After a decade in which there was a very high level of migration from Ukraine’s farms to its cities, the country is hardly the same place that it was when independence was declared just over 16 years ago. Today the city dweller is likely to spend more time worrying about the price and venue of his or her next holiday than about the price of bread.
It is not only the city dwellers who have changed, but those remaining actively engaged in Ukraine’s agricultural sector have advanced at a pace that could hardly have been imagined in the days of collectivised agriculture. The most progressive farms are likely to use European – or American – made tractors and combines, some precision-guided by Global Positioning System (GPS) attachments that rival what might have been installed on a nuclear submarine just a few years ago.
Agriculture and food processing in Ukraine are not only changing at warp speed, in the process of change the whole sector is becoming more vertically integrated and better managed by a new generation who can discuss IPOs and return on investment just as authoritatively as they do crop rotation and fertilisation.
The process remains far from universal, but very quickly Ukraine is adapting to true 21st century agriculture and food production.
Size matters
During the Soviet era and the early years of independence, collective farms and their immediate successors would range from 5,000 to 15,000 hectares, with many private farmers doing their best to make a living on the 50 hectare allotments that were first given just after independence.
Today in Ukraine there are any number of agricultural operations that have aggregated well over 100,000 hectares each with hundreds of tractors and combines.
More importantly, the reading materials for those who lead these operations are more likely to be the Financial Times or The Wall Street Journal, rather than Silkskiy Visti.
This is the result of not only a new approach to agriculture but a whole new generation who understand management and marketing in a way that could not have been imagined just a few years ago.
Perhaps most interesting of all is that many of the most effective of these leaders are young – and native to Ukraine or other parts of the former Soviet Union.
Young and far-sighted
Where farm managers in the past may have come out of the National Agricultural University and other strictly agriculture-related higher educational institutions, today’s top managers in the field may just as likely have an education that includes an MBA from a European or American university.
For example, only a few months ago Alexei Sizov was named CEO of Agrarian Investments, LLC, a major agricultural firm which he is leading in a new direction.
Sizov, a banker with a background that includes work throughout the CIS with Renaissance Capital and JP Morgan, now has the firm concentrating its crop planting in a dual use mode, i.e. every planting decision is made based on the potential for the crop’s use as a human food and also as a biofuel feed stock.
Sizov believes that this route provides options for the company to choose between markets for its farm produce, thereby enhancing options for profitability, never a certain thing in agriculture.
However, just as the firm’s cropping plans must support two options, Sizov himself does double duty, first as the top overall manager of the firm, but just as importantly as a trained banker who is doing his best to lead Ukraine’s banks toward offering better “off-the-shelf” solutions to financing problems for agricultural businesses.
Sizov, who had been quite critical of the flexibility of Ukrainian banks in the past, told Business Ukraine that he believes he is seeing a greater receptiveness to his ideas by Ukrainian banks. “We have been working more closely with banks for our own benefit, but also we believe some of the banking products that we may be able to develop will benefit all companies in our field,” Sizov said.
On the sweet side
While some farm-related companies engage in a wider range of crops, some prefer to limit their operations to an area where they have greater expertise. Dr. Sergei Feofilov, a highly regarded independent agricultural economist, pointed to Astarta-Kyiv as an example of one such company.
Sugar profitability has been a very erratic thing in Ukraine, partly because of limited investment at the refinery level, and partly because of political meddling. Many in the sugar business point to former Prime Minister Pavlo Lazarenko as one who made a number of politically oriented decisions which it has taken years to overcome.
In spite of many ups and downs, sugar production has been a part of Ukraine for almost 200 years. In fact, in 19th century Ukraine, it was not wheat but sugar that was the country’s main cash crop, with Ukraine-grown beets producing almost all of the sugar for the tsarist empire and much of Europe. In all of Europe there was no place as well-suited to beet production as Ukraine’s Right Bank.
By the 1840s, sugar production was well-established and was the basis for some of the largest fortunes of that era. Family names that are well-known today – Tereshchenko, Symyrenko and Brodsky – became famous when these families were among those who came to be known as the “sugar barons.”
However, sugar’s better days have passed and it may take time and more investment before sugar plays a great role again in Ukraine. In a recent newspaper interview, Astarta’s General Director Viktor Ivanchyk was quoted as summing up the sugar situation as follows, “My forecast is that in the market there will be not 5-7 large companies as it is today, but only companies that own one or a few plants and provide themselves with their own sugar beet will remain. Only companies that will occupy a larger share of the market will be more effective.”
Putting the pieces together
Ivanchyk’s remarks reflect a view that is widely held by economists and sugar experts among whom the consensus is that only those will the money to invest and consolidate have a real future in sugar.
There are a half-dozen or more other agricultural operators perhaps worthy of mention, but among that group one seems to stand out as the best example of putting together all the pieces for a vertically integrated and highly profitable future.
If someone had gone to a public relations firm and asked for help in picking a catchy and saleable name for a company, Myronivsky Hliboprodukt (MHP) would hardly have been in the top 100 possibilities.
However, in spite of its tongue-twisting name, MHP has built itself into a world-class operation that is vertically integrated to a greater degree than most agricultural corporations in the world.
Begun in 1998 with the even less riveting name of Myronivsky Factory for Production of Grain and Mixed Fodder, MHP became one of the leading Ukrainian grain trade enterprises in 1999-2000. However, almost immediately after the company’s foundation it chose to direct its efforts toward the production of poultry meat, based on the Peremoga Nova plant.
It is in chicken meat production that MHP has excelled and under the leadership of founder Yury Kosyuk built itself into a huge and efficient producer.
In 2000, after a nine-year period of decreases, Ukraine’s statistics showed growth in chicken meat production volumes. In 2001, MHP ceased its activity as a grain trader and concentrated on production of poultry meat with gradual integration of the entire production process within the company.
The concept was at once simple and quite complicated. What MHP did successfully, perhaps more successfully than anyone has ever done in Ukraine, was to identify old Soviet-era facilities with potential, negotiate partnerships and buy-outs, as well as through investment and reconstruction managed to restore and modernise the acquired operations to efficiency and potential profitability.
Branding and building
If there is a single word that encapsulates the MHP success story, it is branding. The company discovered branding early on in its corporate life and has engaged in brand-building with chicken and other products with great success.
Of course, branding can only work when there is a good product supporting the brand. In 2002, MHP began a two-year programme during which all of its poultry plants were upgraded with modern equipment.
The company began introduction of uniform poultry growing technology, and uniform quality standards were applied to market-ready products. This was combined with an investment project designed to expand existing capacities with the ultimate aim of doubling the volume of market-ready products.
In December 2001, MHP created the Nasha Ryaba trademark as the retail brand for its fresh chicken products with the branded product first appearing in the marketplace in February 2002.
Within a year, the company introduced a franchising programme for Nasha Ryaba products and by the end of 2003 had opened approximately 900 MHP company sales points in all regions of Ukraine exclusively for the sale of Nasha Ryaba fresh chicken meat.
Closing the cycle
In addition to its branding success, MHP has developed production facilities that make it possible to structure the enterprise as an integrated complex with a closed cycle of meat production.
This made possible maximum control over product quality and costs of production. In particular, the company expanded its ability to provide its own mixed feed, thereby exercising maximum cost control.
Further development of its feed capacities made it possible for MHP to bring into being a second major brand with creation of a beef production complex aimed at the premium beef market. The brand has been known as Sertyfikovany Angus and is easily spotted on store shelves by its distinctive packaging.
To further expand its closed cycle concept, in 2004 MHP began sunflower seed processing, allowing the use of soy protein in feeds for animal herds and also providing sunflower oil to the market separately.
During the entire early 2000s period, MHP was constantly searching out new facilities that could bring new depth to its closed cycle operations, always looking to bring greater efficiencies and lower costs to its operations.
Each new acquisition led to new opportunities for brand development. Beginning in 2003, MHP began production of goose liver and products from goose meat based at its Snyatynska Nova plant.
Production of pork, sausages and beef for the premium market also began at the Druzhba Narodiv plant and production of pure bred Angus cattle at its Kyivska farm operation got underway.
Recognising a new market segment in Ukraine’s burgeoning middle class, in January 2006 MHP completed an entire new plant exclusively to produce Legko brand frozen meat chicken, beef and pork dinners that require only brief microwave heating to be table ready.
A bright future
MHP expects to produce over 200,000 tonnes of chicken this year, and 350,000 tonnes annually by 2010. Based on its previous performance, there seems no reason to doubt that the goals will be realised.
The leadership at MHP appears to have learned two very important lessons. First, people do not want just unbranded commodities and products. They want, and are willing to pay for, products with name brands that they trust.
Second, MHP chose to concentrate on chicken meat production because of a simple fact, the birth to market cycle. With beef this takes an average of two years. For pigs, the same cycle is about six months. But for chickens, the cycle from birth to market is only two months.
Chicken meat is not only good business, it is business that can and often does give the producer a return in a much shorter time frame.
Chickens are not the only answer, but they have proved an answer for some and those who turn out a quality chicken product are likely to reap rewards.
There will always be challenges in Ukraine’s agricultural sector, but good business can be done and it can be done profitably, as MHP and other progressive producers are proving.
