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

e: carl.atkin@bidwells.co.uk

w: www.bidwells.co.uk/agribusiness

Thank You