How to win agrarian fight?

Ukrainian government should simplify the conditions for attracting investments in the agrarian sector. Otherwise, the country risks losing the global competition in one of the most promising of its industries – agriculture. This was the conclusion reached at the Fifth Annual Forum “Agribusiness in Ukraine” organized by the Adam Smith Institute. About 150 Ukrainian and foreign agroexperts for three days discussed the main challenges facing the Ukrainian and world agriculture, made recommendations on how not to lose the fight on global arena. Many interesting offers have been suggested. The only sad thing is that apart from speakers, heads of agricultural companies, and journalists there was no one to listen to those messages, since there were only a few people representing the current Ukrainian government and they, generally, confined themselves to their own speeches.

UKRAINE COLLECTS THE CROP OF ONLY THREE TONS OF GRAIN PER HECTARE, WHILE IT CAN WELL CROP TWO TIMES MORE

“Ukraine must make the most of its agricultural potential to renew the status of the ‘breadbasket of Europe,’” said the special guest of the Forum, global investor, the head of Rogers Holdings, and creator of the Rogers International Commodities Index (RICI) Jim Rogers. According to him, in the past 20-30 years the main investments were made in the financial sector. But now other global trends are being formed and the main focus will be on natural resources, in particular the agricultural sector. “Investing in the financial sector will be less interesting, while the agricultural sector will become an exciting game… The best thing about agriculture is to be a farmer, because then a person can grow crops. If you are a farmer, you can expand your farm in the future and make more money. In the next 30 years people involved in the agricultural sector one way or the other will earn a lot of money, that’s a fact… In this situation Ukraine might earn back the title of the ‘breadbasket of Europe’ and even become a ‘breadbasket of Asia,’” said Rogers. He also believes that those who work in agricultural sector should stake on cooperation with countries in Asia, in particular, with China. “Learn Chinese because the main trends will be formed and they will deal with Asia,” recommended the world famous investor.

Forum discussion showed that the main challenge for the Ukrainian Agribusiness lies in the question – what to produce: whether they should continue producing raw materials or they should start advanced processing in order to export ready made goods and make money on the higher added value.

Head of the Agra Analyst Team at Informa Agra Alan Bullion believes that in the near future Ukraine will receive a great advantage, particularly in the cultivation of grain. According to him, together with Russia and Kazakhstan, it will be able to exceed the volume of grain exports by 87 percent compared with the US.

President of the Ukrainian Grain Association Volodymyr Klymenko agrees that the grain business should be a priority for Ukraine. There are obvious reasons for this: in 2013 Ukraine will be the 10th in the world in the production of grain and the seventh in its export (22 million tons of grain), according to Klymenko’s predictions. Along with saying that Klymenko noted that Ukrainian agriculture should develop, following the example of the advanced grain producers, and, respectively, initiate the signing of agreements with agricultural ministries of the United States, France, and Brazil. “We should be interested in the world’s best technology rather than creation of grain pool with backward countries,” Klymenko summed up his vision of the perspectives of joint grain production in the triangle of Russia-Kazakhstan-Ukraine.

“The most liquid market for Ukrainian grain is the European Union,” added the President of Ukrainian Agrarian Confederation Leonid Kozachenko. According to him, the export needs of Europe are five tons of grain per year. He noted that now Ukraine collects the crop of only three tons of grain per hectare, while it can well crop two times more!

Gilles Mettetal, EBRD Director for Agribusiness, in his turn, noted that grain business is the right choice. However, Ukraine’s potential is much wider. According to him, Ukraine does not need to get hung up on the grain business as the source of raw materials supply. “We all are talking about grain here, but we should start talking about meat. Ukraine should focus on meat production. You should also use the huge potential of the biomass. These are the key points that Ukraine should focus on,” Mettetal outlined the new directions for the development of Ukrainian agriculture.

According to Oleksandr Sen, Deputy Minister of Agrarian Policy and Food of Ukraine, the government is focused on the latter. “Now, there are 153 investment projects in livestock farming at various stages of implementation. After the full implementation of these projects milk production in Ukraine will increase by 4 percent and meat production – by 4.5 percent,” predicted Mr. Sen.

IN 20 YEARS ONE BILLION U.S. DOLLARS WAS INVESTED IN UKRAINIAN AGRICULTURE, WHILE IT NEEDS MORE THAN 70 BILLION DOLLARS OF INVESTMENTS

However, it seems that such arguments of state officials do not impress investors. According to Mettetal, the bank is ready to allocate up to 300 million euros for agricultural projects in 2013. But the final amount of the funding will depend on whether Ukraine will be able to solve the basic problems in its agricultural sector. According to him, unpredictable policy in Ukraine remains the constraining factor for the development of agriculture. “For example, take the restrictive export measures. However, it is a positive thing that after some negotiations we managed to avoid them this year. But, of course, it is not enough,” said Mettetal.

Agricultural sector really needs money… According to Kozachenko, huge investments are needed in order to fully realize the potential of the agricultural sector. “Last year the investments in Ukraine reached 4.5 billion US dollars. In the past 20 years one billion US dollars was invested in Ukrainian agriculture, while it needs more than 70 billion dollars of investments in order to get to this level of productivity [six tons per hectare. – Author], more than three billion of which should be invested in the logistics system of Ukraine,” concluded Kozachenko.

“Ukraine should really think about how to increase the investments in agriculture,” said Olena Voloshyna, head of the IFC in Ukraine, supporting the statement made by the previous speaker. According to her, the current model of agribusiness in Ukraine is rather similar to Latin America (low level of state support, attitude to GMOs, and the ease of doing business) than Europe. However, while implementing it, we have somehow forgotten about the powerful tools for attracting financing, for example, about agricultural receipts. In 2012 this economic tool helped to attract 65 billion of investments in Brazil. “That is, there is lots we can learn from Brazil and other countries, including the introduction of such economic tool as agricultural receipts,” said Voloshyna.

Despite all these problems, the interest of international investors in the market of the securities of Ukrainian agricultural companies remains the same, according to Nina Derhunova, analyst of GoldmanSachs. “In the past few years the volume of raised capital in the stock market was about two billion US dollars. Most of these funds were raised in the markets of London and Warsaw stock exchanges because they have the most appropriate investor base: these are Scandinavian countries, the Great Britain, and Polish pension funds. They invested about 60 percent of those two billion investments that were raised in the past 5-7 years on the market. But the general capitalization of the current trading companies in the Ukrainian agricultural sector is not greater than six billion dollars, which is not much compared to major local players in Brazil and the United States,” said Derhunova. According to the expert, trading volume for Ukrainian agricultural holdings is also quite small – the total liquidity of the sector is only four billion dollars. She said that the interest of the international investors in Ukrainian companies in the future will depend on five factors: sustainability of business model of a company (for example, vertical integration, diversification into related industries), strong position of a company on the market, liquidity of its shares, return on investments and growth of company’s profits, quality of management, and risk management.