OREANDA-NEWS. Fitch Ratings says the credit profile of Ukrainian agribusiness companies will remain under pressure from a heightened risk of weak harvests in 2015 resulting from higher costs of sowing campaigns and constrained financing.

Farming and trading and processing companies will be most affected by a weak harvest, while protein producers should be more flexible in procuring fodder but will be hit by the recent significant hryvnia devaluation as they are unable to pass on higher USD-linked costs to consumers. While the ratings of Ukrainian agricultural companies factor in some earnings volatility and liquidity risks, Fitch may consider negative rating actions if conditions deteriorate further.

We expect Ukrainian farmers to suffer in 2015 from increased working capital needs, which will not be adequately met by external financing. We expect the sharp hryvnia devaluation to lead to a significant rise in the costs of the spring sowing campaign, which starts in March 2015, as most inputs, such as seeds, fertilisers, fuel, crops protection and spare parts, are either imported or have USD-linked prices. This will translate into increased working capital needs, which will only be partially covered by proceeds from the sale of last-season grain kept in silos. At the same time, financing sources are now limited, given the combination of a weak Ukrainian banking system and muted foreign investments. In addition, deteriorated public finances reduce the chance of any meaningful direct government support to the industry.

Looking further ahead, underfunding of the current spring sowing campaign may lead to reduced harvested land and deterioration in crop yields through insufficient application of fertilisers or investments in mechanisation and as a result weaker 2015/16 harvests. We do not expect the effects of the military conflict in eastern Ukraine to affect the harvest substantially due to the historically low contribution of Lugansk and Donetsk regions to the country's arable land and crop output.

Operations of small and medium-size farmers will be hurt the most due to hindered access to liquidity and thus their inability to procure sufficient inputs and fully farm their land-bank. Farming operations of large agricultural holdings, such as UkrLandFarming (CC), will be affected primarily by lower yields and hence lower grain sales but we expect their EBITDA margin to remain fairly stable, barring soft commodity price shocks.

Ukrainian soft commodity processors and traders whose operations rely substantially on procuring domestically farmed products, such as Kernel (CCC) and Creative (CC/RWE), could come under pressure in the event of scarcer availability of grains and oilseeds in the country. Yet, given their profile as larger players, these two could suffer less than other local peers. Soft commodity processors and traders generally face the threat of underutilised crushing capacity and infrastructure assets translating into lower EBITDA margin, and of decreased trading and production volumes leading to revenue declines. However, such risks may not materialise if difficult conditions lead to the closure of crushing facilities located in military conflict zones or at small inefficient plants, in turn balancing supply of oilseeds with lower demand.

Protein producers, such as MHP (CCC) and Avangardco (CC), should suffer to a lesser degree the impact of a smaller harvest compared with farmers and trading and processing companies. This is because the availability of fodder, which is made up of grain and oilseeds meal, should be supported by imports if local supplies fall short. Rather, the major risk for the sector is USD-linked fodder prices and their potential effect on compressing profitability due to the hryvnia devaluation, if companies are unable to pass these on to consumers whose disposable income is under pressure.