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Agriculture has become an interesting topic for the international investor community both in Estonia, Eastern Europe and rest of the world. Commodity markets are booming and the sector is starving for investments. The ownership structure of Estonian agricultural landscape has also favoured acquisitions of farms by the outside investors.
On the other hand, there are remarkably few success stories among the transactions made in the recent years (since Estonia joined European Union in 2004) even though the number and volume of transactions have been strong.
From the practical experience we would point at three main reasons, why numerous investment projects in agriculture have underperformed so far:
1. Insufficient knowledge or underestimation of the business model in agriculture
Although agriculture looks like a really simple business from a distance, it is actually (suprisingly) multi-disciplinary and demanding sector. The biological processes that make up the backbone of agriculture tend to behave according to their own logic and pay no attention to the ambitions of the outsiders. Ignoring this notion can bring about some unexpected (if not astonishing) economic results that are quite difficult to digest and understand for the people used to the logic of other business sectors.
It is very important to understand that all key biological conditions must be met in order to achieve a good operating result. Typically, some of those conditions are overstated and others understated, but the final result is determined by the condition least met.
Therefore it is imperative to familiarize oneself with the business model of the chosen agricultural sector and the related biological conditions - otherwise it is impossible to put together a serious business case. Also, these conditions must be measurable and measurements have to be placed in a broader context. Then it will be possible to really understand, where are the weak spots in the farm's production process and whether the achieved result is in an acceptable accordance with the commited inputs.
2. Ignorance or understatement of risks
As a multi-disciplinary business, agriculture is exposed to a whole variety of risks that must be considered in the planning process. For instance:
- Biological risks: illnesses, epidemies, pests
- Climatic risks: drought, excessive precipitation, frosts
- Managerial risks: misplanning, wrong personnel choice
- Legal risks: non-compliance with standards, land access
- Political risks: subsidy levels, change in standards
- Market risks: fluctuation of sales and purchase prices
Fortunately, most of these risks can hedged (to an extent) so that realization of one risk may not pose a very serious threat to the economic results. However, risk hedging should be an integral part of any business planning in agriculture.
3. Poor management model
If the owner / investor in an agricultural enterprise is personally not involved with daily management, then the right management model is critically important. The owners should always have a clear understanding about the current state of business, but at the same time they should avoid being flooded with petty matters. They would anyway not have the sufficient knowledge and time to make well-considered decisions in these matters.
A working management model assumes:
- Competent middle-management
- Motivating organization of labor and compensation system for middle managers
- Good budgeting and reporting system that would also involve key non-financial (biological) parameters.
One should consider from the beginning that good middle managers are not cheap, this sets the lower limit to the scale of the enterprise. Cost of management structure will itself become a major issue in achieving the expected return on investment in undersized businesses.
We have been through the agribusiness investment / turnaround / development process hands-on and made sure in practice, what does work and what doesn't. We're also very well aware of all the risks and hedging options involved.
For sure, every investment project and enterprise is somewhat unique. On the other hand, agricultural businesses also have very much in common: products, inputs and main technologies are the same. Therefore it is possible to avoid mistakes and repeat successes already experienced in earlier projects rather than turn yourself (and your wallet) into yet another test exercise. We can help you sort out these things:
Before commitment to an investment:
- Analysis of the objectives and planned resources of the project
- In acquisition: SWOT analysis of the existing operations (technical issues, land, economic performance, competence of the people involved)
- Analysis of the perspectives and investment needs of the enterprise
- Financial projections
- Valuation of the business based on the abovementioned
In an existing enterprise:
- SWOT analysis of the operations
- Analysis of business plans and perspectives
- Overview of the management model
- Creation/overhaul/implementation of the budgeting and reporting system
We are always happy to participate in teams with (investment) bankers, advisors, lawyers and support the project with our specialized industry knowledge. Our main focus is Estonia, but we would also consider projects elsewhere in Eastern Europe.
If you need additional information or wish to discuss potential cooperation, please contact us. All information is treated as confidential.