STRAIGHT TALK WITH A DISTRIBUTOR:
Seed and Chemicals Producers Switched to Competing With Distributors
Konstantin Tkachenko, Latifundist.com
07.08.2020
Spectacular marketing campaigns, press releases on the launch of a new corn seed product line or the registration of a new fungicide, all sorts of ratings and awards — the distribution market in the media looks like an Oscar ceremony. Sometimes the spotlight is clouded by bankruptcies like Imperia Agro or Sedna and the looming default of THN. But the market quickly ingests bad news and goes back to showy marketing campaigns and loud press coverage.

Like any other activity, distribution has a reverse, darker side. The market is sick. And if not terminally, then it's close to it. The nature of the disease is complex, one of its most probable causes is a kinship tie between the markets where the seed and agrochemical companies are presented. Both markets are saturated with corruption, kickbacks, bubbles, pushing non-existent volumes of goods for bonuses. The list of symptoms is quite long.

We talked to a representative of the distributor company who knows the history firsthand, as she has been working in this market for over 15 years. She described the main periods of its course, causes and specific symptoms. The conversation is long, so make yourself comfortable. Let us begin.
He who possesses the information controls the market
When did you start your career in distribution?
— I started in the 2000s. Back then there were three most powerful players in the market: Tridenta, Rise and Gaben. What was the thing in the market then? I would call it the asymmetry of information. Whoever had access to information and could first, for example, book in China, was on top. At that time even e-mail was not very developed, not to mention messengers and other usual communication channels. These companies knew where the goods were produced and simply imported them. At the same time, they had a good logistic network, warehouses. This made Rise, in particular, a big distribution machine. They set up warehouses in each region, got licenses — then they still needed them to sell CPP. Then they stepped into agricultural production, produced hybrids and at the peak, they sold out to Bakhmatyuk.

There was no serious competition in the market then. That's why they set the prices they wished. They purchased products in China for one price, tripled it, thus the markup was 300%.
There was no serious competition in the market then. That's why they set the prices they wished. They purchased products in China for one price, tripled it, thus the markup was 300%.
As regards Tridenta, the company's turnover was about USD 200 mln in the golden time, in 2004-05. Rise had it even higher. Many well-known companies such as THN, Agroscope, Sedna, Bizon-Tech operated, but more locally. Eridon was bigger than them, but far behind Rise and Tridenta.
What about multinational companies?
— As for the Ukrainian management of multinational companies, people having a good command of English and ability to count money became general directors. However, they knew little of agribusiness.

The majority of those who worked in the distribution and commercial branches of multinational manufacturers knew Ukrainian and Russian but understood what methods work and how money bags are brought to the right offices. Both the former and the latter found a common language in the money matter.
Please explain.
— Let's take Tridenta. It was, by and large, a reflection of what was happening in the market. It was like that: this season we sell Syngenta. We loaned USD 5 mln worth of products and sold them to farmers. But Syngenta said that the money would be paid next year. Then a bag of money will be delivered to the right people so that everybody is happy.

Next season we sell DuPont. The payment was overdue, the cash was brought in, then they switch to selling Bayer products. And so they continued with the importers. Everything came to the point when there was nothing to sell — they were indebted to everyone. Yes, they had some assets, but first of all, they were pledged in banks or other financial institutions as collateral.

Now the issue of responsibility arises. Under the practised model, the owners are responsible for nothing. Shareholders are paid dividends, whereas in legal terms they are merely investors. Hired management is responsible for everything, particularly, the general director. It was exactly the case with Tridenta: the director took much trouble.

It's a paradoxical situation. After all, the farmers were paying them in due time. Warehouses were not stockpiled, products were sold, only illiquid products remained. But the money was simply withdrawn from the company.
What did the owners do?
— They were spending the money as they saw fit, bought Cayennes and everything else. They were dazzled by their success and thought it would last forever. But it was a self-deception. This reminds me of what the former mayor of Kyiv Chernovetskiy once said: you think that you are on top of the world, you buy a yacht, sports cars. In the meantime, a competitor is copying your business model. While you're enjoying champagne somewhere in the ocean, he poaches your clients. For a while, the owners were working on their old stock, but it couldn't last long. Reputation's lost, counterparties are filing lawsuits. They were the ones to whom the Tridenta hadn't delivered the goods or had taken a prepayment and delivered some other product, for example, a made-in-China generic. By the way, such cases were quite common, as some agrarians did not even check what they were supplied with.

The climax of it was when Organized Crime Department came to the office for the first time and the accountants threw seals out of the windows. They did everything they could to avoid being held responsible.
What was with the company then?
— Tridenta transferred its assets to two companies, Technik Energy and High Agrarian Technologies. Good thing it costs nothing to create an LLC, some UAH 100. But the same people were behind it — Vitaliy and Grigory Shelikhovy. By the way, one of them, Vitaliy, was jailed for five years in 2013 for large-scale fraud. He served two.
Did they owe money only to the local business or to the Chinese too?
— The Chinese were screwed out of money, too. They started counting money and stopped loaning anymore. They asked of the immediate payment of at least 20%.

Do you know why the 20/80 system was introduced? It is meant to cover the cost of production. Let's take the pesticide Metamitron. Some time ago, it was imported to Ukraine at about USD 9-10. It was sold at USD 20 to a distributor. And the distributor sold it to the farmer at 22. That is, the importer's margin, let's say Adama's, is 50%.
Perhaps, they were knocked down by the crisis?
— No, they just didn't pay. There were especially high earnings from 2009 through 2012. There were hard times, too. But the suppliers were paid. None of such situations with receivables that we have today existed then.
Tridenta fell. How did the market continue its development?
— Eridon, Bizon-Tech, THN, Agroscope, Agrozahist Donbas intensified themselves. Everyone was gaining momentum. Eridon rose the most. At the moment when Tridenta stiffed the market, Eridon was lending without any prepayments. The company knew that this was the moment to attract clients, take market share and make money.
What lessons did the multinationals learn from this?
— Syngenta, Monsanto, DuPont and the others settled the receivables yet obtained nothing. And the banks didn't take anything. What could they have taken? The seed plant? The warehouse, the seed production line cost about USD 200 thou. It's nothing compared to the total debt. But the multinationals still paid off all for themselves, they raised prices by a couple of dollars and the rest of the distributors paid Tridenta's debts from their margin, etc.
As far as I know, the founder of Imperia Agro Yuri Otsabrik came from Tridenta.
— Yes, the Otsabrik brothers are from Tridenta. They learned all the practices there. As Yuri Otsabrik used to say: "Look, they give you a car, fuel, pay your salary. Take all the goods you want, sell them wherever you want." As a result, he sold products to his legal entity, and only then to farmers. No wonder Otsabrik had to hire a guard already in 2011.
Take more
When did distributors first experienced the margin falling?
— If we're talking about a gross margin, it was about 40% before 2010. Then it went down to 30%. In 2012-13, it dropped to 15%, but since 2014 it has been declining rapidly.
Agriproducers faced falling income and witnessed competition growth. Was the information spreading among more and more companies?
— It is a combination of factors. In many ways, it is the competition. More distributors, suppliers: all of them offered something to agricultural producers. Substitute this, remove that. The price battle began. Moreover, Syngenta, Bayer, and BASF began importing more goods while increasing the credit rate.
Put it more plainly.
— This is the gap between the pre-shipment price and the cost of credit. You take the goods prepaid, they cost UAH 1. You take a credit, say, 20 to 80 (20% paid at once, 80% later, in autumn) — then you have it, let's say, at UAH 1.5. And then a system of rebates follows, after season discounts if you meet all conditions. These are discounts for prescheduled repayment, early shipment, marketing discounts, etc. They are counted at the end of the year for the entire amount. It may reach 5%, 10% or 30%. But there can be other figures, there are ways to increase this discount.
It turns out that the rebates are tailored to building up volumes.
— Yes, it's all about volume. Take more. Until 2014, the market was growing, commercial corn was 200 USD/t, agriproducers did not save on technology. At the same time, the cost of corn production was about 450 USD/ha. It yielded 9-10 t, and the earnings were nice.
Did the rebate system imply that you would not sell competitor products?
— Yes, that was one of the points — no sales of certain products of other companies. They were mostly based on active substances (AS).

Let's say you're selling herbicide Granstar, then you can't offer a generic analogue anymore. It was called loyalty to the AS. And it meant a discount, too. But no one hesitated to create a new legal entity/separate company and bypass the ban. That's what Bershad, Eridon did.

This was not the case with seeds. It was even more interesting: there are cultivation programs with multinational companies, offering many white bags of NK Kondi sunflower and corn DKS.
Were profits rising from both agrochemistry and seeds?
— The thing is, one always makes money on seeds. Even if you have carryovers, you'll sell them next season. But the CPPs started losing it with time.
Did generics step in?
— They did. None paid much attention to this market for a long time, but it was growing as their quality was improving.
How did the manufacturers-multinationals respond then?
— The manufacturers tightened conditions, raised the cost of funds: it totalled over 40%. It is, in fact, like a loan from a bank, only a commodity one.

What's in it for a distributor? He barely has any money of his own. Suppose you have UAH 5 mln. You are credited by a multinational with its funds, same as all its distributors. You take the goods on credit without investing your money and sell them on a pre-pay basis with a markup.

But the market and competition dictated their terms, there was an excess of goods in warehouses. You give me a loan as an agricultural producer, and someone promises me 10 cents cheaper. It so happened that another distributor, for example, took 50-50 from DuPont, and you took 20-80. You have a difference in price with this distributor, still, you have to sell the product. And you were selling, realizing that you were doing it at a loss, hoping that you'd make some money later. But no, that didn't happen — everything went down and even led to surcharges. Which is ridiculous. Despite, the marginality of the business as a whole in 2011-12 was satisfactory at 20%. In 2013, it changed.
What happened that year?
— THN was aggressively entering the market. They included rebates in their prices, which were impossible to get.

No one's ever done that before. You had a 12% prepayment discount, that was it. You included it in your price list. How do you draw a model? You take the supplier's price, you put your markup on it. If you talk to the middle management of an agricultural company, you put a 20% markup, if you talk to the director, you put a 10% markup.

And THN included all the rebates in the price from the supplier right away and built its sales from there. But eventually, there was a gap.

One gets rebates if he meets all the requirements: pay, ship on time. Moreover, there are certain products that you have to buy more to get a discount for the entire contract. Well, there are Corteva's Tanos, Acanto Plus, and some other hard to sell illiquids, DuPont's Venzar. All companies have such products. There's an extra discount for that.

If one observes the shipping schedule, he adds another 2% to a discount.

And so THN held its head high with BASF, Syngenta, stating that it would do everything on time, collect all the goods, ship on credit to reach those maximum rebates. And what killed them was that they weren't actually selling.
Were products stockpiled?
— Statistically, some Syngenta or Bayer was fine, sales volumes were growing. Yet the products did not reach the end-users. They got stuck with a distributor and were never sold. For various reasons. Subjective ones are price dumping by separate distributors, competition from generics. Among the objective reasons are something you won't be affected by, above all, the weather. For example, there was a year when all distributors had warehouses full of fungicides. Simply because agrarians did not apply fungicides on wheat for the third or second time. It was hot, there was no sense in the third application. In particular, there were a lot of Bayer products at that time, which had a package of 5 fungicides.
Was it for the distributors' greed?
— It wouldn't be fair to blame the distributors only. It's all coming from the multinationals. Imagine this situation: a new top manager of a multinational company is appointed. Do you know the first question he asks the distributors?
It wouldn't be fair to blame the distributors only. It's all coming from the multinationals.
What is it?
"How much more will you buy?" You explain the features of the season, the market situation, competition, how the areas under crops change, that farmers do not pay in advance. No one cares. Only "how much more will you buy" matters. To get a discount, you get the warehouses fully stocked. You can't sell, but you pay at the end of the season. Besides, in 2013, the cost of funds increased with the suppliers, as I have mentioned before. The policy of scaling up volumes only intensified. General managers don't control stock balances at the distributors' warehouses. Everything's aimed at making you take more. Buy products for USD 50 mln, get a 10% discount. If one buys for USD 20 mln, it's 3%. The gap is 7%, so, of course, you want to take more to make money. Everyone wants to grow, but here is a thing: the market is stable, and it's also overfilled with a surplus.
Are those true figures?
— They are, yes. The figures on average are close to reality. Different companies had different policies, but roughly speaking, they were so. Multinationals thought they did great, but they actually withdrew the money from distribution and ruined it.
Multinationals thought they did great, but they actually withdrew the money from distribution and ruined it.
So basically, you may be the number one distributor in the multinational's rating and have your warehouses full but sell nothing.
— That's exactly what happened with THN which 5 years ago overtook Eridon in the Bayer rating. They won by the procurement volume, but not by the selling to agricultural producers. THN was bragging here and there. Of course, they could not say that they had stocks worth USD 20 mln. And Bayer said: "It is fine. We are growing. The market is growing. We shall just import a little less next year."
What kind of multinationals' headquarters logic is it?
— The headquarters says: "Guys, you have a USD 200 mln business in Ukraine. Next year you need it no less". The market may be different, the cropping plan may change. But the Ukrainian top manager does not admit it, it is tantamount to giving up the annual bonus.
So the Ukrainian management is overwhelming the market with products because of its annual bonuses.
— The results and the situation prove this to be true. Or they are so unprofessional that they do not understand basic things about stocks, market size and strategy. After all, it is very convenient to care only about market share, receivables settled, and ignore whatever happens in the fields.
Doing business on falling margin
Speaking about THN, did the market take up their model?
— It did. Everybody adapted to it. THN then did some math to find a way to make a "successful" business with a 2-3% margin.
Weren't they too risky especially given the high interest rates on loans?
— They were. The economy is complicated here. Syngenta, for instance, offers 26% in the currency. It's very expensive. But it's not just about the rates.
Each distributor makes up a plan for selling throughout the season. He has a limited amount of his own money, bank's money, and resources that he expects to come from customers. In this case, some of the goods are prepaid, some are on credit. This is a complex combination.

Big holdings such as Agroprosperis, Kernel and MHP originally made prepayments. Distributors expected that this money would be accumulated and some of their own resources would be added. Then they would pay the manufacturer, take more goods and sell the whole season to farmers where margins are higher.

Companies like Eridon attracted in another way: they offered not only chemistry and seeds on credit but also fertilizers. The agricultural division generated funds for prepayments to all multinational manufacturers.
I assume, the reality was a bit different from the plan.
— Absolutely. Manufacturers were heavily involved in the plan, changing their primary agreements. At some point you find that you bought at one price, and closer to the season the manufacturer sold to another distributor at the same price or lower. And you also stored these products for 3 months in warehouses, of course, not for free. You're looking at it all, but you need to pick up the volume. You end up dumping, selling into negative territory from your maximum planned price. Not at the price you get in the invoice or calculated in the excel.

You realize that if you don't drop 10% off the price, you won't reach the required volumes. So you don't get any discounts and you just drop out. But even if you do, the economy is still broken. You have the goods waiting in your warehouse, they are sold either poorly or extremely poorly, and you have a credit from a supplier stressing you out. The rates were as high as 36%. You sell the goods for hryvnia, but next season you buy them for a dollar. And that's how you go deeper into the red.

Customers make it no better for you. Here I mean providing customer services. Back in 2013-15, everybody was afraid to tell a client that he wouldn't be delivered products at this or that price. Consequently, they were in the negative territory. Defaults on payments from agricultural producers mounted. See the registers: the distributors lost in courts as much money as a small company Agro Expert makes. And plus the instability of the hryvnia, the three-fold devaluation to be precise, led to what we're having today in the market.
You have said that the holdings paid in advance at first. Didn't they stop after that?
— They did and it was a result of excess supply in the goods distribution channels. Supply exceeded demand. And the holdings stopped paying in advance before the new season. They claimed they had a new model, "we pay upon shipment" they said. Agroprosperis went this way, then Kernel, Astarta-Kyiv, MHP. And it was so to speak seed money which you either pay to the supplier or deposit in a bank for a while.

The suppliers got the maximum discount if you pay in advance by the end of the year. That' s when you pick up the goods. The holdings have now withdrawn from the prepayment scheme, so you have no money to pay the prepayment to the supplier. The old stock stays in the warehouse, but you still have to pay for it.

You take a loan from a bank, you pay the supplier. Your goods are still getting more expensive. To get some money, you're dumping more. You go into the red from the already new procurement.
And the cost of products from suppliers from year to year has been falling on some already problematic positions, hasn't it?
— Yes, it has. Acanto Plus is a simple example. It used to be sold at $45. Tanos was sold at $60. Now Tanos costs $30, and Acanto Plus can be bought for $25. And the distributors could sell even below those numbers to somehow get out of a vicious circle. Can you imagine the situation a distributor finds himself in when he buys more expensive products and does not sell everything?
Let's get back to basics, what was THN swamped with?
— THN was swamped with the BASF products of 2017-18. They tried to complete the three-year plans and worked to increase volumes. Then THN stopped paying, and BASF suspended the credit line for them, stopped shipping products. THN tried to satisfy their debt, as their farm Archie was pledged to the company. THN has been withdrawing the advance payment for the last few years — they have been paying the debts to BASF and trying to settle them with everyone else. Well, this situation has hit them hard.
THN has been withdrawing the advance payment for the last few years — they have been paying the debts to BASF and trying to settle them with everyone else.
Well, this situation has hit them hard.
Did Bershad default for a similar reason?
— Why did Bershad fall? They started with USD 20 mln, then increased annually to USD 25 mln and to the final USD 30 mln of procurement. They could not manage such volumes, they fell with carryovers on the falling market and went dumping.
Which are the top distributors in terms of the total number of stocks full in recent years?
— Let's split them into three groups. The first ones to make it through are Eridon, Spectr, Agroscope, Soufflet. The second group will fall: THN, Agrozahist Donbas. The third one, which will survive but become significantly less: Bizon-Tech.

Yet here is a thing that the TOP 3 of multinational manufacturers appear to promise to regulate the stocks issues. We shall see.
Did all the multinationals get distributors hooked on discounts?
— Yes, Bayer, Syngenta, BASF, Corteva and other major players did.
You have mentioned "gestures of gratitude" for extending the contract between a supplier and a distributor. What were the most exotic bribes?
— You see, many of them are friends, and it's not always about money. It could be paintings, watches, land plot registration documents and much more.
And what about loyalty programs for agrarians? There is talk that the managers of some multinational companies are more refrigerator sales managers than agronomy consultants…
— Yeah, there are more than enough of such. Managers get sales bonuses, and sometimes they share these bonuses with agronomists/directors or bring them to church. And about refrigerators and stuff like that, you have said right — it is the loyalty system. Those are old approaches under new fashionable names.
Do I get this right that the refrigerators are included in the extra cost for an agrarian?
— Absolutely! For manufacturers it is called to commit the marketing budget. There are millions of dollars there. The distribution marketing budget is incomparable with the budget of a supplier. But we also bring gifts, because if you do not do it, you look bad among the others, you drop out. But the thing is, the stakes are rising steadily.
I can't help but ask about Imperia Agro. What do you think caused their collapse? Is their calendar a rising stake, too?
— They decided to aggressively sell everything to everyone. They recruited university graduates and started taking over the market. They wanted access to all clients. It's a model of Eridon, but among farmers. Besides, like Eridon, they went selling fertilizers.

The company's problem was that they didn't consider expenses, their accounting was very poor. They were overspending money, and I'm not even talking about a helicopter. The calendar revealed much.

At the same time, they worked with a small margin, counted it in sacks, not considering the cost of logistics. And it was costly.

In short, Otsabrik is a typical representative of Ukrainian business: spend now while there is money, not thinking of what will happen tomorrow.
In short, Otsabrik is a typical representative of Ukrainian business: spend now while there is money, not thinking of what will happen tomorrow.
What's next?
Is anybody now, like THN back in their days, aggressive in the market?
— THN was aggressive for three years, until 2016. Now it's Poletehnika. I don't know why they are doing this. Plus, everyone in the market is already saying that they are not doing well. Bizon-Tech was the same, but not in all segments. The company is in a challenging situation, but it should be given its due. Kovernik is doing everything he can to get the company out.
Distributors plan for today, what about multinationals? Three-year contracts are already some kind of planning horizon.
— Supplier management takes short-term approaches in cooperation with a distributor. Even considering three-year contracts. Take, for example, purchase forecasts.

Anyway, they will be influenced with maximum discount and remote growth prospects. And what will be next year? Imagine you sign up with BASF and Syngenta lowers the prices. Or it will start direct sales. If the price of agricultural products drops, will everyone switch to generics? You need to accumulate the volume, because the discount is given in 3 years for all 3 years of purchase. And it can be a tremendous amount. So, everybody gets involved.
One cannot ignore the issue of receivables in the context of distribution. When did agrarians stop paying?
— They stopped right after the prices fell, in 2014 the situation started getting worse. Every time we heard more and more: "Let me pay a little later. I was given a prolongation. Why don't you give me one?"

Don't forget the exchange rate. You delivered to a client at 26, but you will pay the suppliers at 28. You ask the client to be understanding, yet you hear the answer: "Eridon doesn't always include the exchange rate difference". So everyone was to please the client. But you can't do that, it's your money. If you're not paid here, you will have to put extra money to pay the supplier.

One has to deal with it. If you don't collect the exchange rate difference, you're selling into negative territory. And you still have to pay wages to staff.
Everyone was to please the client. But you can't do that, it's your money. If you're not paid here, you will have to put extra money to pay the supplier.
Who will be the next to start direct sales?
— Syngenta. They're already considering it. But this concerns seeds only, they will hardly manage the CPPs too.
How long has Corteva planned to introduce this model?
— It took it long enough. Before that, they worked on the old basis — boosting volumes.

Eridon, LNZ, Agroscope refused to work with them as far as I know. But many, such as THN, Spectr, Agrosem, Bizon-Tech agreed to their terms. And what have they got as a result? They've got tens of thousands of bags of Brevant super genetics in their warehouses right now. Because the top managers of the companies are either way related.
What are the strengths and weaknesses of direct sales in the Corteva model?
— They are now actively headhunting in the market. They do not know how to sell, so they need salesmen and those who know how to work with receivables, otherwise the end of the year will be a disaster for them. Of course, there will be a decline in the coming years, it is already there in all segments.

I assume they have chosen from all the paying in advance clients relatively reliable ones. They are braving that they're very pragmatic about loans. That's why they have selected a bill of exchange to secure the loan. But what kind of collateral is that? It's an ordinary financial instrument. You can take a bill of exchange, give it to a bank, and the bank will accept it at a discount. That's it.
Do you think everybody's going into direct sales?
— I doubt that. Such companies as KWS-UKRAINE, MAS Seeds, Euralis, Limagrain will not make it, they already have small teams. Moreover, they do not know how to manage risks. And BASF is unlikely to start this. They also have a relatively small team, one warehouse. And one needs a network of warehouses, organized logistics.

There' s no point. It's easier for them to share a market where someone will sell. Like Yara did. It sells to four companies, each attached to a particular region.

Nowhere in the world does one move to massive direct sales. For example, in Canada, in the United States, each distributor is assigned to a certain state. It's the same in Europe.
Nowhere in the world does one move to massive direct sales. For example, in Canada, in the US, each distributor is assigned to a certain state. It's the same in Europe.
I consider it a viable model. Here, you initially aim to make money together. It's not about the manufacturer earning 60-80% margin and the distributor having to pay 2% extra to him.
What are the consequences of distributors falling?
— Today, manufacturers and distributors have turned from partners into competitors. Direct sales, behind-the-scenes agreements, mid-season price changes and lack of coordination, shipment of products in the event of non-payment of previous deliveries — all this leads to the destruction of distribution as a class. Manufacturers do not even notify that they are switching to direct sales. How is a distributor supposed to quickly close a USD 50-100 mln hole?

It will lead to losses for everyone for several years ahead, maybe even decades. And the agricultural producer will suffer the most, because he will cover all the new investments of manufacturers who will have to build warehouses and train their employees. It is unlikely that multinationals will finance this from their margins.

What then should distributors do? They have been building certified warehouses, representative offices in all regions and investing into personnel for many years. Are they becoming logistics companies? Well, that's hell of a perspective.
Today, manufacturers and distributors have turned from partners into competitors.
Note that many distributors are Ukrainian companies. They are leaving the market one by one. This means that in time agrarians will be completely dependent on multinationals from production to delivery.

And, naturally, high-profile defaults put the country's reputation, credit limits from banks and credit limits for all distributors at stake. Everybody will ask for a collateral, thus incurring the price go higher. It's also a blow to trading, to forwards. The list is far from complete.
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