stewardship & prosperity exploiting the production ... atkin kinnagri 23.11.12.pdf ·...

stewardship & prosperity Exploiting the Production Potential

of FSU Agriculture: Impacts on

Commodity Supply and Prices

Carl Atkin – KinnAgri Ltd

Conference on International Commodity Markets,

Norwegian University of Life Sciences - 23 November 2012

stewardship & prosperity

KinnAgri Limited are an international management and consultancy business and part of

the Investment AB Kinnevik Group. KinnAgri Limited:

• Provides management and consultancy advice to Investment AB Kinnevik’s existing

agribusiness investments in Poland (7,000 ha) and Russia (319,000 ha)

• Are the retained advisor to other farmland funds in France, Hungary and Romania

• Has worked with numerous other investors on direct investment projects in Poland,

Czech Republic, Hungary, Romania and the Former Soviet Union

• Provides strategic and operational science-based agronomic advice, arable

management advice and training through a JV across the CEEC-FSU region (KCM)

KCM


COMMODITY MARKET

FUNDAMENTALS


4

Long Term Global Agricultural Trends

Developing Countries Drive Growth in World Population Stable Demand Growth

- Increasing global population

- Rising disposable incomes in EM

- Shifting dietary habits towards more

proteins

- Increasing demand for meat

- Multiplier effect on grain demand

- Biofuels

Long Term Supply Constrained

- Declining arable land per capita

- Water is a limited resource

- Diminishing ag productivity growth

Short Term Supply Volatile

- Seasonal weather effects

- Government policies affecting trade

- Supply shocks driver of price volatility

Dietary Shift as Incomes Rise

stewardship & prosperity Global Supply Constraints to Area &

Diminishing Yield Growth

5

Arable Land Development Crop Yield vs. Demand

30

40

50

60

70

80

90

100

110

1960 1970 1980 1990 2000 2010 2020 2030

Ara

ble

la

nd

; a

rab

le l

an

d p

er

cap

ita

(a

ll i

nd

ex

ed

, 1

96

0 =

10

0)

Arable land Arable land per capita

stewardship & prosperity Energy Prices Affects Ag as Cost

Component & Demand Factor

6

Ag Commodity Prices vs. Energy & Metals Biofuels an Increasing Share of Demand


7

Climate an Increasing Factor Driving

Seasonal Supply Shocks Russian 2010

Drought US 2012

Drought

stewardship & prosperity Recent Market Dynamics


AGRI-INVESTMENT

FUNDAMENTALS


“Buy land, they don’t make it

any more”

Mark Twain (1835 -1910)


A structural shift in global commodity prices over the next decade will drive enhanced

returns from agricultural real estate, operational farming and the agribusiness value

chain

Farmland prices are predicted to rise strongly. Farmland is a useful non-

correlated real estate investment and inflation hedge. Farmland markets are

often imperfect which offers purchasing opportunities and in areas such as the

EU there is a strong convergence play with recently accessed countries. To

maximise income yields some operational exposure may be necessary. Asset

selection is critical and requires specialist agricultural knowledge.

Operational farming provides opportunities for high returns on working capital,

but is more risky and management sensitive.

Value chain investments offer high returns from infrastructure and operating

companies in emerging economies especially in the CEEC region.

The Basic Fundamentals

stewardship & prosperity Agri-Investment Overview

Types of agri-investment includes:

Commodities;

Listed Companies with a high degree of sector exposure;

Farmland;

Operational Farming

Value Chain

Operating companies

Infrastructure – e.g. pack houses, cold storage, distribution, grain silos

Of the above, a focus on CEEC-FSU land is sensible because:

There is a belief in a long term structural change – not just cyclical ‘spikes’

‘Real asset’

Non-correlated to other investments - Although land prices softened in Western Europe during the financial crisis by 10-15% they have recovered during the latter half of 2009; in Eastern Europe prices have continued to rise steadily due to convergence over-riding the effect of the financial downturn.

Inflation hedge

Opportunity window

Institutional paralysis

Distressed assets in certain locations

Confusion over trends


There are relatively

few areas of

productive and

resilient soil which will

sustain commercial

agricultural production

Inherent Land Quality Assessment

Source: USDA

Croplands of the

Earth

Source: Professor

Bob Thompson,

University of Illinois

Why CEEC-FSU?

stewardship & prosperity High Commodity Prices – Lessons from

History – Why Farmland & Value Chain?

Farmers

Packer/

processor

Life Science

Companies

Farming has historically

been a very fragmented

sector with more

concentration upstream and

downstream. Farmers have

historically failed to retain

increases in profitability

from landowners or the

value chain.

"The real winners in this are

landowners. If history is any

guide, we will see every

ounce of the (increased)

operating margin bid into

land and cash rents.“

University of Illinois

Report on Agricultural

Commodities, September

2008.

Stylised Agricultural Value Chain

Source: Kinnevik Agri

Consumers

Packers /

Processors

Retailers

Consumers

Sustained Commodity Prices tend to capitalise

themselves in the input supply chain or in land

prices and rents (relative index, November 2006

= 100)

0.00

50.00

100.00

150.00

200.00

250.00

300.00

350.00

400.00

November

2006

August

2007

December

2007

Febr uar y

2008

June 2008 August

2008

October

2008

November

2008

Januar y

2009

Apr i l

2009

June 2009 August

2009

October

2009

Seed

Fer t i l i ser

Chemi cal s

Wheat

Oi l seeds

stewardship & prosperity Strong and Robust European Farmland

Markets despite ‘Financial Crisis’

Figure 11 – Farmland Prices across the EU in 2009 and the % increase in value since 2004 (Source: Savills Research)


OVERVIEW OF THE

CEEC-FSU REGION

stewardship & prosperity CEEC-FSU Region

stewardship & prosperity Europe’s Soils

Source: Soil Atlas of Europe

stewardship & prosperity Europe’s Climate

Source: www.worldbook.com

stewardship & prosperity Europe’s Population Density

Source: Soil Atlas of Europe


FOCUS ON RUSSIA:

SOME MACRO THOUGHTS ON THE

AGRI SECTOR

stewardship & prosperity Russia a Global Top 5 Grain Exporter but

Major Food Importer

22

Russia a Top Exporter of Grains

- Globally competitive producer of Grains

& Oilseeds

- 10-15% of world exports

c.15% of Russian Food

Consumption is Imported - Domestic supply uncompetitive despite

government support via subsidies and

trade barriers

- Specifically retail and packaged food

products

Strong Domestic Consumption

Driving Growth in Processed Foods

- Growing middle class willing to pay a

premium for quality products

- Global food & beverage companies

raising product standards

Underdeveloped Domestic

Supply Chains

Source: CBOT, IKAR

Russian Grain Exports

Russian Food Imports

Russian Food Market

0

4

8

12

16

20

24

28

32

Million tons

stewardship & prosperity Policy and WTO

stewardship & prosperity Global Wheat Production

Global Wheat Production (2011)

20%

17%

13% 8%

8%

4%

30%

EU 27

China

India

US

Russia

Australia

Other

21% 21% of all wheat produced

globally is traded

stewardship & prosperity Wheat Importers and Exporters by Country

17%

14%

11%

11% 11%

10%

26% North Africa

Middle East

Sub-Saharan Africa

SE Asia

East Asia

South America

Other

19%

15%

14% 12%

12%

6%

6%

4%

11%

US

Australia

Russia

EU

Canada

Argentina

Kazakhstan

Ukraine

Other

Importers

Exporters

stewardship & prosperity Russian Grain Production: Much

greater reliance on livestock sector

70%

19%

11%

Food

Feed

Other

41%

37%

11%

10%

Food

Feed

Seed

Other

Global wheat use

Russian wheat use

stewardship & prosperity Russia Production and Consumption

(All Grains)

50.0

60.0

70.0

80.0

90.0

100.0

110.0

0%

5%

10%

15%

20%

25%

30%

35%

Million tons

Stocks to use ratio Russian Domestic Production Russian Domestic Consumption

stewardship & prosperity Russian Grain Markets vs. International

Markets

28

194

238

100

150

200

250

300

350

Chicago (CBOT) Wheat Class 3 Wheat, Central Black EarthUSD/TonUSD/TonUSD/TonUSD/Ton

stewardship & prosperity Russian Regional Differences

stewardship & prosperity Russian crop yields


FOCUS ON RUSSIA:

PRODUCTION ISSUES

stewardship & prosperity Background

Sovkhoz and kolkhoz predominant farm structure pre-1992 in both Russia and

Ukraine

Early 1990s – Decollectivisation and the rise of JSCs as successors to collectives

The ‘failure’ of the private farm sector to thrive in the early years

Land reform process slow and often incomplete

stewardship & prosperity Pre-Parcelled Land

stewardship & prosperity Post Parcelled Land – Central Black

Earth Region

stewardship & prosperity Value highly dependent on land reform stage e.g. for Russia

0

100

200

300

400

500

600

Virtual Land Share Individual Land Plot Aggregated Land Plot Registered Aggregated Land Plot

$ per ha

Impossible Collateralisation Possible


500 1000

2500 3000 3500 4000 4000 4500 5000 50006000

15000 15000

30000

35000

0

5000

10000

15000

20000

25000

30000

35000

40000

Rus

sia

Can

ada

Uru

guay

Rom

ania

Lith

uani

a

Argen

tina

Polan

dUSA

Cze

ch R

epubl

ic

Latv

ia

Franc

eUK

Ger

man

y

Ireland

Den

mark

Series1

International Context – Land Values

€/ha

Risk, title

complications

Impact of

Slow Land

Reform

Foreign ownership

restrictions


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

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 locals or foreigners in Russia is complicated and largely forbidden in Ukraine.

Productivity Overview

stewardship & prosperity Overview of Key Issues

Land Reform

Availability – Market Depth

Price – imperfect markets

Title can be complex

Deployment Complex

Leases / Tenancies

Foreign Ownership Legislation

Management intensive

HR Limiting Factor

stewardship & prosperity Former Soviet Union - Agroecology

Administration

Precipitation Ave

mm/year

0 - 24

25 - 74

75 - 124

125 - 224

225 - 274

275 - 374

375 - 474

475 - 724

725 - 974

975 - 1474

1475 - 2474

2475 - 4974

4975 - 7474

7475 - 10004

> 10005

No Data

Russia

Precipitation

Source: FAO

Ukraine


Growing season

Russia

Administration

Length of Growing

Period (Days)

0

1 - 29

30 - 59

60 - 89

90 - 119

120 - 149

150 - 179

180 - 209

210 - 239

240 - 269

270 - 299

300 - 329

330 - 364

365 -

365

365 +

Source: FAO

Ukraine


Temperature

Russia

Temperature (Ave Annual ºC)

-24.5 to -15.0

-14.5 to -10.0

-9.5 to -5.0

-4.5 to 0.0

0.5 to 5.0

5.5 to 10.0

10.5 to 15.0

15.5 to 20.0

20.5 to 30.0

Source: FAO

Ukraine


Soil productivity and resilience

Growing season – major impact on yield potential

Microclimates

Water

Asset selection fundamental

Agroecological Issues

stewardship & prosperity Farm Lease Market in Russia

stewardship & prosperity FSU Land

0

20

40

60

80

100

120

140

160

180

200

Former

Soviet

Union

USA India China EU 27 Brazil Canada Australia Indonesia Nigeria

Series1

Series2

Million ha of Arable Land in Top 10 Countries and Regions

stewardship & prosperity Challenges of bringing land back into

cultivation…..

stewardship & prosperity Crop Rotations

Northern & Western Europe

Wheat, oilseed rape

75% Autumn crop

Southern & Eastern Europe

Wheat, Maize (Corn), Oilseed Rape, Sunflowers

50% Autumn crop

50% Spring crop

stewardship & prosperity Crop Yields


6

53

142

183 180

235

0

50

100

150

200

250

2006 2007 2008 2009 2010 2011E

Tho

usand

Hecta

res

0

50

100

150

200

250

300

350

Th

ou

sa

nd

he

cta

res

Full Ownership Long Term Lease Registration Process

48

BLACK EARTH FARMING (BEF) - One of the world’s largest publicly-listed agricultural companies

Company officially founded in 2006

Operating in Russia’s “Black Earth” area Agricultural region historically endowed with highly fertile soil

Major producer of wheat, barley, sunflower & rape seeds

Near/mid term strategy

To become best-in-class agro-industrial company in terms

of costs and operational effectiveness

Substantial production footprint 2010/2011: 235 thousand hectares

Substantial land bank Controlling 326 thousand hectares… …of which over 252 thousand hectares in full free hold ownership, 48 thousand in long term lease

One of few listed large ag commodity producers

Listed on NASDAQ OMX Stockholm (BEFSDB:SS) Market Cap: 460 MUSD Net Debt : 38 MUSD

Founding anchor investors: Investment AB Kinnevik - 24.9%

Vostok Nafta Investment Ltd - 24.8%

Substantial Land Bank in Ownership

Crop Area

Key Facts


49

MOSCOW

Tambov region

Kursk

region

Lipetsk

region

Voronezh

region

Area of Operation


AGRONOMIC AND OPERATIONAL

CHALLENGES AND OPPORTUNITIES

stewardship & prosperity Correcting Soil Structure

stewardship & prosperity Weed Management

stewardship & prosperity Correcting Soil pH

stewardship & prosperity Appropriate Cultivations

stewardship & prosperity Basal Nutrition – P/K/S

stewardship & prosperity Efficient Logistics

stewardship & prosperity Genetic Improvement!

stewardship & prosperity Moving to a culture of “Science-Based

Decision Making”

Access = Distance Weighted Least Squares

Option = Distance Weighted Least Squares

Savannah = Distance Weighted Least Squares

-50 0 50 100 150 200 250 300 350 400

Nitrogen fertilizer applied (kg/ha)

4

5

6

7

8

9

10

11

12

13

14

Gra

in y

ield

(t/

ha

@ 8

5%

d.m

.)

Access

Option

Savannah

stewardship & prosperity More Flexibility than the “Soviet

Rule Book”


Regional Production Cluster Org. Structure

Unit # 1 Unit # 2 Unit # 3 Unit # 4 Unit # 5

Unit # 3

SVK Dep.

SVK Dep.

Engineering Dep.Infras. / Logistic

Dep.

Administration

Dep.

Cultiv., Seeding, Fertilization, Harvesting, Spraying

Infras. / Logistic

Dep.

General Director Stanovoe

Production Departement Lipetsk and Tambov

Infrastructure

General Director Agro Lipetsk General Director Tambov

Cultiv., Seeding,

FertilizationSpraying Dep. Harvesting Dep. Agronomy Dep.

Cultiv., Seeding,

FertilizationSpraying Dep. Harvesting Dep. Agronomy Dep. Engineering Dep.

Unit # 1 Unit # 2

Unit # 1 Unit # 2 Unit # 3 Unit # 4 Unit # 5

Administration

Dep.SVK Dep.Agronomy Dep. Engineering Dep.

IT Departement

Engineer

AssistantAssistant

Administration

Dep.

Pers. Assistant Transl. Tambov P.D. Deputy Deputy Tambov

IT Departement

Engineer Lipetsk

Directum InfrastructureLawyer Land Issue

Deputy Filial Director - Lipetsk

Land Issue Directum

Deputy Filial Director - Tambov

RegionHR Lawyer

Infras. / Logistic

Dep.

Administration

Dep.

Production Director Lipetsk - Tambov Region

Admin. Assistant

HR

Management Structures

stewardship & prosperity Challenges: Infrastructure


63

Grains Transportation Issues

stewardship & prosperity Other Issues

Bureaucracy

Security

Culture

Government Relations

Procurement

stewardship & prosperity Conclusion

CEEC and FSU farmland and operations a sound

investment proposition both from an income return and

capital appreciation point of view.

Dynamic situation

All about execution – risk management, crop yields,

science based decision making, integrating agronomic and

operational programmes effectively.

Substantial opportunity to raise crop yields whilst reducing

non production costs (Bureaucracy!)

CEEC-FSU will continue to become a more important

exporting region; infrastructure and logistics improvements

essential to reduce local market price differences


Carl Atkin

KinnAgri Limited

Trinity House, Cambridge Business Park

Cambridge CB4 0WZ UK

t: + 44 (0) 1223 393 847

m: + 44 (0) 7810 290 511

e: [email protected]

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