Ukraine An emerging challenge for Australian wheat exports Authors Acknowledgement Many thanks to those in the industry who have more than Prof Ross Kingwell | Chief Economist generously contributed to this report through interviews and Mr Peter Elliott | Manager — Strategy & Market Analysis reviews of the document. Your time, effort and guidance Dr Peter White | Supply Chain Specialist have been much appreciated. We especially thank Lawrence Richmond. Dr Chris Carter | Economic Analyst Please note 1. Export and import values often vary depending on the information source — exercise caution when interpreting information presented in this publication. 2. All units cited in this report are metric measurements. Of particular note, the unit tonnes is a metric tonnes (1000 kilograms). Australian Export Grains Innovation Centre 3 Baron-Hay Court Department of South Perth Agriculture and Food Western Australia 6151 P: +61 8 6168 9900 E: [email protected] AEGIC is an initiative of the Western Australian State Government and W: aegic.org.au Australia’s Grains Research and Development Corporation April 2016 All contents copyright ©AEGIC. All rights reserved. The related bodies corporate, directors and employees of AEGIC accept no liability whatsoever for any injury, loss, claim, damage, incidental or consequential damage, arising out of, or in any way connected with, the use of any information, or any, error, omission or defect in the information contained in this publication. Whilst every care has been taken in the preparation of this publication AEGIC accepts no liability for the accuracy of the information supplied. Contents List of abbreviations 2 Wheat quality and end-product functionality 58 59 Foreword 3 Grain quality, classification and grading The wheat supply chain 62 Summary of key findings 4 On-farm costs of wheat production 64 Summary of Australia’s required actions 5 Elevators and grain handling 67 Executive summary 6 Elevator to port 72 Wheat export competition from Ukraine is a potential threat 7 Port operations and shipping 76 A possibly rocky future 8 Duties and regulations 80 Ukraine’s post-farm gate supply chain costs are likely to fall 8 Organisational support into markets 81 9 Land reform in Ukraine would facilitate crop production Competitor analysis 82 Ukraine has a rich vein of human talent and energy 10 Ukraine wheat — a SWOT analysis 88 Implications for Australia 11 Implications for the Australian grain industry and its Black Sea grain — a rising tide 12 export supply chain 90 91 Ukraine’s agricultural landscape 14 Collate, monitor and analyse developments in Ukraine Investigate why (or whether) Australian wheat is preferred 91 Ukraine — a historical overview 18 Convey market and competitor information to Australian 92 Ukraine — a present-day overview 20 stakeholders Use our ‘window of opportunity’ carefully 95 Global competitiveness 24 Appendix 1 96 The structure of Ukraine’s agricultural sector 26 The rise of vertically-integrated agroholdings 28 References 98 Government and industry bodies affecting the agriculture Acknowledgements 104 sector 31 Ukraine 104 Grain production and trade 36 Australia 104 The challenges of grain production in Ukraine 40 Productivity improvements in Ukrainian grain production 46 Grain pricing in Ukraine 50 Ukrainian wheat — production, consumption and export 52 Ukraine: An emerging challenge for Australian wheat exports 1 List of abbreviations ABARES Australian Bureau of FAO Food and Agriculture NBN National Broadband Network Agricultural and Resource Organisation (United Nations) ntk net tonne kilometre Economics and Sciences FAS Foreign Agricultural Service NVT national variety trials ACCC Australian Competition and FOB free-on-board Consumer Commission OECD Organisation for Economic Co- GASC General Authority for Supply operation and Development ADM Archer Daniels Midland Commodities PBGI Plant Breeding and Genetics AEGIC Australian Export Grains GCM general circulation model Institute Innovation Centre GDP gross domestic product PSE Producer Support Estimate AH Australian Hard wheat GFC global financial crisis R&D research and development APH Australian Prime Hard wheat GGL Grain Growers Limited RED Renewable Energy Directive APW Australian Premium White wheat GM genetically modified SFGCU State Food Grain Corporation of Ukraine ASW Australian Standard White GPA Grain Producers Australia wheat SOE State-owned enterprise GRDC Grains Research and ASX Australian Stock Exchange Development Corporation t tonnes AUD Australian dollar GSR growing season rainfall UAH Ukrainian hryvnia AWB Australian Wheat Board GTA Grain Trade Australia UK United Kingdm BAMA Biosecurity and Agricultural GVAP gross value of agricultural US United States Management production USD United States dollar BOM Bureau of Meteorology ha hectares USDA United States Department of CBOT Chicago Board of Trade HRS hard red spring wheat Agriculture CFR cost and freight HRW hard red winter wheat VAT value-added tax CIF cost, insurance and freight IMF International Monetary Fund WCC Wheat Classification Council CIGI Canadian International Grains IP intellectual property WQA Wheat Quality Australia Institute JSC joint stock companies WTO World Trade Organisation CPT carriage paid to KCBT Kansas City Board of Trade CSIRO Commonwealth Scientific km kilometres and Industrial Research Organisation LOC letter of credit DCFTA Deep and Comprehensive Free MATIF Marché à Terme International Trade Agreement de France EBRD European Bank for MENA Middle East and North Africa Reconstruction and MGEX Minneapolis Grain Exchange Development mmt million metric tonnes EPR end-point royalty mt metric tonnes EU European Union NATO North Atlantic Treaty EUR Euro Organization 2 Ukraine: An emerging challenge for Australian wheat exports FOREWORD Foreword This report, which focuses on the Ukrainian grains sector, is the third in a series of comparative studies where we look closely at the factors underpinning the international competitiveness of Australian grain relative to alternative origins. On-farm storage and grain-drying facilities in Kyshentsi, Cherkasy Oblast. Source: AEGIC (2015) Competitiveness is relative, not absolute, influence the future of Ukraine’s grains Grain value chains are complex, with so to establish competitiveness we industry. high geographic dependency. At any identify each link in the grain value point along the chain there can be In choosing Ukraine as the third chain to determine the extent to which considerable variation in costs and instalment of this series, we have disparities between Australia and our returns, which depend on economic, compared two strikingly different value competitors may eventually affect our as well as social, cultural, political and chains challenging Australian grain ability to compete in key markets. historical factors that preside at each markets. Ukraine and Canada each location. This report attempts to capture The first of these reports: The cost of have distinctive competitive advantages. and summarise this inherent complexity, Australia’s bulk grain export supply Examining these two likely extremes where relevant to agriculture, in order chains: an information paper, was of competitive advantage allows us to derive insights into the forces driving published in January 2014 and focused to propose strategic responses that change within the grains value chains exclusively on Australia. The second encompass the range of competitive of Ukraine. From these insights we have report: Canada challenges Australia’s challenges Australia is likely to face in identified the nature of the challenge grain supply chains, focused on the short to medium term. Ukraine is likely to pose to Australia’s Canada’s Pacific grain terminals, through Because wheat is by far the dominant competitive position in international which Canada exports most of its grain. crop exported by Australia, the grain markets alongside the actions In this third instalment we predominantly overarching focus of this report is the Australia may consider in response. focus on Ukraine’s export grain value wheat export value chain in Ukraine chain where we compare and contrast and Australia. the Ukrainian and Australian grain value chains and review the factors that may Ukraine: An emerging challenge for Australian wheat exports 3 SUMMARY Summary of key findings Ukrainian wheat exports are currently a modest threat to Australia’s wheat 1 export industry in its key markets. BUT... the potential threat is large, albeit uncertain for many reasons. Ukraine’s competitiveness in the international wheat export market is 2 underpinned by greater rates of yield advancement and greater cost efficiencies in its grain supply chains. During the next decade these advantages are likely to undermine Australia’s price competitiveness. Ukraine is currently less able, compared with Australia, to reliably satisfy the 3 wheat volume and wheat quality needs of end-users in Asian markets. Australia has time to prepare for and counter likely greater competition from 4 Ukrainian wheat exports. 4 Ukraine: An emerging challenge for Australian wheat exports SUMMARY Summary of Australia’s required actions The following four actions are derived from a detailed analysis of the implications of developments in Ukraine. Collate, monitor and analyse developments in Ukraine (and surrounding 1 nations) and inform the Australian grains industry of the implications. Forewarned is forearmed. Accurate and timely information about emerging competitors increases the