Agribusiness in the XXI Century - Black Sea Economic Forum

Agriculture into the XXI CenturyBlack Sea Economic Forum

Presentation to the Black Sea Economic Forum

Yalta, Ukraine

8 October 2011

Ian LuytNOViROST

www.novirost.com

Index of SlidesSLIDE NUMBER

2. Index Slides

3. Black Sea Economic Forum

4. Panel Session: Agriculture in XXI Century

5. Participants in the Agribusiness Panel

6. Black Sea Region: Agricultural GDP

7. Turkey most advanced agriculturally

8. BSR market 296 million people

9. Russia: major import market

10. Business competitiveness rankings

11. Farmland: significant scope

12. Ukraine: agriculture priorities

13. Farmland rights: fundamental

14. Crimea: unique location advantages

15. Crimea: agriculture development issues

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16. Crimea: linkage tourism and agriculture

17. Antalya a global brand

18. Visitors: best promotion of food products

19. Organic agriculture significant promise

20. Key trends in Global Agriculture

21. Agriculture: Key Investment Drivers

22. Example: HJ Heinz company

23. FDI brings additionality

24. Investment Landscape

25. Agribusiness: Investment funds

26. Crimea: investment advantages

27. Prerequisites to attracting investors

28. End slide

Black Sea Economic Forum

Black Sea Economic Forum, organized under the auspices of President of Ukraine by the Council of Ministers of the Autonomous Republic of Crimea, is an annual high-level

platform for dialogue among leading government and business stakeholders of the Black Sea region. The Forum focuses on the most relevant issues of economic cooperation and

helps discover new opportunities to positively affect investment climate, economic development and competitiveness of the entire region and Crimea in particular.

www.blackseaeconomicforum.com.ua

Agency for Regional Development of the Autonomous Republic of Crimea (ARC) was founded by the government of Crimea (the Council of Ministers of the ARC) as a single

coordinating body for investment activity on the peninsula.

www.ard.crimea.ua

The United Nations Development Programme (UNDP) is the UN’s global development network, advocating for change and connecting countries to knowledge, experience and

resources to help people build a better life.

www.undp.org

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PANEL SESSION: KEY ISSUES“Development of XXI Century Agriculture

in the Countries of the Region”

• Development of the high quality agricultural production on the basis of eco-friendly technologies and fully leveraging biological climate of the Black Sea region.

• Practice of organic agriculture in the countries of the region: creation of non-competitive economic clusters to boost competitiveness of the Black Sea basin regions and countries in a global agricultural market.

• Prospects for agricultural exports growth. Attracting investments into fruit & vegetables, meat & poultry, winemaking and spirits industries of Crimea and Black Sea basin regional economies.

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Participants in the Agribusiness Panel

• Ian Luyt – Panel Moderator – UNDP Advisor

Managing Director, NOViROST Food and Agribusiness Strategic Advisors

• Mykola Prysyazhnyuk, Minister for Agrarian Policy of Ukraine

• Dario Marchetti, General Manager, Danone Ukraine

• Iryna Starodubova, Partner, Horizon Capital

• Dimitri Podoliev, Country Manager, Alpcot Capital Management

• Yury Gordeychuk, General Director, VALARS

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Black Sea Region Agriculture GDP $205bnKey role in global food production

Source: Global Finance (www.gfmag.com)

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COUNTRYPopulation

‘000,000GDP

US$ blnPer Capita

GDPAgriculture

GDP

Agriculture as % of

GDP

UKRAINE 46.0 $157.6 $3,483 $15.4 9.8%

RUSSIA 141.8 $1894.0 $13,543 $89.0 4.7%

TURKEY 74.8 $797.6 $11,054 $74.0 9.3%

BULGARIA 7.6 $53.0 $7,073 $3.9 7.5%

ROMANIA 21.5 $174.4 $8,157 $21.6 12.4%

GEORGIA 4.7 $12.8 $2,629 $1.56 12.2%

TOTAL 296.4 $3089.4 $205.5 6.6%

Turkey is most advanced agriculturally – public-private partnerships significant

• Mostly small-scale farming – 3 million farms of average size 6 ha (only 57 farms > 500 ha)

• Global Top 10 agricultural producer - Self-sufficiency since 1980s

• 43 million tons of fruit and vegetables per annum – over $800 billion

• World’s #1 producer of hazelnut, cherry, fig, apricot, quince, pomegranate

• World’s #2 producer of watermelon, cucumber and chickpea

• World’s #3 producer of tomato, eggplant, green pepper, lentil, pistachio

• Poultry production has doubled in 10 years

• Organic production only 141,000 ha – but significant potential

• Strong government support: example: “Southeastern Anatolia

Project” will provide irrigation to 1.82 million hectares

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Source: Turkish Agriculture Report: Deloitte July 2010

Black Sea Region a market of 296 million people – but limited integration

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RUSSIA: Major Regional Import Market

• GEOGRAPHIC PROXIMITY

• STRONG CULTURAL LINKS - UKRAINE

• Direct air, road, rail, sea links

• FOOD IMPORTS ~ $33 bn (2008)

• Import growth significant: 500% in 8 years (2000-2008)

• Main imports: meat, processed products, fruit and vegetables

• Currently relatively small presence of high value food products from Ukraine

• Crimea needs stronger PROMOTION at major food exhibitions in Russia (e.g. World Food)

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Business Competitiveness rankings are weak – except Georgia (some aspects)

COUNTRYGlobal

Competitiveness(out of 133)

Doing Business (Ranking

out of 183)

TURKEY 61 65

RUSSIA 63 123

ROMANIA 67 56

BULGARIA 71 51

UKRAINE 89 145

GEORGIA 93 12

Source: Global Finance (www.gfmag.com)

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FARMLAND: Arable potential larger than the EU but less than 5% irrigated

COUNTRYTOTAL LANDSq Km

Agricultural Land

Hectares

Agri Land as % of

Total Land

Arable Land

Hectares

UKRAINE 603,550 41,292,000 68.4% 32,474,000

RUSSIA 17,098,240 215,494,000 12.6% 121,649,000

TURKEY 783,562 39,122,000 50.0% 21,555,000

BULGARIA 110,910 5,116,000 46.1% 3,086,000

ROMANIA 238,490 13,546,000 56.8% 8,271,000

GEORGIA 69,700 2,517,000 36.1% 463,000

TOTAL 18,904,402 317,087,000 16.8% 187,498,000

EU27 4,308,406 178,813,000 41.7% 106,751,000

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59.6% of arable land in EU27 is irrigated59.6% of arable land in EU27 is irrigatedSOURCE: www.eastagri.org

Ukraine Agriculture - PRIORITIES• Significant achievements in past decade – agriculture is one of the untold success

stories in the CIS but key reforms remain:

– Clarity on state policy towards strategic crops – needs predictable environment

– Land law reform – new law expected by end of 2011

– Improved investor protections – rule of law issues

– Investment in Innovation and R&D – public-private partnerships and linkages to global strategic players

– Development of effective soft commodity exchange

– Farm finance – significant progress but needs competitive interest rates

– Infrastructure – development of competitive logistics and distribution facilities

– Skills development – significant progress/ more needed

– Food safety standards – harmonization with WTO standards

– Improved State support to agriculture development and exports

– Improved competitiveness – cost and quality

– Improved market linkages

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SECURE FARMLAND RIGHTSFundamental to Investment

Further reform needed

COUNTRY FARMLAND RIGHTS

UKRAINE Leasehold only/ new land law due end of 2011

RUSSIA Freehold/ with restrictions on foreign ownership

TURKEY Freehold

BULGARIA Freehold/ Only Bulgarian residents and corporate entities

ROMANIA Freehold/ subject to seven year limit from EU Accession Date

GEORGIA Freehold/ subject to limitations

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Successful Land Reform in Ukraine will create a collateral base of potentially $50 billion

Successful Land Reform in Ukraine will create a collateral base of potentially $50 billion

CRIMEAUnique location advantages

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★ Crimea offers strategic maritime and land corridors

within the Black Sea Region

CRIMEAKey Agribusiness Development Issues

• Infrastructure – distribution and logistics – cold chain development

• Efficient markets – development of wholesale markets

• Improved Productivity – plant genetics, yield, quality, promotion

• Incentives to re-develop aged vineyards and fruit orchards

• Product Quality and Food Safety

• Food Safety must be the image of Crimea

• Organic production must be preceded by achievement of efficient production standards: food safety is a bigger priority

• Good information and active promotion – key to attracting and facilitating investors

• Needs proactive state support (example of Turkey, Chile, Brazil,

Argentina, USA, New Zealand, Australia, Egypt, others

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CRIMEAStrong Linkage between Agriculture and Tourism

• Tourism development will catalyze agricultural development

• Turkey is a good example of this:

– Tourist arrivals 1990-2010: 5m to 28m

– Agricultural GDP increased from TRY 17 to TRY 79 billion in past decade – up 500%

• Key agribusiness sectors:

– Fruits and vegetables and processing thereof

– Milk and milk products

– Meat and meat products

– Wine

– Seafood

– Cereals (opportunity for Durum wheat)

– Essential oils and herbs16

CRIMEA offers 700,000 ha of arable landCRIMEA offers 700,000 ha of arable land

EXAMPLE: Turkey has developed ANTALYA as a “global brand”

• Turkey receives 31 million visitors every year – target is 50 million tourists

• Global market 900 million tourists annually - $1.0 trillion market

• Antalya hosts 9.2 million tourists every year (Crimea 600,000 – average spend is lowest in region ($172 per visitor)

• Turkish state supports 40 tourist offices in 37 countries

• Tourism will be single biggest impact on local food production in Crimea

• Crimea has potential to emulate Turkey’s achievements

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Tourists may be best promotionof local food products

• Strong demand during tourist season

• Prime export location – BSR, EU, Russia, Middle East, etc

• Local market ~2.0 million people

• Effective Public-Private Partnerships are prerequisite to success (again, Turkey an example of this success)

• Seek “anchor investors” (example of Danone)

• Promote “icon” crops (e.g. Hazelnut in Turkey – Crimean red onion)

• Goal to be a reliable player in local and world markets

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ORGANIC AGRICULTUREFew certified producers but significant promise

• Global market ~$60 billion per annum (240% growth)

• Over 35 million hectares certified as organic production

• 141 million certified producers

• Relatively small presence of certified producers in CIS/ Ukraine

• Crimea – offers wide diversity of production

• Strong precedent in Crimea in production of aromatic herbs (currently ~8,500 ha)

• Addressing fundamentals must take precedence – productivity, food safety standards, management, marketing, promotion

• Also needs development of organic product standards and certification and monitoring procedures

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Key trends in Global AgricultureIncreasing farmland values

• Farm consolidation – larger farms

• Greater on-farm specialization

• Higher capitalization

• Improving productivity

• Increasing farmland values

• Increasing contractual arrangements/ supply chain integration

• Risk from specialization/ surpluses

• Vertical integration - enterprises that bring advanced technology, superior managerial expertise, and investment

• Increased exposure to global market trends

• Environmental and food safety focus

• Changing markets – urbanization/ growing middle class

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Global AgricultureKey Investment Drivers

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• BASIC INVESTMENT PREMISE

“A looming imbalance in the supply and demand of food commodities will result in a prolonged period of higher food commodity prices”

• DEMAND FACTORS

– POPULATION GROWTH

• Global population to increase from 7.0 to 9.0 billion by 2050

• Middle class to increase from 430 million to 1.15 billion by 2030

– CHANGING GLOBAL FOOD CONSUMPTION TRENDS - AS INCOMES RISE

• Switch from starch-rich to protein-rich diets

• Professionalization of meat industries will demand more grain

• Move towards higher margin branded foods

• SUPPLY FACTORS

– PRODUCTION LIMITS: Industrialization, urbanization, water limitations,

climate change, slowing productivity gains

– IMPACT OF BIOFUELS - diversion of crops and farmland

Example: HJ Heinz CompanyAnticipated growth in Emerging Markets

• “Emerging Markets are on track to deliver at least 20% of our total sales by 2013, more than double their contribution of just five years ago,” Mr. Johnson said. “Heinz is already well-established in Emerging Markets like China, India, Indonesia, Latin America and Russia, where we have strong brands, local marketing expertise and the infrastructure necessary to sustain strong growth.”

• “Emerging Markets are key to unlocking future growth because their economies are growing at a significantly higher rate than developed markets; the middle-class in Emerging Markets will eventually outnumber the combined populations of the U.S. and Europe; and per capita consumption of packaged foods in Emerging Markets has significant upside.”

William R. Johnson, Chairman, President and CEO,

H.J. Heinz Company, Pittsburgh, 31 August 2010

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FDI may bring significant Additionality“Global Partners”

• Bridge to global technology, markets, and capital

• Provides expertise in structuring investments and unlocking value

• Improved strategic focus, management, and asset utilization

• Sets benchmark in product quality and standards

• Facilitates harmonization with global standards

• Corporate governance: facilitates development of private businesses into institutionalized companies

• Investment discipline - enhanced leverage/ borrowing capacity

• Improves efficiency of market information and access

• Often strong partner in articulating and lobbying reforms

• Turkey regards foreign investors as “Global Partners”

• Turkey: FDI into agriculture > $1.5 billion (500 investors)

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INVESTMENT LANDSCAPESignificant investor interest in agriculture

• Sector- and region-specific private equity funds

• Specialized agribusiness funds

• Sovereign Wealth Funds

• Food Sector Strategics

• Local agribusiness conglomerates

• SMEs have a significant role

• Ukraine lagging in investor perceptions due to uncertainties in regulatory and business conditions

• Limitations also due to lack of scale, fragmentation, corporate governance weaknesses, policy and land rights uncertainties

• Effective promotion is key to investor awareness

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Agribusiness: Investment FundsInvestor perceptions are important

• Since 2007 over $13.0 billion invested by funds and others into agribusiness globally

• Emergence of specialist farmland and food sector funds – over $1.0 billion invested in Russia since 2006

• Ukraine: country perceptions – limited fund presence

• Weak perceptions about governance and corruption

• Crimea: ignorance about investment potential

• Black Sea Economic Forum is addressing this but needs to engage more private investors

• Addressing perceptions starts with central government

reforms

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CRIMEA: Investment advantages

• Proactive business-friendly government

• Strategic maritime and land corridors between Europe and Asia

• Positive growth forecast for all countries in surrounding Black Sea Region - but limited fiscal capacity so FDI is critical

• Significant potential for greater intra-regional trade

• Resilient and innovative echelon of farm entrepreneurs

• Most BCR countries produce the same food products, so competitiveness is critical

• Relatively little is known about Crimean products, beyond wine

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Prerequisites to Attracting Agri Investors

• Clear Development Vision

• Stable and predictable policy environment

• Strong public administration

• Skills development (more so than location)

• Efficient and competitive Infrastructure

• Aggressive marketing

• Seek anchor investors to attract others

• Competitiveness is key to attracting investment

• It’s a PACKAGE of requirements

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Thank You

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Ian LuytAdviser to UNDP

NOViROSTFood & Agribusiness

Strategic Advisory and Corporate Financewww.novirost.com

[email protected]+ 7 915 201-3244