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Example of analysis of resource area of the New Oilseeds Crushing
Plant in central part of Ukraine
Basic assumptions
1. Construction of new crushing plant will take no less than 18 months (means 2018 as starting point)
2. Daily crushing capacity assumed at no less than 2000 mt of sunflower seeds per wd level (means abt 585 ths MT per year taking into consideration 325 wd per year and 90% of capacity loading) or 1100 mt of soybeans per wd (means abt 322 ths MT per year and 90% of capacity loading)
Methodology
We consider the territory that lies within the circle with a radius of 150 km around the city of Kirovograd as the resource area.
To evaluate accessibility of "remainder to purchase" the calculation of predictive marketability of selected crops has been made for the resource area of interest. Under the term “marketability” we mean the volume of production that could potentially be (or has been) offered on the market in the area, excluding the volume of products that is claimed (or will be claimed) by competing structures.
Calculation of marketability for a particular resource area was made without dividing agricultural producers into categories (enterprises, people). The share of supply of certain products in the resource area was estimated according to the data at the district level.
To forecast selected agricultural commodity production the assessment was made for the period from 2015 to 2020. In the prototype of the forecast the possibility of a strong impact of force majeure factors and risks (climatic, socio-economic, political conditions, etc.) has been excluded. That could significantly affect the production figures in the context of a specific period. As a guideline for the variation of performance indicators of selected crops current trends and forecasts for the development of the global and domestic agricultural market were employed.
The main projected indices in the model were the following: sown area in total and yields of basic crops.
The cultivated land in the resource area
Total sown area. The current stage of development of crop production in the region in the medium-term prospect does not imply significant changes that could fundamentally affect the use of land resources. At the same time, a further increase in demand for crop production will lead to the increase in sown areas at the expense of arable land which was previously withdrawn from rotation. Taking into account the current reserves of unused arable land, average annual increase in sown areas will not exceed 0.6% per year.
In the period 2015-2020 the total sown area will increase by 148 thousand ha, or by 3,4% compared to the average value of 2010-2014.
Wheat. Wheat will remain a key grain crop for the given area. However, in the medium-term prospect its sowing land will be reduced, taking into account the demand for sunflower in the region. Moreover, the reduction pace of the acreage of wheat in the resource area will be higher than in the rest of Ukraine on average.
In the period 2015-2020 the total land in wheat will increase by 108 thousand ha, or by 13%, compared to the average value of 2010-2014.
Barley. Barley, as well as wheat, is one of the traditional crops of the region. Factors of growing demand for fodder barley in the domestic market, stirred by a significant export demand and having stimulated production growth in 2006-2009, in the medium-term prospect will not have such a strong influence. We expect the sown land in barley in the region to have a steady downward trend at the level of 2% per year (CAGR).
In the period 2018-2020 the total sown land in barley will decrease by 135 thousand ha, or by 21%, compared to the average value of 2010-2014.
The rate of decline could be higher, but for the necessity for this crop in crop rotation.
Corn. In recent years corn has become one of the most popular and profitable crops, both in the domestic and global market. Despite the fact that this region is not the most favorable for the cultivation of this crop, the land in corn in the years 2010-14 grew by an average of 15% annually (CAGR).
In the medium-term prospect we expect a slight decrease at the level of 1.5% annually. The reasons are as follows: corn is a resource-consuming crop, and in the medium-term prospect agricultural producers cannot hope for cheaper financing, world market prices also do not show an upward trend. All these factors will lead to a gradual drop in interest of the producers as for this crop.
Despite the bearish forecast the average crop area for the period 2015-2020 will increase by 50 thousand. ha, or 6%, compared to the average value of 2010-2014.
Sunflower. In the medium-term prospect the growing demand for oilseeds and derived products will remain the main stimulus for the further expansion of the acreage of sunflower. The main reasons are the return of withdrawn arable land to agricultural use and reduction of the areas under grain crops. Taking into account a high concentration of fat and oil companies in the region, the growth rate of the sunflower acreage is likely to amount to about 4.5% annually.
Furthermore, the fact that Kirovohrad oblast, which occupies a third of the resource area, is one of the main regions where sunflower is cultivated in Ukraine, with developed methods of cultivation and technological equipment, will have its effect.
In the period 2015-2020 the total sown land in sunflower will increase by 306 thousand ha, or 30%, compared to the average value of 2010-2014.
It should be noted that most experts agree that the real official production volumes of sunflower seeds are significantly higher than those of official statistics. The main reasons for data discrepancies are connected with the accounting methods of agricultural activities of households, not to mention the lack of objectively declared data on volumes of production, mainly by small agricultural enterprises and farms.
Due to stable high profitability of sunflower, violations in terms of efficient crop rotation are the most common. In order to conceal this fact, many companies understate the production figures, which they hand to official statistical bodies. As a result, in 2014/2015 MY the objective understated amount of sunflower production ranged from 0.5 to 0.8 million tons according to various estimates.
In our calculations we have not considered the volume of direct illegal land use. However, this factor has been used indirectly in the grounds for the estimation of prospective crop yields. In more detail this question is discussed in the corresponding part.
Rapeseeds. During the period 2003-2008, expansion of the acreage of rape was accounted for by virtually limitless consumer demand on the foreign market. In recent years the demand for this crop on the world market, especially in the EU, the main buyer of Ukrainian rape, has decreased significantly, and in the future will remain relatively low. Owing to these conditions, we expect a gradual decrease in the acreage of rape at the level of 6% per annum from the current level.
In the period 2015-2020 the total land in rape will decrease by 27 thousand ha, or 20%, compared to the average value of 2010-2014.
Soybeans. Soybeans at this stage are one of the most promising crops, excessive demand for which is generated by both the internal and external markets. Considering the predicted high demand for soybean, we expect that in the period 2015-2020 the pace of expansion of soybean acreage will stay at 9% annually.
In the period 2015-2020. the total land in soybean will increase by 154 thousand ha, or 57%, compared to the average value of 2010-2015.
The crop yield of oilseeds in the resource area
Sunflower. 150-km resource area around the city of Kirovograd is located in the so-called "sunflower belt"; it encompasses Kirovohrad and Dnipropetrovsk oblasts, the regions with average production of about 1 million tonnes each in the years 2010-14.
At the same time, we would like to point out that the average yield in these areas lags behind that of other regions. So, the peak of the average yield in the period 2010-14 in Kirovograd oblast was at 2,4 tons/ha, in Dnipropetrovsk oblast – 2,3 tons/ha. At the same time, for example, in Poltava and Kharkiv oblasts the index was 2,9 tons/ha, and in Cherkasy oblast- 3,1 tons/ha.
This situation indicates unrealized potential and opportunities for increasing the yield of sunflower in the resource area. Increase in the value of this indicator can be achieved by using more productive hybrids for sowing, as well as improved agricultural technologies.
At the same time, it should be mentioned that in the next two years the financial and economic situation in Ukraine is unlikely to change dramatically towards improvement. So agriciltural producers will have to deal with limited financial resources and save. Undoubtedly, it will affect both the quality of the seed and agro-technologies used. Therefore, in this period we forecast yield reduction to 5% with subsequent growth in the range of 5-8% annually until 2020.
As it has been previously mentioned, the real indicator of the yield of sunflower may be somewhat overstated due to the concealment of shadow schemes of use of agricultural land. In particular, in order to document the origin of sunflower seeds, some enterprises calculate the yield on the basis of reported sown area. The actual gross yield is counted using the areas which include concealed acreage. As a result, the actual yield is considerably higher. Quite often this approach is used by small enterprises and farms.
Taking into account the above-mentioned factors, as well as the analysis of long-term productivity, the growth of sunflower yield can amount to about 6% or 2,11 tons/ha compared to the average five-year index (2010-2014).
Yield of sunflower by regions of Ukraine
Gross harvest of sunflower by regions of Ukraine
Soybeans. The key factor in increasing the yield of soybean in 2010-14, as well as in the forecasted period is annually increasing volumes of genetically-modified seeds used. It is the seed, which in the short-term prospect will be the main driving force of yield growth of this popular crop. In case the state tries to implement strict control on the use of genetically-modified plants, the rapid progress of the productivity growth characteristic of recent years
may be terminated. However, given the peculiarities of Ukraine, this factor will not have much impact.
The increase in soybean yield may amount to 25%, or 2,3 tons/ha compared to the average five-year volume (2010-2014), while CAGR will be 6% (4% in 2010-14).
Yield of soybeans by regions of Ukraine
Gross harvest of soybeans by regions of Ukraine
The principles of determining stock-taking sales in view of influence of competitors
So that we could adequately determine the influence of competitors on the trade stock of Kirovograd resource area, we have considered their location according to the degree of their geographical remoteness from the region.
150-km resource area with the center in the city of Kirovohrad
150-km resource area with the center in the city of Kirovograd
For these purposes, let us assume that each of the companies of competitors has its own resource area, which is equivalent of ours in size. Next, we considered the percentage of entries of the above-mentioned resource areas into Kirovograd area. In total, the number of enterprises-competitors, which meet the condition of intersection of resource areas, equals 36 in the case of sunflower seeds and 17 – in the case of soybeans. Then using the aforesaid coefficient of entry, we can calculate which of their processing capacities could potentially be provided in Kirovograd area.
Capacities of enterprises of competitors, whose resource areas intersect with Kirovograd area (sunflower seeds)
№ Company name
% of the Kirovograd
area resources
sunflower crushing capacity, ths tons/year
total
that will be resourced in Kirovograd area
2014/15MY 2015/16MY and
beyond
1 Kirovogradoliya 100 424 424 424
2 Creative Group 100 1 100 1 100 1 100
3 Vidrodzhennia 100 130 130 130 4 Bandursky elevator 58 470 272 272
5 Rapso-Diya 47 33 15 15
6 Katerynopilsky elevator 56 202 113 113 7 Krasnogorsk oil plant 45 31 14 14
8 Viktor & K 58 313 182 182
9 Myronivsky PMGF 37 390 143 143
10 Vinnitsa Oil and Fat Plant 1 689 6 6
11 Vinnytsia poultry 1 325 3 3
12 Avis 1 33 0 0
13 Nizhyn fat processing plant 2 59 1 1
14 Zinkovskiy feeding plants 10 39 4 4
15 Poltava OEP Kernel 20 442 90 90 16 Nasha Oliya 3 33 1 1
17 Dnipropetrovsk OEP 21 506 104 104
18 Sunflower 24 26 6 6
19 Zaporozhye OFP 13 783 102 102
20 Solt-Oil 13 39 5 5
21 Raduha 13 20 3 3 22 Agroproinvest 08 9 189 18 18
23 Verhneserogozsky oil plant 4 33 1 1 24 Kakhovka Cargill 18 438 79 79 25 Ekobiotek Ukraine 19 26 5 5
26 Desko Ukraine 10 33 3 3 27 Ekotrans 30 163 49 49
28 Nikolaev OEP 30 189 57 57
29 Ukrsoya 30 26 8 8
30 Bunge 30 876 265
31 Allseeds 6 650 42
32 Delta Wilmar CIS 6 376 24 24
33 Ukrainian Black Sea Industry 3 626 18 18
34 Odessa OEP 3 250 7 7 35 Ilyichevsk OEP 3 221 6 6
36 Bioil Universal Ukraine 8 81 7 7
Total 10 257 3 001 3 308
As the calculations show, the total processing capacity of sunflower seeds will amount to 3,0 mln tons/year in 2014/15 MY and 3,3 mln tons/year in 2015/16 MY.
Capacities of enterprises of competitors, whose resource areas intersect with Kirovograd area (soybeans)
№ Company
% of the Kirovograd
area resources
soybeans crushing capacity, ths tons/year
total
that will be resourced in Kirovograd area
2014/15MY 2015/16MY and
beyond 1 Protein Production 100 266 266 266
2 Gaysin affiliate DC Thegra Ukraine 18 65 12 12
3 Valenta 17 16 3 3 4 Kyiv-Atlantic Ukraine 9 49 4 4
5 Eva-Oleum 13 16 2 2
6 Ukroliya 15 46 7 7
7 Private Alliance 17 33 5 5
8 Yukon agro 7 16 1 1 9 Agroproinvest 08 9 96 9 9 10 Company System 13 98 13 13
11 PC "Dniprovskyj" 13 39 5 5
12 Kakhovka Protein Agro 18 221 39 39 13 Tavria perspective 19 16 3 3
14 Ukrsoya 30 33 10 10
15 Globyno Soybean Processing Plant 50 221 110 110 16 Kremiks 55 16 9 9
17 Allseeds 6 440 29
Total 1685 448 526
The total processing capacity of sunflower seeds will amount to 448 ths tons/year in 2014/15 MY and 526 ths tons/year in 2015 /16 MY.
Production of oilseeds and their processing capacity in the 150-km resource area around the city of Kirovograd, ths. Tons
Production of oilseeds and their processing capacity in the 150-km resource area around the city of Kirovograd, ths. tons
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
The total supply of sunflower, ths tons
Production, ths tons 1622 1948 1932 2622 2369 2366 2423 2658 2917 3292 3715
New Oilseeds Crushing Plant, ths tons 585 585 585
Competitors, ths tons 3222 3222 3529 3529 3529 3529 3529 3529
Balance, ths tons -600 -853 -
1163 -
1106 -871 -612 -237 186
The total supply of soybeans, ths tons
Production, ths tons 314 472 422 422 498 565 652 754 871 1006 1162
New Oilseeds Crushing Plant, ths tons 322 322 322
Competitors, ths tons 498 498 526 526 526 526 526 526
Balance, ths tons -76 1 38 126 227 22 158 314
In the case of sunflower, these figures exceed the production potential of the 150-km Kirovograd resource area. At the same time, the cumulative effect from the growth of sown areas together with the growth of productivity will be noticeable by 2020.
Probable shortage of sunflower can strengthen the processes of consolidation in the industry, resulting in the fact that small and medium-size processing plants may cease their activities, which will improve access to raw materials for large processors.
At the same time, intensive growth of soybean production in the region, its market demand and a relatively small number of large processors on the market create conditions for the launch of new processing facilities.
In case soybean processing capacity stays at the current level, the surplus of the resource area
can exceed 300 thousand tons by 2020.
Main recommendations are the following - the New Oilseeds Crushing Plant should be multi –
seeds and mostly oriented on soybeans crushing.
Sergey Bebko
Independent Consultant
+38 050 377 93 29
Skype sbagmarkets
