European Bank for Reconstruction and Development

Recent Trends in Food Prices

& EBRD Approach

Agro-invest Conference Astana23-24 October 2008

Mehmet İlkinPrincipal Banker

European Bank for Reconstruction and Development

Outline of the presentation

Short term and the long term views

What is the EBRD role ?

What can be done in the future ?

Categories of factors contributing to higher food commodity prices in the last few years

3

Continuation of long-term trends:

Structural changes:

Temporary factors:

Rapid economic growth in many developing countries Population growth in developing countries

Increasing consumption per capita

High oil prices

Biofuels production

High agri production costs

Adverse weather

Trade policies by exporters and importers

Aggressive buying by importers

Further dollar depreciation

Slower growth in ag productivity

Financial Crisis

Questionable future impact:

HOWEVER…

Food prices were rising dramatically but have recently declined from their peaks

Prices rising due to supply and demand factors

Drought and disease the main temporary supply constraints

Shift into bio-fuels also affects demand for grain and food supply

Demand increasing due to fast growth in emerging markets

Recent price decreases because of bumper harvests and global financial turmoil including decreasing crude oil prices

Selected international cereal prices

Prices have declined from their peaks

(as of October 22, 2008)Commodity Down Since peak in:

Wheat 52 % Early March

Corn 43 % End of June

Soybeans 45 % Early July

5

YEARLY

MONTHLY

CORN PRICES

WHEAT

YEARLY

MONTHLY

SOYBEANSYEARLY

MONTHLY

DRY MILKYEARLY

MONTHLY

YEARLY

MONTHLY

RICE

The EBRD region has a substantial agricultural production potential

Illustrative example - wheat productionAvg. real production 2004-06 (m t)

Max productionPotential* (m t)

* Increasing production through higher yields and returning of unused farm land (Source: IKAR, FAO)

14

126

29

37

77 75

Russia Ukraine Kazakhstan

+64%

+103%

+107%

CIS countries account for 13-14% of the world’s arable land, but only for 6% of the global crops and 3% of the world’s meat production.

More than 13 million hectares of abandoned land could be returned into production

High quality soils and yield improvements could lead to a substantial increase in grain production.

Production potential: higher agricultural commodity prices not only represent a threat, but also an unique opportunity to improve farmers’ incomes and to stimulate investments in agriculture in the EBRD region.

The right answer? Soaring agricultural commodity prices triggered a boom in farm investments in the region

Downsides

Arable land has become an attractive investment opportunity for farmers, strategic investors and financial investors.

Business rationale:

New investors bring in needed financing, know-how and professional standards resulting in substantial yield improvements.

Investors expect to benefit from increases in yields and land appreciation.

Social and environmental issues: “Neo-colonialism” and speculative elements

(land appreciation) Agriholdings and substantial land banks (>

100,000ha) have uncontrollable social and environmental impacts (effects on small farmers & rural societies, irrigation)

Weaknesses in business rationale: Still weak policy/legal frameworks (e.g. land

rights) jeopardising investment security Volatility in yields and commodity prices is

still considerable (recent price decreases) Lack of skilled labour and human capital is

hampering efficient farming activities

Land investments

EBRD is selective towards financing of land and primary agriculture Projects should be linked to a vertically integrated approach with sustainable long-term

growth strategies

EBRD is selective towards financing of land and primary agriculture Projects should be linked to a vertically integrated approach with sustainable long-term

growth strategies

EBRD is following a vertical approach as strategy to bring out the untapped production potential

Agribusiness

The EBRD has invested EUR 4.8 billion in 326 projects in the Agribusiness sector

2007: 40 projects signed with EUR 517 million committed investments

One of the largest sector teams within the EBRD with 30 bankers London and Resident Offices accounting for around 40% of the projects in the EBRD’s corporate sector portfolio.

Client network of leading global and regional players

Indirect support to smaller farmers and food enterprises via SME credit lines

Agribusiness Strategy

All activities along the food and drink production chain are included and rather focused on increasing demand than supply

Vertical approach addresses specific risks and features attached to agribusiness ventures

Downstream investments are mainly in vertical integrated companies with positive spill-over effects to primary agriculture

As a result, EBRD has a conservative approach towards direct land investments

Primary & secondary processing

Packaging & distribution

Retail &Food Service

Downstream Upstream

Agricultural inputs

& production

ConsumerConsumer

SeedsFarm MachineryAgricultural ChemicalsBio-techDistributors/Services

GrainsOilseedsLivestockDairyFish

Edible oilMillersMaltersGrain Handling

Meats/PoultryBaked GoodsConfectionery/SnacksBeverages/Beer/WaterDairy/UHT/CheesesFrozen FoodsFishPet Food

Food retailersDistributorsCaterersWholesale MarketsGlass Bottles/

JarsPET BottlesCansCarton Containers

Primary Primary ProcessingProcessing

ProductionProduction

Agricultural Agricultural InputsInputs

DistributionDistributionFoodserviceFoodservice

Packaging Packaging ProductionProduction

Food Food ProcessorsProcessors

Important to maximise supply potential and identify bottlenecks along the entire food value chain

Investments along the value chain

EBRD’s investments in the beer sector illustrate its vertical approach along the entire food chain

Case study: beer sector

Breweries Packaging RetailRussian

consumer

USD 16m loan in 2007 to Agro Rus (Soufflet’s subsidiary in Russia)

Efes, a leading Turkish brewery: Loans of ca. USD 50m and equity of USD 6m

Vena (Baltic Beverages Holding - BBH): EUR 82 m syndicated loan

Sisecam (a worldwide leading glass-packaging firm): syndicated loans of over USD 168m between 2004-2007 to

Lenta, one of the fastest growing food retail chains in Russia: USD 125m equity and USD 30m loan

Globus, a German food retailer: EUR 135m syndicated loan in Russia

Benefits through higher product quality and increased range of products at lower prices

Local farmers

Malt sector

Working capital loan of up to USD 30m for Desnagrain in Ukraine to supply farms with necessary inputs and technology

The EBRD has initiated short-term responses to the food price crises by bringing together private sector and policy makers

Conference on “Fighting food inflation through sustainable investment” in cooperation with the Food and Agriculture Organization of the United Nations: bringing private sector and public sector together to discuss possible responses on the food crises (London – 10 March 2008)

Follow-up meeting at the Agribusiness Forum at the EBRD’s annual meeting: focus on concrete measures to realise the region’s agricultural potential (Kiev – 20 May 2008)

Agribusiness conference in cooperation with the Russian Agricultural Ministry and in coordination with the FAO: involve private sector in a policy dialogue initiative and explore opportunities to improve agricultural production and strengthening Russia's position as a key exporter of agricultural products (Moscow – 21 October 2008)