Emerging investment trends in primary agriculture in primary trends investment Emerging Emerging investment trends in primary agriculture A review of equity funds and other foreign-led investments in the CEE and CIS region FAO INVESTMENT CENTRE DIRECTIONS IN INVESTMENT Please address questions and comments to: Investment Centre Division Food and Agriculture Organization of the United Nations (FAO) Viale delle Terme di Caracalla – 00153 Rome, Italy [email protected] No. 8 Report www.fao.org/investment/en Report No. 8 – September 2013 I3474E/1/10.13 FAO INVESTMENT CENTRE Emerging investment trends in primary agriculture A review of equity funds and other foreign-led investments in the CEE and CIS region Ian Luyt Agribusiness Expert, Novirost Limited with contributions from: Nuno Santos Economist, Investment Centre Division, FAO Arianna Carita Economist, Investment Centre Division, FAO DIRECTIONS IN INVESTMENT prepared under the FAO/EBRD Cooperation FOOD AND AGRICULTURE ORGANIZATION OF THE UNITED NATIONS Rome, 2013 The designations employed and the presentation of material in this information product do not imply the expression of any opinion whatsoever on the part of the Food and Agriculture Organization of the United Nations (FAO) or the European Bank for Reconstruction and Development (EBRD) concerning the legal or development status of any country, territory, city or area or of its authorities, or concerning the delimitation of its frontiers or boundaries. The mention of specific companies or products of manufacturers, whether or not these have been patented, does not imply that these have been endorsed or recommended by FAO or the EBRD in preference to others of a similar nature that are not mentioned. The views expressed in this information product are those of the author(s) and do not necessarily reflect the views or policies of FAO or the EBRD. © FAO 2013 FAO encourages the use, reproduction and dissemination of material in this information product. Except where otherwise indicated, material may be copied, downloaded and printed for private study, research and teaching purposes, or for use in non-commercial products or services, provided that appropriate acknowledgement of FAO as the source and copyright holder is given and that FAO’s endorsement of users’ views, products or services is not implied in any way. All requests for translation and adaptation rights, and for resale and other commercial use rights should be made via www.fao.org/contact-us/licencerequest or addressed to [email protected]. FAO information products are available on the FAO website (www.fao.org/ publications) and can be purchased through [email protected]. For further information on this publication, please contact: Director Investment Centre Division Food and Agriculture Organization of the United Nations (FAO) Viale delle Terme di Caracalla, 00153 Rome, Italy TABLE OF CONTENTS Foreword iv Acknowledgements v Acronyms and abbreviations vi Executive summary viii 1 The case for investment in primary agriculture 1 The big picture on supply and demand of food 1 Global food consumption – what is to be expected? 1 Global food production – is there a binding constraint? 7 Evolution in prices of main agricultural commodities 13 Expected evolution in global agricultural trade 15 2 Investment drivers and externalities 18 Investment drivers 18 Externalities 29 3 Investors and investment structures 32 Investors 32 Investment structures 39 4 Returns and financial performance 53 Stock market returns 53 Financial performance and key drivers 61 References 67 Annex 1 Case studies: private agriculture equity funds in selected countries 84 Annex 2 Funds investing in primary agriculture and agribusiness 143 iii FOREWORD The increase in agricultural commodity prices, and in particular the 2007–2008 spike, has led to notable growth in public and private investment in primary agriculture. This reassessment of the case for investment in primary agriculture has translated into a relatively new phenomenon of private and quasi-private large-scale acquisitions of farmlands. Such investors in farmland originate from different sectors, including pension funds, equity funds and sovereign wealth funds. In many instances these large-scale investments enhance efficiency and productivity. They contribute to modernizing the primary sector through new technologies and skills, and facilitate access to inputs and output markets. However, this phenomenon also raises a number of concerns regarding inclusion, sustainability and social impact. FAO is contributing to a deeper understanding of this phenomenon through a series of research studies and associated activities. This study is part of a broader group of knowledge products recently developed by FAO focusing on the potential and impact of agricultural investment in different regions. In particular, it directly contributes to analytical work carried out in 2010 by the Organization’s Rural Infrastructure and Agro-Industries Division (AGS), published as Agricultural Investment Funds for Developing Countries, and by the Trade and Markets Division (EST) in 2012. In this context, FAO is also exploring both economic aspects and social trends and impacts of foreign investment in developing country agriculture, as well as food security dimensions of agricultural land-based investments. This includes analysis of both potentially negative aspects of agri-investment, such as concern over “land grabbing”, and positive investments in value addition, agro-infrastructure and/or services that strengthen agricultural competitiveness and inclusiveness of agri-food chains. In addition, FAO is encouraging the development of voluntary standards and guidelines for socially and environmentally sustainable agricultural investments. While a wide range of actors are investing in primary agriculture globally, this study focuses on the relatively recent phenomenon of investments by private equity funds and other institutional investors in selected European and Central Asian countries. In particular, it analyzes the nature and operations of such funds, including associated risks and returns from the investors’ point of view. The study was presented and discussed in its preliminary version at the Global Forum for Food and Agriculture (GFFA) in Berlin, 2013, during a round table session on “Agricultural equity funds” organized by the FAO Investment Centre and FAO’s Regional Office for Europe and Central Asia (REU) at the invitation of the German government. The session included stakeholders from civil society, private and public sectors, and the final version of the study incorporated useful comments and suggestions made by the audience. Eugenia Serova, Gustavo Merino, Gilles Mettetal, Anne Fossemalle, Director, Director, Director, Director, Rural Infrastructure Investment Centre Agribusiness, EBRD Equity Funds, EBRD and Agro-Industries Division, FAO Division, FAO iv ACKNOWLEDGEMENTS This study was commissioned by the European Bank for Reconstruction and Development (EBRD) and carried out by the Investment Centre Division of the United Nations Food and Agriculture Organization (FAO) under the cooperation agreement between the two institutions. It was jointly financed by FAO and EBRD’s Shareholder Special Funds. The main author of the study is Ian Luyt, Agribusiness Expert, Novirost Limited. Nuno Santos and Arianna Carita, Economists, Investment Centre Division, FAO, wrote the Executive Summary and Chapter 1, and made revisions to the overall document. Emmanuel Hidier, Senior Economist, Nuno Santos and Ece Filiz, Associate Banker at the EBRD, coordinated the implementation of the study. Iain Henderson, Senior Advisor; Todd Nalven, Senior Advisor; and Marika Saridi, Senior Analyst (all from Novirost) contributed to drafting sections of the report, while Austin Peat, Novirost, contributed to editing the report. Yaroslav Udovenko led the analysis of companies with the support of Ivan Panin and Oleksandr Lozovyi, all from Fovil Securities. The study was reviewed by Pascal Liu, Economist, Trade and Markets Division, FAO; Erik Jesper Karlsson, Foreign Direct Investment Expert, Trade and Markets Division, FAO; Calvin Miller, Senior Officer, Rural Infrastructure and Agro-Industries Division, FAO; Michael Marx, Credit and Rural Finance Officer, Investment Centre Division, FAO; Ece Filiz, Associate Banker, EBRD; Lyudmyla Lishchenyuk, Alejandro Trenor, Laurence Bahk and Meltem Ankara, Bankers, EBRD; and Emmanuel Hidier. An earlier draft of this study benefited from discussions and comments from a range of stakeholders present at a session organized at the Global Forum on Food and Agriculture in Berlin in January 2013. The authors would like to acknowledge in particular the contributions of the following panelists: Ece Filiz; Pascal Liu; Calvin Miller; Charles Whitaker, Head of Agricultural Business Consultancy, Brown & Co; Lamon Rutten, Programme Manager in Policies, Markets & ICT, CTA Netherlands; and Stefan Baecke, CEO of RaboFarm. The authors would like to thank Holger Matthey, Agricultural Economist, Trade and Markets Division, FAO; Dominique Van der Mensbrugghe, Senior Economist, Agricultural Development Economics Division, FAO; Piero Conforti, Senior Statistician, Statistics Division, FAO; and Merritt Cluff, Senior Economist, Trade and Markets Division, FAO, for their valuable suggestions regarding Chapter 1. The FAO-EBRD teams would like to thank all the stakeholders who gave of their time and offered insights during the data collection process.