Dmitriy Skornyakov: extensive growth potential of Ukraine’s agriculture has already been exhausted
The company has disclosed its 2015 revenues for the first time and shared innovative development plans for the years to come.
- With nearly two years in the military conflict in Donbass, you have lost some fields and staff, felt the impact of war, but the company is afloat. What was the most important in your operations over this time?
- The past two years have been extremely challenging for HarvEast. We had to make decisions at a time of utter uncertainty. The situation in Donetsk Oblast where we work was changing rapidly and usually for the worse. We lost some of our storage facilities and the new seed plant, therefore a single supply chain was broken. I can positively say that we have survived thanks to our team: farm machinery operators, drivers, agronomists and employees in the management company. For more than six months, people lived in different places: in our production facilities and dormitories. Yet we haven’t lost control over the business at all. Certainly, this is a great achievement of our employees.
We have gone to such great lengths to negotiate debt restructuring with banks. I’m grateful to our partners for understanding and meeting us halfway. Our problems came from the loss of some assets in force-majeure circumstances. To find the common ground, we had to show our openness and integrity to banks, and we did so.
- How did you raise credits for the sowing season? The company is at the frontline – does anyone want to give money?
- Our sowing campaign for the 2016 harvest is funded by 95%. We didn’t have to make any additional loans, trade finance transactions or instalment payments this season thanks to the restructured loan portfolio.
- How did you perform in 2015?
- In 2015, our total revenue was $37.6 million, which is much less than in 2014 when we made $66.8 million. This comes from the loss of land in the non-government controlled area in Donetsk Oblast and the Crimea, the grey areas, and a drop in prices in all commodity markets, including the grain market. In 2015, our EBITDA grew 50% and exceeded the level of $100 per hectare, considering the grey areas. Overall, the harvest fell by half in 2015 year on year due to a significant reduction in the land bank.
- We all know that a part of the land has been dispossessed by gunmen. What is happening to the areas you don’t control today? When do their lease agreements terminate? Do you pay the rent for them?
- As to the land in the non-government controlled area, the assets are under the management of the labour team living there. The team is working independently. We don’t manage the assets but we reserve the right of ownership of our property.
- How much are you going to seed this year? What are the expected costs for the sowing season? Is it going be easier this year than in 2015? What lessons have you learned from last year?
- The sowing season costs have risen significantly as the price of imported goods has grown half as much. Besides, our goals are quite different now: in 2015, the sowing season was a struggle for survival with extremely tight resources, and today we are working as normal and in compliance with the pre-scheduled production programme. However, this season is very complex for winter crops. We had to reseed some of the early crops in October, and seedlings sprouted late because of late rains. Of course, this is not an ideal development for our area but we remain optimistic about it. We did everything we’d planned for early spring.
- How did you export the grain harvested last year? How did you change your supply chains? Did you have to sell the harvest as soon as possible or did you manage to take it to some elevators?
- I’ll answer the second question first. Yes, we had an opportunity to take the grain to the elevators in Zaporozhye Oblast and to Kalchiksky elevator in Donetsk Oblast. In terms of logistics, Mariupol is our closest port, so we sold some of the grain from the field at once. I take this opportunity to thank our partners, Cargill and Noble Group (COFCA) that cooperate with us closely. We managed to establish supply chains.
- Did you work with SCM trader? Did they help solve your problems?
- We have repeatedly reported in the media that UMG-AGRO is a separate project of SCM Group, so they didn’t have to help us. Yes, we cooperated with them last season when it was profitable for us.
- What are the company’s goals for 2016? What are your business development plans?
- This year is completely different from 2015 and 2014. Today, the situation in the region where we operate is relatively stable and clear, and we understand the rules of the game. We know where we can work and what we can expect, so we prepared very carefully for 2016 season, including equipment, seeding plans, PPPs and fertilizers. I am confident that we as a company will show what we can do this year. We are resuming our normal course for making timely plans and running farming operations. Today we are coordinating our business development plans. First, we need to upgrade the equipment which may cause problems such as harvesters and spraying machines. In addition, we are considering several modernisation projects of dairy farms to move up to a qualitatively new level. We are conducting a feasibility study to install a system decreasing the temperature in the cow barns in summer. We are studying the Israeli experience.
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- Do you support or oppose tax benefits for agrarians? Why?
- I can tell you one thing. Currently, tax benefit administration is hard both for business and tax authorities. The situation must definitely be changed. However, the system that used to be in place, I mean the VAT relief, was no good either, because it didn’t encourage capital investments or implement any specific projects. I believe that agrarians should enjoy certain benefits as it is part of international practice. Without benefits we will be in a worse position compared to our competitors. First of all, they must be transparent and independent of the will of government officials. The mechanism for calculating and paying off these benefits should be as simple as possible. For example, such-and-such amount per cultivated hectare or partly reimbursed capital investments or a reduced VAT rate for agricultural products (10%, for instance). Such benefits will not be burdensome for the budget as they will help a great number of illegal agricultural businesses come out of the shadow.
- How do you feel about the fact that Ukraine has been unable to open the land market for several years by now? Do we really need it and what hinders its establishment, in your opinion?
- Many people are not interested in free purchase and sale of land. Personally, I support the land reform. I believe that the land owned by the state should be sold first. It is a huge source of corruption today. This land benefits concrete government employees and not the state. If we start selling this land, there’ll be no market crash, which is always the case when there is an excess offer. A certain price for the land will be established, and in a year or two the moratorium can be completely removed. The logic is very simple. I don’t think about it in terms of whether it benefits our company or not. I think that if we have the right to property, we cannot restrict our right to dispose of this property. It contradicts the basic laws that operate worldwide. Yes, this will reshape the land users market but I can’t say it is very effective today.
- Dmitriy, HarvEast is turning five this year and you’ve been with the company since its inception. How has it changed over the years?
- Five years ago, our company was established on the basis of agricultural assets of Ilyich Steel. We pooled together 70 separate collective farms that had no supervisory control. Every farm had a land area ranging from 1,500 to 5,000 hectares and made own decisions regarding the development directions and purchase of equipment, commodities and materials. Most often, they had everything and anything: for example, hens, geese, ducks, pigs, cows or, literally, a whole zoo coexisted. From a business point of view, these areas were absolutely unprofitable. We combined the collective farms in clusters on an area basis. Every cluster has about 20,000 hectares of land and focuses on one activity – either crop raising, or livestock breeding, or warehousing, or logistics. We had to close down or sell the most loss-making areas. Today it is difficult to compare the agricultural units of the steel plant with the current organised agricultural business. We can surely say that our business performance has definitely improved. Steelmakers used to spend millions of dollars annually to fund farms. However, it’s been five years since we are self-reliant and have shown a positive EBITDA in the past two years.
- What do five years in HarvEast mean to you? Have you achieved everything you planned?
- This is a huge part of my life, and I can say that I have found myself here. I enjoy what I do. Agriculture is a very interesting area to apply your knowledge. You should understand chemistry, technology and management and develop all the time. You are always on the move because the situation is changing daily, and every day you have to make decisions that impact the outcomes. I can say that I want to dedicate my entire working life to agriculture.
I think we have done 80% of what we planned to do over the past five years. Unfortunately, the situation in the country prevented us from carrying out all our plans. Yet we have not given them up, we just postponed their implementation, for example, the development of our seed business area.
- In conclusion, we’d like to hear your recipe for success in agribusiness.
- If we talk specifically about our company, it is not about one ordinary fellow. We have a team of professionals at all levels. Our farm machinery operators take annual tests and every time they perform better and better. We invest a lot of money and efforts into training mid-level managers. Our senior managers also attend training sessions every year. Thus, we have a team of leaders, and this is probably a key to success in business.
It’s a shame that Ukraine, a major actor in many agricultural markets, does not have the premium niches like Canada, for instance. Some countries buy raw materials from Ukraine, refine them a little and re-sell them with a significant mark-up. Turkey does it, for example. I believe that the extensive growth potential of Ukraine’s agriculture has already been exhausted. Today we need to grow rapidly by improving product quality, boosting processing efficiency and opening new premium markets.
Source: Agravery
