Records have squeezed the juices out of farmers

This year Ukrainian agrarians achieved a record-high grain harvest, entered the markets of the European Union and increased production in the animal husbandry sector, albeit they went along a rocky road to achieve positive growth.

Due to the record-high grain harvest all over the world the prices in exchange markets dropped to the minimum, while due to the devaluation of the hryvnia resources for sowing and harvesting campaigns have increased in price by 30 — 50%. The annexation of Crimea, where 5% of the harvest was reaped, and the military conflict in the east of the country, where there was a harvest of approximately 15%, dealt a serious blow to Ukraine’s agricultural sector. Leading agro holding companies are reporting major losses and requesting the restructuring of debts as some are on the verge of default.

Horticultural dissension

This season the horticultural agro-business was more vulnerable than the animal husbandry sector. For example, the increase in the price of resources due to devaluation of the currency dealt a heavy blow to horticultural companies. Around 70% of all expenditures were spent on the sowing of fields (fuel, plant protection agents, fertilizers, seeds, etc.) — these are imported products, says Director of the Analytical Department of the Agricultural Commodities Exchange Anatoliy Stoyanov. «For this reason, the autumn sowing campaign was one and a half times more expensive than last year taking into account that the sowing areas were expanded for certain crops,» he says.

Despite this fact and the annexation of Crimea and the military actions in the Donbas region, agrarians set a record in practically all sub-sectors. In 2014, according to statistics of the Ministry of Agrarian Policy and Foodstuffs, 64 mn t of grain were harvested.

Expert of the Ukrainian Club of Agrarian Business (UCAB) Ihor Ostapchuk said two trends have been observed on the horticultural market: a reduction in the share of food wheat and its transitory reserves and an increase in the export of grain to Europe by 11.4 times (to 7.5 mn t in the first week of September) compared to last year. As a reminder, the quota for duty-free delivery of grain to the EU is 950,000 t that has been contracted in full. The situation with corn is similar. The export to EU countries grew 1.7 times to 11.4 mn t (over 9 months of 2014) and the European quota of 400,000 t was also harvested.

The oil segment is also showing good results, despite the fact that several plants in the east of Ukraine have been shut down, says General Director of UkrOliyaProm Stepan Kapshuk. The aggregate harvest of sunflower seeds of 11 mn t allows for holding its price at a sufficiently high level as the market is competing for quality raw materials.

A collapse of the sugar market in Ukraine is being observed. Its overproduction (more than 2 mn t were produced instead of the necessary 1.7 mn t) led to a drop in the price of sugar on the domestic market lower than its production cost. «Today the domestic sugar market is characterized by supply higher than demand and the impact of seasonal overproduction of sugar is being observed. The wholesale output prices that are fluctuating in the range of UAH 6,950-7,400/t including VAT is testimony to this fact,» says Chairman of the Board of the National Association of Sugar Producers of Ukraine (UkrTsukor) Mykola Yarchuk. The expert says the production cost of sugar produced from sugar beets of the 2014 harvest is predicted at 15 — 20% higher than last season due to the rise in the prices of natural gas and the main material and technical resources.

Hopes for export

The generous harvest fostered an increase in export. According to data of the Ministry of Agriculture, this season market players will be able to sell close to 37 mn t of grain. For comparison, last year they exported 32.5 mn t. Producers of sunflower oil can sell 4 mn t of the commodity, thereby securing their financial standing with export proceeds.

Premier Arseniy Yatsenyuk noted at one of the meetings of the government that the export of Ukrainian grain up to the end of 2014 brought in US $2 bn. And that is notwithstanding the fact that the grain prices on world markets, for example wheat, were a historic minimum this fall.

Today, exporters are striving to turn a profit from devaluation of the national currency, which is why they are restraining shipments to the maximum. Director of the Analytical Department of the AAA Consulting Company Maria Kolesnyk notes that there is a possibility of limitation of grain export due to the rise in prices of necessity food goods. «If there will be complaints such as „the prices of bread and grains are rising, so let’s limit the export of grain!“, then agribusiness will sustain serious losses,» Kolesnyk predicts. However, experts are so far not assessing the losses, hoping that limitations will not be introduced.

Reformatting regime

Over the year the animal husbandry segment has split into two planes: while the producers of meat felt quite comfortable, dairy farmers were forced to take a number of radical measures to save their business and minimize losses. Expert of the agrarian market of the Ukrainian Club of the Agrarian Business (UCAB) Alina Zharko said this year for the first time in many years the domestic trading of meat showed a positive balance as the import of meat fell by more than two times. Due to the devaluation of the hryvnia imported meat cannot compete in price with domestic meat.

Cheese makers were forced to change their specialization. The Russian embargo and devaluation had their impact on the production cost of cheese. According to data that Zharko possesses, profits from exports of dairy products to Russia were US $119 mn based on results of the year compared to last year’s figure of US $374 mn. Domestic dairy farms reoriented towards production of dry milk and butter and are trying to stabilize the situation by seeking new sales markets.

«Ukraine’s Milkiland indeed felt the effect of the Russian embargo. Today, due to the situation in the east of Ukraine, our companies are seeking new markets. New buyers are mainly from Islamic countries,» Executive Director of Milkiland Anatoliy Yurkevych admits.

Head of the Ukrainian Agrarian Council Denys Marchuk says the achievement of the year in the animal husbandry sector is the adoption of laws on the safety of food products and identification of animals thanks to which Ukrainian stockbreeders will soon be allowed onto the European market. At the moment, only aviculturists that are actively insisting on the need to increase quotas have such a privilege: already 36,000 t of poultry have been delivered to the EU.

Financing problems

The development of the agricultural sector in Ukraine is being restrained by the inaccessibility of credit financing. According to data of the Ministry of Agrarian Policy, by the end of the year 2,240 enterprises in the agro-industrial sector attracted loans to the tune of UAH 10.6 bn, which is UAH 3.4 bn less than in 2013. The reason for the cutback in lending was not only devaluation of the national currency, but also the growing distrust of creditors to Ukrainian agrarians.

In the opinion of analyst at the Eavex Capital investment company Ivan Dzvinka, the distinctive features of 2014 clearly divided companies in the domestic ag sector into two categories: those that are ready to successfully overcome difficulties and fulfill the obligations they took upon themselves and those that were not strong enough to do so. Dzvinka says that one of the representatives of the first category is company Myronivskiy Bread Product (MBP), which despite the ban of the Customs Union on the import of poultry into the country, managed to increase export by 20% thanks to other regions in the country. Aside from that, the MBP managed to attract a US $250 mn line-of-credit from the International Finance Corporation (IFC), which will help it redeem its bonds in the amount of US $234 mn in 2015.

Among the successful agro holding companies is Kernel owned by Andriy Verevskiy, who confirmed the planned sum of dividends this year, despite the company’s losses. The company minimizes the risk of volatility of prices through sales on forward contracts. Also, the sugar giant Astarta owned by Viktor Ivanchyk managed to attract loans from the European Investment Bank thanks to diversification of its business.

Representatives of the second category are those that were unable to settle their debts and have submitted requests for restructuring. «An example is the Mria agro holding company owned by Ivan Huta, which judging from all aspects is not willing to enter into constructive dialog with creditors,» says Dzvinka. The company Aroton owned by Yuriy Zhuravlev, KSG Agro of Serhiy Kasyanov and Milkiland controlled by Anatoliy Yurkevych are in a pre-default situation. The non-public agro holding company Harve East controlled by Rinat Akhmetov also recently appealed for restructuring.