Interview with Robert K. Frowein from AgroEnergy.
AgroEnergy purchases, leases and operates farm and farm land in East Germany with the objective to create sustainable tangible asset values, generate operating returns and participate in potential value increases.
AgroEnergy is based in Hamburg and have been doing investments in agriculture, in East Germany, over the past 10 years.
We believe that agriculture is a very interesting investment opportunity because there are several very strong megatrends which support the case.
The world’s population is growing, hence the increasing need for food. But not only for food, but also for feed. The quality of the food that is required is increasing and if you for example eat meat instead of grain, you need a multiple amount of grain to feed the animal that you want to eat afterwards. Hence the growing demand for quality food, richer food, increases the demand.
On the other side, you have a limited amount of areas in the world that are suitable for agriculture. In the future, you will have the high productive land, which prevails in Europe, the USA and in some places in South America. These areas already benefit from these megatrends.
Also, crops as a source of renewable energy is becoming important. It was more important when oil prices were higher than today, however technology improvements will come in the game and it will allow us to produce synthetic fuels out of for instance fast growing trees.
Several elements bring agriculture to a place where it has not been for many years. Hence, we believe agriculture is a very interesting investment opportunity.
Agriculture in East Germany
What you can expect from your investment in agriculture is a relatively low return, compared to for instance private equity, but at a very low risk. You invest in land and that makes up a large part of your investment in terms of value. That land remains there. Hence, you combine low risk with low returns. We believe that the place where you go, in this case East Germany, should fit within this strategy. That means you can manage the risk, or that the risk is low.
In East Germany we know the legal system, we speak the language, it is easy to access from Hamburg, we are there, we know the people and their mentality. Hence, we know that the risk we would be exposed to would be limited.
If you go further East, for example to Poland, Ukraine or Bulgaria, where theoretically conditions for agriculture seems to be good because soil is good and the land is cheap, there might indeed be opportunities to produce high returns. However, we know from experience that there is political risk, operational risk, management risk and legal risk in those countries. We think that does not fit with the profile we are looking for.
We feel comfortable in an environment that we know and that is East Germany. Here the opportunities are great.
From the past, there are very large structures; you can easily find operations with 2000 – 3000 ha, or even over 5000 ha at times. This gives you great advantages when you look at your economics in operations. Furthermore, there are very favourable natural conditions; good soil, moderate climate, little exposure to climate change, very good logistics and some other points. They all help making this a very good investment case.
We started AgroEnergy in 2007. That was a time when nobody talked about agriculture as an investment. However, we did some extra analysis and we found that agriculture would become a more dynamic sector. Funny enough we were right; about 2-3 years later, prices started to go up. First was prices for produce: in 2007 wheat prices were EUR 11-12/100kg, about 3 years later the price was EUR 25. That brought a lot of dynamic into the sector. Also, the prices for land went up dramatically. We really came at the right moment.
When we started AgroEnergy 1 in 2008, we invested EUR 25Mn in equity in two operations of a total of 5000ha. We had one large investor who initially looked at our venture as a place where he wanted to gain some experience. After a while, however, he realized that we were right about our assessment and that we were doing well in terms of operation. That led him to a proposal, 3-4 years later, where he wanted it all for himself and consequently made an offer to buy out all the other investors. That produced a return of 13.5%/year for the investors that was then bought out. Everybody was very happy and we had proven that the principle of our investment story was right.
We then set up AgroEnergy 2 with more or less the same investors. We have bought one operation of 3000ha in East Germany which is still running and the investors are happy. It is generating some returns and is currently closed for investments. There is no possibility for investors from outside to come in as these investors would not want to exit. That is the point where we now started AgroEnergy 3.
AgroEnergy 3 has the same proposal, the same story and the same fundamentals because we have seen that they have been proven to be right.
A unique proposition
Starting AgroEnergy 3 means that we have on the table one operation that we have analysed fully. It has about 2500ha in East Germany. It is a clean, well run and well managed operation which has the particularity that all the land is grouped together. It is impressive; you can stand in the middle and look towards the horizon and all you see is the same operation.
The operation has good results in terms of harvest, EBIT and it has a reasonable pricing behind it. We have done the due diligence and we have found it is clean and could be taken over tomorrow. It is a very nice opportunity that perfectly fits in our story where we say that we have a long-term sustainable investment with moderate returns and low risk.