Seeds of change in Ukraine threaten next corn belt

Cold war and corn have gone together for a long time.

In September 1959, at the height of the U.S.-Russian geopolitical animosity, Soviet Premier Nikita Khrushchev stood on a farm field in Coon Rapids, Iowa, to view the latest innovations in U.S. agricultural production methods and equipment. A legend in American farm and seed innovation, Roswell Garst, had invited Khrushchev to his family farm. Agricultural historians argue that even though he was overthrown in 1964, Khrushchev's trip to Iowa was critical in transitioning Russian agriculture into an industry that today is the third-largest exporter of grains behind the U.S. and European Union.

The current standoff between the U.S. and Russia features a different Khrushchev decision-his jettisoning of the Crimea in 1954. But there's an agricultural angle to explore: Ukraine's political showdown with Russia is threatening one of post-Soviet Europe's feel-good growth stories-the emergence of Ukraine as an agricultural powerhouse rocketing up the ranks of the world's food exporters.

Now everything from an unstable currency to tight credit threatens the spring planting season, and the uncertain outlook for the Ukrainian economy is a longer-term threat to the prediction by some of the biggest agricultural companies that a future Ukrainian corn belt will rival the U.S. market.

Ukraine and, to a wider extent, Eastern Europe, are among the most promising growth markets for farm-equipment giant Deere (NYSE:DE - News), as well as seed producers Monsanto (NYSE:MON - News) and DuPont (NYSE:DD - News), said Michael Cox, senior analyst and research director at Piper Jaffray. Ukraine's growth is becoming even more important, as it will serve to counterbalance the South American farm markets, where overseas growth has been increasing in places like Argentina and Brazil for these companies.

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Room for growth
Four keys point toward Ukraine's possible success as a corn giant: the right kind of land and level of farm technology development, room for yield improvement, and a growing demand for corn from the world.

Soil and climate conditions in western Ukraine closely resemble the U.S. northern corn belt in Minnesota and the Dakotas. Meanwhile, Ukraine is only now adopting Western farming practices, Cox said, who visited Ukraine last fall, and that means the Ukranian agricultural revolution is really just beginning.

Corn producers in Ukraine get yields of only about 80 bushels per acre, compared with 130 on similar land in the U.S.-roughly 60 percent of U.S. yields. And with almost 40 percent of U.S. corn going to ethanol, and rising worldwide demand for meat and other protein that is produced by feeding animals corn, there is room in the market, he added.

"It's the Western corporate farm operators that are pushing these new techniques,'' Cox said. "The U.S. has made this same transition. It took several decades, but that's as the technology was being developed. Since the technology and tools are readily available now, the improvement in yields could progress much faster in Eastern Europe.''

DuPont already has a corn seed production plant in Ukraine. Monsanto is building a $140 million seed plant that isn't open yet. Last week DuPont said in a regulatory filing that first-quarter earnings forecasts would be "challenged'' by the Ukraine crisis, which has caused delays in shipments of corn seed from its plant in Ukraine.

Even with farming that's still primitive by Western standards, Ukraine is moving up the exporter charts with a bullet. The nation of 45 million people gets 10 percent of its economy from agriculture-10 times the U.S. percentage-and its corn production has risen almost 17 percent a year since 2008, three times as fast as Brazil, the second-fastest-growing major producer.

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With the world's 29th-largest population, Ukraine is now the fifth-biggest corn producer in the world and tied with Argentina for the third-largest exporter. (The U.S. is by far the largest producer and exporter of corn.) Exports are up 15-fold since the USSR collapsed, tripling from 2010 to last year. In wheat, Ukraine is the sixth-largest producer but only the ninth-largest exporter, since it uses more of that crop at home, Cox said.

It's not trade that makes a huge difference for U.S. consumers, since little Ukrainian grain ends up in the U.S.'' said David Sedik, senior agricultural policy officer for Europe and Central Asia at the United Nations' Food and Agriculture Organization, but impediments to Ukrainian agricultural growth could have big implications for global food supply, including in the European Union, where short-term concern has been expressed regarding Ukrainian crop disruptions. In January, Cargill , which has operated in the Ukraine for many years, agreed to pay $200 million for a 5 percent stake in UkrLandFarming, Ukraine's largest agribusiness holding, in a deal expected to boost exports to China. The crisis has not affected Ukrainian grain exports to date, with corn futures falling steeply earlier this week after data showing that Ukrainian supply had not slowed at the docks.

Agricultural experts said Ukraine is at a middle stage in adopting Western farm techniques. The government still controls most farmland, leasing it out to small and large farms. Equipment is often old and unreliable, Cox said, while Sidek adds that the Ukranian government's unwillingness to let farms fail slows the adoption of more-efficient techniques. A Piper Jaffray survey of Ukranian farmers found Deere the most popular of the Western equipment makers, while Trimble Navigation (NASDAQ:TRMB - News), which makes GPS systems for farming, may also get a sales boost from Ukraine.

There have been clear signs of agricultural disruption from Ukraine's political crisis.

The price of corn in futures markets had jumped by a double-digit percentage since November, when Ukrainian protests began. Ukraine's currency is also down double digits-there are forecasts it may drop another 20 percent-making farmers more reluctant to sell crops for export, while also threatening access to the equipment and financing that farmers need to keep growing-in both senses of the word.

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"If Ukraine is 10 percent of the [worldwide] export market and corn prices have gone up 10 percent, that may be the simple math,'' Cox said. "The market may be adjusting for a total wipeout of Ukraine's production, which isn't likely."

"It increases the price of chemicals and machinery, and most of that is imported,'' Sidek said. "That's close to a 50 percent increase in the price of the inputs.''

Fertilizer has been the most examined aspect of the Ukraine farm story-and the geopolitical crisis has even helped some fertilizer stocks, since corn prices move in tandem with crop prices and there has also been speculation about potential impacts from the crisis on Russia's large domestic fertilizer industry, which has dominated in Ukraine and also kept a lid on global fertilizer opportunities. The benchmark Black Sea price for urea fertilizer is up about 18 percent since the Ukrainian crisis began.

Corn dètente
The longer-term story is tied to the shaky Ukrainian economy. Experts worry that Ukrainian farmers may not be able to get credit to plant this spring, hitting companies that make and sell seeds, or sell equipment and chemicals. Moreover, an unstable economy can wreak havoc on agricultural innovation-after Khrushchev's visit to Iowa, the reality of Soviet economics made an immediate transition to Western farming equipment difficult. Ukrainian agriculture could also be hurt in the short term by labor shortages if farmhands are diverted to resist Russian incursions, Cox said.

"The growth aspirations for the seed companies in the Ukraine are critical," said one analyst who was not authorized to speak on the issue because he had not written a public note covering potential fallout from the geopolitical standoff.

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DuPont's citing of Ukraine in a recent regulatory filing warning of potential weakness to quarterly earnings also included a reference to bad weather in the U.S. as a culprit, and DuPont expressed confidence it would meet its targets for the full year. Monsanto spokeswoman Sara Milller said Ukraine is only a small part of its $2 billion European sales segment-the company does not break out Ukrainian revenue. Monsanto makes about 40 percent of seeds for Ukraine's market within the country.

"We're continuing to carefully monitor the developments like everyone else,'' Miller said via email.

The Ukrainian corn crop is set to be planted in May, and nearly all of it would normally end up on the export market, Cox said. Wheat gets planted in the fall, giving more time for the crisis to be resolved.

"If there's war, all activities will be disrupted,'' said Evgenia Apostolopoulou, a senior consultant at IHS Chemical in London.

Iowa farming innovator Garst had a political reason for inviting Khrushchev to his family farm. He had been to Communist nations throughout the 1950s-and had previously visited Khrushchev in the Soviet Union-trying to spread his message of agricultural revolution to feed the hungry masses behind the Iron Curtain and bridge U.S.-Soviet differences-through a corn détente.

It's the wrong seeds of change, though, at work in Ukraine right now.

-By Tim Mullaney, Special to CNBC.com

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