Hot Investment: Agribusiness in Ukraine?
- by Nick Gaidai WG19
Making a case for four Eastern European agricultural sectors that are ripe for growth
“Ukraine is a good place to invest for United States business. And my home state of Ohio has some similarities with Ukraine in terms of our industrial sector, our agriculture sector, our IT sector, and I think there is an opportunity for more foreign direct investment.”—U.S. Senator Rob Portman (R-OH) during his visit to Ukraine in April 2018.
From a favorable climate to rich soils, Ukraine has abundant resources and ideal conditions for large-scale agribusiness. Ukraine possesses 32.5 million hectares of arable land, an amount equal to 30.3 percent of the European Union’s arable land, 21.3 percent of the U.S.’s, and 2.3 percent of the world’s total farmland. The sector has demonstrated a 21 percent average annual growth rate over the past 10 years and accounts for over 11 percent of the country’s GDP, contributing every ninth dollar to GDP per capita. Yet Ukraine and its booming agribusiness sector are often overlooked by U.S. investors; total direct investments into the sector constituted a mere $170 million between 2010 and 2017.
Opportunities to deploy capital in Ukraine’s agribusiness sector are vast for U.S. investors with above-average risk appetite and a ticket size of $15-30 million seeking IRR in the mid-20 percent range. Here are the four most promising segments of Ukraine’s agribusiness for potential investors.
Grain storage: Lack of capacity requires additional CAPEX
The Ukrainian grain storage market is currently underserved. According to the Ministry of Agrarian Policy of Ukraine, annual grain harvests are expected to nearly double and exceed over 100 million metric tons in five years, creating strong demand for investments in new agricultural infrastructure. To ensure safe storage of harvested grains in Ukraine, a 35 to 40 million metric ton storage capacity expansion is needed through additional CAPEX. In a recent study, the World Bank Group discussed three investment cases related to grain logistics in Ukraine. One suggests that a $1.5 billion investment in 6.4 million metric tons of new elevator capacity could reduce grain losses from 15 percent per annual yield to one percent. U.S. investors can benefit from such a project, gaining expected IRR of nearly 25 percent with 1.6 times cost-benefit ratio.
Irrigation: Underdeveloped infrastructure, capital injection is needed
Of the cultivated land in Ukraine, only only roughly 30 percent is currently equipped for irrigation due to inefficient and underdeveloped infrastructure. Direct investments in the irrigation market may lead to significant yields increase—up to 95 percent depending on the crop. According to the National Academy of Agrarian Sciences of Ukraine, reconstruction of the country’s current irrigation infrastructure requires a capital injection of nearly $3.5 billion. Meanwhile, EBRD and Ukrainian Agriculture Ministry are discussing launching a two billion dollar project aimed at expanding irrigated areas in five regions of Ukraine. American firms can help achieve higher crop yields in Ukraine by using their experience of managing irrigation systems in the U.S. and worldwide. Development of proper irrigation systems in Nebraska is one such example. With the implementation of this project, Nebraska saw a yield of 10.5 million tons of corn per hectare on irrigated land compared to a yield of 4.0 metric tons per hectare on dry land, as well as revenue growth of roughly $600 per irrigated hectare.
Smart farming: Utilizing advanced technologies to improve efficiency
Technological progress has opened new opportunities for U.S. investors in the smart farming market, which is revolutionizing farming practices by optimizing consumption of agricultural inputs and increasing productivity through a broad range of technologies. According to the Boston Consulting Group, smart farming is one of the most influential trends that may affect farming practices and is expected to grow 10 to 15 percent annually through 2020 worldwide. Taking into account that the Ukrainian smart farming market is on the introduction-growth lifecycle stage with only three to four percent of arable land under complex supervision, it is a great opportunity for U.S. investors with $15 to 30 million check size to take advantage of this potentially $200 million market in Ukraine. Such initiatives will lead to an increase in agricultural productivity by reducing production costs and risks through the use of smart technologies, such as precision farming, GPS monitoring, farm management, drone technologies, etc. For example, in 2014 agricultural company Svitanok became one of the pioneers of these technologies in Ukraine. Since then, the company’s yields have been far outperforming Ukraine’s average—3.0 vs. 1.8 metric tons per hectare for soybeans, 4.0 vs. 2.2 metric tons per hectare for sunflower seeds, and 7.5 vs. 3.8 metric tons per hectare for wheat.
Data analytics and ag-tech: Blue ocean for potential investors
In Ukraine, the use of data analytics may become a new driver of the agribusiness sector. For instance, SmartFarming, a Ukrainian start-up, helps agriculture firms increase crop yields through data-driven solutions such as precision farming, soil analysis, and crop condition monitoring. By utilizing these technologies, some of SmartFarming’s clients were able to bring down costs by as much as $3,000 per hectare. Furthermore, by using sophisticated computer algorithms to analyze decades, and sometime centuries, of weather and crop data, other Ukrainian ag-tech firms can predict crop yields with shocking accuracy before planting a single seed.
Ultimately, there are ample opportunities for both small and medium U.S. investors in Ukraine’s agribusiness sector. These opportunities may generate sufficient returns through the investment in smart farming technologies, irrigation, storage facilities, and data analytics solutions.
Editor’s note: This article was co-authored by Andriy Shpakov, Executive Director, and Dmytro Lyvch, Head of Analytics at EasyBusiness, a government advisory organization that works to create favorable conditions for businesses in Ukraine.