Yevgeny Osipov:
No Monopoly Is Present in the Market of Soybean Processing and Export
2.04.2018 Konstantin Tkachenko, Aleksei Beskletko
For a long time the position of the CEO in Kernel, one of Ukraine's largest agroholdings, remained vacant. But after management reshuffles at the end of the year, Yevgeny Osipov, the head of Kernel's agribusiness branch, occupied it. was the first to interview a new CEO. We had a chance to talk during a round table devoted to "soybean-rapeseed issues", where he was advocating, as it is easy to guess, the processing. Yevgeny Osipov told how these amendments will reflect on Kernel, which investment plans the company will implement in the coming years, how to keep a balance between different business areas of the holding and why changes in management are not a "revolution".
Yevgeny Osipov
Yevgeny Osipov
Yevgeny Osipov
Yevgeny Osipov
During the round table, you have noted that both the producer and the processor should receive VAT refunds. Please, explain your point. How does the amendment affect Kernel's activities?
The topic of soy and rapeseed amendments has no direct relationship to Kernel, because at our plants, we process only sunflower seeds. Our plant in Nikolaev region can process soy and rapeseed, but it is not profitable in terms of logistics. A new multi-factory plant in Starokonstantinov will be launched in three years when the soy amendment will no longer be in effect. Today we process approximately 3 million tons of sunflower seed. Our capacity rate is about 90%, and we are not short of raw materials for processing.

At the same time, we are a major producer of agricultural products. Annually we grow approximately 3 million tons of grain and oilseed crops, and we clearly understand how certain changes in the taxation system can affect the agricultural producer. The share of agricultural production in the company's gross profits is about 43%, and the share of processing sunflower seeds constitutes about 26%. Accordingly, if you look closely at the company's profile, today we are far more a farmer rather than a processor.
Poltava Oil Crushing Plant
With regard to the soy and rapeseed amendment, I think it makes sense to study the potential for development of the industry and business as a whole. Large and small producers, along with soybean and rapeseed processors, need to negotiate and agree. After all, the issue of margin does not matter, since it does not affect the price and cost of the finished goods.

Today, this indicator is high, and tomorrow may be low. Other questions in the production chain are more of interest here. Firstly, which delivery route of raw materials and finished products FIELD-PORT is the cheapest one, i.e. with minimal and most effective logistics. Secondly, what facilities should be involved in this process: elevators, OCPs, railways, rivers, livestock, etc.

I believe that the norm on which VAT refund is returned to the producer and processor of oilseed with certain time limits, for international traders is the most balanced decision from the producer and the processor's point of view, as well as in terms of the industry development as a whole. Being a company that runs both business directions, we consider this model as the most appropriate one.
But is it a profitable diversification of business for you?
Why do we think that it is necessary to process soybean and rapeseed within the country? This must be done to create added value within the country. And our experience in the sunflower oil-processing business proved the effectiveness of this model.

We deepen the processing of sunflower seeds, conduct refining, produce high-quality lecithin, develop husk-based bioenergy, bottled oil for the domestic market, and develop our brands for export to 50 countries. We, just like other processors, achieved it thanks to the state regulation through the introduction of a duty, which was 23%, and then decreased to 10%. We work efficiently and compete freely. Ukraine's entry into the free trade zone limits the government's right to impose duties on the export of raw materials from the country, so the VAT regulation is likely to be a tool for the development of the soybean and rapeseed market in Ukraine.

The similar policy should be developed for soy and rapeseed, but the mechanism for its introduction needs to be carefully thought over. Today there is a compromise mechanism, which was proposed by the MPs. We, as agricultural producers and as processors, are ready to support it. What is the essence of the mechanism? Both the processor who exports the end product, and the agricultural producer who can export it, have the right to VAT refund. So both sides are protected.
Are you ready to support such a mechanism?
Yes, I support it. Today, Kernel produces soybeans and rapeseed on a large area. We export the products, but we do not process them at our plants. Holding's plants are engaged in sunflower processing. As a commodity producer, this form of taxation benefits us. We will export and receive a VAT refund.

Nowadays more and more producers — large, medium and small ones — sell their products in the currency under CPT contracts, and every year the number of such transactions grows tenfold. When in three years we will launch a new plant in Khmelnitsky region, whatever the market is, I believe that through effective processing within the country, we will be able to concentrate the necessary volumes of sunflower, soybean, and rapeseed.
Does it mean that Kernel has a vision for the future?
Yes, it does. We are working for the future. I believe that we should all think today of the prospect of strengthening the domestic infrastructure and the export potential of end products.

All the countries we are trying to compete with have a share of the integration of domestic infrastructure higher than ours. Dozens of times higher! They substantially outweigh in logistics, transport, port, and processing capacities compared to ours. Yet we remain a mere supplier of raw materials, and we are made to fight with others, saying that this is the problem of farmers and processors. This is not true! It's not about that at all. If a farmer wants to receive a VAT refund upon export — go and get it! Or he can have it processed with the help of third parties. Today, the processors market is extremely competitive, and they are ready to pay competitive prices.
Do you have any concerns that the cost of soybean and rapeseed will decrease?
I have no such fear, because I see a high level of competition for these products. If the market had been monopolized, there would have been such a risk, and we would not have supported it, because we are the largest commodity producer. Since the market is demonopolized, there is a big competition among plants and exporters, so I believe that we will not face such problem.
When do you plan to commission the new plant in Khmelnytsky region? And how will the processing capacity of Kernel change as a result?
The commissioning is due in 2021. Today, the total processing capacity of Kernel is 3.5 million tons. We plan to add 1 million tons more. And this will be a multi-plant, so we will process soybean, rapeseed, and sunflower in any ratio there. But again, the basic culture for us is sunflower. The basic loading of the plant is sunflower. We see the potential of sunflower in this region. The yield that we receive at our agro-enterprises in this region is 4 t/ha. This is a good economics for an agricultural producer. This makes us think that there will be a potential for sunflower processing in the future.
Talking about the land bank, do we understand it correctly that you decided to stop at 600 thousand hectares and increase the efficiency per hectare, rather than extend the land bank?
You are right. We are convinced that the main thing is the effectiveness of each hectare. Naturally, with the growth of the company, we have the opportunity to increase the land bank, and last year we made two fairly large acquisitions: Ukrainian Agrarian Investments and Agro Invest Ukraine. Today, these lands are integrated into the Kernel production structure.

The task for the next few years is to achieve the level of technology and yield that has already become an indicator of the effectiveness of agricultural production in many regions of the company's presence. With regard to the optimization of the land bank, we plan to stop at 560 thousand hectares. This is the figure with which we plan to stay in the near future.
Is the reduction planned or is it already in progress?
We are already reducing the land bank, now we are divesting of assets in non-optimal areas for us. And this again confirms our idea that we do not pursue the amount of cultivated land. For us, efficiency is of the most importance. Thus, we evaluate each land plot in terms of its location, efficiency, and potential.
What do you mean by that?
Our decisions depend not only on the region but also on logistics, remoteness from our main facilities. Even if we have 1 thou. hectares in a good region, but they are located at a great distance from our other land areas, we divest of this land. We cannot manage effectively from the point of view of logistics and production. Suppose we sell 1 thou. hectares in Khmelnytsky region. We consider this region to be the best in many respects, but there are 1,000 hectares that do not fall into the logistics of production, and we are forced to dispose the corporate rights for this land.

A similar situation is in Kirovograd, Nikolaev, Ivano-Frankovsk, and Chernigov regions. Almost in each region there is land that simply does not logically fall into the model that we apply. We believe it is right to transfer this land to other producers who will work on it more efficiently building their own logistics.
If we talk about efficiency per hectare, how much profit does Kernel get from 1 hectare now?
Over the past fiscal year, EBITDA amounted to about USD 143 million. It was our profit from the land bank of 385,000 hectares, the volume that we had before the acquisition of new assets. Thus, we got USD 371 per hectare. The acquisition of new assets will reduce our profitability for a while. We will need several years to integrate, implement our technologies, automate processes, and train staff to achieve our usual indicators.
How did the situation with the monopoly in the fertilizer market affect the company?
In order to apply enough fertilizer, agrarians have to spend huge sums of money because the fertilizer market is monopolized in Ukraine. I made some calculations: today we, the Ukrainian agrarians, applying a sufficient rate of fertilizer on 20 million hectares of cultivated land, overpay 30% for each ton of fertilizers. This is about UAH 1,000 per ha and UAH 20 billion per year.

Ukrainian farmers pay more for fertilizers than agrarians in any other country in the world. Today, not enough attention is given to this topic. But we believe that fertilizers and logistics are not less important than, for example, taxation of farmers. Fertilizers are a basic thing, and monopoly in this sector is unacceptable, the problem must be solved.
Please share your investment plans for this year.
We have a fairly large investment program. We invest in the construction of the terminal in Chernomorsk and thereby increase the transshipment capacity from 4 to 8 million tons. We are investing in a new plant in Khmelnitsky with 1 million tons processing capacity. We invest in new elevators to maintain our land bank.
Are new elevators constructed?
Yes, we are constructing two new elevators in Sumy and Chernigov regions with the loading capacity of up to 8,000 tons/day, and the storage capacity of 130-160 thousand tons. We are also reconstructing old elevators. At the same time, we are now realizing bioenergy projects, producing electricity at our oil crushing plants. This is energy independence, and these projects can have a fairly good payback.
In total, we have a common investment program for the next few years of more than USD 500 million. We responsibly approach our role within the country and continue to invest money in Ukraine, increasing the efficiency of our business.

Today at the round table I heard a statement that there is a need to introduce a limit on the size of cultivated land bank for large holdings. I think this is fundamentally wrong. The possibility to increase the land bank and apply the latest technologies on a large area gives us the opportunity to earn more so that we can then invest in building enterprises, create new jobs, increase tax payments, and so on. In Ukraine, there is enough space for small and large-scale businesses, each has its own role.
What other technologies do you apply to improve business efficiency?
We are working to increase the efficiency of each hectare. We improve the technology, the performance of technological operations, we work on improving the productivity of machinery and optimizing the fleet, automating business processes, and introducing DigitalAgriBusiness.

At plants, elevators, and terminals we are working on productivity increasing, updating equipment, optimizing processes, and improving the quality of service for internal and external partners.

In addition, today we are very attentive to the product logistics within the country. The main focus is on reducing the cost of logistics along the chain from field to port. Our task is to make sure that the commodity producer sees us as a partner who can maximize its added value so that cooperation with Kernel would be most beneficial. We aspire to transship all products within our infrastructure, providing maximal service to our partners-producers.

Our benefit is that we have own large agricultural production and significant volumes, respectively, we can test for ourselves all the interaction models and service quality.

We believe in partnership with the commodity producer and in the joint chains of marketing and creation of added value, which is beneficial for both sides.
What is the situation in Chernomorsk now?
Today, design and preparatory works are being actively carried out, we are starting the construction. In 2018-2019, we plan to launch the first phase of the new terminal, and in 2019-2020 we expect to reach the transshipment volume of 4 million tons.

An important point in the project is the realization of the obligations of the Ukrainian Sea Ports Administration in accordance with the Memorandum on dredging works in the Chernomorsk seaport water area. The work that was done in Yuzhny Sea Port, we expect it done in Chernomorsk Sea Port as well. Dredging will increase revenues both of the state budget due to better use of berths and port facilities, as well as those operators that work directly in the port. At the same time, the profitability of farmers will grow. Today, the market is arranged in such a way that any dollar, in addition to the received margin due to the growth of infrastructure efficiency, transits to the agrarian.
You came from farming segment. Are there concerns that you will pay much attention to this direction?
I think I have already removed my hand from the pulse of agribusiness and I do not feel it as I did before. The renewed Central Office team and strong management in the clusters confidently manage this segment.

Kernel has a vertically integrated structure, and our strategy is to maintain a balance between directions, improve the quality of their cooperation and find synergy and added value in their integration. This is what I am concentrating on. We took steps towards the growth of the land bank and learned how to manage it effectively. Investments in increasing the port capacities, infrastructure, and processing — this is the synchronization of our business model. We expect to have approximately equal profits in each of the business directions and believe that due to this the company will be the most stable in the long term perspective.
How are you going to compete in the international markets?
The competition is extremely high in the international markets. Our task now is to reach the end-user. On the one hand, we are developing CIF-programs for the supply of grain, meal, and vegetable oil to foreign markets. On the other hand, we are actively working to promote the final product — bottled vegetable oil. We aim at putting it on the market shelves for the final users in the Middle East, Africa, and Europe. We ensure high quality of the product and believe that the brand created in Ukraine should be worldwide. What is more, of course, there is an additional margin.
Are you planning to enter new markets?
It is difficult to enter new markets since we are represented almost everywhere. Now we are talking about the growth of efficiency and the balance of assets, organizing more optimal logistics within the country, as well as qualitative work with those markets that we already have cooperation with.

In addition, you know, we have a unique situation that is not yet developed: Ukraine is the largest producer of non-GMO products in the world. We produce vegetable oil, corn, non-GMO varieties of soybean, and we do not get a benefit from it yet. I believe that this direction has potential and will be strengthened.
Are you sure there is non-GMO soybean in Ukraine?
Kernel produces only non-GMO soy. The market operates, of course, in different ways. The production of GMO soy is prohibited in Ukraine. Some commodity producers violate the law and export GMO soy as raw materials. It is another matter if soybean is processed, and oil is tested when exported. In this case, the presence of GMOs cannot be concealed. We believe that this is a natural cleansing of the country in terms of product quality.
It is much said about the state's assistance in introducing business on foreign markets. What do you expect from the authorities in this direction?
We do not think that the state should provide any great help in this matter. Of course, support is OK if it is provided. But, the country has much work to do, and there are many internal and external challenges. Therefore, it is important for Ukraine to maintain a fairly stable level of the legislative base, which makes it possible to invest. It is extremely important for us that the state works on the infrastructure inside the country. I have mentioned the ports, but the same is with the railway and highways. There is much to be done. And I believe that we can promote products on foreign markets ourselves.
Has the "management revolution" ended in the company?
I would not call our changes a "revolution". We have reorganized the management structure, which naturally led to some changes in the management. We are always open to dialogue and to reforms that make the company more efficient. We support the initiative people within the company who are ready to take responsibility for the implementation of their ideas. We constantly look and communicate with people in the market, and we search for those who can bring additional efficiency.

Nothing is stable in the modern world. We must constantly change, move forward, and improve our processes. The team is our main value. We invest considerable efforts and budgets in training and development of people, form a personnel reserve, and work on motivation and corporate culture. Every employee has the opportunity to grow inside the company, regardless of the position he occupies, and the region he works in.

My example, probably, can be one of the brightest. When I started my career in Kernel, I had no idea that at some point I would lead the whole company. When you face a specific challenge or a goal, you simply try on the responsibility: whether you are ready for it or not. In Kernel, this approach is applied to all positions. We are ready to give such an opportunity to any specialist who is ready to take on a greater level of authority and responsibility.
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