R. Brovdi: income from grain processing should remain in Ukraine, not in foreign mills

Last week, Ukraine had launched official and full-scale procedure of forward agreements concluding with agricultural enterprises - producers of food. The thing expected by the villagers and surprising for private traders, who believed that activities in Ukraine based on trust and investing in uncropped harvest is, at least, short-sighted. It's much better to see this harvest in the barn and even more - on a ship that sailed abroad, providing a significant income for a trader.

But this year enjoying of the pleasant pictures will be able not only and perhaps to a smaller extent to private traders. The organization of forward purchases will primarily provide the state intervention fund with a wide range of food and join the lucrative trading in grain, both locally and abroad. And that's not all.

The benefits and opportunities of implemented forward were declared to the UNN by the general director of the LLC "Khilb Investbud" Robert Brovdi.

- Sir Robert, so what is flow of the forward procurement mechanism?

- The scheme is simple and effective. It is assumed that the grain will be paid base on three stages. The first tranche at 50% of minimum intervention price of grain, which is regulated by the orders of Minagroprod (Ministry of Agricultural Policy and Goods) and CMU, the producer will receive immediately after forward contracts' conclusion. The second tranche - 20% of the grain cost - will be credited during the growth of culture. The remaining 30% will be paid base on the harvesting results and its transfer to certified warehouses located throughout the country.

It is very convenient and profitable mechanism for farmers that allows getting financial support on key stages of harvest growth. Also, note that these are not loan resources. The manufacturer will not be obliged to pay interest on them, which currently is rather high. Thus, in January the average bank rate on loans for agricultural enterprises amounted to 15,8% in hryvnia and 11.6% in foreign currency.

- There was the information that parties of forward agreements will have additional preferences - in particular, regarding fuel  and fertilizers assistance. Is this true?

Yes. Thanks to the government efforts and signed memorandums, we have the opportunities to provide the agricultural producers with agricultural fertilizers and fuel at discounted prices at the first 50% tranche.

Ton price of this "privileged" nitrate will be UAH 2815, when the average price of it in Ukraine is UAH 3200-3500. We have similar agreements with fuel suppliers. State enterprise of Ukrgazvidobuvannya concern provided an opportunity to purchase discounted diesel fuel and low-octane petrol in amount sufficient for the forward.

- Will there be any mechanism to control fuel and fertilizer consumption - to prevent speculation and resale of the "privileged" nitrate or diesel?

- Sure. Farmers can get the discount for the number of nitrate, which directly depends on the amount of contracted forward. What do I mean? Producers, which concluded a supply agreement with us, for example, for 10 thousand tons of various type grains shall own near 3 thousand hectares of land. In order to ensure agreed amount of harvest on that land area, it is required to have around 300 kilograms of fertilizer in spring and summer. We accept even 350 kg. Based on the calculation we have: commitment to supply 10 tons of grain provides an opportunity to buy 900-1000 tons of nitrates at discounted prices at the cost of the first 50% tranche. Thus, we exclude the possibility of speculation and resale of fertilizers on the market.

Regarding to fuel, the scheme will be similar. However, in this part the application of regional administrations stated in a special Minagroprod resolution will also be considered. Nor a single litre of fuel, neither a kilogram of discounted nitrate will not enter the free market.

- You’ve mentioned the price of fertilizer, and is it clear today, what would be the price of grain for the state intervention fund setting?

- Yes. Volumes and prices of forward operations have been calculated in advance. Under the agreement signed on 4 March 2011, LLC “Khilb Investbud” acting as a single performer will supply grain to Agrarian Fund base on forward procurement method. Agreement price is over UAH 1.55 billion.

The agreement also includes 2-4 class soft wheat (over 786 thousand tonnes), 1-3 class rye (99 thousand tons) and buckwheat (10 tons) supplies to the Agrarian Fund. Thus, the total volume will be near 895 thousand tons. Defined grains will be used solely for the state intervention fund setting, which used for commodity interventions in domestic food market to ensure price stability.

Due to the law, the procurement will be held at minimal intervention rates for the respective marketing period. Currently base on Minagroprod’s order dated February 10, the following price range was defined depending on a class: wheat - from UAH 1612 to 1792 per ton, rye - from UAH 1447 to 1582 per ton, on buckwheat – UAH 6750 per tonne.

Forward transactions themselves have been executed for a week. Can we already say that they are popular?
Excitement for participation in this program is so great that I think we might close it within a calendar month. Based on demand and fund limits and the in order to prevent abuse, we performed as follows – we’ve divided the country into 25 territorial units depending on the number of fertile land. All regional offices of Agrofund and “Khilb Investbud" received plans of forward funding with preferences to pools of smaller producers to one large.

- What are the guarantees of forward fulfilment by the manufacturer, for example?

- Control will be performed on several levels. State funds, fertilizer, fuel and other forward preferences will be available only for manufacturers. Mediators, traders or speculators are out of the question. The entire application process, document flow, agreements concluding and fulfilment will be provided and controlled simultaneously by state authorities, Agrarian Fund institutions and departments of “Khilb Investbud". By the way, the agreement with the Agrarian Fund includes a weekly report on the implementation of forward contracts, cash and inventories flow.

Supervisory functions will be covered by insurance companies as well. They are also interested in the accuracy of the process, as they will be responsible with their funds. Insurance would be a mandatory forward procedure and is to be executed base on pool programs of insurance companies, selected not just for popularity, but for insurance financial capacity, wideness of branches network and effective foreign reinsurances. Insurance contributions will be executed at the cost of funds received within 50% forward tranche.

In addition, we have opened special hotlines to define all the facts of abuse, bureaucratic delays or corruption claims. I assure you that each fact will get tough and principal response. We have everything necessary to implement the forward program in a quality and full manner.

- You are frequently accused in the fact that "Khilb Investbud” is a structure with non-transparent capital basis. Also, not everyone likes what " Khilb Investbud” performs a forward program as the single member. What would be your comment on these?

- The capital structure of our company is really an issue of discussions. Though inexplicably. Moreover, from time to time there are various interpretations of possible answers in the media, including the names of a minister of agriculture, and even the prime minister of Russia.

I will give a simple response: "Khilb Investbud" is a structural subdivision of the State food and grain corporation. Its procurement activities are due to the laws on state procurements. Therefore, the state involvement in it amounting to 50% plus includes procurements execution only on tender method. Thus, the share of state presence in the company is 49%. The remaining part of our company includes the leading financial and investment institutions around the world and their affiliated entities, most of which are presented in the Wall-street as well. I am not entitled to defined the names of these structures due to non-disclosure agreement.

However, the price of entry into the structure of the « Khilb Investbud» is the investments management activities. Only during this year our company performed near two million tons of sold production, including for export and under intergovernmental agreements. Company doesn’t use any state hryvnia for its commercial activities. There are only investment and credit resources, which are based on defined programs of the Ukrainian economy financing. This year the volume of such investment amounted to 250 million dollars. These are initial investment figures with the assistance of which "Khilb Investbud" performs foreign and local business activities’ agreements conclusion. This will include the complex method – it’s not just a trade, but own forward programs, investments into storage and processing of grain.

- Yet. Why is it "Khilb Investbud” and what is the reason of procurement from a single participant?

- At first, it clearly proved by the law provisions on state procurements, as well as the specifics and terms of state intervention fund setting. Second, the "Khilb Investbud”, again, is part of the State food and grain corporations in Ukraine. Thirdly, the company as a state operator has been performed successfully similar procurements and fits to defined requirements. Fourth, the agreement with the Agrarian Fund doesn’t include any "surcharges”, commissions and bonuses, even operating costs surcharges. "Khilb Investbud” is to provide defined grain volume at defined prise. Dot. No commercial income. Now tell me how many structures are there willing to work with zero profitability and perform these large-scale tasks?

- Do I understand correctly that the "zero return" is a feature of the state forward program based on budget funding? E.g. you do not earn any cent from procurements for the Agrarian Fund?

- What brings you revenue then?

- Commercial activities. Our main profile is investment and construction. Our task is to modernize existing 36 processing plants, modernize port facilities owned by The State Food and Grain Corporation. We also plan to integrate into the process of production growing.

One part of the company activities is flour processing and export. When we, for example, get the requests to buy one million tons of grain, we reply that are ready to sell 200 thousand tons of grain and 200 tons of flour, because the income from grain processing should remain in Ukraine, not in foreign mills.

I want to say that our business activities are based on actual investment funds, which reach the manufacturer. In addition to forward program within the budgetary allocations, we execute forward transactions at the cost of investment funds. The volume of such transaction is UAH 2 billion.

- You mentioned the experience in the market - both internal and external. This marketing year, you had several areas of work - on the interstate agreements and on grain realization base on quota obtained. Can you give at least some details: how the grain had been sold, where did it go?

- With respect to interstate agreements, they are executed out of quota restrictions under the free trade agreements. Today we have active agreements with six countries: Armenia, Georgia, Azerbaijan, Uzbekistan, Russia and Belarus. These are the countries that require our products. We perform supplies around all countries - both for state operators and on the insitutions identified by the governments of these countries.

Within the allocation we have quotas for 200 tons of wheat and 500 tons of corn. Near 60% grain have already been shipped and delivered. Remaining 40% on the balance of "Khlib Investbud” (over 300 thousand grains) will be shipped on regular basis under contracts, logistics and port capacity. As our grain volumes are located throughout Ukraine, and we are cooperating with 750 certified elevators in all regions.

As part of these supplies we sell products in countries like Turkey, Egypt, Spain and others. I emphasize that this is just about the final consumers’ pool - not traders reselling Ukrainian grain. It is noteworthy that these countries are traditional domestic consumers of grain, which previously received it through intermediary traders, and now at direct prices.

- Returning to forward, I want to ask you the main question: how do you personally assess the fact of forward itself and its sufficiency in Ukraine?

- As a head of a company executing the state program and an active player of a grain market I’ll give you a simple answer: this is a new culture of cooperation with manufacturers. Sad, but this culture hasn’t bee popular in Ukraine, but today we have the possibility to implement it. And this is without any doubt a positive tendency.

Source:  UNN

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