Milling and Grain attended a recent webinar as presented by the Department for International Trade in November 2017. Here she writes up the presentation looking at "Agriculture: Opportunities for UK companies in Ukraine"
by Laura Clark, Milling and Grain
Ukraine, a country inhabited in its modern state since 32,000BC, has a long history of grain production. The opportunities for export for contemporary Britain are numerous. From February 21-23, 2018 the Department of International Trade will be hosting their annual conference in Kyiv, at the International Exhibition Center, 15, Broavskiy Ave. The exhibition will present UK nationals the chance to initiate new business ventures with potential Ukrainian clients. Cathy Cottrell from the British Embassy in Kyiv, Ganna Drozd (DIT) and Chris Jackson from UK TAG (Technology for Agriculture and Genetics) discuss the possibilities.
Doing business in Ukraine – A few key facts
Cathy Cottrell, (First Secretary Energy Policy and Head of Commercial Section) British Embassy, Kyiv
"The Ukrainian market is a large developed market, there are five cities with more than a million people and there"s a highly educated work force here with low labour cost. Ukraine has a strategic location between Europe and Asia, with access to black sea ports. Aside from being a world leader in agriculture there"s a broad (if aging) industrial base here and significant natural resources including oil, gas and coal.
"Yes there are issues, there is political instability, Russia"s illegal annexation of Crimea and the conflict in Eastern Ukraine; other challenges include the dominance of inefficient state enterprises, corruption and over-regulation. However, the Ukrainian government has since implemented a number of reforms to address structural imbalances, we have seen the establishment of the anti-corruption agency and a business ombudsman and the strong support from the donor community here. So although the last few years have seen macroeconomic and political challenges, the economy is returning to growth.
Economy
Growth in global prices for agriculture and steel commodities is giving a boost. There"s been a growth in investment in fixed assets, 23.7 percent year on year and an increase in consumption. We"re seeing an increase in consumer confidence and positive feedback from UK companies; industrial production recovered by 1.2 percent year -on-year in August. Substantial growth in machine building and construction, suggest investments remain strong.
Although the Ukraine parliament satisfied the IMS with the adoption of the long awaited pension reforms in October, there are other requirements, for example: adjustment of gas prices; establishment of an anti-corruption court; an acceleration of the privatisation of state owned enterprises.
Ukraine will have to reach agreements on these in order to pass the next review and to secure a fifth loan tranche; this is feasible, although difficult politically. Elections in 2019, although they seem a long way off are very much on peoples minds and the government have a tendency to avoid difficult but necessary economic policies; further reforms are necessary to secure higher levels of international investment.
UK exports to Ukraine were up 24 percent in 2016, around 374 millions pounds and the UK is the sixth largest investor in Ukraine. Some of the major companies, present on the market include: GSK; AstraZeneca; Crown Agents; Vodafone; Shell; Mott MacDonald. It"s also important to note that Ukraine is a political and trade priority for the UK.
The EU-Ukraine association agreement (DCFTA free trade agreement) are among the initial set of four EU third country agreements being explored for transition to a bilateral UK agreement. Ukraine remains a very important market for us."
Overview of Ukrainian agriculture
Ganna Drozd, (Development Advisor) Department of International Trade
"With over 42 million hectors of agricultural land, covering 70 percent of the overall territory, Ukraine is the largest country in Europe by area of arable land per capita. Although Ukraine has been going through a difficult economic and political time lately, the agricultural sector has been less affected than other sectors of the economy and continues to develop; with 11 percent of GDP and 42 percent of Ukrainian exports in 2016, the agricultural sector is one of the priorities of the current Ukrainian government. It is also the only sector with no signs of decline in 2014, 2016 and is a major agricultural producer worldwide.
In 2016 Ukraine again set a record for grain output, harvesting 66 million tonnes of grain crops, which is six million tonnes more than in 2015. By 2020, Ukraine"s grain production will reach 70-75 million tonnes a year.
As regards livestock it is false to note, that cattle breeding and poultry farming in Ukraine follow different dynamics; poultry remains a locomotive of the Ukrainian livestock industry.
The two biggest poultry meat producers and four main players in the agricultural industry account for 70 percent of production of both sectors, turning eggs and poultry meat into major export product of animal origin. Pork production and trade were hindered by low prices in 2015 and 2016, as well as by the spread of African swine fever.
In general, market players in pork breeding invest in productivity and bio-security, while less efficient farms, of course, go out of business. With a herd of nearly two million cows and annual milk production of 10 million tonnes, their industry remains an important sector of Ukraine"s economy, despite the fact that it sees a contraction of cattle numbers.
Up to today, rural households continue to be the main milk producers, but large Ukrainian farms invest, expand their capacities and increase their milk production. High milk prices in 2017 have created a favourable economic climate, allowing agricultural producers to retain their cattle.
Over the last year, a greater political stability, a much stronger economy, of course record setting increases in agricultural output, a more stable local currency and delayed demands, enabled and encouraged Ukrainian farmers to resume the capital investments, including in agricultural equipment. Capital investment in agriculture grew from one billion US dollars in 2015 to 1.7 billion in 2016, the highest growth during the last 19 years.
The agricultural share in the total investment volume steadily grew from 6.1 in 2012 to 13.8 percent in 2016. Despite this, the access to finance is restricting agricultural development of companies; domestic loans are expensive and Ukraine"s challenging business climate prevents local companies from attracting cheaper international funds. Therefore the competition among foreign suppliers of agricultural machinery in Ukraine is not only about the quality of the machinery, but is also about supplier"s financial terms.
Opportunities in the Agri sector
Import of farm machinery and equipment increased two times in 2016 compared to 2015, returning to 2013 levels, which is huge progress for the sector.
In 2017 the trend of increased imports continued since the demand for quality machinery and equipment is not saturated yet. According to different estimations, the agri producers are equipped with machinery for 50-70 percent; approximately 35 percent of machinery is considered today, outdated. This represents a significant opportunity for British manufacturers.
However, British companies envisaging entering into the Ukrainian market should also be aware of the competitive landscape. For example, American and other European manufacturers are selling widely in the Ukrainian market; competition is particularly fierce for tractors and harvesters. Competition from the European suppliers is likely to increase for a variety of reasons, including the DCFTA, which is a deep and comprehensive free trade agreement, part of Ukraine"s European association agreement – since it includes the removal of customs tariffs and quarters. As well as the homogenisation of laws and regulations in various sectors and it has already taken place in the agricultural sector.
Opportunities in livestock
Large Ukrainian farmers have expanded their production facilities some time ago and now main opportunities for UK businesses are increasing productivity of cattle, through quality genetics; in animal feed solutions and in upgrading the data equipment and antiquated technologies that are used today; increasing efficiency of the waste recovery process at abattoirs and of course, in processing and cold chain and storage facilities.
Opportunities in the agri-chemicals sector
The year 2016 set a record in mineral fertilisers import to Ukraine; import of this product demonstrated a growth of 48 percent. This trend is due to agricultural intensification, which turns Ukrainian market into a premium one, even in comparison with the European market. In Ukraine, according to some experts, farmers use three times less fertilisers than in the European union.
This means that in the long term this market would grow by approximately 60 percent. In 2016 import value of crop protection product exceeded the before crisis level and totaled almost 800 million US dollars; herbicides were the fastest growing segments. This increase in imports was caused by the weather conditions, which were favourable to the spread of disease and plant pests.
While Ukraine has improved it"s ranking in terms of logistics performance, the availability and quality of its physical infrastructure, including transportation and storage remain inadequate. Given the absence of low quality storage, Ukraine loses 15-25 percent of its harvest annually.
If you look at the figures on the table you will see the effort that needs to be made to store the increasing harvest output. Despite an impressive increase of private investment in grain storage facilities that we have observed in the last couple of years, further investments would be needed to meet the future needs for storage and to almost double the existing capacity by 2020.
Since Ukraine is an export-orientated country, it has already made an effort to develop, not only storage but also transshipment capacities as well. The transshipment capacities for grain are sufficient at the moment, that is why the competition is quite strong in the market and operators are forced to review tariffs.
However the capacity to transport, load and reload grain would need to be increased by around 50 percent to meet the future demands, again by 2020.
Top-10 Ukrainian agro holdings, according to their landbank size
The landbank size of these top-10 agro companies varies from almost 700 thousand hectares to 100 thousand hectares; in terms of numbers there are another approximately 20 companies with landbank size from 100,000-500,000 hectares and again approximately some 70 companies with a landbank that goes from from 50,000 hectares to 15,000 hectares, so the landbank of these companies is very important, on the European level but again when comparing with UK farms as well.
In most cases the biggest agroholdings in Ukraine are vertically integrated, some agroholdings demonstrate backward vertical integration when they control subsidiaries that produce some of the inputs used in their production, for example seeds or agro-chemicals and of course there are also agroholdings with forward vertical integration and these companies control distribution centres, for example they own machinery distributors or have their retail chains and can also trade overseas. Some companies have opted for a more complicated integration, meaning that they include both forward and background vertical integration. Normally, the bigger the landbank size, vertically, the more integrated the company is.
Key opportunities and areas for investment in the sector for UK businesses
• Innovative technologies in agricultural machinery
• Storage and transshipment
• Project consultancy for agroholdings, medium and big farms
• Crop protection products
• Agri-chemicals
• Biogas and biomass (handful of opportunities – some projects in place/about to be launched)
• Animal genetics and animal feeds (a priority for farmers and government, who provide subsidies for farmers)
• Organic agriculture (Ukraine holds more than 400,000 hectares of organic land, suitable for organic agriculture, of course the organic agriculture products are mostly oriented to export for the internal demand).
Grain and sugar infrastructure – Challenges
Of course we don"t want to paint too rosy a picture; there are a number of challenges in the Ukrainian market: the political situation, currency devaluation, corruption, a bit of excessive bureaucracy sometimes.
Agriculture is a risky investment itself, climate and weather conditions, volatility of commodity prices on the world market and as a result some problematic access to finance for agri producers in Ukraine. The bank interest rates are often climbing up to 20 percent for local producers and it is somewhat a challenge for them to attract international investment. One more thing worth mentioning is the land sale moratorium; it has been in place in Ukraine since 2001 and it was recently extended until January 2018. It is likely to be listed next year albeit probably not in January. Right now fewer than 90 percent of agricultural land is under moratorium and currently the agricultural producers rent lands on medium and long term lease. The current land lease rate is less than US$40 per hectare, making it the cheapest in the world.
Funding for overseas export – "Trade Show Access Programme"
Chris Jackson, (Export Director) UK TAG
UK TAG (Technology for Agriculture and Genetics) is a trade organisation, which works with the Department of International Trade to help companies to export. They are a part of The British Pig Association, now an accredited Trade Organisation and Trade Challenge Partner.
"We formed it to better represent our broader interests, specialising in livestock and anybody involved in the agri-tech industry," explained Mr Jackson.
"A not for profit charitable trust is behind us, so we are in the job to help companies to export and expand their businesses. The DIT Trade Show Access Programme, commonly called TAP, is a programme that helps companies go to exhibitions overseas.
"It has some limitations now, in that companies can only apply for six grants under this scheme in their lifetime to anywhere in the world, which is a major downside to it; you must also attend the show and pay for a minimum of 4 m2 of stand space in order to qualify for a grant. To help small companies access the markets we organise and in this case, work with the British Embassy on their pavilion."
He continues, "We take a space at an exhibition and then we can sub-divide it up; we have to make a charge for that and in this instance the charge will be £800 to have a presence at the show. The grant for this exhibition, this year is set at £2000 so NET you have £1200, but you do have your own stand space within the pavilion."
"To be eligible, there are restrictions. It is a scheme that is only open to small and medium sized enterprises. So far, in 20 years, I think I"ve only found maybe some of the big machinery companies, JCB for sure are not eligible, they"re far too big, so for small and medium size enterprises apart from JCB and one of our major feed companies, everyone else I have dealt with has qualified for the scheme. You have to be a company registered in the UK, but now we can have companies that are registered overseas but they have to be in production in the UK, with UK management.
"You need to be New to Export to begin with, you don"t have to be brand new, you can be exporting. New to Export is proactive, which means you go out there and get the orders, rather than the orders come to you. So mostly people can qualify on that, I don"t have a problem with that usually.
The definition is stated: you have to have less than 250 employees; an annual turnover not exceeding 50 million euros; educational establishments, universities and any training establishments have a right to access the programme.
"It is a fairly simple scheme and it is not difficult to apply for funding either; we have a set of forms that we have to fill in, with a little bit about the company.
"Nowadays, the way the scheme has evolved as the Trade Challenge Partner responsible for this sector, it is left to myself and my colleagues to deem whether you are a suitable company to export, so a conversation with me would usually decide whether you are eligible for funding; once we"ve got to that point then the funding is paid, after the event, after we"ve signed off a document that says you have attended the exhibition and everything worked out OK for you. After I"ve signed that off, I send the claim form on your behalf in to the government; who then pay me and as soon as we"ve got the money from them, we pay you. So it is all fairly painless and it is a very worthwhile scheme to get small companies into market place."
He summarises, "There is for this exhibition and for all exhibitions, another downside to this in that we are only allocated so many grants per exhibition. For this exhibition I have been allocated nine grants; so the first nine companies that apply will get funding. Three companies have already expressed interest in the show and it is a show that can yield very good, quick results. Ukraine is a country that want us to trade with them, so that makes life a lot easier."
Useful contacts
The Ministry of Agrarian Policy of Ukraine – check current legislation or projects – www.minagro.gov.ua
Ukrainian Agribusiness Club – one of the major associations that unites the biggest agroholdings in Ukraine, they could provide you with some analytics as well and an overview of the agricultural sector – www.ucab.ua
Baker Tilly Ukraine – a British consultancy, who offer a wide range of services. www.bakertilly.ua
Latifundist Media – one of the major media holdings, a resource for updates on the Ukrainian agriculture sector, latest news and projects – www.latifundist.com
Department of International Trade – ganna.drozd@fco.gov.uk
Chris Jackson, who attended the Grain Tech last year with a group of companies, was full of praise for the event: "it is a very well organised event, with good customer contacts; we also have a very enthusiastic team at the Embassy in Ukraine, who are there to help us practically to make contacts. I think this event in Ukraine is one of the shows that I would put a "must attend" during the year."
Question time
At the end of the webinar the floor was opened up for those attending to ask questions. The following is those questions and answers:
I want to sell into the Ukrainian market, how should I proceed?
As answered by Ganna Drozd
Regarding selling into the Ukrainian market, of course, for British companies it would be easier to sell the equipment and machinery to local distributers, rather than to end users. This is because distributors have local exposure, meaning they know who needs the products and most importantly who can pay for it.
Also, a local distributor may handle customs clearance, tax payments and of course certification procedures. Distributors also have original presence, meaning that they can arrange the demand for spare parts and repair services very quickly. You can of course sell your products to big agroholdings that often have their own import/export departments; these departments are experienced in these procedures and in importing machinery and equipment directly.
However, they will import directly only if it is economically wise and if they costs are justified; interacting with manufacturers (check) allows them to avoid distributors margins and to negotiate a direct price with the manufacturer. However, selling to agroholdings directly from abroad is rare and not without risks, so we would suggest you envisage the local distributors first.
What finance mechanisms are available to UK exporters to Ukraine?
As answered by Cathy Cottrell
There is or may be the possibility of UK export finance. Ukraine currently has a high OECD risk category, so the only projects currently eligible for UK export finance are ones that generate foreign currency reserves, so that would be non-payment risk insurance and perhaps supplier credit, which are likely to be considered. I think it"s important to say decisions are made on a case-by-case basis, so if this is of interest I would definitely encourage people to get in touch either with us or at the Embassy or UK Export Finance directly.
How does the import/export system work in Ukraine for animal feeds?
As answered by Ganna Drozd
There are a number of UK companies that already export animal feeds to Ukraine, the Ukrainian animal farmers prefer, when they have means, to buy overseas manufactured animal feed because of the quality and the reliable supply chain.
There are a number of Ukrainian manufacturers of animal feed in Ukraine, of course; however DIT are talking to a number of Ukrainian distributors that distribute UK manufactured animal feed. Despite the decreasing numbers of livestock (since 1990s) these segments of agriculture are still a priority for the government, especially the cattle; poultry is doing very well and the numbers are increasing.
But despite the sharp decrease of cattle and pig herds, these segments of livestock are still doing very well and there is a demand from Ukrainian farmers for quality produce, for quality feed.
Agriculture
OPPORTUNITIES FOR UK COMPANIES IN UKRAINE
INDUSTRY EVENTS
Agri Trade Show
Grain Tech/ Agro Animal Show/ Fruit, Vegetables and Logistics is the leading B2B agricultural trade fair in the Ukraine; the exhibition encompasses all sectors of agriculture and takes place in February 2018. The expo annually brings together over 500 exhibitors from over 20 countries and attracts over 15000 visitors from leading Ukrainian and international companies. The UK national pavillion, organised by the DIT, was the second largest stand, after Germany at Grain Tech 2017.
Last year more than 15 companies directly participated in the national pavilion: around five companies were exhibiting and more than 50 companies were present remotely through the catalogue. The DIT offers a range of free and chargeable services: B2B meetings with a list of financial partners and contacts; detailed and more ad hoc market research; specialised seminars and conferences.
There are a number turnkey and hassle free solutions offered by the DIT, which enable individuals to showcase their company and products at the event:
• Include a profile in the exhibitions catalogue
• Network with thousands of visitors
• Book a specially equipped meeting area to discuss business in more detail
• Register as a speaker at the agri business forum, to share you expertise
• Have a programme of meetings with potential customers pre-arranged
• Experience the benefits of the sponsorship opportunities
• Experience the advantages of DIT"s PR campaign
Chris Jackson, who attended the Grain Tech last year with a group of companies, was full of praise for the event, he commented, "It is a very well organised event, with good customer contacts; we also have a very enthusiastic team at the Embassy in Ukraine that are there to help us practically to make contacts. I think this event in Ukraine is one of the shows that I would put a must attend during the year."
LAMMA trade show
Last year, the DIT brought a large group of Ukrainian farmers to the LAMMA agricultural and machinery show, the UK"s leading farm machinery, equipment and services show. For 2018 they plan to bring a group of Ukrainian journalists to the show, to provide more visibility about UK equipment and machinery on the Ukrainian market.
Ganna Drozd commented, "We see there is a lack of knowledge from the Ukrainian farmers about the UK machinery. So, in addition to bringing buyers last year, we thought that we would go for giving more visibility to the UK agricultural machinery and equipment as a whole and bring a group of journalists, that will of course result in a series of publications about the UK companies at present at LAMMA. You"re very welcome to contact me if you want your company to be mentioned in these publications and if you are a participant in LAMMA we will make sure that we pass by stand and film or take an interview."
