Shestopalov: At the end of the year there will be a shortage of some grain crops
Under quarantine conditions, processing enterprises were forced to reorganize to a new operating mode, make adjustments to the usual routine, and change the business strategy. On the situation of raw material for flour, cereal and bakery production, as well as operation of the bakery industry nowadays, dwells Boris Shestopalov, co-owner of HD-group in an interview with the portal “Storage and grain processing».
— HD-Group produces a wide range of products, ranging from flour and cereals, ending with bakery and confectionery. How does the company manage to operate under quarantine and ensure the safety of almost 5,000 employees throughout Ukraine?
— To date, all enterprises are operating stably. During the time that we are in quarantine, we have become accustomed to a certain state of anxiety, and it has already turned into an ordinary feeling. Virtually all our facilities embedded HACCP principles a long time ago, so the concept of food security for us has always been not just empty words. However, due to the huge number of panic messages on the Internet at the beginning of quarantine, we actually were very wary of how stable it is to work in such conditions.
HD-Group employees work across the country, therefore, we decided to implement our own quarantine regulations, offered all partners and regulatory authorities to temporarily suspend any visits and audits, tightened the entrance to the enterprise, limited the access of suppliers, set up a certain “front” through the security at checkpoints. At all enterprises, the temperature is measured, and all employees were provided with protective equipment and disinfectants. At each entrance, enterprises installed automated sanitary barriers for arms and legs. We updated some documentation and standards, the warning system, switched to single electronic communication channels.
If the situation does not worsen, then I can say that we are quite stable. We are conducting reports on the percentage of sick employees. The recovery process of each sick employee is accompanied by the trade union and the security service to confirm or refute COVID-19.
Perhaps now we will work constantly in this mode and will be ready for anything. Together with the trade union, we created a joint fund, Medical Stabilization, in the amount of 500 thousand UAH. Its purpose is to help sick employees. Unused funds will be used to fund the rehabilitation of our employees’ children. At this point, in my opinion, the team is working very harmoniously due to daily communication with all the enterprises.
In a crisis, there is an opportunity to implement solutions for which there was not enough time before: the other day, for example, we launched a Telegram-channel for our employees. There we publish one or two news every day and hope that by the end of quarantine we will have a full-scale media tool.
— How acute is the issue of providing raw materials for production? What is the situation with imported raw materials? How do you manage to work in the face of rising prices for wheat and other types of raw materials, how does this affect the price of finished products?
— Indeed, according to the trends of the previous years, it is time to reduce the price of wheat, as export activity ends. And even those who kept grain in elevators in the hope of earning also start to empty it by the new season.
We were extremely concerned about rising commodity prices amid growing demand. If we talk about the price of flour in retail, then at the moment it corresponds to the most acute period of 2014. I have not seen a price tag of 27-30 UAH for a two-kilogram package of flour for a long time, and I do not think that this is an adequate price, since the weighted average price fluctuates within 8 UAH per kg. This is a high price for bakers. In my opinion, an adequate price for a two-kilogram package of flour has to be 22-23 UAH.
We were also worried about the general situation of rising wheat prices, together with the Union “Millers of Ukraine” and the All-Ukrainian Association of Bakers, given that its quality is declining by the end of the MY. Increased demand for wheat and flour exports is linked to concerns about food shortages. Therefore, we advocated quotas for wheat exports. At the moment, there is a verbal agreement with the authorities that exports will be no more than 20.2 million tons.
The other day, we noted a certain reduction in prices up to 100-200 UAH. If this trend continues, we can assume that there will be no need to increase prices for our products. We have not increased the price of bread so far, although there are all the reasons to do so, given that we switched to packaged products, which contributes to the over-expenditure of packaging material.
Much worse is the situation with niche raw materials, such as rye, the prices for which are running high, and cereals. We are acutely short of oats and, therefore, of oatmeal. Some manufacturers were already forced to stop production and accumulate the required amount. At the moment, we have inconsistent deliveries of oats from Belarus and the closure of exports in Kazakhstan. I believe that at the end of the year there will be a shortage of some crops. Imported cereals will disappear, given the appreciation of the currency and bans. The whole foundation is a domestic producer. As a result, products will be more expensive and there will be a shortage of them.
It seems to me that another reason for the deficit is unjustified demand. Rodion Rybchinsky, the President of The Union“Millers of Ukraine”, has repeatedly said that some of the purchased products will simply be thrown out by consumers because storage conditions will not be met and the products will simply go bad. All associations will need to think and learn a lesson from this crisis. It is necessary to honestly talk about how much stock we have of raw materials and what is generally happening with the balance of enterprises.
— How has the demand for HD-Group products changed in the domestic market? Is there a redistribution in production and consumption?
— The portfolio was slightly redistributed towards the lowest margin products. The average price for products by the company decreased by 10-12%, that is, the assortment is shifting. And if before there was a demand for small-piece products, now it shifted to more mass products weighing 500-600 g.
— How does the company operate in foreign markets under quarantine? Are there any difficulties with internal and external logistics, import of products, increased safety requirements for products? How is importer demand estimated today?
— There is demand, however, it is very irregular. Also, this demand may be caused by the closure of the borders of several countries for entry. Every year, starting in November, we begin exporting a significant number of packed Easter cakes or analogs of Italian Panettone. This year a lot of them were also sent abroad, but part of them returned. For example, at the beginning of quarantine, a car was sent back from Slovakia.
I think that this week will be indicative as we are concluding many new contracts. Moreover, if earlier in the export contracts the flour was mostly tared, now in almost all applications (Eastern and Western Europe) it is in 1-kilogram packages. Rush demand. At the moment, we have several orders for the supply of flour, which we will ship within a week. These are mainly orders for Slovakia, Germany, and the Middle East.
The same applies to a number of confectionery products: there is demand. I repeat that the world is now plunged into a state of hysteria and deep deficit. I think this situation will continue for a long time. When quarantine ends, neither masks nor sanitizers will cost as before quarantine. People remember events very well and this fear will last for a long time.
FAO fears a humanitarian catastrophe could occur in some of the world’s poorest countries. According to UN estimates, about 1,500 billion people may face food hunger. We understand that the UN and the FAO will not stand aside, but Ukraine is obliged to make its step, simplifying exports as much as possible, creating favorable conditions for exporters, for example, sorting out the VAT refund.
In this case, our technological backlog will turn out to be a plus, since there will be a demand for basic food products like cereals, flour, etc. Nevertheless, it is worth considering the development of technologies, because, after the demand for basic products, demand for high-tech long-term storage products will arise again.
I can say that requests for the supply of frozen bread have become more frequent. I find this direction promising, especially its development in export shipments. The quarantine will only reinforce this trend, I am sure of it. We have every reason to be a global bread exporter.
Immediately after quarantine, when the normal legislative process is restored, I would suggest holding some sort of agrarian confederation of associations, because it is necessary to tackle two laws. This is a law on trade, first of all, which will ensure the normal passage of sales and marketing of products from processing enterprises. Any manufacturer includes in the price risks that are passed on to the final consumer. Trading networks are built at the expense of trade deferment and, in fact, at the expense of buyers. Here we need to set priorities. Secondly, it is necessary to return to the law on food safety of food products. We all see that only some enterprises are implementing measures to ensure this same food safety, introducing HACCP standards. This should become the norm, the rule. In particular, you need to pay attention to the mandatory packaging of products. For example, packaging of bread that comes in contact with a large number of surfaces until it reaches the buyer. Warm bread will soon become a domain of bakeries, because “exotic” occupies only 20-30% of the market, while industrial producers – 70-80%. There should be one rule for everyone.
— How do you assess the company’s future work in a crisis? Do you have a specific plan for responding to various scenarios of the development of the situation with the coronavirus, for example, in case of prolongation of quarantine, the introduction of emergency, etc.?
— The basic risks are not a decrease in demand, but a hindrance to sales to retail chains. For example, the Chernivtsi Regional State Administration decided to close the region, including shops (from 1 pm on Saturday to Monday morning). I do not presume to evaluate this decision, but even our colleagues in the UAE do not close supermarkets. In connection with this decision, we were forced to stop production. As a result, 500 people stayed at home and did not receive their money. Such risks will continue to increase.
We negotiated with banks about the allocation of funds to create a “raw material bank”, which we are also building up now to prevent any force majeure. This is the main way to respond. There is also an increase in epidemiological activities. We will not reduce investments, yet we slowed down with making new deals. We have 4 contracts at its early start which will be implemented after the quarantine. We purchased 15 vehicles, and a contract for another 50 cars is under finalization. The product portfolio will be partially revised, again with an emphasis on packaged shelf foods. We do not regard the crisis as a time of opportunity, without it things would have been better.
HD-group is a national group of companies comprising grain processing enterprises, bread and pastry factories, a jam and preserves plant, as well as companies providing procurement and logistics services. It positions itself as an agrifood platform, acting as a service center with a set of outsourcing functions in the B2B market — from the production of goods (within the existing production areas) to the provision of procurement and logistics services.