The study “Development of Ukraine’s Agribusiness Strategies. Investment Climate. Factorial Analysis” presents an analysis of strategies for agribusiness development in Ukraine with applying new forecasting tools, shows the role and impact of different factors on the development of agricultural production and exports in Ukraine.
The study’s goals include showing development trends and growth in agricultural companies’ profitability in 2017-2022, as well as strategies of Ukraine’s agriholdings and banking sector.
Key points and issues covered in the study:
Geopolitical factors. Key trends in the global market and Ukraine’s economy
Investment climate forecast for Ukraine's agricultural sector
New pricing tools in commodity markets
Forecast price behaviors resulting from natural disasters in any grain growing country
Key tools for increasing profitability of agricultural companies in Ukraine
Development trends in the agri company structure, 2017 – 2022
Opening the land market: possible scenarios of land market opening, active merger and acquisition processes, developments in the agri company structure
Analysis of strategies of Ukraine’s agriholdings, farmers and banking sector
Short-term, medium-term and long-term crop forecasts.
The most important points in the latest update:
Competition as a tool for stimulating production
In the context of the study, competition at all levels is not considered as a tool for stimulating production (product quality improvement, performance growth, reduction of costs, development of new products), unlike it was done before. The assessment of the Ukrainian agricultural sector’s prospects is based on the fact that the goals and methods of keen competition in global commodity markets currently include the following: squeezing other producers of similar products out of the market, monopolization of the market, elimination of competition as such for gaining monopoly profit.
Upsides and downsides of opening the land market
This study assumes that resolving the land market issue is an aspect of the state agricultural policy that aims at bringing Ukraine’s agricultural sector to a steady, strong position in the global market. The declared goals of opening the land market include setting up a ten-year grace period when only farmers will be eligible to buying land or only farmers will be granted the preemptive right to this. However, no information is available on tools for solving this task. The most probable mechanism of such a grace period could envisage the creation of a state land bank.
Correlation between land bank size and grain yields, 2013-2015
Source: State Statistics Committee of Ukraine
Key factors of investment policy in Ukraine’s agricultural production
Other contributors to the 2015-2016 recovery of investment in Ukrainian agricultural production included high devaluation of the national currency and an aggressive policy of input suppliers. These factors curbed growth of agricultural technology prices in US dollar terms and increased farmer revenues/profits. However, potential of the above factors as competitiveness drivers had actually been exhausted by 2017. Further development of Ukraine’s agriculture is determined by investment climate improvements and credit/financial sector enhancements with a declining role of the informal alternative credit system and farmers’ own funds.
Peculiarities of strategies in Ukraine’s agricultural sector
The current strategies of Ukraine’s agricultural sector are based on linear forecasting methods. As a result, these strategies overestimate quantitative production parameters and focus on production aspects but underestimate the role of profitability. Crop growing develops primarily by importing advanced agricultural technologies and intensifying grain and oilseed production. This is the most clear but costly tool for increasing grain crops and exports. At the same time, the technological factor is almost always considered as a production performance driver acting isolatedly, i.e. with no significant improvement in the company management structures and their functions.
Conditions for effective development of agricultural production
In present, the development of agricultural production needs to be based on thorough processing of information on market changes. Also, new market formation factors are to be taken into account, and company development scenarios and effective models are to be elaborated. On that ground, agricultural policy will create conditions for higher profitability of agricultural companies, i.e. it will reduce risks and enhance their investment appeal.
Pricing chain of agriholding products
Relevance of the subject:
When developing their strategies, major participants of the grain and oilseed market need to take into account that farmer revenues and profits continue to be the main source of finance for agricultural production in 2017 - 2022. The role of the banking sector and forward contracts is insignificant.
Macroeconomic stabilization with very likely preservation of low grain and oilseed prices will lead to a drop in crop growing margins and farmer revenues/profits. Consequently, this will significantly undermine possibilities for financing agricultural production from farmers’ own reserves with the absence (or a minor role) of alternative funding sources.
Increasingly stiffer competition due to expanding investments in other farming regions (South America, Russia, Central and Eastern Europe etc.) reduces access of Ukrainian grain to world markets. Some countries continue to actively exploit currency exchange tools that, combined with a significant boost in investments, will enhance their competitive positions and enlarge global market shares in the coming one to three years. This makes Ukrainian companies focus their marketing strategies on getting a foothold in target markets and extending the range of export products toward those with higher added value.
Agricultural production in Ukraine increasingly transforms from costly and labor intensive into capital-intensive one. The amount of investment determines agricultural production growth with a 2-3-year lag. This is confirmed by Ukraine’s record grain crops and exports in 2014-2016 following a significant investment inflow during the 2009-2013 period of high prices for agricultural commodities.
Studying and forecasting methodology
1. Key trends of the global market. Open economy of Ukraine
1.1. Paradox of the 21st century: An era of cheap raw materials against stagnation of the world economy
1.2. Growing role of geopolitical factors
1.3. Regionalization as the main trend of the global economic development
2. Ukraine: Intensification of the agricultural sector as a response to new challenges
2.1. State agricultural policy
2.2. Investment climate forecast for Ukraine’s agricultural sector. Margin/profit of companies as the main source of financing agricultural production. SWOT analysis
2.2.1. Agricultural sector: From labor-intensive production to capital-intensive one
2.2.2. Forecast for Ukraine’s investment climate
2.2.3 Analysis of consequences of the national currency’s devaluation
2.2.4 Analysis of price behavior resulting from natural disasters in any grain growing country
2.2.5 Impact of the global commodity market’s price cycle (price growth) on revenues of Ukraine’s agricultural companies
2.2.6 New pricing tools in commodity markets
3. Opening the land market. Forecast for post-trends
3.1. Opening the land market: Forecast for agri company structure
3.1.1. Agricultural sector condition features the following trends as of 2018
3.1.2. Scenarios of land market opening
3.1.3 Development trends in the agri company structure, 2017-2022
3.2. New reality: Strategies of key groups of agricultural market participants
3.2.1. Analysis of agriholding strategies
3.2.2. Analysis of current strategies of Ukraine’s banking sector
3.2.3 Analysis of the behavior of farming entities
3.2.4 Analysis of strategies of input suppliers
3.3. Ukraine: Key tools for increasing profitability of agricultural companies
4. Short-term, medium-term and long-term crop forecasts
In view of high capital intensity of agricultural production and consequently aggravating struggle for markets and demand, the investment focus shifts from grain producing countries to grain buying ones in order to set up own local infrastructure there for promoting own commodities and generating demand for them.
The majority of the world’s economies have not yet overcome the consequences of the 2007-2008 financial crisis. The current strategies of Ukraine’s development do not adequately reflect the economy’s place and role in the context of its new openness level and, as a result, fail to adequately reflect its global competitiveness. Two strategy options dominate now. The first one consists in making partial, band-aid decisions able to improve and/or stabilize the situation in the short run. The latter of the two strategy options envisages developing and adopting new goals, incentives and equilibrating mechanisms in the course of economic/consumption growth, i.e. search for a new paradigm of the agricultural company’s development.
In the medium term (3-5 years), the strategies should avoid situations when investments are sourced from devaluation, not from profit and effective conduct of business. Unfortunately, there is no understanding that Ukraine’s open economy sharply enhances the role of performance and real profit indicators calculated according to international methodology and parameters.
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