Ukraine’s biggest grain exporter, Kernel Holding, said it was in “survival mode” thanks to the devastation caused by Russia’s invasion, for which the trails to the group look like getting worse yet.
The year to June 2023 “will probably be the most challenging season in our history”, said Andrii Verevskyi, chairman of the farming-to-crushing group, even as it unveiled a war toll for the year to June this year which included the death of 41 of its staff, and injury to a further 51.
The group counted $11m of its inventories destroyed, with a further $53m left in occupied territories, while it was forced to cancel $1.6bn in export contracts, as the closure of Ukraine’s Black Sea ports, ahead of July’s UN-brokered deal with Russia, meant the group “halted virtually all export activities”.
And while the grain corridor deal proved “some relief”, in preventing a “full collapse of grain storage and logistic infrastructure caused by the approaching harvest in Ukraine”, Mr Verevskyi was cautious over prospects, even if the agreement is extended beyond this week’s deadline.
‘Risk of sabotage’
“Even if the grain deal is extended, it remains subject to the risk of sabotage from Russia,” Mr Verevskyi said, noting continued Russian missile attacks on Ukraine port infrastructure, besides blaming Moscow for shipping hold-ups.
He claimed that “we have already seen that Russian representatives deliberately delayed the inspection of vessels” in Turkey, as demanded by the deal, with more than 100 vessels, carrying 2m tonnes of produce, waiting to leave the Bosphorus as of late October.
“Some vessels had to wait for more than 20 days to be inspected,” so boosting shipping costs and squeezing margins.
Mr Verevskyi unveiled plans for Kernel to revamp its export operations in response to the war, which in the April-to-June period saw its grain exports plunge by 96% compared with those in the October-to-December quarter, ahead of Russia’s invasion, with sunflower oil volumes down by 85%.
Given Russia’s missile attacks on Mykolaiv, even after signing the Ukraine grain export deal, Kernel “may face an urgent need to acquire some port facilities in neighbouring countries or in the other parts of Ukraine”, he said.
A further $170m was needed for investment in the likes of rail containers, trucks and barges to boost the group’s ability to export crops overland to the European Union.
However, such proposals came at a time when the group’s net debt has swollen by 78% to $1.5bn as of the end of June, forcing Kernel to seek a temporary deal with its creditors not to pay down capital, with a further agreement being negotiated.
With the future unclear, “we might be in urgent search of capital to finance our survival.
“We are no longer talking about growth and expansion, but rather about maintaining the minimal required level of exports to cover our expenses, to pay salaries, and to service debt.”
The group added that owing to the war, it needed “to temporarily set aside its growth strategy and operate in survival mode”.
Already Kernel had sold farm operations covering 134,000 hectares to Mr Verevskyi to raise cash and “derisk the business”, given the reliance of Ukraine producers on exporters for selling their crops.
The group had planted 28,000 hectares of 2022 spring crops, which are coming in at yields down 17% year on year for sunflowers, although with only a marginal decline for corn, but said it was “far from making our final decision on our crop mix” for 2023-24.
“When deciding on that, we will be restricted by crop inputs availability, mostly nitrogen-based fertilizers,” he said.
For the 12 months to the end of June 2022, Kernel reported a loss of $41m, compared with earnings of $513m a year before, on revenues down 5% at $5.60bn.
Results would have been much worse were it not for a strong start to the financial year, and to a strong performance by Kernel’s Avere grain trading arm, which achieved $134m in ebitda – more than half the group’s total of $220m once losses in crushing were factored in.
“The trading team skilfully exploited the volatility prevailing on the soft commodity markets,” Kernel said, which raised its stake in Avere from 60% to 100%, as minority shareholders exercised options to sell their stakes.
Avere also profited as it “advanced capabilities of fundamental supply and demand analysis of key agricultural markets”, Kernel said.
However, the group struck a more downbeat note on Avere’s performance in the current financial year.
With trading in volatile markets “extremely risky… our approach is to stick to mild earnings but to minimise potential losses”, meaning that “Avere’s trading team reduced their positions and is acting very cautiously in the current year.
“As of the day of this report, the business remains profitable, but we do not retain much optimism over the full year performance.”
Kernel shares, which are listed in Warsaw, stood down 5.7% at 19.80 zloty in afternoon deals.