Investment in Farmland and Farming in Central and Eastern Europe and the Former Soviet Union Carl Atkin Head of Research

1. "Land Grab: The Race for the World's Farmland" Investment in Farmland and Farming in Central and Eastern Europe and the Former Soviet Union Carl Atkin Head of Research, Bidwells Agribusiness, UK

2. “Buy land, they don’t make it any more” Mark Twain (1835 -1910)

4. Demand pull (i) Population (ii) Dietary shift (iii) Policy changes (iv) Bioenergy Supply Constraints (v) Land (vi) Water and climate change (viii) Technology Introduction: Drivers

5. Commodities Equities Agricultural Real Estate - (EU CEECs) Operational Farming – (EU CEECs & FSU) The Value Chain Introduction: Types of Agri-Investment

6. Productivity Potential Water, Climate Change and Sustainability Costs of Production Costs to Market  Strong drivers for CEEC and FSU Long Term Competitiveness of Agricultural Regions

8. Agricultural Real Estate

9. Operational Farming

10. Returns – Income and Capital Real Estate vs Operational Farming vs Both Operations – in hand; contract; lease Useful Real Estate Characteristics Support Environment – SAPS vs SPS etc. EU Structural Funding Supply Chain – at both ends Culture, Management and ‘Localisms’ Why All the Investment Interest?

11. Output including Subsidy (A) €1,396,030 Seeds, Fertilisers and Agrochemicals (B) € 403,500 Sundry Operating Costs (C) € 120,000 Contracting Charge to Contractor (D) € 324,000 (for labour, machinery and management services) Landowners Retention to Landowner (E) € 277,500 (or “prior charge“ / “rental equivalent“) Divisible Surplus (A – B – C – D – E) (F) € 271,030 60% Contractor (G) € 162,618 40% Landowner (H) € 108,412 Total Income to Landowner = E+ H = = €385,912 (€257/ha) Return on capital of 4.54% based on land price of €5000/ha Total Income to Contractor = D + G = = €486,618 (€324/ha) Contract Farming to drive returns in CEECs – e.g. 1500 ha in Czech Republic

12. Challenges of Agricultural Real Estate in CEECs & FSU • Land Reform – e.g. Romania • Availability – Market Depth • Price – imperfect markets • Title can be complex – e.g. FSU • Deployment Complex • Leases / Tenancies e.g. France, Poland • Land Locked in Corporates e.g. Germany • Foreign Ownership Legislation e.g. Poland • Management intensive • HR Limiting Factor

13. Pre-Parcelled Land Romania

14. Post Parcelled Land - Ukraine

15. Current Issues

16. Operational farming has inherently more risks than other real estate investments. Variables include: Yield Price Land Value Single Payment / Government Subsidy Variable Costs Fixed Costs And any combination of the above Risk is managed through: Risk management on marketing arrangements Operational excellence Effective monitoring Correct structuring of contract arrangements Operational Farming vs Agric. Real Estate

17. Indicative Global Farmland Values – 2008 €/ha Source: Bidwells Research

18. Parcelling and Land Banking Land Improvement Grants and Support / Subsidies Cost of Capital Risk Premiums Other Issues to Consider

19. Not CAP rates and covenants Until 24 months ago farming companies never traded above asset value! DCF probably most relevant technique Need to consider: Basis of projections – esp soft comm prices Input prices and fixed costs Subsidies Management team and operational competence Select correct mid point Need to split out different types of return – ROC and ROWC Valuation of FSU Farming Companies

20. Better suited to arable production than livestock – biosecurity issues etc. Full landownership rights for foreigners (albeit with some complications in certain countries) Access to Black Sea For most countries, legal and economic stability of EU membership Interest in Poland, Czech, Hungary, Romania Also Baltic Countries Bulgaria (?) CEEC (within EU) - Overview

21. CEEC – Arable suitability e.g. Romania Source: Institute of Soil Science, Bucharest (ICPA)

22. 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 Variable costs similar to UK 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 foreigners is limited in Kazakhstan and ownership by locals or foreigners in Russia is complicated and largely forbidden in Ukraine. Former Soviet Union - overview

23. Former Soviet Union - Agroecology Growing season Russia Kazakhstan Source: FAO

24. Former Soviet Union - Soils Russia

25. Concern over FSU especially Ukraine ‘Retreat’ to safer products within EU CEEC land price growth slowed but convergence in EU overpowering other drivers Output down especially in FSU as working capital restricted, especially where land is not available as collateral Impact of ‘The Crisis’

26. Soft Commodities & Agriculture: Just how ‘recession proof’ – what does history tell us?

27. Government View National Regional Local Local Community View Supply Chain View ‘Western’ Operator and Investor View Many got too big too quick and are now ‘consolidating’ ‘Dot.com’ bubble burst Impact of ‘The Land Grab’

28. Distinction between short term (commodities and equities) and long term (farmland, farming, value chain) investment opportunities Farmland & Farming has high operational gearing - partners are critical EU more about real estate and FSU about operations although often a mix of the two Assessment of opportunities not always easy – how to measure risk premiums etc. Plenty of ‘cars with nothing under the bonnet’ over the last 18 months – long on fundamentals and short on execution capability Mixed experiences of agri-investment from government, local communities and investors/operators themselves Conclusion

29. Carl Atkin Partner and Head of Research Bidwells Agribusiness Trumpington Road Cambridge CB2 9LD United Kingdom t: + 44 1223 559 539 e: carl.atkin@bidwells.co.uk w: www.bidwells.co.uk/agribusiness Thank You