Alpcot Agro, Black Earth Farming, Black Earth region, Continental Farmers Group, Cresud, farmland, Market Cap/hectare, Trigon Agri
Today, with some regret, I let go of one of the agricultural plays in my portfolio.
I wrote in a recent article about ‘…the increasing global demand for protein as living standards improve around the world…’. This prompted me to identify farmland as perhaps the purest investment opportunity to exploit this trend. Imagine my delight on discovering the most fertile farmland in the world coincided with some of the cheapest (productive) farmland globally. I highlighted the Black Earth region of Ukraine & Russia as one of the best farmland opportunities, and promised to write about it at a later date.
After extensive research, I identified a selection of agri-business stocks in the region and eventually homed in on a particular stock. However, I already owned Cresud (CRESY:US) at that point, and couldn’t choose between them in terms of risk and reward. Ultimately, I decided on a 4-5% portfolio allocation to pure farmland, split between these two stocks. But first, let me walk you through the stocks I researched. Many were unsuitable from my current perspective, but I wanted to cover them all as they may well stimulate your own interest and research.
The first 3 stocks are focused on Eastern European farmland. In light of their geographic focus, and the higher farmland valuations in this region, I didn’t investigate these any further:
FirstFarms (FFARMS:DC): Romania & Slovakia – Cereals & Dairy
KTG Agrar (7KT:GR): East Germany & Lithuania – Cereals
Agrowill (AVG1L:LH): Lithuania – Cereals & Dairy
The next 9 stocks are listed on Polish/Russian stock exchanges, and/or have poor English language websites. Creativ was listed in Germany, but I can’t locate their ticker/listing any longer for some reason. These are a stretch too far for me at the moment..! As standards and transparency improve, I may revisit these stocks:
Razgulay Group (GRAZ:RM): Russia – Cereals & Sugar
Agroton (AGT:PW): Ukraine – Cereals, Oilseeds & Poultry
Kernel (KER:PW): Ukraine – Cereals & Oilseeds
Astarta (AST:PW): Ukraine – Sugar
Rusgrain (RUGR:RM, currently in a stock split process): Russia – Cereals, Poultry & Eggs
KSG Agro (KSG:PW): Ukraine – Cereals
Industrial Milk Co (IMC:PW): Ukraine – Dairy & Cereals
Milkiland (MLK:PW): Russia & Ukraine – Dairy
Creativ Group: Ukraine – Oilseeds
The next 5 are a lot more interesting. Remember, if you’re analyzing land values in the regions, there’s a couple of things to note: In Russia, land will be in registered ownership, in the process of ownership registration or occasionally will be leased. Steady/improving progress has been made in completing the registration process, so it’s reasonable to treat land in this category as owned. Ukraine, on the other hand, does not permit foreign ownership, so farmland must be leased. Since most leases are longer-term, and/or with options to buy (upon any change in the law), I generally value leased land at a 50% discount to my owned land valuation.
When I evaluate these stocks based on a USD Market Cap/hectare, I come up with a range of values from $1,700 to $4,200 per hectare. At those kind of valuations, none of these stocks offer me enough potential upside from a pure farmland appreciation perspective. In my opinion, they’re better evaluated in terms of their current/potential earnings growth. I’ve drilled down on each of these companies, but ultimately set them aside as I already own a Ukrainian agribusiness on a similar basis. I’ll write about this holding at a later date. I’ll admit it’s giving me some heartburn these days, but its operational and earnings growth are exceptional:
Ros Agro (AGRO:LI): Russia – Sugar & Pork
AgroGeneration (ALAGR:FP): Ukraine – Cereals
Continental Farmers Group (CFGP:ID or LN): Ukraine – Cereals
Mriya Agro (MAYA:GR): Ukraine – Cereals & Sugar
MHP (MHPC:LI): Ukraine – Poultry
The next 3 are in the same category, but they are even purer earnings/growth stories as they do not own any significant amounts of farmland:
Avangardco (AVGR:LI): Ukraine – Eggs
Cherkizovo (CHE:LI): Russia – Poultry, Meat Processing & Poultry
Ukrproduct (UKR:LN): Ukraine – Dairy
Now we can finally home in on my Top 6 most undervalued farmland companies. I’ve listed them according to their level of undervaluation:
Landkom (LKI:LN): Ukraine – Oilseeds & Cereals [(0.5) years]
Alpcot Agro (ALPA:SS): Russia (92%, but half is leased) & Ukraine (8%) – Cereals [0.8 years]
Black Earth Farming (BEFSDB:SS): Russia – Cereals [0.7 years]
Trigon Agri (TAGR:SS): Russia (2/3) & Ukraine (1/3) – Cereals [2.5 years]
MCB Agricole (4GW1:GR): Ukraine – Cereals & Oilseeds [(0.5) years]
Sintal (SNPS:GR): Ukraine – Cereals [(1.4) years]
To be continued…
what are risks in terms of investing in Ukraine and Russia ?
Is it similar or higher than investing in China ?
What are the possibilities of them being frauds ?
I hear they do Business with guns over there ?
Sorry for the questions i have no clue in terms of investing in those area.
Please share your knowledge
Baically what are the chances of going to zero ? 0 to 10 ?
I can’t think of any outright frauds in Ukraine & Russia, like we’ve seen in China recently. Then again, I can think of plenty of scandals/frauds in the US/Canada over the years so human nature is the same everywhere, I would conclude! Yes, I guess they do carry guns in Ukraine/Russia…simply because everybody else does (inc. the taxman!)! Maybe they all need to call a truce…
More generally, I’ve never been too concerned about risk/corruption in emerging markets – I always felt that lower valuations and higher growth prospects were adequate compensation. Also, when you consider the recent financial crises and political farce in the developed markets, I don’t think it’s at all clear that emerging markets are riskier..!
If you have a portfolio that is just focused on your home market/region, I think a portfolio restructuring to include a major allocation to overseas/emerging/frontier markets is an excellent idea. Yes, individual markets can prove risky (so can the US), but overall I believe you will end up with a better diversified, lower risk, higher return portfolio longer-term. If you don’t feel confident yet about certain individual investments, using closed end funds/investment trusts/ETFs, even mutual funds, is a perfectly good approach also.
I see that he and Mohnish Pabrai are buddies – Pabrai’s a big holder of CRESY. Interestingly, they both also talk about using checklists. I’ve been leaning towards this recently. I must try read The Checklist Manifesto – written by a surgeon, but v relevant I believe and I’ve seen it cited by quite a few people recently.
Your stock Cresud is also in the portfolio of Aquamarine Capital (Guy Spier and family).
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