2017-2022: Development of Ukraine’s agribusiness strategies. Investment climate. Factorial analysis

16.05.2017

2017-2022: Development of Ukraine’s agribusiness strategies. Investment climate. Factorial analysisThe overwhelming majority of market participants predict an increase in grain and oilseed harvests in the medium- and long-term outlooks. As a rule, these scenarios are based on linear forecasting methods. However, one should take into account new factors questioning the feasibility of the linear scenarios.

Study results provide a ground for UkrAgroConsult experts to interpret the 2017-2022 behavior of Ukraine’s market differently.  When developing their strategies, grain and oilseed market participants need to take into account that farmer revenues and profits will remain the key source of finance for agricultural production in 2017 - 2022 with the banking sector playing a minor role.

Macroeconomic stabilization with very likely preservation of low grain and oilseed prices will lead to a drop in crop growing margins and farmer revenues/profits. Consequently, this will significantly undermine possibilities for financing agricultural production from farmers’ own reserves with the absence (or a minor role) of alternative funding sources.

In the study “2017-2022: Development of Ukraine’s agribusiness strategies. Investment climate. Factorial analysis”, UkrAgroConsult experts show that this factor increases probability that Ukraine’s agricultural sector will develop at a slowing pace by inertia in 2017-2022. Stabilization of grain production is possible in this case, or crops and exports will sink in the medium term.
 

Contents

Summary

Studying and forecasting methodology

1.    Key trends of the global market. Open economy of Ukraine

  • Paradox of the 21st century: An era of cheap raw materials against stagnation of the world economy
  • Growing role of geopolitical factors
  • Regionalization as the main trend of the global economic development.

2. Ukraine: Intensification of the agricultural sector as a response to new challenges    

2.1.    State agricultural policy: Evolution in 1990-2017.

2.2.    Investment climate forecast for Ukraine’s agricultural sector. Margin/profit of companies as the main source of financing agricultural production. SWOT analysi

  • Agricultural sector: From labor intensive production to capital intensive one
  • Forecast for Ukraine’s investment climate    
  • Analysis of consequences of the national currency’s devaluation    
  • Analysis of price behaviour resulting from natural disasters in any grain growing country       
  • Impact of the global commodity market’s price cycle (price growth) on revenues of Ukraine’s agricultural companies    New pricing tools in commodity markets    

3. Opening the land market. Forecast for post-trends    

3.1. Opening the land market: Forecast for agri company structure

  • Agricultural sector condition features the following trends as of 2017:    
  • Scenarios of land market opening
  • Development trends in the agri company structure, 2017-2022    

3.2. New reality: Strategies of key groups of agricultural market participants.    

  • Analysis of agri holding strategies    
  • Analysis of current strategies of Ukraine’s banking sector    
  • Analysis of the behavior of farming entities
  • Analysis of strategies of input suppliers    

3.3. Ukraine: Key tools for increasing profitability of agricultural companies    

4. Short-term, medium-term and long-term crop forecasts    

Conclusion

 

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Summary

The development of Ukraine’s agricultural sector in the medium-term (3-5 years) and long-term (5-10 years) outlooks is determined by the following factors:

  • Transformation of agricultural production from labor intensive into capital intensive one
  • Change of the level of access to world markets and escalating global competition 
  • Opening the land market as a basis for the concentration of agricultural production

Growth and stabilization of grain production in Ukraine at 60-65 MMT in 2013-2017 is a consequence of significant agricultural investments in 2008-2013. The 2014 fall in investments into agricultural production and their restoration in 2015-2016 happened under the impact of the following factors:

  • the drop in commodity market prices was offset by a sharp devaluation of the national currency resulting in higher hryvnia revenues of farmers
  • weakness of the financial/banking sector that entails active functioning of an alternative credit system

The 2015-2016 restoration of investments into Ukraine’s agricultural production was also caused by strong devaluation and an aggressive policy of input suppliers that curbed growth of agricultural technology prices in U.S. dollar terms and raised farmer revenues/profits. However, potential for raising competitiveness on the basis of these two factors is actually exhausted as of 2017.   

When developing their strategies, major participants of the grain and oilseed market need to take into account that farmer revenues and profits continue to be the main source of finance for agricultural production in 2017 - 2022. The role of the banking sector and forward contracts is insignificant. The further development of Ukraine’s agricultural production is determined by improvement of the investment climate and strengthening of the credit and financial sector with a declining role of the informal alternative credit system and farmers’ own money.

Macroeconomic stabilization with very likely preservation of low grain and oilseed prices will lead to a drop in crop growing margins and farmer revenues/profits. Consequently, this will significantly undermine possibilities for financing agricultural production from farmers’ own reserves with the absence (or a minor role) of alternative funding sources.

Active merger and acquisition processes will unfold in the agricultural sector once the land market gets open. This will require considerable modification of current agricultural company strategies. The results of our study indicate that medium-sized and large agri holdings (16-50 Th ha and 50-150 Th ha, respectively) will develop to the greatest degree.  

The bulk of grains and oilseeds will be grown by medium-sized and large/major companies with a slump in the production share of small farmers as noncompetitive producers. The present-day agri holdings with land banks varying from 150 to 600 Th ha will probably be transformed into smaller companies with an increasing role of vertical integration.

The main reasons for the expanding production share of medium-sized and large/major growers is their greater investment appeal:

  • high managerial efficiency, a more advantaged position for getting various types of financial support, including that from the State Budget
  • possibility of large-scale application of new practices related to production, infrastructure, logistics, management and marketing.

Increasingly stiffer competition due to expanding investments in other farming regions (South America, Russia, Central and Eastern Europe etc.) reduces access of Ukrainian grain to world markets. Some countries continue to actively exploit currency exchange tools that, combined with a significant boost in investments, will enhance their competitive positions and enlarge global market shares in the coming one to three years.

This makes Ukrainian agricultural companies focus their marketing strategies on the following two points: 1) getting a foothold in target markets; and 2) extending the range of export products toward those with higher added value. 

According to this scenario/forecast, Ukraine’s agricultural sector is likely to develop at a slowing pace by inertia in 2017-2022. Possible is further stabilization of grain output at 60-65 MMT. We do not rule out a harvest decrease to 55-60 MMT in the medium-term outlook (3-5 years) with this value likely to rise to 65-75 MMT over a longer term (8-10 years) on the basis of conducting adequate reforms.

Reliability of this scenario/forecast will depend on the speed and effectiveness of reforming Ukraine’s agricultural sector under the effect of the above-mentioned key factors.

Growing competitive capacity and prospects of Ukraine’s agricultural production make it necessary to recognize as highly topical and immediately implement the following measures:

  • Improving the quality and effectiveness of the agricultural sector management at the macro and micro levels
  • Developing and adapting business strategies to new factors of the global market
  • Active application of new information analysis techniques and the development of market behavior scenarios as the basis of management

The price fall in commodity markets is considered as a consequence of extremely slow overcoming of the 2007-2009 financial crisis.

Ukraine’s economy is regarded as an open economy wholly integrated into global economic relations. The 2016 openness index of the Ukrainian economy varies from 38% to 84% depending on the index calculation method.

 

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