The political play in agri investing

National politics and the risks they entail can create havoc for agriculture investment managers.

Political problems are often a reason for agriculture investors to steer clear of certain markets. The Ukraine crisis, and its impact more widely on the reputation of the central and eastern European (CEE) region as an investment destination, is a good example. Appetite for the region’s rich soils and cheap land has waned.

But there are some investors that are happy to take on political risk, according to Dania Zinurova, CEE regional agriculture analyst at Towers Watson, the investment consultancy.

“For some investors who are looking for higher return strategies, additional political risk would mean potentially higher returns,” she told Agri Investor. “Investing in agriculture in an unstable country would probably not be a problem to them. More conservative investors would seek moderate returns and so they will avoid emerging markets with higher political risks.”

But the crisis is not the only thing putting off investors, according to Daryna Kovalska, agriculture commodities analyst at Australian banking group Macquarie.

“Even before the crisis, the Ukrainian agriculture sector was viewed with caution because of political and tax complications in the country,” she said. “Now interest is extremely limited as there is no stability and even domestic agribusinesses are struggling.”

Equally, uncertainty surrounding political leadership can weigh heavy on investment prospects, even in previously popular private investment destinations.

Brazil’s newly re-elected president Dilma Rousseff won a bittersweet victory because the investment community’s confidence in Rousseff waned as Brazil became mired in recession. Markets reacted accordingly, but investors still see a long-term future for investment in Brazil.

“With many Brazilian assets sold down in anticipation of a Rousseff victory, the current attractive valuations combined with an ongoing market adjustment of the Real will entice investors back in and strengthen the country’s position as a lucrative investment destination,” noted James Duckworth, chief research officer at Liquid Investments, a Brazil-focused agriculture investment firm.

And just as politics can impair a market’s development, it can also do good. India is a recent example of political will playing out favourably for the agriculture sector, when the newly-elected prime minister Narendra Modi announced a $16 million fund for agtech start-ups in July. A small amount for an under-funded sector, it was still hailed as a much-needed boost to India’s agricultural advancement.

Crucially, private investors in India believe the financial support for agriculture will continue and this is attracting them to the sector. “The government is now focusing on the commercial development of India and we’re keen to invest in sectors which are receiving government support,” noted Rahul Kumar, head of Exhilway India, a private equity firm which made a $20 million agribusiness investment in India this August.

Several countries on the African continent are also working hard to improve their image among the investing community. The Democratic Republic of Congo (DRC), for example, is working with the Multilateral Investment Guarantee Agency to help secure private investments into its ‘agribusiness parks’ which will be established across the country, John Ulimwengu, senior agribusiness investment advisor to the DRC government told Agri Investor.

“I don’t perceive there is a political risk to investing in DRC for a number of reasons; not least that a good company survives political disturbances here,” he added.

It might still be some time before Ukraine becomes an appealing investment destination for many as farmers struggle to pay for increasingly expensive inputs in the wake of currency depreciation. The negative crop yields combined with general negative speculation about the region could last a while.

“Since most of our potential clients are American, the reminders of the Cold War and tendency to group all Eastern European countries together has made them especially hesitant,” said Jeff Notaro, chief executive of Black Sea Agriculture, which offers farmland investment in Romania and Bulgaria.

“This has been unfortunate for these potential investors (and for us) because there have been no increased political risks in Bulgaria. Farmland there continues to look fundamentally attractive, especially compared with land in the US which is beginning to weaken from very lofty levels,” he said.