The consolidation play in Romanian farmland

Agricultural managers and consultants Brown & Co have been active in Central and Eastern Europe since 1998. Stephen Hall, who advises on investment strategy and sources opportunities, talks through the big players and the possible strategies in the eastern European country.

The farming landscape

The land reform process in Romania, which started after the fall of Ceausescu, saw the dismantling of the majority of the co-operative state farms and the land given back to its former owners.

During the land restitution process, more than 10 million hectares of land was given back to more than 4 million beneficiaries. As a result, substantial areas of Romania are farmed by leasehold farming businesses which act as a tenant to a large number of landlords in an area. These companies, some of which also own land, range from small to medium local farming operations, to a number of large scale, multi-faceted Romanian farming companies.

Intercereal, a successful and diversified farming business has large areas of land in the south of the country near the Danube. Their website says that between the 1990s and 2010, they increased their area of cultivation to about 43,000 hectares of tillable land, vineyards and pasture. Racova Group, another professional farming group in the Moldovan region of Romania states it has 54,000 hectares as part of its diversified businesses, including food processing and biodiesel. Spearhead International, a multinational farming business, based in the UK and recently bought by Paine and Partners, farms over 18,000 hectares in Romania, all of which is leasehold.

From a freehold point of view, a number of Scandinavian funds have invested in large areas of freehold land titles, with a plan to consolidate ownership in order to achieve areas of critical mass, improve the productivity of land and ultimately the underlying value. RoDen Invest, a group of Danish investors, owns more 6,000 hectares in Ialomita county leasing the land out to local farmers. Another Austrian group owns 3,000 hectares in the western county of Timisoara, an area of land known for its excellent soil, good rainfall and sophisticated agricultural market. Both groups have invested in individual but numerous acquisitions of small areas of land, bought from local owners to form large portfolios of land ownership. Having taken the projects through this consolidation, both groups are now looking to dispose of their portfolios.

The land investment opportunity

This process of consolidating owned land into larger, more efficient blocks is one of the fundamental investment opportunities in Romania. The premium in value between small parcels of less than 2 hectares of land against larger areas of say 50 hectares can be over 40-50 percent. Our graph shows land value progression, taken from data published from Eurostat, The Centre for European Policy Studies, from agent opinion and Brown and Co’s empirical data.

Land value progression

Data: Eurostat, The Centre for European Policy Studies, agent opinion and Brown and Co’s empirical data. Graph: Brown and Co.

As shown by the research, the difference in value between fragmented and consolidated land is widening and this means there is a real opportunity for a farming or land-owning entity to purchase individual parcels of land at a discount to what it is worth once it is owned as part of a larger single ownership.

There are a number of ways this can be done, but the most common is to acquire a leasehold business where the farming company is the tenant to a large number of smaller landlords and then over time acquire the freehold titles from the landlords.

Alternatively, if the investor is a non-farming entity, they can purchase a portfolio of fragmented land (of which there a number available for sale) and continue to invest in acquiring land within the portfolios, slowly consolidating the surfaces.

A third option is to work with an already operational leasehold farming business. The land investor, using the relationship the farming business has with its landlords, acquires individual freehold titles from the landlords and then leases them back to the farming business. This has a number of benefits for both the investor and the farming business. The investor can benefit from the relationship between the tenant farming company and the local landlord without having to actively farm themselves. They are also able to ensure that the land they acquire is let to a known farming entity, providing rental income. For the farming business as tenants, they can reduce the management requirements of having to administer large numbers of rental agreements by reducing the number of landlords they deal with whilst also ensuring continuity of business by agreeing medium- to long-term rental agreements with the investor.

Brown and Co research’s conservative forecast shows 10-15 percent land appreciated per year over the short- to medium -term without the additional benefit such consolidation projects can offer.

 Other opportunities

The recent Common Agricultural Policy reforms across Europe have ensured that significant subsidy and grant funding is made available for Romanian agriculture. This includes per hectare subsidy payments reaching circa €185 a year by 2020.

Changes to the grant funding system will also pose real opportunities for farming businesses in the next few years. We feel one of the most interesting in these is the grant funding made available for irrigation equipment – once a prominent feature across the country where in the mid-80’s more than 30 percent of the arable land in Romania was irrigated.

Under the current Common Agricultural Policy reforms, up to €1million per business will be made available for investment in irrigation systems. The increase in yields irrigation can have on spring crops like maize, sunflower and soy is significant; often up to 5 tonnes per hectare of maize.

Such grant funding will not only significantly improve the profitability of those arable farms affected, but also reduce the risk during the drier seasons.

Other grants available to farming businesses in Romania include up to €2 million funding for investment in supply chain infrastructure and up to €1.5million for investment in livestock farms.

Funding for grain storage is also a key opportunity for the industry and one which should be taken up by any business without appropriate storage facilities. To sell a maize at harvest instead of to store for later in the season can mean 10-20 percent less in the sale price.