Russia Forum Buzz – Agriculture: Is Wheat the New Oil?

February 4, 2011

 

Peter Bryde (EBRD) – global demand for agricultural commodities is rapidly increasing. In this respect, the CIS region has great growth potential. However, the focal point for investors is how to generate sufficient returns on these investments, which can be disrupted by poor infrastructure and a lack of funding. The EBRD is looking to address this by bringing in the world’s best practices (including the example of Brazil, which benefits from regular funding and good infrastructure for farming). But the bottleneck is a lack of instruments and insurance.

Ivan Tyryshkin (Rusgrain) – 2011 will be successful for agricultural companies. Last year was a trial for the sector, with many players leaving the stage, while the rest are reviewing their strategies, considering business modernization and M&A activity. There are still many weak players on the market struggling with financial issues, as only southern regions generated sufficient returns over the past three years. Rusgrain was focused mainly on storage and processing prior to the crisis, but then expanded into the crop harvesting and poultry and egg segments. As long as eggs and meat counterbalance each other, Rusgrain is well positioned to preserve its profitability. The company is counting on high grain prices this year, driven mainly by low stocking and presumably moderate crops. At the moment, the company is not pursuing a strategy of land bank expansion, unless the land is really high quality, generates sustainable cash flow and is offered at a low price.

Narek Harutyunyan (Penta Agro) – the company has been through a tough year. However, the performance was supported by the poultry division. One critical point is increasing EBITDA per ha rather than harvest yield maximization. Some of the issues Penta Agro is facing include a lack of knowledgeable staff, poor infrastructure and scarce capacity (in terms of storage and elevators). Resolving these problems can boost yields from 2-3 tonnes/ha to as high as 6-7 tonnes/ha. The company can draw on government support, such as subsidies at the regional level. However, Mr Harutyunyan sees inefficient state participation in addressing infrastructure and human capital problems. Finally, agricultural companies have to agree with insurance companies on terms that facilitate funding.

Nikolay Kovalsky (Astarta-Kyiv) – Astarta-Kyiv has seen impressive growth since its foundation. The company believes that Ukraine is the world’s best place to produce food, which should support the company’s operations.

Oleg Bakhmatyuk (Avangard) – the company produced 4.4 bln eggs last year and may raise output to 7 bln by 2012. It has long-term plans to go into new markets with the ambition of becoming a global player. Avangard’s competitive edge lies in its costs, which were the lowest among global egg producers in 2010, and eggs are the cheapest source of protein, which should fuel the company’s growth and provide solid investment returns. Amid acute harvest problems, coupled with a rising middle class globally, agriculture will remain on a growth curve. Ukraine has the potential to ramp up its annual crops to 100-180 mln tonnes of grain.