Flour milling business can be attractive even in the existing realities – S.Sakirkin

Source

APK-Inform

2167

During the last several seasons the flour milling industry of Ukraine demonstrates stable decrease in production volumes, but at the same – expansion of export shipments. As a result of economic crisis Ukrainian millers had an incentive for the expansion of geography sales having a chance to represent the Ukrainian flour to new importing countries which already estimated its quality.

One of the most perspective still far not really mastered, is the market of Black Africa' countries where some amounts of goods were delivered.

We talked with the expert of flour market, Adviser to the Chairman at Agrarian Fund PJSC, Sergei Sakirkin about the current tendencies in a flour milling business of Ukraine, prospects and feature of work with the region of Black Africa.

 

- Sergei Varetovich, the previous season showed us new records of the Ukrainian flour export market. How do you estimate the flour export trade prospects in 2016/17 MY taking into account the developing tendencies in the grain market today?

The prospects are perspective (joke). If it's serious, the dynamics of export shipments during last years is encouraging. Since 2012, the annual growth of flour export volumes constituted at least 10%, and in 2015/16 MY it reached 30%. We can increase amounts of shipments in current MY to 400–450 thsd tonnes without essential changes of the shipments's mechanism by itself. But further – we'll rest. Without development of bulk shipments directly into vessel's hold we won't be able to increase export volumes significantly. An example of Turkey for us is a sample of all that concerns flour export.

 

- How do processors estimate the quality of wheat harvested in 2016? And in what extant does it meet the requirements of millers?

Now it's hard to say what is the share of milling wheat out of more than 26 mln tonnes of the harvest. Tentatively it's likely to say we have less wheat with high gluten, and less wheat of second class. The droughty fall did one's bit. For example, in some districts of Zaporizhia region where farmers previously harvested grain of 1-st and 2-nd classes, winter crops in the current season started to sprout just in January! Naturally - it is fodder.

 

- Ukraine is expanding the export of flour market more and more. How did the requirements of importers to the quality of delivered products change? And what new conditions and contract risks do the Ukrainian millers face most commonly?

Strangely enough, and to be more accurate – without any surprise, but expansion of the sales market hasn't add any new quality requirements to exporters. The main requirement now so as recently – is the compliance with the contractual terms. The European market where Ukrainian production started to get gradually, is quite satisfied with quality of our flour. And as for risks – the buyers are the most vulnarable as practically all production is saled in 100% advance payment. Once, when it turned out, our regular customer lost it's batch of products by $160 thsd, the Ukrainian side fulfilled the liabilities completely. And the intermediary-company of our custumer was to resold the fright.

 

- Logistics questions in case of agrarian products trade are of great importance. It is known that the share of costs for logistics in Ukraine exceeds considerably that one in Europe and the USA. In this season due to increasing tariffs on railway and autotransportation, the strenghtening of check-weighing, the share of logistic costs became even higher. How much does the flour milling market feel logistic problems?

I don't think that railway rates are lower in the USA and Europe than in our country while the check-weighing there are much stricter. However, the profitability of export transactions is higher there. And first of all – at the expense of higher sales' prices. And Ukraine primaraly wins the international market on account of low prices yet. If it's follow the example of Turkey, where export-oriented mills are in close proximity to ports, it's easy to explain low logistic costs there.

But the import wheat there is also received by mills directly from ports.

 

- What other sensitive issues, connected with export products' logistics can exert a negative impact, in your opinion?

As I've already noted right at the beginning, the most painful question is a method of products ' transportation to the buyer. Some quantity of products is shipped in covered wagons to Moldova, Georgia and other countries of the former Union. And all the rest – in maritime containers. And in the majority – on railway platforms. Now we approach a critical point of containers' turnover. Firstly, they aren't enough bacause of import reduction. Secondly, time delivery to the mill and back is rising. On the top of everything else it increases payments "for use of rolling stock". The lion share of shipments from Turkey – is bulk shipments. In contrast, during last MY we had only 2 ships with 5 thsd tonnes. But there is no other way...

 

- Last season the geography of flour export extended at the expense of new importing countries, and partially on account of the countries from Black Africa region. How do you estimate the prospects of flour export volums growth to this region?

I consider this region to be the most attractive one to take attention on. Last MY we shipped 2.48 mln tonnes there. In current MY world exporters plan to ship nearly 2,6 mln tonnes there. Ukraine shipped 2% of all world export volume in 2014/15 MY and 8% in 2015/16 MY. The growth is obvious, but it's not enough. Still we have an opportunity to win a part of this huge market. Practically all of our shipments were made to the African countries: two years ago to Syria, two months ago – to Libya. Shipments to Angola which imports annually more than half a mln tonnes of flour is also increasing. We should develop this direction in every possible way.

 

- What features and risks must the Ukrainian processors consider while working with this region?

Firstly, the paramount importance in case of trade with the African countries is personal relationships. It is possible to deal with state bodies arbitrarily long but to have any shipment as a rerult. But if you have personal contacts with someone from "the necessary persons" – the issue is almost resolved. It is necessary to take into account also such feature as a prohibition on an advance payment at some countries, for instance in Angola where payment is possible only with delay and/or according to the letter of credit. Therefore our producers work through the intermediaries ready to pay an advance payment and to gain a half of income.

 

- The Food and Agriculture Organization of the Unatied Nations (FAO) gives humanitarian support to the states of Black Africa, and within the cooperation with this organization it is possible to perform supply of flour according to humanitarian programs. What demands does FAO make on the participants of programs, and  how much is it interesting for Ukrainian grain processors to take part in it?

FAO provides helpfor our sectoral Union of millers. In particular, it partially pays costs for participation in exhibitions, trainings. But as for participation in humanitarian programs – it's quite another deal because it's very bureaucratized procedure with a lot of nuances which are not for a print. As far as I know, Ukraine managed to participate in some of grain FAO programs. As for the programs of humanitarian flour supply we didn't though it would be very profitable. To put it more precisely that was the reason we couldn't.

 

- If takes to the expansion of Ukrainian flour supply geography to the foreign market in general what regions of the world are the most perspective?

First of all, it's African countries.  North Africa – Libya. South Africa – Angola. The western Africa – Nigeria. And the Middle East – Syria, Iraq. We should regain the lost ground in Southeast Asia and increase this market share. It's necessary also to amplify deliveries to Israel where our flour  market share takes 35% - to bring our presence to 50%, 70%, 100%!

 

- Several global questions. Sergey Varetovich, you have been working at the flour milling market of Ukraine for a long time already being not just an observer of its development, but an active insider of it processes. While comparing the Ukrainian flour milling industry 10 years ago and today, how would you characterize this period?

Probably, it's appropriate to highlight two phases here. 1996-2006 can be characterised as the first decade of mills and elevators' freedom. Privatization of the state assets, subsequent changes of some owners and the starting of activities. And the second decade – from 2006 till present – the formation of an industry as such. The beginning of independent export, the first record of privatized industry in 2007 – the shipment of more than 200 thsd tonnes of flour. And the present time: dozens of leading exporters; understanding of complete manufactyring modernization and the first steps in this direction; the creation of millers's Union, etc.

 

- More and more frequently these days we may hear the phrase both from the experts and representatives of the Ukrainian state bodies about the necessity of increasing production of value-added products. What does the state have to undertake for stimulation the development of a flour milling industry of Ukraine, in your opinion?

First of all – it is certification of mills!!! Just primal screaming! Officially more than 900 producers of flour issue 2.2 mln tonnes of products. Indeed, everywhone who wants, where wants and by what wants can grind wheat of any quality and, calling it "wheat flour" sell this production really cheap. The concept of food security in Ukraine is absent at all! And the profitableness of production is close to zero. And the mills of 1950-1980-th are still in work. For comparison: in Germany 300 mills produce 7.2 mln tonnes. The flour is much more expensive, than our's, while wheat prices are identical. The bread, respectively, is more expensive. And why, actually, must the bread be uncostly? Who said it should be so?

 

- What are the key factors that constrain development of a flour milling business of the country?

I've already mentioned it above: the extremely low marginality of this type of business frightens off the potential investors. And owners at the same time have no opportunity to invest in upgrade because of long term of investments' reccurence. Though, even in case of the existing realities, it is possible to make this business attractive.

 

Interviewed by Elena Cherednichenko

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