A working investment model: On what conditions business is ready to invest in the agricultural sector

According to FAO, the total value of fixed assets in the Ukrainian agricultural sector, including the processing sector, is estimated at US$29 billion.

According to the Ukrainian official statistics, the volume of investments has increased almost fivefold over the past 10 years – from UAH 11.6 billion in 2010 up to UAH 49.1 billion in 2021. At the same time, investments in US dollars at different periods of time amounted to about US$1-2 billion per year, Iaroslav Serputko, Head of Food Processing and Agriculture Industry Group at Deloitte Ukraine said in a commentary to AgroPortal.ua.

According to him, the volume of investments was affected by various factors such as the country’s macroeconomic indicators, production profitability, political risks, expectations concerning the land market opening, the pandemic, etc.

Iaroslav Serputko, Head of Food Processing and Agriculture Industry Group at Deloitte Ukraine

The lion’s share (almost 80%) of investment resources in 2021 was allocated to the production of annual and perennial crops (i.e. the most profitable types of activities and with a relatively fast turnover of funds). However, only 14% of resources were invested in livestock sector.

An extraordinary in terms of profitability year of 2021 due to the pandemic-driven deferred demand in 2020 promised some new investment records in 2022. However, Russia’s full-scale invasion of Ukraine has dramatically changed the business priorities.

Deloitte identifies a number of challenges faced by agricultural companies such as occupation of territories, mined fields, physical destruction of assets, unprecedented logistics challenges, huge difference between the domestic and international grain prices, disparity between the official and market exchange rates, mobilization of employees, record-high energy prices, and other issues.

Iaroslav Serputko, Head of Food Processing and Agriculture Industry Group at Deloitte Ukraine

However, just a few months after adapting business processes to the new realities, companies and their owners returned to the issue of updating investment planning. Although the access to statistics is currently limited, it can be assumed that the total amount of investments in the agricultural sector in 2022 correlates with a decrease in the country’s GDP.

The Ukrainian Agribusiness Club (UCAB) added that most of investments that have already been made or are currently planned are investments by domestic private investors who are trying to optimize their business, pursue certain opportunities, or avoid threats.

According to the UCAB CEO Roman Slastion, logistics was the main area of investment for companies to ensure exports and to expand the ability of other Ukrainian agricultural producers to access global consumers. Another sector for investment was processing, with a main focus on biofuels and biogas, and some interest in bioethanol, including the acquisition of distilleries that have not yet been sold off after the large-scale privatization of Ukrspirt’s enterprises.

As for the land, the UCAB says that there is no serious investment today, as agricultural enterprises and producers cannot buy land due to a lack of financial resources, while the landowners are not willing to sell it at a reduced price.

Roman Slastion, UCAB CEO

Many foreign investors are interested in buying agrarian enterprises in Ukraine or other agricultural assets, but most of them are ready to consider this option after the war is over and Ukraine has won.

Still, some foreign companies are sending a clear signal to international businesses that it is worth investing in the Ukrainian economy without waiting for the active phase of the war to end. For example, Nestlé has announced that it will concentrate its European production of instant noodles in Ukraine.

In general, BlackRock Continental Europe indicates that Ukraine expects its post-war financing needs to reach US$350-750 billion by 2032, much of it to be used for restoration, reconstruction, and modernization. According to the Ministry of Finance, BlackRock intends to create a special fund in Ukraine to attract foreign investment.

Marc Bubeck, Head of Corporate Communications Continental Europe at BlackRock

BlackRock does not profit from providing advisory services to Ukraine and supports it on a pro bono basis. BlackRock intends to use the funds raised to help Ukraine to rebuild its agricultural, energy, manufacturing, information technology, and infrastructure sectors.

The experts believe that Ukraine’s cooperation with the company can be built on the principles of public-private partnership.

The International Finance Corporation (IFC) is also ready to support the Ukrainian agri-food sector. It has already invested more than US$150 million in the Ukrainian economy since the beginning of the full-scale invasion and plans to provide financial assistance of US$2 billion.

Olena Voloshyna, Head of IFC in Ukraine

Today we are doing our homework, convincing donors that the private sector of Ukraine, which generated 70% of GDP before the war, needs support. We are developing appropriate tools and are ready to offer them to businesses. Investments will be provided in partnership with donor countries.

At the same time, Roman Slastion adds that the most effective model today is the one where the majority of investments are domestic, sometimes with an involvement of credit resources from abroad.

Three examples

The Danish Investment Fund has launched a social program for Ukraine totaling DKK 1 billion, which is approximately US$133 million. The funding has already been approved for two pilot projects in the agricultural and agro-processing sectors. This refers to the affected companies in the southern region of Ukraine – NIBULON, which will receive a €25 million loan, and Agrofusion, which will receive a €15 million loan. Loans will also be provided to the agricultural companies located near the front line in Mykolaiv, which will be engaged in restoring the destroyed production facilities by purchasing equipment from Danish exporters.

Epicentr announced that its investment plans for 2023-2025 envisage an investment of up to US$1.9 billion in the Ukrainian economy. Epicenter K’s CEO Petro Mykhailyshyn has clarified that the plans include not only the development of retail, but also the production, which will become the basis for increasing export revenues in the future. “Epicentr plans to invest in the construction of agro-industrial parks, reconstruction of elevators, construction of new production workshops, expansion of the agricultural machinery fleet, and strengthening of logistics capacities. We aim to improve our own efficiency by setting up processing plants and producing value-added products,” stated the company’s press service.

Kernel Holding plans to continue investing in its facilities in the Reni port, which was acquired in early spring. The company plans to raise investments through the USAID Agriculture Sustainability Initiative. Overall, US$8 million will be received from the USAID and more than US$36 million – from three Ukrainian business partners. According to Kernel’s forecasts, the joint financing will increase grain transportation capacity by 3.35 million tons per year. Kernel CEO Yevhen Osipov noted that the company also continues to develop green energy, including providing all plants with uninterrupted power supply, with the surplus being fed into the grid. According to him, Kernel’s investment program in the pre-war years amounted to more than US$800 million.

At the same time, Iaroslav Serputko, Head of Food Processing and Agriculture Industry Group at Deloitte Ukraine, speaking about investment projects after the start of the full-scale invasion, divides them into several areas.

Logistics related projects

Due to the restricted operation of the Black Sea deepwater ports, many players have invested in alternative transportation routes. In addition to Kernel, NIBULON invested US$15.5 million to develop the facilities for transshipment of grain from rail and road transport to the river with further delivery to the Romanian seaport of Constanta.

Energy efficiency and energy independence projects

These include additional power generators to ensure the continuity of production during power blackouts, replacement of expensive natural gas by pellet dryers, biomethane production, etc. As for the latter, it is expected that five biomethane plants will open in Ukraine in 2023. So far, more than 10 companies have applied to the Gas Transmission System Operator of Ukraine (GTSOU), which are considering the construction of the 31st biomethane plant with a capacity of 225 million cubic meters per year.

Greenfield projects related to raw material processing

Although the margin on processing usually does not exceed 5-7%, and the project payback period is 7-10 years, some players believe in the prospects of this sector. For example, Eridon has resumed construction of a corn processing plant. According to the public announcements, the company plans to enter the market with its product by the end of 2023. The plant’s capacity, according to the owner, is expected to reach about 350 tons of corn per day. The main products will be L-lysine sulfate 70%, gluten, fiber, and germ. Another example is TERRA, a Ukrainian producer of cereals and flakes. The company announced the construction of a plant in western Ukraine that is expected to process 300 thousand tons of raw materials per year. In addition to the usual range of cereals, flour, flakes and instant soups, the company is going to launch a buckwheat line and a corn processing line. The new plant will cost approximately US$20 million to build.

Privatization of existing state-owned enterprises

According to the State Property Fund of Ukraine, since the resumption of small-scale privatization in September 2022, more than UAH 1.24 billion in private investment in agricultural assets has been attracted, which is more than 40% of all investments raised through the privatization auctions. Distilleries were in the highest demand, accounting for five of the most expensive agricultural assets. As for the plans for 2023, the State Property Fund intends to find private investors for more than 28 distilleries capable of producing potable and methyl alcohol, as well as bioethanol.

Iaroslav Serputko, Head of Food Processing and Agriculture Industry Group at Deloitte Ukraine

In addition to investing in Ukrainian companies, owners of large agribusinesses are considering buying or setting up enterprises abroad, as well as developing existing assets in other countries to ensure geographic diversification of their business. For example, in its annual report for 2022, MHP, a leading agricultural holding, cited additional investments in the expansion and modernization of its production assets (Perutnina Ptuj) in the Balkan Peninsula as one of the reasons for a 12% increase in capital investments.

Although the market participants agree that it is hard to talk about the investment attractiveness of the country’s agricultural sector today, it has demonstrated that it is a fairly resilient sector of the Ukrainian economy even during the war.

Source: AgroPortal.ua