Market Overview Summary

Of the top-10 largest countries by arable land, large-scale farming exists as a business whose viability is not dependent on state subsidies in only four: Ukraine, Brazil, Russia and Argentina (UBRA for short). Consequently, the investable equity universe in farming businesses is limited to UBRA, with roughly half of the names rooted in Ukraine.

That said, we analyze Ukrainian agriculture using primarily Brazil, Russia, and Argentina as a comparison base, referring to other countries only to assess long-term growth potential, i.e. in yields or fertilizer application levels.

We find that all UBRA countries:

• have more or less the same high yield growth potential

• are more or less similar in terms of prices for key inputs: fertilizers, labor and fuel costs, with only Russian producers enjoying better input prices

At the same time Ukrainian farmers’ competitive advantages are:

• Lower lease costs than in Brazil or Argentina

• Land quality that allows for a low-cost low-yield business model to be profitable unlike in Brazil, Argentina and the majority of Russia

Listed Ukrainian farmers in general outperform the Ukrainian average and Brazilian, Russian and Argentinian listed peers in the following:

• Higher land utilization ratio: 79%-96% in Ukraine vs. 39%-75% for listed peers in other UBRA countries

• Yields are higher than the Ukrainian average for most of the companies, and company-to-company comparison inside the global investable universe favors Ukrainian companies for all crops except soybean (where Brazilians and Argentinians are the undisputable leaders) and corn for SLC Agricola only

• More profitable crop mix compared to the Ukrainian average and/or Russian companies. This however differs from LatAm peers that devote more than 3/4 of their landbank to the three most profitable cultures

• Cheaper financing than the average Ukrainian farmer, which consequently allows for larger profits per ha through higher fertilizer application, selling at higher prices off harvest season and higher yields due to better machinery usage

The key Ukrainian disadvantage lies in the inability to achieve higher revenues per ha, since Ukraine has historically focused on either low-priced grains or low-yield sunflower seeds, while Brazil farmers, for instance, cultivate soybeans (yields are 1.5x-2.0x higher than in Ukraine), cotton, or sugar cane which provides ~2x higher revenues per ha (high cost high revenues model).

Ukraine is the only UBRA country where agricultural land trading is banned (though a legislative change has been discussed for much of the last decade), with mixed investment implications. From one point-of-view, this limits the investor base to exclude those who desire to own assets they operate. On the other hand, this has created an environment where many Ukrainian farmers focus on operating efficiency, while most UBRA peers’ business models are more akin to land developers, with farming as a secondary activity.

UBRA overview summary
	Ukraine	Russia		Brazil			Argentina
Land trade	Not allowed, discussed	Allowed		Allowed			Allowed
Business model for listed companies	Farming, mixed with processing or cattle breeding	Farming, mixed with land speculation		Land developers, farming is secondary			Land developers, farming is secondary
	Low costs low yields	Low costs low yields		High costs high yields			High costs high yields
Share of land planted, average for public companies	89%	57%		57%			50%
Key crops	Wheat, sunflower	Wheat, barley, potatoes		Soybean, corn, cottonseed, cane sugar, coffee			Soybean, corn, cottonseed, cane sugar
Secondary crops	Corn, rapeseed, barley, sugar beets, potatoes, soybean	Sunflower, rye, corn, sugar beets		Wheat, rice, beans			Wheat, sunflower
GMO	Not allowed	Partially allowed		Partially allowed			Allowed
Railway shipment costs to port, USD/t	~USD 10-20	USD 10-70, railway bottlenecks		USD 10-60, railway bottlenecks			USD 15-60
Regulatory risks	Export quotas introduced in bad harvest years, export duties possible	Export ban in bad harvest years, local price regulations; restrictions on foreign land ownership		Requirements to keep land in reserves; limitation on size of land ownership by foreigners			Export taxes on agricultural products. Quotas and price regulations possible. Restrictions on foreign land ownership
State support	Zero VAT on agricultural produce; negligible income tax	Direct subsidies of USD 4.5-9 bln annually; interest rates subsidies		Preferential credit to farmers, tax-incentives			Negligible
Land price, USD/ha	n/a	USD 500-1,000		Undeveloped land USD 1,500 – 4,500; developed land USD 6,500 – 14,500			USD 4,000-10,000
Lease costs, USD/ha	USD 35-90, average close to USD 60	USD 30-60		USD 250			USD 350

Sources: FAO, Margenes Agropecuarious, USDA, CARD, Black Rock, World Bank, Rusagrotrans, FIDA, OECD, Agroton, Sintal Agriculture, MCB Agricole, Mriya, Industrial Milk Company, KSG Agro, Astarta, Kernel, MHP, Alpcot Agro, Black Earth Farming, Trigon Agri, SLC Agricola, Brasilagro, Cresud, Adecoagro, Concorde Capital