Food processing attracts investors

SHORTLY after the fall of communism, agriculture was a marginal business interest.

SHORTLY after the fall of communism, agriculture was a marginal business interest.

But with food prices now rising globally and demand for food products growing, the agriculture sector is posing both challenges and investment opportunities.

Private equity investors have marked some areas of the food industry on their investment maps, with Slovak private equity players investing largely in vegetable fat and meat processing.

And each of the major private equity players has made investments that they feel promise a solid return.

Palma Tumys, which processes vegetable oils and fats, and the Czech company Agropodnik Jihlava, producing methyl ester, are the most significant acquisitions of Slavia Capital. Both acquisitions are part of the company's strategic focus on biofuels, which, according to Peter Benčurik, spokesman of Slavia Capital, can stabilise and develop the agro-sector.

"The trend to plug agriculture into industrial as well as food production is supported by the European Union," said Benčurik.

The food industry is able to absorb a wide range of innovations, research results and development projects while also incorporating new technologies, said Benčurik.

The most marketable areas of food production are those pertaining to ecologically acceptable food production and those promising a return on the investments, said Benčurik.

Penta Investments has acquired PM Zbrojníky, the fourth-largest meat processing plant in Slovakia. Penta has also acquired the Mecom group, the meat-processing leader; the deal is still awaiting approval by the antitrust authority.

Penta Investments considers meat processing the most attractive segment of the food industry, as there is still much room for improvement. The area has not been through the necessary consolidation and specialisation of producers yet, said Martin Danko, spokesman for Penta Investments.

"Our goal is to create a central European food processing holding headquartered in Slovakia," he added.

Penta wants to consolidate leading meat producers under one roof, hoping that a whole range of positive synergic effects would emerge in operations and market policies, according to Danko.

Private equity player J&T, whose food industry investments are in the Czech Republic, is also focused entirely on meat processing. It has acquired the Czech companies Kmotr - Masna Kroměříž and Vysočina Hodice, producers of non-perishable salami, along with Krahulík - Masozávod Krahulčí, which produces smoked meat products.

Processing branches that manufacture products with added value are the most promising for investment, according to Martin Maňák, responsible for communication of corporate investments at J&T.

Maňák added that the food-processing industry is becoming more attractive to investors because prices are gradually reflecting real market conditions.

"Food prices will certainly rise in Slovakia," Danko told The Slovak Spectator.

Over-the-counter prices of meat products in Slovakia are currently 60 percent of EU15 prices, while the purchase price of pork halves is the same as in these countries, according to Danko. In other words, Slovak meat producers buy the meat in the Netherlands or Denmark for the same price as producers in the EU 15, but sell for only 60 percent of EU selling prices.

The price of agricultural commodities such as wheat is also rising, as world stockpiles are the lowest since the end of WWII, Danko said.

However, major players agree that investments in the food-processing industry do carry risks, especially for sectors tightly linked to agricultural production.

"The risks lie with uncontrollable factors such as weather, poor crop yield or pests," Benčurik said.

It also is necessary to monitor price fluctuations on the commodity markets and to keep up with sanitary and phytosanitary standards, according to Benčurik.

"Food processing companies must begin to cooperate effectively with agricultural production," he said.

However, there are also risks linked to competitive pressures due to the lack of consolidation in the food industry, said Maňák.

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