Agriculture, Direct Speech, Investments, Latvia, Ukraine

International Internet Magazine. Baltic States news & analytics Saturday, 08.08.2020, 09:07

Chairman of the Board of “Agrolats Holding”: Latvian agricultural holding is trying to save its Ukrainian investments from a respectable American investment fund

BC, Riga, 08.07.2020.Print version
Interview with Vitauts Paškausks, Chairman of the Board of “Agrolats Holding”about business and investment.

A couple of years ago it was said that you have the biggest family in business in Latvia with three generations being represented. Is that still the case and how many family members are actively involved in the business? Who does what?


We started out as a family-run business twenty years ago and we are still developing it today. If at first it was just a couple of family members working in the business, then today we already have three generations, and we are expanding to more and more agriculture-related business sectors. Today, companies owned by our family in Latvia employ over 600 people.


Which business area is closer to your own heart, or do you manage them all?


My main function is strategic advice. We set our main strategic targets that our companies will strive towards, the rest is up to the board, which has to actually implement the work. Our strategy is to have separate business areas that are still inter-related and complement each other. We try to generate as much added value as we can for all of our products. For example, Agrofirma Tērvete grows grain, which is used to produce beer. We grow our own animal feed. Part of the milk we produce, we process ourselves — we make ice-cream, sell part of what is produced. Manure is further processed into biogas and consequently used to produce electricity and heat. The heat is, in turn, used in beer production, and heating for the local parish, school and houses. The digestive by-product from the production of biogas is used as fertilizer on our fields.


This year “Agrolats Holding” has registered changes in capital and company officials, including naming former head of “Swedbank” Māris Mančinksis as Vice-Chairman of the Board. What is the reason for these changes?


In any business sector or area, you always have to seek out people who are smarter than you. Māris Mančinskis is a very experienced individual who has worked in finance for a very long time and is familiar with various types of business. We look for people who can give a contribution through their experience, and he is one such person. We are grateful that he has agreed to join us. I think this is a big win for us.


How has Covid-19 affected your various business areas?


No year is the same in agriculture. The past three years were not easy for any farmer — big or small. Our business is rather diversified. We have production, processing, storage, as well as sales — that makes it easier to get through these difficult times. At the moment, we feel the fall in milk prices the most. Milk prices have dropped by 50 euros.


The Ministry of Agriculture has drafted a EUR 613 million programme to help rural business recover from the crisis created by Covid-19. What is your opinion on this?


What the Ministry is doing, is, of course, very good. But if someone says it’s a huge amount of money, I have to say that it’s really not. If you divide this funding among 80,000 farms or based on the tonnes of milk produced, it’s nothing. If we produce 25,000 tonnes of milk, but receive EUR 100,000 in aid, how much is that per tonne? The support is minimal. We’ve lost more than a million euros, but we could potentially get up to EUR 100,000 in aid. We will be nowhere near break-even; we will be working at a loss.


Which state-aid mechanisms have you used?


The government decisions taken so far have not really applied to us. For example, as regards dairy farming. We have about 2,500 dairy cows, so we cannot receive aid for all of them, because there are certain ceilings set based on the number of cows. Therefore, the state-aid is unequal: someone gets more per tonne of milk, someone gets less. But despite that, I am proud to say that we have been able to keep all of our employees, we have not cut back production volumes. For example, the average monthly salary of employees at “Agrofirma Tērvete” is over EUR 1,150. That is our greatest value — our people. Likewise, we are also continuing to pay significant amounts in taxes. If we calculate how much we pay in taxes for our farmed land, then last year we paid more than EUR 2,200 per hectare, and that is just the taxes.


Do you think the eligibility criteria for aid should be revised and changed?


As for our sector, I think we need eligibility criteria that are understandable to everyone and easily applied. My proposal would be that aid is paid for each tonne of milk sold to consumers, rather than per cow. Some companies sell more than 95% of the milk they produce, while others don't even sell half of their production. That means someone gets more, someone gets less. I think there should be two directions in allocation of support. First, regardless of the size of the company — big or small — support payments should be allocated based on the proportional amount of milk you have sold. Second, I would suggest reducing the tax burden on production during this time. For example, “Agrofirma Tērvete” pays more than EUR 1 million in social insurance contributions for its employees. It would be a great help, if the government were to release us from part of these payments for now. This is easily administrated and would provide a direct and tangible benefit to everyone. That would be support.


The Latvian Chamber of Commerce and Industry has proposed that the government should cover the employers’ part of the state social insurance mandatory contributions of 24.09% for the part of the gross salary over a certain threshold. Do you agree?


Yes, we agree. We think this would be totally appropriate.


Society often tends to think that farmers just keep producing and selling their products, and they don’t really need any support...


Yes, but you have to understand what the price of that production is for the farmer. The number of cows in Latvia was decreased by more than 10,000 over the last two years, which means that farmers can’t stay on the market with a price that would allow them to keep producing. Of course, some farms shut down production due to old age, because there is no one to take over.


What has been the primary market for your milk until now? Neighbouring countries?


We export all of our milk to Lithuania, because of the significant difference in the price that we can get for it here in Latvia and over there. Our milk is very high quality, so buyers are willing to pay more for it. We are constantly in touch with milk processing plants in Latvia, but unfortunately the price they offer is lower.


What is the reason for milk prices in Latvia being lower than elsewhere?


The price of milk is determined by supply and demand. More than 800 tonnes of milk leaves Latvia every day. What can be concluded from that is that there isn’t enough demand here in Latvia. Furthermore, the competition in milk processing in Latvia is very tough: there are a lot of companies that process small volumes. Therefore, efficiency is hard to achieve. Lithuania has long since consolidated its milk processing sector — there are four or five major companies in the market which basically process all of the milk there is. That gives much more room to manoeuvre and work more efficiently.


You also grow cereals. What is the current situation in crop farming? Are grain prices stable or is there a downward trend?


This winter seems to have been a good one for the majority or nearly all crop farmers, despite the fact that there was no real winter to speak of. Grain prices are stable. We have already concluded the majority of contracts for sale of our grain. Sales contracts are still outstanding for only small volumes of grain, rapeseed and other cultures. We are constantly looking for better species, analysing which is better to grow at a specific time. It is just like with any other type of business. You have to seek new solutions and constantly improve yourself.


Has the сoronavirus crisis made you review your goals for this year?


Situations like this, of course, always call for certain adjustments. But our goal remains the same — to continue developing the whole of our production, develop all our business areas in Latvia. We reviewed out international business already a few years ago. New major risks have come up for various businesses we have in various countries. We determinedly bring money back here to Latvia and we believe that we should invest it in Latvia.


Do you plan on expanding your business in Latvia?


We have focused on expansion here every year. Every year we have acquired new companies and started working in new business areas. We will continue to do so, if we can and the circumstances allow us to. Our business is based on three pillars: production, processing and sales. This is the model we are trying to maintain and go forward with.


Do you agree that the preconditions for working in agriculture in Lithuania and Estonia are better than in Latvia, or not?


There are certain advantages and certain drawbacks in each country. For example, Lithuania has much smaller cattle herds than Latvia, so the quality of milk is significantly lower. Secondly, the logistics of milk collection is much more expensive. The situation in Estonia, as compared to Latvia, is much better, the average herd size is much larger than in Latvia, which gives them certain advantages in the dairy sector. Likewise, we can compare electricity prices, roads, many factors, but I don’t want to go into detailed comparisons and say that the situation is better over there than here. It is, what it is. We plan to maintain our business here, we are not planning to move elsewhere. Of course, we are keeping our eyes open: if we see an opportunity come up, naturally, we can decide to take advantage of it. I am not saying that we will never go anywhere else and not do anything else. But in the current situation we will support what we have here in Latvia.


What about investments? Have you put plans on hold due to the uncertainty of the future?


We are not planning any major investments in any of our companies this year. We will develop further the things that we are already doing. Each company has certain investment plans, but they are not as large-scale as they were a couple of years ago, when we invested over EUR 30 million in “Agrofirma Tērvete” to further live-stock farming, the brewery and biogas production. We don’t have any such large investments planned at the moment, but we want to significantly improve the efficiency of what we have been doing so far. You can never predict when a company worth investing in will appear. If we come across such a company, we will examine the possibility. We have created a board that purposefully looks at various production and business directions. If it sees such an investment as possible and useful, we will, of course, think about it.


As far as I know, you have businesses in Ukraine, Morocco, Dubai. How much of your business is currently abroad?


A rather large part. It might be around a third of our total business.

 

Are you not worried about diversifying your markets, not placing all your eggs in one basket?


Of course, we are diversifying our markets. But if we see major risks come up that we have no way of controlling or mitigating, then we have to recuse ourselves from certain countries. The level of corruption in many countries is extremely high. Even in countries where we started doing business ten years ago or more when the level of corruption was much lower, and we could work safely. The situation has changed.


By that so you mean the increase in corruption in CIS countries?


CIS, but also elsewhere to a certain extent. A different issue is the form that corruption takes in different countries. Whether it directly affects the company or business it is in. It is a little different in every country. But it is much easier to control your business in the country that you know best.


In Ukraine you have a joint venture with “NCH Capital”. What does this business do?


Ukraine has long since been known as the breadbasket of Europe, that’s why this market was interesting for us. A little over 12 years ago, we founded the joint venture “Golden Sunrise” in Ukraine. Back then we were approached by Kārlis Cerbulis, head of the Latvian office of what seemed to us a very respectable US-based investment fund NCH Capital, and offered us a partnership. We signed an investment agreement which provided that NCH would fund the project, while we would supply our know-how in agriculture and production, manage the day-to-day business.


The company is very successful, stable and profitable. Its average EBITDA indicator is EUR 8-10 million per year. It has over 30,000 hectares of land and two elevators under its management. It produces everything that can be obtained from the land: cereals, maize, rapeseed and other cultures, which are then sold on our international markets.


I understand that there has been a disagreement with NCH and its even gone to court. Could you, please, elaborate what the disagreement is about?


About four years ago NCH started taking over our joint venture “Golden Sunrise”. They set up their own off-shores, from which our joint venture had to take out loans, buy raw materials for an inflated price, and sell to them our products at prices below-market value. That way part of the company profits were siphoned out of the company. Furthermore, the NCH staff policy, which is unethical to say the least, was absolutely unacceptable to us. We began to take a strict stand against all of this, and as a result, NCH has, to our mind, hijacked the management of the company, ignoring our mutual investment agreement. Of course, we could discuss at length various actions that could only be classified as 90’s style activity: illegal takeovers, hijacking of management, falsification of minutes of meetings, just like in the movies.


What is your opinion of the justice system in Ukraine? Do you even have a chance of a verdict in your favour?


Over the past couple of years Ukraine has placed itself on a development path towards European style democracy, which gives hope for a just and fair settlement of disputes. But, if we look closer, we know that there are still quite a lot of cases like this. An especially big problem in Ukraine is related to registers where entries are made regarding company shareholders, officials etc. It is precisely the shady and possibly corrupt actions of these registers and registrars that has made possible much of the illegal actions we see today. It is, of course, clear that there has been some behind all of these actions. We think that the Ukrainian government has not done everything it could have to provide to us, as an investor, an environment based on the rule of law, and possibilities to stand up for ourselves.


How many legal proceedings have been started in relation to this case?


There were several violations identified in the case. At first, we wanted to resolve the matter peacefully through negotiation. We started to point out that their actions were wrong and unacceptable, that they were not in our mutual interest. When we said that, the illegal takeover began. As I mentioned, there were minutes of meetings that had never actually taken place. 


They arbitrarily and illegally fired the director, replacing him with their own. The rest just logically followed — products were sold, loan agreements concluded for unfavourable interest rates. This has a significant impact on the value of our business in Ukraine compared to what it was, say, two years ago. We never expected something like this to be done by a respectable American foundation that has invested more than a billion US dollars in Eastern Europe, we never even imagined that things like this were still being done today. The investors of this foundation are well-known universities, various organisations that fight for universal values, a sustainable world and fair business practices. I’m not sure these noble goals justify the use of what we see as unfairly obtained means. We are not willing to use gangster methods to achieve something, we never have and never will. We cannot work alongside someone who employs such methods.


Yes, there are several parallel legal proceedings ongoing in Ukraine right now. Among other things, the Ukrainian court has already found certain NCH actions to have been illegal and has reinstated our director, but what good is that if another meeting is falsified the next day and our director illegally removed once again? That is why we also turned to the Latvian, as well as the US courts and law enforcement authorities.


If the verdict is to some extent not in your favour, what is the worst impact it could have on your business?


I am not allowing for the possibility of a worst-case scenario, because we have acted properly, legally and punctually. We have done everything in strict accordance with the law and our agreement. The decision cannot be against us. We will not rest, and we will find a solution. Thank God, we live in a civilised country, in Europe, and I now have the chance to compare how courts work in Latvia and what methods they use in Ukraine. We do live at quite another level, and I am very pleased and proud of that.


How much of your total portfolio does the business in Ukraine account for?


I cannot really say, but it definitely does not affect our business in Latvia — we will continue to work according to plan. These are two totally separate things. The business in Ukraine is just one branch of the whole tree. But I want to stress once more that we have always tried to resolve all issues in a proper manner, and I would like to believe that justice will be served.


What will be the focus of your activity for the rest of this year?


We will continue to develop the business we have begun and work in all of its directions. Despite the current situation in the world and domestically, we have managed to keep all of our jobs and we will fight for our people. We are constantly examining our performance; if there will be areas where performance deteriorates or if we see that there are no more future prospects, then we will decide on what to do — whether to reduce or completely shut down that specific business direction. Our main goal for this year is to significantly boost the efficiency of all of our business sectors, all of our companies. We see opportunities in all of them to improve productivity, raise the quality of the products or increase market share, optimise costs. This year’s objective is becoming more efficient.

 






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