Location matters: Value of land by region

We attempt to capture differences in land location, probably the most important factor for farming businesses anywhere in the world, with a series of premiums and discounts applied to a base Ukraine`s EV/ha per region. We work with region-level data (for Ukraine’s 25 regions, average size of 24.1 sq km), assuming land is identical within the region.

We find the two most important factors that determine profitability of location:

• The ability to achieve higher-than-average yields. Based on five-year average data on yields for each region, data on costs per ha in 2010 (both State Statistics Committee of Ukraine) and APK-Inform crop prices for 2010, we calculate each region’s average profits per ha for key crops: corn, sunflower, wheat and sugar beets.

• The ability to focus on growth for the highest margin crops: sugar beets, oilseeds, corn. We calculate the weighted average profit per ha for each region, dividing all crops in four groups: corn, sugar beets, oilseeds (assuming all oilseeds have the same profit per ha as sunflowers, as cost data for other crops is not available) and non-corn grains (assuming profit is the same as for wheat).

Average gross profit*, USD/ha, by components

*Based on 5Y average yields for region, average costs/ha and selling prices for 2010. Source: State Statistics Committee of Ukraine, Concorde Capital estimates

Dividing each region`s average gross profit per ha to Ukraine`s average, we arrive at a premium/discount for each region. We apply this premium to the target of USD 1,600/ha (see details for how we arrive at this figure in Appendix).

Target EV/ha per region, USD

S ource: Concorde Capital

Yields efficiency comparing to benchmark region

We found that in most cases the crop yield premiums listed Ukrainian companies report to the Ukrainian average are related more to their region of operations than to the real efficiency of the company itself. Since we capture the quality of location separately, to evaluate efficiency we compare reported yields to their region of operations’ average for 2010-11.

Benchmark region yields for each company are based on a weighted average for each region of operations, with weights proportional to landbank distribution as of end-2011. We then compare each company’s yields to the benchmarks and calculate an average premium, weighting for crop mix (average for 2010-11) and relative crop importance for profitability (2.0 for sugar beets, 1.5 for corn and oilseeds, 1.0 for wheat, 0.5 for barley).

Yield premiums/discounts to benchmark region averages, 2010-11
	Corn	Soybean	Sunflower	Rapeseed	Barley		Wheat	Sugar beets	Weighted average
Agroton	10%		36%	-18%	-5%		24%		27%
Astarta	30%	8%	3%		22%		21%	30%	22%
Industrial Milk Company	27%	19%	26%	-32%	-50%		27%		25%
Kernel	1%	-6%	-1%	-4%	-7%		-3%	-20%	-5%
KSG Agro		-11%	14%	-64%	5%		1%		6%
MCB Agricole	-2%	-11%	16%	18%	19%		2%		9%
MHP	28%		45%	59%			40%		35%
Mriya	-10%	-57%		-4%	-21%		11%	33%	11%
Sintal	-9%	-34%	18%	28%	6%		1%	17%	5%

Source: Company data, UkrStat, Concorde Capital calculations

Our approach indicates Agroton, Astarta, Industrial Milk Company and MHP are the most efficient in terms of delivering higher yields vs. their region’s average, while Kernel is least efficient and the only underperformer.