Ukraine - new trends in agrarian business

Since the early 2000s development of agricultural holdings became the dominant factor for the agricultural business in Ukraine. The TOP-5 leaders of agricultural land bank dramatically changed during 6 recent years. 5 agricultural holdings, which land banks previously exceeded the level of 100 thsd ha, either disappeared from the territory of Ukraine, or significantly reduced the volume of its business activity. The reporting factors show unprecedented dynamism in development of the sector. The present article analyzes the major reasons influencing development of the current leaders and causing substantial reallocation of the market.

Changing of the leaders

A half of the leaders of the TOP-10 as of 31.12.2007 kept its positions in the TOP-10 rating for the present moment. Also, it is worth noting that Land West Company and Rise CJSC, which in 2007 took the 3rd and 5th positions respectively, became the foundation for development of the leadership positions of the agricultural business of Ukrlandfarming, which began its formation in 2008, and realized active expansion in 2011. The key reasons for development of such dramatic changes were the following ones: presence of the financial base, vertical integration and reducing the role of holding companies, founded on the basis of industrial plants, but not business-profitableness of agricultural businesses.

Finances are the staff of life

The financial crisis of 2008 greatly influenced the Ukrainian market, and predetermined the further development of the market of mergers and acquisitions for the following 5 years. The companies which had some access to international investors and creditors, started actively buying assets from the owners, who did not have such resource. And it is not surprising that as a result, 8 of 10 current market leaders attracted finances of foreign investors or creditors in the form of IPO, private placement, issuing of straight eurobonds.

According to estimations of the company Deloitte, Ukrlandfarming and Kernel made a bid for the jet growth, and started purchasing holdings with the average land bank of 40-140 thsd ha. Acquisitions of Stiomi Holding and Druzhba Narodiv became the indicative events for Kernel. The companies NCH, Mironivsky Hliboproduct and Mriya preferred keeping more moderate growth, and did not acquire the companies with land bank of over 50 thsd ha.

Such market players as MCB Agricole and the holding Valars left the market, due to failure of the IPO.

Due to the access to cheaper financing, the new wave holdings managed to significantly increase their capital investment, which contributed to increasing of their yield indices and improving of the profitability. The sum of fixed assets per hectare of the leading companies exceeds 1,000 USD/ha. As a result, during three recent years the yield indices of the leading agricultural holdings exceed the average yield in Ukraine by 25-35%, according to the Deloitte analysis of annual reports of the leading companies.

Vertical integration

Another trend of five recent years is active overgrowth of the land banks by holdings-processors. It is no secret that Ukrlandfarming is the leader on the market of eggs by Avangardco, Kernel - production of sunflower oil, Mironivsky Hliboproduct - poultry meat, and Astarte - sugar.

The presence of processing plants became rather important factor for the further growth of the general value of the business, as the factor reduced volatility and improved marginality of the processing business through development of the private raw material base. In the future, we expect for the further growth of the influence of vertically integrated holdings on the Ukrainian agricultural market, due to significant decreasing of prices for grains and oilseeds.

Quit of the previous leaders

During five recent years the agricultural business significantly strengthened its position. To date agricultural assets are more considered as the business generating profit, than the assets requiring permanent financing. As a result, there was observed reorientation of many agricultural holdings. The owners refused to use lands which are difficult to build a successful working business.

A lot of the old leaders of the agricultural business left the market, because they mainly served as some kind of application to various industrial giants. For example, Agricultural firm Shakhtar almost left the market, it was affiliated with PJSC Mine named after A.F.Zasyadko; the assets of PJSC “Ilyich Iron and Steel Works of Mariupol” got new life in the form of the holding HarvEast. According to the analysis of information in the mass media and rating agencies, during last year the holding Nafkom significantly reduced its activity.

Some displacement of the major location of agricultural holdings towards the center of Ukraine became another trend in development of the business. According to Forbes, the holding SintalAgriculture has a very difficult situation, its land bank exceeds 150 thsd ha, and primarily located in Kharkiv and Kherson oblasts.

Moderate increase

The current economic situation is reminiscent of 2008: over 50% UAH devaluation, limited access to credit resources, and rather great uncertainty on the further development of the economy. Should we expect for significant changes in the structure of the market leaders in the following three years?

In our estimations, we rely upon the current conditions on the land market. But it is extremely difficult to forecast development of the issue after 2016, taking into account the permanent political crisis.

We believe if the current political crisis does not end with the complete collapse and the land prices not fall, the business activity of the current leaders will be much lower compared with 2011-2013 period. The two leaders, who continued rapidly developing during three recent years, will mainly focus on increasing the profitability of their current assets. In turn, the other market players will continue growing at moderate rates, within availability of favourable offers in the nearby areas where the companies operate.

We do not expect for appearance of new significant players on the Ukrainian land market during three following years, as it happened with Kernel and Ukrlandfarming, taking into account scarce financial resources of the Ukrainian business.

In the long-term prospect, in the case of stabilization of the political situation, the Ukrainian market should expect for new sales transactions of Ukrainian holdings specializing exclusively in crop production, in favor of foreign investors, who will have active interest in purchasing of Ukrainian land areas.