Nature of investments into the agricultural sector has changed significantly over the last year. The number corporate bond offerings and IPOs on stock exchanges has decreased, while the number of mergers and acquisitions in the agricultural sector increased dramatically.

The last years have been a period of high consolidation. The main purpose of agricultural companies is improving the efficiency of their business and the completion of major investment projects. For small and medium-sized agricultural enterprises it was a difficult time, as they felt the lack of funding. It is these companies that took positively the proposals to merge. Some of them were swallowed up by large holdings. In general we can say that the main trend for the past two years has been the consolidation of the agricultural business.

The inflow of investments, which is one of the main levers of the agricultural sector development in Ukraine, has intensified about 5-6 years ago, namely in 2006-2007.

If you look at the development of agrarian sector in Ukraine, there are 3 phases. The first phase is dated from 1991-2000. This period is characterized by the preservation of collective agricultural enterprises, state purchases and supplies of inputs resources, lack of private grain silos. These factors, as well as unfavourable weather conditions in the late 90's led to a decline in production in the agricultural sector by about 50%.

Agrarian and land reforms initiated in 1999 contributed to a sharp improvement in the agricultural sector. After extensive privatization of 2000-2001 market factors and private investments have become the major forces shaping development trends of the agricultural sector.

Measures of 2000-2001 included division of agricultural land, rejection of collective farm as a major form of organization of production, and the issuance of low-interest loans to new private enterprises.

In 2005, the agricultural sector grew for the first time since Ukraine's independence and continues to maintain this trend.

However, growth rates remained low and agricultural businesses have come to realize that the development of the business only at the expense of their own investments isn't effective enough and significant raised investments are required.

Agricultural production

Source: State Statistics Service of Ukraine

New forms of investment attraction into the agricultural sector were reported in 2006. That year Ukrainian agricultural companies first listed their shares on the international stock exchanges during IPOs (Ukrproduct, Astrata, MHP). Astrata and MHP invested the raised funds to increase production efficiency and in a year had shown very good results.

After them, other Ukrainian companies carried out their IPOs. Ukrainian companies continued to raise funds through IPO, even after the financial crisis of 2008-2010.

At the same time with the Ukrainian companies placing their shares on international stock exchanges, investments in the form of Foreign Direct Investment (FDI) have intensified. Companies such as Cargill, Noble, Glencore started to implement large-scale investment programs in the agricultural sector of Ukraine. One of the biggest deals was the purchase of Sandora.

Foreign direct investment into the agricultural sector (U.S. $ million)

Source: State Statistics Service of Ukraine

By its nature, the agricultural sector is a fairly reliable target for investment, since it does not have sharp drops in production, with the rate of growth being quite stable.

After the collapse of Ukraine's banking system in 2008-2009, virtually the entire economy declined by 15-20%. However, the agrarian sector of Ukraine was the only sector with a growth rate of 3% in 2009.

Labor productivity in Ukraine's agriculture

Source: State Statistics Service of Ukraine

The second phase of Ukrainian agricultural sector development is characterized by the following form of investment: corporate loans, which emerged in 2008-2009 after the global financial crisis. The reason for wide spread of corporate loans is serious problems of the agricultural holdings, which did not use the attracted investments effectively. That led to a fall in profitability and production in such farms. A number of agricultural holdings was not able to attract additional investment.

What are the prospects for attracting investments today, in the third stage of development of the Ukrainian agricultural sector? It should be emphasized that at the present time we are seeing significantly modified form of investment.

An IPO is virtually impossible, as Europe and the world are still affected by the financial crisis. This is the cause of absence of high liquidity in the European markets and the European banking system is in a sharp deficit of money to invest in corporate bonds.

In the long term, before crisis ends in Europe, IPO or corporate loans shoudn't be expected. Direct investment in the Ukrainian agricultural sector from Europe in the near future also isn't not expected.

A new development for the past two years is an active process of consolidation of companies. The profitability of large producers in Ukraine is so high ($50 -$100 million) that they grow organically, using this income as a funding base.

At the same time, sovereign funds from Middle and Far East come to Ukraine. As an example, consider the trade credit line of $3 billion for the company UkrLandFarming from China Development Bank. Ukrainian agricultural companies are also able to obtain trade credit from the Arab countries.

One of the major problems to be solved is the land issue. We have a rich land, but at the same time, there is a legal chaos in land laws. Law on agricultural land market will not function without land register, which the country does not have. This situation, even with the adoption of the law, will create uncertainty, which won't allow to buy and sell land or use it as a collateral for the bank.

Creation of a land market in general is not a stimulus for investment attraction into Ukrainian agriculture. On the contrary, the system that exists at the moment, is the best for investment. The availability of developed and cheap leases is the factor, which allows Ukraine to be the most efficient producer of agricultural products.

We believe that the transition to the land market can significantly reduce the amount of investment into the agricultural sector.

The next problem that prevents the attraction of investments into the Ukrainian agricultural sector is a limited number of large-scale projects. Given this factor, mergers and acquisitions in the agricultural market, which we are now witnessing, is a natural and positive process.

Consolidation - basically the only and necessary step in the context of the situation for the future development of efficient production.

Financial Activity

Source: State Statistics Service of Ukraine

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