Risks related to INVL Baltic Farmland operations
Restrictions on the purchase of agricultural land
The public joint-stock company INVL Baltic Farmland will invest in agricultural land in Lithuania through its owned private companies.
On 1 January 2014 changes to the Agricultural Land Acquisition temporary law (No. IX-1314) entered into force, imposing restrictions on the purchase of agricultural land (including restrictions on the purchase of shares of a legal entity owning agricultural land).
These restrictions mean that the public joint-stock company INVL Baltic Farmland and private companies it owns will not be able to purchase additional agricultural land and/or acquire shares in companies owning agricultural land.
Stipulations in the law may reduce the number of potential buyers of the agricultural land owned by subsidiaries of the public joint-stock company INVL Baltic Farmland, and thus the liquidity and price of the assets.
Overall investment risk
The value of an investment in agricultural land can vary in the short term, depending on the harvest, prices of agricultural products, local demand and supply fluctuations, competition between farmers and the financial situation. Investments in agricultural land should be made for the medium and long term so that the investor can avoid short-term price fluctuations. Investing in real estate is associated with the long-term risks. Failure of investments or other adverse circumstances (preventing payment to creditors) may lead to the initiation of bankruptcy proceedings.
Risk of volatility in agricultural output and other commodities prices
Prices of agricultural products and other commodities have historically shown very large fluctuations, which in many cases affect the price of agricultural land. The main factor affecting the profitability of an agricultural business is the price of the crop (wheat, canola, etc.), but the prices of fuel, labour, fertilizers and other commodities also affect the cost of agricultural activity, therefore their increase lowers profit margins and reduces the ability to pay higher prices for agricultural land leases. If high fuel, fertilizer and labour costs coincide with a fall of agricultural output prices, farmers and investors in the agricultural sector may suffer losses.
General agricultural risk
INVL Baltic Farmland will seek to lease the agricultural land it owns to farmers and agricultural companies at the highest price possible. Factors that could adversely affect the agricultural sector may be: weather conditions (floods, droughts, heavy rains, hail, frost, weeds, pests, diseases, fire, climate-change related worsening conditions, and others).
Any of these factors, together or separately, could have a negative impact on farmers' incomes and farmland values. Some of the risks, not all, can be insured, but as insurance costs reduce agricultural profitability, not all Lithuanian farmers do so.
Reliance on the European Union and national subsidies
Lithuanian and the European Union farmers' activities and profits are highly dependent on the European Union's Common Agricultural Policy (CAP) - EU and national subsidies for agricultural activities. Recent changes to the CAP are valid for the period 2014 – 2020.
Elimination of direct payments could have a negative impact on agricultural land rents and values.
Land illiquidity risk
Investments in agricultural land under certain market conditions are relatively illiquid, thus finding buyers for the land can take time. Investors should consider investing in agricultural land only if they do not face sudden liquidity needs.
Risk of legislative and regulatory changes
Changes to Lithuanian law, European Union directives and other legislation may affect farmers’ income and agricultural land rents. For example, changes affecting price controls, export restrictions and customs entry or exit for agricultural products, or more stringent environmental restrictions, could adversely affect the profitability of agriculture.
Tax increase risk
Changes to tax laws may lead to higher taxation of INVL Baltic Farmland and its group companies, which in turn may reduce the profits and assets of the company.
Inflation and deflation risk
It is likely that during its operational period INVL Baltic Farmland will face both inflation and deflation risks as investments in agricultural land are long-term. If the profit from renting out agriculture land rent is less than the inflation rate, it will result in a loss of purchasing power. The correlation of returns on investments in agricultural land with inflation is estimated to be high.
INVL Baltic Farmland will seek to lease agricultural land plots at the highest price possible to Lithuanian farmers and agricultural companies. There is a risk that tenants of the land will not meet their obligations, which would adversely affect the profit of INVL Baltic Farmland. Their failure to meet a large portion of commitments on time could lead to disruption in INVL Baltic Farmland’s activities and could make it necessary to seek additional sources of financing, which may not always be available.
INVL Baltic Farmland also bears the risk of holding funds in bank accounts or investing in short-term financial instruments.
INVL Baltic Farmland may face a situation where it is unable to settle with suppliers and other creditors on time. The company will seek to maintain adequate liquidity levels or secure funding in order to reduce this risk.
Interest rate risk
Interest rate risk mainly relates to loans with a variable interest rate. INVL Baltic Farmland plans to use a very small amount of debt. Rising interest rates worldwide may adversely affect the value of property, i.e. agricultural land.
Large shareholders risk
Three shareholders of the public joint-stock company INVL Baltic Farmland together with related parties hold more than 60 percent of shares and their voting will influence the election of the Members of the Boards of company and essential decisions regarding management of INVL Baltic Farmland, its operations and financial position. There is no guarantee that the decisions made by the major shareholders will always coincide with the opinion and interest of the minority shareholders. Large shareholders have the right to block decisions proposed by other shareholders.
The Split-Off from the public joint-stock company Invalda INVL risk
The public joint-stock company INVL Baltic Farmland established in the process of Split-Off of the public joint-stock company Invalda INVL (former name – Invalda LT) and took over 14.45 percent of assets, equity and liabilities of the public joint-stock company Invalda INVL. If certain public joint-stock company's Invalda INVL obligations will not be distributed to all companies operating after the separation, then all post-split-off-based companies will be jointly liable for it. Each of the companies' responsibility will be limited by the size of equity, attributable under the Split-Off conditions.
When any obligation of the public joint-stock company Invalda INVL under the terms of the Split-Off will be assigned to one of the company, established after the Split-Off, that company will be liable to answer the obligation. If this company does not meet the whole or part of the obligation, and there is no additional guarantee provided to creditors under the Company Law, all post-split-off companies will be jointly liable for that obligation (or part of it). Each of the companies' responsibility will be limited by the size of equity, attributable under the split-off conditions.