ХІІІ International Conference “Black Sea Grain - 2016”
April 20-21, 2016, Kiev, InterContinental
 
 

Conference report

 

Report about the IX International Conference “BlackSeaGrain-2012”

BLACK SEA GRAIN: MARKET MAKER

 

BLACKSEAGRAIN CONFERENCE: THE ROLE OF THE BLACK SEA COUNTRIES IN THE GLOBAL AG BUSINESS IS GROWING


The 9th annual international conference “BlackSeaGrain-2012: Market Maker” was held on April 18-19, 2012 in Kyiv.

Despite the rainy weather in Kiev, the lobbies of "InterContinental" hotel were full of excitement: the conference was attended by about 700 people - representatives of more than 400 companies producing cereals and oilseed crops (farmers, agricultural holdings), as well as traders, brokers, representatives of  investment banks, insurance and consulting companies from 52 countries worldwide.

Three years ago, the number of participants was much smaller. Such rapid growth proves that "Black Sea Grain" conference has become perhaps the most representative agricultural forum of the region.

LAND BELONGS TO GOD, PEOPLE – TO THE GOVERNMENT

Approximately in this way participants of the first round table ("Government policies on land market regulation. Today and in the future”), evaluated the future of a draft law on agricultural land market regulation and lifting of moratorium on land sale and purchase in Ukraine.

There is no proper legislation on land market now and in the nearest future (a year at least) it will not appear. The prospects for lifting moratorium are vague, though operators of the ag markets have learned how to do business without land purchase long ago and build their relationships on a basis of land lease.

Moreover, even if the law is voted in, due to a wide range of factors (to be described further), the land market will start functioning with a great delay and the law will only consolidate the existing status quo. Briefly, the market de-jure is absent, but de-facto land lease  market works and the land tends to move to the most efficient companies.

Opening the session, a representative of Ukrainian State Land Agency - Yevhen Berdnikov - described government’s point of view on land reform. In particular, he stressed out that the draft law on land market, adoption of which government linked to the moratorium lift, is unlikely to be adopted before elections to the Ukrainian parliament in Autumn 2012 for political reasons.

According to the existing Land Code, moratorium on farmland sale/buy will be removed in case if two more laws enter into force: the Law on Land Registry and the Law on farmland market. Back in January 2011, President of Ukraine, Viktor Yanukovych, stated that maximum in 6 months the Parliament will adopt these two laws. However, if the first law was passed and accepted with great difficulty, the other stuck to the second reading. "UkrAgroConsult" predicted the unlikelihood of law approval by current Parliament - it is a question for new members of parliament (after the 2012 election).

"The real land market should not be expected even with a pass of the Law on land market regulation", - emphasized a representative of a law firm "KM Partners" -  Maksim Oleksiyuk. In his opinion, the draft law has too many limitations for a potential buyer (the maximum allotment in the ownership of one person is 100 hectares, fees for the resale of land, land market agents can only be citizens of Ukraine and so on). The draft law raises questions and a speaker of a law firm "OMP" Nikolai Orlov, who stated that the bill in its current form does not regulate a legal status of not solicited shares (including bequests, but which did not find the heirs), roads, forest belts, lands under agricultural infrastructure and so on.

In addition, according to Mr. Oleksiyuk, citizens of Ukraine are not a source of investments, so the future land market simply will not have any buyers. The speaker was supported by a Director of Strategic Development of “UkrAgroConsult” - Bohdan Chomiak. According to Mr. Chomiak, successful agricultural companies in Ukraine do not focus on the purchase of land.

Participants of the round table were inclined to believe that even if the law on the land market regulation is adopted, it will not affect today's existing relationship between the owner and producer that have been firmly fixed by lease contracts. This, in particular, was said by Dr. Julian Rice (BEITEN BURKHARDT, Ukraine). According to him, today more than half of the country's farmland - 17, 3 million hectares out of the 30 million ectares  - are handled on a land lease basis.

The proposed graft law does not contain any direct or indirect threats to tenants: even under the current Ukrainian legislation, lessee has virtually the same rights as owner. Moreover, the trend in legislation is not aimed at changing this situation. In addition, the draft law provides rather soft limitations on rent (not more than 10% of agricultural area and not more than 100 thousand hectares in the whole country can be leased by the same person).

Also did not see a particular future threat for the tenants a representative of the "Alexandrov and Partners" law firm  - Ruslana Muzychko. According to her,  limitations on lease areas, as well as a proposed 1% fee, which will be paid by both land owners and tenants (this legislative innovation is already registered in the parliament) put owners and tenants in an almost equal footing.

It should be noted, that general opinion was a bit discordant with a position of scholars. For example, a researcher at the Institute of Agroecology and Nature of Ukraine  -Alexander Kovaliv, stressed the fact that de facto agricultural lands are being bought and sold already for a long time, and this appears to be a threat to food security of Ukraine. "Continuation of moratorium - is bad, and a lack of an integrated approach to address land market – is even worse," - concluded the speaker.

However, it seems that majority supported the other resume: “Land market - it is like an ax in a household. It is needed, and if it is, it does not mean that the owner will only use it.”


STORMY SEA OF PEACE


Issues of government interference into ag market operation are classified as perennial. On the one hand, Ukraine has got used to this intervention and traders only would like the government to clarify the instruments of the regulation in details and beforehand. On the other hand, this indeed is the main problem for the government policy, and the government uses a wide range of tools - from outright bans to "voluntary self-limitation" of exports. Instability, alas, is stable.

Ukrainian ag markets are accustomed to a fact that agricultural exchange is not a place where the market price is determined, but the place where export contracts are registered. Therefore, the exchange is a very important lever of government influence on the market. The eternal topic "Black Sea region: export regulation or deregulation?” was discussed not only during the second round table, but also throughout the conference.

Representative of Ukrainian Ministry of Agricultural Policy and Food, Sergey Petrenko, focused his speech on statistics. According to his words, on April 17 volume of grain exports amounted to 17.5 million tons. Nevertheless, the speech of Mr. Petrenko made a positive impression by its market-based approaches to the analysis. However, conclusions from this analysis were extremely cautious, due to a too short period of agricultural policy planning.

Deputy Director of Agrarian Exchange, Constantine Balitsky, showed a bolder look. He stressed that today Agrarian Exchange company is a state-owned enterprise, which is more focused on export contracts registration (according to the speaker, in 2011 were signed/registered 7400 contracts totaling $ 72 billion UAH).

CME Group, which is managing commodity exchanges in Chicago (CBOT) and New York (Nymex), announced a launch of new Black Sea wheat futures. The standard futures contract involves delivery of 5 000 bushels (136 MT) to the Black Sea port of Ukraine, Russia, Romania on a FOB basis. The start of Black Sea grain futures trading is scheduled for June 6, 2012.

According to CME Group, demand for Black Sea wheat futures can be contributed by international grain traders as well as by large agricultural producers from Ukraine, Russia and Kazakhstan (agriholdings) which are involved into exporting activity. In the first half of marketing year demand for Black Sea grain futures may be supported by the dominance of Black Sea grain in the wheat pricing, and in the second half of the season - by importance of coming harvest for global market.

However, not all the participants shared this optimism. According to a representative of NYSE Liffe (UK) Elena Patimova, among the necessary conditions for a normal functioning of commodity derivatives market (including futures) are: non-interference (or projected adjustment) of the commodity market by the state and volatility in grain prices. In Ukraine, due to the absence of the first condition a classic futures cannot operate. E.Patimova also highlighted that other factors needed for the full functioning of commodity derivatives market are absent too: little or no potential hedgers ( large export companies operating in Ukrainian grain market tend to hedge price risks in Europe) and absence of a relevant trading platform.

The issue of the CME Group futures caused an active discussion. In particular, C.Balitsky was asked if he sees any competition of new futures contract to existing contracts (including futures) that are running on the Ukrainian stock exchanges. Constantine Balitsky replied that activities of Agrarian Exchange and CME Black Sea wheat contract are in different non-overlapping sectors. A question about perspectives of Ukrainian futures was addressed to E. Patimova who supported idea that in the nearest future, futures contracts operations in the Ukrainian ag market seems unrealistic.

 

CORN IS A QUEEN OF FIELDS AGAIN


In the nearest future analysts predict a further increase in corn production. During the second round table "Black Sea region: export regulation or deregulation?" were announced projections of future harvest and export volumes.

According to U.S. expert Mark Lindemann, in 2012 wheat crop in Ukraine will amount to 12 million tonnes, barley - 9 million tons, corn - 25 million tons, sunflower - 10 million tonnes, canola - 1 million tons, soybeans - 2.5 million tons. The expert also noted that due to adverse weather conditions, on January 2012 lost winter crops in Ukraine amounted to 43%. However, at the beginning of April "there appeared reasons for optimizing the forecasts." Among the factors determining 2012-13 MY, M.Lindeman mentioned an extremely dry autumn, a threat of early frost, poor conditions for winter crops maturing, as well as record-high area under sunflower, soy and corn.

The latter is forecasted to become a “Queen of fields”. An expert of UkrAgroConsult, Elizaveta Malyshko, noted that corn is a key crop for Ukrainian grain exports and in 2012 its volume may reach 12.5 million tons. According to the expert, last year along with traditional importers of Ukrainian maize, such as North Africa and the Middle East countries, Ukrainian maize was imported by Japan. "In 2012/13 season we expect Ukrainian grain harvest to reach 46-47 million tons, of which more than 21 million tons will be corn," - said E.Malyshko.

Another expert of UkrAgroConsult, Julia Garkavenko, informed that sunflower acreage in 2012 may reach 5.7 million hectares and production is likely to amount to 9.5 - 10 million tons. The volume of sunflower oil exports in the 2011/12 season will comprise 3 - 3.1 million tons.

According to the report of UkrAgroConsult expert Elena Loshkaryova, total amount of grain harvest in Russia, Ukraine and Kazakhstan will reach 167 million tons (which is 11 million tons less than in 2011), of which 55 million tons will be exported.

Describing transport infrastructure of exporting countries of the Black Sea region, an expert of UkrAgroConsult, Svetlana Malysh, reported that railways reforms, which finished in Russia and started in Ukraine, consist in a transfer of grain railcars to car-repair factories and establishment of private shipping firms-mediators. This can lead to negative consequences, such as increased rail tariffs. According to forecasts of UkrAgroConsult, growth rates will reach a double-digit number already in 2012.

The speaker also emphasized that this trend stimulates production of grain wagons (since 2008 its growth rate increased by 5 times), as well as purchase of the cars by traders. According to S. Malysh, bottlenecks in rail transport will stimulate interest to grain transportation by road and river. Grain barges will be walking along Dnieper, as along Mississippi.

 

EXPERIENCE OF SUCCESSEEDORS

On the first day of the conference were also held presentations by agricultural holdings that demonstrated high performance. According to a representative of Grain Aliance, Eugene Radovenyuk, issue of land ownership did not play and does not play a decisive role in a creation of effective management.

The company currently handles about 40 thousand hectares of land and successfully solves management problems as it complies with a number of conditions, among which are transparency, staff training and application of the best international practice. To date, achieved results are very positive - a significant increase in credits while maintaining the same level of production costs.

Representative of the Industrial Milk Company, Oleg Todchuk, believes that creating an effective business model allows the company, whose land bank amounts to 64 hectares, achieve a significant reduction in production costs. In particular, cultivation cost of one ton of maize amounts to $ 80 while an average cost in Ukraine is $ 143.

At the end of 2010 the company successfully passed the IPO, selling 24% of the shares on a Warsaw Stock Exchange. The received proceeds of $ 30 million were invested into development of production. The company possesses a storage capacity of 24 thousand tons, 7.5 million heads of cattle and produces 18 thousand tons of milk (2011).

 

WAS EATEN IN CHINA 


The second day of the conference was filled with presentations on the prospects of global production and consumption of agricultural products. It was agreed that a key role in the global consumption will be played by Asian countries and Black Sea region can make a good profit on it.

Opening the first session, "Global economic performance and agricultural markets" UBS representative, Wayne Gordon, drew attention to the growth trends in food consumption in the Asian region. According to him, growth of import of agricultural products to these countries will continue. Imports of soybeans to China is estimated at 156-157 million tons. The speaker also drew attention to a gradual decline in corn stocks in the U.S. (traditionally - the largest global producer of corn) and a significant increase in corn production in China. According to forecasts of USDA, corn harvest in China may reach 190 million tons per year.

When asked about reliability of USDA forecasts, the speaker answered he believes they are traditionally somewhat overstated.

Nicholas Higgins, Rabobank International (UK), continued the topic of food consumption growth in Asian countries. N.Higgins cited the following statistics: if in 2001/02 China's maize consumption amounted to 65% of Brazil’s production (43 million tonnes), in 2011/12 with its maize production of 66.5 million tonnes, China’s consumption will reach 113%!

The speaker noted that volume of China's corn imports will exceed the volume of corn harvest in Ukraine. He said the trend of increasing consumption in China will lead to an increased production of this crop in Ukraine, Russia, Bulgaria and Romania.

The role of the Black Sea countries in this process cannot be overestimated. According to General director of IKAR (Russia), Dmitry Rylko, total exports of grain from Russia, Ukraine and Kazakhstan in recent years came to the same level as exports from the United States (Gulf of Mexico), and "there is a tendency of exports growth from the Black Sea region."

General Director of UkrAgroConsult, Sergey Feofilov, touched a topic of Ukrainian potential. He estimated that the main factors to determine the country's market in the nearest future are: stability of export regime, high export capacity (due to corn), expansion of sunflower and maize acreage and a growing role of feed grains in export structure.

The potential for grain export, according to S. Feofilov, is to reach 18-19 million tons in 2012, and 20-21 million tons in 2013.

According to S.Feofilov, in 2012 MY oil crop will exceed 2011 MY level of production and will amount to: sunflower - 9.5 million tonnes (in 2011 - 9.3), soybean - 2.5 million tonnes (in 2011 - 2.3 ), canola - 0.98 million tonnes (in 2011 - 1.42).

The main problems of exporters, unfortunately, are likely to stay. Among them, according to S.Feofilov, is a slow return of export VAT, uncertainty in the regulation of markets, problems with registration of relevant documents and a sharp rise in prices for transportation.

Describing potential of Russian oil and fat sector, Vladimir Petrichenko, MICEX, RTS Russia, drew attention to reduction in Russian sunflower acreage with an increase in canola and soybean acreage. If in 2011 sunflower area was at 7614 thousand hectares, soya area - 1229 thousand ha and rapeseed area - 893 thousand hectares, in 2012 these figures stood at 7103, 1370 and 982 thousand hectares correspondingly.

Representative of KazAgroMarketing, Zhanna Baytemirova (Kazakhstan), emphasized that farmers in Kazakhstan are traditionally oriented to wheat production due to a lack of technological readiness for other crops cultivation. The country’s wheat acreage amounts to 13 million hectares out of total of 15-16 million ha. Over the past 5 years wheat exports did not exceed 9 million tons per year.

 

PROSPECTS FOR BLACK SEA REGION


The conference was closing with a session "Measuring impact of Black Sea region on global S&D”. Opening the session, president of Ukrainian Agrarian Confederation, Leonid Kozachenko, reminded that in 1888 62% of grain was exported from the ports of Black Sea. "Ukraine can and will produce up to 100 million tons of grain annually," - said L. Kozachenko and expressed confidence that in  40-50s years of the XXI century about 50% of grain will be exported from the Black Sea countries. No less optimistic view was presented by Dmitry Prikhodko, FAO, who stated that now a price-maker in the world grain market is Black Sea region.

Conference participants also discussed a number of issues directly related to agricultural production. Leading expert on agrarian sector, Peter Bride, EBRD, focused on the possibility of using future crop as collateral and attract bank loans for farmers' receipts.

This idea has aroused a great interest. Even a question of its implementation at a legislative level in Ukraine was discussed.

Operating in Brazil, such system allows bringing into ag sector about $ 20 billion of investment annually. Advisor to the Board on Agriculture at Credit Agricole bank, Jean-Jacques Herve, said that the cost of credit for agricultural enterprises in Ukraine today is not less than 21% per annum, and spoke about some mechanisms of cost reduction.

Director on Strategic Planning, UkrAgroConsult, Bohdan Chomiak, evaluated possibility of investing in vertically-integrated agricultural enterprises in Ukraine. Among investment risks the speaker named insecurity of land ownership,  shortcomings of judicial system, high levels of criminality and corruption.

In his opinion, among conditions that must be met during purchasing of agricultural enterprises in Ukraine, are - effective business plan, profitability of enterprise, not more than one owner, no problems with debts and taxes, availability of effective management, staff, infrastructure and equipment.

Representative of SGS Group Management (Switzerland), Gennady Shulga, spoke about work of inspection companies in the field of safety and quality of production. According to him, about 10% of world’s grain harvest may be lost due to pollution, insects and so on. Inspection companies not only help to save a crop, but also offer consumer a range of services, among which are - fumigation certificates, DNA analysis of the products, market research and so on.

Alexander Artiushin from SwissRe Insurance Company, reported about experience in the field of risk reduction in value chain of agribusiness. He said that profitability is influenced not only by risks of price volatility but also by interest rates, exchange rates fluctuations etc. The speaker also stressed that his company insures many of these risks, including the risk of not getting the crop.

On this optimistic note, the conference “BlackSeaGrain -2012” finished.

Black Sea Grain