What market do we have today and which we will have tomorrow. Interview of the CEO of Investment Company INTELEVRAZ for magazine “ZERNO”
The basis for the examination of the land market and the situation in the agro-industrial complex of Ukraine is 10 years of experience of our company, “INTELEVRAZ” – an investment boutique, a rare and unusual form in our reality. We specialize in attracting investments, both Ukrainian and foreign, in the Ukrainian economy. Even before the establishment of the company and in the first stages of its existence, we participated in the purchase of small farms and merging them into holdings. The market was different, I remember the times when the right to rent in the cornfield cost 150 dollars/ha, then rose to 500, then to 1000. There were peak moments, there were periods of decline. Recently, I have seen fluctuations from 700 to 1000 dollars/ha, depending on the zone.
Boutique companies are extremely few, because they are based on many years of experience, a large number of cases. We have crossed paths in this market with the «Big Four» companies, which mostly audit large players and then handle their assets quite professionally because they are well versed in what they are dealing with. In this activity, it is important that the owner and the advisor equally understand the price of the asset. We have had situations where the owner did not understand the price of his company, underestimated it, and recently, on the contrary, there are more cases when the owner overstates the price. All these are normal market realities. The market is not public, it is quite closed, and real deals do not advertise the value. It is difficult to determine the value of land, and this is a key factor in assessing the crop business. The advantage of working with us for the seller is that we know all the stakeholders in the area of the enterprise, we know the reputation of the people who sell the business – this is an advantage for the buyer. When we prepare information for the buyer, we provide him with impersonal data and only after signing the confidentiality agreement, we reveal the names of individuals. We eliminate the need for the seller to communicate personally with the buyer, this is important when the transaction takes place between neighbors. Our task is to sell at the most effective price.
Now the market is waiting. Although, I think, the situation with COVID19 did not affect farmers. Yes, there is a fall due to the uniquely snowless winter, it has affected winter crops, low moisture reserves, but the cycles are clearly followed by farmers, they work according to schedules. As for spring crops, corn and sunflower, yields will be good, and in some regions – peak. The mergers and acquisitions, M&A, market came to a halt before the land market law came into force.
People did not understand how to act, there was a purchase of only a few lots in the area of presence or exchange, we ourselves invested in agribusiness and sold it in April. But after the law was passed, the market moved. Interest is only growing, in conditions of instability, crop production is a very attractive segment. The lack of high-profile deals does not mean a collapse, land market deals are not something that happens instantly.
Now there is an agreement that is not advertised, people have entered the management processes of the company from another company, and the agreement will be closed to the land bank of more than 20 thousand hectares of cultivation. Companies have already sold 4,000 hectares and 5,000 on the market since the law was passed. And we have in our portfolio the sale of a company with a land area of more than 5 thousand hectares, and a fairly high interest is observed, all these are factors in the revival of market processes. The market will not be affected by the value of lease rights, it will not increase or decrease. Although this is the only way to buy arrays with a large consolidation. Otherwise you will have to buy small pieces of land. And people who create the conditions for the purchase of consolidated land will be able to ensure 50-100% efficiency of investment.
The open market was launched with the purchase of land provided to anti-terrorist operation participants. Now it is not growing and stands still, but it has access to a limited number of investors in the regions who directly know where this land is. This market segment will significantly recover after 2021, people will consider it as an investment asset or a supplement to the pension. Now they are adjusting to it. There will be a certain number of people entering the market who today do not have information about the existence of the land market of ATO participants, about emphyteusis agreements, and this will increase the price by 30-40%. In the first year, we will fix the price of 2000-2500 dollars per hectare.
But in 2024 we expect a doubling of the market. Financing will be opened for consolidated lots of land, now a large number of banks are looking for ways to enter this market to enter with large capital lending. There will be a certain boom, there will be a bubble, as always at the time of the opening of funding.
The model of a farmer’s behavior is to find investors who will help him buy the land and continue growing crops. Because buying land for a farmer can be catastrophic, he will be able to buy 30% of the land he cultivates, and these funds have long been accumulated. Last year, the market for the purchase of agricultural machinery stopped, and agricultural producers were optimized.
But the rest of the land will have to look for a partner, an investor. It is also important to restrain the rental market, which is constantly growing in value. This factor has a threshold of economic feasibility, which the landlord, of course, does not think. A record harvest in the world can make leased land unprofitable. Farmers have difficult access to finance, it is very expensive in Ukraine, and even the reduction of the NBU discount rate to 6% has not led to cheaper loans. They say that the price of land rent is even higher in the USA, but I have seen some farmers from the USA in Ukraine as buyers of agricultural companies – the margins with high rents are so low that they are looking for opportunities to earn in other countries. There are many of them in Latin America. Although with the advent of capital, the cost of renting land will increase.
An increase in the dollar exchange rate for farmers is a plus, because most of its cost is fixed in hryvnia, and the harvest is sold pegged to the currency. Agrarians are not afraid of a weak, but a strong hryvnia, such are the economic realities. When the exchange rate decreases, the cost to farmers increases.
There are still problems with working capital, which cannot be closed due to underdeveloped financial culture, lack of collateral. In such a situation, the farmer must clearly define for himself what size lot he wants to leave as an anchor, for the production base and efficient operation. In fact, farmers already have these amounts, because they expected that the market will be introduced earlier and stopped investing.
For the remaining areas, it is necessary to look for financial partners who are interested in acquiring land and leasing it. For many, these are additional opportunities. We can also expect the transformation of large holdings with the launch of the land market, because the market does not provide for the existence of large models with their own land bank. Holdings will also adapt their structure to the market by limiting 10,000 hectares in one hand.
Of course, the main difficulty for farmers is the need to make fateful decisions on their own. This is where an experienced advisor, consultant, investment boutique with reputable capital, with the values shared by each employee – honesty, honesty, profitability for the client, logic and common sense can be useful. That any economic action was directed for the benefit of the person and for the benefit of Ukraine.
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