"French wine exports equal our total grain exports" Interview with HarvEast CEO Dmytro Skorniakov

Photo: Persha Shalta

Photo: Persha Shalta

HarvEast CEO Dmtytro Skvorniakov

Ukraine during the 2018/2019 marketing year exported a record 49.7 million tonnes of grain, 26% more than a year earlier. Not only have grain exports increased, so have export prices.

The growth of farmers' revenues from exports explains why so much foreign currency has entered the country. This was one reason for the strengthening of the hryvnia in June.

In general, the agrarian market is on the rise and has a strong impact on the entire economy. We asked Dmytro Skorniakov, who heads one of the largest agro-enterprises in the country, HarvEast, about this and much more. His company is owned by SCM's Rinat Akhmetov and Smart Holding's Vadim Novinsky.

Before joining HarvEast, Skorniakov worked at PricewaterhouseCoopers. At HarvEast, he became operations director (before Simon Cherniavsky left for the Mriya agricultural holding). In addition to managing the company's production assets, he now oversees the entire holding.

Read the interview below to learn what's happening at the agroholding owned by Ukrainian businessmen Rinat Akhmetov and Vadim Novinsky.

- How do you assess the past year for the Ukrainian agro-industrial complex?

- Last year was a record for grain yield. The good weather contributed to a record corn harvest. This is the main grain crop in Ukraine. High crop yields and record exports were achieved last year. Why? First of all, thanks to the weather. But an important factor is the changes that are occurring in the sector. First of all, I would say that a lot of inefficient proprietors are leaving the market, many of whom have have been operating Soviet times. Now they are being bought up more efficiently. New technologies are being introduced and more crops are being grown.

- How long will this process go on?

- I think another five years for sure. ...There may be rollbacks, but if we look at the trend, we see growth for the next several years. Opening the land market [read: lifting the moratorium on land sales] will also give a powerful impetus to the development of Ukraine's agricultural sector.

- What will the introduction of the land market do?

- My position is clear. There must be a market for farmland sales. Take this very simple analogy. Imagine that you rent an apartment, and you've been renting it for a long time, for seven years. You will be unlikely to make major repairs, because it's unlikely you'll be staying in the flat. It's unlikely you'll invest a lot of money in the flat until then. The same holds true in agriculture. For example, we are very proud of Ukraine’s agriculture. Exports are growing. The export of agricultural products, as compared with other industries, now tops the list for Ukrainian exports. The export of all agricultural products from Ukraine today is roughly comparable to France's total wine exports.

Ukraine's southern regions are also perfect for wine growing. But in order to improve irrigation, huge investments are needed. One hectare of irrigation costs approximately $2,000 to $5,000. They fight for 4 — 7 years. That is, the payback period of investments is equal to the term of the lease agreement. When, at the end of the lease agreement, the shareholder sees that irrigation is established on his lands, he can simply say, "Thank you, goodbye," or "Now you pay me ten times more." Companies are very circumspect when it comes to such investments. I believe that the lack of a land market is hindered by capital investments in agriculture — first of all, talking about irrigation, orchards, vineyards, and so on. That is, everyone now is trying to make as much money as quickly as possible. It's very risky to invest 'long term' when you are working on rented land.

- What will Ukraine's farmland market look like?

- Rhetoric about land market has changed even among populists. If they used to say that you cannot sell your own mother, although you can rent her out. Now they say, "Yes, yes, the land market is good, but we are not ready." The "We are not ready" refrain has been repeated for the last 20 years. We cannot 'not be ready' for another 20-30 years. In fact, we are not ready for the rental market. And it's no worse than the farmland sales market. Introducing a farmland market should be done as quickly as possible. And yes, some important pieces of legislation should be adopted beforehand.

What should Ukraine's farmland market look like? I believe that it should be as liberal as possible, that is, everyone can participate, including foreigners. With only one exception: we understand that a credit resource in Ukraine is much more expensive than a credit resource in any other European country. Therefore, I personally would introduce some additional taxes, duties, notary fees — the mechanism can be thought out. But if a foreigner buys for the purpose of speculation and sells for several years, he must pay very large additional taxes on this business.

- The Ministry of Agrarian Policy and Food was in favor of opening the land market, but against selling it to legal entities and non-residents....

- If we are talking about individuals and legal entities, then I, frankly, do not understand the logic. Moreover, we have a huge amount of agricultural land owned by the state. If you look at how much the state earns today, then this is practically nothing. Officials who 'sit' on this earth, pseudo-scientific employees think that they are doing well. Therefore, of course, they resist change. Well, well, you are afraid to enter the land market for the whole unit land (although I honestly don’t see any problems), so sell the state for a start, so that at least to set indicative prices. Because now the state absolutely receives nothing from this.

- Do you think the land market will still opened up or not?

- I believe that it will be created. The only thing I can say for sure is that if they do not do this in the next two years, they will not do it until the end of Volodymyr Zelensky's term in office. Because doing reforms at the end of a ones term in office is a political suicide. Because the benefits of the opening of the land market will be in the third or fourth year after the opening. Opening up a market for farmland sales at the end of [Zelensky's presidential] term, makes little sense, because the top is so politicized.

- What segments of the agrarian market will grow in the near future?

- In Ukraine, from the point of view of agriculture, there are three main climatic zones: this is northern Ukraine, which is extremely rainy, central Ukraine, the 'tastiest' part, and southern Ukraine, which is of little interest without irrigation. But on the other hand, Ukraine was lucky, and there is the Dnipro River, and in Soviet times, the Crimean Canal was built, which runs through almost the entire Kherson region and has a bunch of branches. This is an extremely expensive construction. I think it would cost tens of billions of dollars to build today, if we started from scratch. I'm not a builder, but this is gigantic money. And we use from five to seven percent of its capacity, maximum. That is, we are a very rich country in this regard, if we can afford not to use such a resource. So, the area of Ukraine's agrarian market to grow will be irrigation. How fast will it grow? The whole of southern Ukraine — Kherson, Zaporizhia, Donetsk, Bessarabia, all this needs to be irrigated. W have water resources for this. Looking for a big investment. I think foreigners would gladly lend to us for irrigation if there was a land market. How quickly we grow depends on whether there is land market is or not.

Another segment that will grow is agricultural engineering. If we take three major brands — John Deere, New Holland, ACCO, — then they do not have assembly production in Ukraine. If we look at the countries around Ukraine, then in each of them, except for Belarus, such productions are available. In Ukraine, they are not. If the state policy changes, then I'm sure that they will begin to open production here. This is another niche.

Photo: Persha Shpalta

Photo: Persha Shpalta

- How was last year for your company?

- Bad. Because most of our assets are concentrated in the Donbas. And last year there was a severe drought. This is probably the most severe year in terms of climatic conditions for the whole time that I am generally in agriculture, and this is almost nine years. Therefore, the results in Donbas were unsatisfactory. But last year we built a seed plant. This is a very modern production — probably the most modern in the east of Ukraine. We put it into operation. We also bought a company that works the land in the Kyiv and Zhytomyr regions. We closed the deal last December, and now we have a more balanced land bank.

- Did you have a positive EBITDA or was it still negative?

- Our EBITDA is weakly positive. Given that this is the average temperature in the hospital — when one died, and the second is in a fever. That is, in the Donbas we got a minus, and the Kyiv asset, which we attached, was profitable.

- Where are your assets currently located?

- Today we have almost 100,000 hectares in Donbas, almost 10,000 of which are in the so-called "gray zone," that is, along the contact line

- So you have 90,000 hectares left there?

- In fact, a little less — 88,000 hectares. The figure varies, depending on which areas have been bombarded and the like. We spend a huge amount of money on demining, as well, clearing more area that the state as a whole, or almost just has much.

- How much land have you cleared?

- Yes, about 6,000 hectares, I guess. This is a lot, in fact. Right now, for example, there is a large international grant — Europeans pay for mine clearance. So, they probably cleared 100 hectares of land, while we have cleared 6,000.

- Why do you, in principle, work near the contact line? Why not sell the asset?

- I am afraid that it is an asset not sold today. In principle, Donetsk region, from the point of view of agriculture, is, to put it mildly, not the best region. When I said the cost irrigation from $2,000 to $5,000 per hectare, I meant $2,000 in Kherson and $5,000 in Donbas. Because in Kherson there is a lot of water, and the infrastructure has been there since Soviet times. In the Donbas, there is almost no infrastructure left from Soviet times. Yes, and Donbas never had normal water. It was always a problem there.

- What types of products provided you sales last year?

- Our main sales item is wheat, then comes sunflower and corn. Again, it varies by region. If we take Donbas, then it is sunflower, wheat, peas and rape. There are even more exotic cultures — lentils, green peas and onions.

- What of this last year gave the highest profitability?

- Oddly enough, in our region Donbas already has a second or third year in terms of profitability, overtaking sunflower. Although everyone thinks that a sunflower is a super-profitable crop.

- Do you grow hybrid wheat varieties?

- No, we have ordinary wheat, varietal. And, probably, about eighty percent is a Ukrainian selection. We have experimented a lot with foreign varieties. "Foreigners" strains in terms of potential are, of course, higher, but in the Donbas there are so extreme conditions that they fall even lower, conditionally speaking. That is, Ukrainian wheat gives some stability, but a foreign strain in a good year will give you more crop, and in a bad year — less. Therefore, for the Donbas we mainly go to the Ukrainian selection. In Kyiv region the corn crop is probably the most profitable.

- And what about drying facilities and grain elevators?

- In Kyiv region we have an elevator and two dryers. Now we are reconstructing them.

- What are niche agricultural products you decide to grow?

- We have several small projects. This is a nut garden in the Donbas — walnut and almonds. We started about three years ago. We have a feed project. We are a fairly large supplier of feed in the Donetsk region to factories, and individuals, too. Although this project still has not proved its long-term viability. We also have a seed line of business.

But in general, we always try something a little bit. In parallel, we always look at 10 to 20 possibilities. But from these 10 to 20 only half seems interesting to us. That is, we are in constant search. Now, for example, we are studying biogas production plants.

- What about recycling?

- In order to recycle, you must have a brand. We in brands absolutely do not understand anything. That is, building a brand, a relationship with retail chains is generally a competence that we do not own.

- Last year was bad for the Donbas. What will this one be?

- This year will be an average for Donbas. Although even before the beginning of May it seemed that we would repeat our record for 2017, when everything was very good. But, unfortunately, the beginning of May was very tough — and record temperatures, and there was no moisture. Well, this year will be, I think, average.

- Will EBITDA be positive?

- Yes of course. In our entire history of our existence, negative EBITDA was only the first two years, when, in fact, we came to socialism and changed the concept of agribusiness altogether. Then we went to stable positive EBITDA. And we had the only negative last year, when during the period from March to July there was not a single rain.

- Imagine that you have a certain amount of money, you enter agribusiness with it. First, would you go there at all in principle?

- Of course, I would go to agribusiness. I really like. That is, if I was offered a job (I don’t know anywhere, any production, industry, metallurgy) and offered a salary two to three times more, I would not go unequivocally. I really like farming a lot. Therefore, I would also invest my money there. I understand that this is not the most profitable business. Somewhere you can earn more. Plus, this is a rather complicated business, where you can even make everything perfect, but not earn the first year, because you are not lucky with the weather. That is, it is always a "long" game. But if you are not ready to suffer losses for a couple of years, then it's better not to start at all.

If we take engineering — how much turnover is there? 10 — 20 times, but just one in agriculture, that is, one crop equals one turnover. If it doesn't work the first time, you have to wait another year. Where would I invest money? Probably where I do now – in HarvEast. In addition, I would invest in gardening.

- What is your long-term strategy?

- It's now accepted for everyone to compete with the land bank. We won't make the same mistake as others. I won't mention their names. We will not grow at any cost. That is, for me, this business is climbing a mountain where there are base camps. That is, you stood up, stopped in the camp, rested, regained strength and climb up further. The main mistake is to skip the camp and try to get to the top as quickly as possible. And here a huge number of companies in Ukraine succumbed to this error. Therefore, I do not think that we will be in the top three in land bank even in five years.

I see that we will continue to develop high-margin areas of our business (complex, but high-margin), such as seed selection and production. We want to provide the best service to foreign companies, so that they feel comfortable working with us. We will also focus on developing gardening and other profitable areas. 

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