Grain Market: Investments and Opportunities

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Grain Market Investments and Opportunities
Leonid Kozachenko, President of Ukrainian
Agrarian Confederation
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Ukrainian Agrarian Confederation

• was founded in 1998 as an umbrella organization
  for the Ukrainian agribusiness and food sector
• unites more than thirty branch associations of
  Ukraine, including Ukrainian Farmers and
  Landowners Association, Ukrainian Grain
  Association, as well as major agribusiness and
  food producing companies
• represents interests of more than 30 000
  agricultural producers.

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Global food crisis significant challenge for
the humanity

• Population growth rate
• Climate change (global warming)
• Biofuel production development
• Higher incomes in Indo-China
• These factors may lead to the shortage of
  agricultural products on the Earth and famines in
  given countries.

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World Grain Market Dynamics
Source USDA, UAC calculation
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World Wheat Market Dynamics
Source USDA, UAC calculation
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Unprecedented Commodity Price Growth
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Consequences and Ways to Overcome

• The head of the FAO, Jacques Diouf If you
  combine the increase of the oil prices and the
  increase of food prices then you have the
  elements of a very serious social crisis in the
  future.
• 1,2 billion people will suffer from starvation by
  2025 UN.
• Only a few countries have potential to increase
  rapidly agricultural production, including grain
  production and significantly contribute to the
  overcoming of food crisis Ukraine, Russia,
  Kazakhstan and Argentina.

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BLACK SEA AND DANUBIAN
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Why does Ukraine have potential to increase grain
production?

• Large land areas (including arable land) with
  relatively fertile soils and favorable weather
  conditions.
• Low yields of grain crops due to insufficient use
  of modern technologies (low agriculture input
  application rate).
• Unutilized human resources and logistics (export
  infrastructure, low labor cost).
• Strong market demand and future price
  attractiveness that guarantees profitability.

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Source International Institute for Applied
Systems Analysis, Laxenburg,Austria
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Average Grain Yields in Certain Countries
Source USDA
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Domestic Grain Market Dynamics
Source State Statistic Committee
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Ukraine, Russia and Kazakhstan Grain Production
and Exports
Source USDA
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(No Transcript)
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Promising Development

• Large corporate farms
• Market infrastructure (seaports, transshipment
  capacities etc.)
• Finance system (banks, investment funds etc.)

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Large Corporate Farms

• May till more than 200 000 hectares and are
  established with investments from large food
  processing companies, heavy industries (coal
  mining), bank sector and investment funds.
• Farm management and the volume of resources
  applied are decisive.
• Large corporate farms have better positions in
  marketing/getting a loan.
• Integration of supply chain actors reduces
  transaction costs and taxes.
• Public capitalization, diversification etc.
• Effects on rural development and employment are
  controversial.

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Groups of Risks Limiting Investments
Risks
Political
Infrastructural
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Infrastructural Risks

• Underdeveloped agriculture insurance programs,
  absence of price hedging system
• Lack of credit history bureaus, collateral
  registration systems, rating agencies etc.
• Independent commodities market regulation bureau
  (state commodities intervention fund use)
• Incompleteness of land reform (land privatization
  moratorium)
• Informational systems and statistic data

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Political Risks

• Inconsequent / unpredictable agrarian policy
• Uncertain tax policy (agriculture tax regime)
• Direct illegal state interference in agrarian
  markets
• Reprivatization, VAT refunding
• Export and commodity price limitations
• Corruption

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Grain Market Policies in Ukraine

• Motivated by social/political reasons to mitigate
  the increase of food prices and inflation rate.
• The Government imposes export limitations (export
  quotas) and profit rate regulation for food
  industry.
• It leads to the gap between domestic and world
  prices in competitive agricultural markets, trade
  distortion.
• Ukrainian farmers do not benefit from high world
  prices, and have no incentives to increase
  production.
• The policies have negative impact on agriculture
  business climate, rural development, and
  investment/credit attraction to farms.

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Alternative Grain Market Polices

• 1) Agriculture interventions should be improved
  (in terms of mechanisms, financing, the
  functions of Agrarian Fund / State Reserve,
  delivery/payment procedures etc) and be based on
  market principles.
• 2) Mechanisms of securing interests of poor
  people should be developed and implemented.
• 3) Grain export quotas should be applied only
  in extraordinary situations, and if applied,
  should be transparent and managed by
  professionals, not politicians.
• 4) Industry image should be changed from risky
  to promising with modern risk management.

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Competitiveness (price quality) of grain supply
chain

• Lower cost of resources (WTO rules and
  perspective EU FTA may be a plus)
• Access to land through purchase or rent
• Cheaper credits, investment protection
• Information and communication support
• Human resources (education, trainings and
  extension)
• Stimulating of modern technology use
• Favorable and stable tax regime
• Predicted and transparent state policy
• Export promotion assistance
• Retail sector competitive development

Issues that should be discussed Free market
incentives for agricultural production or
attempts to fight inflation with administrative
methods? Or the government should use address
food aid/support for poor people?
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Main Conclusions

• 1) Food supply challenges and market
  developments create great opportunities for
  investments into grain production.
• 2) The role of Ukraine, Russia and Kazakhstan in
  grain market development will strengthen in the
  future.
• 3) Political and infrastructural risks for
  investments should be declined.
• 4) The Government should improve business
  climate through market oriented policies.

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• Thank you for your attention!
• Ukrainian Agrarian Confederation
• 38-044-2876566
• 38-044-2843238
• www.agroconf.org
• agroconf_at_agroconf.org