Companies with largest capacities and sales by segments
1 Source: USDA, KNU estimates
Strengthening regional positioning. Favorable climate, access to the Black Sea, good transport infrastructure in the country, low prime cost and prices of agricultural products guarantee sales of excess output abroad. Sunflower oil and grains of the Ukrainian origin are exported to Egypt, Algeria, Turkey, Iran, EU, India and China. A geographic location of developing countries, expected growth of their population and diet changes will promote further geographic expansion of sales of Ukrainian products to the developing countries taking into account relatively higher prime cost of goods produces by powerful rivals in the region, namely Russia, France and Germany.
*5-Most favorable to Kernel
0 - Least favorable to Kernel
Source: KNU estimates
Figure 12 . Grain market
Porter's Five Forces Model*
*5-Most favorable to Kernel
0 - Least favorable to Kernel
Source: KNU estimates
Source: FAPRI, KNU estimates
Figure 14 : Top 5 Grain Exporters, 2011/2012
Shares of Companies in Grain Export of Ukraine
| Company | Wheat | Barley | Corn |
| Khlib Investbud | 29% | 24% | 6% |
| Nibulon | 9% | 5% | 11% |
| Kernel-Trade | 8% | 10% | 8% |
| Louis Dreyfus C. Ukraine | 5% | 11% | 7% |
| Serna | 3% | 3% | 5% |
| Total export, M tonnes | 5.3 | 2.5 | 13.6 |
Source: ISI Emerging Markets, APK Inform, KNU estimates
Figure 15 : Crop yield in the world, 2011/2012
Ukraine’s potential to increase its crop yield
| 2011 | Wheat | Barley | Corn | Sunflower |
| EU | 5.35 | 4.31 | 7.62 | 1.97 |
| USA | 3.11 | 3.65 | 7.67 | 1.51 |
| Canada | 3.03 | 3.28 | 2.91 | n/a |
| Australia | 1.97 | 2.29 | 6.11 | 1.55 |
| Ukraine | 3.35 | 2.47 | 6.44 | 1.84 |
| Kernel | 3.80 | 2.59 | 8.10 | 2.32 |
Source: USDA, AAFC, ABARES, Company
Sunflower oil market
Bulk oil is stable business. In 2011/2012 Ukraine produced 4.0 MMT of sunflower oil. 80% of this amount was exported abroad. Ukrainian sunflower oil market is characterized by a high level of market saturation, a large number of producers and few leaders that possess crushing capacities. Existing competition on the market is strengthened by demand for substitute products (palm, soybean, rapeseed, olive oils, see Figure 13). Many agricultural manufacturers prefer to raise sunflower because of its profitability. Yet an agricultural producer does not work on equal footing with strong agriholdings due to his small production capacities. We believe in case of an unfavorable situation in the agricultural sector Kernel is able to protect its market share, thus it has its own production, long-term cooperation arrangements with farmers. Simultaneously Kernel owns 36% of the sunflower crushing capacities in Ukraine and private storage facilities.
|
|
|
Bottled oil market heads towards exhaustion. Bottled oil provides higher margins for Ukrainian producers than bulk oil that is less resource-demanding. Bulk oil still remains more attractive due to its sales volume. Domestic consumption stands at 420 million liters and is completely satisfied by Ukrainian manufacturers. Excess of their production is exported to the neighboring countries of the former Soviet Union where sunflower oil still prevails over other types of vegetable oil in the diet. Kernel satisfies one third of the domestic consumption of sunflower oil. Kernel also works in Russia and competes with local producers and Bunge which is at the same time its main rival in Ukraine. We suppose there are no grounds for rapid growth of sunflower oil demand in the nearest future.
Grain market
Ukraine highlights its significance as a grain exporter. As of 2011/2012 Ukrainian agricultural manufacturers harvested about 57 MMT of grains including 22 MMT of wheat, 23 MMT of corn and 9 MMT of barley. Ukrainian exports average one fourth of the total output of wheat and barley and more than 60% of corn. The market is relatively concentrated, thus TOP 5 grain exporters represent a half of the country’s export potential.
Diversification of crops brings profits. Increasing demand for Ukrainian crops in the world has been backed up with an advantageous geographic position, absence of available substitute products and a growing number of potential grain consumers. The grain market is characterized by strong rivalry which pushes big players to take necessary measures to defend their market share (see Figure 14). Kernel takes the third place among Ukrainian grain exporters (9% of the overall crop exports). The company prefers to produce wheat, corn and soybeans contributing 30.4%, 15.6% and 16.5% of its cultivated land bank correspondingly among the aforesaid crops. Ukrainian favorable weather conditions provide grounds for further expansion of arable land for soybeans that generate high profitability.
|
|
|
Figure 16 . Yield vs. Fertilizers
Wheat, 2008-2012 Average
Source: FAPRI, KNU estimates
Main trends
Crop yield vs. fertilizer use. Average crop yield of sunflower seed in Ukraine is one of the highest in the world (see Figure 16). Given favorable climate sunflower oil of the Ukrainian origin remains competitive on the market despite low fertilizer use. Grain agricultural output of Ukraine is significantly less than in the EU and USA and is caused by poor agricultural machinery. Kernel’s crop yield surpasses average figures in Ukraine while its sunflower and maize agricultural output exceeds average crop yield figures of the strongest agricultural producers in the world. Moreover, it was achieved by relatively bigger fertilizer use. Hence we do not expect further improvement of Kernel’s crop yield taking into account average figures in the industry.
Neighboring opportunities for integration. Russian agricultural sector attracts Ukrainian producers with its 72% of non-cultivated farmland (Ukrainian figure stands at 33%). Big players often open an affiliate in Russia to get an opportunity to buy land and to prevent themselves from negative impacts of any possible trade wars in the future taking into account a recent precedent with dairy products.
Figure 17 . Wheat Price Convergence
Wheat Price, USD
Source: FAPRI, KNU estimates
Advantages of using competitive market positioning. We see Russian wheat and sugar beets more competitive comparing to products of the Ukrainian origin assuming that prime cost and export prices do not differ significantly. Thus, Ukrainian agricultural producers that integrated into the Russian market have an opportunity to use funds accumulated from production and sales of sunflower, corn, soybeans, barley and rapeseed in Ukraine to finance their activities connected with manufacture and sales of wheat and sugar beets in Russia.
|
|
|
Price boost. Decrease in a spread between world and export prices of Ukrainian agricultural products ascertains the fact that foreign consumers are willing to pay some extra margin to a Ukrainian manufacturer for available transport infrastructure connected with a favorable geographic position. World grain prices impacted an income margin of traders and demonstrated rather high volatility (see Figure 17). The spread between winter and fall prices reached up to 10% and the overall trend was directed upwards with an average annual growth of 20% over the last 3 years. Absence of destabilizing factors corroborates the aforesaid trend.
Searching for new trade areas. Continuing growth of Ukraine’s dependency on global processes and available arable land stimulates the government to search for new trade areas. In case of attracting foreign loans and investment from potential buyers of Ukrainian agricultural products it is planned to improve production technology, renew fixed assets of agricultural enterprises and to maintain further cooperation with China, Qatar and Bangladesh. Kernel attracted loans in USD with a low interest rate which it used to strengthen its position on the market.
Investment Summary
| ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
