Q&A with Anna Dudchenko, deputy chief executive officer of Sintal Agriculture, who speaks about her sector’s prospects. While much of Ukraine’s economy has been severely punished by recession, many agriculture firms in the “breadbasket of Europe” prospered last year. Their future will be even brighter if investment pours in, as expected. To learn more about the sector’s prospects, the Kyiv Post turned to Anna Dudchenko, deputy chief executive officer of Sintal Agriculture, one of the nation’s larger agricultural groups.
Sintal, which raised $13 million late last year by selling a 17 percent equity stake on the Frankfurt (Germany) Stock Exchange, controls nearly 100,000 hectares of farming land. It produces sugar and has a hog farm.
The majority stake at Sintal Agriculture belongs to a Ukrainian real estate tycoon-turned-farmer. Mykola Tolmachev, owner of TMM property development, is one of many top Ukrainian businessmen seeking to capitalize on the country’s vast agriculture and food industry potential.
Investors, meanwhile, are increasingly viewing Sintal and other agriculture companies as strong investment opportunities that give them exposure to the country’s potentially hot food and farming sector.
KP: Why is Ukraine’s agriculture sector increasingly considered attractive for investors?
AD: There are many reasons. Firstly, if you look from the global perspective, agriculture is attractive for a lot of reasons. As the world’s population grows, the demand for food products is also on the rise. Secondly, as far as Europe goes, Ukraine holds the largest agriculture land resources. It is known historically and internationally that Ukraine’s soil is among the most fertile worldwide. Thirdly, the costs facing the agriculture business in Ukraine are still much lower compared to Europe. But our producers sell their products on global markets, for European prices.
In terms of lower costs in Ukraine, first and foremost we are referring to lower expenditures on land, such as leasing land. The cost of leasing agriculture land in Ukraine is one of the lowest in Europe. In addition, labor costs are also much lower. Meanwhile, the rest of the costs – fertilizers and fuel – are the same as in Europe. Hence, our profitability is much higher.
Investors are interested to put their money into big companies that have huge growth potential. In Ukraine, agricultural growth potential is almost unlimited thanks to its rich land resources. A big company can, with investments, increase its land assets and business dramatically. These are all the factors that make Ukraine’s agriculture sector so attractive for investors.
KP: If the potential is so huge and interest high, do you think foreign companies will snap up the lion’s share of Ukraine’s agricultural market soon?
AD: The majority of agricultural companies operating in Ukraine are still controlled by Ukrainian owners, but many have already attracted foreign investors, giving them a stake in the business. Given the complexities of doing business in Ukraine, I think that this balance will remain for some time.
First of all, it’s more convenient for investors. When they put their money into a big and experienced company, whose management has demonstrated growth and solid strategy, they take upon much less risk than entering market by themselves and building a company from scratch.
Moreover, it is still not clear when the moratorium banning the sale of agriculture land will be cancelled. And even if it is cancelled, there are many rumors that foreigners will be prohibited to buy Ukrainian agriculture land directly and easily. So, there it is not likely that foreigners will flood the market and buy it all up for themselves. They are more likely to work in cooperation with domestic partners.
KP: How does the moratorium on land sale affect the agricultural market? Doesn’t it keep a lot of investment and development for the sector at bay?
AD: There has been total misunderstanding of such policies a concern on how companies can operate with land that they don’t own. Investors often consider it to be a very big risk. But after some time, and after more precise study of the market and experience, they realized that for Ukrainian companies it is actually a benefit under the current circumstances.
Normally, agriculture companies lease their land resources from 7 to 25 years, the longer the better. It costs less than to buy. Currently, the annual rent fee, depending on the region and land quality, varies from $30 to $80 per hectare. Though it is difficult to estimate, should the moratorium be cancelled, the price of purchasing this very same land could be in the $300 to $500 range per hectare. Hence, agriculture companies would need to amass a huge investment to buy 100,000 hectares. It would be a challenge for many agriculture companies. They don’t have such assets now.
In this sense, the moratorium is a plus for Ukrainian companies, not a minus. But if the moratorium is finally cancelled, it will be a good sign for investors. Companies that are capable to find assets to buy out their land will become owners of a huge long-term asset. And as owners, they could find it easier borrow more from creditors by using these assets as collateral.
KP: How did the recession affect Ukraine’s agriculture market? Has or could it yet fuel merger and acquisition activity?
AD: As in other business areas, most big players grew bigger while smaller players were hit harder. Some of strong and publicly listed companies have used the recession as a chance to strengthen their market position by buying up distressed competitors or expanding by building new facilities.
Sintal, for example, attracted investment to expand during this period, increasing its land resource bank, for less than the cost before the recession. Also, we are planning to build a new grain elevator, construction of which will cost less than before the crisis.
There haven’t been a lot of big deals thus far. [Note: Kernel Group, a leading Ukrainian agriculture group controlled by lawmaker Andriy Verevsky, purchased competitor Allseeds early this year in a deal valued at roughly $200 million.] Rumors are flying around, though. I think there will be many merger-and-acquisition deals on the agriculture market in coming years. Many big companies are in a good position now to acquire smaller, less effective or bankrupt ones. And foreign investors are also eying acquisitions.
KP: Is Sintal eyeing an acquisition?
AD: Yes, we plan to expand our land bank by 30,000 hectares by buying two to three smaller agricultural companies in Kherson oblast.
KP: In the near future, will your current owner maintain majority ownership, or sell the company?
AD: For now, our owners see vast potential ahead and don’t want to concede. But, I would not rule out that Sintal would during the next 2-3 years attract more investment in equity on the external markets, and that the share of foreign capital in our company will increase.
Kyiv Post staff writer Olga Gnativ can be reached at [email protected]
