Ukrainian flour market - results for July-March of 2016/17 MY

Before considering the results of the milling industry for nine months of 2016/17 MY, it is worth noting a positive trend in the market segment. It is a beginning of fundamental changes in the attitude towards grain processing. It is possible that the recent successes of Ukrainian companies-exporters of flour have played a positive role in rising of interest in the flour milling industry.

Several companies started reconstructing and building new complexes, but their rates were rather slow. The current article considers the issue of flour milling complexes with daily capacities at 250 tonnes of grains and above. During several recent years, the country had only one flour milling complex with production capacities at 380 tonnes/day - Roma Commercial Manufacturing Company LLC in  Pervomaisky, Kharkiv oblast, equipped with Turkish machinery, Ugur. But to date, there are several flour mills with similar technical equipment, which are being built or already working.

First of all, I should specify 300-tonne flour milling complex in Kirovohrad oblast, which is under construction now. It will be the most technologically advanced mill in Ukraine, because Buhler supplies technical equipment for the complex. Of course, there are large investments, and they won't be compensated quickly, but the owner has an European approach to business investments.

However, Vinnytsia bread factory #2 demonstrates that successful business does not always require the leaders in technical equipment. After recent modernization of technical equipment of the Turkish company Or-taş, which is not a leader in the flour industry, the owners increased the plant capacities to 350 tonnes/day. Significant market experience played a crucial role — the production almost doubled, as well as flour sales. Also, the plant increased the export volumes.

Unfortunately, a new 250-tonne mill, which was built in Odessa several years, almost did not show its worth, although it has Turkish equipment of Alapala. The same company realized a fundamental reconstruction of the mill of former Vasilkov Factory of Bakery Products, which is now owned by Kulinichi LLC. In fact, they constructed a new mill complex. In that case, there will be no idle periods, and the economic effect of equipment updating will be on full display.

In Skibnevo, Khmelnytskyi oblast, Chmielnicki Mlyn Group built a new elevator and 300-tonne mill with budget-friendly technical equipment from a little-known Turkish company Moramill. But its flour production volumes have all chances to move the plant to the TOP-10 of grain processors.

Flour production

According to several studies of the industry trends, during several recent years Ukraine reduced the consumption of farinaceous products - bread and macaroni. However, the official statistics did not show any trends for decreasing of the level of flour production. So, in January-March of 2017 the production volumes of flour even increased compared with the same period last year. At the same time, real production volumes started significantly decreasing. The official figures, received from flour producers, remained almost stable, but "grey" production volumes massively decreased. The consumption of farinaceous products per capita is growing due to the low cost of such products and impoverishment of the majority of population. Also, the population is declining.

However, during nine months of 2016/17 MY, Ukraine have officially produced nearly 1.527 mln tonnes of wheat flour, while in the same period last year - 1.526 mln tonnes.

The trend of real decline in flour production is not unique to Ukraine, where it is unnoticeable to the official statistics, but all European countries face the same problem.

Ukraine continues decreasing a number of enterprises, which provide their balances about grain processing volumes in current MY. Taking into account the production of minimum flour volumes (from 1 tonne), in March 2017 the number of such enterprises totaled 312. And the number of enterprises which officially produced more than 1 thsd tonnes of flour in March, totaled 45 only. But there were only 7 enterprises, which produced more than 5 thsd tonnes. In the reporting period, 10 largest flour milling companies produced 41.83% of the general flour volumes.

Flour exports

During three quarters of the current season, flour export volumes exceeded the last year figures, due to large volumes of December shipments, as well as in November, February and March. In November, Ukraine exported 33.9 thsd tonnes of flour, in December - 42.43 thsd tonnes, which broke a record, in February and March - 33.3 thsd tonnes and 32.6 thsd tonnes, respectively.

During nine months of 2016/17 MY, the exports totaled 298.4 thsd tonnes. In the same period of 2015/16 MY, Ukraine exported 255.7 thsd tonnes of flour only. The exports increased by almost 15%, which shows the country's export potential. It is clear that the forecast of export shipments at 370 thsd tonnes will be completely realized. In terms of such shipment dynamics, a new record of Ukrainian flour exports will increase to 400 thsd tonnes per marketing year, or 535 thsd tonnes in wheat equivalent. As a reminder, in 2016 calendar year Ukraine exported more than 369.6 thsd tonnes of wheat flour, against 305 thsd tonnes in 2015.

Price situation

At the end of December, the prices for top-grade flour exceeded 200 USD/t FCA centre/east of Ukraine. The price growth continued developing in January-March period. To date, the prices for top-grade flour reached 210-215 USD/t under the same terms. The prices of 1-grade flour mostly varied at the level of 190 USD/t. In several cases, flour producers prefer engaging in predatory pricing, and the prices for top-grade flour reached 190 USD/t, and 1-grade flour - 180 USD/t.

Geography of Ukrainian flour exports

According to the official customs statistics, during nine months of the current MY 46 countries imported flour from Ukraine. They purchased flour for themselves, as well as for reexports to other countries.

The companies from the UK purchased 109.5 thsd tonnes of flour, and became the leaders. The second, with a large gap, the United Arab Emirates with a volume of 29 thsd tonnes.

But the consumers of Ukrainian flour are often at very different geographical locations. During nine months of 2016/17 MY, 50 countries consumed Ukrainian flour. North Korea remained an unreachable leader among all consumers of the Ukrainian products. Ukraine started developing the African market, but in very unstable rates.

Sergei Sakirkin, Adviser to the Chairman at Agrarian Fund PJSC