Presentation to the Black Sea Economic Forum, September 2011

1. Agriculture into the XXI Century
Black Sea Economic Forum
Ian Luyt
NOViROST
www.novirost.com
Presentation to the Black Sea Economic Forum
Yalta, Ukraine
8 October 2011

2. Index of Slides
SLIDE NUMBER
2. Index Slides 16. Crimea: linkage tourism and agriculture
3. Black Sea Economic Forum 17. Antalya a global brand
4. Panel Session: Agriculture in XXI Century 18. Visitors: best promotion of food products
5. Participants in the Agribusiness Panel 19. Organic agriculture significant promise
6. Black Sea Region: Agricultural GDP 20. Key trends in Global Agriculture
7. Turkey most advanced agriculturally 21. Agriculture: Key Investment Drivers
8. BSR market 296 million people 22. Example: HJ Heinz company
9. Russia: major import market 23. FDI brings additionality
10. Business competitiveness rankings 24. Investment Landscape
11. Farmland: significant scope 25. Agribusiness: Investment funds
12. Ukraine: agriculture priorities 26. Crimea: investment advantages
13. Farmland rights: fundamental 27. Prerequisites to attracting investors
14. Crimea: unique location advantages 28. End slide
15. Crimea: agriculture development issues
2

3. Black Sea Economic Forum
Black Sea Economic Forum, organized under the auspices of President of Ukraine by the
Council of Ministers of the Autonomous Republic of Crimea, is an annual high-level
platform for dialogue among leading government and business stakeholders of the Black
Sea region. The Forum focuses on the most relevant issues of economic cooperation and
helps discover new opportunities to positively affect investment climate, economic
development and competitiveness of the entire region and Crimea in particular.
www.blackseaeconomicforum.com.ua
Agency for Regional Development of the Autonomous Republic of Crimea (ARC) was
founded by the government of Crimea (the Council of Ministers of the ARC) as a single
coordinating body for investment activity on the peninsula.
www.ard.crimea.ua
The United Nations Development Programme (UNDP) is the UN’s global development
network, advocating for change and connecting countries to knowledge, experience and
resources to help people build a better life.
www.undp.org
3

4. PANEL SESSION: KEY ISSUES
“Development of XXI Century Agriculture
in the Countries of the Region”
• Development of the high quality agricultural production on the basis of
eco-friendly technologies and fully leveraging biological climate of the
Black Sea region.
• Practice of organic agriculture in the countries of the region: creation
of non-competitive economic clusters to boost competitiveness of the
Black Sea basin regions and countries in a global agricultural market.
• Prospects for agricultural exports growth. Attracting investments into
fruit & vegetables, meat & poultry, winemaking and spirits industries of
Crimea and Black Sea basin regional economies.
4

5. Participants in the Agribusiness Panel
• Ian Luyt – Panel Moderator – UNDP Advisor
Managing Director, NOViROST Food and Agribusiness Strategic
Advisors
• Mykola Prysyazhnyuk, Minister for Agrarian Policy of Ukraine
• Dario Marchetti, General Manager, Danone Ukraine
• Iryna Starodubova, Partner, Horizon Capital
• Dimitri Podoliev, Country Manager, Alpcot Capital Management
• Yury Gordeychuk, General Director, VALARS
5

6. Black Sea Region Agriculture GDP $205bn
Key role in global food production
Agriculture
Population GDP Per Capita Agriculture
COUNTRY as % of
‘000,000 US$ bln GDP GDP
GDP
UKRAINE 46.0 $157.6 $3,483 $15.4 9.8%
RUSSIA 141.8 $1894.0 $13,543 $89.0 4.7%
TURKEY 74.8 $797.6 $11,054 $74.0 9.3%
BULGARIA 7.6 $53.0 $7,073 $3.9 7.5%
ROMANIA 21.5 $174.4 $8,157 $21.6 12.4%
GEORGIA 4.7 $12.8 $2,629 $1.56 12.2%
TOTAL 296.4 $3089.4 $205.5 6.6%
Source: Global Finance (www.gfmag.com)
6

7. Turkey is most advanced agriculturally –
public-private partnerships significant
• Mostly small-scale farming – 3 million farms of average size 6 ha (only 57
farms > 500 ha)
• Global Top 10 agricultural producer - Self-sufficiency since 1980s
• 43 million tons of fruit and vegetables per annum – over $800 billion
• World’s #1 producer of hazelnut, cherry, fig, apricot, quince, pomegranate
• World’s #2 producer of watermelon, cucumber and chickpea
• World’s #3 producer of tomato, eggplant, green pepper, lentil, pistachio
• Poultry production has doubled in 10 years
• Organic production only 141,000 ha – but significant potential
• Strong government support: example: “Southeastern Anatolia
Project” will provide irrigation to 1.82 million hectares
Source: Turkish Agriculture Report: Deloitte July 2010
7

8. Black Sea Region a market of 296 million
people – but limited integration
8

9. RUSSIA: Major Regional Import Market
• GEOGRAPHIC PROXIMITY
• STRONG CULTURAL LINKS - UKRAINE
• Direct air, road, rail, sea links
• FOOD IMPORTS ~ $33 bn (2008)
• Import growth significant: 500% in 8 years (2000-2008)
• Main imports: meat, processed products, fruit and vegetables
• Currently relatively small presence of high value food
products from Ukraine
• Crimea needs stronger PROMOTION at major food
exhibitions in Russia (e.g. World Food)
9

10. Business Competitiveness rankings are
weak – except Georgia (some aspects)
Global Doing Business
COUNTRY Competitiveness (Ranking
(out of 133) out of 183)
TURKEY 61 65
RUSSIA 63 123
ROMANIA 67 56
BULGARIA 71 51
UKRAINE 89 145
GEORGIA 93 12
Source: Global Finance (www.gfmag.com)
10

11. FARMLAND: Arable potential larger than
the EU but less than 5% irrigated
TOTAL Agricultural Agri Land Arable
COUNTRY LAND Land as % of Land
Sq Km Hectares Total Land Hectares
UKRAINE 603,550 41,292,000 68.4% 32,474,000
RUSSIA 17,098,240 215,494,000 12.6% 121,649,000
TURKEY 783,562 39,122,000 50.0% 21,555,000
BULGARIA 110,910 5,116,000 46.1% 3,086,000
ROMANIA 238,490 13,546,000 56.8% 8,271,000
GEORGIA 69,700 2,517,000 36.1% 463,000
TOTAL 18,904,402 317,087,000 16.8% 187,498,000
EU27 4,308,406 178,813,000 41.7% 106,751,000
SOURCE: www.eastagri.org
59.6% of arable land in EU27 is irrigated
11

12. Ukraine Agriculture - PRIORITIES
• Significant achievements in past decade – agriculture is one of the untold success
stories in the CIS but key reforms remain:
– Clarity on state policy towards strategic crops – needs predictable environment
– Land law reform – new law expected by end of 2011
– Improved investor protections – rule of law issues
– Investment in Innovation and R&D – public-private partnerships and linkages
to global strategic players
– Development of effective soft commodity exchange
– Farm finance – significant progress but needs competitive interest rates
– Infrastructure – development of competitive logistics and distribution facilities
– Skills development – significant progress/ more needed
– Food safety standards – harmonization with WTO standards
– Improved State support to agriculture development and exports
– Improved competitiveness – cost and quality
– Improved market linkages
12

13. SECURE FARMLAND RIGHTS
Fundamental to Investment
Further reform needed
COUNTRY FARMLAND RIGHTS
UKRAINE Leasehold only/ new land law due end of 2011
RUSSIA Freehold/ with restrictions on foreign ownership
TURKEY Freehold
BULGARIA Freehold/ Only Bulgarian residents and corporate entities
ROMANIA Freehold/ subject to seven year limit from EU Accession Date
GEORGIA Freehold/ subject to limitations
Successful Land Reform in Ukraine will create a
collateral base of potentially $50 billion
13

14. CRIMEA
Unique location advantages
★ Crimea offers strategic
maritime and land corridors
within the Black Sea Region
14

15. CRIMEA
Key Agribusiness Development Issues
• Infrastructure – distribution and logistics – cold chain development
• Efficient markets – development of wholesale markets
• Improved Productivity – plant genetics, yield, quality, promotion
• Incentives to re-develop aged vineyards and fruit orchards
• Product Quality and Food Safety
• Food Safety must be the image of Crimea
• Organic production must be preceded by achievement of efficient
production standards: food safety is a bigger priority
• Good information and active promotion – key to attracting and facilitating
investors
• Needs proactive state support (example of Turkey, Chile, Brazil,
Argentina, USA, New Zealand, Australia, Egypt, others
15

16. CRIMEA
Strong Linkage between Agriculture and Tourism
• Tourism development will catalyze agricultural development
• Turkey is a good example of this:
– Tourist arrivals 1990-2010: 5m to 28m
– Agricultural GDP increased from TRY 17 to TRY 79 billion in past
decade – up 500%
• Key agribusiness sectors:
– Fruits and vegetables and processing thereof
– Milk and milk products
– Meat and meat products
– Wine CRIMEA offers 700,000 ha of arable land
– Seafood
– Cereals (opportunity for Durum wheat)
– Essential oils and herbs
16

17. EXAMPLE: Turkey has developed
ANTALYA as a “global brand”
• Turkey receives 31 million visitors every year – target is 50
million tourists
• Global market 900 million tourists annually - $1.0 trillion
market
• Antalya hosts 9.2 million tourists every year (Crimea 600,000
– average spend is lowest in region ($172 per visitor)
• Turkish state supports 40 tourist offices in 37 countries
• Tourism will be single biggest impact on local food production
in Crimea
• Crimea has potential to emulate Turkey’s achievements
17

18. Tourists may be best promotion
of local food products
• Strong demand during tourist season
• Prime export location – BSR, EU, Russia, Middle East, etc
• Local market ~2.0 million people
• Effective Public-Private Partnerships are prerequisite to
success (again, Turkey an example of this success)
• Seek “anchor investors” (example of Danone)
• Promote “icon” crops (e.g. Hazelnut in Turkey – Crimean red
onion)
• Goal to be a reliable player in local and world markets
18

19. ORGANIC AGRICULTURE
Few certified producers but significant promise
• Global market ~$60 billion per annum (240% growth)
• Over 35 million hectares certified as organic production
• 141 million certified producers
• Relatively small presence of certified producers in CIS/ Ukraine
• Crimea – offers wide diversity of production
• Strong precedent in Crimea in production of aromatic herbs (currently
~8,500 ha)
• Addressing fundamentals must take precedence – productivity, food safety
standards, management, marketing, promotion
• Also needs development of organic product standards and certification and
monitoring procedures
19

20. Key trends in Global Agriculture
Increasing farmland values
• Farm consolidation – larger farms
• Greater on-farm specialization
• Higher capitalization
• Improving productivity
• Increasing farmland values
• Increasing contractual arrangements/ supply chain integration
• Risk from specialization/ surpluses
• Vertical integration - enterprises that bring advanced technology, superior
managerial expertise, and investment
• Increased exposure to global market trends
• Environmental and food safety focus
• Changing markets – urbanization/ growing middle class
20

21. Global Agriculture
Key Investment Drivers
• BASIC INVESTMENT PREMISE
“A looming imbalance in the supply and demand of food commodities will result in a prolonged
period of higher food commodity prices”
• DEMAND FACTORS
– POPULATION GROWTH
• Global population to increase from 7.0 to 9.0 billion by 2050
• Middle class to increase from 430 million to 1.15 billion by 2030
– CHANGING GLOBAL FOOD CONSUMPTION TRENDS - AS INCOMES RISE
• Switch from starch-rich to protein-rich diets
• Professionalization of meat industries will demand more grain
• Move towards higher margin branded foods
• SUPPLY FACTORS
– PRODUCTION LIMITS: Industrialization, urbanization, water limitations,
climate change, slowing productivity gains
– IMPACT OF BIOFUELS - diversion of crops and farmland
21

22. Example: HJ Heinz Company
Anticipated growth in Emerging Markets
• “Emerging Markets are on track to deliver at least 20% of our total sales by 2013, more than
double their contribution of just five years ago,” Mr. Johnson said. “Heinz is already well-
established in Emerging Markets like China, India, Indonesia, Latin America and Russia, where
we have strong brands, local marketing expertise and the infrastructure necessary to sustain
strong growth.”
• “Emerging Markets are key to unlocking future growth because their economies are growing at
a significantly higher rate than developed markets; the middle-class in Emerging Markets will
eventually outnumber the combined populations of the U.S. and Europe; and per capita
consumption of packaged foods in Emerging Markets has significant upside.”
William R. Johnson, Chairman, President and CEO,
H.J. Heinz Company, Pittsburgh, 31 August 2010
22

23. FDI may bring significant Additionality
“Global Partners”
• Bridge to global technology, markets, and capital
• Provides expertise in structuring investments and unlocking value
• Improved strategic focus, management, and asset utilization
• Sets benchmark in product quality and standards
• Facilitates harmonization with global standards
• Corporate governance: facilitates development of private businesses
into institutionalized companies
• Investment discipline - enhanced leverage/ borrowing capacity
• Improves efficiency of market information and access
• Often strong partner in articulating and lobbying reforms
• Turkey regards foreign investors as “Global Partners”
• Turkey: FDI into agriculture > $1.5 billion (500 investors)
23

24. INVESTMENT LANDSCAPE
Significant investor interest in agriculture
• Sector- and region-specific private equity funds
• Specialized agribusiness funds
• Sovereign Wealth Funds
• Food Sector Strategics
• Local agribusiness conglomerates
• SMEs have a significant role
• Ukraine lagging in investor perceptions due to uncertainties in regulatory
and business conditions
• Limitations also due to lack of scale, fragmentation, corporate governance
weaknesses, policy and land rights uncertainties
• Effective promotion is key to investor awareness
24

25. Agribusiness: Investment Funds
Investor perceptions are important
• Since 2007 over $13.0 billion invested by funds and others into
agribusiness globally
• Emergence of specialist farmland and food sector funds – over $1.0 billion
invested in Russia since 2006
• Ukraine: country perceptions – limited fund presence
• Weak perceptions about governance and corruption
• Crimea: ignorance about investment potential
• Black Sea Economic Forum is addressing this but needs to engage more
private investors
• Addressing perceptions starts with central government
reforms
25

26. CRIMEA: Investment advantages
• Proactive business-friendly government
• Strategic maritime and land corridors between Europe and Asia
• Positive growth forecast for all countries in surrounding Black Sea Region
- but limited fiscal capacity so FDI is critical
• Significant potential for greater intra-regional trade
• Resilient and innovative echelon of farm entrepreneurs
• Most BCR countries produce the same food products, so competitiveness is
critical
• Relatively little is known about Crimean products, beyond wine
26

27. Prerequisites to Attracting Agri Investors
• Clear Development Vision
• Stable and predictable policy environment
• Strong public administration
• Skills development (more so than location)
• Efficient and competitive Infrastructure
• Aggressive marketing
• Seek anchor investors to attract others
• Competitiveness is key to attracting investment
• It’s a PACKAGE of requirements
27

28. Thank You
Ian Luyt
Adviser to UNDP
NOViROST
Food & Agribusiness
Strategic Advisory and Corporate Finance
www.novirost.com
ian.luyt@novirost.com
+ 7 915 201-3244
28