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)