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The Wall Street Journal: Sweden’s Black Earth IPO Farms Russia

EXTRACT: Oil giants BP PLC and Royal Dutch Shell PLC, for example, have been forced to sell stakes in lucrative energy projects to Kremlin-controlled companies.

By ALISTAIR MACDONALD
November 27, 2007; Page C5

Black Earth Farming Ltd., a Swedish-run company that invests in Russian farmland, is planning an initial public stock offering aimed at raising 1.6 billion Swedish kronor ($255.7 million) to take advantage of soaring grain prices by buying more land.

Black Earth, which plans to offer the stock in Stockholm by the end of the year, is one of several Western European companies hoping to capitalize on the glut of cheap farmland in the nutrient-rich belt that stretches from Ukraine into central Russia.

Black Earth thinks it can bring more Russian land back into production after years of low crop yields following the collapse of the Soviet system of collectivized farming and years of underinvestment, said Per Brilioth, the company’s chairman. “There are up to 49 million hectares 121 million acres) of fertile land in Russia’s Black Earth region, and it isn’t producing to its capacity,” Mr. Brilioth said.

The company’s owners — Swedish investment firms Investment AB Kinnevik and Vostok Nafta Investment Ltd. — plan to retain around a 70% share after the IPO, depending on the price of the shares.

Grain prices are booming, with the world’s farmers struggling to keep up with increased demand as populations grow, diets in emerging markets change and crops are used for biofuels. Wheat prices alone have more than doubled this year, with poor harvests leaving stocks at their lowest levels in almost 30 years.

To keep up with demand, agricultural production will need to grow by 3.3% a year, according to research by Credit Suisse Group. But grain production has grown by only 1.3% a year during the past 20 years, implying that grain prices will continue to rise, Credit Suisse says.

Other farmland-development companies have been making inroads in Russia lately. Britain’s Heartland Farms (UK) Ltd. has brought 29,640 acres of Russian farmland back into production to produce crops including wheat, malting barley and sunflower seeds, according to its Web site.

Denmark’s Trigon Agri A/S invests in grain and dairy farms in Russia, Ukraine and Estonia. Since it listed in May, its share price has risen 37% at a time when European markets have fallen sharply. Yesterday, the stock closed at €1.82 ($2.70) in Stockholm. So far, foreign companies buying Russian farmland are having a smoother time than foreign investors in some other parts of the Russian economy. Oil giants BP PLC and Royal Dutch Shell PLC, for example, have been forced to sell stakes in lucrative energy projects to Kremlin-controlled companies.

Andrey Sizov Jr., managing director at consulting firm SovEcon in Moscow, said he believes the Russian government considers industries such as oil, gas and metals more sensitive than agriculture, where Russia has fared so poorly for so long that it isn’t on the Kremlin’s radar.

Any interference would be more likely to come from local authorities, who could force farmers to employ more people, change their business or even restrict exports of crops from the area, Mr. Sizov said. Even so, “thanks to record-high price levels for grains and oilseeds, production is very profitable, and this profitability probably is enough to cover the risks,” he added.

The Russian land in question costs about $500 per 2.47 acres, compared with $6,000 to $8,000 for comparable land in Argentina and $30,000 in Sweden, according to Black Earth. Black Earth harvested crops from about 130,000 acres this year, up from about 14,600 acres last year, and says it hopes to harvest about 365,000 acres next year.

Write to Alistair MacDonald at [email protected]

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