Wall Street Journal | May 18, 2008
A British entrepreneur is leasing land from smallholders in an attempt to revive the breadbasket of the former Soviet Union
John Miller of The Wall Street Journal in Bilyi Kamin
THE vast collective farms that fed the Soviet Union are now a patchwork of tiny gardens, fields and vacant lots. But, combined, they could help to feed the world: Russia, Kazakhstan and Ukraine have substantial amounts of fertile yet untilled land.
If someone could just stitch the land back together and create modern farms, agronomists say, the vast spaces north and east of the Black Sea could generate an extra 115m metric tons of wheat a year — 20% of the world’s present production.
Richard Spinks is trying to do just that. The 41-year-old Briton has been going door-to-door, leasing small plots of land from thousands of poor farmers in western Ukraine. His company, Landkom International, has planted wheat, barley and rapeseed on a combined 10,000 hectares. Landkom expects to reap its first big harvest this autumn.
Such efforts could give a much-needed boost to global food supplies. For decades, agribusiness companies relied on new seed and fertiliser varieties to push yields higher. But as technology gains have slowed, the search for additional arable land has intensified. That has created an opening for entrepreneurs with visions of recollectivising the land in former communist countries and reviving production.
The approach is also being tried in China, where much of the farmland is divided into small plots controlled by village collectives. A handful of farmers are trying to form larger and more efficient farms by cobbling together pieces of land rented from absent neighbours.
In Ukraine, Spinks faces long odds. Property laws bar private land sales, so companies must sign leases with individual landowners who often pull out before the contract expires. Spinks said that, to keep his lessors happy, he invests heavily in local infrastructure and has built roads, schools and orphanages. Over Easter, television commercials wished viewers a happy holiday from Landkom.
Bilyi Kamin was once among the brightest stars in the Soviet agricultural constellation. Some 500 miles west of Kiev, the village regularly fetched accolades from Moscow for its crop yields. The land here, as in most of Ukraine, is rich in humus, organic matter that makes soil more fertile. Soviet planners depended on Ukraine for 40% of their agricultural output.
After the break-up of the Soviet Union in 1991, governments chopped up the old state farms and distributed plots to their citizens. Lacking capital to invest in the land, the new owners mostly planted small vegetable plots or let their animals graze. Many title deeds were not claimed because their owners had died or emigrated. In all, some 22m hectares of arable land in Russia, Kazakhstan and Ukraine went uncultivated. The region, although still a big grain producer, has continued to suffer from a lack of capital investment ever since.
Despite the election of a pro-Western government in Ukraine in 2004, an influential business and political elite that takes its cues from Moscow remains suspicious of Western investment. In turn, foreign investors find themselves coping with a venal political system and courts that are deeply corrupt. According to a “corruption perception index” compiled by Transparency International, a Berlin-based watchdog, international business executives consider Ukraine among the most corrupt countries in the world, worse than Uganda, Moldova and Cuba.
Critics of the land-leasing model say that when a local farmer breaks a contract, there is little legal recourse. Sphere Asset Management, a Kiev-based hedge fund, recently started selling off the leases it holds to 29,600 hectares there. “We are regularly in litigation with landowners,” said Yevgeniy Khata, Sphere’s managing director.
The central government in Kiev is now considering a law to legalise land sales. That could trigger a land rush and quickly push up prices. Landkom’s 15-year leases include a clause that would give it first crack at purchasing land. But whether that would work in practice is unclear.
A native of Kent, Spinks said he joined the Royal Air Force when he was 16 and was sent to the Falkland Islands after Britain’s war with Argentina ended in 1982.
He picked up Russian, Spanish and Polish in the air force. After leaving the military in 1987, he bounced around Europe for 14 years, selling advertising for several media and publishing companies. In 2000, he met his current wife, who is Ukrainian. They have three children.
In 2001, Spinks took a job with British Seafood Group, a producer and processor. He travelled through Russia, Ukraine and eastern Europe buying fish. He said it was a hard life. Archangel, an Arctic Russian port where he often worked, “was so depressing they played disco music from the tops of lamp posts to prevent people from committing suicide,” he joked.
Over a beer in Warsaw in November 2005, Spinks discussed the biofuels boom with friends. Konrad Nowicki, a young Polish entrepreneur, suggested leasing 100 hectares in Ukraine and growing rapeseed, which is commonly used in Europe to make biodiesel.
Together with a third partner they invested £600,000 of their own money. Spinks formed Landkom and began leasing land in western Ukraine in early 2006. He worked 18-hour days, often sleeping in a tent next to his fields.
Spinks’s quest took him to the quiet village of Bilyi Kamin in October 2006, where he set up Landkom’s headquarters. The village’s name — Ukrainian for white stone — comes from the surrounding chalky hills.
The locals were initially sceptical. Stalin seized land in the 1930s to build collectives, eventually starving millions of peasants. Hitler literally shipped Ukraine’s coveted soil back to Germany.
One evening, Landkom officials called a meeting of the village’s 300 landowners. “We are here to help you develop,” Landkom public-relations director Yuri Pelenski, a British son of Ukrainian refugees, recalls telling the crowd. He offered to lease everybody’s land for about $35 a hectare a year — a standard price in Ukraine but less than a tenth the price in Britain. More attractive, however, was the salary Landkom would pay the farmers to help work the land: $400 a month, or twice the national average base salary for manual labour.
Maria Petryshyn, 70, said she wasn’t sure what to do at first. “I didn’t want to give up something I worked my whole life for,” said Petryshyn, who in 1973 was given a medal for local sugar-beet production. In 1996, she received a one-hectare plot from the government as part of a privatisation plan.
In the end, she agreed to Landkom’s offer. “I’m an old woman,” said Petryshyn. “I do not have a tractor or combine harvester, and my hands are worn out.” Her $35 annual payment from Landkom supplements her $100 monthly pension. Many of Petryshyn’s neighbours, lured by the promise of working their own land for Landkom for an additional fee, also went along.
Landkom routinely lobbies local officials in an effort to get all landowners in a village to sign leases. The company recently gave its lessors in the town of Zolochiv $22,000 to refurbish an orphanage. It then aired a television commercial advertising its goodwill. “I didn't know where the money came from until I saw a Landkom commercial with our orphanage on television,” said Natalya Medvid, one of the six Catholic nuns looking after the kids.
Doing business “would be harder if he didn’t do these things for us”, said Ivan Stefanishin, deputy governor of Lvivksa, the oblast — or province — that includes Bilyi Kamin and Zolochiv. “An investor has to be part of his environment, that’s normal.”
Still, some people are holding out. Andriy Duk, 42, farms 48 hectares next to Landkom’s headquarters. He owns two tractors and one combine. “People in Ukraine can make it on their own,” he said.
Spinks also faced competition from a handful of multinational companies using a similar model to bet on Ukrainian land. MK Group, a Serbian conglomerate, farms 40,000 hectares on leased land around Kiev and is building a complex of silos and storage buildings with an $18m loan from the European Bank for Reconstruction and Development. Another dozen or so Ukrainian companies are also in the mix.
By February 2007, Landkom had leased 10,000 hectares. Commodity prices were rising. Eager to expand, Spinks hired the London consultancy Libertas Partners to help him find investors. Four investment funds contributed a total of $12.9m.
Last autumn, Spinks set a goal of leasing nearly 400,000 hectares by 2015. To raise funds, the company sold a 44% stake on the London Stock Exchange in November for $106m. Since then, the company’s market value has grown to $386m. Spinks’s 5.8% stake is valued at about $22.4m.
Landkom, which has subsidiaries in Britain, Cyprus and Ukraine, said it pays Ukraine’s regular corporate tax rate of 25%. A Ukrainian government spokesman said he could not comment on individual firms.
For now, Landkom can farm only a small percentage of its 66,000 hectares because preparing the land and buying equipment is time-consuming and costly. This year, Spinks expects his 10,000-hectare harvest to net about $1,000 per hectare, depending on the crop and the yield. Next year, he hopes to harvest four times as much. The biggest American farms rarely exceed 4,000 hectares.
Spinks plans to ship the wheat and rapeseed to processing plants in eastern Ukraine or in western Europe. He is negotiating contracts with big commodity traders, including Glencore International and Louis Dreyfus. Spokesmen for those companies confirmed they were in talks with Landkom but said they were waiting to conclude their purchases.
With land and labour so inexpensive, Landkom figures it can make up for the rising costs of seed, fertiliser and equipment, which has put pressure on farming margins around the world. The price of fertiliser alone has doubled in the past year. Spinks estimates he will have a 60% profit margin.
He dismissed the notion that his lack of experience in farming will doom his ambitions. “It’s just like the fish business. You need to make sure you have professionals who can supply the raw material,” he said. He has hired dozens of professional farmers and agronomists to make key decisions on planting, harvesting and investing in equipment, he said.
Spinks said the company is investing $250,000 in Bilyi Kamin’s old collective headquarters to put in a modern command centre that will guide combines by satellite. It is building a bar room, sauna and gym to lure western managers, and a fireproof room to store its leases.
On a recent day, Spinks toured the fields around Bilyi Kamin in a four-wheel-drive Mitsubishi Pajero. He chain-smoked and barked orders at some of Landkom’s 500 employees into his iPhone. He checked in with villagers and employees.
Vassil Stebnitski, Bilyi Kamin’s chief agronomist under Soviet rule — now a Landkom field manager — showed off a new German-made combine.
“We need their new technology,” said Stebnitski, 54. “All we had before was land and sky.”
Additional reporting by Andrew Batson