TEXT-Fitch:Agri businesses prepared for Ukraine export restrictions

Tue Nov 13, 2012 4:40am EST

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(The following statement was released by the rating agency)

Nov 13 - Major wheat producers in Ukraine would suffer little impact from the potential introduction of export restrictions later this year, Fitch Ratings says. Our discussions with producers indicate that most had been anticipating export restrictions because of the weaker harvest, and had therefore already sold most of their stocks - usually they would have stored significant amounts through the winter to take advantage of the seasonality of soft commodity prices.

Although we expect little impact on the Ukrainian agriculture producers' credit profiles, the likely imposition of restrictions by end of 2012 or in early 2013 highlights some of the uncertainties around grain and particularly wheat procurement that are specific to the region. In some cases these can constrain credit ratings in the sector.

The current situation adds to the already unpredictable operating and regulatory framework in Ukraine. Wheat production is more strategically important than that of other grains because of its position as a staple food, and therefore critical for the government to keep prices down. The government's record of interfering in grain markets, which included export restrictions during Q311 and Q411, limits the credit ratings of farmers and traders such as Kernel and Mriya Agro to the 'B' rating category. Perennial budget deficits also increase the possibility of future export restrictions. Moreover, the weather in Ukraine is less predictable than in the main grain-producing regions of western Europe, leading to greater variation in crop yields.

Nevertheless, we believe the Ukrainian agriculture sector has good long-term growth prospects. Yields are low compared with western European producers and there is significant potential for improvement through further investment in machinery and fertilisers. Changing diets in developing markets should boost demand for grains and oilseeds, particularly for animal feed, although meeting this demand will require further investment in infrastructure around the Black Sea.

A structural shift towards corn production, with the area used to grow corn increasing by 10%-15% annually in recent years, is a further positive development. Farmers have shown evidence of strong crop-yield potential for corn in Ukraine and we also expect slightly less regulatory pressure on corn than on wheat, because of wheat's importance as a staple food.

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