Mykola Gorbachov: We definitely will not be left without food

In the exclusive interview with FEG, President of the Ukrainian Grain Association Mykola Gorbachov spoke about the prospects of grain prices, the problems of transport infrastructure and logistics and the future of grain production increase resulting from the land reform/

You have recently returned from the Global Grain Conference in Geneva. What trends in world grains trade were mentioned there? What is the foreseen future of the grain market?

It is the largest European-scale conference. The fact is that in Geneva there are all the head offices of major European companies, including those operating in Ukraine. Therefore, participation in such a conference is always honorable, informative and everyone aspires to get there.

Grain and oilseed production is growing worldwide. And so is consumption. Thus, the main issues discussed there are as follows: from what countries they will import, to what countries they will export, what the logistics will be and how it will affect the price of the product. Because if logistics chains change, so does the cost of goods. Over the past year, the freight has become extremely expensive and this has affected the price for the final consumer. An increase in grain trade has also taken place. Whereas wheat trade used to be at the level of between 170 and 180 million tons in total, this year it has already exceeded 200 million tons.

The amount of printed money in the world is enormous, so prices will be high. It is also linked to the improvement of the lives of people globally. In addition to population growth, incomes are also rising. The issue of global warming must be addressed, because it changes the pattern of production dramatically. Logistics will be disrupted. Energy will be expensive. Demand will increase. And, unfortunately, there is yet no answer how we may replace it.

Furthermore, there is a very popular world trend — how to make a transparent chain “from field to table” or, as the English say, “from field to fork”. To this end, digital certificates for products from different countries and new payment technologies will be introduced on a larger scale. By the way, there have already been struck a number of deals where the grain was paid for by cryptocurrencies. This will continue. The issues of offshoring and cash flow control were also discussed.

The world is now “overheated”, and it may lead to significant economic redistribution. Population growth in Asian countries — such as India and China — might transfer the center of economic power to Asia. Arab countries, however, invest massively in agriculture. Qatar and the UAE are actively building mills, ports, and allocating substantial money to agriculture. Grain business has companies with “deep pockets”, so they always want to remain relevant.

This year, Ukrainian farmers have collected 3 million tons of food grains more than the previous year. What is the reason of such an increase?

Good weather is the main one. In addition, our farmers use more high-quality technologies. It concerns seeds and machinery. Seeds have greater potential and machinery losses less. Many agricultural enterprises use good fertilizers.

Anyway, the total wheat production increased by 8 million tons compared to the previous year. On the domestic market, consumption for bread production is 3.5 million tons, maximum — 4 million tons. With 33 million tons of production, it is less than 10%. Therefore, we definitely will not be left without food.

Assessing the trends, we may observe that the year before last we had a record grain and oilseed crop — 98 million tons. Last year, due to bad weather conditions, production fell to 84 million. This year we expect a harvest of 105-108 million tons. This will be another record. There is something to be proud of. I think the same trend will continue. Exports this year will be almost 70 million tons.

Our biggest partner was China, but we also export actively to Indonesia, Egypt and North Africa in general. The number two importer is the EU countries that import 10 to 14 million tons of maize alone. And this trend, I think, will continue, because we are in a good climate zone and we increase maize production every year. 10 years ago, Ukraine produced 10 million tons of this crop, and this year we expect a harvest of 37-40 million tons. Currently, about 85% of this crop has been harvested, but the figures indicate that the harvest will be a record one.

What are the dynamics of grain prices this season, and how do you expect the prices will change?

It is very difficult to predict the grain prices dynamics due to the uncertainty of energy, logistics and fertilizer prices. According to these factors, the cost of grain production is determined. In recent years, we have observed a substantial increase in grain cost. Whereas three years ago the price of maize was about $160 on the terms of “loading on board”, today it is about $270 on the same conditions.

The increase is likely to continue as the world expands its money supply. People with that money will compete for goods, creating global inflationary processes. There is therefore a possibility that the price will continue to rise. Furthermore, grain products are traded on the exchange and are a very attractive investment tool for banks. This is an additional incentive to boost the grain price, for when the banks on stock markets compete with their billions, it also makes the prices grow.

Though, I am really glad that our farmers will be able to make big profit this year and invest in their own development.

Grain exports in recent years have been a significant source of foreign exchange earnings for the country. Will a share of such earnings also increase?

If you observe it in absolute monetary terms and not as a percentage, then yes — it will increase. We produce more grain, and it is getting more and more expensive. Our population does not grow, so we will not be able to consume more. Therefore, we will export most of it. Today, in fact, grain exports account for 50% of all foreign exchange earnings. Whether it will remain in percentage terms depends on whether we will export more metals and ore.

Does our infrastructure keep up with this export rate? What weaknesses in the logistics and supply chain you would note?

The biggest problem with grain exports is the railroad, which is now all worn out — the rails, the wagons — and there is no investment for upgrading this infrastructure. We need billion dollars investments.

I may say that Europe or the US in normal times use only 40% of their infrastructure capacity. Therefore, they can withstand peak loads easily. We use the railway at 80-90% at usual rate, but when there are peak loads, we do not cope with them.

Recently, I had a meeting with the UZ, where it was mentioned that in November the railroad carried a record amount of just over 4 million tons of grain. According to our calculations, in order to reach the export targets, the railway has to transport 4 million tons within 7 months. Will the railroad get through it? No, it will not. We just risk failing to get the grain to the ports. 98% of grain exports go through seaports and only 2% is transferred by the railway directly to Europe.

As for the port facilities, vast amount of money has already been invested there, mostly by private companies. For instance, the Olvia port concession has been recently signed with “QTerminals”, one of the largest port operators, the headquarters of which is in Qatar. I think we need to develop more public-private partnerships. Because this way, it turns out that the state does not have the money to invest, but it does not wish to transfer it to the private sector as well. Although, we have port infrastructure. For example, Paraguay does not have a single kilometer of rail and is landlocked, so it transfers everything by river or by road to neighbouring Uruguay or Argentina, where the production is trans-shipped.

n the foreseeable future, what are the prospects of actively involving the potential that we are not using in transport logistics — considering such a beautiful river as Dnipro?

Indeed, we have a beautiful river. But the adopted Inland Waterways Act is quite imperfect. It lets in ships with foreign flags and creates a disparity in competition. Well, our barges pay an excise on fuel — the foreign ones do not. On the contrary, I would exempt them from the diesel tax at all. This excise is used to repair roads, and in fact, river transport alleviates strain on the roads. So why should they pay for it? That does not seem logical.

This is an economic distortion, not to mention the security one. Imagine, that the depth of Dnipro on fairway is three meters. And if there is a barge that sinks, who will take it out? Do you remember when the “Delphi” tanker was lifted in Odesa?

Moreover, the law includes an ecological problem — it allows ballast water to be discharged to Dnipro. And 70% of our population drinks water from Dnipro.

Also, the throughput of gateways is very weak. They need repairing. They are painted and oiled at best. Currently, there are already traffic jams in the Kakhov transition. And no one says that it needs to be expanded.

The infrastructure of Dnipro is not ready to massively increase grain transportation — you cannot move grain from the field with shovels onto the barge. It takes hubs, wharfs, grain silos to accumulate that grain. Dnipro flows through six regions in which more than 50 million tons of grains and oilseeds are grown. Therefore, it is necessary to create such multimodal hubs where farmers can load grain from vehicles to barges. This would significantly reduce the burden on the railway and roads.

Due to the Great Construction, the motorways are being built, a railway is promised to be built somehow, but I think it will take time to address the river problem. It is therefore necessary to create conditions for the investor to create these hubs himself, if the state does not allocate money for it. On the contrary, the highly competitive foreign flagged entry modes for cabotage are being created. I am afraid that even the largest barge owner of the country may get under some Moldovan or Romanian flag to save on fuel. And why not, if it saves $5-7 per ton? If it transports 3-4 million tons, that is substantial money.

At what stage is now the introduction of a bank guarantee mechanism for forward contracts? What gives you grounds to believe that by implementing it, the Ukrainian grain market will change from discount to premium?

Over 100 companies export grain in Ukraine, but TOP-10 of them exports 70%. TOP-20 exports 90%. If these 20 companies buy forward contracts exclusively with a bank guarantee, I am sure the whole market will work according to these rules. Why? First of all, it is inexpensive. According to our calculations, the cost of a bank guarantee would be between $1 and $2 per ton.

Although, 75% of the grain production comes not from agricultural holdings, but from medium-scale farmers, processing from 500 to 10 thousand hectares. However, 75% of the grain production is produced by agricultural holdings. And they tend to get a price lower than agricultural holdings. They do not turn to IPO, they do not sell shares. Therefore, there is a certain risk and they are paid $5-7 less than agricultural holdings.

The buyer in our country — the trader — will get guaranteed risk management that in the case the prices go up, he will not experience losses. After all, buying grain in February, which will be delivered in August, the trader also sells it in February. He plans logistics and fixes margins. But if the farm fails to deliver it in August, and the price difference is already $50, the trader loses $48-47 per ton.

Today’s Ukrainian market is not just risky, it is discount. But Ukraine will become a premium market because all buyers and shipowners will know that they are guaranteed to receive the cargo, that there will be no default. And if even the farmer does not deliver the goods, it is not a problem to buy them on the spot market. It is all a question of who pays the price difference.

As for the risk coverage, banks are much more effective than traders in managing risks. Well, the bank knows its farmer better. It sees all the transactions, it knows all assets. And it can use a wider range of risk management tools. It may borrow any assets, grain, fuel, agricultural receipts, deposits or personal property. Moreover, a bank can use insurance companies to control risks.

As a result, farmers get a higher price, and banks are able to manage risks more effectively. Traders will get guaranteed control over the risks of price increases. In total, according to our calculations, Ukraine may receive between $500 and $700 million additional money. Therefore, I believe that this instrument will work.

How will you assess the first few months after the land market opening? Is there a link between land reform and grain production in Ukraine?

So far, almost nothing happens nationwide. Not even a million hectares has been sold. Everything is measured only in tens of thousands. We observe the sale land units. They are sold only by those who are not interested in land as an asset. The limit of 100 hectares does not allow scaling.

I really hope that since 2024, when legal entities will be able to buy land, the changes will begin. What kind of changes? Any landowner will fight to make his land more profitable. And to do that, he will invest in it, increasing its capitalization. To do so, he will fertilize it better, he will water it. As a result, it will harvest not 4 tons of wheat per hectare, but 8. Consequently, the value of this land will increase. That is why I believe in increasing production since 2024.

I mean, considering the production efficiency, you can get from one hectare of wheat from $1,000 to $2,000 of income. If you grow strawberries there, you can get up to $30,000 per hectare. And you do not need a big mechanization and a $250,000 tractor. But it needs labor, which in turn can solve the unemployment problem. I hope some of the people who buy 100 hectares will do this kind of production. And we will finally solve the problem of importing vegetables and fruits by growing them ourselves.

I am sure that the creation of small, though consolidated farms specialized in growing vegetables and berries will be very competitive in Ukraine. I have been to a lot of farms in France and the US. There are two or three hectares-farms where the families live. They grow, for example, tomatoes of different varieties. I know a French farmer-grandfather, who grows peaches and berries on 50 hectares of land. This grandfather is a millionaire. He has recently bought a house in Monaco. Therefore, efficient use of land will be a priority for the land owner who works on it. From that point of view, the adopted land law is really good.

FEG

Tags: grain prices, grain production, grain market, logistics, Mykola Gorbachov, Ukrainian Grain Association, transport infrastructure, land reform