Since the end of the last year the State Food and Grain Corporation of Ukraine (SFGCU) has not exported even a tonne of agricultural produce. How does the company intend to make up for this trading loss?
SFGCU, which represents the Ukraine’s interests on the world agro market, has frozen its main and most profitable business activity – trading. According to customs records, for the last three months the corporation hasn’t exported even a tonne of grain abroad. The reason – a dead-end deal with its main trading partner – the China National Complete Engineering Corporation (CCEC) and destabilizing processes underway within the SFGCU itself.
The State Produce and Grain Corporation of Ukraine (SFGCU) was created by the government of Ukraine in August 2010. It is comprised of a network of subsidiaries, line and port elevators, windmills, ready-to-use multi-grain speciality and cereal factories. A total of 53 SFGCU subsidiaries have capacity to store 3.75 million tonnes of grain, including total capacity an offloading centers for export at the Odessa and Mykolaiv ports of about 2.5 million tonnes of grain annually. SFGCU in 2012 signed a contract with the China National Complete Engineering Corporation (CCEC) to supply 80 million tonnes of grain by 2027. For comparison, Ukraine’s maximum annual grain harvest to date is 68 million tonnes.
One of the key factors allowed that deal to take go ahead, even considering the unlimited resources of the contract with China, was SFGCU’s status as the single state player on grain market in Ukraine, which by then had occupied a solid position among the top three largest world grain exporters.
SFGCU’s star has fallen over the last seven years on the agro market, starting as a leading player with its own infrastructure and administrative resources, and winding up almost bankrupt. All the corporation’s indicators took a nose dive during 2016, and it appears to be an irreversible one.
Some of SFGCU’s problems arose because of external, objective reasons. Recent seasons on the world market registered record low prices, which lowered the profit margin of trading for all exporters. But in SFGCU’s case, external negative factors were compounded by ineffective management. Since October 2016 Oleksandr Hryhorovych has headed the corporation, the seventh chief in as many years as SFGCU has existed. Agriculture Policy Minister Taras Kutovoy in appointing him apparently took into consideration Hryhorovych’s experience working in Ukraine’s agricultural production sector. He obviously disregarded the fact Hyrhorovych has limited managerial expertise. Oleksandr Hryhorovych during the tenure of disgraced ex President Viktor Yanukovych and his Agriculture Policy Minister Mykola Prysiazhniuk was a figure in some of the most corrupt schemes on the agro market. Back then he worked for the State Agriculture Inspection, which had a monopoly right on authorizing all grain exports. Faced with the necessity to work “clean” as SFGCU head, it only took several months before Hryhorovych brought the state grain operator to the brink of the abyss.
The reason for deterioration of the corporation’s affairs leading to a halt in grain exports were negotiations between Hryhorovych and CCEC top executives.
“The Chinese traditionally are considered difficult sparring partners in the world of diplomacy. And here comes along a guy, who has been corporation chief for only a week and thinks he can hoodwink them. The result was preordained,” one of SFGCU’s top managers who has worked closely with the CCEC and knows the situation at the corporation said.
The executive said that as a result of changing the loan contract, Ukraine was put in an awful predicament. Prices, purchases, which were fixed by CCEC executives were from $5 to $7 per tonne lower than average world export prices.
“And SFGCU needs to export four million tonnes of grain with a margin of $13 a tonne in order to just break even,” the SFGCU insider said. Moreover, the CCEC abrogated unto itself the status of an exclusive partner, meaning SFGCU can not sell agricultural produce without first agreeing the terms of the sale with the Chinese side, including commercial conditions and buyer status.
No longer able to fulfill updated conditions of the contract he himself agreed to, Hryhorovych decided to forgo exports altogether.
Meanwhile, at SFGCU’s warehouses (its own) there are 550,000 tonnes of grain, of which 340,000 tonnes are maize, which is expensive to store and quickly spoils, losing value and quality. As a result, SFGCU stands to lose about $2 million in less than three months.
In order to fulfill its export plan SFGCU in the current season needs to export five million tonnes of grain, a minimum export volume of 300,000 tonnes a month. The result so far – zero tonnes and zero hryvnias.
SFGCU’s failure to meet the export goal means losses ranging from $500 million to $1 billion in export sales, depending on world prices and not taking into account reputation risks for the government as a reliable trading partner.
Operationally, SFGCU made several global gaffes in a record short period of time which pale in comparison to the halt in exports but will nonetheless hasten the demise of the corporation.
For example, the structure of the corporation was optimized at the end of last year with a number of the corporation’s activities – it turned out the most profitable of them – reformed.
There was another reform idea, adopted by Oleksandr Hryhoryvch singlehandedly, to supply grain from western regions in Ukraine to ports on highways, instead of using Ukrzalyzntsia. Ukraine’s state railways this season indeed suffered from a shortage of railway grain wagons and lines to junctions leading to ports at the peak of the export season was tantamount to a transportation collapse. However, professional operators on the market – international grain traders opted to solve the problem by changing railways schedules and correcting the schedule of shipments. SFGCU found itself in a privileged position, thanks to its state status and could have counted on preference from its sister state holding, just as it had throughout the corporation’s existence. However, SFGCU’s current top management could not hold productive talks with Ukrzalyznitsia and it was decided to use Ukraine’s motorways to deliver grain to the port. This upped the price of delivery by UAH 1,000 per tonne.
SFGCU also found itself subject to an investigation of the State Financial Inspection, which detected inflated VAT compensation demands amounting to UAH 200 million. State budget requests of the corporation were significantly reduced as a result.
Because of the halt in exports the corporation completely stopped buying grain supplies, creating tension on the domestic grain market. The corporation announced a large forward campaign for spring planting and agricultural producers, mostly small farmers found themselves without funds they counted on in the absence of bank credits
Without revenues from operational activities SFGCU is unable to service interest payments on the Chinese $1.5 billion loan, which amount to 4.5% plus Libor 6, or the equivalent of $80 million each year. The only remaining source of income for pay down the debt is the 5.5% interest from the deposit of the remaining $830 million from the Chinese loan. In light of these conditions, passive income received by SFGCU amounts to $45 million. This is insufficient to even pay interest on the loan. Nevertheless, SFGCU’s top manager, despite financial reality, has spoken about development plans for the corporation. Oleksandr Hryhorovych has announced the start of SFGCU’s realization of a number infrastructure projects. Supplies of pesticides with planned investments of around $4 million, the purchase of 3,000 railway grain wagon park for $18 million and reconstruction of the Mykhailovsky port elevator’s underground storage facilities for $75 million, which will increase capacity from 700,000 tonnes to 3.5 million tonnes.
The main declarative aim of these investment projects – an increase of profitability and increase of the corporations worth prior to privatization. The value of the company must increase from his negative value (- $154 million taking into account its storage facilities) to $500 million.
Total investment of $211 million, according to Oleksandr Hryhorovych, should pay for itself over the course of seven to nine years. But the corporation doesn’t have that much time … or money. In 2018 SFGCU must start paying down the principal of the Chinese loan, and SFGCU’s status as bankrupt, an observation already obvious to agro market experts, that will become official.