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Investment Opportunities in Russia’s Growing Agriculture Sector

Investment Opportunities in Russia’s Growing Agriculture Sector

As the world’s population and demand for food continues to sharply increase, a major looming question for policymakers, investors and communities is, “Where will increased food supply come from?” While additional food production will depend on various factors, including government policies, private sector investment and technology, one country that will likely play an increasingly important role in feeding the world is Russia.

Since 2000, Russia’s grain exports have rapidly grown and in 2017 Russia surpassed the United States to become the world’s largest exporter of wheat. In addition to its current agricultural production capabilities, climate change may make many millions of additional acres in northern Russia available for farming. This, combined with planned expansions of Russia’s export infrastructure, broadening export markets and a planned increase of fertilizer use, could increasingly place it in a position of global agriculture sector leadership.

This article provides a brief overview of the Russian agriculture sector, how it has been impacted by economic sanctions in the wake of Russia’s annexation of Crimea and its great potential going forward. In addition to having major world food supply significance, this will create significant opportunities for global agriculture sector investors.

A Snapshot of Russia’s Agriculture Sector

The largest country in the world, Russia has approximately 1,282,500 square kilometers of arable land. While the key drivers of Russia’s economy are oil and natural gas exports, the agriculture sector is also important and currently comprises approximately 4.7% of Russia’s GDP.

Russia’s most important crops are grains, sunflower oil and corn. It is one of the world’s top producers of wheat, the world’s largest producer of sunflower oil and an important producer of corn. In addition to grains and vegetable oils, Russia also produces and exports many other food products such as barley, fish, meat, dairy products, fruit and nuts.

Russian food products are exported around the world. Russian grains, for example, are exported to over 120 countries. The main export destinations for Russian grains are North Africa, the Middle East and the South Caucasas. The main export destinations for Russian sunflower oil are the CIS countries, China, Turkey, Egypt and Iran.

The Macroeconomic, Geopolitical and Climate Context

Since 2014 Russia’s agriculture sector has been impacted by a number of major macroeconomic and geopolitical events. The first event was the collapse of the price of petroleum, Russia’s most important export. Between 2014 and 2018 the price of oil fell from US $103 a barrel to a low of US $39 a barrel and the price is currently US $61 a barrel.

This has had several important consequences for Russia, including pushing the Russian economy into recession, causing a sharp fall in the value of the rouble and a causing a drop in Russia’s foreign currency reserves. The rouble’s devaluation caused the price of imports to sharply increase which in turn created strong upward inflationary pressure. In 2015, the inflation rate in Russia was over 15%, its highest level in a decade.

A geopolitical development that has had an important impact on Russia’s agriculture sector is the economic sanctions against Russia. Following Russia’s annexation of Crimea, various countries implemented several rounds of economic sanctions against Russia. In response to these sanctions, the Russian government banned food imports from several countries and areas, including the United States, Canada and the European Union. Following this, the structure of Russian consumer food consumption significantly changed. Between 2014 and 2018, the percentage of food consumption that was based on imports fell from approximately 37% to approximately 22%.

A third set of events, whose cause and significance still remain difficult to analyze precisely, are temperature increases and extreme weather events. What is clear is that due to several years of highly favorable weather conditions Russian grain production has sharply increased. In 2017 Russia become the largest exporter of wheat in the world, exporting nearly 28 million tons. It is expected that the 2017-2018 harvesting season will produce about 133 million tons of grains, of which approximately 45 million tons will be exported. It is expected that about 32 million tons of these exports will be comprised of wheat.

Agriculture Sector Potential and Obstacles

The Russian agriculture sector has massive potential going forward for several reasons, one of which is rising global temperatures that may melt snow currently covering massive areas of potential farmland. According to one report, global warming could create an additional 140 million arable acres of land in Russia. This, combined with an additional use of fertilizers and technological developments, could exponentially increase Russian agricultural production capability.

Additional production capacity has the ability to be matched with new markets. Vladimir Putin’s vision of a Greater Eurasian region and the possibility of great economic integration with China, a massive source of food demand, could significantly increase export market depth.
Russia faces, however, major challenges to building its agriculture sector. A major current challenge is its weakened economic condition due to low oil prices and the weak rouble. This has made it much more expensive to import needed agriculture machinery. Further, weakened central government finances have made it more difficult to support the agriculture sector with subsidies, a key component of Russia’s overall agriculture sector public policy.

Another major obstacle to Russian food export sector growth is infrastructure limitations. Russian traders have lost access to ports in the Ukraine, which has limited export capacities. Several upgrades to Russian ports and terminals are current being built or are planned, but it is unlikely that these improvements will have a major impact on grain export capabilities for at least a few years. One of these ports is a new grain facility that is planned to be built at the sea port of Zarubino, near the Russia-China border.

Russia’s great size also creates opportunities as well as challenges. While Russia is uniquely positioned to supply markets in Europe, Asia and the Middle East, due to its immense size and the fact that many places with great agriculture growth potential are in areas that are not highly populated, it will be a challenge to put in place, not only agricultural product storage and transport infrastructure, but also the communities required to support significant further agriculture sector development.

Investment Opportunities

The current and potential future economic and agriculture landscape in Russia creates many investment opportunities. These include:

-investing in farming companies that have production growth strategies

-investing in company or investment funds with agriculture-driven infrastructure strategies, including ports, roads and logistic centers

-investing in companies whose business models are based on agriculture sector inputs, including agriculture machinery, agriculture equipment and fertilizers

-investing in companies in the financial sector that can complement or increase existing agriculture sector financing sources


The already important Russian agriculture sector has the potential to grow significantly in the years to come. In addition to having major significance for global food supply, this will create many investment opportunities for global agriculture sector investors.

This article was written by Darin Bifani. The photo for this article was taken by Nitin Bhosale.

If you would like to discuss potential agriculture investment strategies in Russia or other parts of the world, please contact us!

Six Steps to a Great Business Plan

Six Steps to a Great Business Plan

Regardless of what stage a company is in in its corporate life cycle, the market conditions it faces or how successful it is, it can always benefit from creating a strong business plan. In addition to serving as a constant guide for a firm’s entire team, a great business plan can help articulate a firm’s vision and strategy to many different types of external audiences that are vital for a firm’s success, including customers, financing parties, potential joint venture partners and counterparties in M&A transactions. This article identifies six steps that entrepreneurs and companies should keep in mind when creating and implementing their business plans.

Step #1 Create a Strong Value Statement

The basis of every business is its core values, the principles that guide a company regardless of the business conditions it faces and regardless of whether it is succeeding or failing. These principles are not only a firm’s internal compass; they are also the key bridge between a firm and the market it operates in. As Steve Jobs said in a well-known speech on marketing, given that in a noisy world with constant competition for consumers’ attention consumers will remember very little about a business, its values are what help consumers internalize an image of a business as not only a utilitarian set of products and services, but rather as a representation of the way consumers live and want to live.

Step #2 Create a Business Plan That is as Unique as Your Business

Many business plans simply state, in essence, that a business will sell more products and services and, as a consequence, its revenues will significantly grow. But even if two businesses operate in the same market, sector and segment, there will often be large differences in how they do business. This is because they have different people, different cultures, different ways of operating and different histories. Rather than being superfluous to a business plan, these differences are often a business’ heart and soul and what make it great.

Accordingly, rather than losing what is unique about a business through off-the-shelf business plan templates that are applicable to all firms in all sectors, a better approach is not to be afraid to throw out standard business plan formats and instead create a plan that clearly presents what is different about a firm, the opportunities it sees and how it plans to take advantage of those opportunities. Create a business plan that only your business can create and only your business can implement.

Step #3 Understand Market Force Allies and Adversaries

Businesses do not, and cannot, operate in an economic and financial vacuum. As the Chinese philosopher Sun Tzu said in the strategy class The Art of War, if you want to win in war you have to have a deep understanding of not only yourself but also others. In the business context this means clearly understanding the internal and external forces that work to your advantage and those that work against you. These forces are often different for every firm and can include factors as diverse as:

  • Employee morale.
  • The nature of a business’ competitors and barriers to competition.
  • Financial factors such as the cost of capital.
  • Microeconomic and macroeconomic variables.
  • Regulatory factors.

To create a strong business plan, it is vital to understand the internal and external forces that work in a firm’s favor and against it. The impact of these factors can also change with positive forces creating risks and negative forces creating opportunities.

It may sound straightforward, but truly understanding our businesses and the market around us is far from easy. To understand market forces better than your competitors, it is important to have an analytical approach where assumptions about the market that are based on anecdotes about the market or unfounded perceptions are replaced with investigative processes that are designed to obtain empirical data and systematically apply that data to business plan hypotheses.

This data should provide a firm with not only actionable information regarding the current supply and demand for a product or service, but also the factors that affect that supply and demand, how they change, and factors that can affect those changes. To develop this type of vision of the market, it is necessary to both study the market from diverse perspectives and to have strong relationships with your target consumers and have a deep understanding of how they live, how they make decisions about products and services and how they use those products and services. Ultimately, every business is the sum of its clients.

Step #4 Plan for Uncertainty and Moving Targets

Business plans often paint a static view of businesses and the markets that they operate and assume that the only thing that a business needs to do going forward is more of what it is currently doing. This simplistic view of business operating realities, not surprisingly, often leads to situations where a business’ performance projections quickly deviate from business realities. Particularly for businesses that seek investment from outside investors, missing forecasts can cause investors to question a business’ credibility which of course can undermine fundraising efforts and other business initiatives.

Rather than assuming that an operating environment will be static, business plans should assume that many types of operating environments are possible.

Because of this, rather than view the future world as fixed target that will remain still as a business moves toward it, it is better to view it as a set of macroeconomic and microeconomic possibilities which have different sets of likelihoods of occurring. In this type of vision of the future businesses have to have the flexibility of reacting to different internal and market scenarios as they develop.

Step #5 Don’t Let the Long Term Become the Enemy of the Short Term

A business plan should be a document that not only inspires people to stretch for goals in the future but also provides a very concrete picture of the steps that are required to be taken to reach those goals. Businesses can fall into the trap of painting a clear picture of targeted future goals but not providing a clear path to the short term changes, quantitative as well as qualitative, that will be required of a business in order to meet those goals. A business plan fails if it cannot answer the question: “What should I be doing right now to be where I want to be tomorrow?”

Step #6 Review the Business Plan Every Day

Some companies prepare a business plan, review it once a quarter or less and then, if results fall short of projections, go through a period of internal questioning as to why the targets are not being met. However, a business plan should be a document that is reviewed on a daily basis and becomes a constant guide through changing business currents and an inspiration to meet the challenges it sets forth. It also should be a document that reflects the best of a firm and incorporates new firm wisdom as the firm grows, makes mistakes and learns from them.


Business plans can range from general statements of abstract goals that have little chance of being realized to living documents that play a large role in the day to day activities of a firm. There is no one correct way to prepare a business plan, but by creating a strong value statement, identifying a firm’s unique strengths, developing an objective methodology to understand the positive and negative forces that affect a firm, preparing for uncertainty, focusing on the short as well as long term and reviewing a business plan constantly, a business plan can play a major role in strengthening a firm’s business performance.

This article was written by Darin Bifani. The photo for this article was taken by Stephan Leonardi.

You might also be interested in FIVE REASONS TO RIDE THE M&A WAVE TODAY

Green Bonds and Agriculture Project Finance

Green Bonds and Agriculture Project Finance

As we move forward in the 21st century, the global agriculture sector faces two immediate and very large challenges, the solutions to which can at times be at odds with each other. The first is to find a way to produce dramatically greater amounts of food to feed the world’s rapidly growing population. The second is that agriculture production and activity can at times cause significant negative impacts on the environment.

While successfully meeting these challenges will require a sustained combination of many political, financial and industry tools, green bonds are one way to both channel significant amounts of capital into the agriculture sector and at the same time support agriculture practices that have positive environmental consequences. These bonds could become an important complementary financing source, not only for governments and large corporations, but also for smaller agriculture companies that play a very important role in the global food chain.

Population Growth and Food Demand

The global demand for food, which is already very high, will rise dramatically in the years to come. According to a report by the United Nations, the world’s population will reach 9.8 billion by 2050, an increase of more than 2 billion.  This population increase will have a major impact on global demand for food. An article published by Maarten Elferink and Florian Schierhorn in the Harvard Business Review suggested that by 2050 the world’s demand for food could increase between 59% to 98%, a staggering amount.

Production Ramp-up Financial and Environmental Challenges

The goal of dramatically ramping up food production to meet food demand faces important hurdles. One of these hurdles is not only providing financing for food production initiatives but also providing that financing at a cost that agriculture projects can reasonably support.

Traditional agriculture project finance methods can be challenging to fit into simultaneously production-minded and environmentally friendly production strategies. From a credit perspective, the dependence of a great deal of agriculture finance on the use of land as loan security can limit the pace of production growth.

While private equity investments can provide large amounts of capital for agriculture projects that is based on project cash flows rather than land values, the effective cost of private equity capital can be extremely high. Further, meeting often high return requirements can lead to financing business plans which emphasize maximizing financial returns rather than sustainable agriculture initiatives.

A second hurdle is the potential negative impact of increased agriculture production on the environment. Agriculture practices can cause many harmful impacts on the environment, including the release of greenhouse gases, deforestation, massive amounts of water use and pollutants. This can cause situations where agriculture production takes one step forward but environmental protection takes two steps back.

Green Bonds and the Agriculture Sector

One financial product which has the potential to help bridge the gap between the need for increased agriculture production and concern for the environment is green bonds. While there are different types of green bonds, generally speaking green bonds are bonds whose proceeds are used, either wholly or in part, for projects that have a positive impact on the environment. “Labelled” green bonds are those which have been certified as green bonds by a qualified third-party certifying entity.

According to the standards set forth by the International Capital Markets Association, green bonds should meet four key criteria:

– They should be used for “green projects”;

-Green bond issuers must communicate several things to investors, including environmental sustainability objectives, the process by which projects are determined to be green projects and green project eligibility criteria;

-There must be a formal process for managing the funds that are invested in green projects;

-And there must be clear and detailed reporting procedures.

Under the International Capital Markets Association framework, agriculture projects expressly qualify as green projects. According to the International Capital Markets Association’s Green Bond Principles, qualifying projects include: “environmentally sustainable management of living natural resources and land use (including environmentally sustainable agriculture; environmentally sustainable animal husbandry; climate smart inputs such as biological crop protection or drip-irrigation; environmentally sustainable fishery and aquaculture; environmentally-sustainable forestry, including afforestation or reforestation, and preservation or restoration of natural landscapes).”

Potential of Green Bonds

Green bonds have the potential to have a significant impact on the financial and agriculture sector.    According to a report prepared by Nikko Asset Management in 2017, by the year 2020 the value of green bonds issued and outstanding could reach US $1.2 trillion.

An early green bond issuance was the issuance of bonds by the Agricultural Bank of China (“ABC”) in the amount of US $1 billion.  A majority of the ABC’s lending activity is related to the purchase of grains and cereal reserves. The ABC also provides large amounts of funding to  improve rural infrastructure that supports farming activities. At the end of 2017, the Agricultural Development of China issued over 3 billion yuan in green bonds (US $473 million).

Brazil, one of the world’s most important emerging markets with a population of about 208 million, has become an important issuer of green bonds. Brazil has already issued more than R $11 billion (US $3.4 billion) in green bonds.  Reportedly 24% of the funds from these bond issuance were used to finance forestry and agriculture projects.

Private Placement

While green bonds are often publicly traded, they can also be placed privately. This creates a very potentially interesting financing alternative for smaller companies that have strong projects that they wish to finance but who may not qualify for trading on public markets or who may want to tailor bond terms and conditions for specific investors.



Meeting the world’s growing food demands and ensuring future environmental security requires creative financing solutions. Green bonds have great potential to become an important financial tool in achieving food production and environmental objectives.

The photo for this article was taken by Adam Morse.

Agriculture Sector M&A and Earnouts

As in every sector, agriculture company owners and investors often disagree on valuation when  negotiating the terms of a potential company sale.  This is particularly the case when a valuation is based on a company’s future cash flows, which may be very difficult to reasonably forecast given the inherent volatility of agriculture commodity prices.  This uncertainty can be compounded by numerous production maturity cycle, company and agriculture sector-specific risks, such as weather.

To overcome potential deal breaking impasses that arise due to valuation issues, one possible solution is an earnout.  Earnouts are often used by private equity investors in M&A deals where the future cash flows of a business are difficult to predict or, alternatively, a company’s future business results are highly dependent on the post-deal closure commitment and performance of the sellers.  This has become an increasingly important issue in cross-border agriculture sector M&A, where investors may not have specific agriculture sector expertise and, even if they do, they may lack the ability to effectively manage a company’s business in what may be a new agriculture vertical or operating environment.

In simple terms, an earnout is a mechanism where the payment of a portion of the purchase price in a M&A transaction is deferred until a point in time in the future when pre-agreed financial or operating targets are met.  These financial targets can be based on revenues, EBITDA, EBIT or net income.  The amount of the purchase price that is deferred depends on the nature of the transaction, but factors that can affect the amount of the payment deferral are the size of the transaction, how far the parties are apart on valuation and the riskiness of future business cash flows.  How far in the future the earnout mechanism is structured also varies, but many investors would likely structure the earnout period around the investor’s planned investment horizon or the occurrence of certain key future events that will have a major impact on business performance, such as the implementation of a major new production project.

There are several challenges with using earnouts for both buyers and sellers.  Apart from the obvious issue that for the seller a significant portion of deal compensation may be deferred potentially for years into the future, the quick receipt of which may have been the key reason for the transaction in the first place, another issue is that both the buyer and seller can have incentives to manipulate earnout triggers to raise or lower the deal payout in a way that is not in the best overall interests of the business.

If the seller will remain in control of the business and the earnout is structured based on revenues, it may be possible for the seller to increase revenues by significantly increasing underlying costs, which helps the seller financially but may harm the overall financial performance of the business. On the other hand, if the buyer is in control of the business and the earnout trigger is based on a financial metric, it may be possible for the buyer to manipulate costs so that lesser earnouts in favor of the seller are paid.  Even in situations where the seller remains in control of the business and a revenue-based earnout is used, a seller may object because factors which drive agriculture sector commodity revenues are generally not in the seller’s control.

Despite potential drawbacks, the earnout remains an important mechanism to keep in mind when the parties to an agriculture M&A deal do not agree on valuation terms.  Properly structured, an earnout can help the parties share risk and, perhaps more importantly, align the interests of both the buyer and seller in the post-sale period so that both parties ultimately benefit.

Article written by Darin Bifani.