Expert: Investors no longer believe fairytales about Ukrainian agriculture

Dr. Alex Lissitsa

Kyiv Post | 11 October 2010

by John Marone

Following the global financial crisis of 2008, the once golden eggs of the emerging Ukrainian market – real estate, retail and banking – remain cracked, soiled and reeking with debt.

At the same time, in a world of increasingly inclement weather and billions of mouths to feed, the country’s agriculture sector has come to command center stage among foreign investors eager to get in on growth.

Yet, despite a few well-publicized share offerings on European exchanges, and some high-profile mergers and acquisitions, this year’s expected boom has still not boomed.

Alex Lissitsa, president of the Kyiv-based agricultural lobby Ukrainian Agribusiness Club, grew up in a Ukrainian village before studying agriculture in the West.

Lissitsa told the Kyiv Post in a recent interview that foreign investors are already knee deep in Ukrainian agriculture, with full or partial stakes in around half of the country’s top 60 agricultural holdings.

But the road ahead toward greater consolidation and increased export presents several challenges, such as still-cautious equity markets and more questions than answers about Ukraine’s expected cancellation of the country’s ban on the sale of agricultural land.

KP: The Ukrainian parliament has repeatedly renewed the country's moratorium on the sale of agricultural land on a yearly basis, although many expect the moratorium to finally be lifted in 2011, when it comes up for renewal again. Large international agribusiness companies have said they welcome the end to the moratorium, but you have said you are concerned. Why? What are these concerns? And what needs to be done to allay them?

AL: It’s not so important that Ukraine will have a land market, but what kind of land market it will be. Right now, it’s a black box, and no one knows what’s inside. For example, will it be possible for legal entities or only physical entities to buy land? What will be the limit on the maximum size of land use? Who will have legal advantage in a purchase? Will it be obligatory to sell land via a state bank, or will this be possible on the free market? How will it be possible to combat parcelization of land plots? Will a minimum price on land be set? There are a lot of such questions, but the seven draft laws on the land market that have been written up over the last three years offer different answers to these questions.

From the point of view of business interests, it’s important that the decisions taken are not only sufficient but also predictable for the mid-term. Otherwise, it will be difficult for a real business to operate. Only land speculators will win, which is also a big problem. For now, the whole process of introducing a land market looks more like a slogans’ competition than a well thought out economic strategy. The inevitability, however, of introducing a land market is becoming clearer every year.

KP: What about market consolidation in the sector? Are foreign companies also getting involved in the consolidation or can we expect them to wait until the sector is already consolidated before investing? Are smaller farms being gobbled up because they lack, for instance, storage facilities, or will some survive consolidation?

AL: Consolidation in the agricultural sector is an established fact. Holdings are increasing their presence, with 60 companies cultivating more than four million hectares of land. Half of these are fully or partially owned by foreign capital. For example, these are companies that have done IPOs (initial public offerings of company shares). Foreign capital is quite interested in Ukrainian assets, so it would be senseless to wait for the consolidation process to end when no opportunities for creating new agro companies will remain on the market and when an entry ticket in the form of the purchase of an already existing business could become more expensive.

Regarding small farms, their prospects are clear. Of course, we have examples of farming companies turning into large holdings over the years, but such precedents are few. It’s not just a matter of the presence of storage facilities, processing potential, sales or access to finance. Simple calculations show that it’s not profitable to grow grain in areas of less than 3,000 to 4,000 hectares, because you cannot cover the costs of modern equipment and technology in a reasonable amount of time. And without these things, you cannot be competitive. Therefore, small companies will fall into niche production of things like vegetables.

KP: Some large Ukrainian agribusiness players, such as Avangard and Nibulon, are placing their bets on export. What are Ukraine's chances of becoming a serious global food exporter? I know it's already a big grain and seed-oil exporter, but is there tension between those who want Ukraine to export finished food products and those who want to export more grain, seed oil and other raw food? Is government hampering the latter, for example, by bans on exports? Is export of food Ukraine's future?

AL: It’s clear to everyone in the world and Ukraine that Ukraine’s potential allows it not only to cover its domestic needs but to export significant volumes of agricultural products. Consolidation of the export business with production continues afoot. But this is just one of the ways toward vertical integration. Some companies are getting the most added value from the domestic market. As regards the structure of export, buyers on the world market prefer to buy raw [agricultural] materials rather than finished [food] products. This is a fact. For example, the global market for wheat is a lot higher than the global market for flour.

Of course, we need to think about how to export products with a high added value, but it’s more important not to lose the markets of food production that we already have. For example, in free-trade talks with the European Union, the Europeans insist on the cancellation of export tariffs on [Ukrainian] sunflower seeds. This would make us into a supplier of raw materials for European sunflower seed oil makers. So, Ukrainian negotiators have to expend maximum effort toward maintaining these tariffs. As regards limits on export: First of all, they are restricted by our obligations as members of the World Trade Organization. But on the other hand, the depth of our country’s economic policy doesn’t allow one to hope that the government will somehow modernize the structure of export.

KP: Lastly, we have seen some IPO activity this year, but we were promised a lot more. What is holding up more IPOs by Ukrainian companies in Europe – bad market conditions?

AL: Over the past two or three years, there have been significant country risks and a crisis. When there were serious discussions about whether the hryvnia would collapse, or when one of branch of executive authority blocked the other, it was difficult to explain to investors that Ukraine was a country to invest in. As a results Ukrainian assets were undervalued. I cannot say now that everything is ideal, but at least the edge has been taken off these and other problems. In addition, food prices have risen. Therefore, we expect the investment attractiveness of Ukrainian agro companies on world capital markets to rise in the next couple of years. Without a doubt, a lot depends on the companies themselves. The days when one could tell investors fairytales about Ukrainian agriculture are long gone.

Kyiv Post staff writer John Marone can be reached at [email protected]
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