Sergey Feofilov: Was the crop year of 2017 a year of the great turn in Ukraine? Forecast for 2018

17.01.2018

Traditionally, December is a time for new forecasts and summing up the year. We believe the estimates and expectations for 2018 from Sergey Feofilov, the founder and Director General of UkrAgroConsult Company, Ph.D. in Economics will be of interest to our colleagues and readers.

UkrAgroConsult: To what extent your forecasts for 2017 have come true? Tell us about features of the past year of 2017 and trends of the coming year of 2018.

Sergey Feofilov: Most of the expectations for 2017 have come true (the full text of the forecast can be seen here). In particular, my forecast about a turning point in 2017 has come fully true. It is the current year of 2017 when fundamentally new trends have taken shape.

First of all, noteworthy is further drastic decline in crop production margins. The entire market focused its attention on taxation of the agricultural sector. This includes automatic VAT refunds to exporters, abolition of preferential taxation for agricultural companies early in the year, and cancellation of VAT refunds to exporters of key oilseeds late in the year.

This confirms the absence of transparent agricultural development strategies, critical instability of legislation and a growing share of the uncontrolled market.

Far not everyone is aware of the consequences and scale of the changes that started in 2017, which was, so to speak, a year of the great turn. The agricultural sector has not yet fully realized the main consequences of the 2017 tax system changes.

UkrAgroConsult:     Ukrainian growers have been harvesting bumper crops for a third year now. Will this trend continue in the coming year of 2018? What is the price of these records? Who paid for such rich crops?

The 2018 crop will most likely be at 60-65 MMT with grain exports at 39-43 MMT. GDP growth will approximate 2%, though this actually means stagnation of the economy. Prices in the global commodity markets will slightly fluctuate at low levels. A number of major projects for expanding grain handling capacities will be completed at Ukraine’s ports.

The cropping pattern will be arranged on the basis of crop margins.

Ukraine’s agriculture has achieved unprecedented results, primarily due to application of advanced technologies. However, any technologies are expensive, and farmers, agricultural companies paid for them from their own earnings, out of pocket, because Ukraine’s banking sector has just begun to recover. But incomes have been sinking for a second year in a row and, we forecast, profitability will not improve in 2018 either. 

In addition, the financial issues were aggravated by extremely insignificant government support to growers along with rising prices for input supplies. Therefore, only companies that have realized on time how the profit factors and access to finance are important and adapted their growth strategy to the long-term low-price trend will be successful in the coming 2-4 years.

It will be possible to enhance competitiveness on the basis of still wider use of advanced farming practices. This will inevitably increase attention to financing, bank crediting of the production and larger investments into growing and processing operations.

UkrAgroConsult: What key events or turning points of 2018 you can forecast already now?

I would like to dwell on a logistics forecast. Businesses are increasingly aware of the fact that traders cannot move grain as of old, and carriers are not ready to respond to exporters’ requirements in full.

That significant increase in the cost of inland grain movements literally forces market participants to look for alternative ways for developing their business. 

I am sure that the majority of exporters do not realize that underdeveloped inland logistics could make direct export less profitable than local processing.

UkrAgroConsult has for a long time emphasized in its studies that products with high added value are highly profitable. We’ll see new investments in Ukrainian processing of raw materials in 2018.

Another consequence of the logistics deadlock will be growth of investment in rolling stock, locomotives, grain storage (briefly speaking, in inland infrastructure) that will also be a turning point in the coming year of 2018. 

I don’t think the opening of the land market will be a key event of 2018 or even 2019. However, this will depend on political factors rather than on economic ones.

It can be said with certainty that opening the land market would entail, apart from other economic consequences, further growth of production costs. It will take at least 3-5-7 years to get adapted to the land market. This will be a period of the highest risks for companies of any size.

After the close of this period, we predict the next surge in yields and exports to occur in 2024-2027, when the crop may reach 75-80 MMT with commodity exports exceeding 55 MMT.

UkrAgroConsult: And our traditional question concerns new trends in the consulting market

Sergey Feofilov: Yes, I noted in my annual forecast in December 2016 that demand for quality analytics would increase. This continues this year and, I hope it will keep on in 2018, too. We have noticed that new demand is generated primarily by novices and representatives of related branches of Ukraine’s economy. Remarkably, the novices come both from absolutely different businesses and related agricultural sub-sectors.

Of course, the development factors change constantly and agricultural companies can by no means be effective without paying special attention to long-term aspects of their business. This can be achieved by using new tools for processing a huge number of factors. UkrAgroConsult has made a big step toward this goal by offering the market a principally new analytical platform named AgriSupp. We have got a number of positive feedbacks on this product confirming that our strategy is correct.

 

UkrAgroConsult

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