Might there be one less Swedish investor in post-Soviet agriculture?

Agrokultura, formally known as Alpcot Agro, has called an extraordinary shareholder meeting for November 11 2013 here in Stockholm. Founded in 2006, Agrokultura owns or leases a total of 281 000 ha in Ukraine and Russia. While the initial indication was that the meeting would be about selecting a new board and discussing their salaries, Agrokultura founder Björn Lindström stated in a recent  interview that he gave for the Swedish magazine Affärs Världen that he intends to call for a liquidation of the company because, as he says, he does not see near-term prospects for profitability. 

In August of this year, Agrokultura reported (see also the half year report) a loss of 76,9 million kr (about 12.4 million USD) for the first half of 2013, and much of its land remains unharvested. In 2012 for example they harvested on 126 000 ha. Legal disputes involved with the purchase of LandKom in 2012, which was supposed to allow Agrokultura to expand their operations in Ukraine, instead hampered consolidation and integration of their Ukrainian holdings (see Agrokultura's most recent annual report). 

The legal disputes were resolved towards the end of 2012, and Agrokultura has since moved this year to consolidate their Ukrainian operations around Lviv in western Ukraine, divesting around 24 800 ha in central and southern Ukraine (see this report). It is a trend in Ukraine that agroholdings  (or super large farms) are consolidating holdings and even decreasing them to focus on acquiring better machinery, infrastructure and improving crop production. In this regard Agrokultura has invested in increasing its elevator capacity and taken other steps to improve profitability.  

It should be an interesting meeting in November. (Again for the purposes of disclosure, I should mentioned that I own a tiny amount of shares in Agrokultura).

Where is the Swedish Black Earth?

I have a map here of where -- approximately -- Swedish land investments in Russia and Ukraine are located (The list of Swedish investments was posted earlier on this blog).  I have taken the information on where Swedish investments are located from the respective web-sites of these companies, which all list (or show) the oblasts (first order administrative units) they are active in. I have merely put a dot in each oblast for each company. I do not know in which raioni (second order administrative units) these companies have their farms, so there is likely to be positional inaccuracy with respect to the actual location. For example, both Black Earth Farming and Agrokultura (Alpcot Agro) are in oblasts in the central black earth district in Russia, but within these oblasts, I do not know if the farms/fields of one are to the west, east, north or south of the other. Indeed they are probably all intermixed within these oblasts. In any case, the dots themselves, according to the map scale, can be larger than one or two raioni put together. This is a first draft of the map, and the idea with this map was only to get a general idea of where the different Swedish companies have invested to discuss the geography of this investment and the question of consolidation of holdings. The source for the soil data is the Harmonized World Soil Database. 

Keeping in mind of course that Swedish companies constitute a fraction (albeit an important fraction) of all foreign agricultural investment in these countries, the geography of these investments are nevertheless interesting. The first point to make is that the bulk of farming takes places in a stretch of territory from western Ukraine, across northern Ukraine and into the Central Black Earth District of Russia (and then a little further east), in other words, the northern steppe and steppe-forest region. Though parts of this area actually fall outside the famed black-earth zone (particularly in Ukraine), this sweep of territory receives more rainfall compared to areas further south. As an official from Agrokultura said "A few units less sun is not going to bankrupt you, but getting no rain will" (quoted in this article) and indeed Agrokultura is consolidating its Ukrainian holdings around its hub in Lviv (in western Ukraine). It should also be said that this preponderance of Swedish investments in this stretch of territory corresponds to what Deininger et al (see previous post) report about where the largest farms are located in Ukraine. 

The need to consolidate operations is another aspect to discuss. On the one hand, agro-holdings or large farms like to spread out their land holdings to mitigate weather related risk. Drought is a regular occurrence in steppe agriculture, particularly the farther south one goes. Spreading investments  around a larger territory means that drought in one area can perhaps be mitigated by adequate rainfall in another. At the same time, this creates a logistical and supervision problem -- overseeing far-flung fields or farms -- and then it can be challenging to bring product to market. 

With respect to bringing product to market, Black Earth Farming in their corporate literature stresses their (relative) closeness both to the Black Sea and Baltic Sea for export purposes. Previously BEF had a cluster in Samara (in Russia), but they have closed that cluster down -- were the logistics too challenging?

Agrokultura and Trigon Agri stand out as being spread out over a large area. Trigon Agri has a milk producing cluster in Estonia and outside St. Petersburg, but they have also consolidated their land holding, swapping land in (again) Samara and Stravropol for land in Rostov in southern Russia, which, as their corporate literature says, is close to export outlets.  Agrokultura's dispersion reflects their purchase of LandKom (active in many oblasts in Ukraine), and Agrokultura has been working to consolidate their Ukrainian holdings ever since. (For the purposes of disclosure, I should perhaps mention here that I own a minuscule amount of shares in all three companies that are traded on the Stockholm Stock Exchange and that have invested in post-Soviet agriculture.)

There must be a balance between geographic diversity for the purposes of weather mitigation and consolidation for better operational oversight and logistical efficiency, and it would be interesting to study that question further. 

All comments, by the way, are welcome. I think these investments are interesting to follow, but it's not my main line of research. 

On returns to scale in agriculture

A short comment on Brian Kuns blogpost Constant returns to scale in Ukrainan agriculture :  Thanks Brian !  The term "returns to scale" opened up an easy googleable way towards empirical results on small scale vs. large scale agriculture: "returns to scale in agriculture". I did one full-time semester in Economics in 1970 so I am bit ashamed that I did not remember the economic jargon better. First hit referred to the well-known inverse relationship between farm size and output per acre. I find it a conundrum that much circulated articles like Jonathan Foley et al. Solutions for a cultivated planet and other in same genre are silent on the social organisation of agriculture. Foley emphasises that the floor rather than the ceiling needs to be raised (increasing area productivity on the worlds low productive farmlands rather than more nitrogen in US and Europe see interview with Foley) but does do not say whether agrobusiness or support to small-holders is the way forward. Foley also on a seminar in Stockholm did not want to answer whether large land acquistions or small holders was the solution.  I don't expect these (natural) scientists to raise the issue of equity, I just want them to include evidence based results from social science on area productivity.  And social scientists should speak with a much louder voice on the problem of feeding 9 billions in 2050.

Constant Returns to Scale in Ukrainian Agriculture?

Renowned world bank economist Klaus Deininger with co-authors recently published a report which studied the performance of super large farms in Ukraine compared to smaller scale farms. The results (on this question) were, well, ambiguous. This is reminiscent of Lerman et al's 2007 report which investigated whether smaller-scale family farmers (fermeri) in Ukraine (the average size of such a "family farm" is around 100 ha) are more efficient than larger scale farms (The Lerman et al report did not take into account the super large farm phenomenon as it was still an emerging trend when they were gathering data). Lerman et al's results were also ambiguous, i.e. "smaller-scale" family farmers were shown to have similar total factor productivity as larger scale corporate farm enterprises. So, here we have two competing theories. One, the so-called inverse-relation argument is that smaller-scale family-managed and owned farming is inherently more efficient than larger-scale operations. The other is that new technologies, plus a superior ability to access capital, allow super large farms to overcome some of the traditional obstacles that large-scale operations face (transaction costs, etc...). The empirical results in Ukraine do not support one or the other position (yet, it should be said). 

Nevertheless, Deininger et al show some really fascinating results. One is that raioni (municipalities or second level administrative units) that in 2001 had more concentration of land under fewer farms exhibited poorer productivity growth by 2011 compared to raioni with less concentration of land in 2001. Deininger et al's data show that much of the productivity growth between 2001 and 2011 is due to newer, more efficient actors entering the markets, so the presumption is that relatively high land concentration prohibits market entry of new actors. 

Second the geography of large-scale production has shifted. If in 2001, larger scale farms were concentrated in the east and south, they are now (in 2011) concentrated in a band stretching across the north of the country. 

By the way, their data did in fact show that output was highest for farms between 30,000 and 50,000 ha, but this advantage disappeared when they controlled for regional and farm level effects. Their data showed that profitability was highest for farms between 2000 to 3000 ha. 

One has to wonder does the Ukrainian evidence indicate that there are constant returns to scale in agriculture, as Deininger et al suggest, or does it show that Ukraine is where economic theories go to die? 

Notes from the field

I recently came back from the last fieldwork for my PhD during which I gathered data on the modes and practices of irrigation in the villages of Tot, Kenya and Engaruka, Tanzania. These two systems have a long history that has been documented by anthropologists, archaeologists and geographers (i.e. Sutton, Watson, Moore, Soper..). However they have not been studied in their current conditions and development, which is what my work is focusing upon. The peculiarity of these two system is that they are indigenous and they have been successful in making agriculture flourish in dry-land areas. Thus, in the context of the call for a new green revolution (for Swedish speakers see the article on this month Naturskyddsföreningen´s magazine) to close the yield gap and ensure food security - also through irrigation projects -, it is crucial to look at how indigenous systems have fared. This research can feed into the current debate on the Guardian on the sustainable water use in agriculture, which appears to favor local solutions.

Nevertheless the new green revolution is becoming apparent in the village of Tot, Kenya where the Red Cross started off an irrigation project. According to the Kenyan Red Cross livelihood officer  I interviewed, (who did not want to be recorded - ah, the challenges of the field!) sprinkle irrigation will allow for yr round production of cash crops i.e. green gram, onions and tomatoes that farmers will be selling to wholesalers in Eldoret.

While not yet operational, the project is already visible in Tot and has already modified the fields landscape. Here is a picture of a participant mapping exercise done under the Arron tree, where traditionally all decisions regarding irrigation are taken by male elders. On this same spot there is now a cement drain for the pipes of the Red Cross project. 

It will be interesting to follow up on this project and investigating how it will revolutionize agriculture in Tot and how farmers will autonomously use it in a few years time when the Red Cross will phase out. This last element is especially relevant in order to draw a comparison with the neighboring Italian Cooperation Wei Wei valley irrigation  project which is now being extended.

Hopefully carrying out such studies will be possible given that local authorities and representatives of the organizations dealing with these projects were available to meet, but not to be recorded. Such unexpected element represented certainly a big challenge for me as a a researcher, which brings me to the second point I want to bring up in this post: fieldwork challenges.

Conditions on the ground were quite challenging this time in the field. Not only weather related conditions as in Engaruka:

The scarce vegetation and the sandy soil were in fact the perfect mix for wind storms that forced my assistant and I to cover our mouth and nose to be able to breathe properly.

While geographical fieldwork has historically been a “male solo endeavor” (Frohlich 2002:50), being a single western white woman does not probably represent the ideal condition to carry out fieldwork in such a diverse cultural environment. Speaking Swahili made me even more aware of what was going on around me and more exposed to the psychological consequences of hearing stories about violence and abuse against women and children and understanding what men were shouting at me and my female assistants.

Fieldwork over these last three years has certainly changed me as a woman and as a researcher. I had not envisioned the instances I mentioned above before going to the field, because ethical and gender related dilemmas were never brought up in any conversation with fellow researchers, who happened actually to be mostly men. Now, at the end of my fieldwork endeavor, I realize that - and I am aware it is not rocket science - that female researchers in some environments are faced with a unique set of challenges which female students should be made aware of during their undergrad education.