Graham Stack in Kyiv -
Once Europe's breadbasket, Ukraine is only now pulling its agriculture sector out of the post-Soviet slump. Its revival is being driven by brash exchange-listed companies introducing new technologies and management techniques, for whom the devaluation of Ukraine's currency has opened up new opportunities both at home and abroad.
The swank glass and steel headquarters of Ukrainian agricultural concern MHP glitters in the sun, and stepping into the marble-paved foyer it seems you have entered a five-star hotel. And the premises are all the more impressive for the view they afford of the surrounding countryside on the outskirts of Kiyiv: MHP's headquarters look on to an open-air museum park of Ukraine's rural past, dotted with ancient windmills and carved wooden huts. "The windmills don't belong to us," jokes Yury Kosyuk, owner and CEO of MHP, and Ukraine's 12th richest man, according to Korrespondent magazine. MHP has a 39% share of Ukraine's commercially produced poultry market, and is building Europe's biggest and most modern poultry facility. With the second stage completed, the $550m Myronivsky poultry plant has an annual output of more than 200,000 tonnes of meat.
An inspection team from the EU's Directorate General for Health and Consumer Affairs wrapped up a visit to Ukraine on June 18 concerning the certification of Ukrainian poultry plants for export to the EU, including MHP's facilities. The official report will be released in July, though the commission met with Ukraine's agriculture minister, Yuriy Melnik, and the chairman of the Ukrainian Committee for Veterinary Medicine, Petro Verbitsky, to discuss some of the results. According to Verbitsky, the commission has only a few concerns, and those relate to Ukrainian legislation rather than the quality and security of poultry facilities. In particular, he noted the inconsistency between Ukrainian and EU standards on the frequency of internal product testing (which occurs every 10 days in Ukraine compared with every seven days in the EU). He also mentioned discrepancies with regard to entities issuing export quality certificates for poultry in both the EU and Ukraine. "If the EU commission confirms that Ukrainian poultry producers satisfy its quality requirements, we believe that the next step should be an agreement on import quotas and tariffs," say analysts at investment bank Troika Dialog. "Overall, we consider the news to be neutral to positive for MHP. Although it generates positive sentiment, there is still a great deal of uncertainty regarding the commission's final ruling on import quotas and tariffs, as well as its timing."
Kosyuk says the preliminary feedback from the EU inspectors has been positive, but he still fears increased protectionism on the part of the EU. MHP's poultry products would be highly competitive in Europe, due to the weak hryvnia and lower operational costs. Prices for poultry products in Europe average 30-40% more than Ukrainian prices. "If they don't certify us, it will only be because of politics," he sighs.
41 years old, suave and fluent in English, Kosyuk is the opposite of the reactionary kolkhoz manager that has shaped large-scale Ukrainian agriculture until now. Kosyuk talks about "delivering high-quality protein" rather than farming chickens, and discusses finance as readily as crop planting. He is, however, consumed by a passion for agriculture and food-processing that has seen him build up a billion-dollar business in the course of 10 years, leading to a successful float on the London Stock Exchange in 2008 - only Ukraine's second LSE listing and the first company from the agricultural sector. Ukraine now boasts three international-listed agriculture set-ups, with sugar makers Astarta Kiev and grain producer and trader Kernel listed on the Warsaw stock exchange. These three flag-bearers of capitalist Ukrainian agriculture share not only Western-style high corporate governance standards, but also a vertically integrated business model, from field to factory, that creates high efficiency and synergy effects.
MHP, for example, farms 180,000 hectares of land to ensure self-sufficiency and high quality in chicken feed. The fields are in close proximity to its poultry plants, cutting transport costs, and fertilized with chicken manure, protecting against soaring fertilizers prices. At the other end of the production line, MHP runs its own meat sales franchise selling its "Nasha Ryaba" branded products. The franchise sales 50% of its produce, and thus reduces price pressure from supermarket chains. "Companies in the West would love to have such a structure," argues Kosyuk, "but it too late for most of them to set it up."
In many ways, vertical integration has been thrust upon these companies due to the stagnation and legal uncertainty afflicting Ukraine's massively inefficient agricultural sector. MHP's motto, according to Kosyuk, is "if you want something done well, do it yourself."
"Vertical integration was born of fear," says Kosyuk. "We were afraid of market pressure from supermarkets, so we set up our own franchise. We were afraid of problems with egg suppliers, so we set up our own incubation plants. We were afraid of low grain quality for fodder, so we organized our own crop production."
Furthermore, "Everything we do here is basically green field," says Kosyuk. "Our factories would not look out of place in Denmark."
Agriculture could lead Ukraine out of crisis
Agriculture is the only part of the Ukrainian economy to have registered growth (1.5%) in the first quarter of 2009, reflecting the extent to which it has been decoupled from the rest of the economy. Now, thanks to devaluation, both Ukraine agriculture exports as well as producers oriented to the domestic market are doing fine. For MHP, the loss of agricultural subsidies and protection due to Ukraine's accession to the World Trade Organisation (WTO) accession has been at least partially offset by the devaluation and also the fact that in times of crisis consumers tend to buy cheaper chicken rather than pork or beef.
The long-term prognosis for meat consumption is also good. Ukraine currently lags 15% behind Russia in terms of meat consumption, not to mention Western Europe.
Institutionally, agriculture is still hindered by a ban on sales of agriculture land. This means that MHP has to administer around 150,000 individual leases for land plots averaging 1.5 hectares for an average period of 15 years. Kosyuk does not believe the moratorium on land sales will be lifted "within the next five years."
At the other end of the spectrum, Ukraine's accession to the WTO in 2008 meant that its agriculture sector is part of the global trade regime. Although Kosyuk publicly criticized the terms of Ukraine's WTO accession in 2008 for being too soft and leaving Ukraine agriculture insufficient protection, he says he only did so on the part of the sector as a whole. MHP, he insists, has nothing to fear from international competition.
Send comments to The Editor
Graham Stack in Kyiv - Ukraine's largest lender PrivatBank has survived a stormy week of speculation over its future, but there are larger rocks ahead, with some market participants anticipating the ... more
Henry Kirby in London - Ukraine and Russia’s latest “Despair Index” scores suggest that the two struggling economies could finally be turning the corner, following nearly two years of steady ... more
bne IntelliNews - Erste Group Bank saw the continuing economic recovery across Central and Eastern Europe push its January-September financial results back into net profit of €764.2mn, the ... more