Lessons from Romania

In Eastern Europe, improving macro agri fundamentals alone aren’t enough to make even a passive investment strategy succeed.

Romanian farmland investment has been a topic of conversation recently. At Agri Investor’s latest informal get-together in London, one fund manager in attendance told me about negotiations he was in with some Danish landowners to buy farmland from them. Apart from describing them as “tough negotiators”(!), he told me that these wealthy Danish farmers, organised into consortiums, were disappointed by the valuations on offer for some of their farmland which they bought around 10 years ago.

Another investment professional operating in the country later vented his frustration at the expectations of some investors who wanted to pursue a buy-and-lease strategy in Romania and make instant returns without investing beyond the initial land acquisition.

Farmland in Romania, and across much of Eastern Europe particularly the further East you go, is typically very fragmented and made up of small individual farms. This is due to the post-Soviet split of land into plots given to local farmers. According to my sources, the way to add value to this land is to aggregate single parcels, some of them as small as one hectare each, into larger, contiguous blocks of land suitable for scalable agricultural production.

“This really is a two-tier farmland market place,” said one of them. Tier-one farmland, that which has been consolidated and aggregated into contiguous farmland, is reaching prices of between 30 percent and 50 percent higher per hectare than tier-two farmland, i.e. land that is still in small parcels. “There will have been some capital appreciation for these smaller plots, as Romania has improved, but the price differential between tier one and two is huge. You can’t just own land and hope to ride the wave.”

For many leasees and end-buyers, only consolidated, tier-one land makes for an attractive proposition. For example, Dutch farmers typically won’t be willing to do the consolidating themselves, but they will be interested in moving their machinery onto Romania’s fertile soils where they can farm areas of 5,000 hectares or more. The same is true for Middle Eastern investors who want to produce large quantities of food to send back to their populations: small-scale farming in Romania will be a no-go, but large-scale is appealing.

The take-away from this is clear: investors that haven’t had the time or money to aggregate land may find themselves stuck with portfolios of scattered and fragmented assets that probably aren’t worth much more than what they paid for them.  As one of my sources argued: “You simply can’t expect to get high annual returns from day one and benefit from high land appreciation and not be willing to invest in more than just land.”

In other words, entirely passive farmland investing with an expectation that valuations will appreciate solely on the back of improving agricultural fundamentals alone is a risky bet. In a market like Romania, you may not need to farm the land yourself to make a lucrative return. But if you went in years ago to acquire those small post-Soviet units, a value creation strategy based on combining them will have stood you in good stead.