Update on Economic Conditions at the Plants
Evaluation Part 4 (Return to Part 3)

1^st Sugar Plant Named after Petrovskiy. Last year the company worked only 40 days but it needs to work 100 days to be profitable. In 1995 the company produced 32,000 tons but in 1998 produced only 14,000.

The company helped the farmers by supplying two harvesting machines. However, the farmers produced less beet due to the hot and dry weather, a lack of fertilizers, and a desire to grow grain rather than sugar beet.

Due to the poor harvest, a neighboring sugar company did not work at all in 1998. Ukraine has too many sugar plants and these need to be rationalized. Nevertheless, all the sugar companies are preparing for 1999 when they hope the harvest will improve.

The company is located in a small town and is the only employer for the local population. It also produces molasses, whiting for white washes, and operates a small bakery and sunflower seed processing unit.

Barvenkovskiy Food Plant. The company has not installed new technology but there were many small things they liked. Production is down due to the economic crisis and the firm must reduce employment by 40%.

The company has a bakery which produces 2,000 items/day. A separate operation is a sunflower seed processing facility that is quite old. Macaroni is produced on two slow machines in another facility. There is a bottling line for fruit juices which was idle when we visited in January. The company bottled some water from a local well. Although there is a good profit margin in bottled water, the firm is having trouble finding cash to purchase empty 2 liter plastic bottles. They expect to restart this operation in April and market the product in Kharkiv.

Two weeks after they returned from the study tour, they held a press conference and seminar for about 30 people in the area, including local Rayon officials. They showed their video and other materials collected.

A lack of cash and methods of financing is a major problem for the company. Interest rates are 80% per year. As a result, they are looking for investors. Although CEI is not in a position to find investors, it offered to review an English language version of their business plan.

Fasma. Mr. Gonskiy still cannot believe how useful and valuable the study tour was. It opened his eyes to many new possibilities and a new understanding of the workings of a market economy. What they saw in the US proved that he was correct in pushing for volume production.

Interfruit. Interfruit was not interviewed because they are in a difficult financial position as a result of the financial crisis in Russia. Alina Zhylina is no longer with the company.

Kolos Farm. Due to pressing business problems, Oleksandr Strogiy, Owner, had to return to Ukraine early and participated in only one week of the study tour. However, there were some things of interest to him although the technology was generally the same.

Kolos Farm is now renting land from the peasants and will soon be farming 3,500 hectares (8,648 acres). He felt that the farmers were probably not producing enough, but the main problem was inefficient processing plants.

As with most companies, they feel they must not specialize on order to spread their risk. The company grows grain and has one bakery. They are now looking for a small mill to grind grain. This will have a two-year payback. They grow sunflower and want to install a small oil processing plant. They have a large number of hogs and are considering a meat processing operation.

Taxes are a major concern and there are 25 different taxes to pay. Since the tax burden is so great, the government has decided not to collect VAT for five years. This will allow the farmers to accumulate cash for expansion. There is also a two-year land tax holiday. Last year the company paid 78,000 Hr ($22,000) in VAT.

Kolos Farm operates six small retail stores and one cafe. They employ 120.

The bakery employs 16 plus two drivers. They operate 3 shifts/day and make 1,500-2,000 loaves/day in Turkish ovens. They sell to small shops in the area and can adjust to the needs of the local customers.

We toured the farm area where equipment was being repaired. Spare parts can easily be obtained in five days if you have cash. In one of the farm buildings we were surprised to find a very large, new, bright red Massey Ferguson tractor and combine. There was also similar equipment from Germany. This apparently had been obtained from a large government program to help the farmers and Kolos Farm was the only private farm to participate.

Kongressovskiy Sugar Plant. This plant is located northwest of Kharkiv near the Russian border. We talked with the plant director and he was very pleased with the study tour program. The plant shares the factory with the local collective farm with whom they work closely and they are the only employers in the village. There is a Russian sugar plant nearby with which they have a good working relationship.

The harvest last year was very poor due to the drought and a lack of fertilizers. Despite the fact that they had orders for 4-5 months of production, the plant operated just 28 days. As a result, it operated at a loss of 351,000 Hr ($99,000) and produced only 4,533 tons of sugar. In 1998, the Ukrainian sugar industry operated at 1995 levels.

The plant processes sugar for farmers in the area. It does not pay cash for the sugar beet, but returns 60% of the sugar to the farmers and keeps 40%. Therefore, the plant ends up competing with the farmers.

The plant operates at a high processing level and is retrieving 83% of the potentially available sugar in the beets. When the plant is not in the working season, they employ 30-40. In February, the plant closes except for security and management.

Serguei Pogribnyak returned to Ukraine with many new ideas, and presented the ideas to the local management. However, due to the economic crisis, the company has little cash for expansion.

Nadiya Agricultural Farm. The company is a large processor of fruits, vegetables and fruit juices. A variety of these were sampled in the laboratory. These included berries of various kinds and juices, including pumpkin. The tastes were generally unfamiliar to an American pallet. In addition, the company has a large vodka production operation.

The company is interested in marketing its products to the US. It realizes that it will have to change the packaging from pry top lids to screw top lids and this it is planning to do. CEI felt that taste tests of the products should be conducted before more marketing activities were carried out. Four samples were brought back to the US for sampling.

The company is interested in grain mills and in the production of hard cheese. There is as much as 50 tons of milk per day available in the area. There is also a largely untapped market for diet foods, including drinks. The firm wants to go into food for children aged 3-15 and asked CEI to help find technologies, videos, and trends. There is also a market for rice with meat and rice with fish. They plan to add new lines for soft drinks and bottled water. CEI was asked if there is a line analogous to Tetrapak. If there is, there is interest in a line for mixed products such as milk, juices, etc. They need to process 3,800 tons/hour.

After meeting with the company, we met with the local Rayon officials where there were many questions about the study tour program. They felt the only products that were profitable in the area were grain, sunflower seeds and bottled water.

Novoivanovskiy Sugar Plant. The plant has had a difficult year and new directors will be in place in March. They want to extend the working year by 4-5 months. Therefore more value added products will be added.

Pervkhinskiy Sugar Plant. Upon his return to Ukraine, Mr. Rud had trouble adjusting. He had too many new ideas and things to do. In fact, he had difficulties with his management over this point. One of the benefits of the U.S. tour was that Mr. Rud came to realize that U.S. managers were allowed to make decisions for themselves.

The economic crisis in Russia has also affected Ukraine. The energy prices are much higher, but unfortunately the price of sugar has held constant - squeezing profits. For example, they have had to barter sugar for electricity. Last year they worked 33 days and produced 67 tons of sugar. This is one third of their past production levels. The breakeven point for the plant is 62-63 days.

Rosinka. CEI offered to provide Rosinka with a U.S. contact at Tyson Foods.

Savinskiy Sugar Plant. We visited the facilities and were shown three sugar processing machines, the laboratory, and sections of the processing plant. The operation of the plant, including the receipt and shipment of products by rail, was explained in detail.

Viktor Loza remarked that he liked the American financial systems and the Ohio State Fair.

Taifun. The Directors were very impressed with America in general and specifically with the fast food business where they made particular note of Denny's. Although they looked in the US for a better way to produce thin pancakes, they were not able to find one. In fact, CEI believes there may be a market for Ukrainian pancakes in the US. Taifun felt that new technology was difficult to transfer since the business environment is so different.

Zmievskoy Milk Plant. The supply of raw materials is very low. Farmers' yields get lower and lower every year. Milk is bought for cash but most plants don't have the cash to buy. The collective farms have large debts and only the private companies have cash for purchases.

1st Kharkiv Milk Plant. 1^st Kharkiv Milk has run into some very difficult problems since Victoriya returned to Ukraine. Due to the economic crisis, the plant is now working just 1-2 days per week. The problem is a lack of raw milk since there are fewer cows and the company is short of cash. The plant has a capacity of 300 tons per day and it is receiving only 5 tons per day. As a result, production is only scheduled for one day per week. Most dairies have specific districts committed to them for raw milk, but 1^st Kharkiv Milk does not have such a commitment and must therefore compete every week for its supplies.

The second, and equally as troublesome problem is a lack of working capital. With reduced production it is difficult to determine when there will be sufficient working capital to purchase additional supplies.

Barvenkovskiy Milk Plant. The dairy is temporarily closed for remodeling. The Director has been able to pay down part of the company debts and is trying to survive. Their milk is being processed by another dairy.

Upon his return from the study tour the Director consolidated his notes and plans to put the ideas into operation as soon as the plant is operational.

The Plant has decided to go into the production of sunflower oil and has built a small processing plant. Next season they will be in competition with their neighbor, Barvenkovskiy Food Plant. In order to obtain seeds, they plan to rent land on which to grow sunflower.

Borovskoy Milk Plant. Borovskoy is a small dairy located in a somewhat remote area of the Oblast. There is a large, more modern plant nearby which is completely idle.

Of all the companies visited, Borovskoy probably has the most aggressive plans to expand their local markets. They seem to have a more entrepreneurial spirit towards expansion using techniques learned on the tour. Strategy planning for such a roll-out has already begun assuming the economy will begin to recover before the end of the year. Time will tell if that prediction will hold up.

Chuguev Milk Plant. Upon his return to Ukraine, Mr. Dokuchayev found that the company had new ownership and that all Directors were replaced. The new Directors were not interested in learning the information that had been obtained by Mr. Dokuchayev.

Kharkiv Edible Oil Plant. The visit began with a meeting with Alexander Vasilenko, Chairman of the Board for Kharkiv Edible Oils. Mr. Vasilenko was very supportive of applying US techniques in management and marketing at Kharkiv Edible Oils. Tetyana was promoted to Chief Technologist upon her return from the United States.

Mr. Vasilenko summarized the desires of Kharkiv Edible Oils to find a joint venture partner with a company in the United States. He is interested in discussing any form of investment with an American company including: franchising, distribution, or private label packaging. While Mr. Vasilenko was interested in promoting Kharkiv Oil mayonnaise, it was explained that the short shelf life (Ukraine does not use preservatives) would be a detriment in trying to develop an American market for their products. A better fit might be Kharkiv Oil's dessert margarines which could easily command a premium in US health conscious gourmet markets.

Kharkiv Meat Processing Plant. This plant was forced into bankruptcy shortly after Olena returned from the United States. She was unable to make any suggestions to improve operations based on what she observed in the U.S. meat processing plants. She is hopeful that new investors will be found and that the plant will reopen.

According to Ms. Oliynyk, the company finances were insufficient and borrowed funds were not used wisely. There are more than 500 meat cooperatives in Kharkiv so raw material was not a factor in the bankruptcy proceedings.

Kharkiv Milk Plant. Kharkiv Milk needs time and financing. As a result of the economy they have lost production and specialists. Since returning to Kharkiv, Mr. Bazyura reports that Kharkiv Milk has laid-off 150 employees and now has 350 to 370.

Komarovka Milk Processing Plant. Komarovka currently has 88 employees. The dairy receives 10-17 tons or raw milk per day. Depending upon the daily delivery, anywhere from five to fifteen employees are used to complete the days processing. Production for the soft drinks and meat plant are separate from the dairy.

In addition to the dairy, Komarovka has 4 retail stores, 1 café, and 2 kiosks to sell its products.

Mr. Sergiyenko observed that manufacturing personnel work 2-3 times harder in U.S. than in Ukraine. During the time spent in the U.S. some companies went bankrupt. Many other companies are on the verge of bankruptcy. Dairies should work quickly to fill the void so they can ensure supplies.

Krasnogradski Butter & Cheese Plant. Krasnogradski has been limited by the same problems which impact the rest of the Oblast - namely a lack of raw materials and a very soft economy. The plant currently receives 4 tons of raw material per day or roughly 1/10th of what is needed to meet the demand for its products. As a result most of the plant remains idle. They have 100 employees.

Kupiansk Meat Plant. The Kupiansk Meat Processing Plant was closed when Vitaliy Kozyryev returned from the study tour and therefore there is no report for this company.

Kupiansk Milk Plant. When Mrs. Medvedyeva returned to Ukraine, Kupiansk had a lot of debt that it owed its collective farm. These debts were paid off allowing Kupiansk to buy raw materials from non-collective farms. The quality of the milk supply has improved, and Kupiansk has initiated market-based pricing (similar to that used in the US) to ensure a continuous supply.

Kupiansk receives 30 tons of raw milk per day which is roughly of their minimum needs. As a result, the milk is stored until they have sufficient quantity to begin production - usually every other day.

Late in 1997, Kupiansk purchased Swedish equipment for packaging long shelf-life milk (Tetra Pack). The loan for that equipment must be repaid in 1999. Repayment will mean delaying some of the MTM Study Tour benefits until 2000 - such as the introduction of a full line of yogurt.

Rogan Meat Processing Plant. Rogan is currently working with the Baron's Group on the USAID-funded program for Enterprise Restructuring in Ukraine. Marketing, which will be included in the restructure - it is one of their major weaknesses.

Rogan's main competitors are located in the Sumy and Poltava Oblasts. Their pricing is similar and Rogan can compete if they establish a brand name.

Accounts Receivable is a problem. Nonpayment has increased steadily in the 2^nd half or 1998 as the economy has gotten worse. Rogan needs the cash to buy raw materials and pay its expenses.

About 30% of the company's sausage is now smoked. They are able to make 5 tons of hot dogs per day, but currently produce only one ton. They purchase additives and flavorings from a Czech firm.

Rogan is trying to decide how to compete with the 140 small unauthorized meat producers in the Kharkiv area. These firms do not pay taxes and keep prices low. Recently the Oblast agreed that stricter standards should be enforced on these illegal firms.

Demand for meat products is declining, probably due to the economic situation. Raw materials continue to be a problem since the poor farmers have slaughtered much of their cattle. The illegal firms are able to pay cash of the raw materials and thus there is less for the legal firms.

Solbozhanski Agricultural Farm. Solbozhanski has made few improvements since returning to Ukraine. The MTM Tour was unable to schedule a tour of an American farm.

The economy is much worse now than when Mr. Tovstopyat left for America. With less cash available to purchase hogs and the number of meat processing company failures, Solbozhanski has had to look in other oblasts for potential customers. Some piglets are being sold to Russia in an effort to expand business. Since Solbozhanski is close to the Russian border, Russian buyers send trucks to the farm twice per month to pick up piglets.

The farm was started in 1929. It opened its main office building in 1932. The village, consisting mostly of farm workers, began in 1973. A large celebration is scheduled this summer to commemorate the 70th anniversary of Solbozhanski Agricultural Farm. At present, the farm has 8,000 hogs at the breeder farm (headquarters location) and more than 100,000 hogs at the main farm. Each hog is kept in an individual stall. Watering, feeding, and cleaning of the hogs is automated (some methods and equipment are outdated but still in very good working condition).

Sanitation at both farm locations is excellent. Employees are required to shower and dress in clean sanitized clothing each day. The farm provides the shower, dressing rooms, and clean uniforms and shoes. The stalls are hosed down automatically throughout the day to wash away excrement and other material which may infect the hogs - a sanitizer used to be applied in the water but was discontinued several years ago to reduce costs. Walkways between and within buildings are cleaned three times a day.

Solbozhanski has three types of hogs, Large White, Landros, and Urock. Each produces different yields, and is sold into a different market.

From infancy, the hogs are fed for approximately 200 days or until they reach 112 kg (246 lbs.). To feed all the hogs at Solbozhanski Farm some 150 tons of feed is used per day. An adjoining feed processing plant, owned by another cooperative, supplies the feed. During the off-season, feed arrives by rail and is transported to Solbozhanski by means of elevators and conveyor belts.

Solbozhanski operates a small meat processing plant near the main farm. It produces canned meat, smoked meat, smoked piglets, and its own sausage. Prior to October 1998, nine people worked in the plant.

Ukrainian Edible Oil Institute. The Institute is State funded but is expected to earn most of their operating budget themselves by charging their members for services. It has 120 employees serving 25 member companies. The smallest member has the capability of processing 200 tons per day and the largest can process 1,200 tons daily. The 1999 operating budget of the Kharkiv facility is approximately $300,000. The member companies look to the Institute to develop business plans, feasibility studies, research and other forms of support to keep them competitive with European and Russian producers.

Ukrainian Edible Oil Institute is currently working on restructuring Ukrainian edible oil plant refining processes to meet European standards.

The Institute is currently seeking funding ($25-60 million) to build a new sunflower seed processing plant in Kharkiv. Cargill, a US company is building a new plant in Donetsk capable of producing 300,000 tons of sunflower oil annually. Last year, the Institute helped design a new plant also capable of producing 300,000 tons of oil per year for a partnership between Olena and Citreon (European funding). The proposed Kharkiv plant would employ state-of-the-art technology and be capable of producing 1,000,000 tons of finished product annually, similar to what Tetyana saw when she visited ADM.

A discussion of the current economic situation and the potential for a satisfactory return to investors left little hope that funding could be found. According to the estimates of the capacity of the new and proposed Kharkiv plant, the three plants combined could consume all of Ukraine's current supply of sunflower seeds and sixty-five percent of all potential supply. That would leave the 25 member companies of the Institute without sufficient quantities of raw materials and force them into seeking alternative seeds for processing such as soy.

Velikoburluskii Cheese Plant. Velikoburluskii produces whole milk, lactose, cheese, butter, kefir and sour cream. The company had 322 employees at its peak of production. It now employs only 70-80 depending on the availability of raw materials.

Upon returning to Kharkiv, Mr. Kovalyov concluded an agreement with a Belgian company to supply powdered fat-free cheese to the Belgian processing plant. Velikoburluskii will take their product, process it into a powder, and deliver it to the Belgians who will then reprocess the powder into finished goods from their own plant. The contract is for $260,000 and the Belgians provide the equipment required by Velikoburluskii to meet the agreed upon amounts. Because cash is so crucial in Ukraine, the Belgians prepaid 52,000 DM in operating capital. This allowed Velikoburluskii to acquire the supply of raw material to meet its commitment.

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