Ukrainian Flour Market Review: Have We Lost It?

Expert view

6 April 2021, 09:00

6102

2

Flour production in Ukraine
Photo by: Latifundist.com

A tough time has come for the flour industry in Ukraine and the processors are bracing themselves when they see the charts given below in this blog. This applies not only to flour mills but to all those who deal with agricultural raw materials. Dairy and meat products become more expensive; a bottle of sunflower oil is sold for UAH 60 or more. Consequently, bread and confectionery products are becoming more expensive. Many industries stop, and vice versa, small mills, which have not worked lately, are urgently launched and working in the shadow.

What has happened in Ukraine? Same as usual, nothing new and no work of the enemy: our parliament voted to improve the plight of agriproducers and reduced VAT to 14%. And the President signed the law. Of course, he did! It is the reduction of the tax burden on poor agrarians. It is a holy thing. And nobody gave a second thought to the fact that these people make a fortune every year, often making "black money", failing to achieve fair yield or gross yield and underpaying taxes. And when natural disasters deprive them of their crops, they demand state compensation at the top of their voices!

Related: VAT cut adversely affected Ukrainian milling business — opinion

I shall share with you, in strict confidence, that all, absolutely all processors of agricultural products dislike the producers of this product even more than the government, the tax office and parliament put together.

This year, following the global market situation, grain prices have skyrocketed and producers' profits are off the charts. And then they also got a tax cut of 6%... At the same time, flour millers' profitability of 3-5% is considered pretty good. It is just basic math. Naturally, domestic grain prices are tied to global ones, and prices of processed products are following suit. So much for the result.

It is quite clear that the law has been lobbied for and very strongly. The government in Ukraine has never been so infirm. And not just because it is deeply corrupted, not at all... or rather, not only because of that. Everyone considers corruption to be the main stumbling block in improving our country. Here is the thing, corruption together with dilettantism and unprofessionalism is many times worse! And who have we got serving in the parliament? And in the Cabinet? And in the President's Office? And so on down the list...

Another, confidential (!) opinion: government officials should have been lustrated. But it was not so easy with the top professionals: one could not be a top manager in various sectors and not be involved in schemes. Such people were simply pushed out. It was necessary to create conditions for their smooth operation. It is impossible to produce a replacement for a manager that high in a year or two, and without years of experience. But alas, many of them were removed, and they are doing a fine job for the benefit of private companies. And we are where we are...

Could this have happened, let's say, in Turkey, the world leader in flour exports? Certainly not! Or in Russia? They did a very smart thing there: they introduced an export duty on wheat despite a perfectly sufficient harvest. Taking into account world prices and understanding that farmers themselves will not voluntarily share the profits, this decision increased the treasury revenues and reduced prices in the country. It did not affect export volumes at all. On the contrary, flour exports, for example, grew at the expense of those markets that Ukraine left because of uncompetitive prices. Furthermore, flour from Belarus, which is in fact a product from Russian origins, is actively imported to Ukraine as it is cheaper than that produced in our country. Between October 2020 and February 2021, 11,218.7 t were imported. In March, 2,328 t more were imported from Belarus — for the whole month, there will be more. In addition, a little bit was imported from other countries as well. We did it, as they say.

What do our production statistics have to say? Nothing comforting... We have never produced so little (officially) before: wheat flour production in 8 months of the 2020/21 season reached 828 thou. t, and combined with flour from other crops — only 864.6 thou. t.

During the same period, 494.6 thou. t of bread and bakery products (officially!) were produced, 43.6 thou. t of pasta.

Based on production volumes and taking into account the official population of 42 mln, it can be calculated that 30 kg of flour per capita is produced annually, and 17.6 kg of bread per capita. Not to mention pasta.

Quite authoritative figures, aren't they? Well, let's say we have a population of 35-38 mln people. Even in this case, about 50% of the flour and bread market is in the shadow. Where do these figures come from? Well, for example, from Germany and Poland, where 70-72 kg of flour per capita a year is produced. Apparently, they only eat bread there, they do not have enough money for other products, in contrast to rich Ukraine. Why rich? The cost of wheat flour in small packages in retail chains in Slovakia and Poland is lower than in Ukrainian stores. And so are many flour confectionery products.

And what about our flour exports, which not so long ago were pleasing with annual growth and a so close limit of 500 thou. t a year? There is no chance for that... And even worse!

96 thou. t of flour exports from Ukraine in the first nine months of 2020/21. Is that a lot or not? If you compare it with 2010/11 when 87.5 thou. t were exported during the marketing year, it is probably a lot. And if you compare it with 2017/18, when Ukraine exported 354 thou. t during 9 months, and 428 thou. t during the entire MY, it is nothing. Markets, where we have been selling successfully for a long time, have been taken over by flour from Russia, which is much more competitive as a result of correct and timely measures aimed at protecting its producers and, incidentally, domestic consumers as well.

But even with this low exports, it was not without surprises.

As you know, the SFGCU(The State Food and Grain Corporation of Ukraine) has long "shone" with export prices for flour significantly lower than the domestic ones. This almost came to a halt in August 2020. In February, the Corporation again exported flour at 277 USD/t FAS. Converted to FCA terms of delivery, this amounts to about 255 USD/t. Having added 20% of VAT, we shall receive approximately 8.5 thou. UAH/t of flour. For the record, the minimum price for flour, even of the first grade, was 11.2 thou. UAH in February. Do you think there would be buyers at the price of 8.5 thou. UAH/t? Certainly, they would have lined up!

The company Enlil put an even lower price of 235 USD/t. But there was a catch. There have long been rumours in the market about Enlil's, to put it mildly, strange way of dealing with clients. In this particular case, the buyer was able to force the company to honour a contract it had signed and paid for back in August. Again, according to rumours in the market, not many managed to do this.

Even in the face of a precipitous drop in exports, several companies have managed to retain some of their clients: the company Roma for one with exclusive compounding blends, others, through long-standing partnerships. In any case, these are still the same leaders of yesteryear.

Not all of the aforementioned countries imported flour in January and February 2021, but last months' figures determine the top buyers. We have not shipped to North Korea for a long time, but that country is in the middle of the top buyers. By the way, we will probably not be selling there at all since the US has told China not to re-export from its territory. But shipments to Venezuela continue. And only Pivdenmlyn exports to that country on a regular basis.

The key flour producers in Ukraine remain the same. Sometimes the position in the ranking changes, but there is virtually no change in the top 10 itself.

Even though, in the current circumstances, it is the large enterprises that suffer, working officially, paying taxes and contributing to the budget. The official statistics do not include the many dozens of small and medium-sized mills that operate either entirely on "black cash" or in the shadow and produce up to a million tons of flour per month in total.

Despite the pandemic, production cutbacks, the short-sightedness of our politicians and those proactive in other countries, there are some positive trends in the market. The export price of wheat has fallen by 30 USD/t over the last month and keeps going down. The outlook for the harvest is very good, both in Ukraine and globally. This means that we hope there will be no such extremes as in this season. And if our MPs do not "help" us again, the status quo is likely to be restored. That is what Ukrainian millers hope for desperately.

Sergey Sakirkin, Chairman of the Audit Commission of the Union Millers of Ukraine

Expert view