#2 BFC Ukraine Agriculture Finance Bulletin

07/2016

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2 UKRAINE Agriculture Finance Bulletin Russian Food Embargo Counter-Sanctions Approved EU Holds Food Quality and Safety Seminar in Kiev Ukraine Looks to Increase Agricultural Product Exports to Malaysia Agricultural Exports Total USD 5.7 Billion in First 5 Months

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Agriculture Finance Bulletin Edition #2, July 2016

Contents State Initiatives ........................................................................................................... 2 1) 2) 3)

Minister Kutovyi Discusses Bringing Agriculture to a New Level .................................................... 2 Food Industry Delegation to Visit Israel .......................................................................................... 2 Russian Food Embargo Counter-Sanctions Approved ..................................................................... 2

Foreign Aid ................................................................................................................. 3 4) 5) 6) 7) 8) 9) 10)

EU Holds Food Quality and Safety Seminar in Kiev ......................................................................... 3 Farmers to Receive EUR 400 Million in EIB Soft Loans .................................................................... 3 FAO Ukraine Program Given Go-Ahead........................................................................................... 3 EU Allocates EUR 3 Million Towards Agriculture Development Strategy ....................................... 4 Bunge Opens USD 180 Million Transshipping Complex in Mykolaiv ............................................... 4 Ukraine’s IMC Receives USD 20 Million EBRD Loan ........................................................................ 4 Astarta Group Receives USD 20 Million EBRD Energy Efficiency Loan ............................................ 4

Private Sector.............................................................................................................. 5 11) 12) 13) 14) 15) 16) 17) 18) 19)

Ukraine Looks to Increase Agricultural Product Exports to Malaysia ............................................. 5 Farmers Borrow UAH 9 Billion for Autumn Activities...................................................................... 5 Domestic Agricultural Machinery Production Increases ................................................................. 5 Numerous ‘Difficulties’ Facing Agri-Export Growth ........................................................................ 6 Grain Harvest Expected at 60 Million Tons ..................................................................................... 6 Agriculture Shadow Economy 8% of Total ...................................................................................... 7 Share of Workforce Employed in Agriculture Increases to 17.5% .................................................. 7 Sunflower Oil Exports Estimated at 5.4 Million Tons Over Coming Year ........................................ 7 Agricultural Exports Total USD 5.7 Billion in First 5 Months ........................................................... 8

Note: The Agriculture Finance Bulletin presents a monthly roundup of headlines and news stories related to investments and financing flows to Ukraine’s agricultural sector. This bulletin is prepared by Business & Finance Consulting—a Swiss-based development finance consulting company with a long history of working in Eastern Europe, Central, South and South East Asia and North Africa.

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BFC Agriculture Finance Bulletin

State Initiatives 1)

Minister Kutovyi Discusses Bringing Agriculture to a New Level

August 4th, 2016, http://minagro.gov.ua/en/node/21964

Taras Kutovyi, Minister of Agrarian Policy and Food for Ukraine, met with Hans Joehr, Head of Agriculture for Nestle and President of the Sustainable Agriculture Initiative Platform, to discuss potential avenues of cooperation in further developing the agricultural sector in Ukraine.

During the meeting, Minister Kutovyi stated that of particular importance and emphasis for the Ministry is the development of small- and medium-sized Ukrainian farms, especially as they are seen as having an enormous potential for growth. The Minister also suggested that segment of farmers could especially benefit from investments in new technology that would enable the production of higher quality, more desirable products.

For his part, Mr. Joehr emphasized the common goal of the two parties of cultivating the powerful potential of the Ukrainian agricultural sector and bringing it to a new level of operation. He also stressed his commitment to working to develop agricultural businesses in the territory of Ukraine for a long time to come.

2)

Food Industry Delegation to Visit Israel

July 26th, 2016, http://www.unian.info/economics/1437558-ukraine-to-send-food-producers-mission-to-israel.html

Ukraine is to send a delegation of food industry representatives to Israel, said Ukrainian Trade Representative Nataliya Mykolska following discussions with the Israeli Chamber of Commerce in Tel Aviv. Further free trade negotiations were also held. The negotiations were postponed in the summer of 2013 and resumed last November. In December 2015, President Petro Poroshenko had announced the countries would establish a free trade area in the first half of 2016. The parties also expressed interest in trading in the chemical, wood, mechanical engineering and metallurgy industries.

3)

Russian Food Embargo Counter-Sanctions Approved

July 6th, 2016, http://www.ukrinform.net/rubric-economics/2045930-ukrainian-government-extends-russian-food-embargountil-end-of-2017.html

The Cabinet of Ministers has approved the extension of counter-sanctions in response to Russia’s embargo on Ukrainian food products until December 31, 2017, announced First Vice Deputy Prime Minister and Minister of Economic Development Stepan Kubiv. The Russian food embargo has been in place since January 1, 2016.

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Foreign Aid 4)

EU Holds Food Quality and Safety Seminar in Kiev

July 29th, 2016, http://finchannel.com/index.php/world/ukraine/58988-eu-shares-experience-with-ukraine-on-product-qualitycontrol

A two-day seminar on European Union (EU) food quality and safety standards and procedures will be held for State Inspection for Consumer Rights Protection, and Ministry of Economic Development and Trade employees in Kiev. The seminar will address laboratory inspection, border control, risk analysis and management, and food quality control techniques as well as the EU’s underpinning legal framework. Organized by the Technical Assistance and Information Exchange Instrument of the European Commission (TAIEX), the event is being held in cooperation with Ukraine’s State Food Safety and Consumer Protection Service. TAIEX supports Partnership and Cooperation Agreement, and Association Agreement partners in the approximation, application and enforcement of EU legislation.

5)

Farmers to Receive EUR 400 Million in EIB Soft Loans

July 28th, 2016, http://ubr.ua/market/agricultural-market/eib-mojet-predostavit-400-mln-evro-ukrainskim-fermeram-420913

The European Investment Bank (EIB) is to provide EUR 400 million in preferential loans to small and medium farmers, according to the Ministry of Agrarian Policy and Food (MAPF). Beneficiaries will receive loans totaling up to 50% of project's costs – the remainder must be covered by the borrower or participating banks, according to MAPF Minister Taras Kutovyi. Loan maturity is 12 years with a grace period of up to 4 years, added Kutovyi. The EIB funds will be distributed to participating banks by the Ministry in cooperation with Ukreximbank. Participating banks will select qualifying projects and monitor progress. Funds will be used for infrastructure, processing and logistics projects, said Kutovyi.

6)

FAO Ukraine Program Given Go-Ahead

July 13th, 2016, http://www.fao.org/europe/news/detail-news/en/c/425166/

The government has given the go-ahead for the Food and Agricultural Organization’s (FAO) 2016-2019 Country Programming Framework (CPF) for Ukraine. The program was developed in cooperation with the Ministry of Agrarian Policy and Food and has four components.

The first will focus on business climate and legal framework development. This includes market integration, disease control, and seed sector initiatives, as well as organic farming legislation development. The second component covers land reform and food security, supporting Ukraine’s land consolidation effort in line with FAO guidelines on responsible tenure governance. Farmland will be rationalized into fewer, better adapted parcels that enhance productivity. Food security policy and procedures will also be addressed. The third component focuses on agricultural value chain development, encouraging trade in international markets in line with World Trade Organization (WTO) and European Union (EU) standards. The final component addresses natural resource and environmental management, which includes forestry and fishery, as well as genetic and biodiversity management.

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7)

EU Allocates EUR 3 Million Towards Agriculture Development Strategy

July 8th, 2016, http://ubr.ua/market/agricultural-market/es-vydelil-ukraine-3-mln-na-razvitie-selskogo-hoziaistva-415956

The European Union (EU) will put EUR 3 million towards Ukraine’s 2020 Agriculture Development Strategy (ADS), according to Vladyslava Rutyska, Deputy at the Ministry of Agrarian Policy and Food (MAPF). The National Reform Council approved the program – developed in cooperation with the EU, the United States Agency for International Development (USAID), the Food and Agriculture Organization (FAO), and the World Bank – in December, 2015. ADS should attract USD 300 million in investment while increasing annual food production by 6-8%, baby food production by 9%, agricultural exports by 3%-4%, and EU agricultural exports by 5%-7%, said Rutyska. Food consumption in Ukraine is expected to increase by 3%-7%.

8)

Bunge Opens USD 180 Million Transshipping Complex in Mykolaiv

July 8th, 2016, http://bunews.com.ua/economy/item/ukrainian-agriculture-infrastructure-bunge-invests-usd-280-million-intothe-ukrainian-breadbasket?category_id=11

Agribusiness giant “Bunge” unveiled a USD 180 million industrial and transshipping complex in the Black Sea port of Mykolaiv. Following the construction of a modern grain terminal in 2011, it takes the company’s total investment in the port to USD 280 million. While raising the capacity of the port, the new complex will allow the processing of more complex products, in line with the Ministry of Agrarian Policy and Food’s (MAPF) goal of shifting away from commodity exports to value-added product exports. Mykolaiv is already one of Ukraine’s major grain ports, with Bunge handling more than a third of the total. Last year, Ukraine was the world’s largest sunflower oil exporter and a leading grain exported to key global markets, such as China. Agriculture was one of Ukraine’s best performing sectors, showing remarkable resilience in the face of falling commodity prices, and domestic instability and armed conflict.

9)

Ukraine’s IMC Receives USD 20 Million EBRD Loan

July 6th, 2016, http://www.ebrd.com/news/2016/ebrd-provides-us-20-million-to-ukraines-imc-group.html

Ukraine’s Industrial Milk Company (IMC) – an integrated grain, oilseed and dairy agribusiness – will receive a working capital loan worth up to USD 20 million from the European Bank for Reconstruction and Development (EBRD). The loan will provide pre and post harvesting finance essential to IMC’s export orientated operations. The company will also undergo an EBRD climate change and resource efficiency assessment. The report is expected to provide a basis for IMC’s strategy going forward. The loan comes as part of EBRD’s strategy to develop Ukraine’s agricultural sector, which accounts for 16% of GDP. The development bank is Ukraine’s largest international investor, having pumped EUR 12 billion into the country through 364 projects since operations began.

10) Astarta Group Receives USD 20 Million EBRD Energy Efficiency Loan July 5th, 2016, http://www.ebrd.com/news/2016/ebrd-loan-supports-energy-efficiency-at-plants-in-astarta-ukraine.html

Astarta Group will benefit from a USD 20 million European Bank for Reconstruction and Development (EBRD) energy efficiency and sustainability loan to procure best-in-class machinery at 2 of its 9 sugar refineries. The redevelopment should bring the factors close to the level of international competitors while reducing costs and increasing productivity through improvements in energy and water efficiency.

Technical assistance will be provided by the European Union (EU) Neighbourhood Investment Facility.

The funding comes as part of Astrata Group’s long-term strategy to align production with the EU’s Best Page 4

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Available Techniques (BAT) in food, beverage and dairy production. Astarta and EBRD previously cooperated on reducing the group’s coal and gas consumption and completing Ukraine’s first ever carbon credit transaction. The company is one of Ukraine’s leading vertically integrated agricultural holdings, producing around a quarter of the country’s sugar.

Private Sector 11) Ukraine Looks to Increase Agricultural Product Exports to Malaysia August 4th, 2016, http://www.apk-inform.com/en/news/1070870#.V6QolaLp7m4

Minister of Agrarian Policy and Food, Taras Kutovyi, announced that Ukraine is ready to increase its exports of agricultural products to the Malaysian market. According to Minister Kutovyi, Ukraine is more than able to meet Malaysian demands for many different agricultural products and is excited to expand agricultural cooperation between the two countries. Currently, Malaysia imports dairy products, sunflower and soybean oils, cakes, wheat and wheat flour from Ukraine.

In the first half of 2016, the trade turnover of agricultural products between the two countries amounted to USD 81.9 million, with USD 52.4 million of that being Ukrainian exports.

12) Farmers Borrow UAH 9 Billion for Autumn Activities July 29th, 2016, http://www.unian.info/economics/1444053-ukrainian-farmers-uah-9-bln-short-to-finish-autumn-fieldworks.html

This year, autumn farming activities are expected to cost UAH 89.7 billion, compared to UAH 80 billion in 2015, according to the Ministry of Agrarian Policy and Food (MAPF). Farmers will fund an estimated 90% of the total, with the remaining 10% coming from commercial (UAH 4 billion) and bank (UAH 4.9 billion) loans. Interest rates range between 17.5%-30% per annum. The figure is far too high, according to the MAPF, forcing the state to provide alternative finance. This year, spring farming activities cost UAH 79.3 billion, compared to UAH 65 billion a year prior. As of July 29, agricultural enterprises spent UAH 21.8 billion, up from UAH 19.5 billion during the same period last year, according to the Ministry.

13) Domestic Agricultural Machinery Production Increases July 27th, 2016, http://ucab.ua/en/pres_sluzhba/novosti/v_ukraini_zrostae_virobnitstvo_silskogospodarskoi_tekhniki/?category=29780

During the first half (H1) of 2016, 768 disk harrow, 1981 seeders and 2274 cultivators were produced by the Ukrainian agricultural machinery industry – a 68%, 46% and 25% increase year-on-year, respectively.

Meanwhile agricultural machinery exports decreased 2%. Production increases are a result of domestic demand recovery following the market recession of 2014-2015 coupled with the devaluation of the Ukrainian Hryvnia, rendering local products more competitive, according to Vitalii Kordysh of the Ukrainian Agribusiness Club (UCAB).

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14) Numerous ‘Difficulties’ Facing Agri-Export Growth July 25th, 2016, http://www.unian.info/economics/1436357-ukrainian-dream-to-feed-the-world.html

There are numerous difficulties facing agricultural export growth according to Unian’s Alina Zymenko.

While 40% of Ukraine’s exports are agricultural goods, only 17% of the total are finished goods, leaving foreign countries to benefit from the additional jobs and revenue created through processing, says Zymenko.

Prior to the embargo, 10% of agri-exports went to Russia. This has been a blessing, according to President of the All-Ukrainian Agricultural Council Andriy Dykun, forcing the country to find new markets. Many experts suggest the development of niche product exports, according to Zymenko.

Ukraine-EU Deep and Comprehensive Free Trade Agreement consultant Olha Trofimtseva sees three promising areas: superfoods (healthy foods, including flax seeds, hemp, certain nuts and oils); organic foods, and fruit and vegetable products, including baby food. As well as niche products, Director General of the Ukrainian Association of Retail Suppliers (ARS) Oleksiy Doroshenko believes “white” or private label products, delivered to EU retailers to be sold under their own brand, present the most promising areas.

With protectionism and bureaucracy rife however, cracking new markets is difficult. Several years ago already, Ukraine filed a meat and poultry export request to South Africa. However, applications can take years to process, with filing errors and data redundancy causing further delays, according to Food and Agriculture Organization (FAO) Economist Andriy Yarmak. Many Ukrainian companies are not even ready to export. When the ARS receives export requests from EU based companies, its members mostly cannot oblige, according to Doroshenko.

While Africa is a potential market, it requires significant risk-taking, with infrequent pre-payment of goods and often unreliable, informal suppliers, according to Export Council Coordinator Bohdan Shapoval. With little cold storage, there is demand for long-life products, he added. Asia provides huge export potential, with the Ministry of Agrarian Policy and Food predicting the continent will become a major importer of Ukrainian meat in the next five years. Over the same period, Hanna Lavrenyuk of the Milk Producers’ Association expects an increase in long-life dairy product exports to China and the Gulf States.

15) Grain Harvest Expected at 60 Million Tons July 25th, 2016, http://www.unian.info/economics/1434863-ukrainian-farmers-export-14-mln-tonnes-of-grain-since-july-1.html http://www.unian.info/economics/1436357-ukrainian-dream-to-feed-the-world.html http://finchannel.com/index.php/world/ukraine/58823-ukraine-harvested-nearly-18-mln-tonnes-of-grains

This year, the grain harvest is expected at 60 million tons, according to the Ministry of Agrarian Policy and Food (MAPF). In 2015 and 2014, the harvests totaled 60.1 million tons and 63.8 million tons respectively – the latter representing a record figure. From July 1, 2015, to July 1, 2016, grain exports totaled a record 39.4 million tons, up from 34.8 million tons year-on-year, according to the MAPF. One third of exports are destined for the European Union (EU). Only the United States (US) and EU export more grain, which comprises 42% of Ukraine’s agricultural exports.

As of July 19, 2016, the early grain harvest totaled 17.96 million tons over 4.99 million hectares (52% of the total grain crop), up from 13.53 million tons over 4.22 million hectares year-on-year, according to the MAPF. Average yield totaled 3.6 t/ha, up from 3.21 t/ha year-on-year. Wheat production totaled 11.3 million tons over 2.93 million ha, with yields of 3.85 t/ha, according to APK. Barley production totaled 6.03 million tons over 1.85 million ha, with yields of 3.25 t/ha. Rapeseed production totaled 820,000 tons over 283,000 ha, with yields of 2.55 t/ha. Pea production totaled 596,000 tons over Page 6

BFC Agriculture Finance Bulletin

190,000 ha, with yields of 3.13 t/ha. Rye production totaled 21,000 tons over 9,000 ha, with yields of 2.33 t/ha. Oat production totaled 13,000 tons over 6,000 ha, with yields of 2.27 t/ha.

While some experts suggest grain should be processed into value-added products – such as flour – to increase revenues, President of the Ukrainian Grain Association Volodymyr Klymenko disagrees, proposing the high-tech US model. Yields could be increased twofold to 120 million tons per annum within 10 years, according to Klymenko, countering the threat of Argentinian and Brazilian grain. In addition, Ukraine would have sufficient resources to produce corn biofuel, thus reducing gas import dependency, said the President. With 75% of US corn coming from genetically modified organisms (GMO), Ukraine must consider revising its ban and legalizing all the GMO grain varieties already approved by the US and EU, according to Klymenko.

16) Agriculture Shadow Economy 8% of Total July 20th, 2016, http://ucab.ua/en/pres_sluzhba/novosti/riven_tinizatsii_apk_znizivsya_na_6_/?category=29779

In 2015, the agriculture sector shadow economy share was 8%, down 6% year-on-year. This is the lowest level among all industries in Ukraine, with the mining sector seeing a 56% share; the processing sector a 46% share; and the transportation and warehousing sector a 46% share.

The decrease was attributed to the abolition and reorganization of agriculture sector regulatory authorities as well as the introduction of a simplified taxation system. However an increase in taxes in 2016 may see a reversal in the trend.

17) Share of Workforce Employed in Agriculture Increases to 17.5% July 20th, 2016, http://ucab.ua/en/pres_sluzhba/novosti/chastka_pratsevlashtovanikh_v_apk_zbilshilas_do_175/?category=29779

In 2015, the workforce share employed in the agriculture sector totaled 17.5%, up 2.1% since 2010, according to the State Statistics Service. The compound annual growth rate (CAGR) of the workforce share was 0.17% pre-conflict (2010-2014) and -3.8% post-conflict. From 2010-2015, the total number employed in the sector fell from 20.3 million to 16.4 million – a 3.9 million decrease. Pre-conflict (20102014) employee numbers posted a CAGR of 3.5% while decreasing 1.36% post-conflict. This is one of the slowest post-conflict decreases found across all industries (3.42% average).

18) Sunflower Oil Exports Estimated at 5.4 Million Tons Over Coming Year July 15th, 2016, http://finchannel.com/index.php/world/ukraine/58570-ukraine-in-2016-17-my-sunflower-oil-production-togrow-by-19-the-exports-up-14

Over the July 1, 2016 to July 1, 2017 marketing year, sunflower oil production is forecast at 5.37 million tons, a 19% increase year-on-year, while exports are forecast at 4.8 million tons, a 14% increase year-onyear, according to the oil producers’ association Ukroliyaprom. From September 2015 to May 2016, sunflower oil production totaled 3.8 million tons, with 3.4 million tons exported. This represents 57% of global exports, according to Ukroliyaprom. During the same period, exports to the European Union increased 30%, compared to 13%-17% during the same period in previous years, according to APKInform. Ukroliyaprom estimates that actual sunflower oil production volumes are 20% higher than current figures due to carry-over stocks and other reporting discrepancies.

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19) Agricultural Exports Total USD 5.7 Billion in First 5 Months July 6th, 2016, http://minagro.gov.ua/en/node/21735 http://finchannel.com/index.php/world/ukraine/58517-during-5-months-ukraine-exported-agricultural-products-to-the-eu-at-18-bln-usd

During the first 5 months of 2015, agricultural exports totaled USD 5.7 billion, a 2.3% revenue increase and 4.3% turnover increase year-on- year, according to Deputy Minister of Agrarian Policy and Food Vladyslava Rutytska. Asia was the leading destination, receiving USD 2.5 billion of exports (43.6% of total). Exports to the European Union (EU) totaled USD 1.79 billion, a 23.9% increase year-on-year, added the Deputy.

In the first 4 months of 2016, agricultural exports totaled USD 4.56 billion, amounting to 42.2% of all exports, according to the Ministry of Agrarian Policy and Food, including cereals worth USD 1.93 billion (17.9% of total); finished products worth USD 672 billion (6.2% of total); and oilseeds and oils worth USD 351 million (3.3% of total). During the same period, agricultural imports totaled USD 1.5 billion, resulting in a USD 3.1 billion trade surplus, added the Ministry. Ukraine imported finished products worth USD 527 million (4.5% of total); oilseeds and oils worth USD 222 million; edible fruits worth USD 170 million (1.5% of total); and fish products worth USD 147 million (1.3% of total).

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Prepared by Business & Finance Consulting (BFC) www.bfconsulting.com In this bulletin, BFC provides extracts from articles that have been published by others and as a result cannot be held responsible for such content.

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