Due to low prices and low profitability, Ukrainian farmers may reduce sown areas

The leading Romanian agrarian online media company Agrointeligenta talked to and discussed the overall situation and key trends for agricultural trade with Sergey Feofilov, founder of UkrAgroConsult.

UkrAgroConsult is an analytical agency that has been operating in the market since 1994 and specializes in agriculture in Ukraine and the Black Sea region.

Mr. Feofilov is also one of the few analysts in Ukraine who knows the Romanian agricultural market, having close ties with important players in the local agribusiness and with farmers who are players on the regional level in the agricultural commodities market of Romania.

Agrointeligenta:  What is the general situation in the grain market in Ukraine now?

Mr. Feofilov, UkrAgroConsult: The Ukrainian market is currently focused on grain production in 2023. Almost all market participants have increased their estimates of the total grain harvest. Currently, the figures range from 53 to 55 million tonnes of grain. For comparison, two months ago the crop was estimated at a much lower level – 47-49 million tonnes.

Here I would like to say that Ukraine’s grain production in 2023 is sufficient to cover domestic consumption and potentially increase exports. However, export volumes in the 2023/24 season will depend on how quickly logistical chains are improved. These issues have become a major concern since the cancellation of the grain deal on 17 July.

Agrointeligenta: In August, there was a key meeting in Galati, in which you also participated. What were your impressions of this meeting?

Mr. Feofilov, UkrAgroConsult: In my opinion, trade on the Danube is now at the centre of attention. The meeting in Galati was very important and I have positive impressions because the necessary decisions were taken. It was proposed to optimise the throughput capacity of the Sulina Canal by applying for European funding. The funding could amount to 18 million euros. It is also proposed to provide an additional 25 pilots to escort ships through the Sulina Canal to compensate for the current shortage of pilots.

The possibility of opening the Sulina Canal to round-the-clock traffic in 2-3 months has also been discussed. This will significantly increase the speed and reduce the time needed for ships to pass through the canal. To sum up, my impression after the meeting was very good, I appreciated that the meeting was very effective.

Agrointeligenta: What will be the main transit routes for Ukrainian grain in the new commercial year and 2024? Do you think there will be any major changes?

Mr. Feofilov, UkrAgroConsult: Over the past 18 months, there have been major changes in the trade flows of goods from Ukraine. First, Ukrainian grain exports were disrupted for more than five months from March 2022 due to the blockade of Black Sea ports.

The termination of the grain deal in mid-July 2023 was another crucial factor in changing these flows. I am still hopeful that the grain corridor will be reopened, possibly later in October or November, because this corridor is the best and cheapest supply route for Ukrainian exports.

At the moment, given the situation, the best transit route is through the Romanian port of Constanta, and all parties, all involved and interested countries, are making great efforts to make the transit through the port of Constanta more efficient for grain that will be delivered to the port by barges and ships from the Ukrainian Danube ports.

Agrointeligenta: Can you give us a SWOT analysis of Ukrainian agriculture at the moment? What are the strengths, weaknesses and opportunities?

Mr. Feofilov, UkrAgroConsult: To answer this question, I would like to start with the risk analysis. The biggest risk, and here I mean internal risks, for Ukrainian agriculture is once again the huge stocks. This year’s grain harvest is likely to be higher than originally expected. The best export corridor is blocked and Ukrainian exporters are forced to look for new transport routes.

Why are stocks so important for Ukrainian agriculture? For many years, Ukrainian farmers have traditionally financed almost all of their activities out of their own pockets, using at least 70-80% of their own financial resources. When domestic prices fall, the ability of Ukrainian farmers to finance their activities also falls sharply.

The biggest internal risk is that low prices and low profitability could lead Ukrainian farmers to reduce the area planted to winter crops. Winter oilseed rape sowing has already started, and other crops such as wheat and barley will soon follow. This is the biggest risk to the 2024 grain harvest.

The next threat to Ukrainian agriculture is rising logistics costs. Trade flows through neighbouring countries continue as transit has not been banned. If we look at trade on the Danube, we see that shipowners are paying higher risk costs, and these costs are being passed on to freight rates, which are rising while farmers’ incomes are falling.

Some opportunities are quite unexpected, and I would say that the opportunities often correlate with the risks. When domestic prices are low, the profitability of domestic processing increases. This means that new investments can be made in some sectors of the Ukrainian processing industry, for example in flour milling, in the production of vegetable oils, especially sunflower oil. New investments in maize processing for the production of various syrups, starch and ethanol from maize are very possible. The increase of investments in the pig industry is quite predictable with the prospect of exporting meat produced in Ukraine to the markets of Asia and the EU.

I will leave aside the fact that Ukrainian grain is delivered by sea, mostly by barge, to be transhipped ship-to-ship at the port of Constanta after the grain deal is terminated. Transport of Ukrainian grain by rail and road is at a lower level and will remain much lower than transport by sea, barge and ship. This is likely to increase the cost of transporting, loading and transferring grain from boats to larger ships – another threat.

Agrointeligenta: How do you see the concerns of Romanian farmers regarding the competition for transportation routes and the port of Constanta between Romania and Ukrainian agricultural goods? What is your message to them?

Mr. Feofilov, UkrAgroConsult: This is a really important issue. The Prime Ministers of Romania and Ukraine met recently. I highly appreciate the efforts of the Romanian government to balance the need for transit of Ukrainian grain with the profitability of Romanian farmers.

It should be emphasised that Eastern European countries have never been important buyers of Ukrainian grain and oilseeds. Ukraine used to export mainly to Asia and North Africa. Now all parties involved are facing a new situation. I believe that the only effective way to overcome this situation is to develop the logistics of neighboring countries and to improve the logistics of transit through neighboring countries. Moreover, the better the transit logistics, the more Ukrainian grain will be exported – not to Europe, but to traditional destinations such as Asia and North Africa. China, for example, was the largest buyer of Ukrainian maize. Corn shipments from Ukraine used to account for more than half of China’s total corn imports. So the better the transit logistics, the more Ukrainian corn can be delivered to Chinese buyers.

Road and land transport will become less important in terms of efficiency. The handling of grain in the port of Constanta is becoming more efficient and effective. For example, two new barges arrived in Constanta a few weeks ago, which means that larger ships can be loaded in the port of Constanta. Also in the direction of efficiency, a new floating crane is expected to be delivered in a few weeks.

Of course, the biggest risk for the Danube ports is that they will once again become missile targets. This is the most unpredictable aspect of the new grain corridor.

Finally, the only thing I would like to say is about competition in the grain market. I believe that no market is exempt from competition. This is the new reality. The transit of Ukrainian grain is very important for global food security. Ukraine has been and remains one of the most important grain producers and exporters. All tools should be used and all efforts should be made to limit global food inflation.

Tags: Ukraine, UkrAgroConsult, export, grain, Romania, prices, Sergey Feofilov, logistics