Minding Ag's Business

More War Wounds for a Corn Contender

Provided the Ukrainian economy recovers its war wounds quickly, USDA expects the Former Soviet Union (largely with Ukraine's help) to boost corn exports 21% over the next decade. They already command a strong market share in the Middle East and north Africa, fast growing markets.

Just a few years ago, Ukraine boasted some of the world's most profitable grain farms. Institutional-scale agribusinesses--some approaching 1 million acres-- accounted for more than 25% of the Former Soviet Union's output. Money from as far as China, the Middle East and European stock markets also helped add 21.7 million new acres of Black Sea crop production since 2005, versus just 9.8 million acres in the U.S. That growth spurt also led seed companies to believe Ukraine could easily double corn yields. USDA expected it to soon displace Argentina as the world's second largest corn exporter, after the U.S.

This week, moods at the Ukrainian American Agrarian Congress in Washington, D.C. were definitely more somber.

After all, global grain prices have swooned since 2012 and the war with Russia triggered economic ills that threaten the agricultural powerhouse's ability to expand. The national government itself is on the brink of defaulting on its bonds. Billions of new dollars in foreign agriculture investments have hit the pause button, as the country's currency plunged 55% against the dollar and inflation spiked above 30%.

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Some Middle East farm investors now refuse to put another dollar into their huge agriculture properties until the economy stabilizes, a Kiev lawyer told me. His firm alone has $1.5 billion in agriculture deals now on hold. For anyone with a high tolerance for risk, it might actually be a good time to invest, he added: Turnkey ag companies that hold Ukrainian farmland leases outside the war zone sold for $325 to $500/acre before the conflict, he said, but are running just $40 to $60/acre now. (You don't get land ownership in Ukraine, but farm companies come with leases and larger ones with grain storage, processing plants and other vertically integrated business models.)

Risk insurance, which covers loss of property because of war or political conflict, "needs to be like tap water, cheap and readily available," the Kiev lawyer said. Investors also need guarantors for loans and confidence that their property rights will be honored, he added.

Institutional farms like Astarta-Kiev, a 300,000 acre row-crop producer with interests in cattle and processing, say fellow farmers are feeling the pinch in bank credits. Liquidity just isn't there for 2015 input financing, its CEO said. If a firm borrows money in local currency for operating lines, rates were running as high as 32% in March. Rates ran only 12% to 15% for borrowers who agreed to repay in U.S. dollars, but not everyone has access to U.S. currency. "We need working capital for financing," he said. "That's the lifeblood of the Ukrainian economy."

John Shmorhun, a former DuPont executive who now heads a 300,000-acre, publicly traded Ukrainian farm called AgroGeneration , agrees the cost of credit will delay the country's ag trajectory. "As a company, we're all positioned to grow, but we're hunkering down a bit," Shmorhun said. In addition to crop financing, investors need more confidence before restoring equity financing, he said.

Ukraine possesses more than 79 million acres of arable land--twice the size of France--yet only farms 67 million of that. Twelve million acres are not even touched, Schmorhun said. Then add all the inefficiencies--like a 15% to 20% yield loss from the field to the elevator, a 35 mmt shortage in grain storage (about the same as Brazil's) or average yields a fraction of the western world.

"We can double yields in one or two years, once a western company moves in with better technology," Shmorhun added. With Black Sea ports, a river and rail based export routes and good access to importing countries, there's no reason Ukraine can't become a major feed grain exporter. No reason, except geopolitics.

Follow me on Twitter@MarciaZTaylor

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