6-K 1 a6ker06302020.htm FORM 6-K Document

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549  
 
____________________________________________________________________________________________________________
FORM 6-K  
 
____________________________________________________________________________________________________________
Report of Foreign Private Issuer
Pursuant to Rule 13a-16 or 15d-16
of the Securities Exchange Act of 1934
For the month of August 2020
Commission File Number: 001-35052  
 
____________________________________________________________________________________________________________
Adecoagro S.A.
(Translation of registrant’s name into English)
 
 
____________________________________________________________________________________________________________
Vertigo Naos Building 6,
Rue Eugene Ruppert,
L-2453, Luxembourg
Grand Duchy of Luxembourg
(Address of principal executive offices)  
____________________________________________________________________________________________________________
Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F:
Form 20-F  x            Form 40-F  ¨
Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1):
Yes  ¨            No   x
Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7):
Yes  ¨            No   x
Indicate by check mark whether by furnishing the information contained in this Form, the Registrant is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934:
Yes  ¨            No   x
If “Yes” is marked, indicate below the file number assigned to the registrant in connection with Rule 12g3-2(b): N/A 
 
____________________________________________________________________________________________________________




 
ANNOUNCEMENT OF RESULTS OF OPERATIONS FOR THE SIX MONTH PERIOD ENDED JUNE 30, 2020.
 
On August 13, 2020, the registrant issued a press release pertaining to its results of operations for the six month period ended June 30, 2020 (the “Release”). Registrant hereby furnishes the attached copy of the Release to the Securities and Exchange Commission. The financial and operational information contained in the Release is based on audited consolidated financial statements presented in U.S. dollars and prepared in accordance with International Financial Reporting Standards.
 
The attachment contains forward-looking statements. The registrant desires to qualify for the “safe-harbor” provisions of the Private Securities Litigation Reform Act of 1995, and consequently is hereby including cautionary statements identifying important factors that could cause the registrant’s actual results to differ materially from those set forth in the attachment.
 
The registrant’s forward-looking statements are based on the registrant’s current expectations, assumptions, estimates and projections about the registrant and its 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 the attached relate to, among others: (i) the registrant’s business prospects and future results of operations; (ii) weather and other natural phenomena; (iii) the length and severity of the novel coronavirus (COVID_19) outbreak; (iv) developments in, or changes to, the laws, regulations and governmental policies governing the registrant’s business, including limitations on ownership of farmland by foreign entities in certain jurisdictions in which the registrant operate, environmental laws and regulations; (v) the implementation of the registrant’s business strategy; (vi) the registrant’s plans relating to acquisitions, joint ventures, strategic alliances or divestitures; (vii) the implementation of the registrant’s financing strategy and capital expenditure plan; (viii) the maintenance of the registrant’s relationships with customers; (ix) the competitive nature of the industries in which the registrant operates; (x) the cost and availability of financing; (xi) future demand for the commodities the registrant produces; (xii) international prices for commodities; (xiii) the condition of the registrant’s land holdings; (xiv) the development of the logistics and infrastructure for transportation of the registrant’s products in the countries where it operates; (xv) the performance of the South American and world economies; and (xvi) the relative value of the Brazilian Real, the Argentine Peso, and the Uruguayan Peso compared to other currencies; as well as other risks included in the registrant’s other filings and submissions with the United States Securities and Exchange Commission.
 
These forward-looking statements involve various risks and uncertainties. Although the registrant believes that its expectations expressed in these forward-looking statements are reasonable, its expectations may turn out to be incorrect. The registrant’s actual results could be materially different from its expectations. In light of the risks and uncertainties described above, the estimates and forward-looking statements discussed in the attached might not occur, and the registrant’s future results and its performance may differ materially from those expressed in these forward-looking statements due to, inclusive, 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 the attached relate only to events or information as of the date on which the statements are made in the attached. The registrant undertakes 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.
  

 
 
 




SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
 Adecoagro S.A.
  
 By /s/ Carlos A. Boero Hughes
  
 Name: Carlos A. Boero Hughes
  
 Title: Chief Financial Officer and Chief Accounting Officer





Date: August 13, 2020





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Adecoagro´s Adjusted Net Income reached $18.2 million during 2Q20, $17.3 million higher year-over-year.
2Q20 Earning Release Conference Call
English Conference CallLuxembourg, August 13, 2020 - Adecoagro S.A. (NYSE: AGRO, Bloomberg: AGRO US, Reuters: AGRO.K), a leading agro-industrial company in South America, announced today its results for the second quarter ended June 30, 2020. The financial information contained in this press release is based on unaudited condensed consolidated interim financial statements presented in US dollars and prepared in accordance with International Financial Reporting Standards (IFRS) except for Non - IFRS measures. Please refer to page 34 for a definition and reconciliation to IFRS of the Non - IFRS measures used in this earnings release.
August 14, 2020
9 a.m. (US EST)
10 a.m. (Buenos Aires and Sao Paulo time)
3 p.m. (Luxembourg)
Tel: +1 (412) 317-6366Highlights
Participants calling from other
countries outside the US
Financial & Operating Performance
$ thousands2Q202Q19%6M206M19%
Tel: +1 (844) 435-0324Gross Sales185,208219,974(15.8)%342,272382,072(10.4)%
Participants calling from the US
Net Sales (1)
181,033209,875(13.7)%332,515363,641(8.6)%
Adjusted EBITDA (2)
Investor Relations   Farming & Land Transformation40,17510,468283.8%64,85542,41052.9%
Charlie Boero Hughes   Sugar, Ethanol & Energy45,39781,601(44.4)%86,314112,798(23.5)%
CFO   Corporate Expenses(4,327)(5,081)(14.8)%(8,857)(9,919)(10.7)%
Juan Ignacio GalleanoTotal Adjusted EBITDA81,24586,988(6.6)%142,312145,289(2.0)%
IR Manager
Adjusted EBITDA Margin (2)
44.9%41.4%8.3%42.8%40.0%7.1%
Net Income(12,044)23,262(151.8)%(66,505)21,027(416.3)%
Adjusted Net Income(4)
18,1888861,952.8%62,11915,348304.7%
EmailFarming Planted Area (Hectares)238,494226,4105.3%238,494226,4105.3%
ir@adecoagro.comSugarcane Plantation Area (Hectares)172,452163,3915.5%172,452163,3915.5%
• Adjusted EBITDA(3) in the Farming & Land Transformation business in 2Q20 was $40.2 million, $29.7 million higher than in 2Q19. Results include a gain of $10.1 million derived from the sale of a farm in Argentina.
Website:
www.adecoagro.com
       • Adjusted EBITDA margin year-over-year increased by 8.3% and 7.1% in 2Q20 and 6M20, respectively.
(1) Net Sales are equal to Gross Sales minus sales taxes related to sugar, ethanol and energy.
(2) Please see “Reconciliation of Non-IFRS measures” starting on page 34 for a reconciliation of Adjusted EBITDA and Adjusted EBIT to Profit/(Loss). Adjusted EBITDA is defined as consolidated profit from operations before financing and taxation, depreciation of PP&E, and amortization of intangible assets plus the gains or losses from disposals of non-controlling interests in subsidiaries. Adjusted EBIT is defined as consolidated profit from operations before financing and taxation plus the gains or losses from disposals of non-controlling interests in subsidiaries. Adjusted EBITDA margin and Adjusted EBIT margin are calculated as a percentage of net sales.
(3) Adjusted EBITDA margin excluding third party commercialization activities is defined as the consolidated Adjusted EBITDA net of the Adjusted EBITDA generated by the commercialization of third party sugar, grains and energy, divided by consolidated gross sales net of those generated by the commercialization of third party sugar, grains and energy. We net third party commercialization results to highlight the margin generated by our own production.
(4) Please see “Reconciliation of Non-IFRS measures” starting on page 34 for a reconciliation of Adjusted Net Income. We define Adjusted Net Income as (i) Profit/(Loss) of the period year, plus (ii) any non cash finance costs resulting from foreign exchange losses for such period, which breakdown composed both Exchange Differences and Cash Flow Hedge Transfer from Equity, net of the related income tax effects plus (iii) gains or losses from disposals of non controlling interests in subsidiaries whose main underlying asset is farmland, which are relieved in our Shareholders Equity under the line item. "Reserve from the sale of non-controlling interests in subsidiaries plus (iv) the reversal of the aforementioned income tax effect, plus (v) the inflation accounting effects, plus (vi) the revaluation results from the hectares hold as investment property.
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Financial & Operational Performance Highlights

During 2Q20 we have been able to continue operating our business on a regular basis in spite of the pandemic that spread through the region. Given the general slowdown of the economies and the decrease in prices, we have taken several strategic measures to mitigate the impact. We reassessed our cost structure, reduced SG&A expenses, put on hold uncommitted capital expenditures and raised short-term credit lines to strengthen our cash position, as part of an integral risk management program that includes a $100 million loan agreement with IFC (please refer to the Strategy Execution section on page 4).

In the Sugar & Ethanol industry, ethanol experienced a decrease in price and demand mainly explained by (i) the fall in international oil prices which translated into a drop in the price of ethanol and (ii) the reduction of circulation of people in Brazil as a protective measure in response to Covid-19, leading to a natural decline in the demand for fuels and biofuels. The impact of these factors caused the ethanol industry to experience a challenging second quarter, and led us to reassess our strategy to adjust to the new scenario. Indeed, we diverted 54% of TRS production to sugar (compared with 25% during 2Q19), continuing with our strategy of maximizing the product with the highest marginal contribution; we implemented a cost reduction plan which included the temporary suspension of employees contemplated in MP 936/20; and we reduced our crushing by 1.1 million tons compared to 2Q19, which we expect to recover during the second semester. Indeed, during July we reached a record high of 1.7 million tons of sugarcane crushed as well as an all time record production of sugar. This improvement in our operations, coupled with a positive outlook in terms of productivity, will allow us to take advantage of the recovery in ethanol's fundamentals, as seen in an 11% month-over-month increase in demand and only a 9% year-over-year decrease, as reported by UNICA.

Adjusted EBITDA in our Sugar, Ethanol & Energy business reached $45.4 million in 2Q20, 44.4%, or $36.2 million lower compared to the same period of last year. This decrease is mainly explained by a 46.3% reduction in net sales driven by the lower average prices of sugar, ethanol and energy measured in U.S. dollars and the lower volumes of ethanol and energy sold. This decrease was partially offset by the higher volume of sugar sold, the lower cost of production and SG&A expenses, driven by the combined effect of our cost reduction plan, enhanced agricultural and industrial efficiencies, and the depreciation of the Brazilian Real that further contributed to reduce costs measured in U.S dollar.

Adjusted EBITDA for the Farming and Land Transformation businesses reached $40.2 million in 2Q20, $29.7 million or four times higher year-over-year. The increase is attributable to the $10.1 million gain derived from the sale of a 811 hectare farm in Argentina, in addition to the improved performance of every
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segment in the Farming business as our competitive advantages placed us in a solid position to promptly adapt to the current scenario and capitalize on the increased demand for most food products.

Adjusted EBITDA in the Crops business registered an increase of $14.0 million compared to 2Q19. Results were mostly driven by (i) a year-over-year increase in harvested area, led by 22 thousand hectares more corn generating a $4 million gain in Changes in Fair Value, and (ii) higher average prices despite the impact of the pandemic, as we leveraged on our structure to increase the participation of higher-value crops such as peanut and sunflower, which fit in with our traditional crops and enhance the profitability of the rotation. We have recently invested in a second blanching line in our peanut facility to be able to increase peanuts in the rotation.

The Rice business reported a $5.2 million increase in Adjusted EBITDA, mostly driven by an increase in demand both in the domestic and export market as countries built buffer stocks and increased their food consumption in response to the pandemic. This, in addition to the higher prices observed in the export market and the increase in the sales mix of higher margin products such as parboiled rice.

Net Income in 2Q20 resulted in a loss of $12.1 million, compared to a gain of $23.3 million recorded during the same period of last year. The $35.3 million decrease is primarily explained by the non-cash loss derived from the revaluation of our U.S. dollar denominated financial debt, measured in local currency.

Adjusted Net Income by definition excludes, (i) any non-cash result derived from bilateral exchange variations, (ii) any revaluation result from the hectares held as investment property, (iii) any inflation accounting result; and includes (iv) any gains or losses from disposals of non-controlling interests in subsidiaries whose main underlying asset is farmland (the latter is already included in Adj. EBITDA). We believe Adjusted Net Income is a more appropriate metric to reflect the Company´s performance. Adjusted Net Income in 2Q20 reached $18.2 million, $17.3 million higher compared to 2Q19, mainly explained by $42.0 million higher FX loss quarter-over-quarter and the sale of a farm in 2Q20.

Adjusted Net Income
$ thousands2Q202Q19Chg %6M206M19Chg %
Net Income(12,064)23,262(151.9)%(66,505)21,027 n.a
Foreign exchange losses, net34,742(7,299)(576.0)%136,35912,897957.3%
Cash flow hedge - transfer from equity(63)4,380 n.a 11,10811,981(7.3)%
Inflation Accounting Effects(11,211)(24,230)(53.7)%(25,676)(42,016)(38.9)%
Revaluation Result - Investment Property(1,224)4,773(125.6)%(1,175)3,437(134.2)%
Revaluation surplus of farmland sold8,008n.a.8,0088,022(0.2)%
Adjusted Net Income18,1888861,952.8%62,11915,348304.7%
(1) Please see “Reconciliation of Non-IFRS measures” starting on page 34 for a reconciliation of Adjusted Net Income.
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Strategy Execution

Farmland sale at premium to independent appraisal

In June 2020, we completed the sale of a plot of 811.7 hectares in the Province of Santa Fe, Argentina, for a selling price of $12.1 million, a 21.3% premium to the latest Cushman and Wakefield´s independent appraisal dated September 30, 2019.

The transaction generated an EBITDA of $10.1 million of which $2.1 million represented a gain before tax included in the line item “Other operating income” and $8.0 million as a reclassification of Revaluation Surplus to Retained Earnings Before Income Tax, reflected in the Statements of Changes in Shareholders Equity.


$100 million loan granted by multilateral institution

Not only from an operational point of view did we adapt our strategy in response to the pandemic. We also worked on continue improving our capital structure and liquidity position in light of such an uncertain economic scenario. We began the year with a cash position of $290 million and throughout the first half of the year we reassessed our cost structure, put on hold uncommitted capital expenditures and raised short-term credit lines as a precautionary measure to strengthen our cash position and to secure our financial obligations and working capital needs.

In June 2020 as part of an integral risk management strategy, we entered into a $100 million loan agreement with the International Finance Corporation (IFC), member of the World Bank Group, to support our Argentine operations. Securing a $100 million loan facility is a major achievement given the current global economic situation, and is only possible because of our hard work, solid reputation and the trust worthy stable outlook of our business. This also validates our strong commitment to environmental sustainability. The financing package includes a $17.8 million IFC Green Loan tranche, which is aligned with the Green Loan Principles of the Loan Market Association, and represents the first IFC Green Loan in the real economy in Argentina and in the dairy and animal protein sector globally. The loan's tenor is eight years, including a two-year grace period, and it will enable us to extend the average life of our debt to over six years.




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Pioneers in carbon credit commercialization

In June 2020 we officially became the first company to commercialize carbon credits (CBio) under the RenovaBio program, marking a milestone in Brazil's biofuel policy. We are proud to have kickstarted Brazil's CBio trade through the sale of 100 carbon credits at a price of R$50/CBio (~USD 10/CBio). Being environmentally responsible is central to what we do. RenovaBio is fully aligned with our values of sustainability, efficiency and innovation, and we remain fully committed to continue working towards achieving greener operations and further improving our mills' score, which already positioned us in the top 10%.

RenovaBio is a program designed by the Brazilian government to cut carbon emission in the country by establishing a mechanism that taxes fossil fuel consumption while subsidizing the production of renewable energy. Under this program, a carbon credit market is established in which sellers of fossil fuels have to acquire a mandatory quota of CBios, which is defined based on the amount of non-renewable fuels sold by them in the prior year. The issuers of CBios are biofuel producers whose mills have been certified and awarded a score based on how “green” their mill operation is. CBios are financial instruments traded on Brazil’s B3 platform, with prices based on the supply of and demand for those credits. The RenovaBio program was officially launched on December 24th, 2019. The official trading of CBios in the Brazilian stock exchange started on April 27th, 2020 and the first sale of CBios took place on June 12th, 2020.



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Operational Performance
2019/20 Harvest Year

Farming Production Data
Planting & ProductionPlanted Area (hectares) 2019/20 Harvested AreaYields (Tons per hectare)
2019/202018/19Chg %Hectares% HarvestedProduction2019/202018/19Chg %
Soybean47,53047,690(0.3)%47,01198.9%128,3612.73.5(22.9)%
Soybean 2nd Crop27,16925,6206.0%27,169100.0%52,7171.91.435.7%
Corn (1)
53,91443,39624.2%42,12978.1%268,7496.48.1(20.8)%
Corn 2nd Crop7,3194,45864.2%5,31372.6%32,8396.2n.a
Wheat (2)
32,92540,210(18.1)%32,79999.6%104,2363.22.911.4%
Sunflower6,8183,82578.2%6,818100.0%12,6521.91.619.0%
Cotton 4,4615,316(16.1)%1,38331.0%3280.2 n.a
Peanut16,81415,4798.6%16,814100.0%55,6673.33.24.1%
Total Crops196,950185,9935.9%179,43691.1%655,549
Rice41,54440,4172.8%41,544100.0%278,3486.76.110.3%
Total Farming238,494226,4105.3%220,98092.7%933,897
Owned Croppable Area106,513107,681(1.1)%
Leased Area97,49386,30713.0%
Second Crop Area34,48832,4226.4%
Total Farming Area238,494226,4105.3%
 Milking Cows (Average Heads) Milk Production (MM liters)(1) Productivity (Liters per cow per day)
Dairy2Q202Q19 Chg % 2Q202Q19 Chg % 2Q202Q19 Chg %
Milk Production10,7718,99219.8%34.428.620.5%35.134.51.7%

(1) Includes chia.
(2) Includes barley.

As of July 23rd, 2020, 92.7% of our total planted area was successfully harvested. The remaining hectares are expected to be harvested by early August.





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Crops Update

Soybean 1st crop: As of the end of July, we harvested 47,011 hectares of soybean crop, representing a 98.9% progress and totaling 128,361 tons of production. Average yields reached 2.7 tons per hectare, slightly below expectations in the Pampa region, due to lack of rains during the crop cycle.

Corn: 42,129 hectares of corn were harvested, representing 78.1% of total planted area. 21,950 hectares of early corn were fully harvested with average yields of 7.4 tons per hectare, in line with our expectations. As for late corn, 65.0% of total planted area has been harvested. Yields were affected by the lack of rains during this cycle, especially in the Pampas region, reaching an average of 5.2 tons per hectare.

Peanut: We completed the harvest of 16,814 hectares of peanuts with an average yield of 3.3 tons per hectare, 4.1% higher compared to the previous campaign. Quality conditions of the crop were optimal, leveraging the industrial process performance.

Wheat: We are concluding the planting of 39,000 hectares of wheat, which represents 45% more area than during the previous season. Planting conditions are currently optimal.





















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Farming & Land Transformation Financial Performance

Farming & Land transformation business - Financial highlights
$ thousands2Q202Q19 Chg % 6M206M19 Chg %
Gross Sales
     Farming116,94690,55729.1%209,160162,62028.6%
     Total Sales116,94690,55729.1%209,160162,62028.6%
Adjusted EBITDA (1)
     Farming30,08310,468187.4%54,76333,03465.8%
     Land Transformation10,092 n.a 10,0929,3767.6%
     Total Adjusted EBITDA (1)
40,17510,468283.8%64,85542,41052.9%
Adjusted EBIT (1)
   
     Farming25,3136,262304.2%45,30825,01681.1%
     Land Transformation2,084 n.a 2,0841,35454.0%
     Total Adjusted EBIT (1)
27,3976,262337.5%47,39226,37079.7%
(1) Please see “Reconciliation of Non-IFRS measures” starting on page 34 for a reconciliation of Adjusted EBITDA and Adjusted EBIT to Profit/Loss. Adjusted EBITDA is defined as consolidated profit from operations before financing and taxation, depreciation and amortization plus the gains or losses from disposals of non-controlling interests in subsidiaries. Adjusted EBIT is defined as consolidated profit from operations before financing and taxation plus the gains or losses from disposals of non-controlling interests in subsidiaries. Adjusted EBITDA margin and Adjusted EBIT margin are calculated as a percentage of net sales.
Adjusted EBITDA in the Farming and Land Transformation businesses reached $40.2 million in 2Q20, $29.7 million, or 283.8% higher year-over-year. The increase in financial performance is explained by the $10.1 million higher results derived from the sale of 811 hectares of Abolengo farm, as well as by the improved performance of all the Farming business which reached a consolidated Adjusted EBITDA of $30.1 million, 187.4% higher year-over-year.

The Crops business generated an Adjusted EBITDA of $17.0 million in 2Q20, $14.0 million higher compared to the same period of last year. This increase is mainly explained by (i) higher average prices driven by a greater participation of higher-value crops such as peanut and sunflower, (ii) a year-over-year increase in harvested area, in particular in the case of corn, which increased by 22 thousand hectares generating a $4 million gain in Changes in Fair Value (iii) an increase in the mark-to-market of our commodity hedge position, and (iii) cost dilution following the depreciation of the Argentine peso.

The Rice business generated and Adjusted EBITDA of $8.3 million in 2Q20, 167.8% or $5.2 million higher year-over-year driven by (i) an increase in sales generated both on the account of higher volumes and higher average prices, (ii) an increase in the mark-to-market of our biological asset and (iii) lower costs in dollar terms, as a result of the depreciation of the Argentine peso.
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The Dairy business generated an Adjusted EBITDA of $5.0 million in 2Q20, mainly driven by (i) higher selling volumes on the account of an increased demand in the domestic market, and (ii) achieved efficiencies in our vertically integrated operations, including high productivity at the farm level and the flexibility of our industrial assets, which allowed us to benefit from the spike in demand.


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Crops Segment

Crops - Highlights
metric2Q202Q19Chg %6M206M19Chg %
Gross Sales$ thousands49,56238,82927.6%85,54272,94617.3%
 tons126,217182,823(31.0)%347,057369,160(6.0)%
$ per ton392.7212.484.9%246.5197.624.7%
Adjusted EBITDA$ thousands16,9832,969472.0%23,3018,435176.2%
Adjusted EBIT$ thousands15,5991,779776.8%20,6606,292228.4%
Planted Area hectares238,494226,4105.3%238,494226,4105.3%

During 2Q20 the commodity market was negatively affected by the pandemic, both in terms of prices as well as demand. Indeed, commodities that maintain a correlation with oil and energy suffered the greatest drop in prices, as was the case with corn and soybean given their use in the production of biofuels. In terms of demand, safety purchases and stock rebuilding carried out by countries such as China, coupled with the fact that corn in the Southern hemisphere is not destined for ethanol production but rather for feed, partially offset the decline caused by Covid-19.

Sales in our Crops segment reached $49.6 million in 2Q20, 27.6% or $10.7 million higher year-over-year. This was explained by a 31.0% reduction in selling volumes caused by the pandemic, fully offset by 84.9% higher average prices. We were able to achieve this in spite of the macroeconomic context, as we continued with our strategy of increasing the share of higher value crops such as peanut and sunflower, whose prices increased more than 25% year-over-year. These crops are a good fit in our already functional crop rotation system and synergize well with our traditional crops.

Adjusted EBITDA in our Crops segment was $17.0 million in 2Q20, 472.0% or $14.0 million higher compared to the same period of last year. The increase is mainly derived from (i) 27.6% higher sales, (ii) an year-over-year increase in harvested area, in particular in the case of corn which presented a delta of 22 thousand hectares generating a $4 million gain in Changes in Fair Value, (iii) $4.1 million increase in the mark-to-market of our commodity hedge position, and (iii) the depreciation of the Argentine peso, which allowed a dilution of costs in U.S. dollars. These positive results were partially offset by higher selling expenses.

On a year-to-date basis, gross sales totaled $85.5 million and Adjusted EBITDA $23.3 million, 17.3% and 176.2% higher than the same period of last year, respectively.
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Crops - Gross Sales Breakdown
Amount ($ '000)Volume$ per unit
Crop2Q202Q19Chg %2Q202Q19Chg %2Q202Q19Chg %
Soybean22,19813,85260.3%95,84058,44764.0%232237(2.3)%
Corn (1)12,21415,461(21.0)%85,375104,659(18.4)%143148(3.2)%
Wheat (2)1,0501,976(46.9)%5,51810,047(45.1)%190197(3.2)%
Sunflower3,0683,198(4.1)%3,4124,448(23.3)%899719  25.1%
Cotton Lint n.a  n.a  n.a  n.a  n.a
Peanut8,9494,342106.18,4735,222 n.a 1,05683127.1%
Others2,083 n.a  n.a.
Total49,56238,82927.6%198,617182,8238.6%

Crops - Gross Sales Breakdown
Amount ($ '000)Volume$ per unit
Crop6M206M19Chg %6M206M19Chg %6M206M19Chg %
Soybean28,67518,39755.9%116,28476,41152.2%2472412.4%
Corn (1)25,07935,529(29.4)%170,058234,829(27.6)%147151(5.1)%
Wheat (2)6,6709,006(25.9)%37,01546,104(19.7)%1801953.5%
Sunflower5,1773,81235.8%7,2896,59410.5%710578  22.9%
Cotton Lint182 n.a 152 n.a 1,198 n.a
Peanut16,7294,541268.416,2585,222211.3%1,02987018.3%
Others3,0301,66182.4 n.a
Total85,54272,94617.3%347,057369,160(6.0)%

(1) Includes sorghum
(2) Includes barley

The table below shows the gains and losses from crop production generated during the first six months of 2020. A total of 224,059 hectares were planted in the 2019/20 crop season. As of June 30, 2020, total Changes in Fair Value, which reflect the margin of both the crops that have already been harvested and the expected margin of those that are still on the ground with significant biological growth, was $24.1 million, compared to $22.3 million generated during the same period last year. The main drivers for the increase in margins are higher harvested area and lower costs measured in U.S. dollars driven by the devaluation of the Argentine peso.

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 Crops - Changes in Fair Value Breakdown - as of June 30, 2020
6M20metricSoySoy 2nd CropCornCorn 2nd CropWheatSunflowerCottonPeanutTotal
2019/20 Harvest Year
Total Harvested AreaHectares51,55625,41936,9203,35030,5096,8181,38315,918171,873
Area harvested in previous periodsHectares26,86226,862
Area harvested in current periodHectares51,55625,41936,9203,3503,6476,8181,38315,918145,011
Changes in Fair Value 6M20 from harvested area 2019/20 (ii)$ thousands5,6122,2007,515682688496(120)8,46925,542
Total Planted AreaHectares51,62328,04770,54711,26630,5096,8187,53917,710224,059
Area planted in initial growth stagesHectares51,62326,73353,9837,30830,5096,8184,46116,814198,249
Area planted with significant biological growthHectares1,31416,5643,9583,07889625,810
Changes in Fair Value 6M20 from planted area 2019/20 $ thousands(11)(1,598)213(32)(10)(1,438)
Total Changes in Fair Value in 6M20 $ thousands5,6122,1895,917895688496(152)8,45924,104

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Rice Segment

Rice - Highlights
metric2Q202Q19Chg %6M206M19Chg %
Gross Sales$ thousands33,48829,72512.7%57,88659,136(2.1)%
      Sales of white ricethousand tons675424.5%1141112.1%
$ per ton4394243.6%4404234.1%
$ thousands29,49422,86929.0%49,99047,0336.3%
      Sales of By-products$ thousands3,9136,856(42.9)%7,89612,103(34.8)%
Adjusted EBITDA$ thousands8,2573,083167.8%23,43417,11236.9%
Adjusted EBIT$ thousands6,4901,245421.3%19,90213,49847.4%
Area under productionhectares41,54440,4172.8%41,54440,4172.8%
Rice Mills
Total Processed Rough Rice(1)
thousand tons585016.7%1119516.8%
Ending stock - White Ricethousand tons1016(35.4)%1016(37.5)%
(1) Expressed in white rice equivalent.


As a consequence of the lockdown measures adopted in 2Q20 in response to Covid-19, there was an increase in demand for basic food products. During 2Q20 demand in our Rice business increased 24.5% compared to 2Q19 and average selling prices increased 3.6%, resulting in a 12.7% year-over-year increase in gross sales which amounted to $33.5 million.

The increase in demand was observed both in the domestic market as well as in an active export market, driven by countries rebuilding their stocks in addition to a genuine increase in consumption. Prices in the export market experienced a ~10% spike over pre-Covid-19 levels. However in the domestic market the increase in margin was partially offset by the government establishing maximum price controls to protect customers. In this domestic scenario of high demand, limited supply and maximum prices, we focused on mix by pushing the sale of higher margin products, such as parboiled rice.

We were in a good position to capitalize on the increase in demand because of our flexibility to supply both the domestic and export market and because of the investments we made during the past years to increase productivity and reduce costs, which led to an improvement in EBITDA margins.

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The main investments we carried out in the Rice business include (i) the implementation of zero level technology in +30k hectares which considerably reduces water consumption at the farm, increases yields by providing better germination, uniform irrigation and lower losses during harvest; (ii) the installment of a dryer at Oscuro farm which allows our grain storage and handling to be more efficient, reduces transportation costs, and allows us to increase rice quality by seizing optimal harvest timing; and (iii) the construction of a parboil plant which has growing demand in the domestic market, offers high margins and helps us manage broken rice.

Adjusted EBITDA during 2Q20 reached $8.3 million, $5.2 million or 167.8% higher compared to the same period of last year. This increase was mainly explained by (i) the aforementioned increase in sales, (ii) the $3.8 million increase in the mark-to-market of our biological asset and (iii) lower costs in dollar terms, as a result of the depreciation of the Argentine peso.

On a year-to-date basis, gross sales totaled $57.9 million and Adjusted EBITDA $23.4 million, 2.1% lower and 36.9% higher than the same period of last year, respectively.

In our farm operations we completed the harvest of 41,544 hectares of rice under good conditions, obtaining an average yield of 6.7 tons per hectare, 10.3% higher than the previous campaign. Enhanced efficiencies at the industrial level allowed us to process 111 thousand tons of rough rice, 16.8% higher year-over-year.

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Dairy Segment

Dairy - Highlights
metric2Q202Q19Chg %6M206M19Chg %
Gross Sales
$ thousands (1)
33,55521,64655.0%65,14429,756118.9%
million liters (2)
70.731.9121.6%149.357.9157.9%
Adjusted EBITDA$ thousands5,0084,6667.3%8,1877,44310.0%
Adjusted EBIT$ thousands3,4243,536(3.2)%4,9775,276(5.7)%
Milking Cowsaverage heads10,7718,99219.8%10,3638,66519.6%
Cow Productivity liter/cow/day35.134.51.7%35.135.4(0.8)%
Total Milk Produced million liters 34.428.620.5%66.255.519.3%
(1) Includes sales of powdered milk, cream, electricity, culled cows; and processed dairy product
(2) Includes sales of fluid milk, powder milk and cheese.

During 2Q20, the Dairy market experienced an increase in domestic demand. As a consequence of the pandemic, the market experienced a negative price scenario both in the export and domestic market. In the export market milk powder prices dropped from values in the range of 3,300 USD/Tn at the beginning of the year to 2,700 USD/Tn by April. In the domestic market, given government policies, prices of dairy products were capped for the duration of the pandemic, as was the case in the Rice business.

In this challenging scenario, we continued to focus on achieving efficiencies in our vertically integrated operations and increasing our productivity levels in every stage of the value chain.

Milk production reached 34.4 million liters during 2Q20, 5.8 million or 20.5% higher compared to the same period of last year. This increase is fully attributable to the 19.8% increase in our dairy cow herd as we continue populating our third free-stall dairy facility. Cow productivity remained at very high levels despite the increase in herd number, reaching 35.1 liters per cow per day.

At an industry level during 2Q20 we processed 70 million liters of raw milk, of which 28 million were sourced from our dairy farm operations. The balance was sourced from local producers in nearby areas or supplied by partners to whom we provide tolling services. Our milk processing facilities provided us the flexibility to send milk to the production of a variety of dairy products, as well as to shift sales to the domestic market which presented a more active demand than the export market. During 2Q20 sales reached 70.7 million liters.

These competitive advantages enabled us to cope with a difficult scenario and increase gross sales by 55.0% year-over-year, reaching $33.6 million in 2Q20. Adjusted EBITDA amounted to $5.0 million, 7.3% higher than 2Q19. Year-to-date gross sales reached $65.1 million and Adjusted EBITDA reached $8.2 million.
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However, once (i) interest expenses and (ii) the foreign exchange loss related to the financial debt are taken into account, the result of the business decreased to minus $20.1 million.

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All Other Segments

All Other Segments - Highlights
metric2Q202Q19Chg %6M206M19Chg %
Gross Sales$ thousands341357(4.5)%588782(24.8)%
Adjusted EBITDA$ thousands(165)(250)(34.0)%(159)44n.a
Adjusted EBIT$ thousands(200)(298)(32.9)%(231)(50)362.0%

All Other Segments primarily encompass our cattle business. Our cattle segment consists of pasture land that is not suitable for crop production due to soil quality and is leased to third parties for cattle grazing activities.

Adjusted EBITDA for All Other Segment during 6M20 was negative $0.2 million, $0.2 million lower than 6M19.

Land transformation business

Land transformation - Highlights
metric2Q202Q19Chg %6M206M19Chg %
Adjusted EBITDA$ thousands10,092 n.a 10,0929,3767.6%
Adjusted EBIT$ thousands2,084 n.a 2,0841,35453.9%
Land soldHectares811n.a8116,080(86.7)%

Adjusted EBITDA for our Land Transformation business totaled $10.1 million during 2Q20 due to the sale of 811 hectares of Abolengo farm, located in Argentina's Humid Pampas. Year-to-date, this represents an increase of 7.6% or $0.7 million over the sale of Alto Alegre farm which took place during 6M19.

Over the last 13 years we have been able to generate gains of over $200 million. Monetizing a portion our land transformation gains allows us to redeploy capital into higher yielding activities, enabling us to continue growing and enhancing shareholder value.

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Operational Performance

Sugar, Ethanol & Energy - Selected Information
metric2Q202Q19Chg %6M206M19Chg %
Milling
Sugarcane Milledtons2,904,0064,032,123(28.0)%4,222,4095,384,273(21.6)%
Own Cane tons2,765,8683,890,223(28.9)%4,084,2715,234,517(22.0)%
Third Party Cane tons138,138141,899(2.7)%138,138149,756(7.8)%
Production
TRS Equivalent Producedtons387,178531,739(27.2)%524,716682,098(23.1)%
Sugar tons200,744128,19656.6%206,969131,54757.3%
Ethanol M3104,122233,983(55.5)%181,553320,649(43.4)%
Hydrous EthanolM365,526157,968(58.5)%125,865222,797(43.5)%
Anhydrous EthanolM338,59676,015(49.2)%55,68897,852(43.1)%
Sugar mix in production%54%25%115.1%41%20%104.2%
Ethanol mix in production%46%75%(38.8)%59%80%(26.4)%
Energy Exported (sold to grid)MWh192,764265,531(27.4)%254,864383,347(33.5)%
Cogen efficiency (KWh sold per ton crushed)KWh/ton66.465.90.8%60.471.2(15.2)%
Agricultural Metrics
Harvested own sugarcanetons2,765,8683,890,223(28.9)%4,084,2715,234,517(22.0)%
Harvested areaHectares33,93247,019(27.8)%54,28561,629(11.9)%
Yieldtons/hectare8183(1.5)%7585(11.4)%
TRS contentkg/ton126127(0.7)%117122(4.0)%
TRS per hectarekg/hectare10,28310,513(2.2)%8,82010,370(14.9)%
Mechanized harvest%99.2%98.6%0.6%99.5%98.9%0.6%
Area
Sugarcane Plantationhectares172,452163,3915.5%172,452163,3915.5%
Expansion & Renewal Area hectares7,74911,788(34.3)%15,23019,347(21.3)%
During 2Q20 Brazil’s ethanol business experienced a decrease in prices and demand on the account of the decrease in international oil prices and the decline in the demand for fuels as a consequence of the reduced circulation of people in response to Covid-19. The evolution of these factors, which have a direct impact on the dynamics of the Sugar & Ethanol industry, should be analyzed month by month to gain a more valuable insight into our decision-making process.

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April was defined by uncertainty regarding the extent of Covid-19’s impact. Indeed, estimates pointed to a 50% year-over-year decrease in demand for ethanol. Actual figures, although less negative, still painted a challenging scenario. On a year-over-year comparison, ethanol demand in Brazil declined 28.6%, ethanol prices experienced a 25.0% decrease and international oil prices experienced a sharp decline as well. Ethanol stock levels, in turn, were high due to carry-over from 2019 as fundamentals during the first part of the year pointed to high prices. In light of this, mills across Brazil switched their mix to maximize sugar which traded at a premium to ethanol.

In line with the strategy we designed Mid-March amid the outbreak of Covid-19, during April we continued to maximize sugar production, slow down our crushing and implement a cost reduction plan that led, among others, to the reduction of harvest fronts and the implementation of the Provisional Measure 936/20(*) which allowed us to maintain the workforce sized to our operational needs. Monthly crushing amounted to 0.9 million tons (21.1% lower year-over-year) and 54% of TRS was diverted to sugar.

During May international gasoline prices experienced a recovery and there was a 21.8% month-over-month increase in demand for ethanol in Brazil (27.9% lower year-over-year) due to a less restrictive lockdown than originally thought. It was during this month that we crushed 1.0 million tons and our mix reached 57% of sugar production.

By June there were signs of recovery, namely the year-over-year drop in ethanol demand which stood at 10.5%, aided by higher exports of ethanol for industrial use such as hand sanitizers. Moreover, ethanol prices denominated in Brazilian currency were 1.6% higher year-over-year on the account of a favorable FX rate, higher gasoline prices and lower supply due to mills diverting their production to sugar whose price in Brazilian currency was at historical high levels. Towards year-end analysts estimate a tight supply & demand scenario for ethanol, pointing to a price recovery, as the decrease in demand is expected to amount to 4.9 MM cubic meters while the decrease in supply, caused by the generalized shift in production to sugar, is expected to stand at 5.5 MM cubic meters.

In light of these factors and the expectation of a partial recovery in June we decided to accelerate our crushing pace, favored by the dry weather registered in the Cluster region. To do so we began the process of revamping our operations by reincorporating employees suspended under MP 936/20(*) and increasing our harvest fronts, among others. However, crushing remained in line with May as the full effect of these adjustments will be seen in July. Indeed July marked a crushing record with 1.7 million tons of sugarcane crushed, of which 1.5 million tons corresponded to our Cluster. During the month 54% of TRS was diverted to sugar production, reaching 107 thousand tons of sugar produced.

On a quarterly basis we crushed 2.9 million tons, 28.0% or 1.1 million tons lower compared to the same period of last year, driven by our strategy to slow down crushing, as evidenced in a 10.1% year-over-year decrease in
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effective milling days and a 19.9% decrease in milling per day. Rains in Mato Grosso do Sul during the second quarter were 127.0% higher compared to the same period of last year, mainly concentrated in the month of May. Sugarcane yields reached 81 tons per hectare and TRS content amounted to 126 kg/ton, both in line with last year.

Production mix during the quarter continued to favor sugar in order to profit from higher relative prices (premium of 11.7% and 4.7% to hydrous and anhydrous ethanol, which traded at 9.53 cts/lb and 10.29 cts/lb, respectively). Indeed, 54% of total TRS produced was diverted to sugar, more than doubling last year's sugar mix.

Exported energy totaled 193 thousand MWh during the second quarter of the year, 27.4% lower compared to the same period of 2019. We continued to fulfill volumes secured in government auctions, however, the reduction is explained by our commercial strategy to postpone energy sales in the spot market in light of the low prices observed during the quarter, and by the reduction of 1.1 million tons in crushing volume which translates into lower bagasse. Also in line with our commercial strategy, and driven by our cost reduction plan, we suspended the purchase of wood chips.

Year-to-date, a total of 4.2 million tons of sugarcane has been crushed, 21.6% lower than 6M19, explained by the second quarter's dynamic. 41% of TRS was diverted to sugar, 104.2% higher compared to the same period of last year. Exported energy totaled 255 thousand MWh during the first half of 2020, 33.5% lower year-over-year.

As of June 30, 2020, our sugarcane plantation consisted of 172,452 hectares, 5.5% higher compared to the same period of last year. Sugarcane planting continues to be a key strategy to supply our mills with quality raw material at low cost. During 6M20, we planted a total of 15,230 hectares of sugarcane. Of this total area, 42% or 6,411 hectares were expansion areas planted to supply our growing crushing capacity and 58%, or 8,819 hectares, were areas planted to renew old plantations with newer and high-yielding sugarcane, thus allowing us to maintain the productivity of our plantation.

(*) Provisional Measure 936/20 issued by the Brazilian government contemplates that employees' contracts can be suspended for a maximum period of 60 days. During that period the company is obliged to maintain employee benefits and pay 30% of the base salary, while the rest of the remuneration is paid by the government through unemployment insurance. After said period, suspended employees must be reincorporated and guaranteed employment for the same amount of time they were suspended. MP 936/20 has recently been enacted into Law 14.020/2020 which allows the suspension of the employment contract in successive or intercalated periods, provided they are equal to or greater than 10 days, with a maximum duration of 120 days.
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Financial Performance

Sugar, Ethanol & Energy - Highlights
$ thousands2Q202Q19Chg %6M206M19Chg %
Net Sales (1)64,087119,318(46.3)%123,355201,021(38.6)%
Margin on Manufacturing and Agricultural Act. Before Opex30,27054,531(44.5)%49,94182,269(39.3)%
Adjusted EBITDA45,39781,601(44.4)%86,314112,798(23.5)%
Adjusted EBITDA Margin70.8%68.4%3.5%70.0%56.1%24.8%
(1) Net Sales are calculated as Gross Sales net of sales taxes.
Please see “Reconciliation of Non-IFRS measures” starting on page 34 for a reconciliation of Adjusted EBITDA and Adjusted EBIT to Profit/Loss.

Net sales in 2Q20 reached $64.1 million, $55.2 million or 46.3% lower than in 2Q19. This reduction was driven by the lower average prices of sugar, ethanol and energy measured in U.S. dollars (also measured in BRL in the case of the latter two), and the lower volumes of ethanol and energy, partially offset by higher volumes of sugar.

On a year-to-date basis, net sales totaled $123.4 million, 38.6% lower than the same period of last year.

Adjusted EBITDA during 2Q20 was $45.4 million, $36.2 million or 44.4% lower compared to 2Q19. This decrease was explained by the aforementioned lower net sales, partially offset by (i) cost dilution following the depreciation of the Brazilian real, (ii) lower selling expenses as we renegotiated sugar freight costs and paid less PIS/COFINS tax in line with the lower ethanol sales, and (iii) lower general and administrative expenses both on the account of currency depreciation as well as genuine savings due to our cost reduction initiatives.

The table below reflects the breakdown of net sales for the Sugar, Ethanol & Energy business.
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Sugar, Ethanol & Energy - Net Sales Breakdown (1)
$ thousandsUnits($/unit)
2Q202Q19Chg %2Q202Q19Chg %2Q202Q19Chg %
Sugar (tons)(2)31,87526,55520.0%134,16190,29148.6%238294(19.0)%
Ethanol (cubic meters)23,15577,165(70.0)%83,045173,940(52.3)%279444(37.2)%
Energy (Mwh)(3)9,05715,598(41.9)%259,460315,884(17.9)%3549(28.6)%
TOTAL64,087119,318(46.3)%
$ thousandsUnits($/unit)
6M206M19Chg %6M206M19Chg %6M206M19Chg %
Sugar (tons)(2)34,71037,229(6.8)%142,975122,28716.9%243304(20.3)%
Ethanol (cubic meters)75,393139,852(46.1)%196,071313,238(37.4)%385446(13.9)%
Energy (Mwh)(3)13,25223,940(44.6)%365,869430,920(15.1)%3656(34.8)%
TOTAL123,355201,021(38.6)%
(1) Net Sales are calculated as Gross Sales net of ICMS, PIS COFINS, INSS and IPI taxes.
(2) Includes commercialization of third party sugar: 95 tons ($74 k) in 2Q20; 20.8k tons ($7.0 MM) in 6M20; 21.3k tons ($6.9 MM) in 2Q19 and 42.0k tons ($13.8 MM) in 6M19.
(3) Includes commercialization of energy from third parties.

Ethanol sales volumes decreased 52.3% compared to 2Q19, due to the lockdown measures adopted by some states in Brazil which negatively affected demand for fuels. Hydrous ethanol sales were the most impacted, dropping by 67.3% compared to 2Q19 as liquidity for the product remained limited and there was no clear market price reference. Anhydrous ethanol sales were 29.8% lower compared to the same period of last year, driven by lower gasoline consumption.

Average selling prices were lower both measured in BRL and in U.S. dollars, standing at $279 per m3, representing a 37.2% year-over-year reduction. During the quarter, hydrous and anhydrous ethanol traded, on average, at sugar equivalent prices of cts/lb 9.53 and cts/lb 10.29, 11.7% and 4.7% discount to sugar, respectively. All in all, net ethanol sales during the quarter amounted to $23.2 million, 70.0% lower year-over-year.

The maximization of sugar production resulted in a 48.6% increase in sugar sales volumes compared to 2Q19. Selling prices in U.S. dollars fell by 19.0% to $238 per ton, although prices in BRL were at its maximum. Net sales resulted in $31.9 million during 2Q20, a 20.0% increase year-over-year.

In the case of energy, net sales in 2Q20 were $9.1 million, 41.9% lower compared to 2Q19. Selling volumes reached 259 thousand MWh, marking a 17.9% decrease year-over-year. Average selling prices were lower both measured in BRL as well as in U.S. dollars, standing at $35 per MWh, implying a 28.6% decrease compared to the same period of last year.
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As shown in the table below, total production costs excluding depreciation and amortization reached 4.2 cents per pound during 2Q20, 23.2% lower year-over-year. The impact of a 28.0% lower crushing volume was more than offset by the implementation of a cost reduction plan and by the year-over-year depreciation of the Brazilian Real, which further contributed to reduce unit costs measured in U.S. dollars. In terms of cost reduction, the main savings were observed via (i) the reduction in our level of operations, such as the temporary suspension of personnel under MP 936/20(*) focused on employees within the risk group, (ii) a reduction in the consumption of agricultural supplies driven by enhanced efficiencies and best practices, (iii) the renegotiation of fuel cost, (iv) the suspension of third party services and wood chips purchases, and (v) higher interharvest cost activation.

Sugar, Ethanol & Energy - Production Costs
Total Cost (´000)Total Cost per Pound (cts/lbs)
2Q202Q19Chg %2Q202Q19Chg %
Industrial costs15,06423,089(34.8)%1.92.1(8.8)%
Industrial costs12,44919,969(37.7)%1.61.8(12.9)%
Cane from 3rd parties2,6163,120(16.2)%0.30.317.2%
Agricultural costs48,26284,682(43.0)%6.27.8(20.3)%
Harvest costs18,38232,368(43.2)%2.43.0(20.6)%
Cane depreciation12,27924,166(49.2)%1.62.2(29.0)%
Agricultural Partnership Costs7,3449,979(26.4)%1.00.92.8%
Maintenance costs10,25718,169(43.5)%1.31.7(21.1)%
Total Production Costs63,326107,771(41.2)%8.210.0(17.9)%
Depreciation & Amortization PP&E(30,476)(48,015)(36.5)%(3.9)(4.4)(11.3)%
Total Production Costs (excl D&A)32,85059,756(45.0)%4.25.5(23.2)%


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Sugar, Ethanol & Energy - Total Production Costs
Total Cost (´000)Total Cost per Pound (cts/lbs)
6M206M19Chg %6M206M19Chg %
Industrial costs22,43131,074(27.8)%2.12.2(4.2)%
Industrial costs19,81527,738(28.6)%1.92.0(5.1)%
Cane from 3rd parties2,6163,336(21.6)%0.30.24.1%
Agricultural costs77,855128,137(39.2)%7.59.2(19.3)%
Harvest costs25,89045,272(42.8)%2.53.3(24.1)%
Cane depreciation17,71230,911(42.7)%1.72.2(23.9)%
Agricultural Partnership costs10,81718,462(41.4)%1.01.3(22.2)%
Maintenance costs23,43733,492(30.0)%2.22.4(7.1)%
Total Production Costs100,286159,211(37.0)%9.611.5(16.4)%
Depreciation & Amortization(49,258)(70,698)(30.3)%(4.7)(5.1)(7.5)%
Total Production Costs (excl. D&A)51,02888,513(42.3)%4.96.4(23.5)%

Sugar, Ethanol & Energy - Changes in Fair Value
$ thousands2Q202Q19Chg %6M206M19Chg %
Sugarcane Valuation Model current period53,90258,335(7.6)%53,90258,335(7.6)%
Sugarcane Valuation Model previous period48,24357,684(16.4)%55,35547,47516.6%
Total Changes in Fair Value5,658651769.1%(1,454)10,860n.a.
Total Changes in Fair Value of Unharvested Biological Assets (what is currently growing on the fields and will be harvested during the next 12 months) represented a $5.0 million gain year-over-year fully attributed to the depreciation of the Brazilian real.

Compared to 1Q20, Total Changes in Fair Value of Unharvested Biological Assets registered a $12.7 million gain. Lower prices were fully offset by currency depreciation, coupled with a higher projected crushing volume for the second half of the year, as we expect to make up for the 1.1 million lower crushing registered during 6M20.
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Corporate Expenses

Corporate Expenses
$ thousands2Q202Q19Chg %6M206M19Chg %
Corporate Expenses(4,327)(5,065)(14.6)%(8,857)(9,919)(10.7)%

Adecoagro’s corporate expenses include items that have not been allocated to a specific business segment, such as executive officers and headquarter staff, certain professional fees, travel expenses, and office lease expenses, among others. As shown in the table above, corporate expenses for 6M20 were $8.9 million, 10.7% lower compared to 6M19.

Other Operating Income

Other Operating Income
$ thousands2Q202Q19Chg %6M206M19Chg %
Gain / (Loss) from commodity derivative financial instruments(3,677)644 n.a. 5,741(2,731) n.a.
Gain from disposal of farmland and other assets2,084382445.5%2,0841,85412.4%
(Loss) from forward contracts(139)(530)(73.8)%(139)(530)(73.8)%
Gain from disposal of other property items741(222) n.a. 1,7001521,018.4%
Net Gain from FV Adjustement in Investment Property1,235(4,773) n.a. 1,185(3,437) n.a.
Other498(1,795) n.a. 2,269(3,990) n.a.
Total742(6,294) n.a. 12,840(8,682) n.a.
Other Operating Income for 2Q20 was $0.7 million compared to a loss of $6.3 million in 2Q19. This increase is mainly attributable to the gain from farm sales. Year-to-date Other Operating Income was $12.8 million, $21.5 million higher compared to the same period last year, mostly driven by results registered in 1Q20 as the mark-to-market of our sugar hedge positions followed the downward trend of prices.
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Commodity Hedging
Adecoagro’s financial performance is affected by the volatile price environment inherent in agricultural commodities. The company uses forward and derivative markets to mitigate swings in commodity prices by locking-in margins and stabilizing cash flows.

The table below shows the average selling price of our hedged production volumes, including volumes that have already been invoiced and delivered, forward contracts with fixed-price and volumes hedged through derivative instruments.

Commodity Hedge Position - as of June 30, 2020
Consolidated Hedge Position
FarmingAvg. FAS PriceCBOT FOBResults Booked in FY2019
Volume (1)USD/TonUSD/Bu$ thousands
2019/2020 Harvest season
Soybeans 150,605232.0889.0(653)
Corn 322,553132.0341.0(2,782)
2020/2021 Harvest season
Soybeans 21,000220.0938.07
Corn 38,096142.0403.0(196)
Consolidated Hedge Position
Sugar, Ethanol & EnergyAvg. FOB PriceICE FOBResults Booked in FY2019
Volume (1)
USD/UnitCents/Lb$ thousands
2020/2021 Harvest season
Sugar (tons)406,044269.212.29,859
Ethanol (m3)104,879311.1n.a
Energy (MW/h) (2) 572,17343.2n.a
2021/2022 Harvest season
Sugar (tons)
Ethanol (m3)
Energy (MW/h) (2) 324,16850.6n.a

(1) Energy prices 2020 were converted to USD at an exchange rate of BRL/USD 5.3 and 2021 prices were converted at BRL/USD 5.0

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Financial Results

Financial Results
$ thousands2Q202Q19Chg %6M206M19Chg %
Interest Expenses, net(15,683)(15,976)1.8%(28,982)(27,324)6.1%
Cash Flow Hedge - Transfer from Equity64(4,380) n.a (11,108)(11,981)  (7.3%)
FX (Losses), net(34,743)7,299(576.0)%(136,359)(12,897)  957.3%
Gain/loss from derivative financial Instruments(934)(33)(2730.3)%(2,150)278(873.4)%
Taxes(1,236)(1,059)(16.7)%(2,445)(1,820)34.3%
Finance Cost - Right-of-use Assets(5,373)(1,664)(222.9)%(6,991)(3,587)94.9%
Inflation accounting effects11,21124,230(53.7)%25,67642,016(38.9)%
Other Expenses, net(555)(2,386)(76.7)%1,016(2,309) n.a
Total Financial Results(47,249)6,031(883.5)%(161,343)(17,624)815.5%

Net financial results in 6M20 totaled a loss of $161.3 million compared to a loss of $17.6 million in 6M19. These results are primarily composed of Foreign exchange loss and inflation accounting effects, as explained below:
(i)Foreign exchange losses (composed of “Cash Flow Hedge - Transfer from Equity (1) and “Fx Gain/Loss line” items) reflect the impact of foreign exchange variations on our dollar denominated monetary assets and liabilities. The $136.4 million loss is explained by our negative net foreign currency position (65% of Brazil's financial debt is denominated in foreign currency). During 6M20 the Brazilian Real registered a 35.9% nominal depreciation, compared to an appreciation of 1.1% during 6M19. At the same time, and further contributing to the foreign exchange loss, the Argentine Peso depreciated 17.6% during the first six months of 2020 compared to 12.6% in the same period last year. These results are non-cash in nature and do not impact the net worth of the Company, in US dollars.

(ii)Inflation accounting effects reflect the results derived from the exposure of our net monetary position to inflation. Accordingly, monetary assets generate a loss when exposed to inflation while monetary liabilities generate a gain, every time inflation reduces the owed balance, in real terms. During 6M20, since we had a negative net monetary position (monetary liabilities were higher than monetary assets), we registered a $25.7 million gain, 38.9% lower than 6M19.
(1) Effective July 1, 2014, Adecoagro formally documented and designated cash flow hedging relationships to hedge the foreign exchange rate risk of a portion of its highly probable future sales in US dollars using a portion of its borrowings denominated in US dollars and foreign currency forward contracts. Cash flow hedge accounting permits that gains and losses arising from the effect of changes in foreign currency exchange rates on derivative and non-derivative hedging instruments not be immediately recognized in profit or loss, but be reclassified from equity to profit or loss in the same periods during which the future sales occur, thus allowing for a more appropriate presentation of the results for the period reflecting Adecoagro's Risk Management Policy.
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Indebtedness

Net Debt Breakdown
$ thousands2Q201Q20Chg %2Q19Chg %
Farming232,872203,48314.4%242,897(4.1)%
Short term Debt178,935138,44929.2%166,2427.6%
Long term Debt53,93765,034(17.1)%76,655(29.6)%
Sugar, Ethanol & Energy745,013743,3580.2%670,31911.1%
Short term Debt74,48666,86611.4%40,50583.9%
Long term Debt670,527676,492(0.9)%629,8146.5%
Total Short term Debt253,421205,31623.4%206,74722.6%
Total Long term Debt724,464741,526(2.3)%706,4692.5%
Gross Debt977,885946,8423.3%913,2167.1%
Cash & Equivalents236,259235,4240.4%137,99071.2%
Net Debt741,626711,4154.2%775,226(4.3)%
EOP Net Debt / Adj. EBITDA LTM2.45x2.31x6.2%2.97x(17.4)%

From a seasonality point of view, the first semester has the highest working capital requirements, since during this period all of our crops are planted and harvested and most costs incurred. As we finish harvesting and start collecting sales throughout the third quarter, we expect to reduce working capital invested and debt.

Adecoagro´s net debt as of June 30, 2020 reached $741.6 million, $30.2 million or 4.2% higher than the previous quarter, driven by a $31.0 million increase in gross debt which amounted to $977.9 million, 3.3% higher than the previous quarter and cash and equivalents flat at $236.3 million.

On a year-over-year basis, net debt in 2Q20 was 4.3% lower on the account of higher cash and equivalents driven by a positive free cashflow during the last twelve months which fully offset the higher gross debt. As of June 30, 2020 cash and equivalents were 71.2% higher compared to the same period of last year as it reflects the inflow from the issuance of the CRA bond in Brazil at the end of 2019, as well as the short term working capital lines we raised as part of our integral risk management program.

Our Net Debt ratio (Net Debt / EBITDA) reached 2.45x, 6.2% higher than 1Q20 but 17.4% lower year-over-year. We believe that our balance sheet is in a healthy position not only based on the adequate overall debt levels but also on the term of our indebtedness, with approximately 75% having a long term tenor. As mentioned above, during 2Q20 we increased our short term debt position by 23.4% by raising credit lines to strengthen our cash position and make front to our financial obligations and working capital needs. However in
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terms of our debt amortization schedule, it is important to highlight that due to the seasonality of our business, sales collections are still ahead and that much of this debt was raised as a precautionary measure due to the uncertainty in the macroeconomic scenario. Moreover, IFC's $100 million loan will considerably improve our debt structure and extend its average life to over 6 years.

The Company has full capacity to repay short term debt with its cash balance, as shown by our Liquidity ratio above 1.0x. As of June 30, 2020, our Liquidity ratio (Cash & Equivalents + Marketable Inventories / Short Term Debt) reached 1.22x.

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Capital Expenditures & Investments

$ thousands2Q202Q19Chg %6M206M19Chg %
Farming & Land Transformation2,1945,954(63.2)%7,63265,644(88.4)%
Expansion1,5525,047(69.2)%5,66260,972(90.7)%
Maintenance641908(29.3)%1,9704,672(57.8)%
Sugar, Ethanol & Energy34,37344,223(22.3)%91,184111,683(18.4)%
Maintenance25,13026,423(4.9)%70,06575,567(7.3)%
Planting12,27213,507(9.1)%20,30324,649(17.6)%
Industrial & Agricultural Machinery12,85812,915(0.4)%49,76250,918(2.3)%
Expansion9,24317,800(48.1)%21,11936,117(41.5)%
Planting6,92214,283(51.5)%16,30625,929(37.1)%
Industrial & Agricultural Machinery2,3223,518(34.0)%4,81410,188(52.8)%
Total36,56750,177(27.1)%98,816177.327(44.3)%
Adecoagro´s capital expenditures in 2Q20 totaled $36.6 million, 27.1% lower compared to the same period of last year.

The Sugar, Ethanol and Energy business accounted for 94.0% or $34.4 million of total capex in 2Q20. Expansion capex reached $9.2 million, 48.1% lower than previous year and maintenance capex, in turn, reached $25.1 million, 4.9% lower year-over-year. This is mainly explained by our cost reduction initiatives in light of Covid-19. Indeed we reassessed our Capital Expenditures and postponed uncommitted capital deployments such as the postponement of an anhydrous ethanol column, being mindful to avoid significant impacts in our productivity levels.

Farming & Land Transformation businesses accounted for 6.0%, or $2.2 million of total capex in 2Q20, marking a 63.2% year-over-year decrease. In our Farming business we also carried out capex reductions, however this decrease is mostly explained by the fact that 2019 was the year with the highest capex requirement in our Farming business, as per our 5 Year Plan.

Year-over-year total capex was reduced by 44.3%. Consolidated capex spending is expected to slowdown going forward. Not only are we in the final phase of our 5-Year-Plan, with virtually all the Expansion capex already deployed, but we also expect Maintenance capex to go down in our Sugar, Ethanol and Energy business as a result of efficiencies enhancements.
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Inventories

End of Period Inventories
Volumethousand $
ProductMetric2Q202Q19% Chg2Q202Q19% Chg
Soybeantons80,310131,734(39.0)%17,22227,491(37.4)%
Corn (1)tons80,06046,84870.9%10,0655,84672.2%
Wheat (2)tons21,03727,710(24.1)%3,6165,847(38.1)%
Sunflowertons2,1031,37952.5%650805(19.3)%
Cotton tons1849(63.5)%1527(45.2)%
Ricetons