How to build an agroholding from scratch: the case of Epicentr Agro

02 October 2020

Since early 2000s, Ukraine has been considered as a country that provides an enabling environment for the proliferation of agroholdings. These large farming entities keep emerging and even succeeding despite the protracted political and economic crises in the country. Of nine new agroholdings that emerged in Ukraine over the last decade, one has been developing particularly rapidly. Epicentr Agro has reached considerable scale since being founded in 2015 and nourishes ambitious plans to grow further in the nearest future. 

Epicentr Agro operates 160,000 hectares of farmland, six grain elevators with a total one-time storage capacity of 1.1 million tonnes, 20 livestock farms, a seed plant, and a flour milling plant. The company’s activities are concentrated in three production clusters in five regions of Central and Western Ukraine. 

How did Epicentr Agro grow to become Ukraine’s seventh largest agroholding in terms of area and one of the most efficient vertically integrated agribusiness companies (EBITDA per hectare of $230 as of mid-2020) within just a few years? In an attempt to define the key to success in running a large-scale agribusiness in Ukraine, LargeScaleAgriculture.com analyzed the case of Epicentr Agro.

The founders of Epicentr Agro – Galyna an Oleksandr Gerega – own and operate Ukraine’s largest network of hardware hypermarkets Epicentr and Nova Liniya with a total of 69 stores countrywide. Initially, agribusiness for the Gerega family was meant to be a side activity to hedge risks from financial instability in their major retail business. In 2015, they founded a legal entity called Agroholding 2012 which had no farmland in operation at that time. However, already today, revenues from the agribusiness segment account for 15% in the structure of the holding’s total revenue. 

Consolidating farmland 

The company started the process of farmland accumulation by studying the land lease market in the Khmelnytskyi region, a native region and electoral district of Oleksandr Gerega who is also engaged in politics. The company representatives were contacting the owners of farmland plots whose land-lease agreements with other companies were close to expiration. Offering land rental prices that were 5-7 percentage points higher than those offered by other agricultural enterprises, Agroholding 2012 was able to collect 450 hectares of farmland by early 2016 and thereby made a few enemies among large farms who consequently lost some of their farmland plots. However, this price leadership behavior made average land rentals in the region increase and benefit local rural dwellers.

Note: Currently, Ukraine remains one of the six countries worldwide where farmland sales are banned. The moratorium on farmland sales is in effect since 2001 in Ukraine. At the same time, agricultural enterprises are not forbidden from renting land. As a result of the land reform of early 2000s, most of the farmland in Ukraine is privately owned by individual rural dwellers. 

The next steps toward farmland consolidation included acquisitions of a number of farms with up to 1000 hectares under operation, followed by takeovers of several larger players such as Vinnytsia Agro-Industrial Group with 10,000 hectares of farmland and 230,000 tonnes of storage capacities and one of Glencore subsidiaries with 50,000 hectares of farmland and 70,000 tonnes of storage capacities. 

To smoothly integrate these large companies characterized by different corporate structures and strategies, the management of Epicentr Agro established three production clusters under the centralized management approach  - in the regions of Kyiv (20,000 hectares in size), Vinnytsia (60,000 hectares), Khmelnytskyi and Ternopil (30,000 hectares). The latest large acquisition which helped Epicentr Agro to increase its farmland 40% to 160,000 hectares in 2020, was the Ukrainian agroholding Svarog West Group with operations in Khmelnytskyi region. 

Developing storage capacities and machinery park

A rapid farmland accumulation fostered Epicentr Agro to heavily invest in grain storage facilities to be able to store its harvest. In the period from early 2018 to early 2020, the company increased its storage capacity 300% from 364,000 tonnes to 1.1 million tonnes having invested in the purchase of grain elevators $91 million. In the period from 2016 to 2019, Epicentr Agro invested about $35 million in the purchase of agricultural machinery.

Attracting investors

Epicentr Agro is using the funds of the holding company as well as external capital to develop its businesses. For example, in 2019, Epicentr Agro received a $70 million loan from the Black Sea Trade and Development Bank (BSTDB) for the construction and modernization of its grain elevators. Another loan worth $14 million was provided by OTP Leasing, a subsidiary of OTP Bank, which supplied Epicentr Agro with machinery in 2019. 

Going digital

Obviously, the vast farmland areas cannot be efficiently managed without the use of innovative technologies. Although digitization itself is not considered by Epicentr Agro as the key business objective, the agroholding operates precision machinery and has developed crop yield maps for its fields. The company's planters are equipped with seed controllers, the harvesters are integrated with monitoring systems that calculate yield results while the sprayers are designed to apply fertilizers locally. 

Plans for the future

In the mid-term perspective, Epicentr Agro plans to actively develop a processing segment. So far, the company has been operating a flour milling plant. Flour produced by the plant is sold at Epicentr stores. Furthermore, the agroholding wants to start producing compound feedstuffs from its own produced corn. 

Until 2021, Epicentr Agro plans to increase its storage capacities up to 2 million tonnes and become Ukraine’s third largest agroholding in terms of storage volumes following Kernel and UkrLandFarming. In addition, the company considers its grain elevators as potential collateral to attract loans for farmland purchases after the launch of a full-fledged land market (for legal entities) in Ukraine in 2024. Also, Epicentr Agro plans to allocate another $10 million for the purchase of machinery until 2021. 

Conclusion

Epicentr Agro managed to reach a huge scale from scratch only five years after its foundation due to a successful farmland consolidation, heavy investments in storage capacities and machinery, effective fund-raising, and implementation of modern technologies. Ukrainian mass media tend to qualify the company’s behavior as empire building. Indeed, there were very few, if any, agroholdings that managed to grow that fast within a short timeframe. However, in the view of more public attention to agroholdings nowadays, the example of Epicentr Agro gives an idea of how typical agroholdings in post-Soviet transition countries were able to proliferate to huge-size export-oriented and vertically integrated entities.

By Anna Feshchenko

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