For 5 recent years, agriproducts exports from Ukraine doubled, because people work instead of complaining — W.Selvesyuk

APK-Inform

 

 

 

 

From year to year, the Ukrainian grain market develops, the production and export increase, together with this the number of grain companies also grows. However, despite the positive trend, open information and different hedging opportunities, in recent years the functioning of the sector is less forecasted and more insecure. In particular, the work of the market is influenced by both global and domestic market factors.

The way Ukrainian companies manage to work in such conditions and how the new company can enter the market, APK-Inform asked the CEO at MGT Black Sea, Walenti Selvesyuk.

 

Walenti, You founded the new company. Please tell us more about Your business.

It is a new trading company on the Ukrainian and the global grain market that was founded in 2017 and is a part of the industry group FORAFRIC, Morocco that deals with milling business, production of couscous and pasta. We are united by the shareholders, and the headquarter is in Geneva. Our company works as an independent business-union, and today there are three of them:

— The grain trading in Black Sea region, the offices are located in Kyiv (Ukraine) and Voronezh (Russia);

— Import and distribution to the Egyptian market;

— The import of grains by the trade company Millcorp, Casablanca, and the processing on the plants FORAFRIC, Morocco.

In April of 2018 MGT Black Sea entered the market thus catching the end of 2017/18 MY and continuing the operations in the new 2018/19-season. Speaking of the company’s activities, we deal in origination – purchase of the product from the farmer, and trading – purchase the consignments of product from the exporters and other traders with their further selling in terms of CIF, i.g. the ending consumer.

We mostly collaborate with the importers from the region of Mediterranean Sea, North Africa, Middle East and South Europe.

 

Your company is a member of the group of companies Millcorp, which operates in North Africa. So, what are the competitive advantages for You?

The enterprises of the parent company Millcorp Grain Trading are widely presented on the markets of North Africa and are involved in the importing, logistics, processing and distribution of agriproducts.

This give us more possibilities to establish trusting relationships with the clients and also to open additional marketing perspectives.

Speaking of milling business, the direct contact with the clients, the understanding of their needs and the trust are very important factors.

 

Taking into account the increase of the competition on the Ukrainian and global markets, how is it difficult for the new company to enter the market and find its place in export?

It needs hard work, as it is a difficult process that requires time. This includes the qualified specialists, fine service with the consistent and convenient terms of cooperation. And now, it is one of the main task for our company.

It is especially notable on the market of origination as while buying and exporting the grain you should understand the market limits in volumes of production of one or another crop. The purchase of the volumes by some company means the absence of the possibility for the other one. The issue is easier in terms of trading because the same ship can be sold several times whereas in origination it is possible to do just once.

 

So, if for the company that has the cohesive team with some experience and knowledge to enter the market is a difficult process, so that it is almost unreal to do for the totally new company?

It is difficult, but it is not unreal. Now the market is quite competitive and transparent. Every participant has enough information about the market tendencies and situation. Earlier the information was the competitive advantage of the international companies. Moreover, I consider the new generation of the Ukrainian exporters and traders to be enough educated and advanced, who actively participates the International conferences and symposiums. Herewith, the market is overcrowded and it is actually quite difficult to enter.

 

Despite the open information, there are more and more factors that influence the market. As a result, the market situation every year becomes less forecasted. Do You use any instruments for the diversification of risks?

Trading – is a risk itself. You cannot eliminate all the risks and pitfalls with the help of the instruments. Taking short or long position You count on some specific result. Herewith, taking the decision it is necessary to prepare for any-time situation changes. In turn, the instruments can insure the risks and restrict the possible losses, i.g. minimize the risks and nothing more. There are no instruments that can guarantee the certain outcome of the contract.

In this case, the methods of risk management and the systems and procedures developed by the company are important.

I can say that our colleagues that export the Ukrainian corn to Egypt via large cargoes, hedge it on the CBOT. We to a greater degree arbitrage the positions. Still, I am rather skeptical of the SWAP-contracts that are increasingly being used in Ukraine.

 

Why are You skeptical over SWAP-contracts?

I personally consider it to be unreliable instrument. The number of risks is the same as at the physical market. If You hedge Your risk on the CBOT or MATIF the risk of the client is close to null and the liquidity is high. This is what is needed to be out at any time. Here are some guarantees whereas there are no such when SWAP-contracting.

In particular, if a seller or a buyer might not accomplish the obligations You won’t have any guarantees as well as at the physical market. Thus, concluding the SWAP-contract with the company You must take in to account the possible risk of contract failure. Moreover, the liquidity of the market is rather low.

 

In other words, it is not worth the trouble, is it?

I suppose yes. The liquidity of the Chicago or French exchange is provided by the high number of market participants and speculators. This particular word «speculator» here in Ukraine has a negative meaning, at the same time on the exchange market the speculators create the market liquidity via buying/selling the futures and options.

 

What products do You export? What is the main product?

We plan to develop the specialized channels of distribution apart from merely export of feed grains (wheat, corn, barley) via the standard directions by Panamax.

We mostly export milling wheat.

 

What is the reason of Your choice, as the competition in Ukraine for wheat is rather fierce among the traders and millers taking into account that the biggest global exporter Russia is our neighbor?

We consider the Ukrainian milling wheat to be premium. Of course, it needs some marketing and client-work in some countries-beneficiaries. Many foreign millers still prefer the Russian wheat to Ukrainian. Herewith, it is often due to not some real reasons (for example, quality of the grain) but rather formed attitude of the importers. The representatives of the milling sector are mostly conservative and stick to the habits. This situation is actually typical for the global trade. The same as it was 10-15 years in North Africa that due to high price of French wheat tried to purchase some Russian wheat, Ukrainian wheat also is finding its market. So, I consider this market to be highly perspective in terms of international grain trade.

Our company develops this segment and I can say that from the start of the company’s foundation it has enjoyed some success. For example, we actively export wheat to Lebanon and Morocco.

 

What countries do You consider to be perspective?

For example, Egypt and Greece. We will be developing the exports of mining wheat to these countries.

 

In 2018, one of the most topical issue was the quality of Ukrainian wheat. Was it difficult to form the export cargoes?

In our practice, we never faced such problems. Since the beginning of 2018/19 MY our company exported nearly 300 thsd tonnes of milling wheat. We also exported the high-pro wheat (15%). I can say that our clients were satisfied with the quality of the gain.

Speaking of the traditional, 11.5% wheat, in 2018 its milling qualities are very good. And the quality parameters of corn are excellent.

 

Herewith, Ukrainian wheat and the products of processing are one of the cheapest on the global market which is deliberately creates the impression of less quality product. What in You opinion would help to remedy the situation?

I would not combine this issues. As the quality of flour depends not only on the quality parameters of wheat but also on the quality of the crushing. Is this case unfortunately the milling industry in Ukraine is lagging behind. The millers mostly comply with the requirements of the domestic bakeries. They cannot meet the requirements of the importers.

There is a production surplus of wheat flour in Ukraine based on the annual gradual decrease of the domestic consumption thus sector is becoming harder to operate and less advantageous in terms of the investments.

Moreover, despite the rather low cost of labor the total cost of the production of flour in Ukraine is rather high. To compare: there are less people on the French or Turkish plants but the effectiveness is twice higher.

 

Do You consider the possibility to export wheat processing products from Ukraine?

We do not see the prospects in this area. Ukraine exports these products in small quantity. Herewith, wheat flour and bran are exported mostly by the crushers. I believe that there are few opportunities for the trader.

 

Via what ports do You export the agriproducts?

Mostly we export through the small ports of Azov Sea (Mariupol and Berdyansk) and also via the Nikolayev Sea Port. Some consignments are shipped via the Kherson Sea Port.

 

Taking into account the decline of the transshipping costs in the deep water ports and the increase in the low water, where is it more profitable for the trader to work?

There are some changes of the shipping costs in the seaports in Ukraine. For now, the difference of the expenditures for the shipping in deep water ports and low water decreased. Thus, for us the shipping via Kherson Sea Port became less attractive.

In particular, the cost of wheat in terms of FOB in Kherson and the Sea Port of Nikolaev is almost the same. Herewith, the freight rate for the small cargoes is much higher compared to the large cargoes. Speaking of the Azov Sea Port the low cost of wheat in terms of FOB compensate the high freight rates.

 

What main features of the grain market in 2018 would You note?

In 2017, there was a bumper wheat wheat crop in Russia, which was not a surprise but it caught the market participants off the guard. In 2018, the same situation is seen in Ukraine due to the unexpectedly large corn crop.

The production of corn in Ukraine is estimated at record 35 mln tonnes, which was a surprise for the most experienced analysts that forecasted the production at 24-26 mln tonnnes.

This is a main factor that severely influence the market. It is some kind of a test for the traders as the hedging instruments loose its performance in terms of a significant deviations from the forecasts.

Moreover, this season the factor of political turbulence preserves, which adds some risks and uncertainty to the market operations.

Still, I would note that the market continues to operate, but the importers are alert to any changes.

 

Based on Your observations, how did these risks affected the prices?

Their influence can be evaluated with regard to the carry (the storage price and financing of the grain on the elevator per month), which is added to the futures of the current month to receive the prices indicators for the next months.

Traditionally, this indicator totaled 2-3 USD/t per month. Now, in the USA and Europe it stayed unchanged whereas in the Black Sea region it increased to 6-8 USD/t per month and sometimes even reached 10 USD/t per month.

The reason is that this indicator also includes the potential risks not only of the military conflict escalation but also the implementation of the limitation of the wheat export from Russia, etc.

This means that You can buy wheat in terms of FOB at 225 USD/t in January, whereas in February You would have to pay 6-8 USD/t more. Moreover, when it is time to ship the product it could appear that the risks were unjustified and the price of wheat declined. Thus, the traders’ marginality decreases.

 

Speaking of the main challenges of 2018/19 MY we could not but touch upon the logistics issue. How do You manage to work in such conditions?

Everyone has heard about the logistics so it is difficult to add something. Our company tries to minimize the dependence on the train transportation by decreasing the volumes of corn and wheat transported by train for the future shipping by Panamax cargoes.

Speaking of auto transportation, for the last 2 years its cost has increased significantly.

At the same time, if the logistics expenditures increased in money terms, the share of logistics at the price of the agriproducts declined due to the growth of the products prices and the reduction of the deep water seaport transshipping.

 

Earlier, the traders could support each other in case of the ship arriving for loading and the product delay due to train logistics. How did the restriction on the grain interchange among the companies in the port terminals complicate the export process?

We should take into account all of these factors. Logistics is a planning. If You cannot manage Your tasks, You fail. Many try to shuffle off the responsibility onto poor operation of the system (“Ukrzaliznytsa” or sea port operator).

Moreover, everyone wants to load the products at once which inevitably leads to the problems.

It is necessary to regulate the logistics, to create the transparent system of the shipping planning. In Ukraine, there is no control over the scheduled export deliveries. The only marker is a line-up of the ships.

 

If we look at the experience of other countries, is the process of the export shipments planning there more transparent?

In the USA, all the export contracts are to be reported in the end of the week, and in case of the export sales activity over 100 thsd tonnes it should be reported at the same day. The export activity data has free access.

In Europe, it is even more transparent as before exporting it is necessary to receive a license.

 

In Your opinion, what is the reason of the absence of such system in Ukraine? Is it because a large part of Ukrainian grain market is gray?

There are some negative connotations. But if the market system of regulations would be fair, this would highly help the export trade.

 

In conclusion, thank You for the interesting talk and could You please share Your expectations of the Ukrainian market development in 2019?

I suppose that, second half of 2019 of the grain season would be rather active. The pace of export is similar to the last year and for now nearly half of the export potential has been realized.

At the same time, the record corn crop will provide the work for all the Ukrainian market participants until the end the season. The key importers of corn will not change. Of course, the record harvest push against the prices which would stay low, that in turn would negatively impact the cost-efficiency of the agribusiness. However, I would like to note, that Ukrainian agrarians work in more advantageous conditions than the American or European farmers.

In general, the 2018/19 MY is to be successful for the exporters and the agrarians. It is kind of a big step to the development of the Ukrainian agriculture and export.

Speaking of prospects for the harvest in 2019, I would say that the weather conditions for now are favorable for the winter crops. At same time in terms if risks the possibility of drought increases. Statistically Ukraine every 7-8 years faces a severe drought, but in 15 recent years the were not global weather patterns.

 

I cannot but ask about the global warming and thus the gradual shift of the corn belt from the sought regions of Ukraine to the north; also there were problems of the holdings that implemented high technologies but still had no crops.

People naturally believe and share different panic news and forecasts. We should look at the results. For 5 recent years, the export of agriproducts from Ukraine doubled. This is an achievement! This is what matters! The people work but not blame the logistics, climate and so on.

 

Interviewed by Anna Tanskaya, APK-Inform Agency