Nick Louth: A bread and better punt

Quote: Food supplies across the world have become very tight. With 30 per cent of this year’s US maize crop disappearing into vehicle fuel tanks – aided by a federal biofuel subsidy – farmers there have been rushing to grow maize instead of soyabeans, wheat and other cereals. The result has been soaring prices, which have proved catastrophic for poorer nations.
Piling into commodity futures might yield a profit, but I wouldn’t feel comfortable helping raise prices. What I’d like is to invest in a company that helps increase the supply of cereals to ease the shortages.
That is what attracted me to Landkom, an Aim-listed Ukrainian farming group, in which I bought shares at 78p in January. Landkom is destined to be the largest grain producer in Europe and will drag Ukrainian farming practices and output into the 21st century.
In 1991, when Ukraine got independence, the government split up land ownership, allocating a hectare per person, with disastrous results. Access to capital was poor, many farms fell into disuse and output slumped. As a result, 40 per cent of Ukraine’s fertile black soil has been lying fallow for eight to 10 years, according to Libertas Capital, Landkom’s broker. Wheat output from the former “bread basket” plummeted from 50m tonnes at the end of the Soviet era to 20m tonnes in 2000.
Landkom has spent years stitching together rental agreements to turn a patchwork of smallholdings into a 62,500ha farm. With modern machinery and practices, it is expecting a 47,000 tonne harvest of wheat and rapeseed oil in 2008. This will increase to 1.2m tonnes in 2013.
Based on prices of $225 per tonne for wheat and $438 for rapeseed oil, revenues are expected to soar from $16.2m in 2008 to $317m in 2013. These are now very conservative figures. The May 2008 delivery futures prices for wheat and rapeseed oil are $320 and $620 per tonne respectively, 50 per cent above assumed projections. And though the world price of wheat has recently fallen, Ukraine’s decision this week to end an export ban is good news for Landkom as it gives the company access to these higher global prices.
Farming isn’t rocket science, but costs can be hard to control. I took a hard look at Landkom’s projections. Land rental is very cheap in the Ukraine, $50 per ha has been agreed in the first year, and $35 in subsequent years. In Canada or Australia, you would be talking about $60-$70.
Labour is much cheaper in Ukraine than in rival regions, so overall costs are competitive. According to the Scottish Agricultural College, average production costs per hectare for wheat (aside from land) are $100 in Ukraine, compared with $160 in the UK or US.
A bigger risk is politics. Landkom needs to stay on the right side of local politicians. By offering to pay a 25 per cent tax and employ 900 staff it has made a good start.

http://www.ft.com/cms/s/0/fc70c588-12e4-11dd-8d91-0000779fd2ac.html

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