*****Investing In Russian Agriculture*****

One of my sister's friends works as an advisor and consultant in Russian agriculture (sets up deals, etc...). My sister introduced him to my blog couple of months ago and he has been a regular reader since. I got the chance to meet with him last week, and that got me thinking it might be interesting to try to facilitate some investment in Russian agriculture while I was in Moscow.

Russian farm land seems like a very attractive investment. While gold is also a great investment right now, it is a short term investment (something to hold over the next one or two years while the dollar's collapse plays out). In contrast, farm land is an income producing asset, which makes it a great long term investment.


Anyone interested in investing in Russian Agriculture can email me. Once I know what kind of interest there is, I can research more about the investment options available and find the answer to any questions/concerns.

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The article below should give a general idea of the options for investing in Russian agriculture. Business New Europe reports about high demand for Russian agricultural land.

(emphasis mine) [my comment]

High demand for Russian agricultural land
Cushman & Wakefield
April 29, 2009

In spite of the current macroeconomic situation, we continue to see high demand for agricultural land in black earth regions of the Russian Federation, with foreign investment funds some of the most active of our clients.

Purchases are made not for speculative aims, but for creating quality agriculture enterprises. These funds' interest is supported by the fact that agricultural land pricing is traditionally denominated in rubles and the Russian currency's devaluation has made it particularly attractive for purchases made in major foreign currencies.


We have also noticed serious interest from a number of Russian and international investment funds in buying agricultural land for the purpose of creating investment instruments based on rental income. For this group of investors, having a stable tenant plays a major role. The tenant can participate in funding and receive a dividend income.

Of note is also the activity of Russian agriculture funds, which have already acquired and farm large agricultural land plots. Such companies are unfreezing their investment programmes and are beginning to acquire more agricultural land. Their investment is directed towards growing their portfolio.

Thaw in the land market

The Moscow Region's land market is the most attractive for buyers and is clearly beginning to segment. Land plots for cottage construction are no longer popular and our forecast is that demand for these land plots won't increase over 2009.

However, land plots for commercial use (retail, logistics etc.) remain attractive and demand for this type of land is gradually increasing. Potential buyers are also showing particular interest in land plots located up to 30 kilometres from the Moscow Ring Road. Land plots further away have lost their appeal and we forecast that demand for these won't increase in 2009
[Important point! Agricultural land more than 30 kilometres is trading at firesale prices due to financial crisis.].

Buyers are currently a clearly defined group of companies acquiring land plots for business development purposes. Among these are retail chains, logistics operators and industrial companies. We also see interest from Russian producers of goods. High levels of tax for imported goods and the ruble's devaluation have made imported goods too expensive for Russians consumers, so now is a good time for Russian companies to develop their production facilities. Among companies interested in purchasing land plots are food processing companies, furniture makers etc.

We find it interesting that many land plot buyers are ready to take definitive steps to acquire land due to the current low prices. In January and February, there was little activity on the land market. In March and April, however, buyers have been increasingly active in signing letters of intent and undertaking legal and technical due diligence. We expect that many land plot deals will be finalized in July-August. We are currently working on 12 deals for the purchase of land plots.

As far as regional markets go, we note that cities with populations of between 500,000 and 1m have lost their attractiveness for many buyers. However, cities with populations of over 1m remain popular. The only exception to this is the Central Federal District, where cities with populations of fewer than 1m continue to be attractive. Buyers of regional land plots are mostly retail chains. Prices have fallen by up to 40% in comparison to pre-crisis levels and are currently almost $1m per hectare for cities with populations of over 1m and less than $600,000 per hectare for cities with populations of under 1m.


My reaction: The article highlights some ideas for investing in Russian agriculture.

1) Investors seeking to make a major investment might be interested in starting their own fund for the purpose of creating a "quality agriculture enterprise".

2) Investors desiring a more stable/fixed source of income might be interested in funds buying agricultural land for the purpose of creating investment instruments based on rental income.


3) Investors who wish to make a smaller investment might be interested in the investment programs of existing Russian agriculture funds who are expanding their operations.

4) Additionally there is tons of Russian grains being sold at firesale prices. For those interested in agricultural commodities themselves, it might be interesting to buy and store this grain. As I distrust COMEX futures and other paper products sold by insolvent financial institution in non-transparent markets, I consider direct investments into the physical markets as the o nly viable way to purchase commodities.



Finally, below is a video from CNBC Asia which features Jim Rogers. Jim believes (and I agree) that Wall Street is headed for a difficult decade and tells us that farming is the future.



This entry was posted in Attractive_Investments, Background_Info, Food_Crisis. Bookmark the permalink.

14 Responses to *****Investing In Russian Agriculture*****

  1. Lucky says:

    "Rental income" sounds good, but... There are SO many problems to deal with before this kind of income come into being in Russia. From my point of native russian here are some of them:
    1. VERY low effectiveness of our agriculture. Lack of modern machinery, chemicals, technologies, etc. For example, avarage productivity of wheat is 2 tons/ha, while in US it is 2.6 t/ha, and in UK even 7.3 t|ha! So, cost prices are high foe our farmers. Beef cost price is 2-3 times higher that of Argentina's, and we import 1/3 of meat.
    2. Monopolism. Farmers forced to sell their wheat to monopolistic grain elevators at prices ?f about $230 per 100 bushels, because have no other options! It cuts off what is left from their profits after substraction of high cost prices.
    3. As a result of pp 2 and 3, farmers do not have money to invest neither to augment productivity nor to process his crop himself. Vicious circle has locked.

    I think, in Russia you can not just pay for fruitful land once and enjoy rent ever after. To profit from agricultural land in our contry you have to do big investments in technology and farm land yourself!

  2. Very good post, Russia does have a huge potential its yield is only a quarter of what farmers get in western Europe, but land cost only 10% and quality of land is more superior than western European counterparts.
    If you use western agricultural practices on Russian land you get higher yields at a fraction of the cost.

    As they say in Russia, there is one "but". Russian infrastructure has deteriorated so badly that there is nothing left of it. Even if you have a bumper harvest there is no where to store it. Soviet era storage facilities like ruins scattered across Russian landscape. Roads are non existent; railroads are stretched beyond their capacity shipping coal, metal and other commodities leaving farmers to literally fight for spare rail carts.

    Luckily food prices in Russia are rising and that give incentive for people to enter agri business. Mainly they focus on supporting local markets, some are fortunate enough to have access to export market. Without infrastructure which is a long term investment, agriculture is not feasible. Private investment in infrastructure is very limited, Russian investors focus on opportunities that pay out in one year. Infrastructure is in hands of regional governments they don’t have funds and bar foreign business from accessing those projects. Railroads are government owned and don’t see potential in adding capacity for shipping grain and other agricultural products.

    So don’t place big bets on agriculture unless you see improvements in infrastructure.

  3. Martijn says:

    I might still be interested. The land is really cheap, so lots of those problems have already been discounted.

  4. Mac says:

    While i do think Russian farmland will be a moneymaker in the future, i have a distrust for the way the Russian government does business. They are moving closer to policies they had under the iron curtain, and unfortuntely, i don't see this as being good in the long-term. It's a tough call for me to make right now, because Russia is resource rich and I would love to get in on the action. Perhaps limited investments via ETFs will be the direction I take. It's much easier to move in and out of positions this way.

    One may disagree with me, but read a little about the aluminum wars in Russia over the last couple of decades and you'll see how dangerous being a business man in Russia can get.

    just MHO. Thanks.

    Mac

  5. Anonymous says:

    Really Russia? I would accept Canada, Brazil etc. But Russia? Sorry got no money to gamble with Russian bureaucrats.

  6. Bowtie says:

    I'm with Anonymous on this one - although i dislike the SNL "really?" reference. Anyway, I also like the aggie play, what is the best way to play it in the market? I was thinking of picking up some of Jim Rogers index funds...

  7. Anonymous says:

    I live in Rostov, 1000 km down south from Moscow and I can say that agriculture is a really big and successful business here!
    I was a little bit surprised to read about "medieval" infrastructure in previous posts - believe me, paved roads and railways exist, with railcars and trucks running and elevators are not ruined here!
    As you travel across Southern Russia steppes, you may see cultivated fields around you as far as eye can see - with plenty of modern machinery working, both Russian and Western made...
    So, please make a distinction between "risky agriculture zone" in Central and Northern Russia and more climate-friendly Southern Russia - in latter people are ALREADY making good money growing food for other folks!
    But I'd agree that Russians are not very welcoming in their business environment - so pure Western invesment can meet some obstacles on the way... That means you need to be REALLY determined!

  8. Anonymous says:

    After workign 9 years in USA I returned to Russia and was really surprised. There are plenty of highways - newly constructed, better than in US.

    Though beuracrats - yeah - that's big problem. However, what the difference - land and state taxes in US or bribary by beuracrats - whatever. if you want to do real buisness in Russia, it is cheaper and faster to bribe official, then to wait approval in US. besides there were recent several goverment moves against corruption in Russia.

    The land is really cheap, though the buildings are overpriced.

    There are much more poshes, mercedeces, BMWs, ferraries in Moscow than I ever saw in US even on Park Avenue or in Greenwich/ Beverly Hills.
    People do not do buisness here if return less than 30% a year, they consider it does not worth it.

    There are pluses and minuses in doing business in Russia.

    However with all this gold/silver/oil manipulation , naked short selling approved by SEC, all bailouts , Madoff, Base moeny suply risng form 800 billions to 1.8 trillions in 2 monthes, AMeirca becomes much more lwaless.

    Investing in America right now is very dangerous buisness - everything will be taken away by the Fed-led banking Cartel.

    Only insiders in JP Moron and Goldman Sux will prfoit (if they manage to escape).

    America will be probably good place for invemstnet in 10-15 years from now - when everything, including dollar will collapse and hyperinfation will end in toatl ruin.

    Then there will be vvery cheap labor in US, plenty of devastated people unemployed and you can hire them as cheap monkeys after introdcution of NewDollar or whatever currency there will be, and detiorated country requiring rebuilding of infrastructure.

    I hope the US highways will still have some fair parts of the road left.

  9. Pak says:

    Farmland is a very good investment at this time, but Russia is hardly the best choice.

    I was looking very seriously into establishing an agri-business in Russia, which is my home country, and eventually gave up and chose a small Southern Hemisphere country instead.

    If you are looking for a rent income, your concern should be that in Russia you might buy farmland, but then hardly find anyone to rent it to for agricultural purposes, resale is also questionnable due to lack of domestic non-investment demand. Land regulation is a mess (you spend at least 15 days a year sorting out errors in your land tax bill for a 2-acre (!) plot) and fraud is commonplace because there's plenty of land which was fraudulently privatized in the 90's or 'grabbed' in the realty boom of early 2000's under very dubious legal circumstances (ESPECIALLY in the Moscow Region under Governor Gromov). There's no national land registry, and land records are probably as good as those in Sub-Saharan Africa (I make this comparison based on personal experience).

    As to why domestic non-investment demand is inadequate - it's because commercial privately-owned estate farms only account for abt 10% of total agricultural output, as compared to 50% generated by large but inefficient communal farms (ever heard of kolkhoz?) and 40% (!) produced on small farms by 'part-time' (i.e. unemployed or underemployed) or retired 'farmers' who DO NOT employ modern agricultural methods.

    The figure (10%) is growing very slowly due to: 1) land issues as described above; 2) inadequate agricultural credit availability; 3) inadequate labor availability (mostly in areas close to urban centers) and quality (everywhere); 4) high cost for both imported (agricultural machinery being imported from the US, quality pesticides being imported as well) and local (Chinese export demand for N, P & K fertilizers) inputs; 5) inadequate or collapsed breeding programs; 6) inadequate extension and marketing facilities (just consider the level of US farmers' use of futures & options for marketing!); 7) lack of buyers’ competition (see below on soviet-time marketing chains) 8) inadequate farm infrastructure; ironically, areas with the best infrastructure experience most severe manpower problems; 9) non-availability of crop insurance programs which are a must for input-intensive agriculture.

    Most of the existing commercial farms have been formed as a result of transfer of best management, labor, equipment, infrastructure and land from kolkhoz's. They also rely on market chains which they inherited from kolkhoz times.

    Hardcore former kolkhoz bosses are able to keep their farms afloat, but you simply cannot get into this business with any sort of modern business or risk management model in mind.

    Therefore, there's very little inflow of new managerial, financial or agro(bio)-science expertise in the sector. Roads, power lines, sewerage and other infrastructure is decaying. Russian banks still have very little understanding of financing agriculture and industries alike, and there's hardly any progress in this area.

    I don't think Russian government has either interest or expertise to deal with these problems.

    I would rather recommend looking at Canada or Brazil if you want to buy farmland for investment purposes. There may also be other, more promising alternatives, but you need to be careful as risks are difficult to assess.

    Just like real estate, farmland demand in Russia has a disproportionate share of investment (actually, speculative) interest in it.

    "Land plots for commercial use (retail, logistics etc.) remain attractive"? Are they kidding? I happen to know the state of finances of a few people who built logistical complexes within 15km of MKAD in 2007-2008. They are broke.

    Russia has wasted its opportunity to create an environment for productive growth through 2001-2008. Instead, it replicated the US bubble economy model with oil exports serving as a substitute for debt exports. The country seems headed towards more trouble.

  10. Pak says:

    Hmm..

    Wouldn't advise anyone to even think of getting into 'Southern Belt' (Rostov, Kuban) Russian agricultural sector unless you had previously run a kolkhoz in the area. Even if you originate from Moscow, it's easier for you to get into agri-business in Zimababwe (quite an opportunity, BTW, no kidding! problem: similar business environment..) than in Rostov. As for foreigners, you better kill yourself BEFORE you do anything, because that's how you'll likely end up anyway!

    There are very few anecdotal success stories, but they are exemptions to the rule.

    Highways can hardly be referred to as 'farm infrastructure'.) The issue is not only presence of such infrastructure, but whether it can support both production expansion and more modern and efficient farm practices.

    The agri-business has in recent years benefited from a spread between higher food prices and competetive fuel and power costs, but input cost inflation is going to eat up the difference soon because Russian farm business is both less cost-effective and advanced than Western models, and farm costs are high compared to China and India.

    Just being a regular reader of US Farm Press is enought to make you feel depressesed about the state of Russian agriculture..

  11. Lucky says:

    Among the bad factors (which upset me as well cause I'm also looking seriously into agri-business in Russia) there is a good one: probable growth of food prices. In 2001-2008 there was continuing decline in import food prices (partly because rubl was rising), which shattered already under-invested agri-business. But situation is going to Change.

    You can doubt my words, but I believe that global climate change will soon shrink productivity of crops badly all over the world except of high latitude areas of Northen Hemisphere, where Russia and Canada are situated.

    In fact, process of global warming is already coming into its own: never-ending drought in Australia, similar situation in Argentina, weather anomalies in USA's Middle East (mentioned in this blog several times) - note that all these areas are Major "granaries" and rest of the world depend on them! Point of no return has been passed and problems will become worse. And at the same time in Middle Russia, where I live (in latitude 56 North) some people are successfully growing vine! 15 or even 10 years ago we cannot even imagine this would become possible!

    With or without kolhozes, Russia is going to become main granary of the world in next 20 years. Demand for food can solve all other kinds of problems. The only question for me is that will we feed others or they will feed on us.

  12. Eric,

    for your interest Argentina will not export this year any wheat if conditions prevail. This makes more interesting Russi and Ukraine which are now inside the Top 5 wheat exporters.

    See http://www.agfood.net/2009/05/argentina-one-of-top-five-wheat.html

  13. Anonymous says:

    The Russians are some hard bastards. But they don't have anywhere to store grain. They have no modern machinery. I think the Russian agriculture sustains the Russian economy. You'll have the Jewish mafia involved some kind of way.
    Maybe the best investment is to find where the Jews buried all the Russians they murdered outside of Moscow and other cities. It's time to make the Jews pay for what they did to Russia. How many Russians inhere have killed at least one Jew the last year?

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