Figure 2: Increase in world consumption offers bright perspectives to grain exports

Source: World Bank, USDA, KNU estimates

Price boost. 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.

Devaluation brings additional margin. Such factors as prevalence of UAH expenses in prime cost of agricultural companies whose significant part of revenues comes from exports and prospective devaluation (up to 9.18 USD/UAH in 2013 according to the IMF) create grounds for profitability growth in the grain trade market and provide ample opportunities for price competition in the global markets.

Low yield – hindrance and opportunity. Grain output in Ukraine is limited by low crop yield which is twice less than in the EU, and is caused by poor agricultural machinery and relatively insignificant fertilizer usage. Improvement of these figures may be essential to raise crop yield. A positive trend over the last decade gives hope as average crop yield increased by 10% in 2006-2010 comparing to the first half of the decade.

State to be a partner. The government continues to take measures to search for sources of financing (thus there has been reached an agreement of issuing a loan by the China Exim Bank), and 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 a VAT liability). 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 of the agricultural sector only exist on paper.

Land moratorium: easy to abolish, difficult to switch. There are grounds for growing expectations for cancellation of the moratorium on land sales which may result in increase of financial leverage of agricultural companies and affect investment policy. Yet significant changes will not occur in the short-term outlook taking into account valid land lease contracts and lack of legal mechanisms to organize a land market in general, and problems with the land cadaster in particular. Therefore, influence of the aforementioned risk on liquidity of manufacturers and performance of grain traders is minimal.

Costs may hold a threat. Expansion of the grain market may be restricted by: 1) increase in gas prices; 2) low diversification of fertilizer suppliers (Russia provides 75.7% of NPK and 93.7% of nitrogen fertilizers; Belarus supplies 96.7% of Potash); 3) grain storage in current elevators which is limited to 3-4 months to prevent decrease in value; 4) state monopoly of railroads that are one of the means to carry grains to seaports. Thereby each of these factors is a potential threat to raise expenses of grain manufacturers and traders.

Climate risk management needed. Crop yield and grain output are crucially affected by climate risks that are poorly controlled in Ukraine due to underdevelopment of agricultural insurance. At present only 3% of risks are covered comparing to the same figure of 70-80% in the EU. Therefore, profits of market players depend significantly upon climate changes and are referred to be an additional source of uncertainty.

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