Main trends

Crop yield vs. fertilizer use. Average crop yield of sunflower oil in Ukraine is one of the highest in the world. Given favorable climate sunflower oil of the Ukrainian origin remains competitive on the market despite low fertilizer use. Grain agricultural output of Ukraine is significantly less than in the EU and USA and is caused by poor agricultural machinery. Kernel’s crop yield surpasses average figures in Ukraine while its sunflower and maize agricultural output exceeds average crop yield figures of the strongest agricultural producers in the world. Moreover, it was achieved by relatively bigger fertilizer use. Hence we do not expect further improvement of Kernel’s crop yield taking into account average figures in the industry.

Neighboring opportunities to integrate. Russian agricultural sector attracts Ukrainian producers with its 72% of non-cultivated farmland (Ukrainian figure stands at 33%). Big players often open an affiliate in Russia to get an opportunity to buy land and to prevent themselves from negative impacts of any possible trade wars in the future taking into account a recent precedent with dairy products.

Advantages of using competitive market positioning. We see Russian wheat and sugar beets more competitive comparing to products of the Ukrainian origin assuming that prime cost and export prices do not differ significantly. Thus, Ukrainian agricultural producers that integrated into the Russian market have an opportunity to use funds accumulated from production and sales of sunflower, corn, soybeans, barley and rapeseed in Ukraine to finance their activities connected with manufacture and sales of wheat and sugar beets in Russia.

1 – maize; 2 – wheat; 3 – soybeans; 4 – sugar beets; 5 – barley; 6 – sunflower seed; 7 - rapeseed

Price boost. Decrease in a spread between world and export prices of Ukrainian agricultural products ascertains the fact that foreign consumers are willing to pay some extra margin to a Ukrainian manufacturer for available transport infrastructure connected with a favorable geographic position. World grain prices impacted an income margin of traders and demonstrated rather high volatility. The spread between winter and fall prices reached up to 10% and the overall trend was directed upwards with an average annual growth of 20% over the last 3 years. Absence of destabilizing factors corroborates the aforesaid trend.

State to be a partner. The government continues to create a tax friendly environment (the fixed agricultural tax has been launched to exempt a payer from the income tax and other fees as well as an opportunity not to pay VAT). Assignment of quotas, public purchase and interventions are governmental tools to regulate the grain market. Nevertheless a business environment in Ukraine remains intransparent and complex for foreign investors while a majority of officially declared state support programs for the agricultural sector only exist on paper.

Searching for new trade areas. Continuing growth of Ukraine’s dependency on global processes and available arable land stimulates the government to search for new trade areas. In case of attracting foreign loans and investment from potential buyers of Ukrainian agricultural products it is planned to improve production technology, renew fixed assets of agricultural enterprises and to maintain further cooperation with China, Qatar and Bangladesh. Kernel attracted loans in USD with a low interest rate which it used to strengthen its position on the market.