Shift from export of feedstock to finished consumer products is the new way of evolutionary development of Ukrainian agro-industrial complex - Natalia Dombrovskaya

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A true professional will never work according to the principle "any whim for your money"…

The need to popularize ready-made agricultural products produced by Ukrainian manufacturers under their own brands on the world market has been talked about many times. However, many agricultural producers are not ready to invest in long-term projects without support, as it is not only an extremely difficult and long process, but it is also associated with rather high financial costs. How to attract an investor and avoid mistakes when introducing a product to the external markets, and why the agricultural sector operates with low margins, Natalia Dombrovskaya, Aurora Stern GmbH, Company owner, PhD told in an interview with APK-Inform.
Reference

AURORA STERN GmbH was registered in Austria, Vienna, in May 2019.Main activities: consulting services, business solutions from idea to turnkey implementation, engineering and technical development, own business ideas, monitoring, investment projects in Ukraine, strategic management, retail and wholesale trade B2B, B2C in Europe and the UAE ...The staff is 10 people.


 

- Natalia, you have over 20 years of experience in working on the Ukrainian agricultural market. Despite the fact that the agro-industrial complex in Ukraine is one of the developed and progressive sectors, we constantly hear about the lack of the margin. In your opinion, what are the reasons for this?

- Let us consider the Ukrainian fat and oil industry as a perfect example. The first thing to note is the fact that the explosive development of the Ukrainian fat and oil industry began with the implementation of a protective duty of 23% on the export of sunflower seeds in 1999. Thanks to the active position of Ukrainian producers and the creation of a dominant lobby in the government, it was possible to pass a law that still contributes to the development of this industry. However, recently there has been a trend of gradual decline of the processing margin. Pressure from constantly growing competition in the industry supply chain, from refinery to charterer, results in forced fight for every dollar. Given the significant pressure from internal and external market players, it becomes poorly profitable to maintain the plant and continue processing. Oil producers face rather tough conditions that make them to look for new opportunities allowing them to survive in such straits. Naturally, such opportunities arise more often under pressure and even turn to be systemic. Progressive examples include the rapid development of river logistics, vertical integration of companies from farming to ports. Regressive examples include prolonged stagnations, price dumping, depreciation of logistics services. It should be noted that the expected economic effect from the development of related areas is also relatively low, which does not allow the whole industry to function more freely.

- How do you think, what will help to solve the problem of the “dense population” of the sector within the country?

- Thanks to the concerted efforts of the Ukroliyaprom Association, headed by Stepan Kapshuk, started in 1999, Ukraine has made an incredible economic leap in 20 years and is currently the leading producer of sunflower oil in the world, far ahead of competitors such as Russia and Argentina. However, in general, the external relations with markets were formed exclusively through transnational traders - ABCD, etc., who buy crude sunflower oil for further refining and sale under their own brands. Such an intermediary scheme significantly limited the financial profit of Ukrainian producers, while it could also include an impressive income from the sale of the finished product through international retail chains. In fact, Ukraine is a raw material appendage in this industry. Every second bottle of refined sunflower oil is made in Ukraine, but few end consumers know about it. Despite the periodic desperate attempts of Ukrainian processors to break through to foreign markets with their own brands, it can be stated that the initiative in this matter was missed. Surely, the leading position on the market of crude sunflower oil is an excellent result, however, we are talking about the marginality of the whole industry. The development of foreign trade relations and diversification into deep processing is an obvious solution to this problem, which can reduce industry turbulence. The synergistic effect of joint activities will lead to higher profitability of the industry. Some industry enterprises have already shifted to the deep processing of niche blends of refined oils, the properties of which provide additional competitive advantages. For example, cooking oils with the highest temperature of smoking, which are considered safer for consumption, high oleic sunflower oil, the properties of which are equal to olive oil, or various blends of rapeseed, soybean and sunflower oils, pressed oils, organic, etc.

The trend of searching for additional margin can be attributed to the entire agricultural sector.

Many companies are thinking about production of deep processing products. We will see new production launched in the nearest future. This trend can be seen in almost all groups of the commodity segment. As Ukraine massively exports raw materials, it is typical to see the clashes between market participants in the local agricultural sector due to the lack of desired margin in the existing supply chain.

- What constraints can you point out? What is preventing the boom in food development?

- There is a number of constraining factors, the main ones are:

  • Absence of idea of product. Searching for the certain product requires attracting of additional financial resources, building of a business model, developing of a separate strategy, researching and searching for a sales market, etc. Unfortunately, most small and medium-sized agricultural companies are focused on cultivation and do not have such skills and resources.
  • Absence of trading partner in external retail sales systems. Access to this market is also rather difficult given the limited knowledge about the demand for the intended goods. However, the e-commerce market and integration into various fast-growing electronic trading platforms significantly ease the entering of Ukrainian producers to external trade chains.
  • Absence of government support at the legislative level. If we talk about government support, it should be comprehensive, with an emphasis on formation of favorable conditions for further development of the agricultural sector and its successful transformation into deep processing. First of all, the government should be responsible for launching of a mechanism stimulating the development of an internal processor. The rise of the fat and oil industry can serve as an example of effective coordination of work. Farmers need to follow such positive examples and lobby more actively for their interests at the government level.

 

“... now it is time to make adequate conclusions from the experience gained, and improve the export promotion mechanisms that were missed at the moment of the formation of the fat and oil industry”

- Thus, you propose to start with search for business partners, launch production and then lobby for these interests. In this sequence?

- Exactly. We suggest deciding on the product at first. It is extremely important to avoid mistakes made due to the trade expansion of raw materials to the foreign markets, and understand the product and external partners right now. Based on the example of the sunflower seed processing market, we can say that, despite the fact that Ukraine is the No. 1 producer of sunflower oil in the world, 90% of the Ukrainian refined sunflower oil market work under other trademarks. Few Ukrainian trademarks are presented in stores in Europe, Asia, India and China. Usually it is a private label. In fact, our own actions stimulate the development of the economies of partner countries instead of our own economy. These are missed opportunities of both Ukrainian producers and the Ukrainian government. Taking your own product to the external markets is an extremely difficult process and can take quite a long time, which may be associated with additional financial costs, and it must be admitted that not all agricultural producers are ready to invest in such long-term projects without support.

The trade lobby of agrarian processors will be able to influence appropriately decisions on protective measures in favor of processors. By building trade relations today, we will receive a high-quality base of financial guarantees and an abundance of effective margins in the agricultural sector in the future. Ukrainian producer and processor will be protected by stable external demand provided by sale of goods to external trade chains. I would like to emphasize that now it is time to make adequate conclusions from the experience gained, and improve the export promotion mechanisms that were missed at the moment of the formation of the fat and oil industry.

- However, how can a Ukrainian producer and processor reach the end consumer? These are big risks and long money. Isn't it easier to go back to the commodity markets and get the quick money that are so required to ensure the trade turnover?

- It is diversification, and its goal is to ensure the financial balance. By the way, there are already similar products of deep processing in Ukraine. These include the cultivation and processing of flaxseed and amaranth; a new direction - the production of products based on soybean and peas protein; industrial production of various texturates, including those of wheat, soybean, peas, rice; corn by-products such as modified starch, flour, gluten, various mix-feed and feed additives, cultivation of industrial hemp (seeds); production of green energy (biogas), production of snail mucin (compound protein, glycoprotein) as an effective moisturizing ingredient containing collagen and hyaluronic acid, it is a breakthrough component of the Korean cosmetics industry.

 

«…research and advanced analytics should not be neglected»

- What to do, if the global market situation is unfavorable for processor, i.e., how not let “the market go”?

- It is difficult to shut out, but possible to prevent being precautious. As a reverse example, we can examine the situation with flaxseed on the global market. In Ukraine there is a 10% protective duty on flaxseed which stimulates the domestic production. It would seem that everything goes as planned when flaxseed oil producer receives the maximum profit. However, we should consider the fact that flaxseed oil is a niche oil and its target market is much narrower than of the oilseed – flaxseed. At the same time, our competitor – Kazakhstan – has used this situation and was incredibly ahead of Ukraine in terms of flaxseeds trade. China is a main buyer of Kazakh flaxseeds as it has rather low demand on flaxseed oil and stable demand on flaxseeds. Currently, considering equal starting conditions with Ukraine, Kazakhstan has significantly bypassed Ukraine’s flaxseed export potential mostly owing to current strategy for raw material instead of finished niche product. This example shows the necessity to make thorough market analysis at the moment of formation of development strategy for particular product, research and advanced analytics should not be neglected, besides, it is necessary to react quickly and be flexible at all levels

We should understand that transition from export of raw materials to finished products is a new branch of Ukrainian agriculture development which has place for the raw materials as well as for finished products, as for example is the US, where these areas divided 50/50.  It is rather a forced measure connected with the crowded market and as a result absence of expected margin. Considering the fact that the market fights for every USD/t, currently we are not talking about what is easier to accomplish. Business is estimated by its profitability. We can talk only about what is more profitable. What should we focus on to reach the expected financial result? I daresay that over the next 10 years agriculture market will change drastically, transforming towards semi-finished and ready-to-eat products. This is stimulated by not only domestic pressure in this area, but also by global trends, connected with the transition to e-commerce and online form, which allows to define clearly the target market for the product.

- How one can attract an investor? What are the successful examples? How in general do You estimate the investment attractiveness of Ukraine? What target audience can You see for Your company?

- I believe that the most holistic and inspiring investment story belongs to Chinese COFCO. COFCO has created highly intelligent strategy focused on creation of the unified supply chain from Ukraine to China. Acquisition of the two European trade companies (Nidera and Noble) guaranteed stable raw material flow, and the goal was to increase the sales of refined sunflower oil to China under its own brand. Currently this strategy has justified itself for 100%, because COFCO and WILMAR control around 70% of market of refined bottled oil in retail-chains of China. We can only admire the scale of this strategy.

If we talk about the Ukrainian agricultural sector, the level of interest from foreign investors is still quite high, but usually there is nothing more beyond this assessment. There are some objective reasons why the relationships cannot take place. One – is an absence of stable and clear condition for investor. Business is built according to certain laws and risk of loosing in Ukraine is very high. Sadly to state but state support is weak at the legislative level as well as at the local level, despite the fact that lately there are positive shifts, and I mean a Law on reducing of VAT rate to 14% for farmers and 30% guaranteed return of large investments, controlled by the government under a certain program

How does Ukrainian business usually find investors? Usually there are personnel hired to develop certain direction or project with the task to find or attract potential investors. In such conditions we should understand that the task is undertaken by employee who must be motivated by the owner or an authorized person. If there is not enough of motivation or the expectations of manager effectiveness appeared to be too high the owner has to start over again, and so on, and this process is often quite long and tiresome when expecting quick results. It is rather difficult to find qualified specialist of high level. In general, based on successful experience, owners can pledge at least 2 years to attract an external investor.  This is of course is financially burdensome and time-consuming. Time factor can become negative because the market does not stand still, everything moves and changes. Because of lost time the attractiveness of the project can be lost, often permanently. Finance, energy and time are not going to return to owner. We offer an effective solution which will allow the owner to receive quick results and minimize profit risks.

 

 «Idea is a most expensive product»

- What kind of solutions?

- First of all, it is a complex approach to the task and finding the product. Idea is a most expensive product. There should be tight work with the owner, manager, his vision, estimation of the busines, company development strategy, prospects of application, novelty, payback period, etc.  Everything begins with the thorough analysis of the current situation for which complex approach is applied. It is necessary to search for solutions that would satisfy both sides and this is our main task. Data search, analysis, based on the 20 years of experience, reasonable approach and of course luck, which one should know how to attract.

- Only foreign companies can be Your clients? Or You review Ukrainian companies as potential customers as well?

- Any company – foreign and Ukrainian can become our client. The most important thing is sober and objective assessment of the chances and desire to reach cooperative results. Development – is a process of moving up and forward. We design and implement ready-made projects starting from scratching the ideas to their implementation. The main criteria when choosing the product are: marginality, perspectivity, target market availability, innovation, etc. 

 

«There are laws of business and its development. They cannot be questioned, changed or adapted»

- Can be clients sometimes unhappy with Your assessment? Please, tell about “vision” and how it helps in business?

- A real professional will never work to the principle “any whim for your money”, it is important to critically evaluate your abilities and adequacy of the situation. There are laws of business and its development. They cannot be questioned, changed or adapted. The ideal proportion that guarantees the result is understanding and using these laws, desire to develop and of course the vision.

We can discuss long enough the philosophy and technical aspects of the business management, and use a lot of terms: Paleto principle, Deming cycle and so on., but the final destination should be an implementation of the basic business-idea and receiving of the economic effect. “Vision” – is what should owner or manager must have, who when deciding on business-idea gets clear picture of the project result. While working on a project it is normal to make mistakes and have some problems. Business activities are compared with an iceberg for a reason, as everything most ‘interesting” is hidden under the water. Absence of such skills brings risks of additional financial losses for both investors and partners. This skill must be developed, it is pivotal because the leader who has a “vision” will always come back it his mind to the vision of the project installation.

- Aurora Stern GmbH is registered in Austria. Were there projects in Austria? What projects are in progress now?

- Yes, we managed to fulfill several successful projects. The most interesting of them were the development of ready-made business-plan, business model and design of the retreat-center in suburbs of Vienna, Hofburg, on a 5 ha of land, as well as development of a business model and construction of fast-food line and launch of burger chain “167 ℉” in Vienna, Austria. Besides, 167 ℉ – is a temperature of the ideal meat roasting, and this naming became viral. We had a great launch but the pandemic in Europe negatively affected our plans. Currently, we focus on the development of our own projects in Ukraine, and also projects aimed to attract large investments from our foreign partners, particularly for construction of plant of deep processing. The investors willingly agree to negotiate with the Austrian company as it gives them a possibility to stay in one legal field, which is kind of guarantee for them to fulfill taken obligations. On the other hand, our Ukrainian partners can be attracted by the possibility to launch their products into retail in the Middle East and Europe via our trade companies.

- What countries do You work with to attract investments?

- Currently we cooperate with the investors from the Middle East and China, Europe, but we also are open to offers from everyone who is interested in the agrarian sector of Ukraine and related areas.

- Thank You for this interview and good luck!

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