On investment in Ukraine’s agriculture

In the recent years, economic growth of Ukraine has become critically dependent on the agricultural sector’s prospects. In 2010-2016, the industrial share in the country’s GDP dropped from 31.3% to 26.3% (down 5 p.p.), while the agriculture’s contribution grew from 8.3% to 14.4% (up 6 p.p.). Over the three years (2014-2016), the export share of agricultural produce expanded from 31% to 42.5% (up 11.5%!). According to preliminary assessment, the agricultural sector accounted for almost one-third (28%) of currency receipts in 2016.

Further growth of the agricultural sector requires affordable and sizable financing. The financing goals may include the following:

  • expanding the production volume and assortment of agricultural products,
  • improving their quality and increasing the added-value share,
  • major overhaul of production facilities and technologies
  • optimization of the production-sale cycle

Indeed, growth of capital investment in the Ukrainian agriculture has far outpaced growth of agricultural output. The gain in investment was 27.1% in 2015 and 49.5% in 2016, while gross agricultural output sank by 4.8% in 2015 and increased 6.1% last year.

At the same time, the agriculture’s portion in the total investment volume steadily grew from 6.1% in 2012 to 13.8% in 2016.

Taking into account that Ukraine’s economy is an open economy and much of necessary modern agricultural equipment and technology are imported, the assessment of real possibilities of capital investment must be dollar-based.

The investment volumes and production growth are indicated or calculated above in hryvnia value terms. However, these indicators are far less impressive in dollar equivalent. Hryvnia investments in the agricultural sector rose from UAH 18.8 Bl in 2014 to UAH 30.2 Bl in 2015 and UAH 45 Bl in 2016. In dollar terms they dropped from $2.4 Bl in 2012 to $1.4 Bl in 2015 and increased by $500 Ml to $1.9 Bl in 2016.

Remarkably, in hryvnia terms, annual investment in the food industry actually stayed unchanged at some UAH 13.5 Bl from 2012 till 2015. This amount grew to UAH 16.9 Bl last year. In dollar terms, as the diagram shows, investment dropped more than by half, from $1.7 Bl in 2012 to $0.7 Bl in 2016.

This trend shows that the agriculture development was not supported with an adequate gain in food processing capacities. “Excessive” agricultural produce added no value from domestic processing and was sold abroad as feedstock.

Sources of investment in the agricultural sector

A peculiarity of the Ukrainian agricultural economy is that the investment burden is carried mainly by producers, actually financing production from own revenues. The share of producers’ own money in the total investment volume went up constantly throughout 2012-2016 and reached 69.4% last year.

The latest study by UkrAgroConsult Company “2017-2022: Development of Ukraine’s agribusiness strategies. Investment climate. Factorial analysis shows that profitability of faming companies declined in 2016 – this trend will persist at least till 2022. This means the main source of investment and self-finance for maintaining growth, i.e. producers’ profits, is almost exhausted.

The next source of investment is the State Budget. Its share in capital investment decreased from 6.3% to 2.3%.

The most important source of finance for the development is bank loans, but the share of banks in investment fell from 16.1% to 7.1%, or almost by half.

Targeted agricultural loans from the international market (a €400 Ml loan program from the European Investment Bank in 2016, a $150 Ml loan program from the World Bank in 2017 etc.) support Ukrainian banks in crediting investment projects. But these loans do not solve drastically the problem of insufficient domestic resources for investing into growth points – they just put it off for some time, doing this on indemnity basis.

A multitude of reasons can be cited why the bank share in the crediting of company investment is miserable. However, this does not negate the fact that the banking system fails to fulfill one of its key roles – crediting the development of the economy’s real sector, specifically the agriculture as a locomotive of the present economic upturn in Ukraine.

The insufficient crediting horizon prevents farmers even from envisioning and planning large and break-through investment projects. For instance, to the National Bank of Ukraine reports that only 20% of 2016 loans to agricultural companies were provided for more than 5 years.

The development and implementation of medium- and long-term projects are possible with participation of foreign capital. The above table shows that the share of foreign investors’ money in investments generally expanded from 1.6% in 2013 to 2.9% in 2016 in view of the overall decline in capital investment.

Direct investments (share capital) in Ukraine’s agriculture also actually dropped. The volume of direct foreign investment into the sector reached $776.9 Ml by January 1, 2014, shrank to $502.2 Ml by January 1, 2016 and did not actually change by January 1, 2017 ($500.1 Ml).

One of the conclusions of UkrAgroConsult’s study is that, in fact, all of the three system non-government finance sources for enhancing growth and competitiveness of the Ukrainian economy’s key branch – growers’ own profits, bank crediting and foreign investment – are now losing their position as an agriculture development resource. As mentioned above, financing the production development and growth from own profits has actually exhausted its potential and, at best, it will be only able to maintain agricultural production at the previous level.

Reforms and investments

In this stalemate situation, it is understandable why the IMF, as a creditor, insists on conducting reforms by the Ukrainian government as soon as possible. The reforms are to be focused on ensuring mid-term outlook for the debtor’s solvency. One of their key points should be opening the land market.

The overwhelming majority of experts believe only this step can solve the investment shortage problem of the agriculture in the near-term without fundamental changes in the nation’s social and economic set-up. The land market will bring long-awaited significant investment to the Ukrainian agricultural sector that will cause its growth and a greater financial effect for the State Budget.

Once the land market opens, the following investor groups will most probably arise:

  • investors from offshores, who know very well the mechanisms of market relations in the country, including procedure nuances of land purchase / sale and use, and who do not mind investing in the promising asset;
  • transnational capital, which holds a dialogue on equal terms with the central authorities and is interested in the “Ukrainian” link for its technological chain;
  • speculative capital.

Medium-sized foreign investors (primarily ones from EU countries) interested in boosting production by developing the local economy will sit out for one or two years to better assess their risks (both commercial and legal ones).

The risks related to property rights observance, judiciary system effectiveness, state authority actions etc. are unlikely to get practically offset over this period.

UkrAgroConsult’s studies indicate that a substantial inflow of investment into the real agricultural sector can be expected at best toward 2020. However, it is not yet clear if agribusinesses and farmers, like Bolivar, will be able to “carry double”: 1) the burden of capital investment for stabilizing and/or expanding agricultural production; and 2) the government’s aspiration to increase fiscal payments to the State Budget.

Source: blackseagrain.net

Smart agriculture in Ukraine: IT innovations for sustainable farming

Ukrainian start-ups are rushing to stake out the most profitable market niches in the agricultural sector, while venture investors foretell a bright future for agro-technologies, though showing no haste to invest in them. Meanwhile, some agro-corporations are already building their businesses on IT solutions of local developers. So, what is going on in the agtech market – a sector of agricultural technology, which is both new for Ukraine and rather controversial?

The agricultural sector has long remained on the periphery of IT entrepreneurs and venture investors’ attention due to certain skepticism as for agtech, which is traditionally associated with agro-companies owners’ conservatism and low market reach of basic information technologies. However, in 2014, the situation started changing owing to one-off successful projects and growing interest from innovative agro-companies.

It took only one year after the launch for Drone.ua to become the main airborne prospecting provider for Kernel, the largest agro-corporation in the country. Starting in 2015, it uses five quadrocopters and two drones, while forecasting the yield and receiving vegetation indexes and information on evaporation/nitrogen via an IT-solution of the Pixel Solutions start-up.

Created in 2014, Petiole, a “smart” tracker for plant growth, hit the top 20 hot start-ups in 2015 according to CNBC, an American business TV channel.

Although agtech still cannot compete with mainstream niches in a number of top projects, IT entrepreneurs’ interest in the agricultural sector has been growing from year to year. This is caused by an enormous share of the agro-industrial complex in Ukrainian economy. In 2014, the agro-industry became the largest source of the country’s foreign currency earnings. According to the State Fiscal Service, in 2015 Ukraine got $14.5 billion from the food and agricultural products export, which made up 38% of the total exports, while the metallurgical industry was left far behind with its share of 24.8%. Based on the Ministry of Agrarian Policy, in the 2014-2015 seasons Ukraine ranked third among the world’s leaders of grain exports, following the US and the EU.

Also, agtech is attractive for Ukrainian IT entrepreneurs since this is one of the world’s trends and agtech projects are in demand among large agrarian corporations, though sometimes this demand doesn’t get corresponding financial support. In general, local IT entrepreneurs don’t tend to overestimate the current Ukrainian market readiness, often considering the domestic agtech a testing ground.

Source: ukraine-economy.org

Reforms bring a business-friendly Ukraine

For so long mired in corruption and bureaucratic red tape, in the past three years Ukraine has enacted numerous reforms to improve the climate for doing business. Now, writes Natasha Turak, the battle is on to convince investors that the conflict-affected country is a safe bet.

The story is familiar by now: for decades a complicated legacy of corruption, cumbersome bureaucracy and political upheaval has dogged Ukraine’s economic ascent. The country possesses a range of diverse and potentially lucrative sectors, yet has staggered behind its regional neighbours due to internal complications and now conflict.

In the past three years, however, the former Soviet state has enacted more reforms than ever before in its history, with the goal of improving transparency, law enforcement and economic growth.

Ukraine has risen in the World Bank’s Doing Business ranking from number 152 in 2012 to number 80 today. These are crucial steps, according to many of the stakeholders in the country’s business landscape – but as with any country facing such seismic change, there remains more work to be done.

Varied opportunities

Looking at the fundamentals, Ukraine offers enticing investment opportunities across a number of sectors including agriculture, IT, ports and shipping, energy, healthcare and manufacturing. Human talent is abundant and labour costs are low. Yet a survey of corporate executives by international law firm Kinstellar found that 82% of respondents view Ukraine as a difficult place to do business, citing political risk, security risk, corruption and regulatory risk as their top concerns.

Fear of political instability due to the war with Russian-backed separatists in the east of Ukraine deters many investors, and a complex regulatory environment can lead to substantial delays in basic processes such as applications and licensing. Many in the business community, however, cite recent government reforms as reasons for optimism.

“Ukraine has done an incredible amount in a very short period of time – with the police, with judicial reform, with anti-corruption,” says Lenna Koszarny, CEO at Horizon Capital. “More has been done in the past two-and-a-half years than in the 20 years preceding. Clearly, when a country hasn’t pursued structural reforms for 23 years, there is a lot to do. The process has just started.” Her firm is Ukraine’s largest private equity fund, and has invested more than $500m in Ukrainian and regional companies to date.

Mass changes

Among Ukraine’s reforms are: three anti-corruption bureaus established in 2015 for prevention, investigation and prosecution; an electronic system for asset and income disclosure that has led to the resignations of thousands of public servants; a public e-procurement system meeting World Trade Organisation requirements; decentralisation allowing more financial resources to local regions; banking sector and judicial reform; secured macroeconomic stability; a reduction of personal and payroll taxes; and the start in late 2016 of a government effort to repeal hundreds of outdated regulations on taxes, customs, and foreign exchange restrictions.

“The biggest reform of the past three years is decentralisation, which was fundamental because it broke the Soviet vertical of power where all decision making and finance was held at the top,” says Daniel Bilak, a director at UkraineInvest, the national investment support agency founded in November 2016.

“We need to make the business environment a safer and more attractive place,” he adds. “Difficulties with the rule of law and property rights protection have clearly undermined investor confidence. This is why there is huge judiciary reform under way at the Supreme Court level all the way down to the appellate court. People are starting to feel these reforms, but it doesn’t happen overnight.”

People power

Arguably Ukraine’s best asset is its human talent. Of its 45 million inhabitants, 70% hold a secondary education degree or higher and, according to the World Economic Forum, Ukraine produces 130,000 engineering graduates per year – the most in Europe – and is ranked number one for IT engineering in central and eastern Europe (CEE). The countrys IT sector generates about $3bn annually.

Labour costs are also among the lowest in the CEE region; the average monthly salary is $179, according to 2015 figures, significantly below the regional average.

“I’ve been here 10 years, and what Ukraine has to offer is a solution for Western countries facing a shortage of IT personnel,” says Hans Uithol, CEO of Dutch professional services company HYS Enterprise, which runs all its operations from its 150-strong team in Ukraine’s port city of Odessa. “It’s not about money; it’s about the availability of people,” he adds.

More than 100 international companies operate software R&D labs in Ukraine including BMW, Volvo and IBM – Samsung alone employs 1000 Ukrainian engineers for its research projects. IT outsourcing sales have grown twentyfold since 2003, and represent 40% of all Ukraine’s exports to the US.

Meeting challenges

All of this has happened despite a lack of dedicated infrastructure supporting tech entrepreneurs, says Bohdan Kupych, vice-president of business development at Kiev-based tech holding company KM Core. “There is no access to capital for entrepreneurs. It’s boot strapping, family and friends’ money… that’s where we work.” KM Core has invested about $100m in several tech projects in Ukraine. “We help companies get started to the point where they can attract additional investment,” he adds.

“There are some start-ups that manage to gather capital, but once they enter the growth stage they’re forced to look outside the country,” says Yuri Warczynski, co-founder of HYS Enterprise. “That is a disadvantage for Ukraine, but also an opportunity for venture capitalists, for angel investors, for anybody ready to invest in start-up accelerators here in Ukraine.” Notably, the founders of WhatsApp and PayPal were both born and raised in Ukraine but found success in the US.

An additional challenge is the impact Ukraine’s war has on investor perception, says Oleg Shkuropat, Odessa branch manager at Danish-founded Ciklum, one of Ukraine’s leading IT outsourcers with 3000 employees across the country. “The growth of our office here in Odessa has decreased, because of the war in the east and the conflict with Russia,” says Mr Shkuropat. “It’s hard to convince clients to build out their R&D centres anywhere further from Kiev or the country’s west. This office used to grow by 40 to 50 people per year, but in the past three years we’re growing by six to seven people per year. Other companies have been less fortunate and closed down.”

HYS Enterprise’s Mr Uithol believes the biggest efforts “should lie in showing the region is safe”, adding: “We cannot emphasise enough that now it is really safe to invest here, and your capital is secure.”

Rewarding the risks

Despite the apparent hurdles left by decades of mismanagement, Ukraine’s fundamental strengths have provided significant returns for those committed to navigating the country’s investment landscape. “Having discussed the current problems, there are in fact a lot of companies here that have made a lot of money,” says Mr Bilak.

Many of those successful companies are in agribusiness, one of Ukraine’s most lucrative sectors – the country holds 33% of the world’s black earth soil, considered the most fertile for agriculture, and its land bank is capable of feeding 500 million people. More than 70% of Ukraine’s territory is agricultural land, valued at more than $100bn, and the country is the world’s top exporter of sunflower oil and the third largest exporter of corn. The agriculture industry has grown by 14% a year since 2003 and constitutes 38% of all Ukrainian exports.

US-raised Ukrainian John Shmorhun, CEO of AgroGeneration, represents just one of these success stories. Founded a decade ago, the company employs 1400 people across 12 farms in Ukraine and produces 400,000 tonnes of crops per year.

“The reason Ukraine is so important is that we are profitable, in spite of all the hurdles and without subsidies. We were forced to be efficient from the very start,” says Mr Shmorhun. “If you want profitable, efficient farming, come to Ukraine.”

Growing pains

With additional investment into management, irrigation, logistics and equipment, Ukraine could double or triple its annual grain harvests of 60 million tonnes a year. “Ukraine needs $50bn to $60bn in foreign direct investment [FDI] for its agriculture over the next five to six years,” says Mr Shmorhun. “Ukraine doesn’t need smart people, labour or soil, it already has that. All we need is the investment.”

He says land reform is the biggest issue for agricultural investors – something Mr Bilak says is under discussion, as large companies in the sector face complex land ownership laws and cannot own the land on which they work. “Land reform, pension reform and public administration reform – those are the three big reforms being worked on right now,” adds Mr Bilak.

“Investors need to get over the war,” says Mr Shmorhun, who states that the conflict occupies 7% of the country, while 93% of it remains perfectly operable. “Things are moving in the right direction. My message to investors is look at the companies and their success rate over the years. Judge for yourself,” he adds. “When you can make these types of margins, why not? The war doesn’t affect us. Agriculture in Ukraine is revolution-proof. We’ve proven it.”

Room for modernisation

Ukraine is bordered by seven countries, four of them in the EU, and its infrastructure offers connections to key central and western European markets – many of its manufacturing plants are already integrated into European and global supply chains. Thirteen seaports, 170,000 kilometres of roadways, 22,000 kilometres of railways and more than 20 passenger airports support an export-oriented economy, complemented by Ukraine’s Deep Comprehensive Free Trade Agreement with the EU, which lifts tariff and non-tariff barriers for Ukrainian exports.

The ports and shipping sector is vital to exporting the country’s agricultural produce, yet according to the State Property Fund of Ukraine (SPFU), 70% to 90% of the ports’ infrastructure is outdated. FDI is essential to upgrading the ports to boost exports.

This endeavour is complicated, however, by the country’s privatisation regime. It has 3500 state-owned enterprises, and so far, ports are not up for privatisation, says Andriy Gaidutskiy, SPFU’s deputy chairman. Multinationals such as Cargill and ArcelorMittal therefore develop the ports, investing in projects including grain terminals and logistics, on a concession basis.

TIS Group of Terminals in Yuzhny, 27 kilometres east of Odessa, is Ukraine’s busiest maritime hub, operating five maritime terminals for ore, coal, fertilisers, grain and containers. “There is definitely a reason to do business in Ukraine,” says TIS CEO Andrey Stavnitser, citing Ukraine’s global standing as an agricultural producer.

“Yuzhny is the deepest port in Ukraine, which makes it perfect for large-scale commodity trade. TIS has invested in excess of $500m in maritime and land transport infrastructure, and now Yuzhny is the third largest port in the whole Black Sea,” he adds.

“Despite all the bureaucratic challenges, a private business of brick and mortar such as TIS works under international standards and can provide its partners with flexible and reliable services,” says Mr Stavnitser. The government is forming new concession legislation, and assets from ports to power plants are being prepared for concession or privatisation with the help of international consultants.

“The process is moving forward – not too fast, but it definitely is. Moreover, existing ports will also be open for large-scale privatisation, which is another reason to consider Ukrainian reforms seriously. I stress that private business is driving all the positive changes – and does this efficiently and promptly, pushing the government for faster and more efficient solutions as needed,” adds Mr Stavnitser.

Changing mindsets

Numerous other sectors in Ukraine present investment opportunities, among them energy – with everything from oil and gas exploration to coal, where French ArcelorMittal has invested $170m into a coke plant in central Ukraine, to renewables, where Turkish Atlas Global Energy has invested $20m into a wind farm in western Ukraine. Two hydropower plants were privatised in 2016, with more planned for this year.

“The biggest reform we are seeing is a change of mindset, especially in many government officials,” says Andy Hunder, president of the American Chamber of Commerce in Kiev, which represents 600 companies. “There is a lot of resistance – we’re seeing a clash between old and new. The new people, especially over the past three years, are coming in and they want change. Things are moving, albeit slower than we would like, but we have hit rock bottom and now we are climbing out.

“The voice of business can definitely be heard. A lot still needs to be done, but we are in this together and pushing together.”

So what advice would Mr Hunder give investors in Ukraine? “The most important thing is to have a clear strategy and play by the rules,” he says. “If you understand the realities and risks of doing business here, you can really see your success.”

Mr Bilak adds: “We’re in this transition period between old and new Ukraine that began three years ago. Up until three years ago, people were afraid of the system; now the system is afraid of the people. You have to pull many weeds out before you have a garden and that is the process we’re in. You are seeing, and will continue to see, fundamental change.”

Author: Natasha Turak

Source: thebanker.com

Ukrainian agricultural boom: Why it matters to Irish farmers

Ukraine has officially reported yet another record grain harvest for 2016, exceeding 66m tonnes in the process.

Of this, wheat accounted for 26.8m tonnes, maize came in at 28m tonnes and the barley harvest amounted to 9.9m tonnes. Aside, 4.3m tonnes of soy bean were also harvested.

Agriculture-related products are now the largest exports from Ukraine, accounting for €14.6 billion, or 42.5% of total Ukrainian exports in 2016 (by value).

The impact of Ukraine’s agricultural export-led growth can already be seen in Ireland.

Ukraine has been the leading overseas supplier of maize into Ireland over the past three years, exporting 284,908t to Ireland last year.

This figure was 298,016t in 2015 and 235,509t in 2014. In contrast, just 26,000t of Ireland’s maize imports originated from Ukraine in 2011.

The opportunity for further bilateral trade opportunities with Ukraine needs to be further explored.

For example, as a key global fertiliser exporter, Ireland could easily turn to Ukraine for supply of this key input.

At the same time, Ukraine has a deficit in quality bovine stock and genetics. It also imports a lot of its farm machinery needs.

These are areas that Ireland could capitalise on – from an export point of view.

Sugar Beet Industry

Ukraine has the capability to double its agricultural output; there’s enough capacity to feed 500m people. It has the capability to easily capitalise on post-Brexit agri-food trade opportunities.

Similarly, those with notions of resurrecting Ireland’s sugar beet industry should cast a wary eye on the Eastern European country.

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  • The 2016 sugar beet harvest in the Ukraine amounted to 13.7m tonnes, with an average yield less than 50t/ha. Ukraine also exported 465,900t of sugar in 2016 – a new record.

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Keep in mind, Ukraine planted 2.75 times more land area under sugar beet in 2006. Also, Ukrainian sugar beet yields are just two-thirds of EU average yields.

It could easily up the ante in the market, with further growth.

Ukrainian Agriculture

Ukraine has 41m hectares of farmland; that’s ten times Ireland’s 4.1m hectares. Over half of this land is farmed by 48,000 commercial farmers.

Out of these 48,000 commercial farmers:

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  • The top-100 farming companies, known as ‘Agri-Holdings’, collectively farm 6.4m hectares (15.8m acres). These holdings range in size from 14,000ha (34,600ac), to the largest farming corporation in the country with 654,000ha (1.6m acres).
  • Below this there are 5,400 farms managing, on average, farms sizes of 1,950ha (4,815ac).
  • Rounding off the commercial farming sector are 42,700 farmers farming, on average, 108ha each (267ac).

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Long known as the ‘bread-basket of Europe’, Ukraine boasts 33% of the world’s fertile chernozem soils (a fertile black soil – rich in humus).

The country claims the following distinctions in the global agricultural league table:

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  • Top producer of sunflower seeds and sunflower oil.
  • Second highest exporter of grains.
  • Third highest producer of barley.
  • Fourth highest exporter of barley.
  • Fifth highest producer of corn.
  • Sixth highest exporter of wheat.
  • Seventh highest exporter of flour.
  • Eighth highest producer of soy bean.
  • Ninth highest producer of wheat.

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Looking forward to 2017 Bohdan Chomiak, of consulting agency Ukragroconsult, is confident of another good year for Ukraine’s agriculture sector.

“We expect continued growth in output, as deregulation and reforms have made it simpler for Ukrainian producers to access international best technologies.

“As producers learn to effectively use these technologies this will lead to further growth,” he said.

Meanwhile, Ukragroconsult is also running its annual grain conference at the beginning of next month. One of the largest grain conferences in Europe, the event is expected to bring together over 700 executive delegates from 500 companies – representing 50 countries.

The popularity of this event further demonstrates Ukraine’s growing influence in the agricultural sector – within and outside its own borders.

Author: Tom O’Callaghan

Source: agriland.ie