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Where the margin is 2020
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SAILING WITH THE WIND OF CHANGE: Report on “Black Sea Grain” conference
SAILING WITH THE WIND OF CHANGE - this motto was worked out by agribusiness captains at the XIV International Conference “Black Sea Grain-2017”, a major international forum recognized by global grain &oilseed producers and exporters. The conference, organized by UkrAgroConsult, was held on April 5-6 at InterContinental Hotel, Kyiv, Ukraine.
Annual “Black Sea Grain” conference allows participants to learn the latest agricultural market drivers, improve business strategies in a fast-paced world and establish numerous business contacts with agribusinesses representatives from all over the globe. In 2017 “Black Sea Grain” conference gathered over 700 participants from 500 companies and 55 countries.
When opening the conference, Leonid Kozachenko, People’s deputy and Head of Ukrainian Agrarian Confederation, said that during the recent years Ukraine has regained its former glory of the world’s breadbasket, and stressed out that the Ukrainian agricultural sector has an extremely high potential.
Elena Kovalyova, Ukraine’s Deputy Minister of Agrarian Policy and Food, reported that Ukraine will account for 12% of the global grain market in 2016/17 MY. She noted that Ukraine is currently the world’s 4th largest corn exporter, 3rd largest barley exporter and the 6th biggest wheat exporter.
Galyna Zhukova, a board member of Credit Agricole Bank drew the attention of the audience to the Black Sea Grain Conference’s key role in the development of the nation’s entire agricultural sector.
QUALITY VS QUANTITY
Raising profits through expansion of grain output and export volumes is no longer possible. To increase and maintain margins, fundamentally different approaches are needed: technology exports, improvement of competitive factors and modification of investments structure, stated Director general of UkrAgroConsult, Sergey Feofilov, setting the tone to the following discussion.
According to Sergey Feofilov, the surge in the Black Sea region’s share in the world’s total grain supply to 25% (only the U.S. boasts a similar figure) is a great achievement of the local agricultural companies. Brazilian experts, assessing corn market, already list Ukraine among the top four exporters of this crop, the speaker noted. Of course, along with Hryvnia’s devaluation (UAH), this led to higher revenues of Ukrainian producers in national currency and allowed turning agricultural production into a capital-intensive sector and importing advanced technologies.
S. Feofilov also emphasized that farmers’ margins are now influenced to a great extent by external, non-agricultural factors: Hryvnia’s devaluation, natural adversities etc. Securing profits against their negative impact and against cyclical fluctuation of world market prices is only possible through change of the approaches to profit generation.
In the near future, the speaker said, agricultural enterprises will face the need for further growth or maintenance of their margins. This will be impossible to do by building up production volumes, S. Feofilov stressed. He added that competitive struggle in present-day markets unfolds in demand management (access to new markets, technology exports etc.) rather than in the production domain.
In the opinion of the speaker, effective management must also consist in attracting qualitatively new investors. Today, S. Feofilov said, agricultural sector develops primarily at the expense of capital investments made by agricultural companies themselves – the share of investments from the government or banks is negligible. Meanwhile, attracting investments of this sort is able to contribute a lot to the maintenance and increase in profits. At the same time, naturally, the achieved production and export positions should be retained as far as possible.
Andrea Cagnolati, Director of Grain Services (Italy) also insisted on this. In his opinion, production of new types of products, financial speculations and developing international markets are the agribusiness strategies for the near future. While describing the agricultural market trends since 2008, the speaker pointed out enhanced GDP growth, rising debt liabilities of the world’s top economies, low prices and liquidity of agricultural produce. However, such situation will not occur any more. New markets require new strategies, which consider the upturn in demand for organic products. So, the demand for gluten-free products has lately increased 10% in Italy and 27% in the U.S.A.
The speaker also pointed out that last year’s imports from Ukraine to Italy included 21 KMT of wheat and 1.3 MMT of corn.
Oleksiy Stupak, a representative of Credit Agricole Bank, Ukraine, spoke out in the same tone. He stressed that it is now profitable in Ukraine to invest in niche crops and organic products. While conventional soybeans cost EUR 350-370/MT, organic ones are valued at as much as EUR 500-590/MT.
O. Stupak also noted that agriculture is the only sector of Ukraine’s economy that has not declined over recent years.
MULTIPOLAR WORLD: LOCAL VS GLOBAL
Bohdan Chomiak, Partner of UkrAgroConsult, called on the conference participants to consider both local and global challenges. Many of the speakers dwelt in detail on how to balance between “Scylla” of local markets and “Charybdis” of the global market.
The key factors influencing agricultural markets include the policies of China’s and Russia’s leaders on the one hand and the U.S. leader’s policy on the other. This was suggested by French economist Philippe Chalmin in his presentation “East wind, west wind. Donald, Xi, Vladimir and others.”
The speaker drew attention to a so-called “supercycle” of 2006-2014: a business activity slowdown in almost all the economic sectors during the 2007-2008 crisis with a following upturn, build-up of production to the pre-crisis level and relative stabilization of economic indicators.
“However, the supercycle is over and now we’ll have to deal with a rather long period of low prices, including those for agricultural produce,” Ph. Chalmin noted.
In the analyst’s opinion, the next price rally should be expected by the late 2020’s. Decisive factor of the world’s agricultural markets will become growing demand from India and (or) Africa. No stability is to be expected before that time, the speaker emphasized.
Addressing the subject of the “world management”, Ph. Chalmin said that it is currently absent – at least at the level of a “single center” – and called upon the audience to “watch Donald and Xi” (evidently, meaning the U.S. and China presidents).
Argentina is returning to global markets: a bad news or new opportunities for rivals? This was the subject of the speech of Leandro Pierbattisti, a representative of Argentina’s Federation of Elevators Association. In particular, he told the audience that MY 2016/17 features substantial year-on-year increases in planted acreage (from 34 to 36 Ml ha), the harvest of cereals (from 111 to 125 MMT) and grain and oilseed exports (from 82 to 93 MMT). At the same time, much slower growth was seen in the stagnation period (between 2010/11 and 2015/16), when export duties and quotas were in effect.
“Small production volumes by no means imply a low level of exports,” stressed L. Pierbattisti, adding that Argentina features weak domestic consumption of some cereals and oilseeds that leads to abundant exportable stocks.
According to the speaker, 30% of Argentina’s corn production is consumed domestically, while this ratio equals 9% for soybean meal and 33% for soybean oil. The respective percentages in Brazil are 72%, 52% and 80%; those in the U.S.A. equal 84%, 84% and 90%, respectively.
Also, the speaker told about logistics problems of Argentina, with insufficient storage capacities being one of them. Meanwhile, according to the speaker, Argentina is advantaged over Brazil in this respect owing to available silo bunkers. L. Pierbattisti also emphasized the necessity of investments in logistics infrastructure.
The speaker stated that, in case of full utilization of the port capacities, Argentina is capable of exporting up to 108 MMT of crop produce in 2016/17 (against a forecast of 90 MMT), including up to 100 MMT of grains and up to 8 MMT of vegoils.
Grain exports from the Black Sea region represent roughly a quarter of the global grain export volume, said UkrAgroConsult’s grain market expert Elizaveta Malyshko in her presentation “Triumph of the Black Sea region: for how long?”.
E. Malyshko drew the audience’s attention to a strong upward trend in grain production and exports in Russia, Ukraine and Kazakhstan in the last five years. According to statistics presented by the speaker, while Russia, Ukraine and Kazakhstan exported roughly 16, 22 and 6 MMT of grain, respectively, in 2012, the respective 2016 figures were 37, 40 and 9 MMT. Grain outputs in this period also expanded substantially: Russia, Ukraine and Kazakhstan produced about 71, 42 and 13 MMT, respectively, in 2012 and these figures rose to 119, 64 and 20 MMT in 2016.
The speaker predicts these indicators to somewhat sink in 2017: Russia – 113 MMT, Ukraine – 61 MMT.
Also, she noted that grain demand is on the rise in the global market, especially in African countries. So, by 2015, Asian demand for wheat and corn will gain 10%, while Africa will show hikes by 19% (wheat) and 26% (corn) against the respective current levels.
While describing the ways to boost competitiveness, E. Malyshko singled out the following four points: quality, price, currency, information. With regard to the quality, the speaker called attention to the fact that the share of milling wheat steadily stays at 77-87% in Russia and 96-85% in Kazakhstan, whereas it fluctuates around the 50% mark in Ukraine (it drops when yields rise).
With regard to the development of port infrastructure, E. Malyshko pointed out progress both in Russia and Ukraine, but this process is faster in Ukraine. The volume that Ukraine’s ports can theoretically handle expanded from 40 MMT in 2012 to over 60 MMT in 2017.
Devaluation of the Ukrainian currency, which was down 70% in January 2017 against January 2014, also plays into the hands of exporters.
The speaker pointed out the following key trends of MY 2016/17: relative macroeconomic stability, an increasing role of the agricultural sector in the national economy, tax changes etc., as well as a rise in cargo handling tariffs.
Russia will export 36.8 MMT of grain by the end of the current season, Dmitry Rylko, Director of IKAR (Russia) said. According to his forecasts, wheat exports will total 27.5 - 28 MMT. When evaluating wheat quality, the speaker pointed to a large volume of 4th grade and feed wheat.
With regard to end markets, D. Rylko noted that Russian wheat dominates Egypt, is present in South-East Asia and Africa and occupies a niche that emerged due to a drop in French wheat exports.
Also, the speaker reported that Russian farmer’s profits in Rouble terms would increase substantially after 2013 due to devaluation of the national currency.
African and South-East Asian countries push up demand in international grain markets, informed Wayne Gordon, Executive Director, UBS (Singapore), in his presentation “South-East Asia and Africa – the key hope of grain producers.”
According to Mr Gordon, demand is generated primarily by the planet’s population growth, changes in the demographic structure (due to an expanding share of young population in Africa) and rising incomes of African and South-East Asian consumers.
The expert outlined a few more trends in global consumption, including the following:
Grain shortage in Africa aggravates rapidly due to increasing demand. However, the lack of land suitable for an equally rapid expansion of production makes imports the only solution to the food problem, the speaker stressed.
Another trend is a remarkable rise in Indian imports of vegoils, mostly palm oil.
Also, the speaker predicted Ukraine to boost grain and oilseed exports in the coming decade: a gain in yields, infrastructure improvement and growing investments will lead to at least a 6 MMT rise in exports. At the same time, according to him, investments in logistics and port infrastructure are needed to realize the production potential.
LAND: AN ETERNAL QUESTION
Discussion panel “Ukraine’s Agri Sector in 2017: Investments Deficit despite High Returns” was held within the framework of the Conference. Starting the panel, UkrAgroConsult Director Sergey Feofilov pointed out that opening Ukraine’s farmland market could be an effective tool for attracting investments.
In the opinion of Alexander Skurla, Strategic Advisory Group for Support of Ukrainian Reforms, Cabinet of Ministers of Ukraine, land is an effective tool as collateral for taking bank loans. In Slovakia, where the land market is open since 2014, growers can get loans against land on an interest rate of 5% per annum.
Natalia Porvina, Credit Agricole Bank (Ukraine), said that Ukrainian banks are interested to deal with loans against land, but it is necessary to spell out legislatively a title transfer procedure for mortgaged land parcels in case of bankruptcy of the farmer borrower.
Alexander Gavriliuk, Head of agribusiness practice at KPMG in Ukraine, emphasized that, in case of opening the land market, Ukrainian citizens, individuals may get up to USD 3 Bl from sale of their land shares with prices varying within USD 500-2 000/ha.
Sergey Ushakov, Association of Farmers and Private Landowners of Dnipropetrovsk region, stated that opening the land market “is good, but not today”, because it is necessary to protect the rights of the land buying investor. However, it is impossible now in view of the present situation in Ukraine’s cadaster and judicial system.
ANALYSTS FOCUSED ON THE BLACK SEA REGION
Wheat exports from the Black Sea region exceeded those from the U.S. almost two times and are 2.7 times higher than EU exports, said Gennadiy Shulga, SGS Group Management (Switzerland).
He added that the Black Sea countries will dominate in the global wheat trade in the coming years, while “Chicago’s role will decline in the world wheat pricing process.”
Also, the speaker drew the audience’s attention to substantially expanding export potential of South America that will bring about structural changes in world markets. In his opinion, by 2020, the U.S. will lose much of its position as a global holder of grain and soybean stocks.
The speaker also noted that the quality of Black Sea wheat nears the world’s best standards. Roughly 88% of Kazakh wheat contains at least 13% of protein. About 66% of Ukrainian wheat has 11.5% to 13%.
According to G. Shulga, Ukrainian exports of GMO-free grains and oilseeds were up year-on-year in 2016. So, the share of no-GMO soybeans in total exports grew from 6.5% to 10%, while the respective share of corn increased from 60.7% to 77.7% and that of rapeseed from 9.94% to 28.7%.
In Kazakhstan, oilseed production and exports are on the rise with a decrease in respective grain figures. This was reported by Viktor Aslanov, Head of Grain&Oilseeds research buro (Kazakhstan).
According to his statistics, oilseed plantings have been slowly but steadily expanding over the recent years. This particularly concerns sunflower and, to a greater extent, flax. Planted acreage of the latter crop increased from 384.3 Th ha in 2013 to 720 Th ha in 2017. The respective figures for sunflower equal 822 Th ha and 900 Th ha.
The speaker said Kazakhstan accounts for 20% of global linseed production (Russia and Canada for 21% each, China for 14%, the U.S. for 8%, Ukraine for 3%).
Linseed and sunseed exports also show upward trends in terms of marketing years: 2014/15 – 103 and 53 KMT, 2015/16 – 177 and 86 KMT, 2016/17 – 226 and 128 KMT, respectively.
At the same time, a downturn is seen in grain and flour exports: 2015/16 – 8.6 MMT, 2016/17 (forecast) – 7.8 MMT.
Plantings and harvests of staple cereals and oil crops in Russia, Ukraine and Kazakhstan will slightly shrink in MY 2017/18 against MY 2016/17, estimated USDA’s Crop Assessment Analyst Mark Lindeman. According to his forecast, Ukraine’s wheat crop (including Crimea) will drop from 26.8 to 26 MMT, while that of barley will fall from 9.9 to 7.5 MMT, corn from 28 to 27 MMT and sunseed from 13.8 to 12.5 MMT. Only soybeans are to slightly increase from 4.3 to 4.5 MMT.
Similar trends will be observed in Russia and Kazakhstan, too.
Also, the expert predicted that Ukrainian farmers would sow less barley (3.1 – 2.5 Ml ha), corn (4.3 – 4.2 Ml ha) and sunflower (5.2 – 5.7 Ml ha). Wheat plantings will expand from 6.5 to 6.6 Ml ha and soya plantings will grow from 1.8 to 2 Ml ha.
M. Lindeman added that wheat yield would decrease 5% from last year’s high, to a level of 3.94 MT/ha. Supposedly, Ukraine will harvest 26 MMT of wheat this year.
When analyzing margins of staple crops in Ukraine, the speaker pointed out that the most profitable crop is sunflower (51%), while 27% of returns are generated by corn, rapeseed and soybeans. Profitability of wheat and barley cultivation is 16% and 10%, respectively.
Two scenarios of global warming are possible in Ukraine; both will substantially impact the country’s farming sector, said Tatyana Adamenko, Head of the Agrometeorology department, Ukraine’s Hydrometeorological Center.
According to the speaker, in the late 20th and early 21st centuries Ukraine experienced the longest warming period in the entire history of instrumental air temperature records (roughly 130 years). The feature of current warming is not only its unprecedented duration, but also a higher air temperature, with 27-year average (1989-2016) exceeding the climate normal by 1.0ºC. Out of the twenty warmest years since 1961, 18 occurred in the period of 1989-2016.
Also, the speaker emphasized that further climate changes and their impact on Ukraine’s agriculture may follow either an arid or humid scenario.
In case of humid warming, yields can be expected to increase until the middle of the 21st century.
If the arid (dry) warming forecast comes true, grain yields will fall rapidly all across the steppe and forest-steppe zones of the country. Toward the middle of the 21st century, aggravated dryness will become the main weather factor in the most fertile areas of Ukraine. Grain yield drops may exceed 20-25% and become critical for the economy of the southern regions.
LOGISTICS: ANOTHER ETERNAL QUESTION
Industry experts from Ukraine, Russia, Argentina and Serbia took part in Discussion panel “Upgrading logistics system as a factor of regional competitiveness”.
Igor Pavenskiy, Deputy Director of the Strategic marketing department, RusAgroTrans, reported on the preliminary results of the 2016/17 season in Russian grain and shipping markets. According to him, the total milling wheat crop increased to 52.26 MMT in 2016 against 49.49 MMT in the previous year.
Due to strong export activity maintained in the latter half of the season, 2016/17 grain exports may reach a total 35.9 MMT against 34.2 MMT in 2015/16 (excluding pulses and flour in grain equivalent). This means a wheat record of 27.86 MMT (24.6 MMT), a barley slump to 2.49 MMT (4.3 MMT) and a corn record of 5.17 MMT (4.6 MMT).
Also, the speaker noted that another rich crop may be harvested – roughly 110 MMT. With relatively low exports predicted, this will result in record high stocks in early 2017/18.
Suncica Savovic, Serbia Grains Association, estimated Serbia’s 2016-17 export potential, indicating corn exports to total 3.2 MMT and wheat exports at 1.5 MMT. At the same time, 2.5 MMT and 0.75 MMT, respectively, will be shipped abroad via Danube ports.
The speaker assessed overall capacity of Serbia’s ports at 224 KMT and voiced a call to invest in the country’s logistics infrastructure. She identified the following problems faced by Serbia’s river port logistics: unclear relationships between owners and port administrations, a complicated procedure of obtaining permission to build in the ports, port taxes and dues.
Vladimir Osadchuk, Director General of Cofco Agri, Ukraine, pointed out Ukraine’s main logistics problems of the last season. These included truck weight limit of 40 MT, which slashed the export trucking share from 35% to 20%, poor quality of railway grain carriers and the underdeveloped river logistics.
Leandro Pierbattisti, Federation of Elevators Association, Argentina, stressed that South American logistics systems are not very effective. According to him, the bulk of goods in Brazil and Argentina are carried by trucks and rail, contrary to the U.S., where river transport accounts for 60% of shipments.
However, he said, the government of Argentina is planning to make substantial investments in logistics. In particular, it is projected to spend USD 11 Bl on upgrading the seaport access system.
As informed by Sergey Feofilov, Director General, UkrAgroConsult in the final discussion “Summing up: Wind of Change in the Global Market”, Black Sea region and Ukraine have taken over and managed to retain a considerable share in the global export market of grains. This happened owing to intensification of production and growing capital intensity. On the other hand, agricultural companies are now oriented to raising the harvests, but their strategies must be focused on raising business performance, studying foreign markets and securing a foothold there, search for additional funding sources (banking and state capitals).
Elena Voloshyna, Head of IFC, Ukraine, stated that credit resources of major international investors have appeared this year for effective companies of the Ukrainian agricultural and food sectors.
Jean-Jacques Herve, Vice president of French-Ukrainian Chamber of Commerce, said that banks now invest only 10% of total investments in Ukraine’s agriculture. However, the cycle of falling agricultural commodity prices is over, an upward cycle has begun, therefore investments are to be made today to gain profits in five years. However, at the same time, Ukraine must restore investor confidence – this requires primarily political and economic stability.
Vadym Chaykovsky, State Service of Ukraine on Food Safety and Consumer Protection, drew the audience’s attention to the fact that his agency is doing its best to diversify crop product exports. “Ukrainian produce must be a cosmopolite and fit consumers in any country of the world,” he stressed.
Conference participants assessed further prospects of the world grain market. The assessment was based on answers to questions concerning the key problems of grain production and exports.
According to the voting results, the breakdown of the Conference participants’ opinions was as follows:
World grain prices will…
А. Continue falling – 32%
Which region will become the top grain supplier in the near future?
A. Black Sea region -57%
The strategy of Ukrainian agricultural exports:
A. Fits the current market changes -37%
Is the Black Sea grain logistics system competitive?
А. Yes, very much – 17%
Please be informed that on September 19, 2017 UkrAgroCnsult will hold the V International Conference “Black Sea Oil Trade-2017” - leading event of the Black Sea oil and fat industry. Stay tuned for the updates!
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