Agribusiness: Pre-War Investment Horizon

How has the agribusiness changed in recent years? What main transformation stages would you single out?

Iaroslav Serputko: Until 2014, companies tended to amalgamate as much as possible and expanded their land bank; some of them were successfully listed on stock exchanges by, in the first place, raising funds through Eurobonds or by going public. However, not everyone passed the IPO test. Mriya's default appeared on everyone's lips internationally; however, this is not a rare case, sad to say. This significantly reduced the investment attractiveness of the sector in the eyes of foreign investors. In addition, events going on in the East of the country came as a heavy blow to asset valuations. Companies refused from growing extensively and focused on improving their operating models and internal processes, instead.

They evinced a taste for implementing innovations, which turned into a new trend. Telemetry, production process automation, experiments with different land cultivation methods have become common practice and scaled up. Apart from the need to handle production-related matters, large players focus on innovations, aiming to create a new image and make the industry more attractive for young people.

Agricultural holdings started their journey of altering their approach to interaction with local communities. I mean the social sphere in rural areas. Today, communities have eventually been recognized as a key stakeholder; therefore, companies quite often ask us for advice how to interact with this stakeholder more systematically and how to optimize their spendings on this cooperation.

In addition, agricultural holdings are rather active about matters related to education and make effort to bridge gaps still existing in the national agricultural education.

An interesting trend is now observed among small farms: they are more flexible and mobile, so they struggle to enter niche areas—they engage in production and supply of blueberries, asparagus, lavender, snails, and aquaculture.

Another trend is organic agriculture. We can already see quite large players with a high business development pace, who cultivate up to 15,000 hectares on certified land and export their goods to Europe.

The lifting of the moratorium on farmland transactions was undoubtedly the major event of recent years. Despite the effect on the economy not being significant so far, this paved the way for market liberalization.

Since you've mentioned the land market, when do you forecast we can we expect an influx of investors?

Iaroslav Serputko: All have their own understanding of the “influx”. The market in its current state operates at the level of individuals and is quite limited in its size. A certain point of growth may obviously be expected when legal entities will be able to participate in this market. For the time being, there exist certain restrictions for them, and they will be allowed to purchase agricultural land with the designated use “commercial agriculture” only from 2024.

At the same time, the purchase of land may be a profitable investment as it has a number of attractive prospects, including good liquidity, stable income in case of subleasing, and a certain protection from currency fluctuations. Also, there are advantages for operators who carry out their activities on the land—they will have an opportunity to predictably develop infrastructure projects without dependence on landlords' whims, they may start an irrigation service business safely investing money in new undertakings.

Apart from the land market, what other segments of the agricultural sector may attract investors today?

Iaroslav Serputko: In our communication with a number of large strategic players, they admitted that the current interest comes from Asia (South Korea, China) and the Middle East (UAE, Saudi Arabia). This is a matter of food security for these regions. Added to this is the fact that COVID-19 generated additional supply chain disruption risks and logistics-related issues, which stimulated these countries to step up their efforts in this direction. However, we can see that a number of projects are currently being kept on hold. This is chiefly due to current geopolitical risks existing in Ukraine. Players are still biding their time, and meanwhile they continue to study the market.

In terms of areas for investments, foreign strategic investors and large domestic agribusiness are not interested in niche areas, they will rather seek large export contracts. Save some minor experiments, they remain focused on traditional crops: grain and oilseeds. This is why it is important for them to develop the elevator network and port infrastructure.

Within the processing industry, compound feed is another segment, which attracts their attention.

All-in-all, investors demonstrate certain interest in short-term projects. From our experience, the planning horizon is 3–4 years; this is not only the payback period, but also the common period of project participation. Very few market players consider projects with a payback of 10 years—this is an exceptionally long horizon in modern realities. They usually invest in very short-term projects, mainly annual crops. In animal production, there is interest in relatively “fast” projects, such as, to name a few, turkey breeding and pig breeding.

Small and some medium-sized players realize that they stand a poor chance in competition with such large-scale production; therefore, they are more focused on niche segments. Now I am keeping an interested eye on some promising projects, for example, the opening of an aquafarm for the cultivation of tropical shrimps in Mykolaiv region; the owner boasts that his aquafarm is the largest in Europe.

Let me bring up an interesting aspect of the availability of funds. Nowadays, the implementation of projects that include ecological and social components is making headway. Institutional investors, such as EBRD and IFC, consider notable effects of the project on communities and the environment to be a must-have. Even domestic banks are already actively exploring this area, eagerly looking into green technologies and bioenergy. While Ukraine is only cutting its teeth in this domain, developed countries have already been into these practices for a long time.

To what extent do you think the agricultural business is involved in the implementation of sustainable development goals, and what obstacles do you see in this journey? What slows down the process?

Iaroslav Serputko: The analysis of news shows that the number of publications and mentions of sustainable development in agribusiness has grown enormously over the past year. There is a shift from words to actions—everyone has realized that the world is moving towards a low-carbon future. States create sustainable development strategies and action plans, set long-term goals. At this point, it is crucial to understand that Ukraine is not in isolation but exists in the international community regulated by the Paris Agreement; therefore, it has also made certain commitments. Given the structure of the national economy, the agricultural sector is an important element of this program.

Mechanisms to implement the program are already in place, and market players are becoming more and more concerned about the question: “What will happen next? How will the market for carbon credits operate? How will they trade, with or without a discount?” A typical company engaged in crop-growing, in addition to corn, sunflowers, and wheat, will be able to have an additional commodity in the form of reduced CO2 emissions, which can be traded. And, quite obviously, it will pave the grounds for a relevantly specialized market. I know certain Ukrainian players to have already dived into and be exploring this opportunity.

Most Ukrainian companies are still focused on certain aspects of sustainable development; however, they lack a top-to-bottom strategic vision on how to address and implement all aspects. There is a growing demand for the strategy, which makes it reasonable to expect dynamic changes very soon.

Export-oriented manufacturers must follow the European Green Deal and also meet the EU requirements. Are our farmers ready for this?

Iaroslav Serputko: This issue is quite new and understudied. Obviously, the EU is Ukraine's major trade partner, and this factor should definitely be given proper attention. Due to underfunding, our country's fertilizer and plant-protecting agent application rates are objectively lower in than those in Europe, meaning that it will be easier for us to adapt to new requirements. However, that is a bunch of issues that need legislative regulation. This particularly concerns the certification for new chemical products and substances, as well as the strategy for organic agriculture development.

Has Ukraine managed wash off the “raw material appendage of Europe” black spot? What is its position in the today's world?

Iaroslav Serputko: Indeed, the greater share of processed raw materials and value-added products is not new. We are currently operating in a market economy. This means that the country produces what it can sell. If manufacturers only could enter the markets enabling them to sell goods with a higher added value, they would certainly take advantage of it—who would want to lose profits.

Today, Ukraine has leading positions in the market for traditional crops. In particular, we rank first in sunflower oil export, leading positions in cereals, including wheat, corn, etc. We have come a long way. At the same time, if we consider the entry into the European market with processed products—this is quite a different story. The EU market is mature, on the one hand, and is self-sufficient, on the other hand. Therefore, it accepts new players reluctantly: there are quotas, strong pushback, protection of domestic producers.

Ukraine is increasing the export of agricultural products, the world knows us as a supplier of sunflower oil, cereals, and honey. What are the other promising positions?

Iaroslav Serputko: Fruit and vegetable products are in a better position — there is access to the Asian market, and the Poles were slightly sidelined by Ukrainian companies in the apple market. Processing is also interesting for world markets; we just need to realize that it is going to be a rocky road. There is an issue of low awareness of potential foreign partners about Ukrainian products. This is what our government should pursue in order to develop the “Made in Ukraine” brand. There are some things that equally apply to all businesses: players need to become clearer to their partners. Stable supplies are a cornerstone in foreign economic activities, this area needs improving. Also, we should keep an eye on, study, and forecast global trends.

I have drawn these conclusions based on our experience obtained while implementing the Export Hub project for a number of top manufacturers of ready-made food products. They were seeking to enter European markets. This need became particularly acute after Ukraine lost the Russian markets, which necessitated prompt changes to our positions. When implementing the project, both we and our clients gained a unique experience from communication and cooperation with large retail chains from Europe.

Ukraine harvested a record 100 million tons of grain. Do you think Ukraine should further ramp up its grain production? Will we be able to export such volumes? And, most importantly, do world markets need this amount of grain?

Iaroslav Serputko: Personally, I do not see any demand restrictions since all forecasts state with one accord that the planet's population will continue to grow—people need to be provided with food. Among other drivers are changes in the power-generating sector, the transition to green technologies – the corn is increasingly used for bioethanol production. The above will obviously keep demand robust, and the global market will easily “swallow” 150 million tons, and perhaps even 200.

In this particular case, the ball is in supply court because the existing technology does not allow consistent production of such a quantity of grain.

How do we plan to increase production? Broad application of the extensive approach and further breaking new ground is a bad idea from the viewpoint of ecology.

The government links some hopes with improvement of the irrigation system; however, it makes sense for fruit and vegetable production, but I can hardly imagine how it is possible to produce our grains under irrigation. It would be costly.

At the same time, there exists a “gray” grain market in Ukraine. What steps must be taken for it to be effective legalized?

Iaroslav Serputko: The answer to this question lies in understanding the reasons for the existence of the “gray” market. What does the use of cash give? Complicated transactions tracking, purchase of cheaper fuel, access to the illegal labor market and markets for fertilizers and plant protection agents, and savings on taxes. At the end of the day, this significantly reduces the cost of goods. If the state wants to eliminate the gray market, it should create conditions where the risks assume by entrepreneurs working illegally are greater than the “bonuses” they receive working in the shadow.

Biotechnologies are springing up around the world, but Ukrainian science is still standing still. How can this affect Ukraine in the future?

Iaroslav Serputko: I would start by saying that development of modern biotechnologies is very costly. We need to understand the place of Ukraine in the world economy. If the state strategy does not provide for the export of technologies, we appear to have no need to develop our own production, as being focused on the domestic market only is most likely to be economically impractical. International corporations have billions-worth budgets for such development activities. Clearly, it will be difficult to win the world's technological race.

However, I'd rather not estimate this state of affairs as a serious threat. Many countries that import technologies are becoming successful, with China being a good example.

At the same time, I wouldn't be surprised to see a successful Ukrainian startup in the field of biotechnology. Though I should admit that after several rounds of raising funds and bringing the product to mass production, it will de facto be a foreign company with a Ukrainian founder. Ukraine is no exception here. For today in the world exists hunting for brains, and some countries have regard this as their strategic goal; Israel and the USA, just to name a few.

What currently prevents or thwarts the development of small and medium-sized agribusinesses in Ukraine?

Iaroslav Serputko: Certain things remain beyond the players' control. They are related to general business conditions (business landscape). The main issue is lack of confidence in the future. All this significantly narrows the range of investments in short-term projects.

However, a lot depends on the players themselves. A few years ago, our team delved into the profile of a typical Ukrainian farmer. One of our key findings was they tend to avoid cooperation. I believe this is a fundamental limiting factor, because international experience—especially in the countries where the farming model prevails—shows that a small player will not be effective without close cooperation. After all, it is an opportunity for them to land larger contracts and cheaper funding, and access technologies — it is impossible without joint efforts.

Another limitation lies in overall business culture, including fulfilling contractual obligations. Let's look at the way forward contracts are performed. Non-fulfillment of agreements does not contribute to building trust and establishing partnerships.

In addition, unavailability or ineffectiveness of marketing act as deterrents. We are living in times when it is not how much you make that matters, but how much you can sell. We need to explore trends, try hand in different areas, build own brand, to receive an additional bonus.

At the same time, I wouldn't call the lack of funding a real problem. Many small and medium-sized players keep going quite successfully particularly due to the high share of the informal economy. However, many of them hit the “mental ceiling” and prefer to collect cars or buy real estate abroad instead of developing, just because they have no idea of how to move to the next level. In contrast, there are players, especially among young people, who invest in business education, personal development, and the search for new perspectives. We can see such enterprising people among learners at Deloitte Academy. The future of Ukrainian agricultural business lies with them, I believe.

_{Source: AgroPortal.ua}