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Ukraine sunflower seed sowings may grow further from record high

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The renewal in Ukrainian farmers love for growing sunflower seed - which drove ouptut in the top producing country to a record high this year - is not over yet, Kernel Holding said, flagging the "strong economic incentive" for favouring the crop.

Andriy Verevskyy, the Kernel Holding chairman, said that "we clearly see strong profitability of sunflower seed production in Ukraine compared to other major crops", a reflection of strong demand for the oilseed from a series of new crushing plants.

While the competition for sunflower seed by processors has meant "squeezed" crush margins for processors, it has "translated into extra profits for farmers", Mr Verevskyy said.

And this looks set to last, despite a record harvest this year – pegged up 2.2m tonnes at 13.5m tonnes by the US Department of Agriculture – which Kernel said has translated to "at least 1.0m-1.5m tonnes" extra seed supplies on the Ukrainian market.

'Strong economic incentive'

There should "remain a strong economic incentive to Ukrainian farmers in their effort to expand sunflower seed production", Mr Verevskyy said, even after the latest jump in production, which reflected an unexpected rise in sowings this spring.

Ukraine's sunflower plantings rose by 700,000 hectares this year to a record 6.0m hectares, after seven years stuck at 5.0m-5.5m hectares, according to the USDA.

While further growth in sunflower seed area would, longer-term, bring supply and demand back into "equilibrium", for now demand from new crushing plants will keep prices supported.

"We do not expect a rebound in crushing margins in [the year to the end of June 2017] as the additional capacity commissioned during the last season should absorb the incremental supply," Mr Verevskyy said.

"Generally, we expect crushing margins to settle to levels seen a year ago," with its own crush expected to rise in the year to June next year by some 300,000 tonnes to 3.0m tonnes.

Appetite for takeovers

Kernel Holding is a sizeable grower of sunflowers, increasing its sowings by 31% to 81,400 hectares this year, besides being one of the biggest Ukrainian crushers of the oilseed, with a 23% share of the domestic market, and a 7% share of world sunflower oil output.

Indeed, the group, which in February bought a 560,000-tonne crushing plant in Kirovgrad, is hoping to use the downturn in processors' profits to raise its capacity further.

"The primary goal of our strategy is to consolidate the oilseed crushing industry," Mr Verevskyy said.

"We believe that the recent decline in crushing margins is a strong catalyst for industry consolidation."

Farming profits soar

However, the weak margins took a toll on Kernel's sunflower seed processing division, which recorded a 40% fall to $128.8m in earnings before interest, tax, depreciation and amortisation (ebitda) for the year to the end of June this year.

The group flagged farmers' "unwillingness to sell their crops", as well as "intensified competition" among crushers, for weighing on margins.

Still, group ebita fell by a more modest 12.7% to $346.4m, helped by a 49% jump to $146.0m in the result from Kernel's farming division, which operates over more than 380,000 hectares, and produces some 1.8m tonnes of crops a year.

Kernel flagged its record of reaping yields well above the Ukrainian average - with the rapeseed result of 4.3 tonnes per hectare beating the national mean by 65% - besides the boost from the reinstatement last year of VAT refunds on grain exports.

"The change is beneficial for our farming segment, because its net effect is a reduction of the cost base," besides boosting effective farmgate crop prices.

Kernel shares, which are listed in Warsaw, stood 0.9% higher at 60.39 zloty in afternoon deals.

By Mike Verdin

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