CEO Comment

2016 net loss of USD -10.6mn (14.3mn net income), down USD 24.9mn y-o-y, driven by lower cropped area, prices and quality.


2016 Harvest Progress

Whilst 2016 was the second most productive year in the company’s history at a blended yield of 3.5 tons per hectare (exc. beet and potatoes), prices were again lower and quality problems with wheat from a very wet August significantly reduced revenues. Feed Wheat and sunflower in particular were strongly down in hard currency terms in 2016. A reduced cropped area also pressured average production cost per ton, which increased 7%.


2016 Performance

During 2016 our farms experienced 63% higher rainfall than the five year average. Whilst this resulted in decent yields of wheat and corn crops at 4.3 and 5.2 t/ha respectively, it impacted negatively on wheat quality and harvest. Yields of Spring barley and sunflowers were disappointing.

Harvest conditions have been challenging with all the corn and sunflower crops harvested at much higher than average moisture levels and requiring drying. The costs of this wet and delayed harvest have however been controlled relatively well.

Four successive huge global harvests have inevitably resulted in a depressed price environment and a huge growth in stocks internationally. World grain production is up 4% y-o-y to a record high of 2,094mmt. In 2016, Russia also had a record grain harvest estimated at 118mn (vs. 104mn in 2015) tons. Corn and wheat prices are now at 10 and 6 year lows respectively and our actual received average price for wheat is down 43% y-o-y in hard currency terms. Sunflower prices have also proved weak since the year end. Potatoes and carrots yielded well with better quality but big domestic crops have again meant that prices have suffered in hard currency terms.

Our crop price hedging activities in futures contracts resulted in a USD 1.9mn (1.5) gain and mitigated some of the weakness in prices.



2016 Results

Black Earth Farming experienced a tough year in 2016. Reasonable productivity and cost savings in harvest year production costs of USD 6mn and in G&A of USD 3.5mn not proving sufficient to mitigate difficult weather and very low prices. Revenue and gains of USD 97mn (130) was down by 25.4% due to a decline in prices and low quality of winter wheat.

Although the Company benefited from higher profit on grain hedges of USD 1.9mn (1.5), Other Income and Expense in 2016 has declined from 9.7M in 2015 to 1.1M in 2016, since 2015 value included a one-time benefit from the land swap transaction of USD 9.1mn. The Company benefited from positive FX on foreign denominated debt of USD 6.8mn.

At the end of 2016, the Company had a carry-over working capital position of finished goods of 192kt (227), valued at USD 30.2mn (32.7).

With USD 26.8mn (31.9) of cash at 31 December 2016, the Company had net debt of USD 32.3mn (31.5) and a Debt/Equity rate of 49% (59%). Being restricted for the most of the year, we were able to perform only moderate bond buyback in 2016 of USD 3.4mn par value.


Agreement to sell the Russian operations

During 2016, the Company received a number of expressions of interest substantially above the undisturbed share price level of SEK 3.55 per share prior to the announcement on 9th August 2016 confirming that the Company were in talks with potential buyers. All were from prospective Russian buyers underpinning the higher value put on the Company by potential domestic purchasers.

On 9th August 2016, the Board of Directors of Black Earth Farming communicated by press release that the Company was in talks with potential buyers regarding a substantial land and asset sale in Russia. On 13th February 2017, having evaluated an asset sale versus other alternatives, the Board of Directors of Black Earth Farming has concluded that a divestment of AIMC LLC and AIRMC LLC (the two holding companies, owning assets in Russia) to Volgo-DonSelkhozInvest is the best alternative for the Company and its shareholders. Additionally the Board of Directors believes that this alternative is a better alternative for Black Earth Farming's shareholders than continued long-term operations. It was not possible to solicit a public takeover offer for all depositary receipts in the Company on terms favorable than the terms of the Transaction.

A deposit of USD 10mn was received on 16th of February 2017. On the 23rd of March 2017 the EGM of Black Earth Farming shareholders approved the deal. At the current date we are waiting for the regulatory approval from FAS, the Russian anti-monopoly body, who issued an extension to the approval on 22nd of March 2017. Assuming FAS approval is granted soon, we would expect to sign the Russian SPA in mid to late April and to complete and receive the cash proceeds in early to mid May. Upon receipt of proceeds we plan to give notice of a combined EGM for the distribution of funds and an AGM to take place in early June.



While the Company’s business is not directly impacted by current geopolitical tensions, the Group is indirectly exposed to changes in its operating and financial environment. Sanctions on Russia could negatively impact the Russian economy and affect the Company’s financial and operating environment. The ban on imports of certain foreign products is generally positive for the Company but the risks of a potential imposition of export levies increase uncertainty in the Company’s operating environment.

Specifically the proposed transaction is several weeks from completion and is exposed to exchange rates, market prices for remaining crops and other costs. There is a low risk that FAS approval may be delayed or may not be granted.



2016 has been a frustrating year both operationally and financially. I am however pleased to report that we have reached a conclusion from our negotiations with bidders with an agreement that we expect will deliver to shareholders between SEK 7.2-7.5 per Swedish Depository receipt. This is a premium of between 96.5 and 104.7 per cent compared to the volume weighted average trading price for the three months preceding BEF’s announcement of the negotiations.


Richard Warburton

CEO and President

Black Earth Farming Ltd

7 April 2017