The speculative rise in prices for railway transportation will reduce the income of Ukrainian farmers in 2021/22 MY, – Advisor to the Head of the Board of Ukrzaliznytsia
26.10.2021 - 11:00
Grain producers faced a choice: either to overpay UAH 200-300 (USD 7.59-11.38) for the transportation of a ton of grain, or to postpone the deadlines for fulfilling contracts.
The rapid rise in prices for the transportation of grain cargo by the Ukrzaliznytsia wagon fleet, which began in mid-October, provokes a trend of increasing agricultural producers’ costs for railway logistics. This trend will lead to a decrease in the marginality of grain production in 2021/22 MY and in the future threatens Ukrzaliznytsia to lose its share of the market for transportation of grain cargo.
This forecast was voiced by the expert of the logistics market, Advisor to the Head of the Board of Ukrzaliznytsia Yuriy Shchuklin. The expert notes that during October 21st-22nd, the cost of renting a car fleet of Ukrzaliznytsia has sharply increased by 2-3 times compared to the beginning of October. The rapid rise in prices was provoked by the rush of demand for wagons from the intermediary forwarders, with the beginning of the massive harvest of corn.
-Ukrzaliznytsia has 7 thousand grain carriers, which is about 1/4 of the market. But if private wagon fleets (19 thousand wagons) are already occupied by cargo owners and have planned transportation, then Ukrzaliznitsia does not have contracted goods and at the peak of the season enters the spot market, offering its wagons at auction to everyone. And when an army of intermediary forwarders was added to the willing agricultural producers, on October 21st-22nd the price of using these wagons instantly skyrocketed, 2-3 times. This growth will inevitably affect the pricing policy of the remaining three-quarters of the market, because other carriers on this wave are already beginning to revise their prices. And this corridor of prices reduces the marginality of grain production in Ukraine. Grain producers will be shocked by these prices and now they have a choice: either overpay 200-300 UAH for the transportation of a ton of grain, or postpone the deadlines for fulfilling contracts, – the expert explains.
According to Yuriy Shchuklin, uncoordinated actions of crop producers and traders, who strive to fulfill deliveries in one calendar month, led to the peak price increase. And also, the lack of mutual understanding and cooperation between manufacturers of cargoes and owners of wagons. The expert expressed concern that the volatility of the cost of transportation will lead to a reduction in the share of Ukrzaliznytsia in the transportation of grain cargo.
-Every year the situation repeats itself: in the fall the grain producers do not have enough wagons, in the spring – the carriers do not have enough cargo. Evenly distribution of transportation and smoothing the peaks could be earlier planning of transportation, which is not available, – says the expert. -Unfortunately, the rise in prices for wagons inflated by intermediaries will cause damage to agricultural producers and the state carrier Ukrzaliznytsia. Private wagon fleets will certainly take advantage of the new round of prices. They will see a profitable trend for themselves to seize most of the cargo base, and will do their best to push Ukrzaliznytsia exclusively into the spot market, which lasts only 2-3 months a year.
According to the Advisor to the Head of the Board of Ukrzaliznytsia, in order to maintain its share in the grain transportation market, the company needs to change the KPI and success markers for its management.
-Incorrectly set goals and markers of success for the management of Ukrzaliznytsia threaten the company with losses in the long term. Against the background of the peak growth in prices, the direction of grain transportation by Ukrzaliznytsia will show an increase in profitability for several months, and will give cause for praise. But we should not be thinking in terms of two-month returns, but long-term profits. And here Ukrzaliznytsia will suffer from this increase. Because its agricultural buyers will strive to reduce the risks of pressure from an unjustified increase in the carriage component of the tariff on the cost of transportation. They will go to other carriers who will be able to guarantee price stability and will apply earlier transportation planning so as not to create a rush and queues during the peak season. Ukrzaliznytsia must draw conclusions and take measures to prevent the loss of customers and return the reputation of a reliable partner of agricultural producers, – Yuriy Shchuklin believes.
