Rural government

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Commercial offer on joint establishment of gardens, land registration for long-term use, and exporting walnuts

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Ukrainian company “SSK-engineering”, which areas of work include planting nut plantations in Ukraine, operates in the south of Ukraine (Zaporizhzhya and Kherson regions). For today, the company’s management department has decided to look out for U.S. partners who are interested in co-investing into planting walnut in order to further export the outputs to the world market.

An investor is to be invited to participate in this project from 1000 hectares (and a multiple of 1000 ha) on the following conditions:

Funding of 80% of the expenses, according to the schedule (six years), in which the investor’s share of ownership will be equal to 51% of the company’s assets and income, and the share of our co-financing will be 20% of the expenses with the ownership of assets and income equal to 49%.

The practical implementation of the project at all stages is provided by the Ukrainian side.

The total amount of investment for 6 years, including laying the gardens, harvesting and implementation of the first commercial harvest, is 5 989 000,00 euro’s per 1000 hectares.

During the 6th year, the planned yield is to be 3000 kg/ha.

3000 tons of in-shells on 1000 hectares of walnut plantation.
The minimum cost of the implementation of the nut without taking into account transport costs is 1,100 euros per 1 ton.

Gross income is 1,100 EUR/1t – 3000 t = 3 300 000,00 euro/year.

The payback period is 3 years from the date of beginning of commercial fruiting.
The plantations are laid from certified selected varieties.
The process of laying the gardens, growing and harvesting, takes place under supervision of certified companies, vendor of selected seedlings, with a guarantee of a high quality of seedlings themselves. The very activity of growing walnut orchards are not certified.
Currently “SSK-engineering” has issued a long-term use of 635 ha of land for 100 years; 152 ha have already been planted with walnuts in 2018. The company is ready to increase its land bank to 200 hectares per year, followed by planting walnut orchards there.

When the gardens are planted, we issue garden passports, and when the crop is harvested it is to be certified in accordance with the requirements of the importing country.

When growing products we apply bio-fertilizers only.

The finished products are to be delivered in two forms: in-shell walnuts packed in 25 kg bags on pallets and wrapped with stretch plastic wrap, and refined walnut kernel packed in vacuum plastic packaging in cardboard boxes placed on pallets. The minimum batch supply is a twelve feet container.

Cashflow table on 1000 hectares of land – the total amount of investment

5 989 000,00 €

Position year 1 year 2 year 3 year 4 year 5
Investments -3 400 000,00€ 0,00€ 0,00€ 0,00€ 0,00€
Variable costs -257 800,00€ -257 800,00€ -257 800,00€ -257 800,00€ -257 800,00€
Fixed Costs -100 000,00€ -100 000,00€ -100 000,00€ -100 000,00€ -100 000,00€
Feed-in/Export Tariff 0,00€ 0,00€ 0,00€ 0,00€ 0,00€
Annual Cash Flow 3 757 800,00 -357 800,00 -357 800,00 -357 800,00 -357 800,00
Accrued Cash Flow (Cash Balance) -3 757 800,00€ -4 115 600,00€ -4 473 400,00€ -4 831 200,00€ -5 189 000,00€
Position year 6 year 7 year 8 year 9 year 10
Investments 0,00€ 0,00€ 0,00€ 0,00€ 0,00€
Variable costs -700 000,00€ -700 000,00€ -700 000,00€ -700 000,00€ -800 000,00€
Fixed Costs -100 000,00€ -100 000,00€ -100 000,00€ -100 000,00€ -100 000,00€
Feed-in/Export Tariff 3 300 000,00€ 4 400 000,00€ 5 500 000,00€ 6 600 000,00€ 7 700 000,00€
Annual Cash Flow 2 500 000,00 3 600 000,00 4 700 000,00 5 800 000,00 6 800 000,00
Accrued Cash Flow (Cash Balance) -2 689 000,00€   911 000,00€ 5 611 000,00€ 11 411 000,00€ 18 211 000,00€
Position year 11 year 12 year 13 year 14 year 15
Investments 0,00€ 0,00€ 0,00€ 0,00€ 0,00€
Variable costs -800 000,00€ -800 000,00€ -850 000,00€ -850 000,00€ -900 000,00€
Fixed Costs -100 000,00€ -100 000,00€ -100 000,00€ -100 000,00€ -100 000,00€
Feed-in/Export Tariff 8 800 000,00€ 9 350 000,00€ 9 900 000,00€ 10 450 000,00€ 11 000 000,00€
Annual Cash Flow 7 900 000,00 8 450 000,00 8 950 000,00 9 500 000,00 10 000 000,00
Accrued Cash Flow (Cash Balance) 26 111 000,00€ 34 561 000,00€ 43 511 000,00€ 53 011 000,00€ 63 011 000,00€

Investments

Name Unit Amount Unit price Total
1. Finding, purchasing, notarization of the long-term (50 to 100 years) land use (lease and emphyteusis) ha 1000 1500 € 1 500 000 €
2. Planting material and planting pcs 100 000 14 € 1 400 000 €
3. *Expenses for technical and material support pcs 75              – 500 000 €
Total 3 400 000

* List of equipment for the 1000 ha plantation maintenance

Garden tractor – 15 units
Cutter – 15 units
Mulcher – 10 units
Cultivator – 10 units
Irrigation sprinkler – 10 units
Barrel for water – 10 units
Tractor trailer – 5 units.

Variable costs

Name Unit Amount Unit price Total
1. Taking care of a garden 1-5 years

Trimming

ha 1000 31 € 31 000 €
2. Irrigation or water charge ha 1000 65 €  65 000 €
3. Tying trees ha 1000 43 € 43 000 €
4. Weeding ha 1000 42 € 42 000 €
5. Spraying trees ha 1000 76,8 € 76 800 €
Total 257 800
6. From 6 year

Taking care of garden – the cost increase due to the growth of a tree and increased expenses for its care

ha 1000 350 000 €
7. Harvesting t 1 9 €
8. Processing of walnut

– cleaning walnut

– drying walnut

– calibration

– packaging

– transportation

t

t

t

t

t

1

1

1

1

1

5 €

5 €

5 €

8 €

22 €

Total 54

Fixed costs

Name Unit Amount Unit price Total
1. Taxes on land ha 1000 15 €           15 000 €
2. Security of garden ha 1000 50 €  50 000 €
3. Management costs ha 1000 15 € 15 000 €
4. Amortization of equipment ha 1000 17 € 17 000 €
5. Rent for office rooms, communal payments ha 1000 3 € 3 000 €
Total 100 000

Annual indexes of walnut’s harvest – 1000 ha

6 year 7 year 8 year 9 year 10 year 11 year 12 year 13 year 14 year 15 year
3000 t 4000 t 5000 t 6000 t 7000 t 8000 t 8500 t 9000 t 9500 t 10 000 t

Description of businesses and its industries

Ukrainian company “SSK-engineering”, which areas of work include planting nut plantations in Ukraine, operates in the south of Ukraine (Zaporizhzhya and Kherson regions). Currently, the company has decided to search for new partners for joint investment projects regarding the plantation of walnuts for export.

Why work with “SSK-engineering”:

  • The company has solid reputation and expertise.
  • There is a number of projects that have been implemented with the participation of international organizations such as USAID, UNDP and the International Renaissance Foundation (Soros Foundation).
  • We are currently running negotiations about the cooperation with the EBRD and GIZ. “SSK-engineering” is also a partner of several Ukrainian ministries: the Ministry of Economic Development and Trade of Ukraine, and Ministry of Regional Development, Housing and Communal Services of Ukraine;
  • When being engaged into joint venture activities, an independent financial audit is mandatory to be conducted;
  • Despite the fact that activities such as planting walnuts for export is a relatively new sphere of our company’s work, we increase our land bank and the area of perennial plantations on an annual basis;
  • Our team consists of people of 35-45 years old, who have been working hard without taking advantage of bank loans (the average interest rate in Ukraine is 25-30% annually in local currency), regardless the inflation ($1=1.8 UAH in 2001, but it drastically fell down in price in 15 years to the level of 27 UAH for $1) and high-level corruption. The team has managed to go through it all while keeping on developing and not losing its reputation.

Product description

  1. Growing walnuts;
  2. Using walnuts in food industry, medicine and cosmetology. The wood is used in furniture industry and for the production of biofuels;
  3. There are a lot of nutrients in walnut kernel: proteins, amino acids, vitamins and trace elements; walnut shell is used as a polishing material. Moreover, the crushed shells is an excellent thermal insulation material. Ukrainian walnut (wood) is a good ornamental material. It is used for making furniture, flooring, decorative murals, decoration of musical instruments, weapons, etc. Textile dyes for coloring fabrics (yellow and brown shades) are made from walnut juice. Walnut leaves have wound-healing properties, which is why they have been used many centuries ago. In addition, the leaves contain a whole range of useful vitamins for the human body. Many nutritious oils are made from the seeds of walnuts. Planted varieties are trademarked, competitive for export, and they meet all international requirements when it comes to their characteristics.
  4. The plantations are laid from certified selected varieties.
  5. The process of laying the gardens, growing and harvesting takes place under supervision of certified companies, vendor of selected seedlings, with a guarantee of a high quality of seedlings themselves. The very activity of growing walnut orchards are not certified.
  6. The company is ready to increase its land bank to 2,000 hectares per year, followed by planting walnut there.
  7. Certificate of quality for the products. When the gardens are planted, we issue garden passports, and when the crop is harvested it is to be certified in accordance with the requirements of the importing country.
  8. Safety and environmental friendliness. When growing products we apply bio-fertilizers only.
  9. The finished products are to be delivered in two forms: in-shell walnuts packed in 25 kg bags on pallets and wrapped with stretch plastic wrap, and refined walnut kernel packed in vacuum plastic packaging in cardboard boxes placed on pallets. The minimum batch supply is a twelve feet container.

Requirements that a consumer sets for products of this type, and your ability to meet those

Our company has the ability to form walnut batches for export to meet the standards of the European Union UNECE DDP-02, for the marketing and commercial quality control of walnut kernels:

І) In all classes, subject to the special provisions for each class and the tolerances allowed, walnut kernels must be:

  • sufficiently dry to ensure keeping quality;
  • sound; produce affected by rotting or deterioration such as to make it unfit for consumption is excluded;
  • firm;
  • sufficiently developed; shrivelled kernels are to be excluded;
  • clean, practically free from any visible foreign matter and from shell;
  • free from insects or mites whatever their stage of development;
  • free from damage caused by pests ;
  • free of any rancidity or oily appearance;
  • free from mould;
  • free of abnormal external moisture;
  • free of foreign smell and/or taste.

The condition of the walnut kernels must be such as to enable them:

  • to withstand transport and handling, and
  • to arrive in satisfactory condition at the place of destination.

ІІ) Moisture content

The walnut kernels shall have a moisture content of not greater than 5 per cent.

Tolerances in respect of quality, colour and type shall be allowed in each package for produce not satisfying the requirements of the class indicated.

Defects allowed Tolerances allowed (per cent by weight of kernels)
Extra Class I Class II
(1) Kernels not satisfying the minimum requirements, which include not more than: 4 6 8
Rotten kernels 0,5 b b
Mouldy kernels 0,5 b b
Shell fragments or foreign matter 0,1 0,1 0,1
(2) Kernels darker in colour 8 9 10
(3) Scuffing (halves only) 10 10
  1. a) The definitions of defects are listed in Annex II, UNECE DDP-02.
  2. b) Reservation of Poland in favour of a tolerance not exceeding 0.5 per cent

Market research, description of the market and its prospects

Walnut production in Ukraine has been relatively high over the past few years, and it seems the tendency will stay this way in the future. The areas for commercial cultivation of walnut have drastically increased since 2009. Ukraine exports nuts without shells primarily. From September 2015 up to may 2016 no-shell walnuts export was 24,8 tons, which is 18% more than the same period of a previous year. 16,9 thousand tons were exported to the countries of middle east; 5,7 thousand tons were exported to EU. Same as the previous year, those regions have remained the status of the main importing countries for Ukraine. Main markets for Ukrainian walnuts are located in the Middle East: Iran – 6.2 thousand tons, Iraq – 5.0 thousand tons and Turkey – 1.5 thousand tons. France is the biggest importer of Ukrainian walnuts in EU, it has imported 1.3 thousand tons. More than 50% of all products are exported to Europe and the Middle East. In addition, in 2015 the export to China, Hong Kong and Vietnam has significantly increased. In the domestic market, nuts are traditionally used in diet products and desserts, as well as consumed raw. The demand for walnuts is stable from both population and confectionery manufacturers.

Walnut orchards were widespread throughout the territory of Ukraine from the Soviet era; they were grown in state and collective farms. Some of the gardens are still being used in production, but have a very low productivity. Currently, more than 85% of nuts are produced by private sector. Since 2009, walnut orchards have began to be used for commercial purposes. Plantations’ sizes vary widely, from 0.5 to 100 hectares. In central and southern regions there are always good yields, but they require artificial irrigation; while in the northern parts there is a sufficient amount of water, but the yields are small due to the colder climate. Ukrainian farmers grow local varieties of walnuts, which are unable to meet the growing demand. Most Ukrainian producers do not treat their trees against pests and diseases.

Basically, the production of walnuts in Ukraine is still being “old-fashioned”, the crop is harvested by hand or using a primitive devices, those that were used hundred years ago. The average annual growth rates of some nuts stood at 8%. The pace of growth in the value of crushed walnut also shows a steady growth of 10%. In 2015, the price reached $9,160 US per ton (in 2005 the price was no more than $4,000 US).

Prospects for exports of walnuts:

  • High and rising world price of walnut, which makes it attractive for investment.
  • Ukraine increases the rate of production of agricultural products and displays it on the world market of goods;
  • Annual product shortage in Europe is 100 thousand tons;
  • Taste quality of our product (Ukrainian walnut) is superior to all existing ones, except the U.S. one (California);
  • To create a more competitive product (in walnut export sector in particular) there will be process improvement measures implemented at all its stages;
  • the allocation of production facilities for growing, harvesting and processing of walnuts;
  • automation of production;
  • solving the transport component of the process;
  • monitoring the quality of exported products.

Our product:

  1. Walnut calibrated and packed for sale on the European market;
  2. Walnut kernel, calibrated on the quality, vacuum-packed or in craft boxes exported to the world market;
  3. Walnut oil for food, fragrance, and pharmaceutical industries.

Business is exposed to the following risk factors:

  1. Climatic conditions (global climate change) – contingent risks;
  2. The human factor (vandalism, theft);
  3. Natural pests: nut mole (Gracillaria rosciopenella), walnut moth (Сydia pomonella);
  4. With an annual mandatory payment of tranches to the insurance company securing the business from the effects of force majeure, natural and anthropogenic factors all the risks are to be neutralized;
  5. There is a possibility of price fluctuations of walnut on the world markets. However, the estimated cost of 1 kg of unshelled nuts in this document is taken as 1.1 EUR per kg, which is already the minimum price for the last 5 years.

Analysis and description of competitors

There is no data in official statistics about the exact size of the total area of ​​orchards involved in the production of walnuts, but in the past three years the area of orchards has increased at an average rate of 1,000 ha per year, reaching in 2017 as many as 9000 hectares. New orchards will begin to bear fruit in 5-7 years. They are characterized by low productivity, which will gradually increase, reaching its peak in 15-20 years after planting. Along with the expansion of the production area, since 2009 there is a gradual replacement of less productive varieties of trees in old orchards with more modern varieties. It is expected that upon completion of this process, the production of walnut in Ukraine will increase dramatically.

Walnut is characterized by stable demand, both on the domestic and foreign markets. Prices behave predictably, they fall to the bottom planks during fall, when there are new crops coming to the market; during winter they gradually grow up, reaching a peak in spring, when the product stock supply ends. At the national level there is no consolidated information about the prices in the industry as a whole.

Walnut is mainly exported by private companies. An industry group “Ukrainian Nut Association” not only helps farmers in all stages of the production cycle of cultivation of nuts, but also works closely with the exporters, in particular at the stage of targeting global markets. The main exports are tend to be run from October to May. In May, a new crop of walnut begins to flow from the southern hemisphere, which, as a rule, strongly affects the Ukrainian product demand, which is particularly evident from European countries’ turn.

During the season of  2016/2017, exports have increased by 15% due to the expansion of production areas, as well as the success of the state in development of international trade programs.

Stocks of walnut in the country is very difficult to assess. Basically, they are stored at the private producers, and if the product is not exported, it leaves no trace of its movements.

Now the development and export is blocked by the fact that the bulk of nut plantations is concentrated in the private lands and forest belts. It does not give an opportunity to generate sales batch abroad, and  to work steadily in general.

Unlike most disparate competitors, our company through appropriate mechanisms for increasing the land bank and the area of orchards has the ability to independently form the batches of the amount that will meet interests and will benefit the potential buyer.

Production plan

The area designed for the orchards varies from 1000 to 4000 hectares. The company’s land bank is to be increased by the following ways:

  • Obtaining land for use for at least one hundred years;
  • Long-term lease of land from the State (strengthening the gullies and preventing soil erosion (hazelnuts, walnuts)) for 40 years and more with a condition of priority foreclosure or automatic prolongation of the lease;
  • Purchasing the farms that own land.

Distance from Melitopol to ports:

Berdyansk – 110 km;

Ilyichevsk (the largest container port of Ukraine) – 450 km.

Delivery from Melitopol (Ukraine) to any country in Europe is possible by roads.. Ukraine has a direct border with the EU, and a signed Agreement on free trade zone.

The company employs highly qualified staff with high agricultural education. In Melitopol there are Tauride University of Agricultural Technology, as well as specialized Agricultural College and Research Institute of Irrigated Horticulture; there is a signed cooperation agreement with all of them.

In 2018 we are planning to create a special unit for walnut and hazelnut production, and also to lay our own royal nursery. This is why the staff of the enterprise will increase with scientists from Research Institute of Irrigated Horticulture, and we will establish relations with the sites in Kiev and Chisinau (Moldova).

The company is increasing its land bank to 2000 ha per a year and is provided with all the necessary facilities: offices, warehouses, repair and operational base premises for laboratories and research staff, production area and accommodation for peeling and processing.

Investment proposal

An investor is to be invited to participate in this project from 1000 hectares (and a multiple of 1000 ha) on the following conditions:

Funding of 80% of the expenses, according to the schedule (six years), in which the investor’s share of ownership will be equal to 51% of the company’s assets and income, and the share of our co-financing will be 20% of the expenses with the ownership of assets and income equal to 49%.

The practical implementation of the project at all stages is provided by the Ukrainian side.

Form of ownership: joint venture with the distribution of shares of 51% / 49%.

All assets will be owned by the undertaking, including land ownership, emphyteusis contract, lease, machinery, equipment, intellectual property, the development of breeding and so on.

There is a possibility of the opening of a joint venture on the above conditions on the territory of the country of the investor, which, in its turn, will open a branch and a representative office in Ukraine.


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