Only best companies to remain on the oilseed processing market…

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APK-Inform

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During several recent years, Russia received significant investment inflows in development of the fat-and-oil industry, in particular towards increasing of oilseed processing capacities. However, the production rates of sunflower seed are growing much more slowly. As a result, in the current season the general harvest of the oilseed became almost 2 times lower compared with the processing capacities in the country. Many producers of sunflower oil reported on some deficit of raw materials to work with, rather high competition for purchasing of sunflower seed among companies-processors, and the high prices as a consequence. The Director of Mariinsky Posad oil production plant, Alexander Chekunov kindly agreed to tell us how small-scale oilseed processors reacted at the situation, how companies have to survive in such environment, and what measures should be taken for successful development of business.

 

 

 

- Alexander, as far as we know Your company works on the market not that long ago. Please tell us how did You start working, and what trends do You develop to date?

The enterprise was founded a very long time ago when the Soviet Union existed, and it was state-owned. In 2008, we turned it into private property, and in the same year we made its initial start-up. Since the beginning of 2013, we started actively investing funds in development of the enterprise, modernizing of production capacities, and promoting our plant on the market. From the very beginning, the company is exclusively engaged in processing of sunflower seed. We purchase traditional sunflower seed. We have not tried to process high-oleic sunflower seed at all. To date, the oilseed processing capacities total nearly 100 tonnes/day. We plan to continue increasing the processing capacities in the current year to 140 tonnes/day, due to minor engineering changes.

 

- How do You estimate 2014/15 MY for the company at large? As for the coming season, what characteristic differences for the fat-and-oil market can You stress compared with last season?

I should note that 2014/15 MY was favorable period for our enterprise, and we managed to show quite good financial results. Last season was almost similar to the current year by the harvest volumes of sunflower seed (difference totaled nearly 0.3 mln tonnes). The qualitative indices of sunflower seed, and of course its price, became the main difference which we have faced. In the current season-2015/16, the qualitative indicators of oilseed raw material were much better compared with the last one. In the very beginning of the harvesting campaign, there were good weather conditions, so agrarians managed to harvest the lion's share of the planted areas under the high-quality oilseed. Then agricultural producers mainly formed the market trends, and set the prices. As for the prices, in the beginning of last season the prices were rather appropriate, as opposed to the current season.

It is natural that the economic situation in the country is the key point, which is not easy for many market participants. To date, it is necessary to have sufficient financial reserves to work on the fat-and-oil market for keeping quite stable turnover of the company. Such requirements are primarily caused by high prices for oilseed raw materials, as well as decreasing of the paying capacity of buyers. In turn, banks lowered their crediting rates of the business, and the interest rates became much higher. To date, many companies-producers of sunflower oil face some shortage of working capital. There are a lot of examples of large-scale enterprises (500 tonnes/day) which are experiencing some disruption of oilseed supplies, and completely stop their work due to the absence of money resources to purchase raw materials.

Due to the fact that our company is not saddled with investment loans, and we continue developing exclusively at our own expenses (income), we do not feel the debt burden on business, and need loans for working capital financing only.

I think that some veg oil producers, who took a lot of investment loans, invested in production and have little their own money resources, will face fatal aftermath in the following years, someone can even close down.

 

- To date, there is observed quite severe competition on the market of sunflower seed among oilseed processing companies. Would You tell me how the company becomes aware of the difficulties in formation of the raw materials base, and what strategic decisions are made to ensure the stable inflow of the oilseed?

We have a plenty of suppliers of oilseed raw materials. So, we select only the best quality raw materials from all incoming proposals of sunflower seed. The existing customer base and high number of oilseed raw materials sellers give us quite wide choice. Naturally, the main issue concerns the price, but nevertheless, there is no shortage of oilseed proposals from agrarians. At the same time, the minimum distance for delivering of oilseed raw materials from farms totals nearly 300 km and higher. The travel and production expenses are cleared not only at the expense of large number of consumers of sunflower oil and meal in the region, but also at the expense of new technologies. If one has competent engineers and technologists, stimulates them, spares no expenses for new technologies, sets new good equipment, the costs will be simply compensated by reducing of the production costs. We do not feel any severe competition with purchasing of sunflower seed and selling of its by-products.

In order to ensure rather stable provision of the company with oilseed raw materials, for flawless operation, we prefer storing some oilseed raw materials in advance. We have our own storage capacities at several thousand tonnes of sunflower seed.

 

- Alexander, do You conclude forward contracts for the supply of oilseed raw materials from agricultural producers? Does Your company have a land bank?

We have any significant experience of concluding forward contracts. We are more focused on purchasing of oilseed raw materials on the spot market. We calculate the cost price at once, and protect ourselves from unnecessary risks. All our work is based exclusively on the budget and short-term planning. To date, in Russia price forecasting and long-term planning of work activities is quite lowly employment. Due to the unstable economy, significant fluctuations of USD/RUR fluctuations, I consider there is no rationale for setting of any prices, market conditions and trends for the following year. Our enterprise tries to minimize such risks.

As for the land bank, I should say that we own several thousand ha at the territory of the Chuvash Republic, but we do not use them in our business, to date. We did not dare to grow sunflower seed throughout the reporting land areas, because there is a high risk of production poor-quality crop, or even complete loss due to adverse weather conditions.

 

- As far as we know, in the beginning of the current season the plant purchased technical equipment for the workshop on oil refining and bottling. Would You tell us when the company launches the shop? Was the decision made to expand the commodity range and enter new markets, or the customer is more focused on purchasing of refined oil?

That's the case. In summer, we decided to build the new workshop. We started installation of the equipment in September 2015. To date, we realize installation and commissioning works in the shop, starting-up and opening of the shop is scheduled for December 15-20. So, since the beginning of 2016 the market will face our bottled sunflower oil at 0.5 liter, 1 liter and 5 liter under our brand "Akatui". Akatui is a national holiday of Chuvash agrarians, which is dedicated to ending of spring planting works. In Chuvashia, people like purchasing the foods produced in the region, and even more when they symbolize the national traditions. The workshop will produce 12-14 tonnes/day of refined bottled oil, which will sold in our and other neighboring regions.

The decision to launch the refining workshop was mainly made to expand the commodity production range of the plant, and, of course, to increase the income of the enterprise. There is a wide range of sunflower oil brands on the market, but we hope to successfully compete with the leading companies-producers in our country.

 

- What is the sales geography of Your sunflower oil and meal? Do You supply the commodities for exports?

All neighboring regions are the main consumers of our sunflower oil and meal. We supply the commodities to Ulyanovsk, Nizhny Novgorod, Kirov, Vladimir oblasts, and to the Republics of Tatarstan and Mari El, Mordovia and Udmurtia. Also, we supply some share of our products to Moscow and Leningrad oblasts.

To date, we do not supply our sunflower oil for exports. Several years ago there was some experience of oil supplying on the foreign market (in Egypt), but then we started realizing such supplies exclusively through trading companies.

 

- As for the current conflict with Turkey, in terms of possible closing of the exports of sunflower oil to the country, do You think that it will change the situation on the domestic market?

There is some possibility that if the Government closes the product supplying channels to Turkey, it will significantly increase the number of sunflower oil proposals on the domestic market. As a result, the prices will significantly reduce.

Of course, it is too early to comment something, and make any conclusions, but in spite of the reporting news, in late November buyers became very active, there was high demand. The buyers purchased our oil just-in-time, and we often received new requests for purchasing of the product. In early December, all free volumes of sunflower oil were almost completed. I think that not only the pre-New Year period effected at the situation, but also the fact that some large-scale enterprises of the Volga region stopped working, due to the deficit of oilseed raw materials to work with.

 

- Would You tell us about price formation on the market of oilseed raw materials and its by-products, which factors are the most important? Beginning of the current season showed a record leap in prices for raw materials. How can You comment on the situation?

From year to year, the list of key determining factors in price formation includes the qualitative parameters of raw materials, the general harvest of sunflower seed in the country and by region, export volumes of oilseed by-products, and foreign exchange rates, especially the USD/RUR rates.

Our company started working only in early October, so we did not face the sharp price development for oilseed raw materials in September. We managed to pass through the period without any difficulties and losses. When we entered the market and started purchasing sunflower seed, the market formed small-scale bearish trend.

 

- In September 2015, the prices for sunflower oil and cake started declining despite high purchasing prices for oilseed raw materials. How profitable is sunflower seed processing to date, and how, in Your opinion, will the price situation develop in the future?

We experienced the reporting lowering of prices for oilseed by-products. The offer prices for oil dropped to 50`000 RUR/t EXW, against 55`000 RUR/t EXW. The prices for oilseed cake fell by almost 2`000 RUR/t EXW. To date, the prices for cake vary within 13`500-14`000 RUR/t EXW, and oil – 52`000-53`000 RUR/t EXW. Most likely, the simultaneous launching of all plants and provision of huge volumes of sunflower oil and cake on the market became the major reason, which led to short-term saturation of the market and lowering of the prices.

Despite the current price situation, it is profitable to produce sunflower oil and cake, but the production rates are heavily dependent on technologies.

In the nearest future, the oilseed prices will possibly raise and reach the index of 28`000 RUR/t CPT. I suppose that the growth of prices will begin in mid-December. As for sunflower by-products, I note that in January-February of 2016 the excessive demand will reduce. The prices will gradually rise (closer to the spring).

 

- In Your opinion, will the start of such unpredictable oilseed season become fatal for most oil producing enterprises? How will stoppage of the enterprises influence as a whole? Will the season have a negative margin?

Yes, I think that some companies will not survive the crisis at all. It is solely the financial crisis, which will be linked to a deficit of working capital. Strong companies will continue working. Stoppage of enterprises in the country will certainly cause some shortage of sunflower oil total supply on the market and increasing of the prices. One day of business interruption is the direct losses, which simply "eat" your money, and it will be a big minus to the budget of every company.

Our company`s work always starts with preparation of various types of budgets, and further strictly and exclusively operating with them. We have never come to such conclusion that the company is more profitable to stop than continue working. You need to understand when the company can get more losses – if it is stopped, if adverse market conditions develop, and then make a decision about its fate.

 

- In conclusion, would You tell us about the company's plans in the nearest future?

We plan to increase the processing volumes, improve the production technologies and establish something new, in order to reduce the prime costs of the finished products. Also, we have the land areas, so that in the long-term outlook we will definitely develop the agricultural direction. We will gradually develop the market of bulked and bottled refined oil.

Most likely, in the current season many oilseed processors will stop working much earlier than usual. I think in April, we will already observe such situation. Large-scale companies are more likely to continue working on the market, they will stop only in terms of absence of raw material stocks. The companies operating on the spot market will also work, but only those who will have sufficient level of working capital, because the raw material prices will be very high.

The USD/RUR exchange rates will continue gradually increasing and reach the level of 70-75 RUR/USD in the spring. Such foreign exchange rates will increase the domestic prices for oilseed by-products. The offer prices for crude sunflower oil will vary within 58`000-61`000 RUR/t EXW, and sunflower meal - 16`000 RUR/t EXW. The selling prices for oilseed raw materials will total nearly 26`000-28`000 RUR/t EXW.

Every season brings its different surprises, every year we are unhappy with the developing situation, we say that everything is bad, but the number of oilseed processing enterprises does not become smaller, they are continue increasing. Finally, only best companies will remain on the oilseed processing market.

 

About the company

Mariinsky Posad oil production plant LLC started working on December 2, 2008. The enterprise specializes in processing of sunflower seed, and production of sunflower oil by hot pressing. In the IV quarter of 2012, the company built its boiler house, working on waste products - sunflower husks and peel.

The company processes sunflower seed, supplied from Ulyanovsk, Saratov, Samara and Penza oblasts.

 

Interviewed by Anna Skotar

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