07 Dec

From the Field: The US-China Trade War Rumbles On and China’s Traders Aren’t Panicking

Posted by Team Meros in Market Trends

When Meros first visited China in July to discuss the brewing trade war and its potential impact on US agricultural exports, Chinese ag traders were optimistic.

This may blow over in a few months, they assured us. But by September and October when we returned and discussed dairy, grains and soybeans, the mood was decidedly more resigned.

As of this first week in December 2018, where are we?

The trade situation changes weekly and certainly impacts different US agricultural products differently, but there were several common themes among our talks with Chinese ag trade experts.

  • There is both optimism and pessimism about the future of US agriculture trade: When talking to a range of people, from Beijing policy makers to Shanghai importers, it is the policymakers and academics who are far more pessimistic than traders and industry players.  Policymakers see the conflict through the lens of government-to-government conflict and this tension is likely to continue, even as one tariff is replaced by some other barrier.
  • Chinese traders are looking for other suppliers of agricultural and food products and there is no guarantee they will return to US supply even after the trade war abates.  While some Chinese buyers and their US suppliers initially tried to share the tariff burden or freeze prices at pre-tariff levels in the hope that the tariffs would soon be dropped, this is increasingly unsustainable as the war drags on.
  • The chance to diversify suppliers and develop new trade relationships is considered a good opportunity for China.  Both policy makers or traders saw a good chance for China to focus on both its own domestic agriculture industries and supply chain infrastructures. It is also a chance to deepen relationships with new suppliers around the world and support them in strengthening logistics, an area that the US would normally have an advantage.
  • Trade is flexible. If direct routes to the China market are stopped, products tend to find a way to be rerouted, processed or exchanged through third-countries. Reports of US soybeans heading to Argentina for storage until the trade war abates or products routed through Vietnam are already initial indications of global trade doing what it always does – readjusting.
  • It is a chance for Chinese companies to expand into new and growing markets, including Vietnam or Indonesia, where US agricultural commodities and ingredients are more easily available. “See you in Vietnam!” joked one Chinese feed trader, as she described their new operations in Hanoi where they expect to be able to continue their US feed grain imports.

The interest by China central government to strengthen global grain, oil seed and food supply options and build up trade logistics is clear from the effort put into its One Belt One Road initiative, an ambitious policy of trade development from China through central Asia as far as Europe, using a variety of investments and incentives.

While Chinese traders and importers scrambled to adjust their suppliers for many products, there was no sense of impending doom. Overwhelmingly, it was disappointment at how unpredictable agricultural trade with the US has become. Whether this confidence is well placed or overly optimistic will become clearer in the next months.

 

Meros Consulting is a Tokyo-based strategic business advisory. We work with companies and governments globally to advising on trade dynamics and support business development in the food and agriculture industries.

15 Oct

Five Key Trends in Global Agricultural Land Investing

Posted by Team Meros in Market Trends, Publications

The Global AgInvesting Asia 2018 conference was held October 2nd and 3rd at the Tokyo American Club, marking the third time the event has been held in Tokyo since it moved from its previous host city of Singapore. The event aims to help Japanese institutional investors gain a better understanding of overseas agricultural investment opportunities and what makes these opportunities attractive. The event was an interesting chance to hear updates on a wide range of topics, including agricultural land investment as real estate investment, investment into agricultural distribution businesses, opportunities in agritech and developments in agricultural insurance.

Because agricultural land investment is a dynamic investment area, with growing interest from institutional investors, here is a summary of some of the key trends in agricultural investing, based on presentations and discussions at Global AgInvesting Tokyo as well as on our own knowledge.  A pdf version of this discussion can be downloaded at the end of this post.

A Global AgInvesting Panel with Takuma Yoshida (Chief Executive Officer, SEIRYU Asset Management, Ltd.), Masaya Hara Managing Representative, Albourne Partners Japan), Yoshifumi Kida (Manager, Foreign Equity and Alternative Investment Department, Nippon Life Insurance Company), Akitoshi Yamada (Managing Director & Head of Japan, Patheon Ventures (Asia) Limited).  Photo: Meros Consulting

Trend 1: Agricultural land investment greatly increased in the 2010s

Investment in agricultural land by institutional investors such as pension funds had been growing gradually since the 1980s, but had become increasingly controversial in the early 2000s. A 2008 report by the international non-profit GRAIN gained widespread attention for its analysis of increasing global farmland investment and their characterization of this foreign investment in agricultural land as land grabbing. Large-scale investment in agricultural land was hit with heavy criticism, especially as agricultural commodity prices were soaring at that time due to tight supply. Still, according to financial data service Preqin’s database on fund procurement by agricultural land investment funds, agricultural land investments by institutional investors accelerated further in the 2010s after the financial crisis eased.

This acceleration in agriculture and agricultural land investments was driven by institutional investors such as pension funds, government funds, university funds and large family offices. Institutional investors have been looking to expand alternative investments and farmland investment has become an attractive option for balancing risk and return. Agricultural land investment can become a way to hedge risk, since farmland prices are continuing to increase and there is relatively stable revenue from land rent or agricultural product sales. The fact that agricultural investments have a limited relationship with traditional asset investments such as stocks and bonds is also a plus.

Interest from the agriculture side in attracting funding has also increased significantly. South America, particularly Brazil, has abundant unused farmland and Eastern European countries such as the Ukraine still have opportunities for investing in large-scale agricultural development. Even in developed countries such as Australia, Canada and the United States, farmers are increasingly borrowing land from investment funds who have purchased farmland, and investment funds themselves are increasingly entering the farm management business. This is because farmer debt is rising in these countries, as farms try to increase scale for greater efficiency, while the capacity of individual farmers to continue to buy new farmland is limited. When farmland is consolidated under an investment fund and put up for sale, it is common for another investment fund to purchase the whole piece of land rather than selling plots separately to individual farmers.

Trend 2: An investment model has been developed for managing agricultural land investments

One reason behind the increase of investment funding for farmland is the development of an investment model to manage agricultural funds, using US-style limited partnerships.

Source: Meros Consulting

Agricultural land management requires highly specialized management capabilities. There are diverse risk factors to cope with including unpredictable weather and changing market prices; operational environments and systems differ greatly from one region to another. However, thanks to the growth of fund management companies with General Partners (GP) who are specialized in managing farmland in specific regions or countries, an investment model has been established where foreign institutional investors such as pension funds who have no background in local agricultural situations can participate as a limited liability partner (LP), without being involved in management and only receive dividends.

Major agricultural land fund management companies include TIAA Asset Management under the umbrella of the Teachers Insurance and Annuity Association of America (TIAA), which possess about 770,000 ha of grains, oil seeds, sugar cane and wine grape production in Australia, Brazil, the US, Eastern Europe and other regions through multiple funds; Hancock Agricultural Investment Group under a major life insurance company Manulife, which holds about 140,000 ha of fruit trees, nuts, grains and other farm produce production mainly in the US, Canada, Australia; and Proterra Investment Partners, an investment team formerly part of Cargill which invests in agricultural land and businesses in Australia, the US and Asia.

Trend 3:  Investments have been slightly slowing recently due to lower returns

On the other hand, some funds are withdrawing from agricultural land investments. For example, the Canada Pension Plan Investment Board, a public pension investment organization which purchased about 97,000 ha of farmland in Canada and the US after 2012, revised its plan to expand agricultural land investments in 2017 and has decided to focus more on down-stream agricultural industries such as distribution. This is due to the fact that almost half of their farmland was located in Saskatchewan, Canada where regulations on agricultural land investments were tightened, and also because land investments did not proceed as expected in Australia, New Zealand and Brazil. [1]

In addition, global market prices for agricultural products have recently been decreasing, and the situation is becoming even more uncertain due to the US-China trade war. The price of agricultural land has soared due to inflow of investment funds, and so the return on agricultural investment (total of income and capital gains) is decreasing. As such, agricultural investment is slowing compared to the past, even though agricultural investment by institutional investors is continuing to increase.

Trend 4: There is a growing perception that agricultural land investment can have positively impact sustainable development and environmental goals

Despite the recent slow-down, investment in agriculture is still considered to have promising prospects in the mid to long term, given the increasing global population and the need to grow food supply.  Compared to 2008, when concerns about land grabbing created intense controversy, agricultural land investment has gained a more positive image over the last 10 years and institutional investors have increasingly been able to use their agricultural land investments as evidence of their commitment to responsible ESG (Environment, Society and Governance) investing or their support of the SDGs (Sustainable Development Goals).

As a response to concerns that foreign agricultural investments were simply land grabs, the World Bank and the United Nations Food and Agriculture Organization (FAO) jointly formulated the “Principles for Responsible Agricultural Investment (PRAI)” in 2010. This reflected the UN’s “Principles for Responsible Investment (PRI)” enacted in 2006, which laid out guidelines for institutional investors to incorporate consideration of ESG issues into their decision-making process. ESG investments are expanding and the number of institutions that have signed PRI exceeded 2,000 in 2018.

At the same time, the concept of “impact investing”, initially advocated in 2007 by the Rockefeller Foundation, has also steadily gained mainstream acceptance, as seen, for example, by the establishment of the G8 Social Impact Investment Task Force at the 2013 G8 Summit. As a result, the idea that investment, if done carefully, can have positive social impact became increasingly widespread.

The SDGs adopted at the 2015 UN Summit further strengthened this trend. Unlike past global development goals, the SDGs target not only developing countries but also developed countries and encourage the active involvement of private enterprises to contribute to reaching the SDGs. In particular, agricultural land investment has been seen as potential tool for achieving Goal 2, “End hunger, achieve food security and improved nutrition and promote sustainable agriculture”.

In other words, there is growing discussion about how responsible agricultural investments can contribute to solving global food challenges through environmentally friendly and sustainable farmland management, as well as by optimizing limited land and water resources.

Trend 5: Japanese institutional investors are beginning to show interest in overseas agricultural investment 

Japanese institutional investor Nippon Life Insurance Company (Nissay) announced a JPY 10 billion investment (around USD 90 million) in an Australian farmland investment fund from the Hancock Natural Resource Group under Manulife, in April 2018. It is the first farmland investment by a large Japanese life insurance company. Also, SEIRYU Asset Management, a fund operator of the Japanese Government Pension Investment Fund (GPIF), has also started working with a forestry investment fund abroad and, according to our discussions at Global AgInvesting, expects to continue exploring farmland investment opportunities.

Japanese companies do have strong interest in foreign investment. However, there are few successful cases of agricultural investments. In 2018, Mitsui closed its Brazilian subsidiary Multigrain, its grain production and distribution unit, and other Japanese companies have hesitated to enter the agricultural land investment market. Still, with the entry of Nissay into the market this year, there may begin to be more interest by other Japanese companies, who carefully watch the first movers.

[1] Reuters, 2017.4.27, “Exclusive: Canada’s CPPIB pension fund plans farmland retreat – sources”

Five Trends in Agricultural Land Investment 2018 (Meros Consulting)

18 Sep

Invasive Seafood Species is Not Bad News for Bulgaria

Posted by Team Meros in Market Trends

Seafood industry highlights from a recent article by Meros’ Tina Peneva in the Bulgarian gastronomy magazine Bacchus.

Fish consumption is booming in Bulgaria

Deep-fried sprats are a favorite accompaniment to beer in the summer months.

For years, eating fish was typically a seasonal activity for Bulgarian consumers and was mainly limited to two varieties of fish. In the summer, Bulgarians would often have a plate piled high with tiny, deep-fried sprats to go with their cold beer and in the winter, many would enjoy baked, stuffed carp while celebrating the Day of St. Nicola, the Orthodox Christian patron saint of the sea and fishermen.

Until recently, the only other fish commonly found beyond the ubiquitous carp and sprats were mackerel and “white fish”, which refers to any type of white fleshed fish. Frozen fish was the norm, with some fresh seasonal exceptions along the Black Sea coast in the East or the Danube river shore in the North.

While many Bulgarian consumers continue to follow these fish consumption traditions, in the past decade, the Bulgarian fish market has seen major changes and has become increasingly complex, with new seafood industries developing around aquaculture – and around the notorious Black Sea Rapa whelk.

Source: Directorate General, Maritime Affairs and Fisheries, European Commission

Bulgarian fish consumption has been on the rise and, according to official statistics totals, it is up to at least 6.7 kg per capita per year. According to unofficial data, real consumption is actually double this volume if unregistered catch and imports are included.  This increase is due to improvements in cold chain infrastructure, modernised retail outlets, as well as changing eating habits focused on health and variety. Chilled fresh fish is becoming more accessible, especially in larger cities.

Bulgaria is a small fish in the global fish market

Only 34 seafood species are harvested commercially in the Black Sea, including various types of both fish and crustaceans. In 2016, the catch totaled 8,500 MT, according to the official statistics and as much as 10,000 MT when adding the unregulated catch.

Source: Bulgarian Fish Association

In addition to wild catch fisheries, there are now over 670 aquaculture farms in Bulgaria producing mussels and clams, as well as other cold and warm water fish varieties like sturgeon, trout, carp, silver carp and Wels catfish. The total aquaculture production in 2015 was 13,600 MT with shellfish accounting for 25% of the volume. Mussel farms are a new and rapidly developing segment in Bulgarian aquaculture with over 30 farms established along the Black Sea coast.

 2016 Seafood Trade

Black Sea fish volumes are not enough to satisfy the growing consumer demand and already over 75% of the seafood products consumed in Bulgaria are imported. The total volume of fish and seafood products imported into Bulgaria is 34,000 MT per year and over one third of this volume is frozen mackerel imported from the Netherlands, Iceland and Norway, as well as frozen Danish salmon.

Source: International Trade Center

In addition to being a net importer, Bulgaria is a key exporter of various seafood products. In 2016, the total value of seafood exports was estimated at USD 31 million. Almost one third of the exports were shipped to neighboring Romania, including not only processed seafood but live, chilled and frozen fish, shellfish and crustaceans. Spain is Bulgaria’s second largest export partner and shipments were mainly shellfish.

The notorious Veined Rapa Whelk is one of the most lucrative segments in the Bulgarian seafood industry

The veined Rapa whelk, or Rapana venosa is not native to the Black Sea and originated in the South China Sea and the Sea of Japan. Marine historians tell the story of how the whelk was transported along with ballast water to the Black Sea by Russian military ships during WWII and ever since, has become a common inhabitant of the Black Sea.

This whelk is considered one of the top 100 worst predatory invasive species in Europe,  according to the European Invasive Alien Species Gateway (DAISIE).

The Rapa whelk propagates very quickly and has no natural enemies in the Black Sea. In the past 10 years, due to global warming and the constant rise of the Black Sea water temperature, the veined Rapa whelk population has increased tremendously. It has started threatening the biological diversity of the Black Sea as the whelk eat the shellfish living in the sea, which are the natural filters for the sea water.

In order to control overpopulation by this invader, a new industry has developed in Bulgaria focusing on the harvesting and processing of Rapa whelks. The Rapa whelk is not only now the top species harvested in the Black Sea, but it is also one of the most lucrative products for the Bulgarian seafood processing industry. The annual catch is officially 3,500 MT but the actual, unofficial volume is estimated to be even more. Eight factories are processing the catch and products are exported to the key whelk consumers globally: South Korea (exports are valued 4.3 million USD) and Japan (2.4 million US) and smaller volumes to the US and China.