Sergey Feofilov: To survive, grain traders are forced to become investors

03.02.2017

Interview with Sergey Feofilov, Founder and General Director of UkrAgroConsult, Ph.D. in Economics

 

UkrAgroConsult:          Which principally new factors, in your opinion, appeared in Ukrainian grain market since the crisis years of 2008-2009?

Sergey Feofilov:          In early 2010’s, almost all decisions of grain traders were made based on trading tools only. Today, this is not enough. First of all, new factors include substantially consolidated position of the Black Sea region in global grain exports.  Ukrainian grain has gained undoubtedly greater access to world markets over the last 3-5 years. Few people think that, under such a scenario, Ukraine is getting fully engaged in global competition too.

The grain sector of Ukraine has turned from a labor-intensive into capital-intensive branch – its progressive development is maintained primarily by the 2010-2014 investments.

Negative factors are also present. They include, for instance, formation of a parallel financial system in the agricultural production. Unfortunately, bank programs finance at best 10% of the production. The parallel financial system meets the deficit of investments and prevents stagnation in agriculture. 

Another new factor is an increasing contradiction between the hike in Ukraine’s world grain market share and the tools for its promotion. The state has actually steered away from the task of consolidating national exporters’ positions in new food markets. The agricultural policy increasingly resembles a list of good intentions. The nation’s export strategy is determined mainly by private operators. As a result, Ukraine is fitting into international division of labor as a raw material supplier or a player with a priori low margin.

 

UkrAgroConsult:       The grain market has changed. To what extent have these trends impacted consulting business market?

Sergey Feofilov:          To my surprise, lately I am often asked questions about situation in consulting service market. In general, this is a good trend as a sign of growing demand for quality analytics. And I am confident that this demand will increase further.

To my mind, consulting has become more pragmatic and oriented to real inquiries. In fact, consulting and information sector is another new factor of Ukrainian agriculture development, featured by rising interest in strategic aspect of business its long-term development, as contrasted with one-step intentions.  

It is quite easy to predict that the most effective will be agricultural companies making decisions on the basis of comprehensive reckoning with and objective analysis of the newest market factors.

The new approach requires intensive contacts at all the managerial levels. Increasingly important are effective communication platforms, such as, for instance, our approaching “Black Sea Grain” conference to be held on April 5-6, 2017. 

 

UkrAgroConsult:         What is the main obstacle for grain market in the current season?

Sergey Feofilov: Logistics. How many meanings and senses does this word have for any agri market participant? The present-day logistics problems are caused by concentration of investments in grain cultivation with paying too little attention to the issues of grain distribution, movements, exports, handling, unloadings etc. They have managed to at least temporarily ease the acute problems of internal logistics, if not eliminate them, following record movements and exports in October-November.

Raising profits in the long run requires investments not only into internal logistics but also into the creation of infrastructure in target markets. This implies coming to small-scale wholesale, even retail trade in grain, very nearly to sales in individual sacks. 

It is the period of low prices when this factor becomes hugely important. Margin of minor grain sales is much higher than when shipping 15-20-40 KMT cargoes – this will allow compensating for costs of setting up networks. This approach guarantees high competitiveness in the long run. The prospects for grain crop growth and consequently for higher grain exports are now dim due to decreased investments. Increasing investments are coming to South American countries – this implies severe competition with Argentina and Brazil in the Asian markets in as soon as 2-3 years.

 

UkrAgroConsult:          Is Ukrainian agri market ready to face new economic challenges?  

Sergey Feofilov:        What do we see now in Ukraine’s market? Low grain prices with surging input costs, expensive logistics, a weak financial sector and vague consequences of opening the land market. 

In answer to this question it is necessary to give up the ostrich attitude, i.e. to stop believing that all the problems will go away themselves. We consider the internal logistics constraints from the viewpoint of an expanding share of marketing costs and shrinking farmer revenues. It needs to be taken into account that farmer profits are presently the main source of investments in agricultural production. In the current conditions, development of the following chain is likely: “a fall in farmer margin – a fall in investments – a fall in crop cultivation performance – growth of grain prices – weakening competitiveness.”  

Or the grain market, which is often regarded as nearly a panacea for all of the agricultural sector’s problems.   Our latest study indicates that the land market will encourage, first of all, mergers and acquisitions of companies with the formation of large agricultural monopolies in Ukraine. 

Of course, we have good news as well. In the vegoil extraction sector, a rise is seen in exports of branded products to Europe, but these are foreign local European brands. The lack of Ukrainian brands exceptionally complicates development of positive communication between Ukraine’s growers/food industry and the millions of potential consumers of finished foods bought exactly in our country. Effective communication will allow promoting own national brands and own standards, as well as raising sales and profits. Playing away implies cementing the lag and depending on somebody else’s rather tough regulation. Unfolding of this trend is quite probable within the framework of developing bilateral relations and regionalization.

 

UkrAgroConsult:          In conclusion, it would be good to hear your forecasts for 2017.

Sergey Feofilov:        This year, Ukraine’s economy, including its agricultural sector, continues following the inertial scenario of development. Falling company revenues and further devaluation may lead to depreciation of even those investments that barely suffice for maintaining stable grain and oilseed production. Hopefully, restoration of confidence between farmers and banking sector of Ukraine will begin.

Probable scenarios suggest that Ukraine will continue to be a commodity market player. The most important trend of this market is formation of global raw material monopolies, similar to ongoing developments in the crude oil market. By the way, it is the agreement of major oil producing countries on output volumes that substantially boosted oil prices.

Opening the land market is possible in 2018. The consequences will include much more active mergers and acquisitions of agricultural companies and this process will not be always transparent.   

The market will become increasingly transparent and the requirements to effective corporate management will get stricter. First of all, this generates additional demand for effective information support.

Grain harvest is likely to be within 60-65 MMT, entailing keener competition in world markets and impairing liquidity of Ukrainian grain.

Logistics problems will not be that acute, but they will still remain a limiting factor both for investments and competitiveness of Ukrainian grain. Stabilization and growth of exports from Ukraine and the overall Black Sea region will require new grain and oilseed quality control tools.

Commodity market prices will remain as low as in 2014-2016. Price fluctuations are possible, but these will be short-term processes. We forecast a return to previous low price levels even after any serious natural calamities (God forbid such events to everyone) due to abundant grain reserves, slow growth of consumption and a possible rapid gain in agricultural production.

Certainly, the events to happen in February-July may and will adjust and modify this forecast. We’ll check its reliability in a year in our next interview.

 

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