including second harvest, and also planted an additional 3,808 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 220,758 tons during the 2015/2016 harvest year, which accounted for 21% 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 2016/17 harvest year, we planted 39,728 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 fluid 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 fluid milk. We produced approximately 92.4 million liters of fluid milk during 2016, with a daily average of 6,880 milking cows, delivering an average of 36.7 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 27,216 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, 
   2016   2015   2014 
Sales  (In thousands of $) 
Crops(l)   142,124    154,741    177,662 
Rice(2)   96,562    84,668    103,682 
Dairy   32,897    32,981    32,968 
All Other Segments (3)   960    1,302    1,525 
Total   272,543    273,692    315,837 

 

Production 

2015/2016

Harvest

Year

  

2014/2015

Harvest

Year

  

2013/2014

Harvest

Year

 
Crops (tons)(4)   583,639    627,824    643,354 
Rice (tons)(5)   220,758    180,149    205,489 

Total

   804,397    807,973    848,843 

 

   Year Ended December 31 
   2016   2015   2014 
Dairy (thousands of liters)(6)   92,395    88,556    79,468 

 

  

2016/2017

Harvest

Year

  

2015/2016

Harvest

Year

  

2014/2015

Harvest

Year

  

2013/2014

Harvest

Year

 
Planted Area  (In hectares, including second harvest) 
Crops (7)   190,847    172,976    194,271    185,954 
Rice   39,607    37,580    35,328    36,604 

 

 

(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 61 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 136,797 tons, 102,527 tons, and 89,081 tons of forage produced in the 2015/2016, 2014/2015 and 2013/2014 harvest years, respectively.

 

(5)Expressed in tons of rough rice produced on owned and leased farms. As of December 31, 2016, the 2015/16 harvest year of rice harvest had not began.

 

(6)Fluid milk produced at our dairy farms.

 

(7)Includes 4,718 hectares, 4,999 hectares and 3,141 hectares, used for the production of forage during the 2015/16, 2014/2015, and 2013/2014 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, 2016, our total sugarcane plantation consisted of 134,591 hectares, planted mainly over leased land. We currently own and operate three sugar and ethanol mills, UMA, Angélica and Ivinhema, with a total crushing capacity of 11.2 million tons of sugarcane per year as of December 31, 2016. 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 99.5% 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 4.8 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, 2016, we crushed 11.1 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, 2016 we produced 701,060 tons of sugar and 422,395 cubic meters of ethanol.

 

As of December 31, 2016, our overall sugarcane plantation consisted of 134,591 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 124,843 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, 
   2016   2015   2014 
   (In thousands of $) 
Sugar   330,895    177,801    174,459 
Ethanol   211,451    176,150    165,870 
Energy   53,995    46,671    66,800 
Other   351    -    - 
Total   596,692    400,622    407,129 

 

Production  Year Ended December 31 
   2016   2015   2014 
Sugar (tons)   701,060    464,929    413,687 
Ethanol (cubic meters)   422,395    361,001    299,810 
Energy (MWh exported)   751,037    553,090    445,705 

 

   Year Ended December 31 
Other Metrics  2015   2015   2014 
             
Sugarcane milled (% owned)   91%   89%   89%
Sugarcane crushing capacity (millions of tons)   11.2    10.2    7.2 
% Mechanized harvesting operations — Consolidated   98%   97%   97%
% 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 fifteen-year period since our inception, we have effectively put into production 173,801 hectares of land that was previously undeveloped or undermanaged. During 2016, we put into production 4,274 hectares and in addition continued the transformation process of over 131,363 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 246,139 hectares, distributed throughout our operating regions as follows: 85% in Argentina, 14% in Brazil, and 1% in Uruguay. Between 2006 and 2015, we sold 20 of our fully mature farms, generating capital gains of approximately $205 million.

 

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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.

 

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, 
   2016   2015   2014 
Undeveloped/Undermanaged land put into production (hectares)   4,274    2,790    2,580 
Ongoing transformation of croppable land (hectares)   131,363    127,428    122,041 
Number of farms sold   -    3(1)   2(1)
Hectares sold   -    10,905    12,887 
Capital gains from the sale of land ($ thousands) (1)   -    23.900    25,600 

 

(1) Includes the sale of non-controlling interests in farmland companies

 

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.

 

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.

 

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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 fluid 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 216 MW of clean and renewable electricity; (iii) has the capacity of processing 50,400 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.

 

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, fluid 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.

 

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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 $688 million and sold over 77,000 hectares of developed land, generating capital gains of approximately $205 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:

 

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 expansion of our Ivinhema and Angelica mills, which as of December 2016 reached a nominal capacity of 11.2 million tons per year and are expected to reach 14.2 million tons by 2023. 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) reduction in our total fixed costs 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.

 

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.

 

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.

 

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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, from time to time 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 2015/2016 our farming operations were conducted on a total of 210,556 hectares of land, of which we own 146,070 hectares (excluding sugarcane farms) and we leased the remaining 64,486 hectares from third parties. The following table sets forth our production volumes for each of our farming business lines.

 

   Harvest Year 
   2015/2016   2014/2015   2013/2014 
Crops (tons)(1)   583,639    627,385    643,354 
Rice (tons)(2)   220,758    180,149    205,489 

 

   Year Ended December 31, 
   2016   2015   2014 
Dairy (thousands of liters)(3)   92,395    88,556    79,468 

 

 

(1)As of the date of this annual report, the harvest of soybean, corn, sunflower, cotton and rice pertaining to the 2016/2017 harvest year is ongoing. The only crop which has been almost fully harvested in the current 2016/17 harvest year is wheat, with a total production of 102,950 tons.
(2)Expressed in tons of rough rice.
(3)Fluid 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 2015/2016 harvest year, we planted crops over a total area of approximately 172,976 hectares, including our owned land, land leased from third parties and hectares planted in second harvests. During mid 2016 we began the planting of crops pertaining to the 2016/17 harvest year, which was concluded during the first quarter of 2016, with a total planted area of 191,647 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 
   2015/2016   2014/2015   2013/2014 
Product Area  (In hectares) 
Soybeans(l)   88,377    96,476    82,980 
Corn(2)   42,657    40,044    51,324 
Wheat(3)   32,396    37,020    29,412 
Sunflower   9,547    12,314    12,880 
Cotton   -    3,160    6,217 
Forage(4)   4,788    4,999    3,141 
Total   177,765    194,013    185,954 

 

 

(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.

 

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

 

   Harvest Year 
   2016/17   2015/2016   2014/2015   2013/2014 
Crop Production(1)  (In tons) 
Soybeans(2)   -    237,681    285,914    218,608 
Corn(2)   7,538    248,269    232,763    318,381 
Wheat   115,265    82,167    84,609    77,086 
Sunflower(2)   470    15,521    21,762    23,161 
Cotton lint(2)   -    -    2,336    6,118 
Total(2)   123,273    583,638    627,384    643,354 

 

 

(1) Does not include 136,797, 102,527, and 89,081 tons of forage produced in the 2015/16, 2014/2015, and 2013/2014, harvest years respectively.

(2) As of the date of this annual report, the harvest of soybean, corn, sunflower and cotton pertaining to the 2016/17 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, 
   2016   2015   2014 
Sales  (In thousands of $) 
Soybeans   63,797    75,361    79,515 
Corn (l)   48,502    41,924    69,720 
Wheat (2)   18,191    16,750    8,849 
Sunflower   7,275    12,659    10,016 
Cotton   1,434    3,317    9,081 
Other crops (3)   2,925    4,730    481 
Total   142,124    154,741    177,662 

 

 

(1) Includes sorghum.

(2) Includes barley.

(3) Includes other crops and farming services.

 

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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. Approximately 85% of the oil content of soybeans 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 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. In the 2015/16 harvest year, we planted a total area of 88,377 hectares of soybean, producing a total of 237,681 tons representing 51% of our total crop planted area that year, and 41% of our total crop production.

 

Soybeans comprised, 11%, 11%, and 7% of our total consolidated sales in 2014, 2015, and 2016 respectively

 

Corn

 

Corn is a cereal grown around the world and is one of the world’s most widely consumed foods. The main component of corn grain is starch (72% to 73% of grain weight), followed by proteins (8% to 11%). Corn grain is directly used for food and animal feed (beef, swine and poultry meat production and dairy). Corn is also processed to make food and feed ingredients (such as high fructose corn syrup, corn starch and lysine), or industrial products such as ethanol and polylactic acid (PLA). Oil, flour and sugar are also extracted from corn, with several uses in the food, medicine and cosmetic industries. Additionally, there are specific corn types used for direct human consumption such as popcorn and sweet corn.

 

We grow corn in Argentina, Brazil and Uruguay. In the 2013/2014 harvest year, we planted a total area of approximately 51,212 hectares of corn, including the second harvest, producing a total of 318,381 tons of corn representing 28% of our total planted area that year, and 49% of our total crop production. In the 2014/2015 harvest year, we planted a total area of approximately 39,099 hectares of corn, including the second harvest, producing a total of 230,386 tons of corn representing 21% of our total planted area that year, and 37% of our total crop production. In the 2015/2016 harvest year, we planted a total area of approximately 42,657 hectares of corn, including the second harvest, producing a total of 248,269 tons of corn representing 25% of our total crop planted area that year, and 43% of our total crop production.

 

Corn comprised 10% of our consolidated sales in 2014, 6% of our consolidated sales in 2015, and 6% of our consolidated sales in 2016.

 

Wheat

 

Wheat is the world’s largest cereal-grass crop. Unlike other cereals, wheat grain contains a high amount of gluten, the protein that provides the elasticity necessary for excellent bread making. Although most wheat is grown for human consumption, other industries use small quantities to produce starch, paste, malt, dextrose, gluten, alcohol, and other products. Inferior and surplus wheat and various milling byproducts are used for livestock feed. We sell wheat to exporters and to local mills that produce flour for the food industry.

 

We grow wheat in Argentina and Uruguay. In the 2014/2015 harvest year we planted a total area of approximately 37,020 hectares of wheat, producing a total of 84,610 tons of wheat. In the 2015/2016 harvest year, we planted a total area of approximately 32,393 hectares of wheat, producing a total of 82,156 tons of wheat. In the current 2016/2017 harvest year, we planted a total area of approximately 37,998 hectares of wheat, producing a total of 102,950 tons of wheat.

 

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Wheat comprised 1% of our total consolidated sales in 2014, 2% of our total consolidated sales in 2015, and 2% of our total consolidated sales in 2016.

 

Sunflower

 

There are two types of sunflower, the most important in terms of volume being the oilseed sunflower, which is primarily grown for the oil extracted from the seed. Sunflower oil is considered one of the top three oils for human consumption, due to its high oil content (39-49%) and its oil composition (90% of oleic and linoleic oil). The other type of sunflower is the confectionary sunflower, which is used for direct human consumption. Sunflower seeds are an exceptional source of vitamin E, omega-6 fatty acids, dietary fiber and minerals. We grow both types of sunflower.

 

We grow sunflower in Argentina and Uruguay. In the 2013/2014 harvest year, we planted a total area of approximately 12,880 hectares of sunflower producing a total of 23,161 tons of sunflower representing 7% of our total crop planted area that year, and 4% of our total crop production. In the 2014/2015 harvest year, we planted a total area of approximately 12,314 hectares of sunflower producing a total of 21,762 tons of sunflower representing 7% of our total crop planted area that year, and 3% of our total crop production. In the 2015/2016 harvest year, we planted a total area of approximately 9,547 hectares of sunflower producing a total of 15,521 tons of sunflower representing 6% of our total crop planted area that year, and 3% of our total crop production.

 

Sunflower comprised 1% of our total consolidated sales in 2014, 2% in 2015, and 1% in 2016.

 

Cotton

 

Cotton is the world’s most popular natural fiber. The cotton fiber is made primarily into yarns and threads for use in the textile and apparel sectors. Clothing accounts for approximately 60% of cotton consumption. Cotton is also used to make home furnishings, such as draperies (the third major end use), or professional garments (about 5% of cotton fiber demand). The cottonseed is used in animal feeding or crushed in order to separate its three products — oil, meal and hulls. Cottonseed oil is used primarily for cooking oil and salad dressing. In recent years, there has been a growing demand for cotton oil for biodiesel production.

 

We plant upland cotton, the most common type of cotton planted and processed around the world. We produce and sell cotton lint and cotton seed.

 

We grow cotton in northern Argentina and in the western part of Bahia, Brazil. In the 2013/2014 harvest year, we planted a total area of approximately 6,217 hectares of cotton producing a total of 6,118 tons of cotton lint, representing 3% of our total planted crop area that year, and 1% of our total crop production. In the 2014/2015 harvest year, we planted a total area of approximately 3,160 hectares of cotton producing a total of 2,344 tons of cotton lint, representing 2% of our total planted crop area that year, and 0.4% of our total crop production. We did not plant any cotton in the 2015/16 harvest year.

 

Cotton comprised 1% of our total consolidated sales in 2014, 0.5% of our total consolidated sales in 2015 and 0% of our total consolidated sales in 2016.

 

Forages

 

In addition to the above mentioned crops, we are engaged in the production of forage in Argentina, including corn silage, wheat silage, soybean silage and alfalfa silage. We use forage as cow feed in our dairy operation. During the 2015/2016 harvest year, we planted 4,718 hectares of forage and produced 136,797 tons of forage.

 

Crop Production Process

 

Our crop production process is directly linked to the geo-climatic conditions of our farms and our crop cycles, which define the periods for planting and harvesting our various products. Our crop diversification and the location of our farms in various regions of South America enable us to implement an efficient planting and harvesting system throughout the year, which includes second harvests in many cases. Our production process begins with the planting of each crop. After harvesting, crops may go through a processing phase where the grain or seeds are cleaned and dried to reach the required market standards.

 

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For additional discussion of our harvest years and the presentation of production and product area information in this annual report, see “Presentation of Financial and Other Information—Fiscal Year and Harvest Year.”

 

Rice Business

 

Rice is the main food staple for about half of the world’s population. Although it is cultivated in over 100 countries and on almost every continent, 90% of the world’s rice is grown and consumed in Asia. Globally, rice is the most important crop in terms of its contribution to human diets and production value. There are three main types of rice: short grain, medium grain and long grain rice. Each one has a different taste and texture. We produce long grain rice and Carolina double rice, a variety of medium grain rice.

 

We conduct our rice operation in the northeast of Argentina, which is one of the most efficient locations in the world for producing rice at a low cost. This is a result of optimum natural agronomic conditions, including plentiful sunlight, abundant availability of water for low cost irrigation and large quantities of land. The use of public water for artificial irrigation is governed by provincial regulations and is subject to the granting of governmental permits. We currently have permits for the use of water in our production of rice in the provinces of Corrientes and Santa Fe. Maintenance of our permits is subject to our compliance with applicable laws and regulations, which is supervised by the corresponding governmental authority (e.g., the Ministry of Water, Public Services and Environment (Ministerio de Agua, Servicios Publicos y Medio Ambiente), in the province of Santa Fe, and the Water Institute of the Province of Corrientes (Instituto Correntino del Agua).

 

The following table sets forth, for the harvest years indicated, the total number of planted rice hectares we owned and leased as well as the overall rough rice we produced:

 

   Harvest Year 
Rice Product Area & Production  2016/2017   2015/2016   2014/2015   2013/2014 
Owned planted area (hectares)   38,028    35,865    32,104    33,231 
Leased planted area (hectares)   1,700    1,700    3,224    3,100 
Total rice planted (hectares)   39,728    37,565    35,328    36,331 
Rough rice production (tons) (1)   -    220,758    180,149    205,489 

  

(1)As of the date of this annual report, the harvest of rice pertaining to the 2016/2017 harvest year is ongoing.

 

We grow rice on four farms we own and two farms we lease, all located in Argentina. In the 2014/2015 harvest year, we planted a total area of approximately 35,328 hectares of rice, producing a total of 180,149 tons, representing 16% of our total planted area that year, and 22% of our total farming production. In the 2015/2016 harvest year, we planted a total area of approximately 37,580 hectares of rice, producing a total of 220,758 tons, representing 18% of our total planted area that year, and 27% of our total farming production. In the current 2016/2017 harvest year, we planted a total of 39,728 hectares of rice, which have not been fully harvested as of the date of this report.

 

Production Process

 

The rice production cycle lasts approximately five to six months, beginning in September of each year and ending in April of the following year. Rice planting continues until November, followed by treatment of the rice, which lasts approximately three months, until January. In February we begin harvesting, which lasts until April. After harvesting, the rice is ready for processing.

 

We process rice in our three rice mills in Argentina, where we are able to process our entire rice crop and utilize our excess milling capacity to process rough rice we purchase from third party growers. 

 

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At the mill, we clean the rice to remove all impurities. We then put it through a dryer to remove excess moisture from the grains. Proper drying results in increased storage life, prevents deterioration in quality and leads to optimum milling. Once dried, the rice grain, now known as rough rice or paddy rice, is ready for storage. We store rice in elevators or in silo bags until milling. During the milling process, the rough rice goes through a de-husking machine that removes the husk from the kernel. The rice that is obtained after this process is known as brown rice and is ready for human consumption. Brown rice becomes white rice after it is polished to remove the excess bran.

 

The main objective of the milling process is to remove the husk and the bran, preserving the quality of the whole grain. Although the process is highly automated and uses advanced technology, some rice grains are broken in the process. The percentage of broken rice depends on a number of factors such as the crop development cycle at the farm, the variety of the grain, the handling and the industrial process. Average processing of rough rice results in 58% white rice, 11% broken rice and 31% rice husk and bran which is sold for use as cattle feed or floor bedding in the poultry business.

 

   Year Ended December 31, 
   2016   2015   2014 
Processed Rice Production  (In tons) 
Rough rice processed — own   206,794    131,861    188,307 
Rough rice processed — third party   16,382    38,618    29,084 
Total rough rice processed   223,176    170,479    217,391 

 

   Year Ended December 31, 
   2016   2015   2014 
Processed Rice Sales  (In thousand of $) 
Total Sales   96,681    84,668    103,682 

 

Rice comprised 14% of our total consolidated sales in 2014, 13% in 2015 and 11% in 2016.

 

Rice Seed Production

 

In our rice seed facility in Argentina, we are involved in the genetic development of new rice varieties adapted to local conditions to increase rice productivity and quality to improve both farm production as well as the manufacturing process. In connection with these efforts, we have entered into agreements with selected research and development institutions such as the National Institute of Agriculture Technology (Instituto Nacional de Tecnología Agropecuaria, or “INTA”) in Argentina, the Latin American Fund for Irrigated Rice (Fondo Latinoamericano para Arroz de Riego, or “FLAR”) and Latin American Rice Hybrids (Híbridos de Arroz para América Latina, or “HIAAL”) in Colombia, the Santa Catarina State Agricultural Research and Rural Extension Agency (Empresa de pesquisa Agropecuária e Extensão Rural de Santa Catarina, or “EPAGRI”) in Brazil and Badische Anilin- und Soda-Fabrik (“Basf”) in Germany. Our own technical team is continuously testing and developing new rice varieties. Our first rice seed variety, Ita Caabo 105, was released to the market in 2008. In 2011 we released our second variety Ita Caabo 110, and at the beginning of 2014 we released our third variety, Ita Caabo 107. We are currently experimenting with a wide range of varieties to continue improving our productivity. These seeds are both used at our farms and sold to rice farmers in Argentina, and eventually in Brazil, Uruguay and Paraguay. We are also developing, alongside Basf, a herbicide-tolerant rice variety to assist in the control of harmful weeds.

 

Dairy Business

 

We conduct our dairy operation in our farms located in the Argentine humid pampas region. This region is one of the best places in the world for producing fluid milk at a low cost, due to the availability of grains and forages produced efficiently and at low cost, and favorable weather for cow comfort and productivity. Our dairy operation consists of two free-stall dairy facilities with a total capacity of approximately 6,880 milking cows. 

 

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The following table sets forth, for the periods indicated below, the total number of our dairy cows, average daily milk production per cow and our total milk production:

 

   Year Ended December 31, 
Dairy Herd & Production  2016   2015   2014 
Total dairy herd (head)   7,618    7,824    7,396 
Average milking cows   6,880    6,658    6,440 
Average daily production (liters per cow)   36.7    36.3    33.8 
Total production (thousands of liters)   92,395    88,556    79,468 

 

   Year Ended December 31 
Dairy Sales  2016   2015   2014 
   (In thousands of $) 
Sales   32,897    32,981    32,968 

 

As of December 31, 2016, 2015 and 2014, we owned a dairy herd of 7,618 7,824, and 7,396 head, respectively, including 6,880, 6,658, and 6,440 milking cows, respectively, with an average production of 36.7, 36.4; and 33.8 liters per cow per day, respectively.

 

Dairy comprised 5% of our total consolidated sales in 2014and 2015 and 4% in 2016

 

Production Process

 

We wean calves during the 24 hours subsequent to birth and during the next 60 days raise them on pasteurized milk and high protein meal. Male calves are fed concentrates and hay for an additional 30 days in the farm before they are sent to our feedlot to be fattened for sale. Young heifers remain in open corrals during the next 13 months where they are fed with concentrates and forage until they are ready for breeding. Calving occurs nine months later. Heifers are subsequently milked for an average of 320 days. Dairy cows are once again inseminated during the 60- to 90-day period following calving. This process is repeated once a year for a period of six or seven years. The pregnancy rate for our herd is between 85% and 90% per year.

 

Each cow in our dairy herd is mechanically milked three times a day. The milk obtained is cooled to less than four degrees centigrade in order to preserve its quality and is then stored in a tank. Milk is delivered to large third party milk processing facilities on a daily basis by tank trucks. We feed our dairy cows mainly with corn and alfalfa silages, some grass and corn grain, supplemented as needed with soybean by-products, hay, vitamins and minerals.

 

We have invested in technology to improve the genetics of our cows, animal health and feeding in order to enhance our milk production. These investments include top quality imported semen from genetically improved North American Holstein bulls, agricultural machinery and devices, use of dietary supplements and modern equipment to control individual milk production and cooling. Our feeding program is focused on high conversion of feed into milk, while maintaining cows in good health and comfort. We have also invested in technology and know-how so as to increase our forage production and utilization.

 

In 2007, we began the construction of an advanced “free-stall” dairy in Argentina, which we believe was the first of its kind in South America, and started operating in March 2008. This new technology allows large- scale milk production at increased efficiency levels. Our free-stall dairy model consists of 3,000 cows confined inside a large barn where they are free to move within the indoor corrals. We feed our cows specific protein rich diets composed of corn grain and silage and milk them three times a day, using a milking mechanism consisting of an 80-cow rotary platform, which milks an average of 500 cows per hour. Having proved the success of our model we built a second free stall diary in 2011 and started operations during August 2012.

 

Implementation of the free-stall system allows us to position ourselves as a key player in the dairy industry and will boost our agricultural and industrial integration presence in the South American agricultural sector. By eliminating cow grazing, we reduce the amount of land utilized for milk production, which frees up more land for our agricultural and land development activities. Cow productivity (measured in liters of milk produced per day) using the free-stall system increases by over 50% compared to traditional grazing systems. These productivity gains are because the free-stall system significantly improves the conversion rate of animal feed to milk, resulting in an approximate 40% increase in the conversion ratio, or the production of 1.4 liters of milk for each 1 kg of animal feed as compared to the average of 1 liter of milk for each 1 kg of feed associated with the usual grazing model. 

 

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This increased productivity and conversion rate are mainly due to improved cow comfort and an enhanced diet quality. We assess cow comfort through the engagement of expert consultants, who recommended designing beds covered with sand. The sand plays a significant role in helping cows to rest comfortably. Additionally, we installed a cooling system to increase cow comfort as well. This system relies on water sprinklers and ventilation fans located all over the facility to create a controlled, cool atmosphere, which improves cow comfort as the Holstein herd is originally adapted to cold regions. Additionally, we manage diet quality by adapting our feeding regime based on the various feeding stages in the lifetime of each cow. The actual feeding is fully mechanized, and we carefully control the harvesting and storage of feed. The control of all productivity variables, such as reproduction, health and operations, supports efficiency gains through standardized processes. Finally, the physical concentration of the animals facilitates efficient overall management of the dairy business.

 

In terms of the environment, the free-stall model allows for a better effluent treatment, which includes a sand-manure separator stage, a decantation pool and an anaerobic lagoon. All these processes help to decrease the organic matter content of the effluent and deliver a cleaner output. The final treated effluent is used to fert-irrigate crops adjacent to the dairy operation. Accordingly, we transform dairy waste into a high value-added by-product, which reduces fertilizer usage. During the end of 2016, we began the construction of a bio-digester in our free-stall operation. This plant will capture methane gas from manure to co-generate electricity. This project will allow us to improve our manure treatment process and reduce CO2 emissions, and co-generate sufficient electricity to power our dairy operations and supply approximately 9,145 MWh of excess electricity to the local power grid. We received a grant from Sustainable Energy and Climate Change Initiative from the Inter-American Development Bank (SECCI) in order to carry out the pre-feasibility assessment. We have also received a grant from the “Agencia Nacional de Promoción Científica y Tecnologica”, an agency which promotes technological innovation, to partially fund the investment. In July 2016, we participated of Argentina’s “RenovAr” renewable energy auction and entered into a 20-year contract to supply up to 9,145 MWh per year at an average price of USD 158.92 per MWh.

 

The free-stall dairy is expected to allow us to become an efficient large-scale milk producer and optimize the use of our resources (land, cattle and capital) through the standardization of processes. Process standardization provides high operational control and allows us to scale-up our production efficiently and quickly.

 

All Other Segments

 

All Other Segments encompasses our cattle and coffee businesses. In December 2009, we strategically decided to sell almost all of our cattle herd — other than our dairy cows — to Quickfood S.A. (now “Marfrig Argentina S.A.”), an Argentine company and a subsidiary of the Brazilian company, Marfrig Alimentos S.A. (“Marfrig”), for a purchase price of $14.2 million. Additionally, we entered into a 10-year lease agreement under which Marfig Argentina S.A. leases grazing land from us to raise and fatten cattle.

 

In September 2013, Marfrig Argentina S.A. notified us of their intention to early terminate in the fourth quarter of 2013 the lease agreements of the approximately 63,000 hectares of grazing land subject to the 10-year lease agreement. The termination of the lease agreement was effective in the fourth quarter of 2013. We commenced an arbitration proceeding against Marfrig Argentina and Marfrig Alimentos in 2014 claiming unpaid invoices and indemnification for early termination for US$ 23,000,000. See “Item8. Financial Information – Legal and Administrative Proceedings”.

 

We currently own 60,713 hectares of cattle grazing land located mainly in the Argentine provinces of Corrientes, Santa Fe and Buenos Aires. In 2016 we entered into lease agreements with third party cattle farmers for a total area of 27,216 hectares.

 

During May 2013, Adecoagro entered into an agreement to sell the Mimoso farm and Lagoa do Oeste farm located in Luis Eduardo Magalhaes, Bahia, Brazil. The farms have a total area of 3,834 hectares of which 904 hectares are planted with coffee trees. In addition, we entered into an agreement whereby the buyer will operate and make use of 728 hectares of existing coffee trees in our Rio de Janeiro farm for an 8-year period. The total consideration for this transaction was $24 million, of which $6.0 million were collected as of December 31, 2013 and the balance to be paid in three annual installments in 2014, 2015 and 2016. Pursuant to the terms of the agreement, we will retain ownership of the coffee trees, which are expected to have an estimated useful life of 8 years in respect of the Rio de Janeiro farm after expiration of the agreement. We do not expect our coffee business to generate sales in future periods.

 

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Storage and Conditioning

 

Our storage and conditioning facilities in the farming business allow us to condition, store and deliver our products with no third-party involvement. All our crop storage facilities are located close to our farms, allowing us to (i) reduce storage and conditioning costs; (ii) reduce freight costs since we only commence moving the product once the final destination is determined, whether locally or to a port, (iii) capitalize on fluctuations in the prices of commodities; and (iv) improve commercial performance by mixing grains to avoid discounts due to sub-standard quality.

 

We own five conditioning and storage facilities for grains and oilseeds, with a total built storage capacity of 28,800 tons. Our largest storage facility, with a capacity of 18,700 tons, is located in the province of Santa Fe, Argentina, in the town of Christophersen. It has a railway loading terminal, providing logistical flexibility and savings. We also own in Argentina three rice mills, which account for over 116,854 tons of total storage capacity, and two additional storage and conditioning facilities for rice handling, with a total storage capacity of 5,700 tons.

 

Set forth below is our storage capacity as of December 31, 2016:

 

Storage Capacity  Nominal 
Crops (tons)   28,806 
Rice (tons)   116,854 

 

In addition, we use silo bags to increase our storage capacity at low cost. Silo bags are an efficient low-cost method for grain storage. As crops are harvested, they are placed inside large polyethylene bags that can be left in the fields for approximately 12 months without damaging the grain. Each silo bag can hold up to 180 to 200 tons of product, depending on the type of grain. During the 2015/2016 harvest year, we stored approximately 27% of our grain production through silo bags.

 

Silo bags offer important operational and logistic advantages, such as (i) low cost storage; (ii) flexible and scalable capacity that is adapted based on production and commercial strategy; (iii) harvest efficiencies since the bags are filled on the field allowing for a non-stop harvest operation regardless of any logistical setbacks; (iv) logistic efficiencies leading to lower freight since grains are transported during the off-season when truck fares are lower; (v) increased ability to monitor quality and identify different grain qualities, since grains are stored in relatively small amounts (200 tons) and easily monitored, maximizing our commercial performance; and (vi) better use of our drying capacity throughout the year. Silo bags are commercially accepted. Grains stored in silo bags can be sold in the market, and if such grains are to be delivered post harvest, we charge storage costs. Additionally, we can store grains to be used as seed during the following season (soybeans, rice and wheat), achieving quality seed management. We have expanded the use of silo bags from Argentina to our operations in Brazil and Uruguay.

 

Grain conditioning facilities at our farms allow our trade desk to optimize commercialization costs and to achieve commercial quality standards and avoid price discounts. These facilities are operated to dry, clean, mix and separate different qualities of each grain in order to achieve commercial standards. By mixing different batches of a same grain type, differentiated by quality parameters such as moisture, percentage broken, and percentage damaged, among others, we can achieve commercial standards without having to discount a lower-quality stand-alone batch. Efficient management of these facilities results in a lower cost for grain conditioning and a better achievable price.

 

Set forth below is our drying capacity as of December 31, 2016:

 

Drying Capacity  Nominal 
Crops (tons/day)   2,400 
Rice (tons/day)   5,300 

 

Some grains such as soybeans, wheat and rice, can be used for seed during the next planting season. We produce almost 97% of the seed used for planting these crops in our fields. The seed is stored in silo bags and/or grain facilities, where it can be processed, classified, and prepared for planting during next crop season. A deep survey and monitoring process is carried out in order to evaluate, control and deliver high quality seed to our farms.

  

The rest of our seed requirements are purchased from seed suppliers in order to incorporate new enhanced varieties into our planting plan.

 

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Marketing, Sales and Distribution

 

Crops

In Argentina, grain prices are based on the market prices quoted on Argentine grain exchanges, such as the Bolsa de Cereales de Buenos Aires and the Bolsa de Cereales de Rosario, which use as a reference the prevailing prices in international grain exchanges (including CBOT and ICE-NY). In Uruguay, local prices are based on an export parity (during harvest) or import parity in the case of post-harvest sales, which, in each case, take into account the prices and costs associated with each market. In Brazil, the grain market includes the Bolsa de Mercadorias e Futuros (Brazilian Grain Exchange), which, as in Argentina, uses as a price reference the international grain exchanges (including CBOT and ICE-NY). Prices are quoted in relation to the month of delivery and the port in which the product is to be delivered. Different conditions in price, such as terms of storage and shipment, are negotiated between us and the end buyer. We negotiate sales with the top traders and industrial companies in our markets. We also engage in hedging positions by buying and selling futures and options in commodities exchanges, including the Chicago Board of Trade, the New York Board of Trade, BM&FBOVESPA and the Mercado a Término de Buenos Aires (MATBA).

 

Soybeans: Our soybean crop is sold to local companies and is ultimately exported or diverted to the crushing industry. Approximately 56% of the soybean crop was hedged pre-harvest, by forward sales and sales in the futures markets. Harvest and post-harvest sales are a function of the export market versus local premiums paid by crushers (oil, meal and biodiesel) and logistics considerations. Our five largest customers comprised approximately 63% of our sales in the year ended December 31, 2016. In Argentina, the applicable export tax rate on soybeans is 30%. There are no export taxes in Brasil and Uruguay.

 

During 2016 we sold more than 39,000 tons (approximately 16% of our production) certified by the Round Table on Responsible Soybean (“RTRS”), capturing premiums over market value. RTRS is a civil organization that promotes responsible production, processing, and trading of soy on a global level. During 2012 and 2013 we also certified our silo plant in Argentina under 2BSvs (Biomass, Biofuels Sustainability Voluntary Scheme), based on sustentability criteria of the European Directive 2009/28/EC.

 

Corn: Approximately 85% of our total production is exported, of which 26% are FOB sales, with the remainder destined for domestic use in the poultry and food industry, and in our dairy operations. All of our Brazilian production is sold domestically for regional consumption. Approximately 40% of the corn crop was hedged pre-harvest. Approximately 3% of our corn production was destined for special products such as corn seed and popcorn. Our four largest customers comprised approximately 50% of our sales in the year ended December 31, 2015.

 

Wheat: Approximately % of our production is destined for local market and 60% is exported. Quality segregation allows us to negotiate premiums with the millers and export market. Brazil is the main importer of Argentine wheat. Our four largest customers comprised approximately 62% of our sales in the year ended December 31, 2016.

 

Sunflower: Our sunflower production from Argentina is sold to local companies. Sales are made pursuant by production agreements of sunflower for confectionary, high oil content sunflower and seed. Our three largest customers comprised 93% of our sales in the year ended December 31, 2016.

 

Rice: Rough rice is available for sale commencing after the harvest of each year. White rice availability is based on our milling capacity. 67% of our total rice production is sold into the export market, with the remainder sold in Argentina in the retail market. We export approximately 21% of our exported volume to the Middle East, 73% to other Latin American countries, and the remainder is exported to Africa. . We sell approximately 33% of our rice in the Argentine retail market through two brands we own that have a 15.9% market share. Local rice prices are driven by regional supply demand and exchange rate in Brazil. Our five largest customers for rice comprised approximately 67% of our sales in the year ended December 31, 2016.

 

Dairy: During most of 2016, we sold our entire fluid milk production to four dairy producers. These companies manufacture a range of consumer products sold in Argentina and abroad. We negotiate the price of fluid milk on a monthly basis in accordance with domestic supply and demand with these companies. The price of the milk we sell is mainly based on the percentage of fat and protein that it contains and the temperature at which it is cooled. The price we obtain for our milk also rises or falls based on the content of bacteria and somatic cells.

 

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Sugar, Ethanol and Energy

 

Sugarcane

 

Sugarcane is the most efficient agricultural raw material used in the production of sugar and ethanol. Ethanol produced from sugarcane is highly regarded as an environmentally friendly biofuel with the following characteristics.

 

Renewable: Sugarcane ethanol, unlike coal or oil, which can be depleted, is produced from sugarcane plants that grow back year after year, provided that they are replanted every six to eight years.

 

Sustainable: Sugarcane only needs to be replanted every five to seven years, as a semi-perennial crop. It can be harvested without uprooting the plant, and therefore its cultivation has less of an impact on the soil and the surrounding environment. The mechanization of the harvesting and planting process further improves sustainable agricultural management.

 

Energy Efficient: Sugarcane is highly efficient in converting sunlight, water and carbon dioxide into stored energy. The energy output of sugarcane is equal to nine times the energy input used in the production process, whereas the energy output of corn ethanol is only about 1.9 to 2.3 times the energy input used in its production process.

 

Low Carbon Emissions: Compared to gasoline, sugarcane ethanol reduces greenhouse gases by more than 61%, which is the greatest reduction of any other liquid biofuel produced today in large quantities. Ethanol made from sugarcane is deemed an advanced biofuel by the United States EPA.

 

Synergies: The main raw material used in the production of electricity in sugar mills is bagasse, which is a by-product of the sugarcane milling process, allowing for a renewable source of co- generated electricity.

 

Sugarcane is a tropical grass that grows best in locations with stable, warm temperatures and high humidity, although cold and dry winters are an important factor for the sucrose concentration of sugarcane. The climate and topography of the center-south region of Brazil is ideal for the cultivation of sugarcane and accounts for approximately 85% of Brazil’s sugarcane production.

 

As of December 31, 2016, our sugarcane plantations consisted of 134,591 hectares of sugarcane planted in the center-south region of Brazil. Approximately 93% of our sugarcane is planted over land leased through agricultural partnerships. Under these agreements, our partners lease land to us for periods of between one and two sugarcane cycles, equivalent to periods of between 10 to 12 years, on which we cultivate the sugarcane. Lease payments are based on the market value of the sugarcane set forth by the regulations of the State of Sao Paulo Sugarcane, Sugar and Alcohol Growers Counsel (Conselho dos Produtores de Cana-de-Açúcar, Açúcar e Álcool do Estado de Sao Paulo, or “Consecana”). We planted and harvested approximately 91% of the total sugarcane we milled during 2016, with the remaining 9% purchased directly from third parties at prices also determined by the Consecana system, based on the sucrose content of the cane and the prices of sugar and ethanol. The following table sets forth a breakdown during the time periods indicated of the amount of sugarcane we milled that was grown on our owned and leased land or purchased from third parties:

 

   Year Ended December 31, 
   2016   2015   2014 
Grown on our owned and leased land (tons)   10,164,671    7,396,926    6,418,274 
Purchased from third parties (tons)   949,837    938,521    814,554 
Total (tons)   11,114,508    8,335,447    7,232,828 

 

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Sugarcane Harvesting Cycle

 

The annual sugarcane harvesting period in the center-south region of Brazil begins in April and ends in November/December of each year. In Mato Grosso do Sul, where our cluster is located, the weather pattern is less seasonal than in Sao Paulo. Our wet season is dryer and our dry season is more humid than traditional sugarcane regions. As a consequence of this weather pattern, the sugar content (TRS) gap between the beginning and the end of the year compared to the peak of the harvest is much smaller than in Sao Paulo. This allows us to grow and harvest sugarcane year round with a minimal impact on sugar content (TRS).

 

Since the beginning of the 2016/17 harvest year we implemented a “non-stop” or “continuous harvest”strategy. “Non-stop” or “continuous harvest” refers to a continuous operation where we harvest and crush sugarcane year-round, without stopping during the traditional off-season. This new strategy will allow us to increase annual sugarcane milling and sugar, ethanol and energy production by approximately 10%. Another benefit of the system is that we will be producing ethanol in the off-season, when market prices usually are higher than prices at harvest. In addition, cogeneration efficiency is related to harvested volumes and unrelated to TRS, enabling us to utilize our cogeneration potential during the whole year. Considering that approximately 85% of total costs are fixed, this model will result not only in higher revenues but also in the dilution of our fixed costs.

 

We plant several sugarcane varieties, depending on the quality of the soil, the local microclimate and the estimated date of harvest of such area. Once planted, sugarcane can be harvested, once a year, up to six to eight consecutive years. With each subsequent harvest, agricultural yields decrease. The plantations must be carefully managed and treated during the year in order to continue to attain sugar yields similar to a newly-planted crop.

 

We believe we own one of the most mechanized harvesting operations in Brazil. Our sugarcane harvesting process is currently 98% mechanized (100% at Angélica and Ivinhema mills and 84% at UMA mill) and the remaining 2% is harvested manually. Mechanized harvesting does not require burning prior to harvesting, significantly reducing environmental impact when compared to manual harvesting. In addition, the leaves that remain on the fields after the sugarcane has been harvested mechanically create a protective cover for the soil, reducing evaporation and protecting it from sunlight and erosion. This protective cover of leaves decomposes into organic material over time, which increases the fertility of the soil. Mechanized harvesting is more time efficient and has lower costs when compared to manual harvesting. Sugarcane is ready for harvesting when the crop’s sucrose content is at its highest level. Sucrose content and sugarcane yield (tons of cane per hectare) are important measures of productivity for our harvesting operations. Geographical factors, such as soil quality, topography and climate, as well as agricultural techniques that we implement, affect our productivity. Since most sugar mills produce both sugar and ethanol in variable mixes, the industry has adopted a conversion index for measuring sugar and ethanol production capacity, the Total Recoverable Sugar (“TRS”) index, which measures the amount of kilograms of sugar per ton of sugarcane.

 

During the 2016 harvest, our mills harvested sugarcane with an average TRS content of 127 kg/ton and an average yield of 98.0 tons of sugarcane per hectare.

 

Once the sugarcane is harvested, it is transported to our mills for inspection and weighing. We utilize our own trucks and trailers for transportation purposes. The average transportation distance from the sugarcane fields to the mills is approximately 28 kilometers at UMA and 33 kilometers at Angélica and Ivinhema.

 

Our Mills

 

We currently own three sugar mills in Brazil, UMA, Angélica and Ivinhema. Our mills produce sugar, ethanol and energy, and have the flexibility to adjust the production mix between sugar and ethanol, to take advantage of more favorable market demand and prices at given points in time. As of December 31, 2016, our sugar mills had a total installed crushing capacity of 11.2 million tons of sugarcane, of which 10.0 million tons correspond to our sugarcane cluster in Mato Grosso do Sul, Brazil. As of December 31, 2016, we concluded the 2016 harvest crushing an aggregate volume of 11.1 million tons of sugarcane.

 

The Usina Monte Alegre mill (“UMA”) is located in the state of Minas Gerais, Brazil, and has 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 99.5% of the sugarcane milled at UMA, with the remaining 0.5% acquired from third parties. On December 31, 2016, UMA concluded its harvest operations for the 2016 season, crushing 1.1 million tons of sugarcane.

 

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Angélica is an advanced mill, which we built in the state of Mato Grosso do Sul, Brazil, with a total sugarcane crushing capacity of 4.8 million tons per year. Angélica was completed in 2010 and is equipped with two modern high pressure boilers and three turbo-generators with the capacity to use all the sugarcane bagasse by-product to generate approximately 96 MW of electricity that is used to power the mill with an excess of 65MW available for sale to the power grid. Angélica has the flexibility to vary the product slate between 60% to 40% for either product.

 

During mid 2011, we started the construction of our third mill, Ivinhema, located in the state of Mato Grosso do Sul, approximately 45 kilometers south of our existing Angelica mill, in order to complete our planned sugarcane cluster in that region. The construction of the first phase of the Ivinhema mill was completed during the beginning of 2013 reaching 2.0 million tons of sugarcane crushing capacity, and milling operations commenced on April 25, 2013. During early 2014, we began the construction of the second phase of the Ivinhema, adding 3.0 million tons of additional nominal crushing capacity. The investment consisted of expanding the milling equipment, building a new fluidized bed boiler, two new electrical generators and expanding the sugar factory and ethanol distillery, as well as expanding the sugarcane plantation and agricultural machinery.The construction was completed during mid 2015. Ivinhema now has a total milling capacity of 5.3 million tons per year. The mill is equipped with state-of-the-art technology including full cogeneration capacity, flexibility to produce sugar and ethanol and fully mechanized agricultural operations. Ivinhema has capacity to produce up to 330,000 tons of sugar, 264,000 cubic meters of ethanol and 360,000 MWh of energy sales to the grid.

 

During March 2017 we commenced an expansion project to increase the crushing capacity of our cluster in Mato Grosso do Sul by 30% or 3.0 million tons, from 10.0 million tons to 13.0 million tons. The project will be implemented over the next five years and will be executed in two phases. Phase 1 consists of expanding Angelica’s crushing capacity by 0.9 million tons throughout 2017 and 2018. We will expand crushing capacity by 150 tons/hour by installing larger mill rollers in the first mill, and expanding the sugar centrifugation and ethanol filtration processes. Crushing will grow gradually and reach full capacity by 2019. Phase 2 will consist of expanding Ivinhema’s capacity by 2.1 million tons (400 tons/hour), between 2018 and 2022. This will be achieved by installing a new mill (#6) expanding the sugarcane reception, juice treatment and sugar factory. Crushing will grow gradually and reach full capacity in 2023. Total estimated capital expenditure is $166 million (52 USD/ton), of which 20% consists of industrial machinery and equipment, 15% of agricultural equipment (harvesters, tractors, trucks) and 65% of sugarcane planting (51,000 hectares) to supply the new nominal capacity. 55% of the capex will be deployed during 2017-2019, and 45% during 2020-2022.

 

We plant and harvest 91% of the sugarcane milled at our cluster, with the remaining 9% acquired from third parties. On December 31, 2016, our sugarcane cluster concluded its harvest operations for the 2016 season, crushing 10.0 million tons of sugarcane.

 

Our Main Products

 

The following table sets forth a breakdown of our production volumes by product for the years indicated:

 

   Year Ended December 31, 
   2016   2015   2014 
             
Sugar (tons)   701,060    464,929    413,687 
Ethanol (cubic meters)   422, 395    361,001    299,810 
Energy (MWh exported)   751,037    553,090    445,705 

 

The following table sets forth our sales for each of the sugarcane by-products we produce for the years indicated:

 

   Year Ended December 31, 
   2016   2015   2014 
   (In thousands of $) 
Sugar   330,895    177,801    174,459 
Ethanol   211,451    176,150    165,870 
Energy   53,995    46,671    66,800 
Other   351    -    - 
Total   596,692    400,622    407,129 

 

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Sugar

 

As of December 31, 2016 our sugar production capacity was approximately 3,500 tons per day which, in a normal year of 6,819 hours of milling, results in an annual sugar maximum production capacity of over 994,408 tons of sugar. The increased capacity is the result of enhanced operational efficiencies and the completion of the second phase of the Ivinhema mill. In 2016, we produced 701,060 tons of sugar, compared to 464,929 tons of sugar in 2015 and 413,687 tons of sugar in 2014.

 

We produce two types of sugar: very high polarization (“VHP”) standard raw sugar and white crystal sugar. VHP sugar, a raw sugar with a 99.3% or higher sucrose content, is similar to the type of sugar traded in major commodities exchanges, including the standard NY11 contract. The main difference between VHP sugar and NY11 raw sugar is the sugar content of VHP sugar, and it therefore commands a price premium over NY11 raw sugar. Crystal sugar is a non-refined white sugar (color 150 ICUMSA) produced directly from sugarcane juice.

 

Sugar sales comprised 22% of our total consolidated sales in 2014, 26% of our total consolidated sales in 2015 and 38% of our total consolidated sales in 2016.

 

Ethanol

 

As of December 2016, our ethanol production capacity was approximately 2,900 cubic meters per day which, in a normal year of 6,819 hours of milling, results in maximum annual production capacity of over 823,938 cubic meters of ethanol. The increased capacity is the result of enhanced operational efficiencies and the completion of the second phase of the Ivinhema mill. In 2014 we produced 299,810 cubic meters of ethanol, compared to 361,001 cubic meters in 2015 and 445,395 cubic meters in 2016.

 

We produce and sell two different types of ethanol: hydrous ethanol and anhydrous ethanol (as further described in “—Production Process—Ethanol”). Ethanol sales comprised 23% of our total consolidated sales in 2014, 26% of our total consolidated sales in 2015 and 22% of our total consolidated sales in 2016.

 

Cogeneration

 

We generate electricity from sugarcane bagasse (the fiber portion of sugarcane that remains after the extraction of sugarcane juice) in our three mills located in Brazil. As of December 31, 2016, total installed cogeneration capacity reached 232MW, of which 162MW are available for resale to third parties after supplying our mills’ energy requirements. The ability to generate electricity from the by-product of the sugarcane crushing process on a large enough scale to fully power a mill with excess electricity being available is referred to as having full cogeneration capacity. Our three mills are duly licensed by the Agência Nacional de Energia Elétrica (“ANEEL”) to generate and sell electricity. During the year ended December 31, 2016 , 2015 and 2014 we sold 1,028,323 MWh, 607,532 MWh and 445,705 MWh to the local electricity market, comprising 5%, 13%, 8% of our consolidated sales respectively.

 

Production Process

 

Sugar. There are essentially five steps in the sugar manufacturing process. First, we crush the sugarcane to extract the sugarcane juice. We then treat the juice to remove impurities. The residue is used to make an organic compost used as fertilizer in our sugarcane fields. The juice is then boiled until the sugar crystallizes, and sugar is then separated from the molasses (glucose which does not crystallize) by centrifugation. The resulting sugar is dried and sent to storage and/or packaging. We use the molasses in our production of ethanol.

 

Ethanol. Ethanol is produced through the fermentation of sugarcane juice or diluted molasses. Initially, we process the sugarcane used in ethanol production the same way that we process it for sugar production. The molasses resulting from this process is mixed with clear juice and then with yeast in fermentation vats, and the resulting wine has an ethanol content of approximately 8% to 10%. After the fermentation is complete, the yeast is separated for recycling in the ethanol production process. We distill the wine to obtain hydrous ethanol. In order to produce anhydrous ethanol, hydrous ethanol undergoes a dehydration process in a molecular sieve. The liquid remaining after these processes is called vinasse, which we further process to make liquid organic fertilizer that we use in our sugarcane plantations.

 

Cogeneration. Sugarcane is composed of water, fibers, sucrose and other sugars and minerals. When the sugarcane goes through the milling process, we separate the water, sugar and minerals from the fibers or sugarcane bagasse. Bagasse is an important sub-product of sugarcane, and it is used as fuel for the boilers in our mills. Sugarcane bagasse is burned in our state-of-the-art boilers to produce high pressure steam (67 atm) which is used in our high-efficiency turbo-generators to generate electricity to power our mills. The excess electricity, about 66% of production, is sold to the national power grid.

 

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The following flow chart demonstrates the sugar, ethanol and cogeneration production process:

 

 

Historically, the energy produced by Brazilian mills has not been price competitive when compared to the low-cost Brazilian hydro-electricity, which accounts for almost 90% of the country’s electricity matrix. Consequently, the majority of the groups in the sugar and ethanol sector have not invested in expanding their energy generation for sale, and the majority of the mills were constructed with less efficient, low-pressure boilers. Since 2000, the Brazilian economy has experienced significant growth, which in turn has resulted in increased demand for energy.

 

However, hydro- and thermo-electricity have not been able to keep pace for the following reasons: (1) new hydro-electric plants are located in regions (such as the Amazon) distant from consumption centers; (2) significant lead-time is required to construct new hydro- and thermo-electric plants; (3) significant investments are required for transmission lines, pipelines (for natural gas used in thermo-electric plants) and barges; (4) significant environmental costs are associated with both types of electricity generation; and (5) prices for fuel (natural gas) used in the generation of thermo-electricity have increased resulting in greater dependence on Bolivia (Brazil’s principal natural gas supplier). As a result, energy prices in Brazil have been increasing, and alternative sources, such as the electricity from the cogeneration of sugarcane bagasse, have become increasingly competitive and viable options to satisfy the increasing energy demands. Sugarcane bagasse cogeneration is particularly competitive since sugarcane-based electricity is generated following the sugarcane harvest and milling which occurs during the dry season in Brazil, when hydroelectric generation is at its lowest levels.

 

The main advantages of energy generated by sugarcane bagasse are:

 

It is a clean and renewable energy;

 

It complements hydropower, the main source of Brazilian energy, as it is generated during the sugarcane harvest period (April to December) when water reservoirs are at their lowest level;

 

It requires a short period of time to start operations; and

 

It requires only a small investment in transmission lines when plants are located close to consumer centers.

 

As of December 2016, our total installed cogeneration capacity at our cluster and UMA mill was 216MW and 16MW respectively, of which 150MW and 12MW are available to sell to the market.

 

We believe that there is a high potential for growth in the generation of electricity, and we are prepared to make investments to the extent economically viable.

 

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Storage and Conditioning

 

Our sugar and ethanol storage and conditioning facilities are located at our mill sites and allow us to deliver our products when they are ready to be commercialized with no third-party involvement. Having such facilities at mill sites allows us to (i) reduce storage and conditioning costs; (ii) reduce freight costs since we only commence moving the product once the final destination is determined, whether locally or to a port; and (iii) capitalize on fluctuations in the prices of sugar and ethanol.

 

Nominal Storage Capacity  Cluster   UMA   Total 
Ethanol (cubic meters)   160,000    27,000    187,000 
Sugar (tons)   155,000    36,400    191,400 

 

Marketing, Sales and Distribution

 

Sugar: We sell sugar both in the domestic and the international markets at prices that depend on our price parity calculation, which considers each market’s price and the associated costs. Prices for the sugar we sell in Brazil are set, using an index calculated by the Agriculture College of the University of São Paulo (Escola Superior de Agricultura Luiz de Queiroz, or “ESALQ”), with a premium in the state of Minas Gerais due to the use of our regional brand, “Monte Alegre,” the market leader in the southern part of that state. Prices for the sugar we export are set in accordance with international market prices. International prices for raw sugar are established in accordance with the NY11 futures contracts. Our largest six customers for sugar comprised approximately 95% of our sales in the period ended December 31, 2016.

 

Ethanol: Almost all of our ethanol sales are in the domestic Brazilian market given the increasing demand generated from the increase in flex-fuel vehicles in Brazil and better ethanol parity at the gas stations. Around 37% of our ethanol sales are made through formal agreements. The remaining volumes are sold through daily sale orders through specialized brokerage firms that act in the ethanol domestic market, whose role is to intermediate the sale of ethanol between the ethanol producers and the domestic ethanol distribution companies, the prices for these transactions are set using the ESALQ and the futures and commodity exchange of the BM&FBOVESPA indices for ethanol as a reference. Our largest eight customers by volume comprised approximately 74% of our sales in the period ended December 31, 2016.

 

Cogeneration: We also sell electricity co-generated at our sugar and ethanol mills to local electricity commercialization companies and directly to the spot market. Sales are made in the spot market with brokers, through government auctions, to distributors and through long-term contracts. Our largest four customers comprised 72% of our sales revenues in the period ended December 31, 2016.

 

The Brazilian energy agency, ANEEL, has organized yearly auctions for alternative energy and for renewable sources at favored rates. As a hedging strategy, we sell the electricity production of our mills through long-term contracts adjusted for inflation by reference to the National Index of Consumer Prices (“IPCA”).

 

In 2009, UMA entered into a 10-year agreement with CEMIG for the sale of approximately 46,200 MWh during the harvest periods each year (May to November of each year) at a rate of R$ 233.93 per megawatt hour in 2015. In 2009, Angélica sold energy in a public auction carried out by Camara de Comercialização de Energia Elétrica (“CCEE”), Angélica entered into a 15-year agreement with CCEE for the sale of 87,600 MWh per year at a rate of R$232.10 per MWh (price for year 2015). In August 2010, Angélica participated in a public auction, whereupon Angélica entered into a second 15-year agreement with CCEE starting in 2011, for the sale of 131,400 MWh per year at a rate of R$206.30 per MWh (price for year 2015). The delivery period for the first auction is May to December and for the second the delivery period starts in April and ends in November of each year. The rates under both agreements are adjusted annually for inflation by reference to the IPCA. In August 2013, Ivinhema sold 87,600 MWh in an auction carried out by CCEE at R$146.08 per MWh. This volume will start to be delivered in 2018 and its price is adjusted annually by IPCA.

 

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Land Transformation

 

Land transformation is an important element of our business model and a driver of value creation. Through land transformation, we optimize land use and increase the productive potential and value of our farmland. Our land transformation model consists of changing the use of underutilized or undermanaged agricultural land to more profitable cash generating agricultural activities, such as turning low cash-yielding cattle pasture land into high cash-yielding croppable land, allowing profitable agricultural activities, such as crop, rice and sugarcane production.

 

Since our inception, we have successfully identified multiple opportunities for the acquisition of undeveloped or undermanaged farmland with high potential for transformation. During the fourteen-year period since our inception, we have effectively put into production over 169,317 hectares that were previously undeveloped or inefficiently managed and are undergoing the transformation process.

 

The land transformation process begins by determining the productive potential of each plot of land. This will vary according to soil properties, climate, productive risks, and the available technology in each specific region. Before commencing the transformation process, we perform environmental impact studies to evaluate the potential impact on the local ecosystem, with the goal of promoting environmentally responsible agricultural production and ecosystem preservation, thereby supporting sustainable land use. We do not operate in heavily wooded areas or primarily wetland areas.

 

The transformation process for underdeveloped and undermanaged land requires us to make initial investments during a period of one to up to three years, and the land reaches stable productive capability the third to seventh year following commencement of the land transformation activities.

 

We are engaged in three different categories of the land transformation process, which are defined by the previous use of the land:

 

(i) Undeveloped land (savannahs and natural grasslands): This is the most drastic transformation phase since it demands both physical and chemical transformation of the soil. First, the land is mechanically cleared to remove native vegetation. The soil is then mechanically leveled for agricultural operations: in the case of land being transformed for rice production, this process involves heavy land movements and systematization required for irrigation and drainage channels, roads and bridges. In the case of land destined for sugarcane plantations, land movements will also be necessary for the construction of terraces to prevent the excess of water runoff. Certain soils must be chemically treated and corrected by incorporating nutrients such as limestone, gypsum and phosphorous, as is the case of the Brazilian ‘Cerrado’. Soil correction is not required in Argentina or Uruguay due to the natural fertility of the soil. Pesticides and fertilizers are then applied to the soil in preparation for planting. In the case of land destined for crop production (grains and oilseeds), soybean, which is sometimes referred to as a colonizing crop, is usually planted during the first years due to its resistance to pests, weeds and extreme weather and soil conditions. Thereafter, the land will enter into a crop rotation scheme to reduce the incidence of plague and disease and to balance soil nutrients. In the case of rice and sugar cane, which are produced in a monoculture system, there is no colonizing crop or rotation involved. Intensive plague and weed controls and additional soil correction will take place during these first three to five years. Land productivity or yields, measured in tons of soybean or other crops per hectare, will be initially low and will gradually increase year by year. During the first five to seven years, the yields will increase at high and sustained rates. After the seventh year we consider the land developed as yield volatility is reduced and growth is only achievable at marginal rates. Since our inception in 2002, we have put into production 67,892 hectares of undeveloped land into productive croppable land.

 

(ii) Undermanaged or underutilized farmland (cultivated pastures and poorly managed agriculture): This transformation process is lighter than the one described above since it does not require the initial mechanical clearing of vegetation or land leveling. Only in the case of land being prepared for rice production will leveling be required for efficient flood-irrigation. The transformation of cattle pastures or poor agriculture in the Brazilian ‘Cerrado’ will begin with soil correction and soil tillage in preparation for planting of the first soybean or sugarcane crop. The process will then continue as described in the case above. Land productivity or crop yields will grow at high rates during the first three to five years of the transformation process and will then commence to stabilize and grow at marginal rates, at which point we consider the land developed. Since our inception in 2002 we have put into production 101,425 hectares of undermanaged or underutilized farmland into croppable land.

 

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(iii) Ongoing transformation of croppable land: The application of efficient and sustainable crop production technologies and best practices such as “no-till”, crop rotations, integrated pest and weed management and balanced fertilization, among others, incrementally increases soil quality and land productivity over time, maximizing return on invested capital and increasing the land value of our properties. Our entire farmland portfolio is constantly undergoing this phase of land transformation. During the 2015/2016 harvest year, we operated 131,363 hectares of own developed farmland which were enhanced by the use of best productive practices and technology.

 

In each of these categories of transformation, the metric the company uses to track the level and analyze the progress of the transformation process is the level and tendency of crop yields and the number of years the land has been under crop production. Consequently, the process of land transformation is evidenced by the results of the activities within our other business segments, primarily our crops, rice and sugarcane segments. Accordingly the costs associated with the transformation process described above are allocated within these other business segments. As a result, there may be variations in our results from one season to the next according to the amount of farmland undergoing transformation and the amount of land sold and our ability to identify and acquire new farmland.

 

Our land transformation segment seeks not only to profit from crop and rice cultivation, but also from the opportunistic disposition of successfully transformed farmland. We strategically sell farms that have reached productive maturity with marginal potential for further productivity increases (years three to seven after commencing the land transformation process) to realize and monetize the capital gains arising from the land transformation process. Land transformation proceeds are in turn reinvested in the purchase of strategic farmland with potential for transformation and appreciation. The rotation of our land portfolio allows us to allocate capital efficiently. Since 2006 we have had a solid track record of selling farmland and achieving profitable returns. During the last eleven years, we have sold 20 farms, generating capital gains of approximately $205 million.

 

These capital gains are generated by three main factors:

 

(i) the acquisition of land at opportunistic prices below the market value or fair value of the land;

 

(ii) the land transformation and ongoing land transformation process described above enhances the productivity and profitability of land, ultimately increasing the value of the land; and

 

(iii) general market appreciation of land driven by increase in commodity prices and supply and demand dynamics in the land market. In this regard, during the last 30 years, since 1977, farmland prices in Argentina’s core production region have increased an average of 8.1% per year according to data published by Margenes Agropecuarios. The value of the farms we sold between 2006 and 2015 as well as our overall land portfolio, has been positively impacted by this external factor.

 

We believe we are one of the most active players in the land business in South America. Since our inception in 2002, we have executed transactions for the purchase and sale of land for over $688 million. Our business development team is responsible for analyzing, selecting, acquiring and selling land. The 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. Since 2002, the team has analyzed over 11 million hectares of farmland with a total value of approximately $16 billion. We have developed a methodology to analyze investment opportunities, taking into account price, transformation potential, productive model, financial projections, and investment requirements, among others. Our analysis also employs advanced information technology, including the use of satellite images, rain and temperature records, soil analyses, and topography and drainage maps. From time to time, we may leverage our favorable position in and knowledge of the land market to engage in opportunistic buying and selling transactions.

 

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The following table sets forth our acquisitions and divestitures since our inception:

 

   Acquisition   Divestitures   Total Land Holdings 
Year Ended December 31,  (In hectares) 
2002   74,898        74,898 
2003           74,898 
2004   34,659        109,557 
2005   22,262        131,819 
2006   5,759    3,507    134,071 
2007   113,197    8,714    239,274 
2008   43,783    4,857    278,200 
2009       5,005    273,195 
2010   14,755    5,086    282,864 
2011   12,992    2,439    293,417 
2012       9,475    283,942 
2013       14,176    269,838 
2014       12,887    257,036 
2015       10,905    246,139 
2016           246,139 

 

Our Farms

 

Appraisal of Farms. In September 2016, in order to assess the market value of rural properties in Brazil, Argentina and Uruguay, we requested an appraisal by Cushman & Wakefield Argentina S.A., independent real estate valuation firm knowledgeable about the agriculture industry and the local real estate market. As part of these appraisals, the value of each of our properties was determined using the sales comparison approach taking into account current offerings and prices buyers had recently paid for comparable sites, adjusted for the differences between comparable properties and the subject property to arrive at an estimate of the value. The major elements of comparison used to value the properties included the property rights conveyed, the financial terms incorporated into the transaction, the conditions or motivations surrounding the sale, changes in market conditions since the sale, the location of the real estate and the physical characteristics of the property.

 

The above mentioned valuations assumed good and marketable title to subject properties, which were assumed to be free and clear of all liens and encumbrances. The valuation did not include site measurements and no surveys of the subject properties were undertaken. In addition, the valuations also assumed (a) responsible ownership and competent management of the subject properties; (b) there were no hidden or unapparent conditions of the subject properties, subsoil or structures that render the subject properties more or less valuable; (c) full compliance with all applicable federal, state and local zoning and environmental regulations and laws and (d) all required licenses, certificates of occupancy and other governmental consents were or can be obtained and renewed for any use on which the value opinion contained in the appraisals is based. Unless otherwise stated in the appraisals, the existence of potentially hazardous or toxic materials that may have been used in the construction or maintenance of the improvements or may be located at or about the subject properties was not considered in arriving at the appraisal of value. These materials (such as formaldehyde foam insulation, asbestos insulation and other potentially hazardous materials) may adversely affect the value of the subject properties.

 

Cushman & Wakefield has informed us their assessment of the market value of our farmland as of September 30, 2016. According to Cushman & Wakefield, the market value of our farmland totaled $936.1 million, out of which $809.8 million correspond to the market value of our farmland in Argentina and Uruguay, and the remaining $126.3 million correspond to the market value of our farmland in Brazil. Net of non-controlling interests in certain Argentine farms, the market value of our farmland totaled $760.2 million. These valuations are only intended to provide an indicative approximation of the market value of our farmland property as of September 30, 2016 based on then current market conditions. This information is subject to change based on many variables and market conditions.

 

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Farm  State, Country  Gross Size
(Hectares)
   Current Use
El Meridiano  Buenos Aires, Argentina   6,302   Grains
Las Horquetas  Buenos Aires, Argentina   2,086   Grains & Cattle
San Carlos  Buenos Aires, Argentina   4,215   Grains
Huelen  La Pampa, Argentina   4,633   Grains
La Carolina(2)  Santa Fe, Argentina   4,306   Grains & Cattle
El Orden(2)  Santa Fe, Argentina   3,506   Grains & Cattle
La Rosa  Santa Fe, Argentina   4,087   Grains & Cattle
San Joaquín  Santa Fe, Argentina   37,273   Rice, Grains & Cattle
Carmen  Santa Fe, Argentina   10,021   Grains
Abolengo  Santa Fe, Argentina   7,473   Grains
Santa Lucia  Santiago del Estero, Argentina   17,495   Grains & Cattle
El Colorado  Santiago del Estero, Argentina   4,960   Grains
La Guarida (1)  Santiago del Estero, Argentina   7,880   Grains & Cattle
La Garrucha (1)  Salta, Argentina   1,839   Grains
Los Guayacanes (1)  Salta, Argentina   3,693   Grains
Ombú  Formosa, Argentina   18,321   Grains & Cattle
Oscuro  Corrientes, Argentina   33,429   Rice, Grains & Cattle
Itá Caabó  Corrientes, Argentina   22,888   Rice, Grains & Cattle
Alto Alegre  Tocantins, Brazil   6,082   Grains & Cotton
Conquista  Tocantins, Brazil   4,415   Grains & Cotton
Rio de Janeiro  Bahia, Brazil   10,012   Grains & Cotton
Bela Manhã  Mato Grosso do Sul, Brazil   381   Sugarcane
Ouro Verde  Mato Grosso do Sul, Brazil   679   Sugarcane
Don Fabrício  Mato Grosso do Sul, Brazil   3,302   Sugarcane
Takuarê  Mato Grosso do Sul, Brazil   489   Sugarcane
Agua Branca  Mato Grosso do Sul, Brazil   1,614   Sugarcane
Nossa Senhora Aparecida  Mato Grosso do Sul, Brazil   540   Sugarcane
Sapálio  Mato Grosso do Sul, Brazil   6,140   Sugarcane
Carmen (Agua Santa)  Mato Grosso do Sul, Brazil   146   Sugarcane
La Pecuaria  Duranzo, Uruguay   3,177   Grains
Doña Marina  Corrientes, Argentina   14,755   Rice
Total      246,139    

 

(1) On June 2014, we completed the sale of a 49.0% interest in Global Anceo S.L.U and Global Hisingen S.L.U, two Spanish subsidiaries that owned La Guarida, La Garrucha and Los Guayacanes farms.

(2) On 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

 

A substantial portion of our assets consists of rural real estate. The agricultural real estate market in Brazil, Argentina and Uruguay is particularly characterized by volatility and illiquidity. As a result, we may experience difficulties in immediately adjusting our portfolio of rural properties in response to any alterations in the economic or business environments. The volatility of the local market could affect our ability to sell and receive the proceeds from such sales, which could give rise to a material adverse effect on our business, results of operations and financial condition. See “Item 3. Key Information—D. Risk Factors—Risks Related to Our Business and Industries—A substantial portion of our assets is farmland that is highly illiquid.”

 

Land Leasing and Agriculture Partnerships. We enter into operating lease agreements based on criteria regarding the quality and projected profitability of the property, as well as our production and yield objectives in the short or medium term. Generally, we become aware of farms available for lease directly through the owners of farms near our farms and in some cases through regional brokers.

 

 

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We tend to be more open to leasing farmland for sugarcane production than for our farming businesses, where we own the majority of the land that we farm. We lease land for our sugarcane production primarily because leases in this sector are long term, lasting between one or two sugarcane cycles (with each cycle lasting generally 6 years), which allows us to implement and reap the productivity benefits of our land transformation strategies. Sugarcane lease payments are established in terms of tons of sugarcane per hectare, depending on the productivity of the land in terms of tons per hectare and sucrose content per hectare and also on the distance from the land to the mill. Sugarcane prices are based on the market value of the sugarcane set forth by the regulations of the State of Sao Paulo Sugarcane, Sugar and Alcohol Growers Counsel (Conselho dos Produtores de Cana-de-Açúcar, Açúcar e Álcool do Estado de Sao Paulo, or “Consecana”). Given the strategic location of our mills in the region and the inherent inefficiency of growing crops other than sugarcane in this region, we expect to be able to renew our leases for the sugarcane farmland with minimal issues.

 

With respect to our farming business, the initial duration of lease agreements is generally one harvest year. Leases of farmland for production of grains include agreements with both fixed and variable lease payments in local currency or U.S. dollars per hectare.

 

Land Management. We manage our land through an executive committee composed of a country manager, regional manager, farm manager and members of the Technology Adecoagro Group (“TAG”) that meet on a monthly basis. We delegate individual farm management to farm managers, who are responsible for farm operations and receive advisory support from TAG to analyze and determine the most suitable and efficient technologies to be applied. Our executive committee establishes commercial and production rules based on sales, market expectations and risk allocation, and fulfilling production procedures and protocols.

 

Following an acquisition of property, we make investments in technology in order to improve productivity and to increase its value. Occasionally when we purchase property, a parcel of the property is sub-utilized or the infrastructure may be in need of improvement, including traditional fencing and electrical fencing, irrigation equipment and machinery, among other things.

 

Property, Plant and Equipment

 

In addition to our farmland, we also own the following principal industrial facilities:

 

Facility   Province, Country  

Relevant

Operational Data

  Current Use
“Christophersen”   Santa Fe, Argentina  

18,700 tons of storage capacity.

2,400 tons per day of drying

Capacity

  Seedbed and stockpiling plant (1)
             
“Semillero Itá Caabó”   Corrientes, Argentina       Rice genetic improvement program
             
“Molino Ala — Mercedes”   Corrientes, Argentina  

Installed capacity of 4,682 tons

of white rice monthly, and husk

rice drying capacity of 2,400 tons

per day

  Rice processing and drying plant
             
“Molino Ala — San Salvador”   Entre Ríos, Argentina  

Installed capacity of 5,208 tons

of white rice monthly, and husk

rice drying capacity of 1,100 tons

per day

  Rice processing and drying plant
             
Molino Franck   Santa Fe, Argentina  

Processing capacity of 5,617 tons

of white rice monthly, and husk

rice drying capacity of 1,600 tons

per day

  Rice processing and drying plant
             
“Angélica Agroenergía”   Mato Grosso do Sul, Brazil  

Installed milling capacity of

4.7 million tons of

sugarcane annually, 330,000 tons

of VHP sugar and over 264,000

cubic meters of ethanol, and

over 260,000 MWh

  Sugar and ethanol mill producing hydrated ethanol, anhydrous ethanol and VHP sugar. Sells energy to local network
             
“Ivinhema Agroenergía”   Mato Grosso do Sul, Brazil  

Installed milling capacity of

5.3 million tons of

sugarcane annually, 330,000 tons

of VHP sugar, 330,000

cubic meters of ethanol, and

over 360,000 MWh

  Sugar and ethanol mill producing hydrated ethanol and VHP sugar. Sells energy to local network
             
 “Usina Monte Alegre”   Minas Gerais, Brazil  

Present milling capacity of 1.2

million tons of sugarcane

annually, 130,000 tons of VHP

and white sugar and over

52,000 cubic meters of ethanol

and 54,000 MWh

  Sugar mill producing VHP and white sugar and hydrated ethanol. Sells energy to local network

 

 

(1)Classification of wheat and soybean seeds.

 

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For additional information regarding our property, plant and equipment, see Note 6 of the Consolidated Financial Statements.

 

Customers

 

We sell manufactured and agricultural products to a large base of customers. The type and class of customers may differ depending on our business segments. For the year ended December 31, 2016 more than 60% of our sales of crops were sold to 13 well-known customers (both multinational or local) with good credit history. Of these customers, our biggest three customers represented almost 24% of our sales and the remaining ten represented approximately 36% of our net sales in the course of that year.

 

In the Sugar, Ethanol and Energy segment, sales of ethanol were concentrated in 8 customers, which represented 74% of total sales of ethanol for the year ended December 31, 2016. Approximately 95% of our sales of sugar were concentrated in 4 well-known traders for the year ended December 31, 2016. The remaining 10%, which mainly relates to “crystal sugar”, were dispersed among several customers. In 2016, energy sales are 72% concentrated in 4 major customers.

 

Competition

 

The farming sector is highly fragmented. Although we are one of South America’s leading producers, due to the atomized nature of the farming sector, our overall market share in some of the industries in which we participate is insubstantial. Our production volume, however, improves our ability to negotiate favorable supply, transportation and delivery logistics with our suppliers, third-party transporters, ports and other facilities, and customers. Although competition in agriculture varies considerably by product and sector, in general, there are a large number of producers, and each one of them controls only a small portion of the total production. Therefore individual producers often have little influence on the market and cause little or no effect on market prices as a result of their individual strategies, explaining why producers are price takers and not price makers. In many cases, the price is established in international market exchanges. As the majority of agricultural products are commodities, which stifles product differentiation, the principal competition factors are cost of production and volume efficiency gains. In addition, agricultural producers face strong foreign competition, and with this competition the factors are often more difficult to identify.

 

The majority of farming producers in developed countries can rely on specific protectionist policies and subsidies from their governments in order to maintain their position in the market. In general, we have been able to obtain discounts for the acquisition of supplies and excess prices for our production in the farming sector. In this sector, we view SLC Agrícola S.A., BrasilAgro — Companhia Brasileira de Propriedades Agrícolas, Sollus Agrícola, Radar Propriedades Agrícolas, Cresud SACIF y A, MSU S.A. and Los Grobo Agropecuaria, among others, as our competitors. We also compete in Argentina with retailers of agricultural products, including other branded rice products, such as Molinos Río de la Plata S.A., Dos Hermanos S.H., Sagemüller S.A. and Cooperativa Arroceros Villa Elisa Ltda.

 

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The sugar and ethanol industries are highly competitive. In Brazil, we compete with numerous small-and medium-sized sugar and ethanol producers. Despite increased consolidation, the Brazilian sugar and ethanol industries remain highly fragmented, with more than 436 sugar mills. Some of the largest industry players with whom we compete are Cosan Ltd., Grupo São Martinho S.A., Açúcar Guarani S.A., Louis Dreyfus Commodities Brasil S.A., ETH Bioenergia S.A., Bunge, Grupo Zillo Lorenzetti, Grupo Carlos Lyra S.A. and Grupo Irmãos Biaggi. We also face competition from international sugar producers, such as those in the U.S. and the European Union, where local regulators have historically implemented tariffs, agriculture subsidies and/or other governmental incentive programs, of which some remain, to protect local sugar producers from foreign competition. The following table describes the Brazilian competitive landscape:

 

   Brazil 
Number of Mills   389 
Sugarcane crushed (million tons)   641.2 
Ethanol Production (million cubic meters)   27.4 
Sugar Production (million tons)   36.5 

 

 

Source: Ministry of Agriculture & CONAB

 

With respect to farmland, there have historically been few companies competing to acquire and lease farmland for the purpose of benefiting from land appreciation and optimization of yields in different commercial activities. However, we believe that new companies, may become active players in the acquisition of farmland and the leasing of sown land, which would add competitors to the market in coming years.

 

Supplies and Suppliers

 

Our principal supplies for our farming business are seeds, fertilizers, pesticides and fuel, which represented for the year ended December 31, 2016, 14%, 13%, 22% and 11%, respectively, of our total direct expenditures (including leasing costs).Further, these supplies represented 50% of our total production costs for 2016. As we use direct sowing in 99% of our planted area, without requiring soil preparation, fuel represents only 9% of the total cost of production for 2016.

 

Our principal supplies for our sugar, ethanol and energy business are diesel, lubricants and fertilizers, which collectively represented 19% of our total expenditures incurred in the sugar, ethanol and energy business for 2016. Further, these supplies represented 31% of our total production cost for 2016. We have an extensive network of suppliers for each of our business segments and for each required input within each segment, resulting in lower reliance on any particular supplier. Our ten largest suppliers account for 31% of our total expenditures for supplies in 2016. While we value the relationships we have developed with each of our suppliers given the quality we have come to expect, we do not consider any single supplier to be key to our production.

 

We have been able to obtain lower prices particularly due to the volume that derives from our large-scale operations.

 

Seasonality

 

Our business activities are inherently seasonal. We generally harvest and sell our grains (corn, soybean, rice and sunflower) between February and August, with the exception of wheat, which is harvested from December to January. Cotton is a unique in that while it is typically harvested from June to August, it requires processing which takes about two to three months to complete. Sales in our dairy business segment tend to be more stable. However, milk production is generally higher during the fourth quarter, when the weather is more suitable for production. Although our cluster is currently operating under a “non-stop” or “continuous” harvest and without stopping during traditional off-season, the rest of the sector in Brazil is still primarily operating with large off-season periods from December/January to March/April. The result of large off-season periods is fluctuations in our sugar and ethanol sales and in our inventories, usually peaking in December to take advantage of higher prices during the traditional off-season period (i.e., January through April). As a result of the above factors, there may be significant variations in our financial results from one quarter to another. In addition our quarterly results may vary as a result of the effects of fluctuations in commodities prices, production yields and costs on the determination of changes in fair value of biological assets and agricultural produce. See “Item 5. Operating and Financial Review and Prospects—A. Operating Results—Critical Accounting Policies and Estimates—Biological Assets and Agricultural Produce.”

 

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Sustainability

 

Our production model is based on sustainability standards that seek to produce food and renewable energy on a long-term basis by preserving the natural resources involved in the production process. The sustainable approach to farming requires taking into account economic, social and environmental factors adapted to local circumstances. Natural resources are the main foundation of our activities, with land being the most relevant natural resource in our operations. We have developed a sustainable land use strategy that considers factors beyond the requirements of local law and regulations. There are ecosystems that we do not consider appropriate for the use of agricultural development, such as heavy forests and key wetlands, and there are others that we evaluate using (savannahs, natural grasses, bush land, lowlands) only after carrying out an environmental impact assessment. In addition to such evaluations, we analyze the agricultural potential of the land in respect of the soil, the climate, crop productivity and available technology, among other factors. We then consolidate our analysis into a land transformation plan, which includes the best land use option and implements best practices such as the “no-till” technology, crop rotations, integrated pest and weed management, balanced fertilization, responsible pesticide usage and water management. All these best practices aim to increase resource efficiency and to decrease the risk of contamination and waste production and are consolidated into an environmental management plan, which includes biodiversity management when applicable. We aim to properly implement our sustainable production model to enhance land productivity and therefore increase land value.

 

Standardized and Scalable Agribusiness Model

 

We are developing an agribusiness model that allows us to engage in large-scale farming activities in an efficient and sustainable manner. Our agribusiness model consists of developing a specialized workforce and defining standard protocols to track crop development and control production variables, thereby enhancing efficient decision making and facilitating continuous improvement. This approach allows us to grow in scale and execute our expansion plan and efficiently manage various production units spread across different regions by effectively replicating our productive model. Process standardization also helps us assure compliance with local law and regulations and reduce social and environmental risks.

 

We continue to develop and implement crop protocols. The purpose of these protocols is to coordinate and consolidate the knowledge on crop management for each area in order to standardize the implementation of these protocols. The protocols contain all the technical information for managing crops. This information is constantly reviewed by agricultural teams and their advisors, making it possible to preserve the technical knowledge of the company and at the same time improve agricultural production and make decisions pursuant to the company’s guidelines. Based on the results of the application of these protocols, we conduct an annual review of the techniques used and their results. This evaluation is done by means of crop campaign analysis, in which all teams review and discuss the last harvest year’s productive performance and the technological package for the new harvest year.

 

When processes and protocols are defined they can be audited and certified by qualified third parties. Adecoagro is currently in the process of certifying its crop production in Argentina under ISO 9001. We are also working to implement ISO 14001 and OHSAS 18001 in some operating units.

 

In order to achieve efficient scales of production, we have redesigned our field sizes by removing useless cattle infrastructure such as fencing. Larger fields reduce the overlapping of farmworks, enhancing operating efficiency, reducing the use of inputs and achieving agronomic timing (planting or harvesting on time). The goal is to reduce operative time and to improve efficiency in the use of inputs. Large-scale production also requires the implementation of advanced technology such as GPS (Global Positioning System), GIS (Geographic Information System) and modern machinery as well.

 

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We are also adopting Operational Protocols and Procedures in our industrial facilities to improve control of processing variables. In the case of our rice mills, we have certified Good Manufacturing Practices, and in some cases, HACCP (Hazard Analysis and Critical Control Points) standard.

 

When market conditions provide pricepremiums for certified grains or oilseeds, we evaluate the feasibility of implementing specific certifications. Some examples of this are RTRS (Round Table on Responsible Soybeans) and EPA (Environmental Protection Agency, US) certifications for Sustainable Soybeans in Argentina. In Brazil, we are certifying sugar-based products for EPA and Bonsucro certifications.

 

Contractors

 

Contractors play a significant role in our farming business model. We seek to outsource most of the typical farmwork, such as planting, spraying and harvesting. Outsourcing allows us to reduce our investments in heavy machinery and equipments such as tractors or harvesters, enhancing the efficient allocation of our capital in our core productive activities.

 

The contractor model in the Argentine humid pampas region has existed for over fifty years and has developed into a highly competitive market. Contractors have gained extensive expertise and skill in the management of agricultural machinery and have access to modern advanced technology. We seek to develop win-win relationships with our contractors by considering them as part of our production team and providing constant technical training and support through our GTA (as defined below) activities. We strive to have a number of contractors associated with each farm to generate competition and allow benchmarking to enhance operational efficiency and ensure high-quality service.

 

In regions where this model is not fully developed, we use a mixed system where we hire the most experienced contractors in the region and we also operate our own machinery. We promote the development of new contractors by providing training and selling them our used machinery. We also promote the movement of selected contractors from developed regions into new marginal regions by offering them an opportunity to grow their businesses. In other regions where there is no established contractor system or there is specific farmwork (rice land leveling for instance), we own majority of the machinery. In our Sugar, Ethanol and Energy business, we own or lease and operate all the agricultural equipment and machinery needed for sugarcane planting and harvesting operations. Our main goal is to achieve high-quality farmworks, both when selecting any contractor and when using our own machinery. In Brazil we partially employ the contractor model only for specific tasks such as grain harvesting, land leveling, and aerial spraying among others.

 

Adecoagro Technical Group (Grupo Tecnico Adecoagro “GTA”)

 

The GTA is an internal group formed by agronomists, farm managers, external advisors, contractors, trainees and suppliers, whose main goal is to excel in production management by providing constant technical education and analysis regarding production technologies. Although the GTA is focused on developing such knowledge under common criteria for the whole company, it also considers different production systems, such as crops, rice and dairy in Argentina and Uruguay, crops in western Bahia, Brazil and sugarcane in Minas Gerais and Mato Grosso do Sul, Brazil. In order to achieve their goals, the group meets every 20 days to analyze and discuss technical aspects of the farming production processes.

 

The GTA participates in the design of the most efficient and productive land use strategies, the definition of the optimal crop production mix for each farm and region, and supervises and evaluates the implementation of the most profitable and sustainable technologies to be adapted and applied in each region. Additionally, the GTA promotes specific external training courses, facilitates participation in external technical groups, organizes technical farm tours, offers support in establishing the crop planting plan and delivers a full-season analysis for each crop annually. This analysis is essential in order to allow technical improvements to be implemented for the following crop season.

 

Since the GTA is involved in different regions, it plays a relevant role in spreading best practices among productive regions, including “no-till” in lesser-developed areas. In order to evaluate and adapt the proper technologies locally, a vast network of test plots in agrochemicals, seeds, and farm-works are being carried out under specific technical guidelines. Such development is performed to make the necessary technological adjustments in respect of fertilizer levels, choice of the best product varieties for each crop, determination of the best planting periods and improvement in crop management and agricultural mechanization, resulting in higher yields coupled with reduced costs.

 

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In order to continually improve our technical development, we participate in specialized industry groups, such as CREA and AAPRESID, with which we share values and goals. “CREA” is a 50-year-old farmers’ association focused on developing and supporting technical excellence with local farmers. “AAPRESID” is a technical association of highly innovative farmers specializing in no-till development. We participate in certain CREA and AAPRESID discussion groups in which we share and evaluate common technical matters. We take advantage of their vast network of test plots and we constantly exchange technological knowledge for implementation in our farms.

 

In addition, the GTA is focusing its resources on pursuing improvements trough implementing advanced techniques such as variable inputs usage by type of soil based on precision agriculture technology, intensification techniques relating to soil occupation times and diversified crop rotations, adjusting “no-till” in rice production, developing sugarcane production technologies involving agricultural mechanization and minimum tillage, and developing cotton production technologies involving “no-till” and crop rotation among others.

 

By implementing all these education programs and development activities, the GTA provides to the company a network that focuses on the fine-tuning and optimization of the efficiencies throughout all the production processes of each business line.

 

Technology and Best Practices

 

We have consistently used innovative production techniques to ensure that we are at the forefront of technological improvements and standards in our industry. For example, we use the “no-till” technology and “crop rotation” to improve our crop yields. We also practice the use of “second harvests” or double cropping where conditions permit, allowing us to plant and harvest a second crop from the same farmland in the same harvest year. Our crop production model is based on balanced fertilization, integrated pest and weed management and crop intensification. We use the innovative silo bag storage method in our rice and crop businesses allowing us to time the entry of our rice production into the market at optimal price points. Additionally, we believe we were the first company in South America to implement the innovative “free-stall” infrastructure in dairy operations resulting in increased fluid milk production compared to our peers. The free-stall method is a model that provides for better control over production variables by confining dairy cows into large barns. Those barns are equipped with state-of-the-art technology to enhance cow-comfort conditions, such as sand beds, water-spray cooling system and fans. In addition, installations are equipped with indoor corrals and a mechanical advanced milking system on a rotary platform, allowing us to utilize production efficiencies and thereby increase milk production volumes while maximizing our land use and resulting in significantly higher conversion rates of animal feed into milk.

 

Our sugarcane harvesting is 98% mechanized, which has significantly improved operating efficiency, therefore reducing operating costs. We have modern facilities in the sugar and ethanol business including advanced sugar and ethanol mills with high-pressure boilers and that achieve one of the highest ratios of energy produced per ton of cane milled, according to the Cane Technology Center Benchmark program. Our Angélica sugar plant was the first continuously operative facility in Brazil, requiring no production stoppages between sugar batches.

 

No-Till

 

“No-till” is the cornerstone of our crop production technology and the key to maintaining and even increasing the value and productivity of our land assets. “No-till” — often called zero tillage or direct sowing — is a technology developed more than 30 years ago to grow crops from year to year without disturbing the soil through tillage, and arose as an opposition to conventional tillage.

 

Conventional farming consists of using plows to turn and till the soil to remove weeds, mix in soil additives such as fertilizers, and prepare the surface for seeding. Soil tillage leads to unfavorable effects such as soil compaction, loss of organic matter, degradation of soil components, death or disruption of microorganisms, evaporation of soil humidity and soil erosion where topsoil is blown or washed away by wind or rain.