Op-ed

Agribusiness booms in transition countries: Opportunities abound for investment and growth

Dunya, Turkey - 20 July 2005

by H.C. Jacobsen

Having taken a devastating knock when central planning fell apart in the early 1990s, the agricultural sector in former communist countries has come roaring back. In 2004, for the first time, Ukraine and Russia became net exporters of grain. Agriculture was the main force behind stellar growth rates in many countries of the region last year: 12 per cent for Ukraine, for example, and 7 per cent for Serbia and Montenegro.

But even though they work some of the most fertile land in the world, farm communities in these heavily rural countries cannot entrust their future completely to basic agricultural commodities whose sale depends on fickle world markets.

The challenge is to focus less on primary agriculture and more on the higher end of the food chain, in processing, packaging, marketing, retailing and other upstream agribusiness activities.

Happily, that imperative coincides with exploding demand for better food and wider choice across eastern Europe, a market of 400 million consumers in an area the size of South America. Disposable income in this vast zone stretching from central Europe to central Asia is increasing thanks to economic growth averaging of over 5 per cent last year. Yet consumer demand for greater variety on supermarket shelves goes largely unmet.

There are great investment opportunities at each link in the region’s food chain. For example, supermarkets account for just 5-10 per cent of food sales in Russia versus 40 per cent in Czech Republic and 80 per cent in the United States. But this is changing quickly: Russia was the world’s number one destination for foreign direct investment in the retail sector last year and supermarket sales are growing by 30 per cent per year.

Attracting investment

Foreign and local investors and entrepreneurs alike are flourishing across the agribusiness spectrum. The EBRD, with a cumulative portfolio of €3.3 billion in agribusiness investments, is the largest single investor in the sector in transition countries. The Bank aims to demonstrate the viability of investing in the region, thus attracting to it ever-increasing amounts of private capital which should ultimately displace the publicly owned EBRD. Agribusiness is a key sector through which the EBRD is fostering economic development, in part to address the lack of enterprise and employment in rural areas where 30-66 per cent of people in the region live.

The Bank works with local and international agribusiness companies such as Turkey’s own Migros and Ulker Group and US-based Cargill, and with financial institutions to provide a variety of financing products for commodity producers, processors and traders. Agricultural commodities held in warehouses act as security for credit provided under the programme. We also lend directly to individual agribusiness companies; these include small family firms and multinationals. The EBRD and its partners invest all the way along the food chain: in seeds and tractors, in canning factories and bottle cap makers, and in grocery store modernisation.

With investment from the EBRD, Anadolu Efes Breweries Group is making and selling beer (and buying local malt) in Russia and Kazakhstan. Cargill is boosting Crimean farmers’ sunflower sales and national exports with its investment in a Ukraine oilseed crushing facility. Serbia’s Grand Coffee has built a roasting and packaging plant next door in Bosnia-Herzegovina, while the French-Belgian Cora retail group is expanding in Romania.

Foreign agribusinesses investments are having impact at the local producer level. For example, France’s Danone first imported yoghurt into the region from western European factories but quickly realised that growing demand would best be met by building a factory in the region to process local milk. This reduced the price, further boosting yoghurt demand. Similarly, France’s well-known President cheese is now made in Poland to supply the central European market.

Building the food chain

Along with providing finance, the EBRD is working with the World Bank, the UN Food and Agriculture Organisation, the Central European Initiative and private sector partners to improve integration of enterprises along the food chain. In particular this means bringing production into line with consumers’ tastes by improving connections between growers and processors on the one hand, and the retail sector on the other. FAO research in the Czech Republic and Russia shows that better supermarkets drive improvements in the quality of farmers’ produce and their incomes. That is why the EBRD has backed several top-quality retailers’ expansion in the region, including Migros and with Billa of Austria, Cora (France-Belgium), VPMarket (Lithuania), Piccadilly (Bulgaria) and Kesko (Finland).

Weeding out hindrances to growth

The terrain for investment in the region is fertile but still needs a lot of work. For example, in many countries the lag in privatising farm land and in improving the land registration process has hindered rural communities’ access to capital for growth. National laws and regulations should be improved to facilitate the use of commodities as collateral so that farmers can obtain credit to fund seasonal work and expansion. The food industry needs to develop and observe high standards for food quality and hygiene which will encourage homemakers to spend on better brands. Cross-border issues inhibiting trade within the region have to be addressed to boost agribusiness across the board.

Tackling these issues is the EBRD’s daily bread. We conduct policy dialogue with industry and government to improve the investment climate for local and foreign entrepreneurs alike. Through this and by financing the sector, the Bank is helping to add value to farm commodities and to build rural and national economies.

Hans Christian Jacobsen is Director of the EBRD’s Agribusiness Banking Team.