Agriculture

Agribusiness is a key sector of the Ukrainian economy and is composed of vertically integrated, coordinated branches and enterprises, engaged in the manufacture, storage, provision, transportation, processing and sales of agricultural production, as well as servicing and auxiliary enterprises and organizations. This area is essential for the economy of Ukraine, as Ukraine is one of the few countries in the world with a potential for agribusiness development thanks to a favourable geographical location, a qualified and well-priced labour force, technological base, and investor interest. The central link of the Ukrainian agribusiness, as well as in any other country, is agriculture. Along with the food and light industries, agriculture dominates in the country’s food supply, as well as the formation of its food security. Thus, the most important branches of agribusiness are the manufacture and processing of marketable and feed grain, sugar beet, rape, sunflower, as well as breeding and processing of cattle and pigs. In the nearest future, the Ukrainian agriculture could reach the level of the chemical and metals industries, as the profitability of agricultural holdings has reached nearly 30%, with considerable growth potential.

As the process of agribusiness restructuring was ongoing, production output gradually increased. In 2008, a record harvest in the history of Ukraine was gathered. However, the main problem became a shortage of warehouse capacities and considerable remainders of the previous year’s stock due to export quotas. A great harvest in Ukraine and in the world led to a decline in the purchasing prices for grain, both on internal and external markets. Furthermore, interest rates on credits nearly doubled. Therefore, the limitation on goods exports, impossibility of storage inside the country and low prices became the reasons for huge losses of many players on the Ukrainian agricultural market.As the process of agribusiness restructuring was ongoing, production output gradually increased. In 2008, a record harvest in the history of Ukraine was gathered. However, the main problem became a shortage of warehouse capacities and considerable remainders of the previous year’s stock due to export quotas. A great harvest in Ukraine and in the world led to a decline in the purchasing prices for grain, both on internal and external markets. Furthermore, interest rates on credits nearly doubled. Therefore, the limitation on goods exports, impossibility of storage inside the country and low prices became the reasons for huge losses of many players on the Ukrainian agricultural market.

As for state support of agribusiness, presently, complete VAT redemption has been forecasted, as well as state grain purchases, the provision of top-priority grain transhipment in port elevators for domestic enterprises, and stimulation of the construction of small (in the short term) and large elevators (in the long term).

At this juncture, the efforts of market operators will be aimed at increasing investment attractiveness: the legal restructuring of business to form a more transparent structure; audit revisions; investment of funds to decrease production costs and increase the business profitability, etc. Moreover, considerable development of the agricultural production certification is expected to comply with the international standards, as large 2008 harvest remainders and the product yield of 2009 will facilitate an increase in agricultural production export volumes.

The activation of the agricultural sector on the market of M&A (mergers and acquisitions) should also be mentioned. This is a basis for forecasting the agricultural sector’s restructuring. However, an initial public offering (IPO), and an additional or partial stock floatation will be affordable only for a minority of market players with excellent indices, such as profitability, the size of their business, and a professional team of managers. It is also expected that entire or considerable parts of businesses (from 50% to 80%) will be sold in the agricultural sphere. Global and domestic consultants will be engaged for stock floatation or agribusiness sales. A burst of activity is therefore anticipated for this segment. Smaller companies will be exposed to takeovers. The desire to eliminate losses related to the absence of additional financing will lead to a range of structural mergers and allow companies to compensate such losses completely or partially by increasing income from sales of manufactured goods. Furthermore, the creation of both vertical (to decrease costs) and horizontal holdings (to strengthen positions and enlarge market share) is envisaged.

Issuer	Type of transaction	Transaction amount, mln USD	Issued stock sold, %	Capitalization at the timeof deal, mln USD	Deal date
Ukrprodukt	IPO	11.0	27.0%	42.0	February 2005
Astarta-Kyiv	IPO	31.0	20.0%	155.0	August 2006
Zakhidna Kompaniia Dakor	private placement	21.0	20.0%	103.0	May 2007
Sugar Union Ukrros	private placement	42.0	20.0%	210.0<	July 2007
Landkom International	IPO	111.0	54.9%	202.0	December 2007
Kernel	IPO	218.0	38.0%	574.0	November 2007
Land West	private placement	43.0	20.0%	215.0	November 2007
Landkom International	SPO	22.0	10.0%	220.0	March 2008
Kernel	SPO	84.0	9.0%	933.0	March 2008
MCB Agricole (Ukrzernoprom-Agro)	private placement	56.0	24.0%	233.0/p>	March 2008
Myronivskyi Khliboprodukt	IPO	322.5	19.4%	1700.0	May 2008
Mriya	private placement	90.0	20.0%	450.5	June 2008
Sintal Agriculture	private placement	34.5	15.0%	230.0	August 2008