We at Agromanage AD believe that owning farmland has been a successful investment strategy for thousands of years, providing solid income, capital appreciation, and the security of owning real assets across economic cycles. As an investment, farmland has historically delivered attractive, diversified, inflation-hedged returns with both current cash flow and long term appreciation.

Going forward, we believe that the amount of available farmland will continue to decrease while the population continues to rise, thereby ensuring the appeal of the asset class over the long run.

Areas of interest

  • North West Bulgaria and South West Romania : Both regions have very high quality soils; proximity to Danube river facilitates prospective development of irrigation and transportation infrastructure. Current  prices in both regions do not accurately reflect the commercial potential of farmland
  • Large scale commercial farmers are running out of land to rent in Northern and North Eastern Bulgaria.  Commercial farming is currently expanding into North West Bulgaria and will expand into South West Romania over the next 3 years.

Our strategy:

  • Investable segment of agriculture value chain: farmland, not farming
  • Severe fragmentation allows for low entrance prices in undeveloped regions
  • Sharp disparities in regional development in terms of presence of commercial farmers: a regional arbitrage opportunity
  • Accumulate acreage in undeveloped regions at attractive valuations before commercial farmers enter at scale
  • Stimulate rapid rental growth by attracting expansion of large scale commercial farmers into the region
  • Sell regional portfolios when competition between commercial farmers has intensified/rental values have risen
  • EU CAP direct subsidies provide strong income support to productive farmland rents, at all stages

Regional land market overview

The chernozem (or “black earth”) soils of Northern Bulgaria and Southern and Western Romania are among the most fertile in the world and allow high yields of cereal production. Chernozem soils account for about 20% of total arable land in both nations.

The price differential is driven by the higher economic value of larger plots to the farmers.

Consolidation will improve the productivity of farmland. This is expected to lead to higher rents and higher farmland values. Elsewhere in the world, lower farmland fragmentation tends to correlate with higher cereal yields and higher farmland rents.

 

Bulgarian farmland is trading at a farmland P/S ratio of 6.2x, which is a 35.8% discount to the global average farmland P/S of 9.6x. In Bulgaria, plots larger than 5ha command a premium of 50% to 100% over the price and rent of smaller plots. In Bulgaria, direct payments per ha accounted for 16% of revenues in the agricultural sector. According to the National Statistical Institute of Bulgaria, rent agreements in 2012 were already being signed at an average rent of €173.6 per ha, which gives a rent yield of 6.3% on the new agreements. We expect rents to increase by 9.0% per year to reach €209.9 per ha in 2017.

Romanian farmland is trading at a farmland P/S ratio of 3.1x, which is a 68.2% discount to the global average. In Romania, non-consolidated plots sell for €1,600 - €2,200, while price of consolidated plots is above €3,500 (premium of 50%-100%). In Romania, direct payments accounted for 12% of total revenues in the sector. Total public support stood at 39% of agriculture sector revenues in Romania.

In Romania, the level of rents in 2012 has been in the range of €70.00 to €170.00 per Ha. At an average rent of €120.0 per ha, farmland provides a current rental yield of 5.1%, while Romania’s 10-year government bonds provides a yield of 5.3%. We are forecasting rents in Romania to grow by 13.5% annually and to reach €199.1 per ha in 2017.

FARMLAND RENTS IN BULGARIA ARE THE HIGHEST IN THE EU


YIELDS: WHERE ARE WE? WHAT IS THE PROFITABILITY?


Farmland in Bulgaria is among the cheapest in the EU based on its capacity to generate EU CAP direct payment subsidies. The size of the EU CAP subsidy per hectare differs widely among the member states. Farmers in older member states will continue to receive higher subsidy per hectare in the next program period 2014-20 despite the attempt to make distributions more equitable.

We compare farmland prices in different EU countries by factoring the amount of subsidies per hectare received by farmers in different countries.  The EU subsidy entitlement yield is calculated by dividing the estimated average annual EU payment per hectare for the 2014-2020 period by the current market price of land per hectare.

According to the EU CAP Annex III, Bulgarian farmers’ direct payments will increase from €157.2 per ha in 2013 to €224.1 per ha in 2017. The average rent for 2012/13 season on existing rental agreements reported by the three largest farmland REITs was €148.7.  At that level, farmland can provide a current rent yield of 5.4% while the yield on the Bulgarian government’s 10 year government bond is only 3.7%.  We expect rents to increase by 9.0% per year to reach €209.9 per ha in 2017.