AFP reports that black earth stirs investors in Russia.
Black earth stirs investors in Russia
By Eleonore Dermy (AFP) — Oct 11, 2009
OSTROGOZHSK, Russia — For years, foreign investors have been attracted by the gleam of Russia's vast reserves of crude oil.
But deep in the quiet, rolling landscapes of southwest Russia, it is not the seductive power of black gold that has brought foreign money into the country.
It is the more mundane appeal of black earth, millions of hectares of ultra-fertile agricultural land that foreign companies hope will provide the ideal answer to the world's changing food needs.
Swedish company Black Earth Farming (BEF) since 2006 has bought 300,000 hectares (740,000 acres) of Russian farmland after the government finally allowed land to be privatised after decades of state ownership.
"In Europe the price of land is very high," BEF chief executive Sture Gustavsson said as he surveyed the newly acquired lands in the Voronezh region some 600 kilometres south of Moscow.
In Russia, a hectare of land can still be acquired for several hundred dollars.
"It is a great challenge. But we are loving it," Gustavsson said.
Russia has tens of millions of hectares (acres) of chernozem, or black earth, considered a dream soil because of its richness in humus, which is formed by the decomposition of plant matter by micro-organisms.
The high humus content gives the soil an ability to retain moisture that makes it perfect for farming. The famous Black Earth region of Russia and Ukraine covers an area approximately half the size of Germany.
Yet while Russia has become one of the world's main grain exporters, the full potential of its vast agricultural lands remains unfulfilled, with vast tracts of arable land going fallow after the collapse of the Soviet Union.
As a result, the modern techniques that foreign firms can bring to the most traditional of industries are essential if Russia is to fully realise its potential.
"The foreigners have brought us innovative technologies and jobs," said the head of BEF's local subsidiary Agro-Invest Ostrogozhsk, Alexander Averyanov.
"When we arrived in 2006, just 30 percent of the land in the region was being cultivated while 70 percent had been fallow for five, seven, even 12 years," he added.
"We have worked for two-and-a-half years and now we have been able to start cultivation."
Other investors in Russian agricultural land have ranged from investment funds to foreign governments.
In April 2009, South Korean shipbuilder Hyundai Heavy Industries took a majority stake in Khorol Zerno, a firm which owns 10,000 hectares of farmland in Russia's Far East.
"The world needs grain more and more," said Dmitry Katalevsky, a financial analyst with Deloitte, pointing to a shift in Asian diets towards wheat, the development of bio-fuels and the rising global population.
"The surge in agriculture prices has prompted investors to become more interested in these goods, when before they had invested more in oil, metals and gas."
Russia has set ambitious targets to fulfill the export potential of its agriculture industry. [and these goals can only be reached by attracting foreign capital]
Agriculture Minister Elena Skrinnik has said Russia could raise its annual grain production to 120 million tonnes in the next 10-15 years, allowing it to roughly double its exports to 50 million tonnes annually.
This year the total grain harvest is expected to be 90 million tonnes, down from last year's bumper figure of 108 million.
Gustavsson admitted that the challenges remain enormous as the yield from the land being cultivated by BEF remains relatively weak and it will take years of investment to harvest the full benefits of the company's investment.
Meanwhile the price of grain has fallen after a spike in 2007 and foreign investors still have to cope with the hurdles of Russia's notorious bureaucracy.
And because of the lack of rural infrastructure -- a major problem for the Russian agriculture industry -- BEF is this year spending tens of millions of dollars on new silos to keep the grain harvests.
Such investment can only be welcome for Russia and President Dmitry Medvedev admitted last week that billions of dollars of investment were needed to expand storage facilities that currently hold only 30 percent of the harvest.
"Over the past 10 years we have understood that agriculture is not a black hole where money is lost and brings nothing for the state," Medvedev said.
Agweb reports that global farmland disappearing.
Farmland Forecast reports that global farmland is disappearing
An investment tip from Mark Twain: "Buy land. They're not making it anymore."
Farmland is disappearing across the world at an alarming rate. Hundreds of thousands of acres across the globe are disappearing due to climate change, erosion, and urban development. The American Farmland Trust estimates that farmland is disappearing at a rate of 2 acres per minute.
The National Soil Tilth Laboratory in Ames, Iowa, highlighted, "Each human on earth lives off the farming equivalent of about a third of a football field today. Population growth and urbanization will shrink that available land base in half by 2050."
African farmland disappearing
Africa could lose 247 million acres of farmland by 2050 due to climate change according to Environment Science and Policy. This potential loss of farmland is substantial as the U.S. has approximately 246 million acres that support the top eight producing crops.
The study claims that if proper action is taken this far in advance, small farm communities can still be saved. Philip Thornton, co-author of the paper, noted "Though unsuitable for crops, the land could still sustain livestock, which are more tolerant to heat and drought."
Although the African farmland can still be used as pasture, the farmland will no longer be fertile and be able to produce crops. This will significantly reduce the global production of grains and throw a curveball for the supply and demand of farmland globally.
U.S. farmland disappearing
Farmland has also been disappearing in the U.S. due to urban development. Farmland has been used to create new highways, industrial parks, and housing developments. The American Farmland Trust estimates that between 1992-1997, more than six million acres of agricultural land, an area the size of Maryland, was used for urban development.
The global land grab
Developing nations have begun to reconsider their future "food security." By 2050, the world will have to feed 3 billion more humans with significantly less farmland. To solve this dilemma, countries such as China, Saudi Arabia, South Korea, and United Arab Emirates have purchased farmland across the globe to ensure a consistent availability of grains. The countries have sent expatriate farmers who will harvest the crops and directly export the grain back to their home country.
Saudi Arabia has spent $100 million to lease land in Ethiopia to raise wheat, barley, and rice. In Sudan, South Korea has signed deals for 690,000 hectares, the United Arab Emirates for 400,000 hectares, and Egypt has secured a similar deal to grow wheat. Private companies are also acquiring land. Sweden's Alpcot Agro bought 128,000 hectares of Russian farmland, South Korea's Hyundai Heavy Industries acquired 10,000 hectares of eastern Siberia, and Morgan Stanley, an American bank, bought 40,000 hectares of farmland in Ukraine.
How is farmland going to be affected by this?
With this much farmland now at risk of being taken out of production, the demand for farmland will undoubtedly be affected. Farmland is a natural resource with no substitute and cannot be replenished. No more land is being made.
Whenever supply and demand curves become distorted, an investment opportunity can arise. The growing importance of farmland and the limited supply provides farmland the potential to become one of the best investments available over the long-term.
The USDA reports on the decline in sown area.
The Decline in Sown Area in Russia
According to data from the State Statistical Committee, total sown area in Russia slid from 117.7 million hectares in 1990 to 76.4 million in 2007. The decline is attributed in large part to a coincident drop in livestock inventories and a resultant decrease in the sown area of feed grains and other forage crops.
My reaction: The appeal of black earth farmland is attracting investors to Russia.
Black Earth Farmland Attracting Investors
1) Russia's tens of millions of hectares (acres) of chernozem or black earth is considered a dream soil because of its richness in humus (see Pictures From Visiting Russian Farmland)
2) Foreign farmers, ranging from investment funds to foreign governments, have established successful, long-term agricultural enterprises in Russia
3) Russia has set ambitious targets for its agriculture industry, including raising annual grain production to 120 million tons in the next 10-15 years and doubling its exports to 50 million tons annually. These goals can only be reached by attracting foreign capital
4) In Russia, a hectare of land can still be acquired for several hundred dollars ($450 - $750 per ha depending on soil quality and soil/field condition. See Acquiring Black Earth Farmland).
Global Farmland Disappearing
1) Farmland is disappearing at a rate of 2 acres per minute.
2) Africa could lose 247 million acres of farmland by 2050 (See *****Disaster Feared As Desertification Spreads*****)
3) Between 1992 and 1997, over six million acres of agricultural land, an area the size of Maryland, was lost to US urban development.
4) Farmland is a natural resource with no substitute and cannot be replenished.
5) To deal with the farmland shortage, countries such as China, Saudi Arabia, South Korea, and United Arab Emirates have purchased farmland across the globe to ensure a availability of grains. Expatriate farmers are being sent to harvest crops for direct export back to their home country.
Russian agriculture's untapped potential
The enormous untapped potential of Russia's vast agricultural land stands in stark contrast with the overused farmland and desertification occurring in other parts of the world. As I reported before, Russia's agricultural sector is enormously underdeveloped.
Approximately 7% of all arable land on the planet is owned either by the Russian state or by collective farms. Of that, roughly 35 million pristine hectares lies uncultivated. (A hectare is about two and a half acres.) To put that into perspective, Britain has 6 million hectares of cultivatable land.
The land under till coughs up tiny yields due to poor work ethics and antiquated technology. The average Russian grain yield is 1.85 tons a hectare - compared with 6.36 tons a hectare in the U.S.
Russia is the only place on Earth that has significant amount of farmland which is not in use. As uncultivated land comes back into production, Russia will become an agricultural powerhouse (a Saudi Arabia of wheat).
Investing In Black Earth Farmland
Regia Russia Agro Investment Ltd (the fund I am starting to invest in Russian agriculture) is up and running and receiving subscriptions. Please, Email me for a copy of PPM.
With Black Earth farmland available at $670 per hectare, now is the time to act. Already, three other Ag funds have appeared on the horizon in Russia, and it is only a matter of time before money flows into the market and drives up prices.
I will be working with Charles Bausman to acquire Russian farmland. Charles is a Russia-based American with experience in Russian agribusiness who will run the fund's operations on the ground (with my participation after I move to Moscow). Charles Bausman has great deal of experience (18 years) in working in Russia and speaks fluent Russian. Charles will identify, do due diligence on, and acquire properties, and then be responsible for setting up efficient management on the properties. He has already identified a number of properties for potential acquisition, and he is also a director of the fund.
I encourage you to contact him directly with any question about Russian agriculture or Regia Russia Agro Investment Ltd. Charles also has extensive experience in fund management and should be able to answer all your questions.
Regia Fund Strategy
The Regia Fund will make value acquisitions of prime Black Earth farms, farmland, and associated infrastructure (buildings, grain storage facilities, equipment). The Fund will acquire land both in long term leases and as property. The fund will further install high quality efficient management of these farms and provide them with the necessary financing to operate efficiently with the goal of owning producing farms generating positive cash flow and net income.
Local Government Support. The fund will work closely with local and regional administrations to ensure government support for its projects. Local government encourages high-quality, long-term investors, including foreign investment, which can increase production, improve know-how and technological efficiency and employment. The fund will make use of the 15+ years experience and broad contacts of its executive management in Russia and the Black Earth region to facilitate these governmental relationships.
Legal Due Dilligence and Support: The fund will undertake extensive legal due diligence on the security of title on the land it acquires. The fund will retain a reputable European legal firm to provide written opinions as to quality of land title and to advice on other relevant legal issues regarding the operations of the fund.
Legal Structure: The fund will register and own a Russian legal entity which will be the operating company. Leaseholds, equipment, and property in title may be in the name of this entity or in other entities onshore or offshore, as is deemed advisable by fund management, pursuant to Russian legal requirements and the recommendations of the fund's legal advisor.
Farm Management: The fund will seek to retain the best possible agronomic talent, relying primarily on Russian agronomist, while also retaining international agronomists where this is productive, to develop the best possible operations strategy for the farms it controls. The fund will use employee ownership plans to align the interests of shareholders and farm management.
Management Strategy: The fund will pursue a decentralized management method, viewing each operating farm as a separate operating unit, with its own management and oversight needs. Farm sizes can range from approximately 3000 to 7000 ha. The fund will seek to support individual farm management with professional expertise in accounting and financial control, human resources, receipt of government subsidies, acquisition and sharing of equipment, construction and or otherwise securing storage facilities, crop sale and hedging, agronomic expertise, and adequate funding for operations.
Operations Location: The fund plans to acquire properties in the Central Black Earth region of European Russia. The fund will seek to acquire farms in close proximity to each other to maximize management efficiency.
Executive Management Location: The fund's executive operations management will be based in the Black Earth region, to maximize hands-on management of its operating units. Location will be determined depending on where acquisitions are initially made. The fund will not seek to manage operations from Moscow as is common with other large agro-holdings, because this has proven to negatively impair operating efficiency.
Equipment: The fund will purchase modern, efficient machinery (combines, tractors, etc.) to make its farms as efficient as possible.
Main Crops: The main crops grown will be those typical for the Black Earth Region; wheat, rye, barley, sunflower, potatoes, beets, among others. The fund will also explore introducing soy cultivation, which is a less common crop in these regions. The fund will also consider fruit cultivation — primarily apples and cherries. Final decision on which crops to produce will depend on local and market factors to be decided opportunistically. The fund will not engage in dairy or livestock as a major activity, however might do so in order to meet local government requirements or requests.
Markets: Produce from the farms will be sold primarily to internal markets, either directly to processors or to Russian grain brokers. Transport infrastructure in this region of Russia is well-developed relative to world standards.
Other investments: The fund will reserve the right to make selective, non-primary investments in non-cropping activities, most likely in on-site food processing, if the fund management determines these projects to have a high likely return on investment.
Land Speculation: While the fund anticipates that land values will increase, it will not engage in pure land speculation, as this is discouraged by Russian authorities. This means that it will operate the land that it acquires with the goal of generating profitable revenue.
Identifying Acquisitions: Quality of farms in the Black Earth Region can vary significantly from property to property depending on soil quality, proximity to transport (rail and road), availability of storage, and quality of local management, and attitude of local government. Strong local contacts and connections can yield very advantageous acquisition opportunities. Fund management possesses these contacts and will make use of them.
Minimum size: The fund estimates that the minimum capital needed to acquire and operate an adequately funded farm is $US 3 million. This would allow for the initial acquisition and operation of a 3000 ha farm, and access to Russian farm credit and subsidies.
Target Size: The fund will seek to increase the quantity of land under its control to the maximum which is realistic to manage and farm productively, subject to availability of future funding. Experience of other investors shows that it becomes progressively more difficult to manage farms as they grow over a certain size, and that properties over 100,000 ha begin to present management challenges which can reduce efficiency, however there are exceptions to this. The fund will grow to as large a size as possible given management and other constraints. It is estimated that the land under control could end up being between 100,000 and 500,000 ha. The fund will seek to grow in size organically, i.e. at a rate at which it can properly operate land under its control. It will seek to avoid the experience of other investors, both Russian and foreign, of acquiring large amounts of land without having the management systems in place to operate them, which then resulted in low-quality management and large operating losses.
Funding and Subsidies: The fund will make full use of available government sponsored Russian farm credit, with a rough goal of a debt to equity ratio of about 50%. The fund will also make full use of any available Russian government subsidies, both federal and local.
Exit Strategies: The fund will aim for exit strategies that optimize investor value. Possible strategies are future round private placements, an IPO, SPOs, opportunistic sale of assets to other operators, strategic investors, etc. A nticipated time horizon for full or partial exits such as these is from 3 to 5 years. The fund has no fixed time frame for exits, and will pursue them on an opportunistic basis.
Dividends: The fund will initially reinvest profits into attractive acquisition opportunities which are expected to likely continue for 2-3 years. As the fund matures, if it is in the interests of shareholders, the fund will distribute dividends.
*** Private equity fund
*** Fund name: Regia Russia Agro Investment LTD
*** Fund administrator: Cortland Fund Services LLC
*** Fund location: British Virgin Islands (with Russian subsidiary)
*** Management fee: 2 percent per year paid quarterly
*** 20% performance fee paid on exit (profits measured in gold)
*** 1% placement fee
*** 10% discount (.9 grams of gold per share) for first 100,000 grams of gold invested
*** Quarterly net asset valuations (with updates via blog and email)
The Fund's initial term is five (5) years although this is subject to additional one/two year periods of extension at the sole discretion of the Board of Directors.
The Fund is a close-ended fund and, as such, its Shareholders do not have the right to request redemption of their Shares. However, where the Fund's terms is extended beyond five (5) years, the Fund intends (but is not obliged) to offer shareholders the option to redeem some or all of their Shares on the 5th anniversary of their initial subscription.
Subscriptions are in gold (1 gram of gold per share), and the minimum subscription amount is 3000 grams of gold, which is about $106,500 right now ($35.5 per gram). As gold continues to appreciate, the minimum investment will be lowered as appropriate.
Under compelling circumstances, the minimum subscription amount can be waived for international investors.
There is a 10% discount to the Offering Price (.9 grams of gold per share) for first 100,000 gram of gold invested in fund.
Regia Russia Agro Investment Ltd is using Goldmoney to receive subscriptions. GoldMoney is a digital gold currency founded in 2001 by James Turk which allows the instant transfer of gold, silver and platinum between user holdings.
Here is the link for opening a Goldmoney account. The process is simple and transparent.