It’s a brave company that pins its fortunes on establishing business in Russia. Ever since Vladimir Putin came to power, Moscow has developed a nasty habit of simply bulldozing private firms if they get too big for their boots.
Oil, gas and metals firms all live a perilous existence in the former Soviet Union, as BP and Royal Dutch Shell, among others, have found to their cost.
But there’s one sector that Moscow has left to its own devices – farmland. In the past few years, a number of European companies have been allowed to buy up land in the Black Earth region, which stretches from Ukraine into Central Russia. As the Wall Street Journal puts it, agriculture in Russia, “has fared so poorly for so long that it isn’t on the Kremlin’s radar”.
But agriculture is rapidly becoming more important to the Russian authorities. Rising food bills are becoming a real problem – in Russia and everywhere else in the world. The cost of grain and wheat has rocketed in recent years, as the world’s farmers struggle to keep up with population growth, farmland is diverted to biofuel production and a new cosmopolitan class in Asia discovers an appetite for Western food.
Just to keep up with demand, agricultural production will have to grow 3.3% a year, say Credit Suisse analysts. But grain production has only grown by 1.3% a year during the past 20 years. With the world’s population set to swell to 7.7 billion by 2020, farmland is becoming a precious commodity. And as Robert Monk of Heartland Farms noted in The Daily Telegraph earlier this year, “Russia is one of the few places in the world where there are vast areas of land up for sale.”
That’s great news for the firms that have managed to get in early to pick up Russia’s hitherto-neglected farmland at bargain prices. In the Black Earth area, you can get a hectare of farmland for $500. It would cost between $6,000 and $8,000 per hectare for comparable land in Argentina and $30,000 in Sweden.
And it’s not because it’s poor quality – the Black Earth region gets its character from high levels of humus that can support deep-rooted crops with limited rainfall – this is prime farmland. One firm, Black Earth, which is listing in Stockholm later this month, is planning to harvest crops from 365,000 acres next year. It owned just 14,600 acres last year.
Of course, one concern is that as food prices become more of a problem in Russia, the government might start throwing its weight around. Worries about the sting of rising food prices in the run-up to the recent elections have already seen Moscow impose a price freeze on milk and bread to see the country through the New Year. And the government is also considering imposing tariffs on exports of cereals and bread from the country in an effort to direct supply towards the home market.
But that isn’t necessarily a huge problem for foreign companies owning farmland – in the absence of an export market, there is still a healthy domestic market for what these farms are producing, says Shana Gavron, an analyst at SEB Enskilda. “Production is very profitable and is enough to cover the risks,” agrees Andrey Sizov of Moscow-based consultancy SocEcon. We have a look at a Danish company in a prime position to farm Russia’s neglected Black Earth region in the box below.
Two Nordic firms set to make hay from Russian farmland
If you’re keen to play Russian farmland, keep an eye out for when Black Earth Farming lists on the OMX Nordic market this month. Right now, Trigon Agri (Stockholm:TAGR.ST) looks tasty, say Shana Gavron and Ivars Bergmanis of SEB Enskilda.
Trigon is an Estonia-based firm that invests in grain and dairy farms in Russia, Ukraine and Estonia. Trigon aims to have 150,000 hectares of farmland on its books by 2009, primarily in the Black Earth region. It currently owns 25,000 hectares in Ukraine, Russia and Estonia.
Trigon has benefited from escalating prices for grains on global markets, says Gavron. In fact, by mid-August 2007, prices for sunflower and maize had already outstripped the company’s price guidance for 2012 of e196 and e118 per tonne respectively.
Gavron expects Trigon to move into profit for the first time in 2008 – and with increasingly higher yields from the farmland it has taken on, the company can be expected to see revenue growth of 147% next year and 122% in 2009.
Trigon is in the right place (the “especially highly fertile Black Earth region”) and the right sector at the right time, says Gavron. You can buy the stock through Barclays Stockbrokers (0845 777 7700).