Fifth International Conference
"Agricultural Investments - 2012"
November 8, 2012 Kiev, "President-Hotel"
 
 

Conference report

The Fifth International Conference

«Agricultural investments - 2012. Inputs market»

 

The conference was held on November 8, 2012 in Kiev, President Hotel. Organizer – Commodity market analyst "UkrAgroConsult".

At the conference, 20 speakers highlighted the issues of investments into the agricultural sector of Ukraine, revealed the problems and prospects of the inputs market and the Black futures.

More than 120 participants from 10 countries participated in the conference. They were representating  investment companies and banks, farmers and other agricultural producers.

Welcoming remarks from the Minister of Agrarian Policy and Food of Ukraine Prysyazhnyuk N.V. to the conference were read by the Head of investment and infrastructure development Kuzmenkov A.A.

 

 

The first session of the conference «Commodity credits. Back to the future?»

Moderator - Sergey Feofilov, General director, "UkrAgroConsult".

1. Global trends in the investment policy of the agricultural sector were highlighted by Philippe de Lapérouse, executive director of Global Food and Agribusiness Practice, HighQuest Partners (USA). 


Philippe de Lapérouse has 25 years of experience in senior positions at global international companies working in agricultural business.

In his presentation, Mr. de Lapérouse focused on the fact that the most attractive targets for agricultural investments are tilled and perennial crops, as well as inputs such as seeds, fertilizers, plant protection and technology. The greatest amount of agricultural investments is concentrated in South America, the USA, Australia, New Zealand and Europe. According to experts, by 2015 the volume of world investments in the agricultural sector will reach $40 billion. Increase in world agricultural products trade may reach 2.7% by 2020. The report noted that the next 10 years will be characterized by increased demand for basic grains and oilseeds.
 

 

2. The topic of investments into the agricultural sector through mergers and acquisitions was discussed by Bohdan Chomiak - Head of Strategic Development department, UkrAgroConsult..

Nature of investment in the agricultural sector over the last year has changed significantly, said Bohdan Chomiak in his report. The number of IPOs on the stock markets and corporate bond offerings has decreased. This dramatically increased the number of mergers and acquisitions in the agricultural sector. The profitability of large producers in Ukraine is so high ($50 - 100 million) that they grow organically, using their income as a funding base.

Thus, there is risk diversification for large agricultural companies, through vertical integration as well (which in Ukraine mostly occurs due to mergers and acquisitions), significantly increasing their competitiveness, while small and medium-sized farms have significantly less opportunities in such conditions. Over the last 3 years agricultural holdings have increased their controlled land bank from 8 to 11% in Ukraine, storage capacity of grain by 1 million tons, and also invested in chicken production, construction of feed mills, and other components of the production chain.

The main problem for these farms in Ukraine in this, and perhaps next year, is the lack of funding, while the major players in the market are in a much better position. To overcome these problems small and medium-sized farms can organize into cooperatives, making them competitive with agricultural holdings.

 

3. Elena Voloshina's, IFC's Head of Operations in Ukraine, topic of discussion was the financing for farmers through the distribution of risks

In her report, Ms. Voloshina pointed out that during the last fiscal year, IFC invested $156 million. It is expected that the investments volumes of this year will increase to about $250 million. IFC has made the greatest impact in the agribusiness. But it is not only the merit of the corporation, but of the whole sector that is developing quite dynamically. Some pretty big deals are being prepared right now. For example, the deal with "Nibulon" to provide a credit for $ 50 million.

It was stressed that much work was done in agricultural insurance and recently it began to show results.

An innovative project was implemented, in which a mechanism of risk sharing between the bank and the supplier was developed. Specifically, between Bayer, supplier of plant protection products, and banks "Raiffeisen Bank Aval" and "Credit Agricole". Innovation gives positive results.

 

4. The information about the influence of the legal factors on the price of the agricultural business in Ukraine was given by Nikolay Orlov, a partner at the law firm “OMP”.

The report highlighted the aspects of the legalization of agribusiness, on which investors are focusin in the first place, namely:
 

  • The validity of the land lease;
  • The validity of using agricultural infrastructure;
  • Neglected problems with rural communities and state agencies (illegal use of land, share property, etc.)
  • Registration of ownership of corporate rights and limiting the powers of management;
  • Tax accounting and potential disputes with the tax service (reduced VAT and FAT).


With the growth of competition for agricultural land increases the risk of loss, and so does the price of the correct execution of the lease rights for the land. Up to 30 percent of the land of agricultural holdings are  with serious violations, or not legalized at all. Future lifting of the moratorium will only increase the competitive war and, and therefore, will increase attention to the legal side of the agribusiness. Only correctly legalized lease will save from raider attacks said Nikolay Orlov.

The report "Law factors influencing the value of agribusness in Ukraine" included main components of the restructuring and cleaning the agribusiness in the short term.

 


5. On the Brazilian experience of commercial lending David Telio, representative of Syngenta, Brazil, was reporting.

During presentation of Mr. Telio were shown the advantages and disadvantages of trade crediting, how it works and the results. The introduction of commodity crediting in Brazil in1994 helped the country to increase grain production and productivity, as well as to expand cultivated areas. In 2012 grain harvest in the country increased to 160 million tons.

 

6. Newest trends in legislation and the expactations of the agricultural market operators were discussed Andrey Selyutin, advisor, Arzinger.

A number of laws adopted or prepared for adoption in Parliament, allow us to predict major changes in the key market for farmers - the land market.

Today, one of the main issues for the farmers is the completion of the land reform, which will attract credit financing into production.

Land reform and the introduction of land into the market will also create the conditions for land owners to  receive rent payment, determined by market relations.

 

7. Roman Khrypko, Business Development Manager, Syngenta, was reporting on the effective financial solutions in the market of agricultural resources.

At a time when commodity prices are unstable, and the national currency is under pressure, manufacturers must use professional solutions to reduce the risks said Mr. Khrypko.
What are the main risks and what determines the farmers' income?

The main factors with the greatest impact are the local and world prices, which are not always amenable to control, as well as costs, yield, marketing, exchange rates. To reduce these risks there are programs developed by "Syngenta": "Barter", "Prepaid Plus" and "AgriFlex".

 

8. The question of the role of the public and private sectors in attraction of the investments into the agribusiness was discussed by Elena Borodina, Ph.D. in Economics, a member of the National Academy of Sciences of Ukraine, Head of Economy and Policy of Agrarian reforms department of the Institute of Economics and Forecasting of UNAS.

As it was noted in the report, in rural areas there are about 5 million farms, of which about 30% - commercial, 32% - semi-commercial. These farms produce more than 50% of agricultural GDP.

Among the sources of financing the share of fixed capital investment through own funds is 50%, and through bank loans - about 15%. In connection with this the formation of the local development funds within local communities is promising - as a form of efforts consolidation for joint development of the rural economy and to finance local projects. The filling sources of these funds may be the rent fee from the land shares, donor funds, charitable contributions, private investments, personal savings.

Also, in recent years there has been a tendency to increase the volume of households deposits.


 

Round table: «Modern trends in inputs market»

Moderator   - Valeriy Khadzhymatov - Executive director in Seed Association of Ukraine

 

1. Problems and prospects of the plant protection market were discussed by Boris Timofeev, Head of Marketing department, BayerCropScience..

With modern intensive technologies of crop growing use of effective crop protection is necessary and mandatory said Boris Timofeev, who has 20 years of experience in the sector of plant protection.

Therefore, the market of plant protection products - one of the fastest growing global markets related to agriculture.

The apparent current trend in the market is shortage of the pesticide load per hectare with price increase of this treatment: the products become more powerful and expensive.

An example is the grain market, which despite the decline of the sowing area has increased due to the high use of insecticides and herbicides on sparse crops.During his report, Timofeev said that in Ukraine plant protection market is saturated with generic crop protection products, but their share is gradually decreasing.

This year, the market growth slowed slightly compared to previous years, due to weather conditions, the difficulties of funding and lack of food. Next year promises significant improvements. However, in the long term plant protection market in Ukraine is expected to double.

 

2. The efficient production in the conditions of decrease in crediting was discussed by Evgeniy Radovenyuk – Financial Director, Grain Alliance

At this stage of agriculture development in Ukraine and the level of availability of investment resources, the maximization of the efficiency of agricultural enterprises is one of the key factors in the competitiveness of these enterprises. The example of Grain Alliance showed practical benefits of implementing a system of effective management. Using basic functions of management (planning, accounting, monitoring, analysis) at every stage of the production of goods to the final sale, the company was able to double the amount of available credit in the period of 2010-2011.

Setting a clear and tangible goal of achieving a minimum level of 30% of return on investment (ROI), the company began looking for ways to streamline costs, improve logistics chain and use the risk management system. As a result, the acquisition of the calibration factory with ROI 50%, and then the replacement dryers and with the return return 33% and installation of fuel equipment brought 900% ROI. The company constantly monitors the historical data on the fields for identifying trends and forecasting. Finally, as noted by Radovenyuk, there was a reduction in the costs of expanding the lands from $200 per hectare in 2010 to $60 in 2012, saved $5.8 million on the purchase of agricultural machinery, reduced costs for drying by 43%. From 2010 to 2012 the company has an average 15% higher EBITDA margin compared to other market participants, proving with the results the success from the implementation of the system.

3. The strategy of building a distribution system in seeds sales, plant protection products and fertilizers was discussed by Yuriy Zastavniy, "Bunge Ukraine".

The expansion and the approximation of the goods to consumer, as well as securing their positions at the regional level is one of the most important tasks for producers and suppliers in the inputs market.

Building an effective distribution system is one of the key factors for profit. It is at the stage of products distribution that the economic indicators of a product are formed and evaluated, its compliance with the  consumers requirements, competition, its prospects in terms of long-term trends.

 

4.The characteristic of the Ukrainian market of seeds was given by Andrey Kim, inputs market analyst, UkrAgroConsult.

Today the seeds market in Ukraine is more than 2 500 legal entities that are involved in seeds production. Capacity of the Ukrainian seed market is growing. Thus, the capacity of key crop seeds market in 2011 was estimated by UkrAgroConsult to be at $1.1-1.2 billion. By the end of 2012 it is expected to increase by more than 10%.

Foreign and domestic producers are willing to invest in the seeds market, which gives our country a real chance for dynamic economic development. During 2010-2012, almost one-third of surveyed companies have expanded their sales offices, which suggests that the seeds and crop protection market remains financially attractive.

However, for the second consecutive year, the drought has had a negative impact not only on the yield of major crops, but also on the production of seeds. If last year it has mainly affected Europe, this year it is both Europe and North America.

UkrAgroConsult forecasts a dificit of seeds on the world market, particularly, corn and sunflower. This will lead, firstly, to the increase in the prices of seeds, secondly, it will reduce the potential for commodity crediting. Seed suppliers will require, as a rule, pre-payment. Thirdly, the lack of high-quality seeds can affect the yield of corn and sunflower in countries, which import a substantial part thereof.

 

5. On the opportunities of trade financing in the agricultural sector a report was made by Аleksandr Plotnikov, lawyer, advisor in Arzinger.

According to Alexander Plotnikov in the current environment of financial instability and limited crediting both from Ukrainian banks and foreign financial institutions, trade finance is the instrument that allows companies to effectively sell their goods and to get the necessary resources for the modernization of the production base. Unfortunately, Ukrainian producers are not effectively using the potential of trade finance.

The benefits of trade finance include: attracting long resources, cheaper bank loans (by raising funds on international markets), minimization of the risk of failure to carry out their obligations by the other party, the formation of a positive credit history.

A great interest among the participants of the conference was roused by trade finance schemes.

 

6. The report "Difficulty of insurance. How to build understanding between farmers and insurers?" was given by Maciej Szyszko, Head of the Board, PZU Ukraine. 

In his report, Maciej Szyszko said that the agricultural market is now at the stage of formation of civilized practice, through which it could have become a pillar of the Ukrainian national economy. Farmers now have new technologies, investment directions and additional financial instruments. Among those insurance of agricultural risks, which has proved its worth in many leading countries as actually working financial instrument.

The report highlights the details of insurance of all types of agricultural crops and noted that in recent years there has been a tendency to increase the number of insurance contracts.

In 2012, crops on 88,000 hectares were insured in 14 Ukrainian regions for the amount of 327 million UAH. Insurance payments for agricultural risks amounted to 2.5 mln UAH, which is almost three times more than in 2011.

 

7. The influence of climatic factors on the inputs market was discussed by Tatyana Adamenko, Head of Agrometeorology department, Hydrometeorological Center of Ukraine.

Weather factor for farmers is one of the main harvest components. In this season, the unfavourable weather conditions in the Black Sea region have coincided with periods of drought in other regions of the world, adding to the lack of supply of grain on the world market. The report noted that the droughts droughts as the main threat to yields will continue to be a problem in the future, and due to the increased temperatures will stay a permanent factor.

 

Round table: «Ready! Steady! Hedge!»

Moderator – Alexander Bobylov, CME Group

1. The report "Quotes of the Black Sea futures: first results. Volatility, basis, spread, forecasts" was given by Svetlana Malysh, analyst, UkrAgroConsult.

The report described the benefits of futures trading, which has long been an essential part of grain trade in the world. Grain futures quotes are the shaping factors of the spot prices in the Black Sea region. If earlier the Black Sea spot market was orinted on the futures prices of Chicago Mercantile Exchange, now in the 2012/13 season, the countries of the region got their own price indicator on one of the world's major stock exchanges - Black Sea Wheat futures contract.

Also, a detailed description of the course of September and December BSW contracts trading was given, and the obstacles to the further development of futures trading in the global trading platform were analyzed.

 

2. Ole Slot Hansen, Head of Commodity Strategy, Saxo Bank, gave a description of price trends for commodities in 2012 and the price forecast for 2013.

Mr. Ole Slot Hansen described the overall macroeconomic situation in the world, as well as the factors of possible growth and decline of prices of commodities.

In terms of grain demand and supply on the world market in 2012/13 season and the prospects for the yield in 2013, Mr. Hansen noted the increasing role of Ukraine in the grain supply and food security, particularly in the face of increasing price volatility on world markets.

 

3. Sergey Danov made a repor on the need to create own price indicator for grain in the Black Sea region and the role of exchange groups in the process. 

Under current conditions of high price volatility it is stock prices that can become a significant market price guideline, as well as an instrument against market risks. Exchange transactions are transparent, which makes this mechanism a base for the creation of estimated futures contracts.

Also, in his report Mr. Danov considered various examples of strategies based on the exchange contracts.

 

 

Agricultural Investments. Inputs