We are the shark now

December 3, 2012

 Russian agriculture in the Far East has the potential to attract billions in investment, but it doesn’t have a hundredth of this money at the moment. However Cherkizovo Group is ready to take a risk and invest hundreds of millions of dollars in the development of agricultural projects in the region. The founder and Cherkizovo Chairman of the Board Igor Babaev, told RBC daily’s reporter Aleksei Kuzmenko. 

The agricultural holding is ready to build poultry facilities, buy fodder and sell the meat. But, to realise these plans the agro-holding requires strong support from local authorities. 

PANTRY for farmers 

- What caused Cherkizovo’s interest in the Far Eastern regions of Russia? It immediately raises the question of  export to Asian countries. Have you studied the regions with this intention? 

- A trip to the Far East was a natural step in the continuous study of potential new regions in Russia in which to expand our business. During the preparation for the trip we studied many materials, spoke with experts and analysed the statistics showing industry production figures for meat processing and agriculture in the region. We learned that the needs of the region’s population meat products from their own production are 15%. 85% of the meat consumed by the region is imported. Today, the Far East produces a maximum of 30 tonnes of poultry per year compared with   consumption of 150-200 tonnes. Speaking of industrial production, pork production is almost there, although consumption is estimated at more than 100 tonnes.  Packaged meat in the Far Eastern Federal District is all imported   frozen meat.  When frozen meat is used in meat processing the quality is affected, and ultimately the consumer suffers. 

-  But to develop animal industries, forages are necessary... 

- Today, the Amur Region has 1.5 million hectares of arable land, the Primorsky Region has about 700 hectares and the Jewish Autonomous Region has about 300 hectares. This is some 2.5 million hectares of arable land, which, at a conservative estimate, can produce more than 8 million tonnes of soybeans and corn. At the moment it just gives crumbs.  Of course, there is a third element in the geographical proximity to China, Japan, South Korea and other Asian countries - that is at least 2.5 billion consumers. These three components have led to the understanding that the region is of strategic interest to our business. 

- Did the government ask you to explore and invest in the region, or you take the initiative? 

- We took the initiative.  The first step was the meeting at a press conference in Moscow with Victor Ishayev, the Minister on the development of the Far East. We agreed to meet in Khabarovsk after the APEC summit. During the conference, the Minister introduced the participants to the key elements of the program for the development of the Far East until 2050, which was amazing. Despite the fact that in his speech he drew attention to the agricultural potential of the region,a leader in the production of soybeans in the country, we did not find the development of agriculture on the list of priority projects  . After two and a half months of preparation and coordination, we arrived to Khabarovsk and the first meeting was with the Governor of Khabarovsk Region, Vyacheslav Shport. We have a clear understanding that in the vast region there is little arable land. However, the region developed industry, including defense, and there is a transport infrastructure - railroads, roads, utilities and communications. This region is the only one in the Far East that has mains gas. Gas is the key word for the success of pig and poultry production. The next day we met in the premises of the Plenipotentiary Representative of the Russian President   where we presented AIC Cherkizovsky. 

-  Did you visit other cities? 

- Yes, we visited Vladivostok and met with the Minister of Agriculture of the Primorsky Region.   Whilst in the region we visited the Ratimir company and the Michael broiler agribusiness. I must admit, I was pleasantly surprised by the young entrepreneurs, they were very professional.  It is a region where there are many quotas on imported raw materials, usually frozen as there is little chilled raw meat in the Far East and it cannot last long.  All the same, this production process has to rely on its own raw material base. Today, local farmers cannot afford to add the missing links to the production chain and the local authorities do not have the understanding to attract and maintain the rural investor, especially in the creation of logistics. Vladivostok struck me with its beauty. The huge infusion of public resources to prepare for the APEC summit also did a great in terms of communication, roads, new bridges a   campus.  

- And it inspired you too? 

- Of course! But entry into a new area requires great effort and risk. But I'm very pleased with the trip to the Far East. I see a wonderful future and I feel a great desire to start a new investment project.  and  We will stay in touch with the governors of the Far Eastern regions, and will  come back with a new project but not at a breakneck pace. Our trip has shown that the local government structures are not yet ready to receive large private investors, whether Russians or foreigners. There are no developed investment proposals and no structural support. The lion's share of the arable land is not put to the cadastre or incorporated into property. This means that the land cannot be used by an investor as collateral for bank loans.. The Far East  is the storehouse of the future, and not to go there would be strategic myopia. Farmers in the region are in dire straits because of the lack of demand for what they produce. In the Far Eastern Federal District, there are very low levels of consumption of feed livestock and that inhibits the development of large-scale crop production, even though it has all the necessary conditions. To take corn and soybeans for export, in the absence of regional and export logistics is impossible.  It is cheaper to import soybeans to Asia from Brazil, which is the case today. 

- How were your meetings with Ratimir and the Michailovsky agribusiness? 

- We have a great desire to cooperate. They know us and they have visited our plants. They understand that they need a reliable source of raw materials, and for this we must have strong links with major commodity investors. This topic is now also discussed by us.  

- But in this region, a farmstead would probably produce  a large amount of pork... 

- The option of pigs in backyard does not work anywhere in the world! Efficiency and competitiveness in pig and poultry production for the small private trader is impossible. Villagers in Russia were driven into such poverty that they were doing it out of desperation! Support for its development at the state level is on   the road to nowhere! For example, in the report on the agricultural production of the Khabarovsk Region, which I studied, says that in 2009 there were 63 thousand pigs in the region, and by 2020 there will be 84 thousand, but it is a virtual statistics as industrial pig production in the region is absent. 

Forgotten POWER 

- Are the local authorities willing to support it? 

- I got the impression that the local authority is of the view: "If you need it, do it." For example, at one meeting which was attended by a number of local businessmen and farmers I asked if they received help from the local budget and they said that they did not. I was surprised, because the agricultural investor without local support, cannot work effectively and develop. Local authorities need to understand two important things: without state support their small agricultural investors will not be able to become big investors.  We were not always the agrarian giant But on the other hand, without the active support of major agricultural players (Cherkizovo Group for example) regions will not be able to rely on the development of large-scale agro projects in their territories. But I'm talking specifically about authority and power as key factors for success. When the authorities understand the importance and value of agricultural investors in the region, I can easily explain and work, but they are still far from full understanding. To say that Cherkizovo will arrive and start to invest is premature. Moreover, as a public company we cannot take irresponsible risks. 

- Is the federal government  ready to support projects? 

- You cannot blame everything on the federal government, which happens a lot. We must pay tribute to the fact that under the leadership of Vladimir Putin, the agricultural sector has received huge financial resources in the form of subsidies which have paid off. Those on the ground have money too, and the regional authorities should use  their fullest capacity and right to control and distribute the resources. 

-  How can local authorities help if regions are subsidised? How would they get money to support your projects? 

- There is no need to say that the regions are poor. It is not so. I give you the example of the Tambov region. Is it rich? How does the head of the region push the process? Governor Oleg Betin could centralize the financial resources of the region to create the necessary conditions for the development of the agricultural sector. As a result in the Tambov region, we have 250 thousand pigs, dairies, mini-farms and process 70 thousand hectares of land. But, if the governor does not understand that the region needs industrial agriculture, the projects will not be implemented. Our experience in the Saratov and Samara areas says so. For example, we bought 40 hectares of land in the Samara region, an elevator, equipment and prepared the project documentation to run poultry farms. But we did not find a common ground with Vladimir Artyakov when he was head of the region, and the project went no further. The main reason was that the governor was far from understanding the agricultural industry. 

 Which regions of the Far East do you foresee as the most interesting from a project investment perspective? 

— Surprisingly, the most promising region is the Khabarovsk Territory. We can build pig and poultry farming facilities where there are no existing crops, but there is an appropriate amount of land, which allows for necessary veterinary gaps between the complexes. . We will bring soy and maize from the neighboring Amur and Jewish Autonomous Regions. The most important things for us are the availability of utility and communications systems, as well as gas. 

— Was visit of Khabarovsk Governor Vyacheslav Shport to the Cherkizovo facilities in Lipetsk an introductory visit?  

— We invited the leaders of various Far Eastern regions to visit our facilities and the first to respond to our invitation was Shport. He understands the need for the development of agriculture in the province at a professional level. This region may become the first, perhaps, in the Far East where Cherkizovo will invest.  Then we can go into other areas, as we did in Central Black Earth back in the day; we entered Lipetsk, and from there we went into the surrounding area.  The situation may explode in a couple of years in terms of demand for meat in the  Far Eastern Federal District. But, to progress, we need the understanding of the authorities.   

— Over what period of time would it be possible for you to execute the process? 

— To develop the poultry complex with a capacity of 50,000  tonnes per year, we will need three years, for pork we need five years.  

- From scratch? 


- Yes, from scratch. 

 —How so? 

We are working on a proven methodology. We have everything: project documentation, experience and builders. We do not need to be as cautious as we were 10 years ago..  Now we are an industry shark. We know the way. 

— How large are the investments? A poultry farm with a capacity of 50,000 thousand tonnes per year for example? 

- A facility of this capacity would need more than $100 million investment. In general, investments in the Far Eastern Federal District can be enormous. I said that the Bank of arable land in the three regions reaches 2.5 million hectares. This is a lot, and the investment flow can be a billion dollars.  There is enough space for everyone; I am not afraid if Rusagro along with other competitors invest there too. This is how we are now working in the Central Black Earth region. The Belgorod region and neighboring areas are home to several large operators who do not interfere with each other. Everyone is busy with their work. 

— How about solving the problem of human resources? 

First, highly skilled professionals can be brought in from other regions, and the common worker at the site. We discussed the existing practice in the region where local educational institutions need to be profiled by an external investor. So, the long-term solution for human resources is to provide training on the spot.  

— Have discussions been held with banks on the financing of Far Eastern projects?  

The issue is not attracting money. The question is where are we investing and what is the return?  I’ll give you an example. Representatives from Rosselkhozbank and Sberbank were present at meetings, which were held throughout our Far East tour. They invited us to visit these areas as they are looking for someone to give money to. To obtain a loan you need collateral value, and if there are no solid assets, then even banks cannot give anything at all, or can only give for a short period of time  and when an investor like Cherkizovo comes along, then we propose $100 million right away, for example. Bankers can only dream about a borrower like that. We are a transparent company, and if we need a loan, then we do not have a problem. The problem, that we do have, is the political risk factor, but if we overcome this risk, then we have great opportunities ahead of us. It is not difficult for us to attract $100 or $200 million. Such amounts are not uncommon for the Central Black Earth region, but for the Far East region, this is an enormous amount of money that they can only dream about. I can confidently say that the Far Eastern region is lagging at least 10–15 years behind the Central Black Earth  region in terms of agricultural development.  

—Will the Far East projects be be implemented under the auspices of Cherkizovo or NAPCO?  

Cherkizovo. NAPC does not have enough resources. NAPCO has its own goals and regions which are the development of crops in the Central Black Earth  and Volga regions.  

SHARES NEED STABILITY  

— What other areas of interest do you have in terms of the realisation of investment projects in animal farming? 

The Republic of Altai Mountains. This is the most beautiful part of Russia, and is surprisingly where there is the highest number of animals per capita. The region is home to 200,000  people and has about 1 million cattle! These are horses, sheep, and cattle. I've been there many times, enjoying the nature, and at the same time studying the feasibility of realising a potential agricultural project. The problem with all of the villagers living there is clear. – There is a chronic lack of working capital, and therefore they are not able to lead the process of fully fattening the cattle to their full body mass potential, and are forced to slaughter cattle with lighter body mass to make ends meet. We met with local authorities and proposed a co-fattening facility for rearing cattle. Confirmation of interest was not given. When asked why the answer was simple! It is not customary to provide real support to the local agricultural investor, especially to one who came from afar. 

— You talk a lot about projects in animal farming, what are your plans in the segment of crop farming? 

 Now more than ever before, Cherkizovo is faced with one key question - how to become top professionals in crop farming. We have developed meat processing, then we took on poultry and pork, and we developed those segments, and now we are back to meat processing, but this time more focused on the consumer, and we also intend to develop our crop farming segment. In the latter segment, we are still weak. We have land, but we cannot get what we want from it. We have invested in experienced professionals,  effective  new technologies and modern methods of agricultural business. We believe that soon we will be there. In the highly competitive international market of agricultural commodities, the winner is the one who manages the production costs, which allows one to overcome the adversities of climate risks inherent in the agricultural sector. Animal feed is responsible for the lion's share of the cost of meat products. In connection to this, we are vigorously developing our elevator group. We put a huge grain elevator in Voronezh and are busy building another in Tambov. A grain elevator with a capacity of 450,000 tonnes of grain storage is currently being constructed in Yelets. Such grain elevators have not existed in Russia. This can be explained by the fact that today, we are consuming 1 million tonnes of feed per year and consumption is growing at a crazy pace. 

—What can explain  the fall in share prices, while the overall business of the Group is growing?  

Six years ago we placed the shares on the stock exchange (IPO), the EBITDA group was $70 – $75 million and the market valued the business at $1 billion, and now our EBITDA exceeds $300 million, but the company's market capitalization is only $800 million. Our chickens and pigs are growing and multiplying. Are we to blame for what is happening with the economies of the European countries? But, alas, it affects the stock market. This market is full of virtual paper, and as soon as there are problems in a country, the value of our shares falls. 

— In connection with this, are you possibly considering a share buyback? 

Try buying them out right now; it is impossible, no one is selling! Investors understand that Cherkizovo capitalization, in accordance with its financial performance, should be worth at least $2.5 billion, but there is still the question of the stability of the agricultural sector, which is directly related to the relationship of the Russian state with the agricultural sector. Our investors see that today we are helping farmers, and tomorrow that support may stop. It is absolutely evident, that we, as agricultural companies, without the support of the state, are unviable. But, the eternal political upheavals, the contradictory statements of Russian officials do not promote investor confidence in the Russian market. Investors understand that the company is successful, but they doubt the stability of this success. 

— What specific state actions make you ask questions? 

Who gets the subsidies? Before, Russia gave out  subsidies providing assistance to all farmers. This year, the state decided to provide aid to only twenty farmers who were in drought-stricken regions. But we all produce pork. We allocated funds in the cost of grain and all other components into one price, but now they are priced differently. On the other hand, after Russia’s accession into the WTO, pig farmers no longer have substantial customs tariff protection. After the reduction of import duties on meat in the past three months, the domestic prices of pork  fell sharply, while there was a crazy rise in grain prices. As a result,  the majority of breeders in the country are on the brink of survival, so state funds should benefit all. We must take the experience of the West to support farmers. And in our country, a company measures: to treat the pork and poultry a little, and immediately talk about the complete folding of support.  

— In your opinion, are there any positives moments for Russian domestic agriculture with its accession into the WTO?  

— There is one positive moment. Specifically because of Russia’s accession into the WTO, backyard pork breeders will disappear. This is a great victory. We were not able to solve this problem ourselves, and to eliminate the practice of pig breeding through private traders. Only a powerful external political influence, such as the WTO, could accomplish this. Look at what happened in Kuban. Small pork breeders kept destroying the pork industry for many years, allowing for infection to spread through the Krasnodar region. Industrial pork facilities are ready for the full opening of the market and international competition. Small pig breeding cannot compete with quality and price, and is therefore doomed. And thank God for that! Only large industrial facilities will be able to truly compete at a necessary level of quality and price.  

— Are there any other positive aspects of the WTO accession for agriculture, and for pork production in particular? 

No, I do not see any. Look at the United States, who have been part of the WTO for a long time, trying selling a kilogram of sausage to this country. Right now, many countries are closed. It is very difficult for us to make products for export. But the worst thing is that whatever protective measures for the agricultural sector in Russia are approved, they will be insufficient. The malady of this sector is so deep, that the infusion of the state must be accounted for decades in advance. Today, the state has invested for several years and has already raised the question of discontinuing support, fully believing that the agricultural sector is now stable. The future of Russia is a powerful agricultural sector. For this exact reason, it is profoundly wrong to end the subsidies, on the contrary, it is necessary to increase subsidies even more. Pay attention to other countries. Why is it that in countries like Denmark, with a population of five million people, there are 20 million pigs? Or in Spain where there 25 million pigs or Germany where there are50 million pigs? In Russia, the population is over 140 million people, and with the land opportunities we have, we should have, by the most conservative estimates, about 200 million pigs. The country currently has a total of 17 million pigs, and 10 million of them are in industrial facilities. It will take us decades to reach the 200 million mark.  

Igor Babaev graduated from the Krasnodar Polytechnic Institute in 1971. He graduated from the Moscow Technological Institute of Meat and Dairy industries in 1981. He began working as a shift engineer, and later as a senior engineer, at the Essentukovskom cannery. From 1976 to 1988, he held management positions in various enterprises of the food industry. In 1988, he was appointed as chief engineer at the Cherkizovsky Meat Processing Plant (CMPP). In 1993, he became the president of the plant. In 2005, he created Cherkizovo group, based on CMPP. He holds an honorary title of “Honored Worker of the Food Industry of the Russian Federation” and in 1994 became a member of the Russian Academy of Engineering. In 2009, he was awarded the Order of Merit by the President of the Russian Federation, Dmitriy Medvedev.