AG Growth Income Fund
TSX : AFN.UN

AG Growth Income Fund

May 09, 2008 09:00 ET

Ag Growth Announces Results for Three Months Ended March 31, 2008

WINNIPEG, MANITOBA--(Marketwire - May 9, 2008) - Ag Growth Income Fund (TSX:AFN.UN) today reported its financial results for the three months ended March 31, 2008.

For the three months ended March 31, 2008, the Fund reported sales of $35.4 million and EBITDA of $5.1 million. This compares to sales of $28.2 million and EBITDA of $7.3 million for the three months ended March 31, 2007. Net earnings for the three months ended March 31, 2008 were $1.9 million, compared to $5.6 million in 2007. Results for the three months ended March 31, 2008 were in line with management expectations, as an increase in sales was offset by costs related to both the integration of the Twister product line and to the Westfield capacity improvement initiative. Although the Twister integration continued into the second quarter, production levels are now approaching historical levels. The Westfield capacity improvement initiative was completed in March 2008 and the Fund is now realizing the benefits of increased production.

Overview of Results

Consecutive large crops, an increase in on-farm storage and continuing high commodity prices have contributed to favourable market conditions in the agricultural sector. Demand for the Fund's portable and stationary grain handling equipment has increased significantly in response to these drivers, and the Fund's order backlogs are at record levels.

Sales at divisions reporting a full three months in both periods (divisions acquired before January 1, 2007) increased $2.4 million or 8% over the prior year. The increase in sales resulted from exceptional demand in the U.S. market, however sales were somewhat tempered by the Westfield capacity improvement initiative and by a 15% appreciation in the Canadian dollar. Gross margin and EBITDA were negatively impacted by the stronger Canadian dollar. Had the average exchange rates experienced in 2007 been in effect in 2008, all other factors remaining constant, gross margin contribution in 2008 would have increased $2.8 million. Also, as anticipated, costs related to the integration of Twister resulted in negative EBITDA in the first quarter of 2008. Although foreign exchange played a large role in the comparability of results in the first quarter, the significance of the exchange rate is likely to decrease in subsequent quarters as the spread between the rate in the current year and the rate in 2007 becomes smaller.

"We are very excited about the remainder of 2008" said Rob Stenson, Chief Executive Officer of Ag Growth Income Fund. "Industry fundamentals remain very strong and our order back logs are the highest we have ever seen. Production at Westfield has increased significantly since the March 2008 completion of the capacity improvement initiative. Other capacity initiatives, including moving certain production to Indiana, are tracking to schedule. We have implemented several price increases in 2008 in response to the rising cost of steel, and are confident in our ability to pass through further cost increases as warranted. Overall, we are very enthusiastic about the state of our company and the Agricultural sector in general".

Company Profile

Ag Growth is a leading manufacturer of portable and stationary grain handling, storage and conditioning equipment, including augers, belt conveyors, grain storage bins, grain handling accessories and grain aeration equipment. Ag Growth's sales, marketing, and distribution system is comprised of approximately 1,400 dealers and distributors that distribute product in 48 states, nine provinces, and overseas.

Non-GAAP Measures

References to "EBITDA" are to earnings before interest, income taxes, depreciation, and amortization. Management believes that, in addition to net income or loss, EBITDA is a useful supplemental measure in evaluating the Fund's performance. EBITDA is not a financial measure recognized by GAAP and does not have a standardized meaning prescribed by GAAP. Management cautions investors that EBITDA should not replace net income or loss as an indicator of performance, or cash flows from operating, investing, and financing activities as a measure of the Fund's liquidity and cash flows. The Fund's method of calculating EBITDA may differ from the methods used by other issuers.

Standardized and adjusted distributable cash are non-GAAP measures generally used by Canadian income funds as an indicator of financial performance. The Fund defines standardized distributable cash as cash flow from operating activities less capital expenditures. The Fund defines adjusted distributable cash as cash flow from operating activities before the net change in non-cash working capital balances and before items not affecting cash other than items that impact amortization, interest expense, future taxes, or tax reserves, less maintenance capital expenditures. Standardized and adjusted distributable cash are not financial measures recognized by GAAP and do not have a standardized meaning prescribed by GAAP. The method of calculating the Fund's standardized and adjusted distributable cash may differ from similar computations as reported by similar entities and, accordingly, may not be comparable to distributable cash as reported by such entities.

Payout ratio is a non-GAAP measure used by Canadian income funds as an indicator of the amount of generated distributable cash that is distributed to the unitholders. The Fund defines payout ratio as total distributions expressed as a percentage of standardized and adjusted distributable cash. Payout ratio is not a financial measure recognized by GAAP and does not have a standardized meaning prescribed by GAAP. The method of calculating the Fund's payout ratio may differ from similar computations as reported by similar entities and, accordingly, may not be comparable to payout ratio as reported by such entities.

Forward-Looking Statements

This news release may contain forward-looking statements that reflect our expectations regarding the future growth, results of operations, performance and business prospects, and opportunities of the Fund. Forward-looking statements may contain such words as "anticipate", "believe", "continue", "could", "expects", "intend", "plans", "will" or similar expressions suggesting future conditions or events. Such forward-looking statements reflect our current beliefs and are based on information currently available to us. Forward-looking statements involve significant risks and uncertainties. A number of factors could cause actual results to differ materially from results discussed in the forward-looking statements, including changes in national and local business conditions, crop yields, crop conditions, seasonality, industry cyclicality, volatility of production costs, commodity prices, foreign exchange rates, and competition. These risks and uncertainties are described in our 2007Annual Report and our Annual Information Form. Further information about these and other risks and uncertainties can be found in these and other disclosure documents filed by Ag Growth Income Fund with the securities regulatory authorities, available at www.sedar.com.


AG GROWTH INCOME FUND

MANAGEMENT'S DISCUSSION AND ANALYSIS

MAY 8, 2008

This Management's Discussion and Analysis should be read in conjunction with the audited consolidated financial statements and accompanying notes of Ag Growth Income Fund for the year ended December 31, 2007 and the unaudited interim consolidated financial statements of Ag Growth Income Fund for the three month period ended March 31, 2008. Results are reported in Canadian dollars unless otherwise stated and have been prepared in accordance with Canadian generally accepted accounting principles. Throughout this Management's Discussion and Analysis references are made to "EBITDA", "standardized distributable cash", "adjusted distributable cash" and "payout ratio". A description of these measures and their limitations are discussed below under "Non-GAAP Measures". See also "Risks and Uncertainties" and "Forward-Looking Statements" below.

FORWARD-LOOKING STATEMENTS

This Management's Discussion and Analysis contains forward-looking statements that reflect our expectations regarding the future growth, results of operations, performance, business prospects, and opportunities of the Fund. Forward-looking statements may contain such words as "anticipate", "believe", "continue", "could", "expects", "intend", "plans", "will" or similar expressions suggesting future conditions or events. Such forward-looking statements reflect our current beliefs and are based on information currently available to us. Forward-looking statements involve significant risks and uncertainties. A number of factors could cause actual results to differ materially from results discussed in the forward-looking statements, including changes in national and local business conditions, crop yields, crop conditions, seasonality, industry cyclicality, volatility of production costs, commodity prices, foreign exchange rates, and competition. These risks and uncertainties are described under "Risks and Uncertainties" in our 2007 Annual Report and our Annual Information Form. Although the forward-looking statements contained in this MD&A are based on what we believe to be reasonable assumptions, we cannot assure readers that actual results will be consistent with these forward-looking statements and we undertake no obligation to update such statements except as expressly required by law.

OVERVIEW OF THE FUND

Ag Growth Income Fund (the "Fund") is an unincorporated, open-ended, limited purpose trust established under the laws of the Province of Ontario by a Declaration of Trust made as at March 24, 2004. The Fund holds indirectly all of the securities of Ag Growth Industries Inc. ("Ag Growth"), which conducts business in the grain handling, storage, and conditioning market.

On October 2, 2007, the Fund completed an equity financing whereby it issued 1,730,000 Trust units at a price of $26.00 per unit for gross proceeds of $45.0 million. Net proceeds after expenses of the offering were $42.4 million. Subsequent to the closing of the equity offering, the Fund repaid $30.7 million and U.S. $12.0 million of its outstanding long-term debt. The remaining $2.3 million was applied against expenses of the offering, including underwriters' commission.



As at December 31, 2007, March 31, 2008 and May 8, 2008, the following
units were issued and outstanding and participated pro rata in
distributions:

Trust Class B Total
units units (1)

December 31, 2006 11,088,915 136,085 11,225,000
October 2, 2007 equity financing 1,730,000 0 1,730,000
-----------------------------------
December 31, 2007, March 31, 2008
and May 8, 2008 12,818,915 136,085 12,955,000
-----------------------------------
-----------------------------------


(1) The previous owners of Ag Growth were issued Class B exchangeable limited partnership units ("Class B units") of AGX Holdings Limited Partnership ("AGHLP"), a wholly owned subsidiary of the Fund. The Class B units are exchangeable for Trust units of the Fund at the option of the holder on a one-for-one basis at any time. The Trust units of the Fund and the Class B units of AGHLP participate pro rata in distributions. The Fund has issued one Special Voting Unit for each Class B unit outstanding. The Special Voting Units are not entitled to any interest or share in the Fund, or in any distribution from the Fund, but are entitled to vote on matters related to the Fund.

220,000 Unit Awards have been granted under the Fund's Unit Award Incentive Plan and remain outstanding at March 31, 2008 and May 8, 2008. Subject to vesting and payment of the exercise price, the Unit Awards are each exercisable for one Trust unit.

The Fund's trust units trade on the Toronto Stock Exchange under the symbol AFN.UN.

FOREIGN EXCHANGE

The appreciation of the Canadian dollar is a significant factor when comparing results for the three months ended March 31, 2008 to the same period in 2007. As the differential between the 2008 foreign exchange rate and the 2007 foreign exchange rate decreases, the impact of foreign exchange when comparing 2008 results to 2007 results will become less significant. The Fund's average rates of exchange for the second, third and fourth quarters of 2007 were $1.11, $1.06, and $0.99, respectively. Accordingly, unless the Canadian dollar appreciates significantly in 2008, the impact of foreign exchange when comparing financial results to the prior year will become less significant.



OPERATING RESULTS Three Months Three Months
March 31 March 31
2008 2007
-------------------------------

Sales $ 35,358,537 $ 28,171,350
Cost of goods sold 22,463,583 15,962,842
-------------------------------
Gross margin 12,894,954 12,208,508
-------------------------------

Selling, general and administration 6,356,354 4,375,971
Professional fees 195,203 155,935
Long-term incentive plan 350,000 157,152
Unit award incentive plan 171,153 0
Research and development 263,781 240,330
Capital taxes 62,500 62,500
Gain on foreign exchange 586,679 (58,896)
Other income (141,491) (40,047)
--------------- --------------
7,844,179 4,892,945
--------------- --------------

EBITDA (1) 5,050,775 7,315,563

Amortization 1,951,623 1,125,264
Interest expense 602,491 630,199
Earnings before provision for income taxes 2,496,661 5,560,100
Current income taxes 527,633 322,991
Reverse tax reserve 0 (500,000)
Future income taxes 80,000 119,200
-------------------------------
Net earnings for the period $ 1,889,028 $ 5,617,909
-------------------------------
-------------------------------

Net earnings per unit $ 0.15 $ 0.50
-------------------------------
-------------------------------

(1) See discussion of non-GAAP measures.



ASSETS AND LIABILITIES March 31 December 31 March 31
2008 2007 2007

Total assets $ 209,738,518 $ 210,683,040 $ 165,796,160
Total liabilities $ 67,183,743 $ 64,028,506 53,828,810


Distributions Declared

The table below summarizes the distributions declared for Trust units of the Fund and for Class B units of AGHLP. The Fund's distribution policy is described in the "Distributions" section of this document.



Three Months Three Months
March 31 March 31
2008 2007

Trust units $ 5,383,944 $ 4,657,344
Class B units 57,156 57,156
--------------- --------------
Total distributions $ 5,441,100 $ 4,714,500
--------------- --------------
--------------- --------------


Acquisitions

The inclusion of the assets and operating results of the following acquisitions significantly impacts comparisons to 2007:

Effective May 31, 2007, the Fund acquired substantially all of the operating assets of Twister Pipe Ltd. ("Twister"), a manufacturer of grain storage bins, aeration equipment, and bin unload systems.

Effective November 19, 2007, the Fund acquired 100% of the outstanding shares of Union Iron Inc. ("Union Iron") and the shares and assets of certain related companies of Union Iron, a manufacturer of material handling and storage equipment.

Effective January 15, 2008, the Fund acquired substantially all of the assets of Applegate Steel Inc. ("Applegate"), a manufacturer of livestock equipment.

Overall Performance

Consecutive large crops, an increase in on-farm storage and high commodity prices have contributed to favourable market conditions in the agricultural sector. The Fund's order backlog is at record levels due to positive market sentiment and depleted inventory levels throughout its distribution network.

Sales for the three months ended March 31, 2008 were $35.4 million, compared to $28.2 million in the first quarter of 2007. Sales at divisions reporting a full three months in both periods (divisions acquired before January 1, 2007) increased $2.4 million or 8% over the prior year. The increase in sales resulted from exceptional demand in the U.S. market, however sales were somewhat tempered as the Westfield capacity improvement initiative was not completed until March 2008, and due to the 15% appreciation in the Canadian dollar compared to first quarter of 2007.

Gross margin as a percentage of sales for the three months ended March 31, 2008 was 36.5% (2007 - 43.3%). The decrease is largely due to the 15% appreciation in the Canadian dollar compared to the first quarter of 2007. The integration of Twister, the completion of the Westfield capacity improvement initiative, and the impact of the lower margin businesses the Fund acquired in 2007 and 2008 also contributed to a lower gross margin percentage.

EBITDA for the three months ended March 31, 2008 was $5.1 million, compared to $7.3 million in 2007. The significant appreciation of the Canadian dollar compared to the first quarter of 2007 reduced gross margin and EBITDA. Had the average exchange rates experienced in 2007 been in effect in 2008, all other factors remaining constant, gross margin contribution from sales would have increased $2.8 million. As anticipated, costs related to the integration of Twister resulted in negative EBITDA from that product line in the first quarter of 2008, and due to expected seasonality the inclusion of Union Iron and Applegate generated nil EBITDA in the first quarter.

Sales

Sales for the three months ended March 31, 2008 were $35.4 million, including $4.8 million at divisions acquired in 2007 and 2008. Excluding the impact of these acquisitions, sales in the first quarter of 2008 were $30.6 million, compared to $28.2 million in 2007. The increase of $2.4 million or 8% over 2007 is largely due to the following:

- Sales in the U.S. increased $1.6 million or 7% over the prior year due to increased sales of stationary belt conveyors, the result of strong demand in the grain handling and food processing sectors, and strong demand for aeration equipment. Sales per unit benefited from price increases but were negatively impacted by the 15% appreciation in the Canadian dollar compared to the first quarter of 2007.

- Sales in Canada increased $1.1 million or 17%. Sales of aeration equipment increased due to strong demand and improved market conditions in western Canada. Sales to commercial facilities in the first quarter of 2008 resulted in increased sales of stationary belt conveyors compared to the prior year.

- International sales decreased $0.3 million due largely to the timing of shipments.

- U.S. sales were negatively impacted by the appreciation of the Canadian dollar. Had the average exchange rates experienced in 2007 been in effect in 2008, all other factors remaining constant, sales excluding acquisitions for the quarter ended March 31, 2008 would have increased an additional $4.4 million.

- As the Westfield capacity improvement initiative was not completed until March 2008, the implementation process limited Westfield's capacity gains in the first quarter. Throughput at Westfield for the three months ended March 31, 2008 remained consistent with the first quarter of 2007, and production increased significantly upon completion of the capacity initiative.

Foreign Exchange

Sales and expenses denominated in a foreign currency are recorded each month at the rate of exchange in effect on the closing business day of the previous month. For the quarter ended March 31, 2008, sales denominated in U.S. dollars accounted for 77% of total sales (2007 - 73%). U.S. dollar denominated expenses equated to approximately 40% of sales (2007 - 30%).

As sales denominated in U.S. dollars significantly exceed purchases denominated in that currency, the Fund is negatively impacted by a strengthening Canadian dollar. The Fund's average rate of exchange for the quarter ended March 31, 2008 was $0.99, reflecting an appreciation in the Canadian dollar of 15% compared to the average rate of $1.17 recorded in the first quarter of 2007. In 2007, the Fund's average exchange rate was $1.11 in the second quarter, $1.06 in the third quarter, and $0.99 in the fourth quarter.

Ag Growth has entered into a series of hedging arrangements to partially mitigate the potential effect of fluctuating exchange rates. Realized gains or losses on foreign currency hedging instruments have been included, along with the gain or loss on the translation of U.S. dollar monetary items, in operating expenses as a gain or loss on foreign exchange.

Gross Margin

Gross margin as a percentage of sales for the quarter ended March 31, 2008 was 36.5%, compared to 43.3% in 2007. The decrease was largely the result of the following:

- Gross margin was negatively impacted by the stronger Canadian dollar. Had the average exchange rates experienced in 2007 been in effect in 2008, all other factors remaining constant, gross margin as a percentage of sales for the three months ended March 31, 2008 would have been 39.5%.

- As expected the integration of Twister negatively impacted gross margin for the three months ended March 31, 2008. The month of January 2008 was largely devoted to setup, and production levels were not at historical levels throughout the quarter.

- The capacity improvement initiative at Westfield continued into the first quarter of 2008. Although throughput remained at levels consistent with 2007, the implementation process negatively impacted gross margin percentages.

- The Fund's sales mix has changed substantially with the acquisitions of Twister, Union Iron, and Applegate. These are lower margin businesses and their inclusion in the Fund's consolidated results will lower the gross margin percentage. Divisions that were acquired in 2007 and 2008 accounted for 14% of total sales in the first quarter of 2008.

Expenses

For the quarter ended March 31, 2008, selling, general and administrative expenses were $6.4 million (2007 - $4.4 million). Excluding acquisitions, selling, general and administrative expenses were $5.4 million, an increase of $1.0 million over 2007. The variance is primarily due to the following:

- Salary expense increased $0.3 million due to personnel additions at the corporate level to facilitate growth and the integration of acquisitions, additions at Edwards to facilitate the integration of Twister, inflationary wage adjustments, and a number of smaller items.

- Commission expense increased $0.2 million largely due to Hi Roller's customer mix in the first quarter.

- Repairs and maintenance increased $0.2 million due to a number of small items at Westfield and Edwards.

- A number of miscellaneous items accounted for the remaining change.

Variances compared to the first quarter of 2007 were also recorded in the following:

- The Fund adopted a unit award incentive plan in May 2007 and recorded an expense related to the plan of $0.2 million for the three months ended March 31, 2008. There was no comparable expense in the first quarter of 2007.

- In 2007 the Fund adopted an amended long-term incentive plan ("LTIP") that results in annual awards being expensed over the term of the participant's vesting period. As a result the expense in 2008 includes a component related to fiscal 2007 as well as a component related to the current fiscal year.

- The Fund recorded a loss on foreign exchange in the first quarter of 2008 largely due to the impact of measuring its U.S. dollar liabilities at the March 31, 2008 foreign exchange rate.

EBITDA and Net Earnings (see discussion of non-GAAP measures)

EBITDA for the three months ended March 31, 2008 was $5.1 million, compared to $7.3 million in 2007. The EBITDA decrease of $2.2 million was largely the result of the following:

- The significant appreciation of the Canadian dollar compared to the first quarter of 2007 reduced gross margin and EBITDA. Had the average exchange rates experienced in 2007 been in effect in 2008, all other factors remaining constant, gross margin contribution from sales would have increased $2.8 million.

- As anticipated, costs related to the integration of Twister resulted in negative EBITDA from that product line in the first quarter of 2008.

- The Fund recorded a loss on foreign exchange in the first quarter of 2008 of $0.6 million (2007 - gain of $0.1 million) largely due to the impact of measuring its U.S. dollar liabilities at the March 31, 2008 foreign exchange rate.

- Selling, general and administrative expenses, excluding the impact of acquisitions, increased $1.0 million largely due to higher commission expense and the addition of management resources to facilitate growth and the integration of acquisitions.

- The Fund adopted a unit award incentive plan in 2007 and for the quarter ended March 31, 2008 recorded an expense of $0.2 million. The Fund also adopted an amended long-term incentive plan in 2007 that resulted in an increased expense of $0.2 million compared to the first quarter of 2007.

The Fund's credit facility includes operating lines of CAD $10.0 million and USD $2.0 million, and provides for long-term debt of up to USD $66.5 million. As at March 31, 2008, $6.0 million was outstanding under the operating line facilities (March 31, 2007 - $1.0 million) and the Fund's outstanding long-term debt was USD $26.5 million. Interest rates on both facilities are based on performance calculations. For the quarter ended March 31, 2008, the Fund's effective interest rate on its Canadian dollar term debt was 5.6% (2007 - 6.0%), and after consideration of the effect of the Fund's interest rate swap was 5.8% (2007 - 4.7%). For the quarter ended March 31, 2008, the Fund's effective interest rate on its U.S. dollar term debt was 7.7% (2007 - 8.8%) and after consideration of the effect of the Fund's interest rate swaps was 6.1% (2007 - 6.4%). See "Financial Instruments".

Amortization for the quarter ended March 31, 2008 was $2.0 million (2007 - $1.1 million) and included the amortization of capital assets of $1.2 million and the amortization of intangible assets of $0.8 million. Compared to 2007, amortization was most significantly impacted by the acquisitions of Twister, Union Iron and Applegate, and amortization of the new paint line at the Westfield facility.

The Fund is a mutual fund trust for income tax purposes and therefore is not at this time subject to tax on income distributed to unitholders. The manufacturing business operations of the Fund's divisions that are based in Canada are carried out within a limited partnership. Income from the limited partnership is not subject to tax but flows through to the holders of the partnership units, which includes the Fund. The Fund's distributions are taxable in the hands of the unitholders. As a result of the Fund's structure, a current tax provision is recorded only for the Fund's subsidiary corporations, including its U.S. based divisions, and for the quarter ended March 31, 2008 the current provision was $0.5 million.

The Fund recorded future tax expense of $0.1 million for the quarter ended March 31, 2008. The expense is derived primarily from the utilization of future tax assets.

For the quarter ended March 31, 2008, the Fund recorded net earnings of $1.9 million (2007 - $5.6 million) and earnings per basic and diluted unit of $0.15 (2007 - $0.50).



Quarterly Financial Information

2008
----------------------------------------------------------------------------
Gain (Loss) Net Earnings Net Earnings
Sales on FX (Loss) per Unit
----------------------------------------------------------------------------
Q1 $35,358,537 $(586,679) $1,889,028 $0.15
----------------------------------------------------------------------------

2007
----------------------------------------------------------------------------
Gain (Loss) Net Earnings Net Earnings
Sales on FX (Loss) per Unit
----------------------------------------------------------------------------
Q1 $ 28,171,350 $ 58,896 $5,617,909 $0.50
Q2 35,067,508 1,077,557 (4,902,784) ($0.44)
Q3 40,798,315 1,117,489 8,976,385 $0.80
Q4 26,664,788 1,863,841 2,674,068 0.20
----------------------------------------------------------------------------
Fiscal 2007 $130,701,961 $4,117,783 $ 12,365,578 $1.06
----------------------------------------------------------------------------

2006
----------------------------------------------------------------------------
Gain (Loss) Net Earnings
Sales on FX Net Earnings per Unit
----------------------------------------------------------------------------
Q1 $19,705,011 $ 201,001 $ 4,115,585 $0.37
Q2 22,571,529 120,997 5,157,065 0.46
Q3 22,049,541 1,102,119 5,771,138 0.51
Q4 17,199,356 2,549,326 4,000,053 0.36
----------------------------------------------------------------------------
Fiscal 2006 $81,525,437 $3,973,443 $19,043,841 $1.70
----------------------------------------------------------------------------


Interim period revenues and earnings historically reflect some seasonality. The third quarter is typically the strongest primarily due to high in-season demand at the farm level. Adjusted distributable cash generated per unit will also typically be highest in the third quarter. Due to the seasonality of the Fund's working capital movements, standardized distributable cash generated per unit will typically be highest in the fourth quarter. The following factors impact comparability between quarters in the table above:

- Sales, gain (loss) on foreign exchange, net earnings, and net earnings per unit are significantly impacted by the rate of exchange between the Canadian and U.S. dollars.

- The second quarter of 2007 includes a non-cash future tax accrual of $11.1 million related to the enactment of taxation laws related to income trusts for taxation years commencing January 1, 2011. The fourth quarter of 2007 includes a $1.6 million credit to future taxes to reflect a lower expected effective tax rate.

- Subsequent to January 15, 2008, results reflect the acquisition of Applegate.

- Subsequent to November 19, 2007, results reflect the acquisition of Union Iron.

- Subsequent to May 31, 2007, results reflect the acquisition of Twister.

- Subsequent to December 31, 2006, results reflect the acquisition of Hi Roller.

NON-GAAP MEASURES

References to "EBITDA" are to earnings before interest, income taxes, depreciation, and amortization. Management believes that, in addition to net income or loss, EBITDA is a useful supplemental measure in evaluating the Fund's performance. EBITDA is not a financial measure recognized by GAAP and does not have a standardized meaning prescribed by GAAP. Management cautions investors that EBITDA should not replace net income or loss as an indicator of performance, or cash flows from operating, investing, and financing activities as a measure of the Fund's liquidity and cash flows. The Fund's method of calculating EBITDA may differ from the methods used by other issuers.

Standardized and adjusted distributable cash are non-GAAP measures generally used by Canadian income funds as an indicator of financial performance. The Fund defines standardized distributable cash as cash flow from operating activities less capital expenditures. The Fund defines adjusted distributable cash as cash flow from operating activities before the net change in non-cash working capital balances and before items not affecting cash other than items that impact amortization, interest expense, future taxes, or tax reserves, less maintenance capital expenditures (see "Capital Expenditures"). Standardized and adjusted distributable cash are not financial measures recognized by GAAP and do not have a standardized meaning prescribed by GAAP. The method of calculating the Fund's standardized and adjusted distributable cash may differ from similar computations as reported by similar entities and, accordingly, may not be comparable to distributable cash as reported by such entities.

Payout ratio is a non-GAAP measure used by Canadian income funds as an indicator of the amount of generated distributable cash that is distributed to the unitholders. The Fund defines payout ratio as total distributions expressed as a percentage of standardized and adjusted distributable cash. Payout ratio is not a financial measure recognized by GAAP and does not have a standardized meaning prescribed by GAAP. The method of calculating the Fund's payout ratio may differ from similar computations as reported by similar entities and, accordingly, may not be comparable to payout ratio as reported by such entities.



CASH FLOW AND LIQUIDITY

The table below reconciles net earnings to cash used by operations for the
quarters ended March 31, 2008 and 2007:

2008 2007

Net earnings for the period $ 1,889,028 $ 5,617,909
Add charges (deduct credits) to operations
not requiring a current cash payment:
Amortization 1,951,623 1,125,264
Future income taxes 80,000 119,200
Translation (gain) loss on foreign exchange 1,189,149 (237,196)
Non-cash component of interest expense 83,171 27,793
Long term incentive plan 350,000 0
Unit award incentive plan 171,153 0
Loss on sale of property, plant & equipment 235 0
--------------- --------------

5,714,359 6,652,970
--------------- --------------
Net change in non-cash working capital
balances related to operations:

Accounts receivable (8,518,925) (2,215,620)
Inventory (3,953,030) (2,455,752)
Prepaid expenses and other assets (109,285) (74,065)
Accounts payable and accrued liabilities (2,222,556) (479,479)
Long term incentive plan 0 (696,848)
Customer deposits (2,434,579) (3,922,142)
Income taxes payable 165,023 (192,589)
--------------- --------------
(17,073,352) (10,036,495)
--------------- --------------

Cash used by operations $ ( 11,358,993) $ (3,383,525)
--------------- --------------
--------------- --------------


For the quarter ended March 31, 2008, cash used by operations was $11.4 million (2007 - $3.4 million). The increase from 2007 is primarily due to the lower net change in non-cash working capital that resulted from acquisitions, the timing of sales and collections, and higher inventory levels. A number of smaller changes account for the remaining variance.

Working Capital

Interim period working capital requirements typically reflect some seasonality. The Fund's collections of accounts receivable are weighted towards the third and fourth quarters. This collection pattern, combined with seasonally high sales in the third quarter, result in accounts receivable levels increasing throughout the year and peaking in the third quarter. In order to ensure the Fund has adequate supply throughout its distribution network in advance of in-season demand, inventory levels must be gradually increased throughout the year. Accordingly, inventory levels typically increase in the first and second quarters and then begin to decline in the third or fourth quarter as sales levels exceed production. As a result of these working capital movements, historically, Ag Growth begins to draw on its operating lines in the first or second quarter. The operating line balance typically peaks in the second or third quarter and normally begins to decline later in the third quarter as collections of accounts receivable increase. Ag Growth has typically fully repaid its operating line balance by early in the fourth quarter. Operating results to date in 2008 have generally reflected these expectations.

Capital Expenditures

The Fund had maintenance capital expenditures of $0.9 million for the quarter ended March 31, 2008 (2007 - $0.4 million). Maintenance capital expenditures in 2008 relate primarily to purchases of a semi tractor unit and trailers and manufacturing equipment. The increase from 2007 is largely the result of the acquisitions of Twister and Union Iron. All 2008 maintenance capital expenditures were funded through cash from operations.

The Fund defines maintenance capital expenditures as cash outlays required to maintain plant and equipment at current operating capacity and efficiency levels. Non-maintenance capital expenditures are defined as cash outlays required to increase operating capacity or improve operating efficiency. The following capital expenditures were classified as non-maintenance in the three months ended March 31, 2008:

i. Westfield capacity improvement initiative - in addition to anticipated capacity enhancements, the initiative is expected to improve the quality and finish of the Westfield product through the implementation of a new paint system. The total expenditure prior to 2008 was $3.6 million. An additional $0.2 million was expended in the first quarter of 2008. The project is substantially complete and project costs were consistent with management expectations.

ii. Westfield facility in Winnipeg, Manitoba - to allow for capacity gains at Westfield's primary facility in Rosenort, Manitoba, the Fund leased space and moved certain production to Winnipeg. In the first quarter of 2008 a total of $0.1 million was expended on manufacturing equipment at this facility.

iii. Union City, Indiana facility - to facilitate moving production from western Canada as well as moving Applegate from Saratoga, management anticipates expenditures of $2.4 million related to manufacturing equipment, paint line equipment, moving costs and building enhancements. In the first quarter of 2008 the Fund expended $0.4 million on this project.

iv. Building and equipment related to the Twister acquisition - in the first quarter of 2008 the Fund expended $0.2 million related to site preparation and material handling equipment. In 2007 the Fund invested $1.6 million in building renovations and certain equipment not included in the purchase agreement.

v. Expansion of Batco manufacturing facility - to enhance capacity and improve productivity, Batco is adding approximately 6,000 square feet to its facility at a total projected cost of $0.7 million. In the first quarter of 2008 expenditures totaled $0.2 million, bringing the project cost to date to $0.5 million.

vi. Acquisition of Hi Roller manufacturing facility - in February 2008 the Fund purchased the facility in Sioux Falls, South Dakota that is had previously leased. Management expects to draw on its long term debt facility to fund this purchase.

Cash Balance

For the quarter ended March 31, 2008 the Fund's cash balance decreased $20.4 million (2007 - $8.7 million). The increase over 2007 was largely the result of initially funding the acquisition of Applegate Steel and strategic CAPEX from cash flow. Management expects to draw on its long-term debt facility to fund these expenditures. A decrease in the net change in non-cash working capital balances accounted for the remainder of the variance.



CONTRACTUAL OBLIGATIONS

Total 2008 2009 2010 2011 2012 +
---------------------------------------------------------

Long-term debt 27,246,280 9,560 6,814,098 20,422,622 0 0
Operating leases 1,942,812 675,179 498,205 356,835 222,172 190,422
---------- ------- --------- ---------- ------- --------
Total obligations 29,189,092 684,739 7,303,303 20,779,457 222,172 190,422
---------- ------- --------- ---------- ------- --------
---------- ------- --------- ---------- ------- --------


Long-term debt at March 31, 2008 includes non-amortizing term loans of $27.2 million (U.S. $26.5 million), which for financial reporting purposes are shown net of the related deferred financing costs of $0.5 million. The remaining long-term debt relates to GMAC financed vehicle loans. The operating leases relate primarily to vehicle, equipment, warehousing, and facility leases and were entered into in the normal course of business.

DISTRIBUTIONS

The Fund declared distributions to public unitholders of $5.4 million for the quarter ended March 31, 2008 (2007 - $4.7 million) and declared distributions to holders of Class B units of AHLP of $0.1 million (2007 - $0.1 million). Total distributions declared to public unitholders have increased as an additional 1,730,000 units were issued in connection with the public equity offering that was completed in October 2007. Distributions declared per unit in the first quarter of 2008 are unchanged from 2007.

The Fund's policy is to make monthly distributions to holders of both Trust units of the Fund and Class B units of AGHLP. The Fund's Declaration of Trust requires that it distribute all taxable income earned in its fiscal period ending December 31. It may be necessary for the Fund to estimate one or more special distributions to achieve this requirement.

The Fund's Board of Trustees reviews financial performance and other factors when assessing the Fund's distribution levels. An adjustment to distribution levels may be made at such time as the Board determines an adjustment to be in long-term best interest of the Fund and its unitholders.

STANDARDIZED DISTRIBUTABLE CASH

The Canadian Institute of Chartered Accountants (CICA) has issued an interpretive release providing guidance on standardized preparation and disclosure of distributable cash for income trusts. The CICA calculation of standardized distributable cash is based on cash flows from operating activities, including the effects of changes in non-cash working capital, less total capital expenditures.

Management believes that the standardized distributable cash calculation distorts the Fund's distributable cash and payout ratios, as the Fund's non-cash working capital fluctuates dramatically due to seasonality of the Fund's business and cash flow cycle. In addition the standardized distributable cash calculation does not contemplate the timing or source of funding for non-maintenance capital expenditures and as a result may not provide complete information with respect to distributable cash ultimately available for distribution.

The table below calculates standardized distributable cash for the three months ended March 31, 2008 and 2007.



Standardized Distributable Cash 2008 2007

Cash used in operations $ (11,358,993) $ (3,383,525)
Capital expenditures (5,265,223) (1,375,673)
------------------------------
Standardized distributable cash generated $ (16,624,216) $ (4,759,198)
------------------------------
------------------------------

Standardized distributable cash generated per
unit $ (1.28) $ (0.37)
Distributions declared $ 0.42 $ 0.42

Previous Twelve Months - Standardized cash
generated $ 18,902,830 $ 18,086,258
Previous Twelve Months - Distributions
declared $ 1.56 $ 1.68
Previous Twelve Months - Standardized cash
generated per unit $ 1.54 $ 1.61
Payout ratio - Standardized distributable cash 101% 104%


ADJUSTED DISTRIBUTABLE CASH

Adjusted distributable cash, as defined under "non-GAAP measures", is the equivalent of EBITDA less maintenance capital expenditures, cash interest expense, and current cash tax expense. The objective of presenting these measures is to calculate the amount that is available for distribution to unitholders and exchangeable unitholders. The adjusted distributable cash definition excludes changes in working capital as they are necessary to drive organic growth and are expected to be financed by the Fund's operating facility (See "Capital Resources"). Adjusted distributable cash should not be construed as an alternative to cash flows from operating, investing, and financing activities as a measure of the Fund's liquidity and cash flows. Adjusted distributable cash can be reconciled to cash provided by operating activities as follows:



Three Months Three Months
March 31 March 31
2008 2007

Cash used in operating activities $ (11,358,993) $ (3,383,525)
Change in non-cash working capital 17,073,352 10,036,495
Long term incentive plan (350,000) 0
Reversal of tax reserve 0 (500,000)
Translation gain (loss) on FX (1,189,149) 237,196
Loss on sale of equipment 235 0
Net maintenance capital expenditures (871,045) (365,861)
--------------- --------------
Adjusted distributable cash (2) 3,303,930 6,024,305
--------------- --------------
--------------- --------------

Weighted average units outstanding 12,955,000 11,225,000
Distributions declared per weighted average
unit $ 0.42 $ 0.42

Distributable cash generated per unit (2) $ 0.26 $ 0.54
Payout ratio 161.5% 77.7%



(1) See "EBITDA and net earnings".
(2) See discussion of non-GAAP measures.
(3) Non-maintenance capital expenditures and acquisitions funded from cash
flow have been or are intended to be funded by long term debt and have
been excluded from the above calculation.

The following table reconciles standardized distributable cash to adjusted
distributable cash:


Three Months Three Months
March 31 March 31
2008 2007

Standardized distributable cash $ (16,624,216) $ (4,759,198)
Change in non-cash working capital 17,073,352 10,036,495
Reversal of tax reserve 0 (500,000)
Long term incentive plan (350,000) 0
Translation gain (loss) on FX (1,189,149) 237,196
Loss on sale of equipment (235) 0
Non-maintenance capital expenditures 4,394,178 1,009,812
--------------- --------------
Adjusted distributable cash $ 3,303,930 $ 6,024,305
--------------- --------------
--------------- --------------

The following table displays total adjusted distributable cash generated and
total distributions declared since the inception of the Fund:

----------------------------------------------------------------------------
Adjusted Distributable Cash
----------------------------------------------------------------------------
Distributable Cash Distributions Payout
Generated Declared (1) Ratio

Period Ended December 31, 2004 $ 9,686,147 $ 9,109,017 94.0%
Year Ended December 31, 2005 22,628,723 18,917,872 83.6%
Year Ended December 31, 2006 21,978,594 18,858,000 85.8%
Year Ended December 31, 2007 27,162,548 19,584,600 72.1%
Quarter Ended March 31, 2008 3,303,930 5,441,100 163.2%
----------------------------------------
Cumulative since inception $ 84,759,942 $ 71,910,589 84.8%
----------------------------------------
----------------------------------------

(1) Distributions declared include special distributions of $1,328,940 in
2004 and $3,367,500 in 2005.


Distributions declared for the quarter ended March 31, 2008 of $0.42 per unit are consistent with distributions declared in the three months ended March 31, 2007, and represent a 29.2% increase over the per unit distribution disclosed in the Fund's 2004 prospectus. Distributions in a fiscal year are funded entirely through cash from operations. Due to seasonality distributions may be funded on a short-term basis by the Fund's operating lines.

The Fund's Declaration of Trust requires distribution of all taxable income earned in its fiscal periods ending December 31. Due to a number of tax deductions available to the Fund and its subsidiary entities, and to the acquisitions of its U.S. divisions, since inception the Fund has retained $12.9 million for internal purposes. The amounts retained have been used primarily to strengthen the Fund's financial position, to fund certain strategic CAPEX projects, to fund certain acquisition costs, and to allow for future strategic or expansionary capital expenditures.

CAPITAL RESOURCES

The Fund's credit facility includes operating lines of CAD $10.0 million and USD $2.0 million, and provides for long-term debt of up to USD $66.5 million. As at March 31, 2008, $6.0 million was outstanding under the operating line facilities (March 31, 2007 - $1.0 million) and the Fund's outstanding long-term debt was USD $26.5 million. Interest rates on both facilities are based on performance calculations. For the quarter ended March 31, 2008, the Fund's effective interest rate on its Canadian dollar term debt was 5.6% (2007 - 6.0%), and after consideration of the effect of the Fund's interest rate swap was 5.8% (2007 - 4.7%). For the quarter ended March 31, 2008, the Fund's effective interest rate on its U.S. dollar term debt was 7.7% (2007 - 8.8%) and after consideration of the effect of the Fund's interest rate swaps was 6.1% (2007 - 6.4%). See "Financial Instruments".

Under the terms of the credit facility agreement, the operating and term loan facilities will bear interest at prime plus 0.00%, 0.50%, or 1.00% per annum based on performance calculations. The loans mature August 31, 2008 and are extendible annually for an additional one-year term at the lender's option. Under the terms of the credit facility agreement, if the bank elects to not extend the operating and term loan facilities beyond the current August 31, 2008 maturity date, all amounts outstanding under the facilities become repayable in four equal quarterly instalments of principal, commencing November 30, 2009.

CRITICAL ACCOUNTING ESTIMATES

The preparation of financial statements in conformity with Canadian generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the period. The Fund believes the accounting policies that are critical to its business relate to the use of estimates regarding the recoverability of accounts receivable and the valuation of inventory, intangibles, goodwill, and future income taxes. Due to the nature of Ag Growth's business and the credit terms it provides to its customers, estimates and judgments are inherent in the on-going assessment of the recoverability of accounts receivable. In addition, assessments and judgments are inherent in the determination of the net realizable value of inventories and the fair value of goodwill and intangible assets. Goodwill and indefinite life intangible assets are tested for impairment at least annually. Future income taxes are calculated based on assumptions related to the future interpretation of tax legislation, future income tax rates, and future operating results, acquisitions and dispositions of assets and liabilities, and distribution policy. In the normal course of its operations, the Fund may become involved in various legal actions. The Fund maintains, and regularly updates on a case-by-case basis, provisions when the expected loss is both likely and can be reasonably estimated. While management has applied judgment based on assumptions believed to be reasonable in the circumstances, actual results can vary from these assumptions. It is possible that materially different results would be reported using different assumptions.

FINANCIAL INSTRUMENTS

Risk from foreign exchange arises as a result of variations in exchange rates between the Canadian and the U.S. Dollar. The Fund has entered into foreign exchange contracts with a Canadian chartered bank to partially hedge its foreign currency exposure on anticipated U.S. dollar sales transactions and the collection of the related accounts receivable. As at March 31, 2008, the Fund had outstanding the following foreign exchange contracts:



----------------------------------------------------------------------------
Foreign Exchange Option Contracts
----------------------------------------------------------------------------
Settlement Dates Face Amount Call Rate Put Rate
USD CND CDN

April - December 2008 $6,300,000 $1.0700 $1.2115


----------------------------------------------------------------------------
Forward Foreign Exchange Contracts
----------------------------------------------------------------------------
Settlement Dates Face Amount Average Rate CAD Amount
USD CDN

May - December 2008 $29,400,000 1.0250 $30,134,950
October - December 2009 $ 8,000,000 1.0332 $ 8,265,800


At March 31, 2008, the fair value of the foreign exchange contracts was a gain of $107,903.

The Fund is subject to risks associated with fluctuating interest rates on its long-term debt. To manage this risk, as at March 31, 2008 the Fund had outstanding the following interest rate swap transactions with a Canadian chartered bank:

(i) Notional amount of USD $17.5 million, expires August 31, 2008, effective interest rate of 4.83%, resulting in interest charges to the Fund of 4.83% plus a variable rate based on performance calculations.

(ii) Notional amount of USD $2.5 million, expires August 31, 2008, effective interest rate of 4.83%, resulting in interest charges to the Fund of 4.83% plus a variable rate based on performance calculations.

(iii) Notional amount of USD $6.5 million, expires August 31, 2008, effective interest rate of 5.10%, resulting in interest charges to the Fund of 5.10% plus a variable rate based on performance calculations.

At March 31, 2008, the fair value of the interest rate swap contracts was a loss of $264,761, and this amount has been recorded in accounts payable and accrued liabilities.

ENACTMENT OF LEGISLATION IMPOSING TAXATION ON INCOME TRUSTS

In June 2007, the Government of Canada enacted new legislation imposing additional income taxes upon publicly traded income trusts, including the Fund, effective January 1, 2011. Prior to June 2007, the Fund estimated the future income tax on certain temporary differences between amounts recorded on its balance sheet for book and tax purposes at a $nil effective tax rate. Upon enactment of the June 2007 legislation, the Fund estimated the effective tax rate to be 31.5% and as a result future income tax liabilities for the period increased by $11.1 million. On December 14, 2007, further legislation was enacted by the federal government to reduce the effective rate of tax on the Fund's temporary differences from the previous rate of 31.5% to 29.5% in 2011 and 28.0% thereafter. As a result the Fund reduced its expected future income tax liability related to the legislation from $11.1 million to $9.5 million. Temporary differences reversing before 2011 will still give rise to $nil future income taxes. The amount and timing of reversals of temporary differences will depend on the Fund's future operating results, acquisitions and dispositions of assets and liabilities, and distribution policy. A significant change in any of the preceding assumptions could materially affect the Fund's estimate of the future tax liability.

Based on its assets and liabilities as at March 31, 2008, the Fund has estimated the amount of its temporary differences and the periods in which these differences will reverse. The Fund estimates that approximately $33.8 million net taxable temporary differences will reverse after January 1, 2011, resulting in a $9.5 million future income tax liability. The taxable temporary differences relate principally to the Fund's intangible assets. Until 2011, the new legislation does not directly affect the Fund's cash flow from operations. However, as enacted in its present form, the legislation will, all other things being equal, result in a reduction of cash available for distribution commencing in 2011.

NEW DEVELOPMENTS

Acquisition of Applegate Steel Inc.

Effective January 15, 2008, the Fund acquired substantially all of the assets of Applegate Steel Inc. ("Applegate"), for cash consideration of $3.4 million. The acquisition was funded from cash flow. Applegate manufactures livestock gates, panels, feeders and stock tanks at locations in Indiana and Iowa.

ACCOUNTING POLICY CHANGES

Capital Disclosures and Financial Instruments - Presentation and Disclosure

Effective January 1, 2008 the Fund has adopted the following accounting standards:

The CICA issued three new accounting standards: section 1535, Capital Disclosures, section 3862, Financial Instruments - Disclosures, and section 3863, Financial Instruments - Presentation. These new standards were adopted on January 1, 2008. The required disclosure has been included in the notes to the unaudited financial statements.

Section 1535 establishes disclosure requirements about an entity's capital and how it is managed. The purpose is to enable users of the financial statements to evaluate the entity's objectives, policies and processes for managing capital.

Sections 3862 and 3863 replaced section 3861, Financial Instruments - Disclosure and Presentation, revising and enhancing its disclosure requirements, and carrying forward unchanged its presentation requirements. These new sections place increased emphasis on disclosures about the nature and extent of risks arising from financial instruments and how the entity manages those risks.

Inventories

The CICA issued section 3031, Inventories, which replaced section 3030, Inventories. This new standard was adopted on January 1, 2008. Section 3031 provides more extensive guidance on measurement, and expands disclosure requirements to increase transparency. The adoption of this standard has had no material impact on the Fund's financial position or results of operations.

NEW ACCOUNTING STANDARDS

Goodwill and Intangible Assets

As at January 1, 2009, the Fund will be required to adopt the CICA Handbook Section 3064, "Goodwill and Intangible Assets", which will replace the existing Goodwill and Intangible Assets standard. The new standard revises the requirement for recognition, measurement, presentation and disclosure of intangible assets. The Fund is in the process of evaluating the impact of this new standard.

International Financial Reporting Standards ("IFRS")

In 2005, the AcSB announced that accounting standards in Canada are to converge with IFRS. On February 13, 2008, the AcSB had confirmed that the use of IFRS will be required by January 1, 2011, with appropriate comparative data from the prior year. Under IFRS, the primary audience is capital markets and as a result, there is significantly more disclosure required, specifically for quarterly reporting. Further, while IFRS uses a conceptual framework similar to Canadian GAAP, there are significant differences in accounting policy that must be addressed. While the Fund has begun assessing the adoption of IFRS for 2011, the financial impact of the transition to IFRS cannot be reasonably estimated at this time.

RISKS AND UNCERTAINTIES

The risks and uncertainties described below are not the only risks and uncertainties we face. We believe that the risks mentioned are the principal risks relating to our operations. The Fund's Annual Information Form contains a description of these and other risks that relate to the structure of the Fund. Additional risks and uncertainties not currently known to us or that we currently deem immaterial also may impair operations. If any of the following risks actually occur, our business, results of operations and financial condition, and the amount of cash available for distribution could suffer.

Industry Cyclicality

The performance of the agricultural industry is cyclical, and to the extent that the agricultural sector declines or experiences a downturn, this is likely to have a negative impact on the farm equipment and commercial grain handling industry, and the business of Ag Growth. The agricultural sector has recently been positively impacted by the expansion of the ethanol industry, and to the extent the ethanol industry declines or experiences a downturn, this is likely to have a negative impact on the farm equipment and commercial grain handling industry, and the business of Ag Growth.

Seasonality of Business

The seasonality of the demand for Ag Growth's products results in lower cash flow in the first three quarters of each calendar year and may impact the ability of the Fund to make cash distributions to Unitholders, or the quantum of such distributions, if any. No assurance can be given that the Fund's credit facility will be sufficient to offset the seasonal variations in Ag Growth's cash flow.

Risk of Decreased Crop Yields

Decreased crop yields due to poor weather conditions and other factors are a significant risk affecting Ag Growth. Both reduced crop volumes and the accompanying decline in farm incomes can negatively affect demand for grain handling equipment.

Potential Volatility of Production Costs

Various materials and components are purchased in connection with Ag Growth's manufacturing process, some or all of which may be subject to wide price variation. Consistent with past and current practices within the industry, Ag Growth manages its exposure to material and component price volatility by planning and negotiating significant purchases on an annual basis, and passing through to customers, most, if not all, of the price volatility. There can be no assurance that industry dynamics will allow Ag Growth to continue to reduce its exposure to volatility of production costs by passing through price increases to its customers.

Commodity Prices, International Trade and Political Uncertainty

Prices of commodities are influenced by a variety of unpredictable factors that are beyond the control of Ag Growth, including weather, government (Canadian, United States and other) farm programs and policies, and changes in global demand or other economic factors. The world grain market is subject to numerous risks and uncertainties, including risks and uncertainties related to international trade and global political conditions.

Competition

Ag Growth experiences competition in the markets in which it operates. Certain of Ag Growth's competitors may have greater financial and capital resources than Ag Growth. Ag Growth could face increased competition from newly formed or emerging entities, as well as from established entities that choose to focus (or increase their existing focus) on Ag Growth's primary markets. As the grain handling equipment sector is fragmented, there is also a risk that a larger, formidable competitor may be created through a combination of one or more smaller competitors. Ag Growth may also face potential competition from the emergence of new products or technology.

Acquisition and Expansion Risk

The Fund may expand its operations, depending on certain conditions, by acquiring additional businesses, products or technologies. There can be no assurance that the Fund will be able to identify, acquire, or profitably manage additional businesses, or successfully integrate any acquired business, products, or technologies into the business without substantial expenses, delays or other operational or financial difficulties. Furthermore, acquisitions may involve a number of special risks including diversion of management's attention, failure to retain key personnel, unanticipated events or circumstances, and legal liabilities, some or all of which could have a material adverse effect on the Fund's performance. In addition, there can be no assurance that acquired businesses, products, or technologies, if any, will achieve anticipated revenues and income. The failure of the Fund to manage its acquisition or expansion strategy successfully could have a material adverse effect on the Fund's results of operations and financial condition. The Fund is subject to restrictions on its ability to grow without becoming subject to additional income taxes that would otherwise not apply to the Fund until the taxation year commencing January 1, 2011.

Business Interruption

The operation of the manufacturing facilities of Ag Growth are subject to a number of business interruption risks, including delays in obtaining production materials, plant shutdowns, labour disruptions and weather conditions/natural disasters. Ag Growth may suffer damages associated with such events that it cannot insure against or which it may elect not to insure against because of high premium costs or other reasons. For instance, Ag Growth's Rosenort facility is located in an area that was affected by widespread floods experienced in Manitoba in 1997, and insurance coverage for this type of business interruption is limited. Ag Growth is not able to predict the occurrence of business interruptions.

Litigation

In the ordinary course of its business, Ag Growth may be party to various legal actions, the outcome of which cannot be predicted with certainty. One category of potential legal actions is product liability claims. Farming is an inherently dangerous occupation. Grain handling equipment used on farms may result in product liability claims that require not only proper insuring of risk, but management of the legal process as well.

Dependence on Key Personnel

Ag Growth's future business, financial condition, and operating results depend on the continued contributions of certain of Ag Growth's executive officers and other key management and personnel, certain of whom would be difficult to replace.

Labour Costs and Shortages and Labour Relations

The success of Ag Growth's business depends on a large number of both hourly and salaried employees. Changes in the general conditions of the employment market could affect the ability of Ag Growth to hire or retain staff at current wage levels. The occurrence of either of these events could have an adverse effect on the Fund's results of operations. There is no assurance that some or all of the employees of Ag Growth will not unionize in the future. If successful, such an occurrence could increase labour costs and thereby have an adverse affect on Ag Growth's results of operations.

Distribution, Sales Representative and Supply Contracts

Ag Growth typically does not enter into written agreements with its dealers, distributors or suppliers. As a result, such parties may, without notice or penalty, terminate their relationship with Ag Growth at any time. In addition, even if such parties should decide to continue their relationship with Ag Growth, there can be no guarantee that the consideration or other terms of such contracts will continue on the same basis.

Foreign Exchange Risk

Ag Growth generates a majority of its sales in US dollars, but a materially smaller proportion of its expenses are denominated in U.S. dollars. As a result, a significant strengthening of the Canadian dollar against the U.S. dollar will negatively impact the return from U.S. dollar sales revenue. To partially mitigate the effects of exchange rate fluctuation, management has implemented a foreign currency hedging strategy. Ag Growth has entered into a series of hedging arrangements to partially mitigate the potential effect of fluctuating exchange rates. To the extent that Ag Growth does not adequately hedge its foreign exchange risk, changes in the exchange rate between the Canadian dollar and the U.S. dollar may have a material adverse effect on Ag Growth's results of operations, business, prospects and financial condition.

Interest Rates

The Fund's term and operating credit facilities bear interest at rates that are in part dependant on performance based financial ratios. The Fund's cost of borrowing may be impacted to the extent that the ratio calculation results in an increase in the performance based component of the interest rate. The Fund is party to a number of interest rate swap arrangements to mitigate the impact of fluctuating market interest rates. These swap arrangements mature on August 31, 2008. In the event the Fund enters new interest rate swap arrangements, the rate of the new contracts will be a function of prevailing market rates.

Uninsured and Underinsured Losses

Ag Growth will use its discretion in determining amounts, coverage limits and deductibility provisions of insurance, with a view to maintaining appropriate insurance coverage on its assets and operations at a commercially reasonable cost and on suitable terms. This may result in insurance coverage that, in the event of a substantial loss, would not be sufficient to pay the full current market value or current replacement cost of its assets or cover the cost of a particular claim.

Nature of Trust Units

Securities such as the Trust Units are hybrids in that they share certain attributes common to both equity securities and debt instruments. The Trust Units do not represent a direct investment in the business of Ag Growth/AGLP and should not be viewed by investors as shares or debt of Ag Growth/AGLP. As holders of Trust Units, Unitholders will not have the statutory rights normally associated with ownership of shares of a corporation including, for example, the right to bring "oppression" or "derivative" actions. The Trust Units represent a fractional interest in the Fund. The Fund's primary asset will be its interest in AGOT. The price per Trust Unit is a function of anticipated distributable cash.

The rights of Unitholders are established by the Declaration of Trust. Although the Declaration of Trust confers upon a Unitholder many of the same protections, rights and remedies as an investor would have as a shareholder of a corporation governed by the Canada Business Corporations Act (the "CBCA"), significant differences exist.

Taxation of Income Trusts

There can be no assurance that Canadian federal income tax laws or the judicial interpretation thereof or the administrative and/or assessing practices of the Canada Revenue Agency and/or the treatment of mutual fund trusts will not be changed in a manner that adversely affects the holders of Trust Units.

As described in the Fund's audited financial statements for the year ended December 31, 2007, in June 2007 the Government of Canada enacted legislation imposing additional income taxes on the Fund for taxation years commencing January 1, 2011. Effective January 1, 2011, taxable income generated by most income trusts will be subject to tax at a special rate based on the federal-provincial corporate tax rates. Unitholders will be taxed on such distributions as if they have received a taxable dividend paid by a taxable Canadian corporation. There will be a transitional period so that existing income trusts and their investors will not be subject to the proposed tax until 2011. The legislation also specifies that "undue growth" may result in immediate taxation of income trusts that would otherwise not be subject to taxation until 2011. The legislation provides that the maximum growth permissible is 100% of an entity's market capitalization determined as at the close of trading on October 31, 2006, and that the growth limit is phased in annually from 2007 - 2010. The legislation could have an adverse effect on the Fund, its ability to pay distributions and the market value of its units.

There can be no assurance that the Fund will be able to reorganize its legal and tax structure to reduce the expected impact of the legislation. In addition, there can be no assurance that the Fund will maintain its "grandfathered" status under the legislation until 2011. If the Fund exceeds "normal growth" during the transitional period from October 31, 2006 to December 31, 2010, the legislation would become effective on a date earlier than January 1, 2011. Loss of grandfathered status could have a material and adverse effect on the value of the Units.

Until June 2007 the Fund had been tax effecting the reversal of taxable temporary differences at a nil tax rate on the assumption that the Fund would make sufficient tax deductible cash distributions to unitholders such that the Fund's taxable income would be nil for the foreseeable future. The new legislation limits the tax deductibility of cash distributions such that income taxes may become payable in the future.

The Fund has estimated its future income taxes based on its best estimates of results of operations and tax pool claims and cash distributions in the future assuming no material change to the Fund's current organizational structure. As currently interpreted, Canadian GAAP does not permit the Fund's estimate of future income taxes to incorporate any assumptions related to a change in organizational structure until such structures are given legal effect.

The Fund's estimate of its future income taxes will vary as do the Fund's assumptions pertaining to the factors described above, and such variations may be material.

OUTLOOK

Demand for portable grain handling equipment in 2008 is expected to be very strong due to positive market sentiment in the U.S., fuelled by continuing record high agricultural commodity prices and an increase in on-farm storage, successive large corn harvests in the U.S., and depleted inventory levels throughout the Fund's distribution network. Consistent with prior years, demand in 2008, particularly in the second half, will be influenced by crop conditions.

Demand for storage and stationary grain handling equipment, manufactured by Hi Roller, Union Iron, and Twister, remains very strong. Hi Roller and Union Iron are expected to continue to benefit from the robust U.S. agricultural sector. Demand for Twister product is expected to be strong due to an improving western Canadian agricultural sector and an increased focus on overseas markets.

The Fund's ability to capitalize on anticipated strong demand is dependent in part on the success of a number of capacity related initiatives. The Westfield capacity improvement initiative, completed in March 2008, has in recent weeks resulted in a significant increase in throughput that management believes will positively impact results for the balance of 2008. The integration of Twister continues, and production levels have increased in recent weeks. A number of labour initiatives, the acquisition of a manufacturing facility in Union City, Indiana, and the addition of a Westfield feeder plant are also expected to contribute to increased capacity.

Fiscal 2008 will include a full twelve months of results for Union Iron. In the three years prior to its acquisition, Union Iron averaged revenue of U.S. $17.4 million. Union Iron is a lower margin business and accordingly its inclusion should positively impact EBITDA but may result in lower consolidated gross margin and EBITDA percentages in 2008. Union Iron is historically seasonal with sales and EBITDA weighted towards the second and third quarters, and this trend is likely to continue in 2008.

Fiscal 2008 will include a full twelve months of results for Twister. In the three years prior to its acquisition, Twister averaged revenue of $12.9 million. Twister is a lower margin business and accordingly its results may lower the Fund's consolidated gross margin and EBITDA percentages. The integration of Twister continued into the second quarter of 2008 and accordingly Twister may negatively impact EBITDA in that quarter.

The results of Applegate Steel will be included subsequent to its acquisition on January 15, 2008. Revenues from Applegate's business over the last number of years have ranged from U.S. $9 million to over U.S. $12 million. Applegate is a lower margin business that operates in the livestock segment of the agricultural sector. Management does not expect Applegate to make a significant contribution to EBITDA in the second quarter of 2008.

Gross margin in 2008 may be negatively impacted by increases in the price of steel. The Fund has implemented a number of price increases to address rising input costs, and believes it has the ability to increase prices further if required. Price increases implemented by the Fund are generally not applied to its back order and accordingly there is a lag effect between the date of a price increase announcement and the full realization by the Fund of the higher sales price.

The value of the Canadian dollar relative to its U.S. counterpart will continue to impact the financial results of the Fund. Any appreciation of the Canadian dollar adversely impacts sales, earnings, and margin percentages compared to prior years. In fiscal 2007, the Fund's average rate of exchange for quarters ended March 31, June 30, September 30 and December 31 were $1.17, $1.11, $1.06 and $0.99 respectively. Also, as the Fund's foreign currency hedging instruments in place for fiscal 2008 are at contract rates lower than the contract rates in 2007, the Fund expects to realize a smaller gain on foreign exchange in 2008.

DISCLOSURE CONTROLS AND PROCEDURES AND INTERNAL CONTROLS

Disclosure controls and procedures are designed to provide reasonable assurance that all relevant information is gathered and reported to senior management, including the Fund's Chief Executive Officer and Chief Financial Officer, on a timely basis so that appropriate decisions can be made regarding public disclosure.

Management of the Fund is responsible for designing internal controls over financial reporting for the Fund as defined under Multilateral Instrument 52-109 issued by the Canadian Securities Administrators. Management has designed such internal controls over financial reporting, or caused them to be designed under their supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the financial statements for external purposes in accordance with GAAP.

On November 19, 2007 the Fund acquired Union Iron Inc., and on January 15, 2008 the Fund acquired Applegate Steel Inc. Management has not fully completed its review of internal controls over financial reporting for the newly acquired operations. Management expects to have finalized the design and implementation of internal controls prior to completion of the current fiscal year. For the period covered by this MD&A, management has undertaken specific procedures to satisfy itself with respect to the accuracy and completeness of the acquired operation's financial information. Management believes that Ag Growth's existing internal controls over financial reporting, including Applegate, provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP.

ADDITIONAL INFORMATION

Additional information relating to the Fund, including the Fund's most recent Annual Information Form, is available on SEDAR (www.sedar.com).



Unaudited Interim Consolidated Financial Statements

Ag Growth Income Fund
March 31, 2008


Ag Growth Income Fund

UNAUDITED INTERIM CONSOLIDATED
BALANCE SHEETS

As at As at
March 31, December 31,
2008 2007
$ $
----------------------------
ASSETS (note 7)
Current
Cash and cash equivalents - 20,410,588
Cash held in trust (note 9) 513,550 1,488,100
Accounts receivable 19,718,846 9,923,311
Inventory (note 3) 34,129,358 28,958,667
Prepaid expenses and other assets (note 10) 1,440,800 1,972,143
----------------------------
Total current assets 55,802,554 62,752,809
Property, plant and equipment, net 27,433,106 21,035,091
Goodwill 52,290,277 51,925,887
Intangible assets 74,212,581 74,969,253
----------------------------
209,738,518 210,683,040
----------------------------
----------------------------
LIABILITIES AND UNITHOLDERS' EQUITY
Current
Bank indebtedness (note 7) 6,023,123 -
Accounts payable and accrued liabilities 10,050,827 10,312,067
Customer deposits 9,124,053 11,558,632
Income taxes payable 534,507 369,484
Distributions payable 1,813,700 1,813,700
Acquisition, transaction and financing costs
payable (note 9) 513,550 2,563,676
Current portion of long-term debt 9,581 11,978
----------------------------
Total current liabilities 28,069,341 26,629,537
Long-term debt 26,737,060 25,622,780
Future income taxes 9,654,500 9,574,500
Long-term incentive plan (note 13) 1,149,596 799,596
Unit award incentive plan (note 14) 1,573,246 1,402,093
----------------------------
Total liabilities 67,183,743 64,028,506
Unitholders' equity 142,554,775 146,654,534
----------------------------
209,738,518 210,683,040
----------------------------
----------------------------
See accompanying notes

On behalf of the Board of Trustees:

(signed) Bill Lambert (signed) John R. Brodie, FCA
Trustee Trustee


Ag Growth Income Fund

UNAUDITED INTERIM CONSOLIDATED
STATEMENTS OF EARNINGS

Three-month Three-month
period ended period ended
March 31, March 31,
2008 2007
$ $
----------------------------
Sales 35,358,537 28,171,350
Cost of goods sold 22,463,583 15,962,842
----------------------------
Gross margin 12,894,954 12,208,508
----------------------------

Expenses
Selling, general and administrative 6,356,354 4,375,971
Professional fees 195,203 155,935
Long-term incentive plan 350,000 157,152
Unit award incentive plan 171,153 --
Research and development 263,781 240,330
Capital taxes 62,500 62,500
Loss (gain) on foreign exchange 586,679 (58,896)
Other income (141,491) (40,047)
----------------------------
7,844,179 4,892,945
----------------------------
Earnings before the following 5,050,775 7,315,563
----------------------------
Interest expense
Short-term debt 22,200 12,782
Long-term debt 580,291 617,417
----------------------------
602,491 630,199
----------------------------
Earnings before amortization and income taxes 4,448,284 6,685,364
----------------------------
Amortization of property, plant and equipment 1,194,951 547,817
Amortization of intangible assets 756,672 577,447
----------------------------
1,951,623 1,125,264
----------------------------
Earnings before income taxes 2,496,661 5,560,100
----------------------------
Provision for (recovery of) income taxes (note 8)
Current 527,633 322,991
Future 80,000 119,200
Reversal of reserve - (500,000)
----------------------------
607,633 (57,809)
----------------------------
Net earnings for the period 1,889,028 5,617,909
----------------------------
----------------------------

Basic and diluted net earnings per unit $0.15 $0.50
----------------------------
----------------------------

Basic and diluted weighted average number of
units outstanding 12,955,000 11,225,000
----------------------------
----------------------------
See accompanying notes


Ag Growth Income Fund

UNAUDITED INTERIM CONSOLIDATED
STATEMENTS OF COMPREHENSIVE INCOME

Three-month Three-month
period ended period ended
March 31, March 31,
2008 2007
$ $
----------------------------

Net earnings for the period 1,889,028 5,617,909
----------------------------
Other comprehensive income (loss)
Change in fair value of derivatives designated
as cash flow hedges (576,420) 350,802
Realized losses on derivatives designated as
cash flow hedges recognized in net earnings
in the current period (119,939) -
Unrealized gains on dual purpose derivatives
designated as cash flow hedges in prior
periods recognized in net earnings in the
current period 155,722 25,223
----------------------------
Other comprehensive income (loss) (540,637) 376,025
----------------------------
Comprehensive income 1,348,391 5,993,934
----------------------------
----------------------------
See accompanying notes


Ag Growth Income Fund

UNAUDITED INTERIM CONSOLIDATED
STATEMENTS OF UNITHOLDERS' EQUITY

Three-month period ended March 31, 2008

Accumulated
other
Unitholders' Accumulated Accumulated comprehensive
capital earnings distributions income (loss) Total
$ $ $ $ $
------------------------------------------------------------------
Balance,
December
31, 2007 152,799,626 59,784,898 (66,469,489) 539,499 146,654,534
Net
earnings
for the
period - 1,889,028 - - 1,889,028
Distributions
declared
(note 15) - - (5,441,100) - (5,441,100)
Issuance
costs (7,050) - - - (7,050)
Other
comprehensive
loss for
the period - - - (540,637) (540,637)
------------------------------------------------------------------
Balance,
March 31,
2008 152,792,576 61,673,926 (71,910,589) (1,138) 142,554,775
------------------------------------------------------------------
------------------------------------------------------------------

Three-month period ended March 31, 2007

Accumulated
other
Unitholders' Accumulated Accumulated comprehensive
capital earnings distributions income (loss) Total
$ $ $ $ $
------------------------------------------------------------------
Balance,
December
31,2006 110,430,194 47,419,320 (46,884,889) - 110,964,625
Transition
adjustment - - - (276,679) (276,679)
Net
earnings
for the
period - 5,617,909 - - 5,617,909
Distributions
declared
(note 15) - - (4,714,500) - (4,714,500)
Other
comprehensive
income for
the period - - - 376,025 376,025
------------------------------------------------------------------
Balance,
March 31,
2007 110,430,194 53,037,229 (51,599,389) 99,346 111,967,380
------------------------------------------------------------------
------------------------------------------------------------------

See accompanying notes


Ag Growth Income Fund

UNAUDITED INTERIM CONSOLIDATED
STATEMENTS OF CASH FLOWS

Three-month Three-month
period ended period ended
March 31, March 31,
2008 2007
$ $
----------------------------
OPERATING ACTIVITIES
Net earnings for the period 1,889,028 5,617,909
Add (deduct) items not affecting cash
Amortization 1,951,623 1,125,264
Future income taxes 80,000 119,200
Translation loss (gain) on foreign exchange 1,189,149 (237,196)
Non-cash component of interest expense 83,171 27,793
Long-term incentive plan 350,000 --
Unit award incentive plan 171,153 --
Loss on sale of property, plant and equipment 235 --
----------------------------
5,714,359 6,652,970
Net change in non-cash working capital
balances related to operations (note 12) (17,073,352) (10,036,495)
----------------------------
Cash used in operating activities (11,358,993) (3,383,525)
----------------------------
INVESTING ACTIVITIES
Acquisition of property, plant and equipment (5,265,223) (1,375,673)
Acquisition of assets of Applegate Steel Inc.,
net of cash acquired (note 9) (3,264,036) --
Payments in current period with respect to
acquisitions in prior periods (note 9) (2,067,079) (837,544)
----------------------------
Cash used in investing activities (10,596,338) (2,213,217)
----------------------------
FINANCING ACTIVITIES
Increase in bank indebtedness 6,023,123 1,033,270
Repayment of long-term debt (4,780) (5,875)
Distributions paid (5,441,100) (4,714,500)
Increase in deferred financing costs on
long-term debt -- (4,921)
Share issuance costs (7,050) --
Transfer from cash held in trust (note 9) 974,550 582,638
----------------------------
Cash provided by (used in) financing activities 1,544,743 (3,109,388)
----------------------------
Net decrease in cash and cash equivalents
during the period (20,410,588) (8,706,130)
Cash and cash equivalents, beginning of period 20,410,588 8,706,130
----------------------------
Cash and cash equivalents, end of period -- --
----------------------------
----------------------------
Supplemental cash flow information
Interest paid 580,901 601,652
Income taxes paid 304,508 11,700
----------------------------
----------------------------
See accompanying notes


Ag Growth Income Fund

NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2008

1. DESCRIPTION OF BUSINESS

Ag Growth Income Fund (the "Fund") is an unincorporated, open-ended, limited purpose trust established under the laws of the Province of Ontario by a Declaration of Trust made as at March 24, 2004. The Fund and its wholly-owned subsidiaries conduct business in the grain handling, storage and conditioning market. Each unitholder participates pro rata in distributions of net earnings and, in the event of termination, participates pro rata in the net assets remaining after satisfaction of all liabilities. Income tax obligations related to the distribution of net earnings by the Fund are the obligations of the unitholders.

2. BASIS OF PRESENTATION

The unaudited interim consolidated financial statements have been prepared in accordance with Canadian generally accepted accounting principles ("GAAP"). They have been prepared using the same accounting policies and methods of application as disclosed in the Fund's audited consolidated financial statements for the year ended December 31, 2007, except as described in note 3.

These unaudited interim consolidated financial statements do not include all of the information and notes to the financial statements required by GAAP for annual financial statements and therefore should be read in conjunction with the audited consolidated financial statements and notes included in the Fund's annual report for the year ended December 31, 2007.

Accounting measurements at interim dates inherently involve a greater reliance on estimates than at year end. In the opinion of management, the unaudited interim consolidated financial statements include all adjustments of a normal recurring nature to present fairly the consolidated financial position of the Fund as at March 31, 2008.

3. CHANGES IN ACCOUNTING POLICIES AND PRACTICES

On January 1, 2008, the Fund adopted the following Canadian Institute of Chartered Accountants ("CICA") Handbook Sections:

Section 3031, "Inventories"

The new standard replaces the previous inventories standard and requires inventory to be valued on a first-in, first-out or weighted average basis, which is consistent with the Fund's accounting policy. The new standard requires the measurement of inventories at the lower of cost and net realizable value and provides guidance on the determination of cost, including any write-down to net realizable value. The adoption of this standard has had no material impact on the financial position or results of operations as reported in the Fund's unaudited interim consolidated financial statements.

The Fund values inventory at the lower of cost and net realizable value. The cost of finished goods includes direct costs and an allocation of fixed manufacturing overhead. Cost is determined on a first-in, first-out basis.

Section 3862, "Financial Instruments - Disclosures" and

Section 3863, "Financial Instruments - Presentation"

The new disclosure standard increases the Fund's disclosure regarding the nature and extent of the risks associated with financial instruments and how those risks are managed (note 10).

Section 1535, "Capital Disclosures"

The new standard requires the Fund to disclose its objectives, policies and processes for managing its capital structure (note 5).

4. RECENT ACCOUNTING PRONOUNCEMENTS

As at January 1, 2009, the Fund will be required to adopt the CICA Handbook Section 3064, "Goodwill and Intangible Assets", which will replace the existing Goodwill and Intangible Assets standard. The new standard revises the requirement for recognition, measurement, presentation and disclosure of intangible assets. The Fund is in the process of evaluating the impact of this new standard.

In February 2008, the Accounting Standards Board confirmed that International Financial Reporting Standards ("IFRS") will replace Canadian GAAP in 2011 for profit-oriented Canadian publicly accountable enterprises. The Fund will be required to report its results in accordance with IFRS starting in 2011. The Fund is assessing the potential impacts of this changeover and development of its plan accordingly.

5. CAPITAL STRUCTURE

The Fund's capital structure is comprised of unitholders' equity and long-term debt. The Fund's objectives when managing its capital structure are to maintain and preserve the Fund's access to capital markets, continue its ability to meet its financial obligations, including the payment of distributions, and finance organic growth and acquisitions.

The Fund monitors its capital structure using non-GAAP financial metrics including long-term debt to earnings before interest, taxes, depreciation and amortization ("EBITDA") for the immediately preceding 12-month period and long-term debt to unitholders' equity.

The Fund's optimal capital structure targets to maintain its long-term debt to EBITDA ratio at levels below 2.5, after taking into consideration the impacts of industry cyclicality and acquisitions. The table below calculates the ratio based on EBITDA achieved in the previous 12 months:



As at As at
March 31, December 31,
2008 2007
-------------------------------

Long-term debt $26.7 million $25.6 million
EBITDA $30.1 million $32.4 million
Ratio 0.89 times 0.79 times

The Fund's optimal capital structure targets to maintain its long-term debt
to unitholders' equity ratio at levels below 1.0, after taking into
consideration the impacts of industry cyclicality and acquisitions:

As at As at
March 31, December 31,
2008 2007
-------------------------------

Long-term debt $26.7 million $25.6 million
Unitholders' equity $142.5 million $146.7 million
Ratio 0.19 times 0.18 times


The Fund's capital management objectives, evaluation measures, definitions and targets have remained unchanged over the periods presented. The Fund is subject to certain financial covenants in its credit facility agreement which must be maintained to avoid acceleration of the termination of the agreement. The Fund is in compliance with all financial covenants.

As a result of the Canadian trust taxation passed in June 2007 and effective January 1, 2011, the Fund is subject to certain capital growth restrictions referred to as "normal growth" equity rules. These rules limit the amount of unitholders' capital that can be issued by the Fund in each of the next three years. If the Fund exceeds "normal growth" during the transitional period from October 31, 2006 to December 31, 2010, the legislation would become effective on a date earlier than January 1, 2011.

6. SEASONALITY OF BUSINESS

Interim period revenues and earnings historically reflect some seasonality. The third quarter is typically the strongest primarily due to high in-season demand at the farm level. The Fund's collections of accounts receivable are weighted towards the third and fourth quarters. This collection pattern, combined with seasonally high sales in the third quarter, result in accounts receivable levels increasing throughout the year and normally peaking in the third quarter. As a result of these working capital movements, historically, the Fund's use of its bank revolver is typically highest in the first and second quarters. The revolver balance begins to decline in the third quarter as collections of accounts receivable increase. The Fund would expect to repay its revolver in the fourth quarter of each year.

7. BANK INDEBTEDNESS

The Fund has an operating facility of Cdn. $10 million and U.S. $2.0 million. The facilities bear interest at a rate of prime to prime plus 1.0% per annum based on performance calculations. The effective interest rate during the three-month period ended March 31, 2008 on the Funds Canadian dollar term debt was 5.6% (2007 - 6.0%). The effective interest rate during the three-month period ended March 31, 2008 on the Fund's U.S. dollar term debt was 7.7% (2007 - 8.8%). At March 31, 2008, there was $6.0 million outstanding under these facilities (December 31, 2007 - nil). Collateral for the operating facility includes a general security agreement over all assets, first position collateral mortgages on land and buildings and assignments of rents and leases and security agreements for patents and trademarks.

8. INCOME TAXES

Income tax obligations relating to distributions from the Fund are the obligations of the unitholders and accordingly, no provision for income taxes on the income of the Fund has been made. A provision for income taxes is recognized for the corporate subsidiaries of the Fund, which are subject to tax. For the three-month period ended March 31, 2008, the Fund has an income tax expense of $607,633. For the three-month period ended March 31, 2007, the Fund had an income tax recovery of $57,809. The recovery was comprised of an income tax expense of $442,191 and a recovery of $500,000 related to the reversal of an accrual which management determined was no longer required.

9. ACQUISITIONS

(a) Applegate Steel Inc.

Effective January 15, 2008, the Fund acquired substantially all of the operating assets of Applegate Steel Inc. ("Applegate"), a manufacturer of livestock equipment, for cash consideration of $3,380,794, which includes transaction costs of $331,111.

The acquisition has been accounted for by the purchase method with the results of Applegate operations included in the Fund's earnings from the date of acquisition. As a result of the timing of the acquisition in relation to the Fund's reporting schedule, the purchase price allocation has not been finalized. Management is in the process of updating its estimates and adjustments to the initial estimates may be required, and these adjustments may be material. The assets and liabilities of Applegate have been recorded in the unaudited interim consolidated financial statements at their estimated fair values, as follows:



$
---------------
Net assets acquired
Cash 116,758
Accounts receivable 1,276,610
Inventory 1,217,661
Prepaid expenses and other assets 55,731
Property, plant and equipment 2,327,977
Accounts payable and accrued liabilities (1,961,316)
Goodwill 347,373
---------------
Cash - consideration 3,380,794
---------------
---------------


Goodwill at the time of acquisition as noted above is fully deductible for tax.

(b) Prior year acquisitions

As described in the December 31, 2007 audited consolidated financial statements, the Fund acquired the assets of Hansen Manufacturing on December 31, 2006, the assets of Twister Pipe Ltd. on May 15, 2007 and the shares of Union Iron Inc. on November 19, 2007. Subsequent to December 31, 2007, transaction costs were paid from cash and cash held in trust. As at March 31, 2008, the Fund had cash held in trust remaining in the amount of $513,550 relating to the acquisition of Union Iron Inc.

10. FINANCIAL INSTRUMENTS AND FINANCIAL RISK FACTORS

The Fund has the following financial instruments: cash and cash equivalents, accounts receivable, bank indebtedness, accounts payable and accrued liabilities, distributions payable, acquisition, transaction and financing costs payable, long-term debt, interest rate swap arrangements and foreign exchange contracts.

The Fund is exposed to financial risks arising from financial assets and liabilities. The financial risks include foreign exchange risk, interest rate risk, credit risk and liquidity risk:

(a) Foreign exchange risk

The Fund operates primarily in North America and as a result fluctuations in the rate of exchange between the U.S. and Canadian dollar can have a significant effect on the Fund's reported results. To mitigate exposure to the fluctuating rate of exchange, the Fund enters into foreign exchange contracts and denominates a portion of its debt in U.S. dollars. At March 31, 2008, the Fund's U.S. dollar denominated debt totaled $26.5 million and the Fund had entered into the following foreign exchange contracts:



Settlement dates Face value Average rate
U.S. $ Cdn. $
---------------------------------------

April 2008 to December 2008 29.4 million 1.0250
October 2009 to December 2009 8.0 million 1.0332
---------------------------------------
---------------------------------------

At March 31, 2008, the Fund had outstanding a series of foreign exchange
call and put options as follows:

Settlement dates Face value Call Put
U.S. $ Cdn. $ Cdn. $
---------------------------------------

April 2008 to December 2008 6,300,000 1.07 1.2115
---------------------------------------
---------------------------------------


The Fund's sales denominated in U.S. dollars in the three-month period ended March 31, 2008 were U.S. $27.7 million, and the total of its cost of sales and its selling, general and administrative expenses denominated in that currency were U.S. $14.5 million. Accordingly, a 10% increase or decrease in the exchange rate between the Canadian and U.S. dollars would result in a $2.8 million increase or decrease in sales and a total increase or decrease of $1.5 million in its cost of sales and its selling, general and administrative expenses.

(b) Interest rate exposures

The Fund is subject to risks associated with fluctuating interest rates on its long-term debt. To manage this risk, the Fund has entered into a number of interest rate swap transactions with a Canadian chartered bank and has limited its exposure to changes in interest rates on its variable rate debt as follows:

(i) Notional amount of U.S. $17.5 million, expires August 31, 2008, effective interest rate of 4.83%, resulting in interest charges to the Fund of 4.83% plus a variable rate based on performance calculations.

(ii) Notional amount of U.S. $6.5 million, expires August 31, 2008, effective interest rate of 5.10%, resulting in interest charges to the Fund of 5.10% plus a variable rate based on performance calculations.

(iii) Notional amount of U.S. $2.5 million, expires August 31, 2008, effective interest rate of 4.83%, resulting in interest charges to the Fund of 4.83% plus a variable rate based on performance calculations.

At March 31, 2008, if interest rates on debt fluctuate there would be no material impact on net earnings for the period as the risk is effectively hedged.

(c) Credit risk

Credit risk is the risk that a customer will fail to perform an obligation or fail to pay amounts due causing a financial loss A substantial portion of the Fund's accounts receivable are with customers in the agriculture industry and are subject to normal industry credit risks. This credit exposure is mitigated through the use of credit practices that limit transactions according to the customer's credit quality and due to the accounts receivable being spread over a large number of customers. The Fund establishes a reasonable allowance for non-collectible amounts with this allowance netted against the accounts receivable on the balance sheet. The Fund does not hold collateral as security of these balances.

The Fund does not believe it has significant concentration risk. The maximum credit risk exposure associated with accounts receivable is the total carrying value.

As is typical in the agriculture sector, the Fund may offer extended terms on its accounts receivable to match the cash flow cycle of its customer. The table below sets out the details of the accounts receivable balances outstanding as at March 31, 2008, based on the status of the receivable in relation to when the receivable was due and payable:



$
---------------
Neither impaired nor past due 17.7 million
Not impaired and past the due date as follows
Within 30 days 1.7 million
31 to 60 days 0.2 million
61 to 90 days 0.2 million
Over 90 days 0.1 million
Allowance for doubtful accounts (0.2) million
---------------
Total receivables 19.7 million
---------------
---------------


There are no impaired accounts receivable.

(d) Liquidity risk

Liquidity risk is the risk the Fund will encounter difficulties in meeting its financial liability obligations. The Fund manages its liquidity risk through cash and debt management. In managing liquidity risk, the Fund has access to committed short and long-term debt facilities as well as to equity markets, the availability of which is dependent on market conditions. The Fund believes it has sufficient funding through the use of these facilities to meet foreseeable borrowing requirements. Trade payables are due within one year and long-term debt is due August 31, 2008 and is extendible annually for an additional one-year term at the lender's option. Under the terms of the Fund's credit facility arrangement, if the bank elects to not extend the credit facilities beyond the current August 31, 2008 maturity date, all amounts outstanding under the facilities become repayable in four equal quarterly instalments of principal, commencing on November 30, 2009.

Fair value

As disclosed in the December 31, 2007 annual audited consolidated financial statements, the Fund has made the following classifications of its financial instruments:

- Cash and cash equivalents are classified as "assets held for trading" and are measured at fair value. Gains and losses resulting from the periodic revaluation are recorded in net earnings.

- Accounts receivable are classified as "loans and receivables" and are recorded at fair value plus initial measurement. Subsequent measurements are recorded at amortized cost using the effective interest rate method.

- Accounts payable and accrued liabilities and acquisition, transaction and financing costs payable are classified as "other financial liabilities" and are measured at their fair value upon initial measurement. Subsequent measurements are recorded at amortized cost using the effective interest rate method.

- Long-term debt is classified as an "other financial liability" and is initially measured at fair value. Subsequent measurements are recorded at amortized cost using the effective interest rate method. The deferred financing cost, are netted against the carrying value of the related debt and amortized into interest expense using the effective interest rate method.

- Derivative financial instruments are measured at fair value, even when they are part of a hedging relationship. All changes in fair value are recorded in earnings unless cash flow hedge accounting is used, in which case the effective portion of the changes in fair value is recorded in other comprehensive income. Accumulated other comprehensive income is included in prepaid expenses and other assets.

At March 31, 2008, the carrying value of cash and cash equivalents, accounts receivable, bank indebtedness, accounts payable and accrued liabilities, distributions payable and acquisition, transaction and financing costs payable approximates their fair value due to the relatively short period to maturity. Long-term debt with a variable interest rate is carried at amortized cost, which reflects fair value as the interest rate is the current market rate available to the Fund. Derivatives are valued based on market quotations. However, when financial instruments lack an available trading market, fair value is determined using management's estimates and is calculated using market factors with similar characteristics and risk profiles. At March 31, 2008, the fair value and carrying value of the foreign exchange contracts was an unrealized gain of $107,903 (December 31, 2007 - $647,063) and the fair value and carrying value of the interest rate swaps that are part of an effective hedging relationship was an unrealized loss of $264,761 (December 31, 2007 - $107,564).

Over the next 12 months, the Fund expects to realize an estimated $0.2 million in net losses reported in other comprehensive income as at March 31, 2008.

11. SEGMENTED DISCLOSURE

The Fund operates in one business segment related to the manufacturing and distributing of grain handling, storage and conditioning equipment. Geographic information about the Fund's revenues is based on the product shipment destination. Assets are based on their physical location as at the period end:



Property, plant and
equipment, goodwill and
Revenues intangible assets as at
---------------------------------------------------------
Three-month Three-month
period ended period ended
March 31, March 31, March 31, December 31,
2008 2007 2008 2007
$ $ $ $
---------------------------------------------------------

Canada 8,330,707 6,193,591 109,918,550 109,801,110
United States 25,824,376 20,696,295 44,017,414 38,129,121
International 1,203,454 1,281,464 -- --
---------------------------------------------------------
35,358,537 28,171,350 153,935,964 147,930,231
---------------------------------------------------------
---------------------------------------------------------

12. NET CHANGE IN NON-CASH WORKING CAPITAL
BALANCES RELATED TO OPERATIONS

Three-month Three-month
period ended period ended
March 31, March 31,
2008 2007
$ $
-------------------------------

Increase in current assets
Accounts receivable (8,518,925) (2,215,620)
Inventory (3,953,030) (2,455,752)
Prepaid expenses and other assets (109,285) (74,065)
-------------------------------
(12,581,240) (4,745,437)
-------------------------------
Increase (decrease) in current liabilities
Accounts payable and accrued liabilities (2,222,556) (479,479)
Customer deposits (2,434,579) (3,922,142)
Income taxes payable 165,023 (192,589)
Long-term incentive plan -- (696,848)
-------------------------------
(4,492,112) (5,291,058)
-------------------------------
(17,073,352) (10,036,495)
-------------------------------
-------------------------------


13. LONG-TERM INCENTIVE PLAN

Effective January 1, 2007, the Fund adopted an amended long-term incentive plan. Pursuant to the long-term incentive plan, the Fund establishes the amount to be allocated to eligible participants based upon the amount by which the Fund's distributable cash as defined in the long-term incentive plan exceeds a predetermined threshold. Accordingly, in April 2008 the Fund purchased $2.2 million of units for the long-term incentive plan to satisfy its obligation related to fiscal 2007. The units awarded vest over a three-year period commencing one year after the fiscal year of the award. The expense related to the long-term incentive plan will be recorded in relation to the vesting period and accordingly the total award related to the current fiscal year will be expensed as to 36% in the current fiscal year and 36%, 20% and 8% in the three fiscal years subsequent to the current year.

For the three-month period ended March 31, 2008, the Fund has recorded an expense with respect to the long-term incentive plan of $350,000 (2007 - $157,152).

14. UNIT AWARD INCENTIVE PLAN

On May 10, 2007, the unitholders of the Fund approved the adoption by the Fund of a unit award incentive plan which will authorize the Trustees to grant awards ("Unit Awards") to employees or officers of the Fund or any affiliates of the Fund or who are consultants or other service providers to the Fund and its affiliates ("Service Providers"). Unit Awards may not be granted to non-management Trustees.

Under the terms of the Unit Award Incentive Plan ("UAIP"), any Service Provider may be granted Unit Awards. Each Unit Award will entitle the holder to be issued the number of Fund Units designated in the Unit Award, upon payment of an exercise price of $0.10 per Fund Unit and such Fund Units will vest and may be issued as to one third on each of January 1, 2010, January 1, 2011 and January 1, 2012 or such earlier or later dates as may be determined by the Trustees. In lieu of receiving units, the holder, with the consent of the Fund, may elect to be paid cash for market value of the units in excess of exercise price of the units. The UAIP provides for immediate vesting of the Unit Awards in the event of retirement, death, termination without cause or in the event the Service Provider becomes disabled.

On May 10, 2007, the Fund reserved for issuance 220,000 Fund Units, subject to adjustment in lieu of distributions, if applicable. The aggregate number of Unit Awards granted to any single Service Provider shall not exceed 5% of the issued and outstanding Fund Units. In addition:

(a) The number of Fund Units issuable to insiders at any time, under all security based compensation arrangements of the Fund, shall not exceed 10% of the issued and outstanding Fund Units; and

(b) The number of Fund Units issued to insiders, within any one-year period, under all security based compensation arrangements of the Fund, shall not exceed 10% of the issued and outstanding Fund Units.

220,000 Unit Awards have been granted and remain outstanding as at March 31, 2008. For the three-month period ended March 31, 2008, the Fund recorded an expense of $171,153 for the Unit Awards.

For the period ended March 31, 2008, the 220,000 Unit Awards granted were excluded from the calculation of diluted net earnings per unit because their effect is anti-dilutive.

15. DISTRIBUTIONS TO UNITHOLDERS

The Declaration of Trust provides that the Fund will, subject to applicable law, distribute to Trust Unitholders by way of monthly distributions all of its distributable cash, being all cash received from its indirect ownership in Ag Growth Industries Limited Partnership ("AGLP"), which will carry on the business of the Fund, less amounts set aside for:

(a) administrative expenses and other obligations of the Fund;

(b) amounts that may be paid by the Fund in connection with any cash redemptions or repurchases of Trust Units;

(c) satisfaction of its debt service obligations (principal and interest) on indebtedness, if any; and

(d) any amount that the Trustees may reasonably consider to be necessary to provide for the payment of any costs or expenses and for reasonable reserves.

The Fund's distribution policy is to pay cash distributions on or about the 30th of each month to unitholders of record on the last business day of the preceding month.

The Fund may make additional distributions in excess of monthly distributions. The distribution in respect of the month ended December 31 of each year will include such amounts as are necessary to ensure that the Fund will not be liable for income taxes under Part I of the Tax Act. Any income of the Fund that is unavailable for cash distribution will, to the extent necessary to ensure that the Fund does not have any such income tax liability, be distributed to Trust Unitholders in the form of additional Trust Units, subject to applicable securities laws. The distribution policy may be amended only with the approval of a majority of the votes cast at a meeting of unitholders.

For the three-month periods ended March 31, 2008 and March 31, 2007, the Fund made distributions of $5,441,100 and $4,714,500 which equated to $0.42 per unit, respectively.

Contact Information

  • Ag Growth Income Fund
    Steve Sommerfeld
    Investor Relations
    (204) 489-1855
    Email: steve@aggrowth.com