Liquidity crisis, cancellation of the special VAT treatment, and slow land reforms – it’s just a short list of basic challenges in the Ukrainian agribusiness. Yet Senior Vice President of AgroGeneration Sergiy Bulavin treats any problem as a seed of opportunity. In his exclusive interview to Latifundist.com he shared about things that helped the holding achieve its targets for 2016, about efficiency improvement through Lean Six Sigma, and about priorities set for the current year.
Latifundist.com: Sergiy Valentynovych, based on preliminary results of 2016 what was this year like for the company?
Sergiy Bulavin: It wasn’t bad, though it wasn’t easy either. There are a number of risks intrinsic to agricultural production, which have a negative impact on work. Yet we dealt with them quite successfully last year. So, the company managed to have positive results at the end of the year despite the decrease in market prices.
Thus, in 2016 we have fulfilled nearly all tasks that we planned. One of the biggest tasks was the strategizing project. Its implementation began at the end of 2015 and we followed it through almost the entire 2016. Within the scope of this project we have defined the mission of AgroGeneration, outlined and improved our strategy, as well as introduced the system of management by objectives (MBO). Moreover, we have worked out and introduced Key Performance Indicators (KPIs).
We did a lot of work, which resulted in creation of an effective staff management and motivation system covering management of the corporate center. In 2017 it will spread to our entities, so that we would have unified corporate values and culture throughout the company. This will allow us to take the next steps in the development of AgroGeneration.
Looking back at last year, one has to sadly admit that the business environment in the country has changed very little since the spring of 2014. Liquidity crisis is still the main problem. It’s very hard for a developing business with stable proceeds to get financing or loans from banks. Many agricultural holdings, including our company, have already learned how to operate in such a business environment and even view it as a positive factor. The negative thing about it is that for the time being there are no objective signs that the situation is about to change.
Latifundist.com: AgroGeneration is demonstrating sustainable development in such unfavorable conditions. What is the key to success?
Sergiy Bulavin: It’s operational efficiency. In other words, it’s about effective management of the company’s resources – human, financial, material resources etc. Agrarian business in Ukraine emerged from the communist heritage, from a grave past, when the notion of efficiency used to include anything but its true meaning and was an imprint of soviet mentality in both management and employees. Yet, this very fact offered the Ukrainian companies an opportunity to seek and try new ways to cut costs and improve operational efficiency.
Latifundist.com: Please tell us more about what you mean.
Sergiy Bulavin: Several years ago we made a decision to introduce Lean Six Sigma in our company. It is essentially about the resource-saving production, optimization of costs, enhancement of agricultural technologies, and improvement of quality. This methodology allows the tracking and elimination of ineffective processes. It is important to note that training in Lean Six Sigma helps the company’s employees optimize their activities and increase their productivity while cultivating teamwork. As a result, there develops a process of ongoing improvement at all levels.
In my opinion, Lean Six Sigma is the most acceptable methodology for Ukrainian agriculture. Yet, there are only a few companies in most countries that have applied this system in their agricultural production. Primarily, these are high-technology holdings producing seeds, high-yield hybrids etc.
Latifundist.com: Is Lean Six Sigma methodology difficult to apply?
Sergiy Bulavin: It leads to a change in the corporate culture. Resource-saving production must become a crucial value for all employees of the company. The effect will be evident after this methodology penetrates into all levels of the company – from top management to the rank and file – and becomes an integral part of the production process. That is why fast introduction is not possible, it takes time and costs. Moreover, it rather takes more willingness and persistence of the management, than financial resources.
We expect that Lean Six Sigma will be fully introduced in our company by the end of 2017, which will be its first practical implementation in the industrial agriculture of the post-soviet states. I am convinced that the application of this methodology will open new possibilities for AgroGeneration leading to competitive advantages.
The introduction of Lean Six Sigma will ensure continuous efficiency improvement throughout the production process. In the world this system has been widely applied long enough showing excellent results comparing to other programs. With the proactivity and managerial skills of our leaders we hope to achieve the best results.
Latifundist.com: While we are talking about effective agricultural production, nothing has been mentioned about such indicator as yield.
Sergiy Bulavin: Many people think that yield is the key indicator of a successful agribusiness. That is absolutely wrong. For agricultural companies yield is an interim indicator, which is not as important as financial results, like how much profit we made on a hectare of land. Thus, basic calculations will show us that high yield does not necessarily mean effective performance.
All over the world those who criticize industrial farming widely use the idea that it’s impossible without application of large amounts of chemicals, which penetrate into rivers from soil deteriorating the quality of water and causing a negative impact on health etc. But it’s only in case the target is to increase yield at any cost. In reality, this target has nothing in common with the effective and successful production. The economy determines optimum level of yield. It makes no sense to exceed it because any further investments won’t pay off. Focus on the increase of yield at any cost can’t be justified neither by profitability, nor in terms of land or environmental care.
Latifundist.com: What is AgroGeneration’s crop yield per hectare?
Sergiy Bulavin: AgroGeneration’s effective production management strategy is all about clustering. Such approach allows geographical assets diversification and weather risk mitigation. In the Eastern Cluster the company farms winter wheat, pulses, and sunflower, whereas in the Western Cluster it farms winter wheat, barley, rape, soybeans, and peas.
Good results are secured by the well-designed crop rotation and application of quality fertilizers, seeds, and plant protection agents.
Latifundist.com: How do you plan to achieve better yield?
Sergiy Bulavin: Differentiated fertilizer application is the next step to precision agriculture. This is a farming concept that examines the condition of soil and needs of individual zones of the field in order to apply different amounts of fertilizers depending on the fertility of the cultivated land. Thus, it leads to reasonable allocation and use of fertilizers, as well as to better yields. The distinguishing feature of this system is more balanced condition of plants, than in traditional farming, which has a positive effect on crop yields and furthermore on farm economy.
Latifundist.com: You have touched upon one of the challenging issues – treatment of land.
Sergiy Bulavin: This issue is so vital that it even found its way into the definition of our company’s mission, which is as follows: “Cultivating the future with caring attitude to land and people”.
To us land is a valuable natural resource, which we must treat with care and pass on to future generations. Believe me I’m not saying this just to make it sound good. In order to preserve natural fertility of our soil we monitor crop rotations, we employ state-of-the-art equipment on our fields, we invest in innovative technologies, we use the best seeds and the best fertilizers in optimal amount. We are doing this on an ongoing basis. In order to see that it’s true, the one has to go into our fields and look at the condition of crops we farm.
We care for land just as much as we care for people working and living on it. That is why we not only grow bread, but also pay taxes, fix roads, develop villages, repair and equip schools, kindergartens, and healthcare institutions. We create jobs and help young talents get higher education and become good specialists.
This is the way how AgroGeneration and other large companies work. By the way, this is what distinguishes industrial farming from individual farmers. Farmers have different aims and different possibilities.
Small-scale farmers are backed in those countries that are willing to bear huge expenses to support local communities. Unfortunately, our country doesn’t have many resources. So what stands behind the decision to focus on the development of small- and medium-scale farming? In my opinion, the problem with the people who make such decisions is not that they don’t have a systematic view on what is expedient and what is not, the problem lies in populism.
Latifundist.com: What are the expectations of large agribusiness from the government in this respect?
Sergiy Bulavin: Land is a crucial resource of the country and it has to be regulated by the government. But it must be done reasonably, responsibly, and based upon strategic goals. Until recently the government tried to regulate what crop and in what amount must be farmed. Every crop and type of soil had an assigned maximum percentage of area within the field structure. This percentage was calculated on the basis of last century scientific studies from 1950-60s, which, considering the development of agricultural technologies, are meaningless today.
Latifundist.com: Are there any intentions to increase the land bank of the company?
Sergiy Bulavin: Earlier in December 2015 AgroGeneration held a strategic planning session, where we defined the company’s mission, guiding principles, and strategic targets for 2020. One of the primary crucial goals was the increase of the land bank. At present the team of the company’s experts is working hard on this.
Latifundist.com: Another important thing. In your opinion, what was the effect of the special VAT treatment cancellation on agricultural producers?
Sergiy Bulavin: For 15 years there have been long discussions around taxation of Ukrainian agriculture. Sadly, the adopted decision is not an optimum strategic solution for Ukraine, especially against the background of a continuing liquidity crisis and troubles with the attraction of bank financing.
No doubt, cancellation of the special VAT treatment was a big loss for many agricultural companies. They have been deprived of the money that could have been invested in production development, social projects etc. But was it a right decision? Today owing to large agricultural holdings the sector of agriculture is No.1 export industry ensuring one third of the hard currency inflow in the country. Thus, it would make sense for the government to show interest in the development of agriculture.
Latifundist.com: Have such taxation changes influenced the performance of your agricultural holding?
Sergiy Bulavin: This decision led to the reduction of working capital and deterioration of the economy of agricultural companies. That’s very bad for the entire sector of agriculture. It is also a negative factor for the investors considering investments in Ukraine. It’s hard to understand why anyone would aggravate operation of a strategically important industry in the country. In 2016 AgroGeneration paid UAH 179.53 million taxes to the state budget. Steadfast taxation policy is crucial both for our company and for all agricultural producers in Ukraine. But now the companies have to rely on their own resources to compensate for the losses they incurred as a result of the amended taxation. Bank financing is still an issue for the sector of agriculture.
Latifundist.com: What are AgroGeneration’s priorities for 2017?
Sergiy Bulavin: One of them is already in the field – it’s our winter crops. We will also keep on elevating production efficiency. We are looking forward to seeing the real outcome of the Lean Six Sigma introduction. We have truly learned how to work in the realities of our country. As they say, every problem is the seed of opportunity. And it is important to timely identify and use those opportunities. For an agricultural company these opportunities may be new crops growing, new markets, new production and management technologies, optimization, or enhancement of business efficiency.
Latifundist.com: Thank you for an interesting conversation!
Valentyna Konovalova, Latifundist.com
The article was originally written in Russian and translated by AgroGeneration