stewardship & prosperity
Investment in Farmland and Farming in Central and Eastern Europe and the Former Soviet Union
Carl AtkinHead of Research, Bidwells Agribusiness, UK
"Land Grab: The Race for the World's Farmland"
stewardship & prosperity
“Buy land, they don’t make it any more”
Mark Twain (1835 -1910)
stewardship & prosperity
stewardship & prosperity
Demand pull(i) Population
(ii) Dietary shift
(iii) Policy changes
(iv) Bioenergy
Supply Constraints(v) Land
(vi) Water and climate change
(viii) Technology
Introduction: Drivers
stewardship & prosperityIntroduction: Types of Agri-Investment
Commodities
Equities
Agricultural Real Estate - (EU CEECs)
Operational Farming – (EU CEECs & FSU)
The Value Chain
stewardship & prosperity
Productivity Potential
Water, Climate Change and Sustainability
Costs of Production
Costs to Market
Strong drivers for CEEC and FSU
Long Term Competitiveness of Agricultural Regions
stewardship & prosperity
stewardship & prosperityAgricultural Real Estate
stewardship & prosperityOperational Farming
stewardship & prosperity
Returns – Income and Capital Real Estate vs Operational Farming vs Both
Operations – in hand; contract; lease
Useful Real Estate Characteristics
Support Environment – SAPS vs SPS etc.
EU Structural Funding
Supply Chain – at both ends
Culture, Management and ‘Localisms’
Why All the Investment Interest?
stewardship & prosperity
Output including Subsidy (A) €1,396,030
Seeds, Fertilisers and Agrochemicals (B)€ 403,500
Sundry Operating Costs (C) € 120,000
Contracting Charge to Contractor (D) € 324,000
(for labour, machinery and management services)
Landowners Retention to Landowner (E) € 277,500
(or “prior charge“ / “rental equivalent“)
Divisible Surplus (A – B – C – D – E) (F) € 271,030– 60% Contractor (G) € 162,618– 40% Landowner (H) € 108,412
• Total Income to Landowner = E + H = = €385,912 (€257/ha)
Return on capital of 4.54% based on land price of €5000/ha• Total Income to Contractor = D + G = = €486,618 (€324/ha)
Contract Farming to drive returns in CEECs – e.g. 1500 ha in Czech Republic
stewardship & prosperityChallenges of Agricultural Real Estate in CEECs & FSU
Land Reform – e.g. Romania
Availability – Market Depth
Price – imperfect markets
Title can be complex – e.g. FSU
Deployment Complex Leases / Tenancies e.g. France, Poland
Land Locked in Corporates e.g. Germany
Foreign Ownership Legislation e.g. Poland
Management intensive
HR Limiting Factor
stewardship & prosperityPre-Parcelled Land Romania
stewardship & prosperityPost Parcelled Land - Ukraine
stewardship & prosperityCurrent Issues
stewardship & prosperityOperational Farming vs Agric. Real Estate
Operational farming has inherently more risks than other real estate investments. Variables include: Yield Price Land Value Single Payment / Government Subsidy Variable Costs Fixed Costs And any combination of the above
Risk is managed through: Risk management on marketing arrangements Operational excellence Effective monitoring Correct structuring of contract arrangements
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Indicative Global Farmland Values – 2008
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Source: Bidwells Research
stewardship & prosperityOther Issues to Consider
Parcelling and Land Banking
Land Improvement
Grants and Support / Subsidies
Cost of Capital
Risk Premiums
stewardship & prosperityValuation of FSU Farming Companies
Not CAP rates and covenants Until 24 months ago farming companies never
traded above asset value! DCF probably most relevant technique Need to consider:
Basis of projections – esp soft comm prices Input prices and fixed costs Subsidies Management team and operational
competence Select correct mid point Need to split out different types of return – ROC
and ROWC
stewardship & prosperityCEEC (within EU) - Overview
Better suited to arable production than livestock – biosecurity issues etc.
Full landownership rights for foreigners (albeit with some complications in certain countries)
Access to Black Sea For most countries, legal and economic
stability of EU membership Interest in Poland, Czech, Hungary, Romania Also Baltic Countries Bulgaria (?)
stewardship & prosperityCEEC – Arable suitability e.g. Romania
Source: Institute of Soil Science, Bucharest (ICPA)
stewardship & prosperity
Cheap, underutilised land with potential to be brought into arable production
Potential to increase yields through management and increasing inputs
Large tracts of land available for purchase / lease Access to Black Sea and Europe Variable costs similar to UK Fixed costs approx half of UK Capital investment required in the supply chain
intermediaries e.g. processors, storage, transport Agriculture largely arable and vegetable although
potential increase in livestock production due to low cost production of grains for feed.
Ownership of land by foreigners is limited in Kazakhstan and ownership by locals or foreigners in Russia is complicated and largely forbidden in Ukraine.
Former Soviet Union - overview
stewardship & prosperityFormer Soviet Union - Agroecology
Kazakhstan
Growing season
Russia
Source: FAO
stewardship & prosperityFormer Soviet Union - Soils
Russia
stewardship & prosperity
Concern over FSU especially Ukraine
‘Retreat’ to safer products within EU
CEEC land price growth slowed but convergence in EU overpowering other drivers
Output down especially in FSU as working capital restricted, especially where land is not available as collateral
Impact of ‘The Crisis’
stewardship & prosperitySoft Commodities & Agriculture: Just how ‘recession proof’ – what does history tell us?
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Government View National Regional Local
Local Community View
Supply Chain View
‘Western’ Operator and Investor View Many got too big too quick and are now ‘consolidating’ ‘Dot.com’ bubble burst
Impact of ‘The Land Grab’
stewardship & prosperityConclusion
Distinction between short term (commodities and equities) and long term (farmland, farming, value chain) investment opportunities
Farmland & Farming has high operational gearing - partners are critical
EU more about real estate and FSU about operations although often a mix of the two
Assessment of opportunities not always easy – how to measure risk premiums etc.
Plenty of ‘cars with nothing under the bonnet’ over the last 18 months – long on fundamentals and short on execution capability
Mixed experiences of agri-investment from government, local communities and investors/operators themselves
stewardship & prosperity
Carl Atkin
Partner and Head of Research
Bidwells Agribusiness
Trumpington Road
Cambridge CB2 9LD
United Kingdom
t: + 44 1223 559 539
w: www.bidwells.co.uk/agribusiness
Thank You