A flurry of trade bans and poor weather has beset Ukraine’s agribusiness sector. This doesn’t mean, however, that the nation’s leading listed companies are not in for a good season.
The 2011 harvest season started off with a record grain crop of 57 million tons. Since then, however, the sector has run into a number of problems, both natural and political.
Yet sanctions on Ukrainian food exports to Russia and Belarus are often not consequential, while a lower harvest does not necessarily spell trouble for major companies.
Threats of trade bans have been bandied around by Ukraine, Russia and Belarus in recent weeks. Trade with Belarus is marginal, though, and only one threat has been enforced.
Since the beginning of February, Russia banned dairy products, primarily cheese, from three Ukrainian producers, claiming they contained palm oil. Later in the month, four more names were added to the list.
The ban includes Warsaw-listed Milkiland, which exports a sizable amount of its products to Russia. This, however, is the only listed company likely to feel the effect of the bans. Yet even this is mitigated by the fact that it has decreased the prices it pays to its milk suppliers, analysts say.
The possibility of a ban on Ukrainian sugar has also been lobbied by Russian sugar producers, though no action has been taken as yet.
Konstantin Fastovets, agribusiness analyst at the investment bank Renaissance Capital, said this is not much of a surprise, particularly given Russia’s pre-election fever.
“This happens from time to time when Russian groups lobby restrictions,” he said. “It’s always profitable for Russian producers to restrict imports.”
Farmers are always the ones who have the problems,
– Pavlo Bidak
Nature may present a more serious threat than geopolitics.
The spell of extreme cold and low rainfall that hit Europe in the past two months has taken its toll. Over one-third of the country’s crops are in bad shape, according to the Agriculture Ministry.
The situation is particularly bad for wheat, 40 percent of which may have to be replanted, said Pavlo Bidak, as food and agribusiness sector analyst at Kyiv’s ICU investment bank.
Yet a fall in total output could benefit the biggest companies by driving prices up. Bidak emphasized that in 2010, when the total grain harvest was just 39.2 million tons, profitability for top players was higher. Agriculture companies can benefit from price increases, he said, but added that complaints are to be expected.
“When the harvest is good it is bad, when the harvest is bad it is bad. Agrarians are never happy,” he said.
Differences between business models also mean a low harvest will affect companies differently. London-listed egg-producer Avangard, for instance, will likely have to buy crops, Bidak said. Meanwhile, poultry giant MHP, also traded on the London Stock Exchange, furnishes itself in-house and will, as a result, be better off.
Yet this does not mean that either company is in for a bad year. Asked about the “hot stocks” for the upcoming season, Fastovets said that MHP topped the list, as previously, but Avangard was also looking underpriced at the moment.
The agricultural sector as a whole, however, will not fare as well.
“You always have someone who wins and who loses,” Bidak said, adding that exporters and big buyers would come out of the current situation relatively unscathed.
Farmers who sell their produce will find the going more difficult, though. The asymmetry of power between them and their clients means that they are price-takers and any dent in profit margins is thus pushed down to them.
“The farmers are always the ones who have the problems,” Bidak said.
Kyiv Post staff writer Jakub Parusinski can be reached at [email protected].
