The acquisition of a stake in Ukraine's largest agricultural holding UkrLandFarming (ULF) by the American corporation Cargill will have enormous consequences not only for the Ukrainian agricultural market, but also for the port industry. The fact is that Cargill is one of the few major international grain-trading companies without their own port transshipment facilities in Ukraine. The partnership between Cargill and ULF has access to a favorably located land plot owned by ULF and the financial might of the global grain trader. It is unclear how roles will be distributed in this partnership, but it is obvious that the American company will finally have the opportunity to begin the long-awaited construction of a grain terminal.

Bakhmatiuk’s grain pipeline After building UkrLandFarming into the largest agricultural holding in Ukraine, Oleh Bakhmatiuk has addressed the need to have his own port facilities. His company plans to export over 2.5 million tons of grain during the 2013/14 marketing year and become one of the three largest exporters in the country.

In late 2012, Bakhmatiuk stunned everyone with an ambitious "grain pipeline" project worth USD 2.5 billion. It involves construction of a series of elevators with a total volume of 5 million tons on the territory of Ukraine, construction of a port with a transshipment capacity of 10 million tons, purchase of 3,000 grain cars, and construction 5-7 ships for transporting grain. His ultimate goal is to create a channel for exporting grain, primarily corn, to China (a market that has been closed to Ukraine until now), the Middle East, and North Africa (to which UkrLandFarming already exports its products).

For this purpose, UkrLandFarming bought a decent land plot at the Yuzhny port. This was stated in the agricultural holding’s Eurobond prospectus in March 2013. According to the prospectus, the company owns the rights to over 68.6 hectares of land in the Small Adzhalyk Estuary. According to estimates by CFTS Consulting, the value of such land may be in the range of USD 18-22 million (this estimate is based on data on the costs of land purchases in the Industrial Park, an industrial park project that the TIS group of companies is implementing at the Yuzhny port). However, the agricultural holding’s General Director Halyna Vasylyk said in August that year that the area of the land plot was already 200 hectares. “This area is sufficient not only to build a grain terminal, but also to have the capability for transshipment of other cargoes,” Vasylyk said in August 2013.

However, the bet on Chinese investors was unsuccessful. The idea of a “grain pipeline" was cleverly appropriated by the State Food and Grain Corporation of Ukraine (SFGCU), which ultimately succeeded in persuading the Chinese to cooperate on such a project. A memorandum of intention to build a mega-port with a grain storage capacity of 20 million tons in the Crimea was even signed in Beijing on December 5.

The idea of a “grain pipeline" was cleverly appropriated by the SFGCU state corporation

It seemed like Bakhmatiuk would have to shelve his dream of a port. Many even predicted that his company would default on its loans. However, Vasylyk continued to stick to her line: "The company is looking [for a partner for construction of a port terminal]. We are performing feasibility studies and preparing all the documents necessary to enable us to present a project to investors in a good and efficient way," said Vasylyk. "Our experts are exploring the market to determine the services or additional cargoes that can be transshipped there. We hope that these partners will come from abroad. Our owner and our entire team are now focused on the search for a partner."

UkrLandFarming’s data appeared in the plan for development of the Yuzhny port, among other projects, in the autumn: construction of a port with a capacity of 7 million tons at the cost of UAH 1 billion by 2016. According to Bakhmatiuk, construction was scheduled to begin in March-April 2014 but it remained unclear on whom the agricultural holding was placing its hopes.

Scots on the Prairies Cargill, one of the largest privately owned companies in the United States and one of the three leading grain traders in the world, has been actively seeking a site for construction of its own port terminal in Ukraine for a long time. The company’s big plans for export of grain from this region necessitated investment in establishment of its own port facilities. The company currently contents itself with only a small terminal with a capacity of about 30,000 tons in Rostov-on-Don (Russia) and the recently acquired a 25% stake plus one share in the Kombinat Stroykomplekt company (Novorossiysk). This cannot satisfy the American company, and it does not correspond to the magnitude of its operations.

Cargill has wanted to acquire its own port facilities in Ukraine for a long time, but it could not do so because of problems with the land plots it considered at the Ilyichevsk merchant seaport. Progress was made after the adoption of the Law on Seaports. In October last year, Cargill and the management of the Ilyichevsk merchant seaport signed a protocol of intention to build a complex for storage and processing of grains and oilseeds with an annual capacity of 4.5 million tons. The document states that the Cargill Ukraine company plans to bid for a concession contract for a package of assets at the Ilyichevsk merchant seaport. Experts estimate the cost of its construction at USD 80-90 million.

In a statement on the deal with Cargill, ULF stressed that the two companies were also discussing development of projects in other sectors, including the logistics sector

"We searched for opportunities to expand our business at Ukrainian ports for more than 15 years. We are pleased to have reached important agreements at the Ilyichevsk port, and we hope to work productively together,” said Cargill’s then-president David MacLennan.

However, progress at the Ilyichevsk port stalled due to "land problems," and it became known a year later (in September 2013) that the Cargill AT company, a subsidiary of Cargill, and a company called MV Cargo, which owns land at the Yuzhny port, had signed a memorandum of understanding.

180-degree turn While a memorandum on construction of a port in the Crimea was being signed in Beijing, Bakhmatiuk did a geopolitical somersault and turned 180 degrees from the eastern to the western direction by selling 5% of UkrLandFarming to Cargill for USD 200 million. This means that the entire UkrLandFarming is valued at USD 4 billion.

"Based on ULF’s EBITDA of USD 0.8 billion in 2012, ULF’s new strategic partner valued the company at five times its EBITDA. This valuation of the company is close to its market valuation because publicly owned Ukrainian agricultural holdings of similar profile are currently valued at 4-7 times their EBITDA,” said Andrii Tovstopiat, an analyst at CFTS Consulting.

In a statement to the CFTS portal on the deal with Cargill, ULF stressed that the two companies were also discussing development of projects in other sectors, including the logistics sector, as well as international cooperation, particularly mutual support when entering the Asian market, including the Chinese market.

"In concluding the deal with ULF, Cargill is pursuing several goals. Firstly, Cargill acquires in ULF a strategic partner that is the largest producer of grain in Ukraine (2 million tons of grain in 2011). The companies were able to reach agreement on guaranteed sale of 1-1.5 million tons of grain, thus giving Cargill a flow of export grain ‘from a single source’ (Cargill’s grain exports totaled 0.88 million tons in 2012 and 1 million tons in the first 11 months of 2013). On the other hand, ULF is guaranteed sale of most of the grain grown in its fields,” said Tovstopiat.

The second but no less important goal for Cargill is the opportunity to begin construction of a grain transshipment terminal on the land plot belonging to ULF at the Yuzhny port, Tovstopiat said.