When Michael Bertram’s team at NCH Agriculture, a $1 billion agriculture investment business, founded Agroprosperis in 2006, they didn’t have a plan. They saw an opportunity to invest in cheap Ukrainian farmland, known for its high-quality “black gold” soil, but understood little about farming, admits Bertram.
But fast forward to today and Agroprosperis is the largest producer and exporter of crops in the Black Sea region, and a profitable business that’s returning an income of around 15% in income per year to its investors.
How have NCH and Agroprosperis achieved this across 500,000 hectares of Ukrainian “black gold” soil yet highly fragmented farmland in a post-Soviet Ukraine where buying up large tracts of farmland is still prohibited?
Learn from Michael Bertram and leading INSEAD business school professors at the Future of Food & Ag Leadership program by AgFunder, Agrohub and INSEAD in October. Find out more and express your interest in a limited number of places here.
Land aggregation was key; Ukraine’s ag sector had all but collapsed as there was little landowners could do on their own to increase crop yields with such smallholdings of around 2 hectares each. Agroprosperis was able to create economies of scale by grouping land it leases from individuals into farms with an average size of 6,000 hectares and by centralizing input, machinery, and agronomy decisions ad purchases. It could then modernize production practices, produce high-quality crops and then aggregate and sell the offtake, giving it better control over the sale price.
But as NCH Agriculture was investing millions of dollars of working capital into the business, it soon became clear that cheap farmland was not going to return the fund to its investors; the business had to generate a return for investors through profits.
“When we started we still had some idea that eventually we could buy some farmland and generate a return, but it became clear that Agroprosperis we will never be able to own farmland and that means all the return on the investment would need to come from operations,” says Bertram.
Spend 80% of your time on your people
Remembering a key lesson from business school, Bertram soon realized that the people working on each farm were going to be the ones taking the business as a whole to profitability.
“When I was at business school, the professors had told us that senior managers needed to spend 20% of their time on technical issues (like internal rate of return forecasts of new investments) and 80% on human resources (HR),” Bertram tells AFN.
“You need to really be serious about HR and say okay, I can’t only say people are important; if they are important, you have to do something for the people.”
The right metric for the right incentive plan
Almost everyone working for a business today does so with one sort of incentive plan or other. But the approach and detailed structure can make or break its success.
In fact, it took Agroprosperis three tries to find the best system, involving three different incentive programs the company has implemented over time.
“The first step is really you have to decide what you want and if I want to get a high crop yield, then my incentive plan will look different than if I want to get a return on working capital,” he says.
With working capital as its guiding light, Agroprosperis kicked things off with a simple bonus scheme based on what each farm could return above 20% of NCH’s working capital investment. But this took several years to become a trusted mechanism among the workers.
“The problem was Ukrainian people are caught out so often that they just don’t trust you,” says Bertram, adding that workers are rightfully mistrustful as there are “so few companies who really stick to their commitments.”
“And that has an impact on the brain and on the culture in Ukraine,” so that often people would “take their share” during the season in the form of stolen fuel or fertilizer, he adds.
So for the first two to three years when Agroprosperis told workers it would pay them every year, no one believed it, and the stealing continued, according to Bertram.
Nevertheless, Agroprosperis stuck to it and kept paying bonuses when they were due and teaching the workers how to calculate what their bonuses could be to motivate them. And as the workers became more trusting, Bertram was able to take things one step further and invite the workers to invest their own money in the success of each farming business. This became a partnership model, which Bertram says was inspired by private equity where the fund manager invests their own money into a fund alongside their investors – known as Limited Partners – as it ensures the fund managers are fully aligned with the success of the fund.
This partnership model gave the farm managers even more control of their businesses, so while key purchases and commerce were still centralized at the corporate level, each farm could make some individual decisions such as what and how much they would plant of each crop each year.
This approach made more sense to both parties, since farmers know best the local conditions of their businesses. The potential returns for farm directors entering the partnership were more attractive than the bonus scheme since the farms performed better under the partnership model. And for NCH, it meant the investment firm could reduce how much working capital it needed to lend.
“We believe farms need to have a certain level of autonomy. If we do not have this level of autonomy, then we end up in the Soviet Union collective farm system, which obviously didn’t work,” said Bertram.
With this in mind, Bertram and his colleagues created a franchise model to give the farm managers even more control over their operations.
“With the partnership program, we still control the procurement side so we still decide centrally what kind of seeds we want to buy, what kinds of equipment we want to buy, what tractor, what harvest style, what crop protection; it’s a central decision. We have some agronomists in Kyiv but farmers always want to get something different from one another and spend their entire life on these decisions,” says Bertram. “These decisions are, again, something that should be made on the farm.”
Franchises for autonomy
So the company set up a franchising model that would give this extra level of autonomy to each farm – with Agroprosperis still organizing procurement – as long as the farm directors invested at least 10% of working capital needed for the farm. And that capital had to be subordinated to the NCH working capital loan for that farm, meaning the risk was very high and they could lose all their money, but equally it could return a lot.
“Some people were lucky because we had a few good years and we had one year we a few people made 200% return on investment. So they put in $500,000 and made a million dollar return and put it back in.”
“So basically I said if you’re ready to invest a lot of money, basically all of your own money, and subordinate your investment below the NCH loan, then I’m ready to give up these decisions because I know if you screw it up then you’re losing more than I’m losing.”
All three of the incentive schemes are still being used at Agroprosperis today, with the franchisees managing those on their farms.
What are Betram’s key learnings from it all?
“I think it’s just a lot of common sense. You need to be consistent.”
Agroprosperis was the subject of a case study conducted by INSEAD professor Stanislav Shekshnia alongside Agrohub‘s Yulia Poroshenko. Shekshnia will take participants of the Future Food & Ag Leadership program through the case study in detail as part of the three-day course in October in France. Learn more about the program and express your interest in a limited number of places here.