Sergey Feofilov: Government policy indirectly creates conditions for monopolization of the ag sector

18.01.2017

In the previous article we promised to discuss further monopolization of Ukraine’s agricultural commodity production as the most likely scenario. Active mergers and acquisitions will be encouraged by the special VAT regime’s cancellation and the new system of agriculture development subsidies.

The first part of the analysis of consequences of the special VAR regime’s cancellation showed risks and the most probable behaviors of farmers, specifically:

- growth of produce prices to compensate for increasing costs;

- an increasingly advantaged position of major producers in terms of getting budget support will push concentration processes in the agricultural sector. 

The studies by UkrAgroConsult suggest a conclusion that the above-mentioned mergers and acquisitions in the Ukrainian agricultural sector will lead to a higher number of large-sized farming companies and the formation of an agricultural monopolist as soon as in the coming 3-5 years. Undoubtedly, the size of agriholdings will be optimized but the number of enterprises farming more than 10,000-15,000 ha will rise due to absorbed small and medium-sized farmers.

The government policy for supporting medium-sized and small enterprises is unfortunately not backed by appropriate financial resources and is rather declarative. We believe the Government of Ukraine has not yet decided on the main point: whether the agricultural production will be based on family farms or on large agriholdings. Maybe, this issue is put off until opening of the land market with a vague hope that the market will set things straight.

Indeed, the agricultural production in the most developed economies – the EU and the USA – is based on medium-sized and small farms. However, it is exactly such enterprises that are competitive due to strong government support.

Unfortunately, our government officials are unconscious of the reasons why the EU countries are able to support its agricultural sector and subsidize small and medium-sized farms. This support is sourced from Europe’s well-developed industry, which actually pays an extra tax for supporting farmers. By the way, not all industrial entities are content with this additional indirect tax.

The processing industry’s role in Ukraine has been constantly declining, though part of the added value created exactly in this most lucrative sector could have been used for supporting agricultural producers.

The cancellation of the special VAT regime actually implies denial of specificity and necessity of significant financial support for the agricultural sector in the specific economic realities of Ukraine. This is happening in a situation when farming is a low-margin sector in almost all countries and its development is impossible without adequate financial aid. 

It is worth emphasizing that the current situation strongly requires stepping up support for Ukraine’s agriculture. In the longer term, overall growth of Ukraine’s economy would probably create conditions for less painful cancellation of the tax benefits for farmers. Our studies indicate that pinning the hope on market mechanisms by the Ukrainian government managers actually confirms that the latter try to shed all responsibility for preparing and making decisions.

This also implies extremely poor qualification of the ruling stratum. In fact, this reflects an overall decline in the quality of state management. The switch to the general taxation system considerably simplifies and unifies economy management tools. The management are not prepared to lead complex production systems in the conditions of Ukraine’s open economy and its integration into global processes. Unfortunately, the controlling center responds to changed conditions of the economy’s operation in an extremely ineffective manner. Specifically, it tries to simplify and make more primitive both management tools and the managed object itself: the unsophisticated raw material branches gain exaggerated significance, whereas the entire processing industry system is being wound down due to loss of markets.

The controlling center fails to take into account the main factor: agriculture needs permanent financial backing, whose sources could include either a well-developed industrial sector or permanent devaluation of the national currency. The latter source is only suitable for getting “paper” profitability and filling out accounting statements with illusory profits.

Theoretically, there is also a third source: foreign investments and loans. However, in view of the current turbulence in the global economy and the declining quality of state administration, we wouldn’t consider this source as reliable enough for working out a long-term development strategy for the leading sector of Ukraine’s economy.

Overall, conditions for the monopolization of raw material sectors (including agriculture) are now developing in Ukraine, since it is quite evident that a limited number of large enterprises are much easier to manage compared to complicated and multi-level industrial systems. Therefore, in the system that has been taking shape over the last 20-25 years, i.e. with a decline in the industry’s role and performance, quite obvious are excellent prospects for the formation of large-scale agricultural commodity production. The question of how effective the monopolist agricultural production pattern will be is answered long ago: any monopoly implies the absence of competition with consequent weakening and ultimate decay.

 

UkrAgroConsult

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