Dark clouds hang over Ukrainian egg industry

Over the past few years Ukrainian egg production has grown steadily, driven by increasing exports against a background of growing political and economic stability in the country. The tables may turn with the possible bankruptcy of what was once the world’s second biggest egg producer, Avangard agricultural holding. Something which would be an unprecedented catastrophe for the entire Ukrainian agricultural industry.

The economic crisis that hit the country in 2014 following Russia’s annexation of Crimea, severely tested the viability of the local egg industry when Avangard reduced egg production by 46% in 2015 compared with the previous year, to 3.434 billion eggs. In 2018, the company produced just over 2.6 billion eggs, almost half of the 5.09 billion produced in 2013.

The bankruptcy of Avangard would cause turbulence not only in Ukraine but also on the global egg market.”

The reduction in housed birds in 2015 was because farms in the east of Ukraine, located close to the conflict zone, ceased production. Added to which the domestic demand for eggs fell due to consumers’ reduced spending power. This further reduction is believed to be associated with a cocktail of factors. Avangard’s share in Ukrainian egg exports in 2018 is estimated at 46.7%.

However, the strong devaluation of the Ukrainian hryvnia during the period of the economic crisis boosted revenue from exports. Needless to say, Ukrainian companies have put a lot of effort into gaining a foothold on the global market. Ukraine has one of the world’s highest per capita levels of egg consumption at around 310 per person per year, according to the International Independent Institute of Agricultural Policy. It would be difficult to raise that figure, hence the focus on exports.

…supply currently exceeds the demand. Right now, this is the main challenge facing the Ukrainian egg industry…” – Anna Tews, Ovostar Union.

Egg exports gain momentum

“Ukraine is actively increasing egg exports. Over the past 2 years our companies have more than doubled export volumes. In 2016 exports amounted to 650 million eggs in total, while in 2018 this figure reached 1.79 billion eggs,” Irina Palamar, chairman of the Ukraine Livestock Industry Association told Poultry World. “The increase in exports can be attributed to both the increase in production and the opening up of new sales markets. Official statistical data show that industrial egg production in Ukraine increased by 6.4% in 2018 compared with the previous year. In 2018 our companies were given the green light to start exporting to Montenegro, Serbia, Hong Kong and Singapore. For egg products we have been given the go-ahead to begin exporting to those same countries, plus Morocco and the Philippines,” Palamar stated.

Ukraine exported 107,500 tonnes of eggs in 2017, up by 21% compared with the same period in the previous year, Palamar noted, citing data from the State Statistical Service. In monetary terms, exports jumped 37% to US$ 94.1 million.

The top 3 biggest sales markets were:

1. UAE with a nett worth of US$ 34.5 million,
2. Iraq with US$ 19 million and
3. Qatar with US$ 9.7 million.

The positive dynamics in egg exports accelerated in both 2018 and 2019. “In the first half of 2019, Ukraine exported 75,400 tonnes of in-shell eggs, 69% up compared with the same period in the previous year,” Palamar continued. Ukraine has managed to establish well diversified egg exports with most eggs being supplied to the Middle East and North Africa, and most eggs products going to the European Union.

“In monetary terms export is growing more slowly than in physical terms. This can be attributed to some growth in the share of liquid egg production in overall sales. The main sales markets for egg products of Ukrainian origin in 2018 were the EU countries, which accounted for nearly half the total sales volume, the MENA countries and Southeast Asia. Anastasya Skibchuk, senior analyst at the Kiev-based think tank Pro Consulting told Poultry World that –

the top 5 sales markets for Ukraine egg products are:

1. Denmark,
2. Italy,
3. Saudi Arabia,
4. Latvia and
5. Indonesia.

“The growth in production is largely determined by the demand in markets outside Ukraine, since domestic demand is projected to grow at a slow pace given that the purchasing power of the local population remains largely unchanged,” Skibchuk added.

With domestic consumption maxed out, the focus is on export to 55 countries in total. Photo: Vadim Uvazhny

Shrinking margins

Despite the strong and continuing growth in production, the biggest egg producers in Ukraine have seen their margins falling. Research conducted by the Ukraine Antitrust Committee in 2018 showed that the 3 biggest companies, Avangard agricultural holding, Ovostar Union and Inter Agrosila, jointly accounted for 46.61% of the country’s sales of egg and egg products.

Ovostar Union

Ovostar Union saw its net profit fall by 81.1% to US$ 2.6 million in January-September 2019 compared with the same period in 2018. Revenue decreased by 18%, to US$ 77.63 million, which was due to lower egg sales and negative price dynamics in the reporting period. Ovostar Union reported that eggs sales in Ukraine had dropped by 15.9%, to 888 million eggs, compared with the same period in 2018. Egg production during this period decreased by 0.9%, to 1.191 billion eggs. “The supply currently exceeds the demand. Right now, this is the main challenge facing the Ukrainian egg industry. Egg production in Ukraine has grown in recent years, while the demand from both the internal and external markets remained flat. In this situation, margins have shrunk to a minimum and operational effectiveness has become the key to maintaining the business,” Anna Tews, chairman of PR department of Ovostar Union told Poultry World.

The oversupply problem has already taken a toll on prices. The company estimated that they fell by 9% to US$ 0.061 per egg this year. Given the challenges currently facing Ukrainian egg companies, the company considers its operational performance in 2019 satisfactory, Tews noted. Ovostar Union sells its products to 55 countries in the EU, the Middle East, Southeast Asia and Africa. The company exports 50% of all eggs, as well as 71% and 48% of dry and liquid egg products, respectively. “To improve management, the company opened commercial representative offices abroad. The first one was launched in Latvia in 2015 to serve as a logistics centre for EU countries, with another one in the UAE in 2018 to manage product flows in the MENA region. In 2019, the company entered into a number of contracts to enhance its presence in the Asia-Pacific region,” Tews added. At one of the production sites, in 2019 the first poultry house was certified in accordance with the European BARN standard. Ovostar Union believes that this will strengthen its position on the global market as an egg exporter.

Inter Agrosila

Inter Agrosila produces around 12% of all eggs in Ukraine but the company prefers to keep a low profile. It has not shared any information or details of its financial performance since 2011, nor is the company disclosing any details of its export campaign.

Avangard in trouble?

It is no secret that during the period of instability, Avangard accumulated a large debt and in the past has been in negotiations with its creditors on how to manage this better. However, the recent conflict between Oleh Bakhmatyuk, the owner of Avangard, and the Ukraine authorities could indicate that the situation is getting out of hand. The total debt of UkrLandFarming, Avangard’s parent company, is estimated to be close to US$ 2 billion. Avangard agricultural holdings’ international creditors have recently written a letter to Prime Minister Alexey Honcharuk asking whether the National Anti-Corruption Bureau of Ukraine should investigate Oleh Bakhmatyuk. Speaking with the local press, Bakhmatyuk noted that the creditors had expressed their concerns about the National Anti-Corruption Bureau investigation of him, which included putting him on a wanted list in his country, stating that “without a constructive position it [a debt restructuring] will be hard to achieve for the shareholders and management”.

Avangard owner Oleh Bakhmatyuk has tough talks with his shareholders to keep the business afloat. Photo: Vadim Uvazhny

Bakhmatyuk is now openly talking about the possible bankruptcy of his egg giant, saying “achieving a constructive position with creditors and the government will save far more than the value of the holdings, while attempting to sell off the assets in parts will only lead to a greater loss.” Bakhmatyuk warned that the first problems may already be seen in the spring of 2020, when the company would need funds to begin a sowing campaign to produce feed for its layers. Apart from the company crashing, there is also the threat of an illegal takeover. “Oleh Bakhmatyuk is staying in Europe to avoid political pressure, manipulation, and to safeguard business security, since there is every reason to believe that under the guise of pre-trial procedures there is a risk of UkrLandfFarming’s assets and Avanguard seizure by government officials,” said Bahmatyuk’s lawyer, Tatyana Kozachenko, during a press conference in Kiev. The investigation has nothing to do with egg industry. The National Anti-Corruption Bureau of Ukraine suspects that in 2014 there was an abuse of power when a UAH1.2 billion (US$ 50 million) stabilisation loan was provided by the National Bank of Ukraine to the VAP Bank, which used to belong to Bakhma­tyuk.”The bankruptcy of Avangard would cause turbulence not only in Ukraine but also on the global egg market,” a source in the Ukraine poultry industry who wished to not be named told Poultry World. “Never before has a company of such a scale stopped operating in the post-Soviet era, and there are no reasons for that to happen – Avangard is a fairly efficient company. But there is common sense and there is policy, and sometimes policy prevails”. The Avangard press office declined to provide any further comment at the time of going to press.