Investing in direct farming operations can involve considerable risk as well as reward, particularly if the investment opportunity is based overseas. However, the rapidly growing world population and the increasing GDP in developing nations is driving demand for food production.
Added to the demand for bio fuels (bioenergy is estimated to be the fourth largest energy resource after coal, oil and natural gas), concerns over climate change, water availability and the sustainability of existing soil resources, it is no wonder that agriculture is, once again, an exciting sector in global investment markets.
While choosing a suitable investment prospect can be challenging, particularly in the current economic climate, Fisher German has identified Eastern Europe as a region with good potential. The implementation of land reform policies has meant significant progress has been achieved in the agricultural sector and, as a result, many Eastern European countries offer expanding opportunities for foreign direct investments.
In Western Europe the major capital element of agriculture is land. While in Russia, for example, the cost of land is low (£110-£150/ha) in many areas substantial capital is required to bring land out of fallow and provide infrastructure which can add another £1,000/ha of capital expenditure.
Operational costs such as fuel, machinery, sprays and fertilisers are similar to Western European operations with only labour being considerably cheaper, meaning that operational overheads are in the region of £110/Ha.
However, there are considerable risks - particularly in those countries not within the EU. Not least of these is political risk in the former CIS countries where land tenure, food and energy prices are still challenging issues. It is therefore important to gain an understanding of local, regional and global politics, markets and policies.
Selecting strategically important productive land and infrastructure is also vital as is effective price risk management: as global markets and trade grow, price volatility will increase.
David Kinnersley of Fisher German’s Eastern European farm investment and management service advises that investors should consider the available commodity markets and the potential to integrate supply chains where appropriate.
To be profitable, businesses have to pay close attention to their cost structure, operational management and technical performance. David explains: “Economies of scale and efficient production alone will not be sufficient to generate above average returns and create a sustainable competitive advantage. Investors need to understand how to manage logistics, marketing, and prioritise investments carefully to be successful.”
However, David says that there are great opportunities in the long term if the risks are managed. “Our experience in Eastern Europe helps investors identify where suitable opportunities lie and how to take advantage of them. We can provide operational management on the ground in Bulgaria, Romania, Poland, Russia and the Ukraine and have a track record in setting up incentivised management contracts for farm managers,” he adds.
For further details, contact David Kinnersley 01295 226294 email david.kinnersley@fishergerman.co.uk
