Despite lower agricultural production, wave of defaults and significant price volatility, Ukraine continues to play an important role on the global market, and it is working to expand export horizons. At the same time, margins are falling, while importers' requirements are toughening. Moreover, competitors are on the alert, world production is increasing, which means that there are plenty of alternative options for importers, and more reliable, more flexible and loyal supplier can occupy a market segment.
Quality and safety, traceability and reliability are the global trends. Quality of Ukrainian grain generally matches this of competitors. Ukraine needs to work on stability, as well as on investment attractiveness. In addition, we need to have a strategy and state support to get new markets, and there are problems with this.
What were the features of 2020/21 MY? Can Ukraine strengthen its positions on the key markets, and why is it so difficult to get to the new markets? The president of Ukrainian Grain Association, Mykola Gorbachev told us about features, challenges, hopes and prospects for Ukrainian grain market.
- Mykola, share your opinion about the key peculiarities of 2020/21 MY..
- I think the main surprise of the current season was the rocketing prices of all grains and oilseeds. It caused problems faced by all market participants. Firstly, it is about a number of defaults on the market.
- How has the strong price volatility observed this season affected the work of exporters and margin as well as importers’ purchases?
- This year, all talks about margin come to losses of exporters. Defaults of sellers resulted in significant losses for traders. We will see the consequences next years too. I am sure that both buyers and financial institutions (banks, funds) will cut financing of production. It will affect the overall production dynamics.
Importers pay high attention to the reliability of suppliers and our (Ukrainian) problems do not add optimism. We see that Ukraine has exported very low volume of wheat in the recent months and our competitors are occupying our traditional markets.
- Wheat is a core of food security. This factor combined with restrictive measures is considered as one of the most important and unpredictable. How to work under such conditions (especially with long-term contracts)?
- Three grains feed the world - wheat, corn and rice. Traditionally, wheat is essential for food security. Global wheat production grows every year providing importers with an alternative of supplies.
In Ukraine, 10 years ago, the Ministry and we developed quite effective mechanism for export forecasting - memorandum. The government has never broken the conditions set in the document. It is reliable guarantee for our importers.
- Importing countries pay more and more attention to the safety of products. Besides, the pandemic arose new tariff and non-tariff barriers and some countries now use them as an element of political pressure. How quickly does the market adjust to such changes?
- “The customer is always right” - this is the principle that the expanding geography of Ukrainian grain exports can be based on. The income level of the population is growing all over the world, people want to eat high-quality and safe food. This is a global trend, and every seller (and Ukraine is a big seller) should tend to be among the leaders not only in terms of volumes, but also in terms of all requirements.
Since November, the EU has tightened its standards on the content of pesticides, and we must to reduce the use of these chemicals. We can replace them with less harmful ones, but this must be done at the country level. UGA addressed to the Ministry and the producers directly, the problem is clear to everyone. We hope that the solution will not be long in coming.
We work on a very competitive market. If we do not adjust to the requirements of buyers, then other sellers will take our place and it will be more difficult to sell Ukrainian grain, and the price of it will be lower.
- On the other hand, the importing countries are interested in accumulation of stocks in the context of pandemic, aren’t they?
- Large stocks come at a price. They require a lot of money. Very few countries have large stocks since the modern developed logistics both land and marine allows delivering any volumes within days. For example, stocks in the EU countries (it can be called carry-over stocks) cover 7-15% of annual consumption only. Of course there are countries, which accumulates large stocks, such as the USA, where this figure can be up to 50%. I would like to note that each country chooses its own policy as to the ensuring its food security and the policy depends on many factors, including what your neighboring countries grow, they are importers or exporters, so on.
- If we talk about the main markets for Ukrainian agricultural products, what key changes in the preferences and requirements of importers would you note and what did they entail?
- Growth of supplies to China this season should not go without mention. I really hope that we will preserve this market and continue to develop export to China. In general, our export is traditional - 30-35% goes to the EU, 25-30% to North Africa and 30-35% to Asia. But I want to emphasize that the population growth is very dynamic in Asia, and young people prefer wheat (bread) compared to traditional rice in this region. So we plan to strengthen our presence in this region.
- What changes have taken place lately as to the import requirements of those countries that buy smaller volumes or have just begun to import Ukrainian agricultural products?
- As to the requirements of the importing countries, they are quite identical and are based on the experience of countries with more developed grain industry. We can sell our cereals to Asia, but the contracts will contain the rules, quality and safety requirements in accordance with the EU standards. Therefore, we highly need a constant dialogue at the level of associations and governments.
- Amid the increasing competition, it is extremely important for Ukraine as an exporter to work on intensifications of its presence on the main markets and to continue working on entering the new ones. What can you say about the success achieved in this matter? What is the role of the state and associations in this process?
- Due to the fact that there are world-renowned companies in Ukraine with ten and even hundred years old history of doing business in the international arena, Ukraine continues to strengthen its presence around the world every year. These companies formed the grain market in our country. They trained young people, who then moved to work in other companies, often Ukrainian. These companies have carried and continue to carry a culture of doing business, set high standards of quality control and safety, make millions of investments in infrastructure essential for operation of all trade chains. The competition between such companies in our country forms Ukrainian grain market. Also, we should note the significant contribution of Ukrainian companies, which managed to reach such a high level in 10-30 years, and in many ways even surpass their western counterparts. This is due to a faster decision-making process and faith in their country, faith in the ability to influence processes in a democratic way. Associations are needed to form a unified industry voice. We try to set the pace and jointly make adjustments during the business process, so it is very difficult to overestimate the activities of the associations.
As to the government bodies, I can say that we have always had and still have a dialogue, which allows us to find the best solutions in any situation. Changes in public administration processes always take more time and require overcoming of not only technical, but also political problems. Recently, the level of understanding of real problems has significantly decreased among the political quarters, therefore, we have got an additional work to do.
- In 2020/21 MY Pakistan started to import Ukrainian wheat, flour and corn, long after Saudi Arabia renewed import of corn, Thailand apart from wheat is interested in corn, and so on. Will such demand be situational (considering the local production, etc.) or it will become permanent?
- Last year Ukraine harvested record grain and oilseed crops – over 98 mln tonnes. Our domestic consumption is 1/3 of the total, thus the potential buyers decided to try alternative source to traditional markets of crops. The faster the country becomes stable and reliable supplier, the more we will interest potential importers.
- Starting January 1, 2021, the agreement on free trade between Ukraine and Israeli, and Great Britain came into force. Moreover, there is a mutual interest to conclude free trade agreement between Ukraine and Vietnam, and work is progressing to establish cooperation with UAE. What measures Ukraine should take in order to increase exports? What can be the problems?
- What we can face with is already clear – competition, and we have seen for many times how countries use their global influence competing for target market.
Ukrainian grain us not inferior in quality to grain of our competitors, but there should be a strategy and state support to win new markets. First of all, it is necessary to sign phytosanitary agreements with potential importers, to involve diplomatic missions on the territory of countries of interest to us, and of course, not to “push around” the exporters, because they are a very important link, which provides financial and technological part of the grain market.
- In terms of UGA and Soufflet company (which actively opens new target markets) experience, what destination Ukraine should focus on and what measures should be taken to increase exports?
- First of all, there should be created a predictability on the grain market. This includes several vector directions:
- protection of investor’s rights (judicial and executive system);
- provision of financial predictability of: national currency rate, cost and availability of credits, stable financial policy;
- creation of investment attractive conditions for business (taxes, duties, levies, etc.).
And most importantly, we should understand that to be independent does not mean to be free of obligation, but on the contrary.
- What difficulties do exporters usually face entering new markets? To what surprises should they also prepare?
- We can talk about the preferences in our countries-competitors on the new markets. For example, wheat of French, USA and Canada origin, that is imported by one of North African countries, is delivered without taxes, while Ukrainian has taxes. Markets don’t like surprises, so we work to exclude them. But, new possibilities of developed countries in terms of their economies financing will, of course, bring results. I think, the prices for goods, traded on exchanges, including grain, will remain high, despite higher production. Grain business is becoming more capital-intensive.
- Are little-know/exotic markets more premium, or everything is overlapped by risks?
- In a time of high developed information technologies, it is quite difficult to find absolutely new markets. New for us are already covered by someone else, and we can enter such market only offering more attractive conditions. As a rule, exotic markets are the market for niche products, such as peas, sorghum, flaxseed, etc., small in terms of consumptions and require very careful study of the rules and customs of the internal trade of those countries (payment conditions and options, delivery speed and guarantees, ways to resolve disputes and other rules). Usually, the costs for exploration of such market are high (on business trips, sales representatives, etc.), and risks of not receiving money for product or spoilage are high, thus no be grain trading company has large shares of niche products.
- Probably, the evaluation of import demand is one of the most interesting questions prior to new season, in a context of distribution among the main target markets, demand and premium of one or another crop. Can You please share Your forecasts and expectations?
- We have slightly different logic, we provide a possibility to sell any grain product, produced by our farmers. Because, only they decide what to grow on Ukrainian fields. In recent years there is a steady tendency to increase of corn, wheat, rapeseed and soybean production and we, as traders, try to develop the markets that consume these crops. But even among these markets we can single out countries with higher prices. For example, China pays more and competes with Saudi Arabia for Ukrainian barley. Moreover, China increased purchases of Ukrainian corn, offering higher prices. There are some countries with higher risks, such as military activity, revolutions, financial instability, and trade with such countries is conducted at higher prices. I believe, that we can continue widening our target market in every direction, and we actually don’t have other choice – the population of our country does not increase, but the production does.
- Considering the defaults on forward contracts for the delivery of corn of 2020-harvest how do You estimate the forward contracting activity for wheat and barley of 2021 production, and even more remoted for corn?
- Problems with defaults is first of all problem of investors rights protection. This problem lies in terms of ensuring the work of the law system of Ukraine. Unfortunately, we are far from ideal in this issue, thus forward contracting for a new season will be much lower, and the criteria of choosing the counteragent will be more strict. As a result, there will be a redistribution of production resources from dishonest to more obligatory producers, and dishonest regional traders will disappear. There is nothing we can do, the market is developing and will be looking for exits and balance points.
- In conclusion, I want to thank You for such interesting and informative conversation and ask You about Your expectations of the SH of 2020/21 MY . What should we pay more attention to?
- First of all – to global financial policy, as there can be big surprises. Inflated companies, trading on the global exchanges, might collapse, which can provoke new financial crisis. We are used to crisis, but the cost of credit resources can not only increase, but also become limited.
Otherwise, we don’t expect big surprises. Ukraine is left to export over 4 mln tonnes of wheat and 11 mln tonnes to corn. Old crop does not have any problems – in quality or security. The moisture in the fields is more than enough, crop condition is good, pandemic is regressing, everything is going to be alright.
Interviewed by Anna Tanskaya