Q&A: What to watch in the Kazakh agri sector

As a new joint venture between Abacus and state-owned KazAgro is launched, advisor Douglas Townsend gives Agri Investor his view on the present and future of agricultural investment in Kazakhstan. Townsend has been Kazakhstan’s honorary consul in Wales since 2007, and was previously Australian ambassador to the central Asian republic.

Can you give us some background on yourself, and the country you spent so much time in?

We saw Kazakhstan’s president visit the UK at the beginning of November. It was a two-day programme, and really the whole of it was devoted to business. There were 40 deals signed with universities, consultancies, investors and so on. There were two in the agriculture sector. I am working on one – Caspian Agri, a joint venture between KazAgro, the state agriculture holding, and Abacus in London.

I was ambassador to Kazakhstan in the 1990s. We had some Australian investment into the grain industry – Kazakhstan is a major grains exporter. There had been some interest in sheep, and at that time the European Bank for Reconstruction and Development (EBRD) was showing interest.

I moved to Wales in 1997 and it has always struck me that there was a strong connection between the UK and Kazakhstan in the livestock sector. There has been some research and co-operation between [Kazakh] universities and the University of Aberystwyth in terms of animal issues.

What is the latest in agriculture investments into Kazakhstan?

There is very widespread interest in Kazakhstan. A good example is the recent co-operation agreement between Hungary and Kazakhstan, and the creation of a private equity fund. Formal co-operation has also been established between the Netherlands and Kazakhstan, with an emphasis on dairy and horticulture. And there has also been a lot of involvement from cattle producers from North Dakota and south Alberta.

The cattle-breeding programme is one of the top priorities for Kazakhstan, and North Dakota has had a [trade] office in Kazakhstan since 2004. A lot of breeding cattle have been imported from North Dakota – mainly Hereford and Aberdeen Angus breeds. The major priorities for Kazakhstan are meat and milk production, and on the milk side it has imported Holsteins from Hungary and Ukraine.

Why should investors look at Kazakh agriculture?

As far as motivation to invest is concerned, Kazakhstan is a major grain exporter with a strong presence in international markets. This is part of the diversification strategy from over-reliance on oil, gas and hard rock mining.

It has all the elements required to be an agricultural powerhouse. There was a long period of reform – including on land holdings, and then a large effort to develop a co-operative structure like Fonterra from New Zealand or Arla from Europe, which would appeal to international producers.

Most of the livestock sector is still in smallholdings, which makes it a slightly more difficult investment object. Grains are quite separate – with large holdings they have no problem with finance and facilities.

What are the most interesting investments?

I see livestock as having the greatest potential in terms of scope to expand productivity and export, in beef as well as lamb. It isn’t possible as a foreigner to buy agricultural land in Kazakhstan, you can only lease it for operational purposes. So it is really about joint venture operations with locals.

What about privatisation? It seems state companies are being privatised to attract direct foreign investment.

A lot of state-owned companies will privatise progressively over the next year. The four main constituents of KazAgro will be privatised – for example, one is being set up as a private leasing company.

Can you tell us more about the livestock and other areas for opportunity?

The government has established five breeding stations across the north, where most of the cattle from Alberta, North Dakota and Australia are based. Dairy is spread more across the country’s east and south. Most of it is grass-fed, and raising the soil and pasture quality are high [government] priorities.

As I see it, the major areas of opportunity will result from supply of genetic material, and there the main breeds are Angus and Hereford. Associated with all of that is the food supply chain for animals and veterinary materials, and I think after that it is support in the grain sector, such as the infrastructure and services associated with grains. Then further down in the list is scientific co-operation.

There is underdevelopment in processing and this is a big opportunity for folks in Northern Ireland where you have big meat processors.

Horticulture also has some real potential. There has been the resurrection of the wine industry in Kazakhstan, in cooperation with France and New Zealand, and a bit of Australia as well. That will be for high-end production with export as a priority.

Who will Kazakhstan export this produce to?

Although Kazakhstan is landlocked, the immediate market is quite large. You have a large Muslim population who are great consumers of [mutton]. Kazakhstan is part of the Eurasian Economic Union, a market of about 180 million people, and now the World Trade Organisation.

Europe is a big market for high quality beef – but also the economic relationship with China is intense. There is a long-term relationship with Korea, and Japan has taken a very active investment position in Kazakhstan. The Middle East is also interested in Kazakhstan as a food source.

What about risk?

One of the issues to bear in mind is that, until recently, the state-owned firms were the key players. The state operations are being privatised, though. That is something to follow closely, to see what it does to performance and operations in the agriculture sector.

In relation to livestock, most of the producers are smallholders and lack the financial resources for major expansive operations. You do need to take into account transport costs too, but with the development of the railways and highways I think this is less of a concern than it once was.

Then you should watch local certifications of pedigree [of livestock]. You need to be able to trace the parentage back quite a long way and so it is worth being aware of this. There is also varying equipment. John Deere and people like that have been marketing in Kazakhstan for some years and the situation is slowly improving, though.

Deciding which markets make the most sense to export to still requires some careful study. With the currency devaluing with the fall in oil and gas prices, we hope that is a temporary and not a long-term worry.