Interview with Sergey Feofilov, Founder and CEO of the company UkrAgroConsult, Ph.D. in Economics
UkrAgroConsult: In December, we traditionally sum up the results of the past year. How reliable did your forecasts for 2018 prove to be and what are the expectations for the coming year?
Sergey Feofilov: The forecast success rate is good. Of course, I failed to forecast some political events and factors. However, these are anyway definitely surprises, often even not kinder surprises.
The cropping pattern was shaped under the impact of crop margins. The application of advanced growing practices financed directly by farmers resulted in a bumper crop and increased competitiveness of Ukrainian products in the world market.
Unfortunately, the forecasts for the logistics sector came true. The rail transportation problems are so critical that major private investments were made even though the railways remain state- owned. The private railcar fleet doubled in 2018 that relieved the workload on railcars. The focus is now shifting towards another state monopoly – locomotive stock.
UkrAgroConsult: Is the record 2018 crop of grains and oilseeds in Ukraine an achievement or an ordeal for agricultural companies? What weaknesses did this record help to reveal? And what new opportunities were opened?
Sergey Feofilov: Yes, indeed, Ukraine harvested roughly 69 MMT of grain in 2018. Its corn crop set a record; the country is the third largest corn exporter after the U.S. and Brazil. Ukraine managed to retain its fifth position in the ranking of wheat exporters.
Four out of the top five destination markets for Ukrainian wheat are distant countries (Indonesia, Philippines, and South Korea). Meanwhile, Egypt, Bangladesh, Thailand and India reduced purchases of Ukrainian grain this season compared with a year ago. In general, Ukrainian exporters managed offset the loss of the Indian market, which was the largest buyer of Ukrainian wheat in the 2016/17 season. The new major buyers are also located mostly in Asia.
Indonesia is a particularly important market, which is only second to Egypt in terms of wheat imports. This Asian importer has been topping the list of buyers of Ukrainian wheat for a second straight season.
Ukrainian corn deliveries to the EU totaled 4.4 MMT during the first five and a half months this season, or 123% more than a year earlier. In the European market, Ukraine pressed Brazil, the second largest supplier, whose share shrank by 10% and shipments fell by almost 400 KMT.
Certainly, problems also exist. As has always been the case, the main obstacle was Ukraine’s logistics, which failed to promptly deliver the bumper grain crop to silos and ports. The second bottleneck was storage capacities, especially during the peak of harvesting the record crops of corn and sunflower seed.
UkrAgroConsult: Are there any preconditions for breaking this record in 2019 as well?
Sergey Feofilov: Ukraine has harvested record grain crops over four consecutive seasons. Following a slight crop decrease in 2017, overall grain output hit a high again. Undoubtedly, there is every chance that production will keep increasing, unless curbed by weather adversities. The development of growing practices continues, making it possible to reduce farmer risks.
2019 will probably witness a shift in priorities. We expect restoration of barley production, a rise in wheat and, most likely, some drop in corn. However, total grain supply from Ukraine remains on the rise, and the country will retain its position as a strong player in the world agricultural market.
UkrAgroConsult: Ukraine still experiences a boom in construction of port terminals. Does its handling capacity match the gains in the crop and exports?
Sergey Feofilov: Because of a lull in the commissioning of new terminals in 2017, it seemed that the construction boom was over. However, in 2018, port silos were completed in the area of Mykolaiv and MV Cargo started operating in Yuzhny. The grain-handling sector remains investment-attractive.
Almost 6 MMT of grains, oilseeds and meals went abroad by sea in November. This is a new monthly record for Ukraine.
UkrAgroConsult: Is the construction of inland silos also investment-attractive?
Sergey Feofilov: By default, production growth is at least an incentive for upgrading silos, if not for building new ones. The market of grain storage facilities still experiences an upward trend in construction of farm silos, which are of small capacity and used for selling grains at the time of their peak prices. Partial compensation of the equipment cost (up to 40%) by the government was helpful as well. As a result, despite a record crop of grains and oilseeds, farmers have harvested almost all corn before the winter onset for the first time in many years. Previously, up to 5-10% of its crops entered winter standing in the field.
For inland silos, it is increasingly important to be capable of either loading route (single-destination) trains consisting of 45-55 railcars or loading 40-50 railcars for 2-3 days (to be semi-route ones – it’s a joke). Such silos will become much more numerous in 2019.
UkrAgroConsult: Rail grain deliveries remain in the focus of attention of the agricultural market. Did 2018 bring any changes in this sector, what can be expected in 2019?
Sergey Feofilov: The new tough requirements to railway logistics include much higher predictability of the administration’s tariff policy and a sharp increase in the transparency of the distribution of railcars and route trains by transport operator.
Rail transportation is the main and most profitable channel of grain delivery to the country’s export hubs. However, rail freight rates have risen by 89% over the last five years, but this has not solved the transportation problem. 2018 was an exception in terms of tariffs growth: the Ukrainian Railways did not index them this past year. However, the railcar component deregulation has produced the same result: rates for using state-owned grain carriers have increased threefold over the year.
Next year’s main novelty is pegging tariff changes to a so-called index of producer prices. At the moment, the situation looks like the tariff cost may increase at least by 24%.
UkrAgroConsult: What event in the world, in your opinion, became the most significant for the agricultural market in 2018?
Sergey Feofilov: Of course, the development of relations between the U.S. and China. The slump in China’s demand for U.S. soybeans certainly resulted in volatility of world prices and may sharply change the cropping pattern. Owing to high premium China is ready to pay for non-American soybeans, Argentina alone managed to earn an estimated over USD 10 Bl. Naturally, expanding soybean acreage for next year’s harvest in Argentina and Brazil looks reasonable, as well as a rise in U.S. corn and wheat plantings. This determines the impact of global trade controversies on the situation in Ukraine, where wheat and corn are the most important grains.
China has resumed soybean purchases as of the end of 2018. I believe these purchases are not very stable. Therefore, it is quite likely that U.S. plantings of wheat and particularly corn will expand and prices for these crops will fall.
UkrAgroConsult: In this case, it is more reasonable for Ukrainian farmers to switch to oilseeds, isn’t it?
Sergey Feofilov: As a rule, oilseeds provide for better margins. Last year, rapeseed was the most profitable crop out of the “big six” (wheat, corn, barley, sunseed, soybeans, rapeseed – editor). Therefore, farmers increased winter rape plantings for the 2019 harvest. But surprises are quite possible. Vegoil prices have been falling for three years now. The record sunseed crop in the Black Sea region in 2018 only aggravated the situation. Further acreage expansion and supply growth will be detrimental to oilseeds.
When making decision on the cropping pattern, farmers need to take into account not only marginality, but also to thoroughly monitor the market situation, at least in the medium term. The current season only proves this. With the bumper crop of sunflower seed, exports of both sunflower oil and meal are down from the previous record set in MY 2016/17.
A similar situation is seen in the soybean market. Theoretically, the fact that soybean export VAT is now only refunded to immediate producers must stimulate domestic soybean crushing. Although Ukraine possesses sufficient crushing capacities, we observe no rise in soybean processing as of today. In view of global oversupply, penetrating new markets is a high-priority task.
In conclusion, I would like to wish everybody wise decisions, successful projects, steady growth in the rapidly changing world.