Back to the Future: how to sell new crop at an old price?

[su_dropcap size=”5″]L[/su_dropcap]ast summer, Ukrainian farmers were in a busy mood. Prices for agricultural commodities were falling from day to day. Domestic corn producers were affected most of all — by the autumn, the price of this crop had fallen by $40. Losses of large exporters were counted in millions. However, there were those who looked at those prices with a smile. One of them was Yuri Belinsky, co-owner of Alpha farm (Kharkiv). He signed a forward contract, according to which he was to sell part of his future crop to Syngenta at the old and better prices. As a result, all were satisfied: Belinsky sold his corn at a high price, and Syngenta gained another regular customer. “Prices for agricultural products have fallen for the third season in a row. So we decided to develop a forward contract, thus encouraging the farmers’ confidence in the price for the next harvest”, says Roman Khrypko, Business Development Manager at Syngenta.

Only the price difference brought the farmer $166,000 [su_dropcap size=”5″]T[/su_dropcap]he Belinskys are the pioneers of farming movement in Ukraine. They founded their 50 hectares farm on rented land in the early 1990s. For twenty five years, the company’s land fund has risen to 7,000 hectares, and the farming enterprise itself has become the largest one in Zolochiv District of the Kharkiv Region. Now wheat, peas, barley, soybeans and corn, the main crop for the Belinskys, are grown in the fields of Alpha in the village of Odnorobovka. Prior to the crises in Ukraine, the company had been operating like most of the agricultural enterprises in the country: investing in seeds and fertilizers at sowing time and returning their investments after the sale of crop. However, both the crisis and hryvnia devaluation have turned foreign agricultural chemicals into luxury for the farmers. The situation was exacerbated with agricultural product price fluctuations in global markets and the collapse of bank lending to farmers. Such circumstances have forced farmers to look for financing alternatives. A replacement for bank lending was offered in the Kyiv office of Syngenta.

In 2014, Belinsky was one of six entrepreneurs who volunteered to test the new Syngenta service — the Forward Plus Program. Cooperation terms were simple: a farmer had to buy chemicals and seeds from the company on credit, and pay it off with part of his future harvest. Prices were fixed at the time of signing the contract according to corn futures quotes on Chicago Mercantile Exchange. “So, if the market price fell, I would sell my corn at a better price. If the price of corn in Chicago grew, I might fix higher prices in the contract”, says Belinsky.

Insurance was not in vain. Good weather in the USA allowed local farmers to collect a record harvest of this crop — 24 million tons more than last year. Such a yield of the world’s largest supplier led to a sharp decline in corn price; corn futures quotes in Chicago fell by $40. “Needless to say what it felt like. I knew that I would sell my crop at a much higher price”, Belinsky recalls with pleasure.

However, there were still three months till harvesting time. Agritel International consulting company, Syngenta’s partner, was watching corn ripening to avoid surprises. According to Yuri Ruban, senior consultant at Agritel International, the company’s experts controlled everything that could affect the yield and its cost — from weather conditions to the situation on world markets.

Such fine tuning of the business paid off. In October, when prices in Chicago froze at $140 per ton, Belinsky sold 3,000 tons of corn to Syngenta for $180. Only the price difference brought the farmer $166,000. Under the terms of the contract, Belinsky received one half of the amount in money, and the second half — in Syngenta’s seeds and chemicals. “I might wait for the spring and sell my crop at even higher prices. But each farm needs money for operational activities, and the deal justified itself”, says Belinsky.

Belinsky’s example became the best advertisement for a new Syngenta project. According to Khrypko, this year 20 agricultural companies are working on forward contract with Syngenta. Intuition did not disappoint Ukrainian farmers. Continued drought in the US led to talks about reducing the yield of corn. In July 2015, pushed by such forecasts, the price of corn on the Chicago Mercantile Exchange rose by $20. “The surge of quotations was expected, and we used this for a signing a contract”, says Ekaterina Konaschuk, Vice President of Commerce at AgroGeneration international company. Her company entered into two forward contracts with Syngenta to sell corn at a fixed price. The company has committed to sell 2,000 tons of corn for $160 per ton, and this fall global price fell to $145. The earnings on the difference in prices were $30,000.

[su_dropcap size=”5″]S[/su_dropcap]yngenta plans to enhance their project. Khrypko says that this year the participants of Forward Plus Program will be able to take advantage of agricultural receipts, legalized in Ukraine this spring. The new tool allows borrowing and selling crops before harvesting. Besides, such loans may be returned not only in products, but also in money. A significant advantage of agricultural receipts is the possibility to sell them to third parties prior to the date of repayment.

Six farmers already agreed to test the new lending scheme, including AgroGeneration. “We will continue our cooperation with Syngenta, because it is really beneficial”, says Konaschuk.

Теxт: Maxim Birovash