Ukraine's grand grains vision blunted on investment doubts

Already one of the world's powerhouses for agricultural products, Ukraine's plans to bolster grains production to cross the 100 million mt threshold by 2020 are ambitious, market sources told Agricensus Monday.

The country, already one of the world's major corn and sunflower oil exporters, has consistently signalled in recent years its intent to maximise further its growing potential, most recently during a press conference just before Christmas.

In late December, the president of the Ukrainian Grains Association, Nickolay Gorbachov, spoke of improved yields and larger area propelling the country's grains production to over 100 million mt by 2020 – although acknowledged that logistic constraints would struggle to accommodate such production volumes.

Currently, according to the USDA's January WASDE estimates, Ukraine is on course to produce some 26.5 million mt of wheat, 25 million mt of corn and just under 10 million mt of other course grains in the 2017/18 marketing year.

That will be a slight fall on the 2016/17 marketing year, when near perfect weather bolstered production and drove the country to produce some 26.8 million mt of wheat, 28 million mt of corn and 11.26 million mt of course grains.

"It's not enough to rely on the weather – it would need investment. From 60 million mt to 100 million mt in three years? I have my doubts," one market source said.

"You need a lot of money to invest in fertiliser and machines. I don't have the feeling that the banks will lend cheap money so, it's impossible," a second market source said.

According to the UGA, Ukraine has seen spectacular improvements in its wheat yields in recent years, with Luhansk and Donetsk seeing yields improve by 79.5% and 82.5% respectively, while many other regions of Ukraine seeing yield improvements of between 10% and up to 50%.

Maintaining such performance would be key to propelling the country to the 100 million mt mark, according to the UGA's forecast.

Collectively, grains and oilseeds currently push Ukraine's agricultural production towards 85 million mt, with just under 50 million mt exported to world markets, according to UGA data.

On average, the country has seen double digit improvements in its yields since 2006 and the UGA forecasts a yield increase of 19% to 4.02 mt per hectare. This, when combined with a 7% increase in acreage to 25.2 million ha and a relative flatline in domestic demand, would be enough to push crop production to 100 million mt. Exports in turn could hit 70 million mt.

However, land could be the main problem in achieving such growth, with available area falling 1% over the period 2010-2014 and 2014-2018.

But a second challenge would be handling such a crop – currently the country has a loading capacity of 715,000 mt a day, but a rail capacity that is a sixth of that total. Some 117,000 mt can be moved by rail per day, while discharge capacity at ports stands at around 182,000 mt, according to the UGA.

That leaves some significant bottlenecks at current production levels, while globally prices for corn and wheat have been under sustained pressure as markets face substantial oversupply.

However, with the US in the midst of renegotiating NAFTA – the free trade agreement that binds Canada, Mexico and the US together – fears that the agreement could be jettisoned by President Trump's administration have put other corn producers on alert.

Mexico is the USA's biggest export market for corn, and sources within the industry are acutely aware that Brazil and Ukraine are well-placed to benefit should the agreement unravel.

Meanwhile, the country is raising investment for key infrastructural projects, with the European Bank for Reconstruction and Development agreeing significant loans in recent weeks to invest in rail rolling stock and upgrade and electrify some of the main railway lines out to key ports such as Odesa.

The country has also recently invested in new storage capacity through late 2015 and early 2016, with a number of market sources pointing at the improvement being instrumental in helping to avoid some of the serious bottlenecks that were seen with the bumper 2016/17 harvest.

They have also been essential in giving farmers additional options – holding onto stock rather than being forced to sell because of a lack of storage space.