In 2006 the Group commenced activities in Ukraine and began accumulating a portfolio of short and long term leases over land in the Lviv region. The Group’s Ukrainian operations benefit from relatively low land leasehold costs, low labour costs, proximity to customers, excellent land quality and a suitable climate.
Ukrainian land bank
The Group currently farms approximately 32,000 hectares in Ukraine, primarily in the fertile Lviv region located in the west of the country. The region has a total agricultural land area of approximately 1.3 million hectares that equates to 3.1% of the total agricultural land area of Ukraine. Road and rail provide quick links to southern and eastern Ukraine as well as eastern Europe, the EU and Russia. The Directors believe that there are significant opportunities for further expansion of the Group’s land bank in the Lviv region.
The Ukrainian land bank is principally made up of five farm blocks organised in a cluster within close proximity to the city of Lviv. Each block is managed separately to maximise the local focus on yield, quality and cost control.
As of 31 December 2014 the Group had approximately 34,000 hectares of land under lease in Ukraine with approximately 30,000 individual land leases with varying lease maturities from 1 to 16 years.
The Group leases all the land on which it grows its crops from individual owners, local authorities and village councils. Annual lease rates are calculated as a fixed percentage of the formal (non-market) valuation of the leased land plot as required by Ukrainian legislation. Typically, the terms of the lease provide for rents to be reassessed every year and lease payments may be indexed in accordance with the official inflation rate on the day of payment. Lease payments can be paid in cash or by payment in kind upon the agreement of the parties to the lease and are often paid in kind with crops.
Land expansion process
The Group has significant experience in acquiring leasehold land in Ukraine. Members of the management team are well known in western Ukraine and have a good knowledge of the location of quality land in the Group's target region. The Group has developed an extensive database of land owners in the areas where the Group may consider expanding. In identifying land plots, the Group focuses on acquiring land with high soil quality and in proximity to its existing land holdings. Such land can be more easily integrated into the Group's existing operations, helping to minimise the need for capital expenditure on infrastructure and machinery.
The Group employs a team of over fifteen staff to manage its existing leases and deal with the acquisition of new leasehold interests and lease renewals. Representatives of the Group also regularly meet with village councils and local and state authorities to discuss available land. Once land plots are identified, the Group approaches the community and individual land owners to discuss the leasing of the land. Typically, the Group will meet with community members at the village hall to discuss and negotiate the terms of the leases, so as to reach a collective decision with community members.
The Group stores details of all of its leases on a land management database which is a central computerised record. The Group has the right to extend each of its current leases, should the owner choose to re-lease. The Group's land management database enables it to track when leases are due to expire. The team works closely with the Group's local landlords to secure the extension of the terms of its leases, generally beginning this process at an early stage.
The local climate in western Ukraine allows for one harvest per year. The crops grown each season can however be either winter crops (seeded during the autumn, staying dormant under snow cover in winter and harvested typically in July or August of the following year) or spring crops (seeded during spring and harvested typically in September or October). The main winter crops grown by the Group are winter wheat, winter barley and OSR. The main spring crops grown by the Group are, spring wheat, soya, maize, potatoes and sugar beet.
The Group looks to combine winter crops with spring crops in its seeding plans to take advantage of the different timing of the seeding and harvesting windows for the winter and spring crops. Using both crop types allows the Group to prolong the production season and use its resources more efficiently.
The Group rotates its five main crops over a five year production cycle in each respective field. The rotation is in line with best agronomic practice to reduce the build up of crop diseases and allows for a sustainable level of future production, whilst protecting the environment. The Ukrainian crop plantings and yields for the past five years are shown in the table below:
(tonnes per hectares)
|Total land under crop||4,059||10,679||12,926||15,927||23,677||28,128||30,822|
|Approximate leasehold land||18,000||21,000||21,000||23,000||31,000||32,000||34,000|
Source: CFG Management Information
The Group's yields are influenced by weather, new land quality, application of inputs and ability to harvest at optimum times. The movement to Block Management of 5,000 to 10,000 hectare clusters as separate profit and cost centres has delivered excellent results and forms one of the core principles underpinning the Groups ability to rapidly increase the scale of operations in the future. The Board has been encouraged by the crop yields that it has achieved since it commenced operations in Ukraine and which it believes are well above Ukrainian average yields.
The short transition between the seasons in Ukraine provides relatively short seeding and harvesting windows for the crops. This increases the importance of large scale plant and machinery and the availability of an organised work force. The Group uses a modern fleet of farm machinery in its agricultural operations and uses combines, tractors, ploughs and other agricultural equipment from such internationally recognised producers as Challenger, John Deere, Claas Lexion as well as from other producers. Much of this equipment is provided under asset financing and rental arrangements. The Group also hires additional equipment on a short term basis at seeding and harvesting time.
New land leased by the Group may have been fallow for a number of years and have a high level of weeds and compacted soil structure which can hold back yields initially. Yield improvements can be achieved through the application of fertiliser, the clearance of weeds from the fields with appropriate agro chemicals and the application of modern equipment to complete seeding and harvesting in the appropriate time windows.
The Group sells its crops to customers in Ukraine and on the International markets. Ukrainian domestic commodity prices tend to be affected by movements in international commodity prices. The Group uses a combination of forward fixed price sales contracts and spot selling at the time of harvest to mitigate some of the volatility of commodity pricing. Where possible the Group sells in hard currency to international traders to reduce the currency risk in Ukraine.
Logistics and Storage
In Ukraine, potatoes, and maize are generally collected by customers from the Group's storage, sugar beet is collected when harvested and barley, soya, wheat and OSR are transferred to the ports by rail after harvest. Over recent years the Group has made substantial investment in storage facilities and further capital expenditure on crop storage facilities and equipment is expected to be made as the Group expands. The Group currently has approximately 54,000 tonnes of crop storage facilities in Ukraine, of which approximately 24,000 tonnes is reserved for cereals storage and 30,000 tonnes for potato storage.
The Group has a fleet of trucks, grain haulers and other road vehicles that it uses to transport crops from the field to storage facilities, to transport materials between the various farm operations and occasionally to deliver products to customers and onwards transport links.