Agrarian 2023: Five trends that will determine the agribusiness performance this year
How the used-to-be key sector of the national economy will survive
After the nearly total economic failure in March 2022, with 85% of businesses in Ukraine de facto shutting down, this figure now stands at no more than 30% of idle enterprises, despite power outages and missile attacks that continue even in the hinterland.
In the agricultural sector, which generated 15% of GDP and 40% of export earnings before the war, the figure is comparable to the national level. According to a study by FAO, the Food and Agriculture Organisation of the United Nations, which polled 5,230 rural households, one in four to a great deal reduced or stopped agricultural production because of the war. The percentage is higher the closer to the combat zone; in the frontline areas it reaches 38%.
Households that are engaged in the agricultural sector have also suffered the most from the declined income. While 55% of households in the country on average report a decrease in income, among agrarians this figure is 91% in the Sumy Oblast, 86% in the Donetsk Oblast and 75% in the Kharkiv Oblast. This means the previously accumulated resource, which to a large extent allowed market actors to just about pass 2022, is exhausted.
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In the context of the war and the yet vague terms of its end, it is impossible to predict the outcome of any industry, and even more so with so many variables (specifically, weather). However, some factors that will have a decisive impact on the performance of agriculture can be identified now. Mind gives a list of them.
Falling production
In 2022, the harvest in Ukraine fell by at least half compared to the 106 million tonnes record that was achieved the previous year. The exact figures for the 2022 harvest are still being debated. According to market participants' senses, the real downfall was even deeper than officially claimed.
However, the present result may be admirable compared to the 2023 harvest, producing which farmers will no longer be able to rely on the accumulated resource base that was completely spent in 2022. The reason for the increased subsidence are the temporarily occupied lands, which account for up to 30% of all agricultural land, and the growing shortage of funds in the industry. In a changing climate, cutting investment per hectare is directly proportional to the reduction in yield.
In the autumn sowing campaign for the harvest-2023, 40% less areas were sown than a year earlier, while not meeting all possible deadlines and technologies. The first was caused by extremely unfavourable weather, and economising on technology was forced due to the scarcity in floating assets. A similar subsidence is forecasted in the spring, when farmers will sow spring crops.
The owner of the Prometheus Group, Rafael Goroyan, predicts that this year's harvest will be 40 million tonnes, matching Ukraine's outcomes in the early 2000s.
The biggest drop is expected in the food crops segment that are expensive in production and cheap in output: wheat, barley and corn. Industrial crop producers will feel relatively safe.
"As for the crops structure: sunflower and rapeseed are going to remain the key crops due to the higher profitability of these crops. Sunflower is in favour, because it is processed domestically and sold as a value-added product as oil – that is, more money is returned to the country than from selling raw materials. "The demand for rapeseed is quite high in Europe, so it keeps being interesting for farmers," said Oleksandr Kravchuk, the director of Syngenta LLC, one of the leading crop protection product and seed suppliers for the agro-industrial complex. "Also, the sowing of legumes, such as soybeans, is expected to increase. The grain group, including winter wheat and barley, shows a downward trend."
There is also a distinct regional trend: the farther from the front, the more sanguine agrarians are. For example, this season in the Dnipropetrovsk province winter crops were sown 60% less, while Volhynia increased this figure by 2%. "The further we move to the East, the more risks farmers face compared to their colleagues in the West of Ukraine, and this is understandable," says Kravchuk.
Nevertheless, many farmers are going to sow, even realising that they are likely to suffer losses in autumn. Bogdan Vitvitsky, the director of Agrofirma Kornatskykh ("The Kornatsky Farm Firm") LLC, small and medium-sized producers who cultivate up to 5,000 ha and specialise in growing grain crops are in the most critical situation. "We are going to sow, because these are the requirements, in particular, crop rotation. The company, however, is immediately forced to lay planned losses," he said.
The good news is that domestic consumption will be completely satisfied even if the most pessimistic harvest forecasts come true. For example, although a historic year-on-year failure is expected for wheat, the result will still be at least 10-12 million tonnes, compared to the pre-war domestic market demand at 7 million tonnes level. Current domestic demand is even smaller.
Read also: Safety margin: How business managed to withstand the war year
Historical experiment with wintering corn
For corn, wintering in the field is technologically acceptable. This used to happen before, but never on the present scale. As of year-end 2022, about a third of corn crops (harvested from 66% of the area, or 2.8 million ha) remained in the field. And in 2023 we will have to learn in practice what came of it. Most likely, nothing good.
This season, Europe faced critically high temperatures, corn suffered from drought, and in Ukraine, on the contrary, almost every region had been flooded with rains since May.
The weather prevented the harvesting of the entire crop before the end of the calendar year. Furthermore, this overlapped with a shortage of storage capacities and power outages that began just before the active harvesting phase and stalled the work of elevators. Only three provinces, Chernivtsi, Ternopil, and Mykolaiv, managed to fully harvest corn from the fields. Most of the unharvested corn in the Sumy Oblast – more than 70% of the area under this crop.
Also, due to high humidity (occasionally more than 25%), the cost of drying the grain has increased considerably, while reducing the quality and, consequently, the price. "The cost of drying corn has reached an incredibly high level, therefore, the profitability threshold for corn has increased dramatically. It used to fluctuate depending on the region from 4 to 6 t/ha, today it is 9-10 t/ha, that is, it is already "breaking even", and to make a profit you need to harvest more," says Oleksandr Kravchuk.
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Overripe in the field is fraught with pest infestation, as well as irreversible loss of quality.
So, an enormous amount of corn goes into the next season – both in the field and in stock, where it remains unable to be exported (more than 12 million tonnes of corn of the last harvest and another 22 million tonnes of the current one). This "tail" will put pressure on the market and wash out the already scant resources from agricultural producers.
Cost growth due to the use of autonomous power supply systems
Grain elevators are very energy-intensive enterprises. And for 2022 and, probably, 2023, this is a threatening property due to interruptions in energy supply. Converting storage facilities to alternative fuels is not a quick task, and the problem must be solved "against the clock."
Using generators, which saves small businesses everywhere, is not a panacea in the case of large storage facilities. It is too expensive. All this makes the grain owner face a hard choice: to lose quality or to store properly, but to increase costs that are unlikely to be compensated for. The cost of drying on "generator-produced" energy has doubled.
Other enterprises in the sector have similar problems. Thus, in dairy farming, the use of diesel generators leads to a fivefold increase in the share of electricity in the cost of production.
Read also: Light vs air: Ukrainian cities encountered an unprecedented influx of power generators. Which among them are the least harmful to health?
Uneasy relations with banks
While small farmers complain about the lack of funds, large agro-formations about the fact that once there used to be too much money.
Most agricultural holdings from the top 20 entered the war with a huge credit load. For example, in the Kernel agricultural holding russia's full-scale invasion coincided with the peak of the floating assets cycle. The company had the highest seasonal (and historical) debt level of $1.9 billion and record high stocks-in-trade worth $0.9 billion.
As of June 30, 2022, the figure was $1.5 billion, meaning a net debt to EBITDA ratio of 1 : 6.8 which is the highest in the company's history.
Loans are a sound business practice that implements the principle of "grow on someone else's money." But this concept works only in peacetime. In times of war, banks, while paying lip service to the heroic Ukraine, are increasingly worried about whether their loans will be repaid.
As exports were blocked and domestic demand fell, all companies faced problems with the liquidity of debt servicing. The external credit market is closed for Ukrainian corporations. The way out is negotiations with creditors, deferral or restructuring, which is likely to be the focus of the coming year.
Cut exports
The opening of the "grain corridor" in July last year was greeted with triumph by most members of the agricultural market. Only some of them sceptically predicted that the trade with russia as a part of the inspection team on the Bosporus will be of little use. The truth appeared to be in the middle.
On one hand, grain exports from Ukraine were unblocked and in some months ( for instance, in November) reached volumes comparable to pre-war levels. On the other hand, it is still a narrow neck, and ships can spend up to a month waiting for their turn to be inspected. The cost of this downtime is built into the purchase price of grain and further impoverishes the Ukrainian farmer.
Therefore, the alternative channels of agricultural exports – the Danube ports and Ukrzaliznytsia railroads – reopened in 2022, will become even stronger in 2023, increasing the temptation of logistics operators to "get rich" on this. The railway state monopolist has already started to.
Read also: The three in a boat excluding russia: Will Ukraine be able to export grain outside the collapsed Istanbul Agreement? UPDATED
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