Ukrainian agriculture: growth despite obstacles

15.11.2017

In recent years, Ukrainian agriculture has demonstrated a consistent growth and set records for certain indicators, for example, for grain production (66 MMT in the 2016/17 marketing year), for share in the country's GDP (more than 12% in 2015), for share in the commodity exports (35.6% in 2016).

Forecasts for agricultural sector development in 2018 are also positive. It became a leading industry (if not a donor) to restore the national economy. Moreover, agricultural sector actually forms economic profile of the country. Potentially, Ukraine can grow 100 MMT of grain per year.

Media space associated with "Economics" is filled with news about dynamic sowing and harvesting campaigns, increase in shipments of agricultural products abroad, opening of new markets, commissioning of new processing or infrastructure facilities and even more - possible investments in agricultural projects. Constrainedly, an impression is emerging that country will soon gain the status of agrarian superstate. However, materials that try to assess problems that stand in this way appear rarely enough.

The present stage in the agriculture development can be characterized as certain stabilization after the fall. The volume of crop production, expressed in constant prices in 2010 (by the method of State Statistics Service of Ukraine), either increased or decreased in 2013-2017. And dynamics of the same indicator (volume of crop production) in USD at average annual rate of NBU in corresponding years shows the decline in volume in 2013-2015 and stabilization in 2016-2017.

If 2013 in USD equivalent is taken as a base one, then trend of crop production index will be as follows:

• 2014 - 69.4%

• 2015 - 35.8%

• 2016 - 33.6%

• 2017, based on forecast, - 30.9%.

Without any doubts in general possibility of obtaining the status of agrarian superstate in future, one should draw attention to a number of restrictions that will prevent a breakthrough growth (boom) in agriculture in the next 5 years and which may affect its slowdown. In plant growing, as the most developed and promising segment, such limiters are the following:

• Land degradation (loss of humus, erosion, pollution, etc.). Thickness of humus layer decreased by 20% over the past decade, total area of eroded lands grew to 13.4 Ml ha, 10.6 Ml ha of which - arable land (32% of total arable land), almost 40% of total land area of Ukraine is contaminated land. Some experts even argue that nutrient content in Ukrainian humus is now half less than in Western Europe. Long-term measures and, consequently, substantial investments are necessary to maintain land productivity. Unfortunately, neither enterprises nor state have opportunity now to plan them in a mode of real resources and terms.

 • Relatively low productivity of basic commercial crops in comparison with main countries-competitors. Proceeding from expert evaluation of the average yield in the 2015/16 marketing year, "disparity" of Ukraine with the leader in wheat yield at MT per ha - EU - is 256%, in corn (with the US) – 285%, soybean (with the US) – 276%. Ukraine is among leaders of sunflower yield on a par with Argentina (about 2 MT/ha).

To reduce this "disparity" and tangible increase in yield, a mass of agricultural producers need to implement a program of measures:

 Intensively use modern and expensive agricultural technologies, which are applied point-wise so far - in individual large farms.

 Regularly invest in new equipment, materials and technologies.

 Turn to modern methods of organizing labor and management at the level of agro-enterprises and farms. These methods should be followed also by regional state and government structures responsible for managing agriculture.

During the next 5 years, the progress in above areas can be achieved, but a drastic change in the situation at agricultural sector level and a breakthrough in productivity is unlikely. Favorable climatic conditions will remain the main variable factor in yield’s growth.

• Weak financial infrastructure and limited financial resources

o  In recent years, own funds of enterprises and organizations were the main source of funding. Their share in the structure of capital investments increased from 63.4% in 2013 to 69.4% in 2016. At the same time, according to the State Statistics Service, the level of agricultural production profitability decreased from 45.6% in 2015 to 37.3% in 2016 (including plant growing products from 50.6% to 44.3%). Profitability of agribusiness, which increased at the turn of 2015 due to sharp UAH depreciation and an increase in exchange earnings from exports, is now declining. The growth of import and domestic prices for inputs consistently narrows ability of enterprises to increase their investments in business development.

o  Crediting is growing very slowly, due to the lack of resources from domestic financial institutions, their archaic approach to development of "bank-agrarian" relations system, not including relations with agricultural holdings. Due to country risks, foreign direct investment in a share capital of enterprises in agriculture, forestry and fisheries did not practically increase: USD 617.0 million (as of January 1, 2015) and USD 617.3 million (as of July 1, 2017).

o  Insurance of agricultural risks is in its infancy and is mainly tied to non-bank financing and supply of material resources. Three insurance companies occupy 75% of the market. In underwriting 2016 year only 787 contracts for insurance fields with total area of 675 Th ha were concluded.

o  State subsidies (at the level of UAH 3 billion this year) are an important element in supporting the agricultural sector in the European style. But in the current period, their volume is relatively small (according to calculations, about 6% of the total amount of capital investments in 2017 or about 2.8% of the cost of the autumn complex of field work), and the implementation mechanism has not been fully worked out yet. Given the assessment of experts that in 2014-2015 agribusiness received a financial resource at 20-30 billion UAH, thanks to the special regime of VAT, the above subsidies will only stimulate limited "point" growth.

• Pressure from markets and competitors

o  Loss of Russian market and free trade zone with the EU spurred moving of agricultural producers to the European markets. In 2016, their share in total exports of Ukrainian crop production was about 25% (about USD 2 billion). Judging by the situation, which unfolds in response to requests of the Ministry of Economic Development and Trade of Ukraine to expand export quotas to the EU, revision of free trade terms, which are already considered by Ukrainian side as "obsolete", and Brussels' positions, "capacity" of the European market for Ukrainian products of plant growing will remain unchanged in the near future. Behavior forecasts of the UK agricultural market after Brexit is in favor of such conclusion, if its market opens to outside world and tariff restrictions are lifted. In this case, influx of cheap imported goods to the UK is expected. Consumers will win, but British farmers are waiting for serious losses. Thus, purchase prices for grain crops will decrease by 5-7%, production volume will fall by 1-2%. Local agricultural lobby is unlikely to make concessions on the regulation of agricultural imports easily.

o  Entrance of Ukrainian agricultural producers to markets of other regions - Middle East, Africa and Asia is progressing gradually for main product groups, on basis of separate transactions and supplies. It seems that competitors still underestimate the potential of Ukrainian "threat" to their positions. No doubt their counteractions will increase in the near future. This will happen in conditions of the forecast that the growth of world prices for agricultural products will be very moderate in the next three years.

• Absence of the modern system for organizing labor and management, including real and strong cooperative structures for scale economy and work specialization.

Today, processes of creating added value in agricultural sector from producers to end consumers are extremely “atomized” in our circumstances, each party of these processes wants to receive as much profit as possible for themselves and immediately, not trusting possibilities of long-term cooperation and long-term planning.

Any action to abolish moratorium on land sale and the beginning of land reform in 2018 or in 2019 may lead to disorientation of market participants. According to expert estimates, transition to a new strategy will take the next three to four years, until new management mechanisms are worked out and stabilized.

• The entrance of agriculture to leading position in economic activity in the country will lead to an increase in direct and indirect tax burden on it in the near future (max. one or two years).

The above mentioned obstacles will restrain the further growth of agriculture, giving it a stagnating character for the next five years.

 

UkrAgroConsult

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