Tuesday, August 9, 2011

Regional Focus: Farm Conditions in Bulgaria and Romania

The following is an interview of Jeff Notaro about farming and the agricultural potential of the Black Sea Region in Eastern Europe.

1. What might surprise readers here the most about this region?

One of the most interesting facts about the Black Sea region is that the area was once considered the “Bread Basket of Europe” before the two World Wars and Communism took their tolls. Starting from the northeast corner of Bulgaria along the Black Sea, and running northward through Romania, Ukraine and into Russia is potentially some of the most productive agriculture land in the world. The topsoil is called “Black Earth” for its deep, rich color. Just recently, the reemergence of this region’s vast production capacity is starting to be noticed by a world dealing with more and more shortages of food.

2. Describe the farm structure, sizes, and government policy in Bulgaria and Romania. Is there a government subsidy system in these nations?

The governments there are keenly aware of the potential of their fertile agriculture land and have programs in place to promote farming. One of the main efforts has been to assist in the process of creating larger farms to deal with the problem of fragmented land ownership that developed after Communism. Bulgaria and Romania are uniquely positioned as members of the European Union to reap the benefits of subsidies. There are two main types. First, the EU provides direct grants in the form of farm subsidies to every nation. It covers such things as new equipment, fuel costs and operational expenses.

The EU also provides what are called structural subsidies. These are directed to the lesser developed countries specifically designed to bring their infrastructure up to modern standards. Improvements in ports, roads and rail links will directly benefit bulk shipping of agriculture products. A new subsidy deal is close to agreement within the EU that would lock in the amount of agriculture and structural subsidies through the next decade. Countries like Bulgaria and Romania should receive more than their current allotment in order to gradually bring them in line with the earlier members of the EU.

3. How do the conditions compare in Bulgaria versus Romania?

In general, most of the aspects of the farmland market are the same in Romania as they are in Bulgaria. Land prices, subsides, plot sizes and such are all very similar. From a foreign investor’s point of view, there are some differences to consider. The most important is the currency systems; the Bulgarian Lev is pegged to the Euro as compared with Romanian Leu, which is free floating. Additionally, corporate tax rates are lower in Bulgaria, 10% compared with 16% in Romania. Our firm, Black Sea Agriculture, is focused on Bulgaria at this time, where we have the most local expertise and have had operations on-the-ground for about six years now.

File:Black Sea map.png

4. Is this part of the Pannonian Plain?

No, the Pannonian Plain begins on the Western side of the Carpathian Mountains in central Romania and stretches West and South into Central Europe. The Black Sea farm region of Bulgaria is in the northeast corner of the country in what is called the Danubian Plain. The fertile Black Earth region of Romania is somewhat larger, running along the east side of the country beginning in the Wallachian Plain.

5. Describe the soil. What nutrients need to be added? Is it rocky?

The soil in the Black Sea region is referred to as “Black Earth”. The technical name for this soil type is Chernozem (which is also Bulgarian for black earth). This type of soil is found in only a few parts of the world and is considered some the most fertile, if not the most. In northeast Bulgaria, this rich Chernozem layer is about three feet deep, forming the first layer of topsoil. The next three feet down are nearly as rich as well, meaning there is about six feet of very good soil to work with. There are few rocks, in fact the soil can be very soft. It has only been the last few years since any significant fertilizing was been applied with the advent of EU subsidies.

6. Describe the weather of the region. What is the annual precipitation? Is the rainfall heaviest during the growing season?

The seasons and the temperatures for Bulgaria are similar to many parts of the northeast United States. Compared with the rest of Bulgaria, the highs and lows are tempered a bit in the Black Sea region due its proximity to the sea, with temperatures in July and August normally peaking in the low 80’s and the winters getting down into the 20’s. Precipitation in the farm belt is a bit on the low side overall, averaging between 1.2” and 2” per month, normally totaling about 19” per year. The driest months are August and September.

Bulgarian sunflower fields

7. Which crops are most common and why?

The overall climate favors the earlier growing season of wheat, which is the predominate crop raised. The second most common crops are sunflower and barley. To a lesser degree, corn and coriander are also grown. The lack of rain late in the summer can sometimes be a problem, which is why crops like corn are not prevalent. This may change as irrigation becomes more utilized in the coming years.

8. Please explain the history of land ownership which has led to small plots of today. How small are these plots and what size are larger pieces of land which come available?

Farmland in post-Communist countries presents a unique set of issues and opportunities. After the Cold War ended in the early 90’s, Eastern European countries like Bulgaria promptly broke up the failed communal farms and returned the land to its previous owners. Since a number of decades had passed since the experiment of collective farming was started, the land ended up being divided between the many family members of the original owner’s future generations. Farms that were not especially large by modern standards before Communism now became even smaller afterwards. This is still the case today with a great number being as tiny as 10 to 20 acres. To make things more challenging, they are usually owned by any number of absentee landlords. Yet, this problem of small plots also creates opportunity.

Large farms are of course, more economical and more productive. They can use larger equipment and afford to make investments in infrastructure and irrigation. Prices for larger plots reflect these benefits. If just 75 acres can be cobbled together in an area that is merely in the same general area (just nearby, not even all adjoining) the price immediately increases by about 15% to 20% over the average. If those 75 acres are all in one continuous plot, the price jumps by 25% to 30%. For the few plots around of 100 acres or more, the price can be up to 40% above the average. The largest single plot to have sold up until this point has been 300 acres. It takes patience and local connections to be able to create larger farms from small plots, but it can be very rewarding for the farmer and the investor. In the process, the entire region becomes more productive.

9. Since so much land is privately owned in very small plots due to subdividing by families, what is being done on those plots? Are many standing idle?

In the Black Sea region, because of its high quality soil and the history of agriculture businesses, nearly all the arable land is being farmed (this is less so in other regions of the country). The need for land consolidation is probably the biggest factor that slows the modernization of the agriculture industry. Farmers and the government are aware of this; everyone involved seems to take it for granted that the process of consolidation will gradually happen in the coming years.

Farmers will regularly swap like-quality land between themselves each year to create more practical operations. Local town meetings are held each month where farmers can swap and barter plots. The government also runs programs helping to facilitate this process as well. At this time, there still remains a large portion of land that is leased from absentee owners. The leasing market is very competitive; annual rents have been averaging between 6% and 7%, based on recent land prices.

10. What brands of tractors and other farm equipment are most commonly used in Bulgaria and Romania? What is the average age of equipment?

There is equipment of all ages there, but medium to large farmers have been able to upgrade in recent years. They have been earning more money with commodity prices high and they have benefited from the direct subsidies from the EU. Most all the new equipment is built by popular US and German companies; tractors are from John Deere and Case, and combines from John Deere and Claas.

11. Is there much foreign farmland ownership in Romania and Bulgaria and the region?

Most of the farmland is owned by Bulgarians and Romanians, as farm operators, family inheritance or as investors. The Bulgarian Stock Exchange actually lists a number of REIT securities that invest entirely in domestic farmland. Looking towards the future, foreign farm operators from Western Europe are starting to consider Bulgaria and Romania for expansion. With their land at home priced as much as 3 to 5 times that of the Black Sea region, it makes obvious sense (plus, the Black Earth is more fertile to boot).

For a foreign buyer, Bulgaria and Romania have a huge advantage over the other choices in the Black Sea region because they are members of the EU. The legal and economic playing field in the EU is clear and understood, not at all comparable to the unpredictable conditions in the Ukraine and Russia.

12. On your website, it says that six out of every ten Romanian citizens is employed in the Farm Industry. Is it like walking back in time to the first half of the 20th century in the U.S.?

Because of the difficult history in this region, there are many places that seem like they are caught in a time warp. There are still plenty of villages in the countryside made up of small family farms that hark back to the early days of rural America. These village populations are what account for the large number of farm workers in these statistics. Keep in mind, the Black Sea farm belt is very different. It is a much more established farming community, not all that different from parts of rural US now.

13. How is the infrastructure for, say, getting wheat to export locations in these two countries and the region?

Currently about 50% of the wheat produced in the coastal farmland region of Bulgaria is exported by way of the Black Sea to markets in the Mediterranean (the rest is used locally). There are few other efficient options at this time, but this is changing. The EU and local government programs are funding major improvements in infrastructure, roads, bridges, ports and rail. These projects are in the early stages and will continue over rest of the decade.

14. You mention that corruption levels are being reduced in these two countries. Please explain a little more.

One of the main concerns for both countries is corruption. This does not affect our company’s activities in any way, but it does hinder the future prosperity of the two countries as a whole. It is not uncommon for officials to use their position for personal gain by way of graft and kickbacks. There have been serious efforts by a few local leaders and the EU to change this, but with limited success. This is a real problem for sure, but there is a big difference between the issues there and the more serious problems in nearby Russia.

The general population of Bulgaria and Romania really wants cleaner government and expects it to come in time. The younger generations lead their lives in a way that assumes things will change, if they are patient and persistent.

15. Citizens of the world today are confused about the great momentum behind international farmland acquisitions. I have seen on your website that, "There are many farming businesses within the Black Sea Farm Belt that have both the operational capacity and desire to farm more land. Yet the majority do not have the capital to purchase more land. This affords BSA the opportunity to establish new leases with relative ease, and at competitive rates. Most leases are five years in length, offering security for the investor and incentive for the leaser to take proper care of the land." Please explain what good you are observing that can come from these ventures.

The farms in the Black Sea region are only able to become more profitable once their operations become larger and more efficient. The EU subsidies are available for both equipment and operational expenses, but without being able to afford to purchase or even find consolidated tracks to lease, the locals are not always able to take advantage of these benefits. Here is where investors can assist in the process by facilitating the formation of larger farms. There are plenty of local farmers with access to EU funding and spare operational capacity that are eager to lease consolidated farmland when it comes available.

Sunflower and wheat fields with some of the many windmills that dot the Black Sea region of Bulgaria in the distance

16. Please explain the harm that could come from foreign farmland acquisitions, if any, in this region.

In Bulgaria, there has been an established history of farmland as an investment. Investors from the capital city of Sofia, regularly invest in farmland either by buying it directly or through REIT’s traded on the local stock exchange. Investor interest in land is not seen as a problem. There have never been any restrictions on foreign ownership of farmland in Bulgaria (through a company structure).

17. Please comment on the following quote: "Over all of Eastern Europe except for some areas of Poland and the Czech Republic you have a very fragmented ownership structure. In Romania you have 15 million hectares and about 5 million land owners. If you buy assets in Romania you typically have lots of one or two hectares so if you want a project of 5,000 hectares you've got to do 2,000 to 4,000 deals to execute."

There is no doubt that this is a reality of the region. Investors with the proper local operation and contacts are able to do the work needed to piece together these small plots into workable units. This is the only way the region will progress and become more productive.

18. And this one: "All the land in this area is in use, it is being operated but in a very poor way. If you put in the right management, the right technology and the right priorities and so on, you can double the yields in two years."

There is no doubt these countries could be more productive. Larger plot sizes in the Black Sea region will make a big difference. Lesser quality farmland in other regions has been used very poorly for a long time - this is probably the source of these impressions. It will be gradual, but the bullish economics of higher commodity prices is spurring local farmers and investors to expand their activities and interests in both the fertile Black Sea region and the other lesser developed parts of both countries.

19. What are the local’s attitudes about foreign land investment in Bulgaria or Romania?

As mentioned before, there has been a great deal of land speculation by local Bulgarians and Romanians over recent years. The advent of foreign investors getting involved does not change their attitude and their view that this part of normal market activity. Since most investors lease their land to local farm operators, there is an opportunity there for them to expand. We have found local farmers to be very interested in aligning with our investment efforts with the hope of being able to lock in leasing arrangements.

20. How are farm input costs looking in this region as compared to the U.S.?

(We do not have enough data to comment properly)

21. What changing trends are you seeing in Ag in this region? Are the changes occurring rapidly or slowly?

In the prime agriculture area near the Black Sea, the trend is clearly for the size of the farming operations to increase in size. Over the next decade, smaller farms of a few hundred acres will become much less common and the scene will be dominated by middle to large size operations of 1,500 to 4,000 acres. Small farmers will have trouble affording newer equipment and the land necessary to expand profitably.

Some of the equipment and grain elevators owned by the largest farm operation in the Black Sea region of Bulgaria

22. Please tell us about the largest agribusinesses of the region.

Our firm, Black Sea Agriculture, works closely with the largest farm operation in the area. They got their start by having the foresight to acquire a substantial amount of land in the early days after Communism at very good prices. The operation now farms about 12,500 acres.

23. Is there irrigation in the region or is it necessary? If yes, what type? Please describe the water availability for farming i.e. adequate rainfall, aquifers, underground, surface...

Irrigation has not been used extensively since Communist times, that equipment is now very outdated and mostly not in use. There is plenty of water available though, with the water table about 150 to 300 feet below the surface. The government charges fees for this water, but it is generally available. The degree of future irrigation will depend on farmers having enough money to cover the expense and land being consolidated enough to make the logistics work. Once it does become commonplace, the size and reliability of the yields for crops like corn will improve dramatically.

24. How do you expect climate change to affect this region? What are the current trends indicating, wetter, drier, more frequent storms?

The locals have not noticed any big changes or unusual weather events over the last two decades.

25. If wheat is the biggest crop here, how many crop failures would you expect every ten years? What is the average wheat yield? What is the potential to increase that yield?

Over the past 20 years there has been only one bad year. In 2001 there was a total loss of the sunflower and corn crops, but wheat was not as severely affected. During these last two decades there has never been a total loss of a wheat crop. The Black Earth produces very good yields, the average being 70 bushels per acre, with good years up to 90 bushels and poor years still about 50.

26. What are the current prices for farmland in Bulgaria and Romania? What has been the history of prices in this region and where do you see them going in the future?

If someone had the ability (and the fortitude) to invest a little over a decade ago, quality farmland could have been had for as little as $400 an acre. More recently, prices a few years back were about $2000. Most small to mid-size plots now sell for around $2500 an acre. Looking towards the future, it seems logical that prices in Bulgaria and Romania will converge with those of the neighboring countries of Central Europe. There farmland prices are double the levels near the Black Sea.

This makes sense since these countries are further along in the process of land consolidation and they had a head start as earlier members of the EU. Other factors, like the better soil quality near the Black Sea, new demand for land from Western European farm operators, and the effects from increased world food demand and subsequent higher commodity prices could combine to push prices in Bulgaria and Romania even higher.


Jeffrey Notaro is one of the two partners that own and operate the agriculture investment management firm
Black Sea Agriculture, a division of Global Quest LLC. His partner, David Florov, resides in Bulgaria and runs the local operation there, while Jeff works out of the company’s home office in New York City. Their business, over the last six years, has been to facilitate investments in Bulgaria in both agriculture land and residential property.

Photos are from Kavarna, Bulgaria, which is in the northeast corner of the country near the Black Sea.