||Ukraine, a “green lode” at the heart of Europe
By Michel Terestchenko,
International Project Manager, Linen of Desna 1
Long known for the fruitfulness of its land and abundant natural resources, Ukraine proceeded to fundamentally reform its agriculture following its independence in 1991. Consequently, the country is now in the process of regaining its status of Europe’s “breadbasket” and ranking among the world’s key exporters of agricultural commodities.
At the Dakar Agricole Forum held on April 18 and 19, 20112 , Michel Terestchenko spoke on the history of agriculture in Ukraine. In the article we are publishing below, he reports on the driving forces to restart the Ukrainian output, and the threats currently affecting agricultural activities. He especially insists on the growing concentration of farmland in the hands of agro-holdings and on the underlying issues of agricultural privatization, whose practical details are bound to play a key role in the upcoming years.
momagri Editorial Board
The Russian Empire’s “breadbasket” in olden days and now a fabulous “green lode” in the center of Europe, Ukraine is certainly the world’s most “agricultural” nation. Today, the country’s agricultural commodities represent resources that are as strategic as its energy matters. As it is the case for any “lode”, such riches are generating a good deal of greed…
An agricultural Eldorado?
Nature endowed Ukraine with this wonderful extremely fertile “black soil”––the renowned “tchernozem”––probably spawned from an ancient tropical forest as large and lush as Amazonia. While Ukraine is barely 10 percent larger than France, it is mostly made of large farmable plains that account for 90 percent of its territory. In addition, its Utilized Agricultural Area covers 70 percent of its farmland, or close to 42 million hectares (or 104 million acres).
Blessed with such natural assets, the newly independent Ukraine could not but return to the “club” of the world’s key exporters of agricultural commodities, and progressively regain its spot as Europe’s “breadbasket”.
Following considerable work to restart its production facilities, agricultural output finally took off in 2008 to reach 50 million tons thanks to an across the board increase of yields, which nevertheless remain on average below 40 percent European levels. Because the total Ukrainian average yield for grain still remains weak, it is clear that any improvement potential is, for the most part, ahead of us. Today, some better-equipped farms are even approximating Western European yields. Consequently, the output of Ukrainian grain could easily be doubled in the next few years.
Ukraine produces many agricultural crops. First, wheat––close to 10 million hectares, or 25 million acres––is grown throughout the country, but most importantly in central regions. We should note that, according to the country’s standards, 70 percent of the national wheat output is considered to be milling quality wheat. Northern Ukraine also produces spring barley. The growing demand for brewing barley generated by large international maltsters, and the availability of quality seeds imported from Western Europe, have led to a jump in national production.
Corn––Ukraine’s third most important cereal––covers about 2.5 million hectares (approximately 6 million acres). Rye and buckwheat continue to take up substantial areas in Ukraine and are mostly grown to supply the domestic market.
The good profit outlook for oil-producing crops has incited Ukrainian farmers to develop other products, such as sunflower (over 4.4 million hectares every year corresponding to a 2010 yield of 6.8 million tons), rape (1.5 million hectares) and soybean (one million hectares), while such crops were practically inexistent in Ukraine only five years ago.
We should note however that, with the exception of sunflower oil, no other oil-proteinic crop is processed in the country, and that the entire rape output––largely encouraged by the global development of biofuel––is exported toward either Asian markets (Pakistan an Bangladesh), or toward Western biodiesel plants.
We thus can see that the new Ukrainian farmers have given priority to large crops, which can be easily exported and are requiring less capital and labor. This trend is currently heightened by the recent arrival of agro-holdings.
From Russia’s “breadbasket” to Europe’s “farm”
Prior to the 1917 October Revolution, Ukraine was already considered as Russia’s “breadbasket” and one of the world’s richest agricultural nations. But, presenting itself as the “peasants’ revolution”, the Bolshevist Revolution happened. The world has yet to truly come to grips with what has been the 1932/33 “great famine”, a famine artificially created to force farmers in accepting the collectivization they were refusing. The political commissioners then stole everything: crops, seeds, livestock and reproductive strains… Two years later, 7.5 million farmers––Ukrainians for the most part––had perished.
Ukraine became independent again in 1991. This enabled the country to regain control over its agriculture. Following a ten-year period spent dismantling the then obsolete Soviet facilities––leading to the total collapse of the Ukrainian agricultural production system––the December 16, 1999 law laid the foundations for a revival. January 1, 2000 thus marked the near total liquidation of all kolkhozes. With most of them gone, modern and large farms were newly formed on the remains of former kolkhozes, thanks to new technologies and Western investment, forming what has been called “agro-holdings” for the past few years.
This reform also signaled the first steps of farmland privatization. In fact, each kolkhoz farmer, or each former kolkhoz worker, received a “PAI” averaging about 3.15 hectares (7.75 acres) in his name. Registered in each township, this document unmistakably resembles a title deed, with the option for each owner to farm his “PAI” or lease it to another farmer. The only stipulation is that he cannot sell it to an eventual buyer.
Former kolkhoz farmers and Western entrepreneurs thus threw themselves into gathering these “pais”, resulting in land regrouping of large surface areas available for rental for up to 40 years, with most leases set up for 10- to 20-year terms. Annual rents are very moderate, with an annual average varying from $30 to $50 per hectare, depending on the quality of the land, thus allowing farmers to invest all their money in the purchase of machines and input required for their activity.
At the same time, a tax system extremely favorable to agricultural businesses was initiated in 1998. First, farms whose sales are made up of at least 75 percent of their own output, are exempt from turnover tax and are only liable for a land tax that is contingent on the number of rented hectares. This tax is low, since it only represents 15 percent of the amount of rent, that is to say from $5 to $8 per leased hectare and per year.
Then, the law of December 26, 1999 allows agricultural businesses to virtually avoid VAT payments. While their sales are indeed subject to VAT, agricultural businesses that have collected the VAT do not have to transfer it to the government, but may keep it and use it for production investment, such as farming equipment and seeds. Consequently, farming businesses receive the VAT but do not turn it over to the tax authorities.
Lastly, a full range of government aid to Ukrainian farms––whether their capital is owned by Ukrainians or by foreigners––grants them subsidies to cover approximately 30 percent of the cost of tractors and machinery manufactured in Ukraine, financial assistance toward a portion of the interest of bank loans (up to 10 percent of interest regarding loans granted in grivnas, or six percent for loans in dollars), and a subsidy per farmed hectare for very rare crops––only for sugar beet, flax and hemp and certain seeds in 2010.
Such favorable and very attractive treatment could not help becoming a magnet for foreign investors. Thanks to resources from private equity funds and other investment funds that are generally supported by large international institutional investors, very large agro-holdings have been formed. These modern businesses are well financed, well guided and always very well outfitted. They constitute the best showcase for Ukrainian agriculture, and still have available room for growth, which makes them very attractive.
This is why, while Ukraine’s industrial and financial activities are still mired into a deep economic crisis, and while credit is practically nonexistent, agro-holdings are expanding smoothly and are increasingly taking over the land.
Access to cheap land, support for equipment and investment production in farming businesses, option to retain profits for new investment… This policy turned out to be fruitful and at the end of the decade––the 2008/09 harvest––Ukraine became the world largest barley and sunflower exporter, the second largest for rape, the fourth for corn, the sixth for wheat and the eighth for soybean!
The technical challenge of re-launching agricultural production in Ukraine seems to have been well engineered and the country certainly appears to be on the way to harvest over 100 million tons before the end of the decade.
The Ukrainian agricultural revolution is on the move. And even if this new quest for effectiveness and profits carries risks––in particular social risks––the “super reform” to be implemented in the next few years will undeniably bring about modernization and effectiveness, as well a very competitive production system.
Export quotas and the threat of extreme concentration
Since the enforcement of the 2010 export quotas––in spite of a several million-ton harvest surplus available for export––the whole world is watching.
Arbitrarily enforcing quotas has generated two types of victims––the traders, who had to assume the financial liabilities linked to penalties and costs of all contracts that were annulled or directed to other sources; and producers of agricultural commodities in Ukraine, who were not able to fully benefit from the spike of international prices since the summer of 2010, while they nevertheless needed to invest and could obtain very limited loans from banks.
The quotas, however, were of beneficial for some. First, to the new government that never failed to state that it acted so rapidly and efficiently to protect the purchasing power of Ukrainians, whose food staples (such as bread) represents a very large part of their monthly budget.
Then, a newly created company––Hleb Investbud––said to be jointly formed for 40 percent by the Government with the contribution of silos and the remains of the former national reserve company Hleb Ukraina, and for 60 percent by “private” investors, whose “identity cannot be recalled” as is often explained by the Minister for Agriculture––the very same official who arbitrarily provided this new company with most of the export quotas finally authorized by Ukrainian authorities. One can thus clearly see that some players want to set up an export monopoly for Ukrainian agricultural commodities in the sphere close to the current government authorities.
At the same time, we are observing a rapid concentration of agricultural input suppliers, particularly regarding nitrogen fertilizers. Among the five largest fertilizer producers, the Dimitri Firtash Group, the gas “monopolist”, now controls the mineral fertilizer sector following the acquisition of four companies in the past few months––Tcherkassy-Azot, Stirol, Severo-Donetsk and RovnoAzot. The Group currently holds over 2.5 percent of the global production of nitrogen fertilizers. It only has to purchase the Odessa Harbor very large plant, whose upcoming privatization has already been announced, to practically become the sole producer of nitrogen fertilizer in Ukraine.
Today, we are observing an unprecedented farmland concentration in the hands of agro-holdings already controlling over 20 percent of Ukraine’s best properties, and a still unclear but yet existing concentration trends between various agro-holdings. It has been common knowledge for the past few weeks that the Agro-holding Avangard––Ukraine’s largest egg producer whose final backers are not clearly known and might include Ukrainian legislators close to the current administration or Russian interests––has recently acquired the Dakor and Rayz Agroservis companies, resulting in the control of 436,000 hectares (one million acres) of the best Ukrainian farmland and making it one of the country’s largest traders.
Currently, recurrent rumors in Ukraine are even mentioning the upcoming formation of a conglomerate concerning over one million hectares and currently owned by various large farms that would soon enter the international markets. Should it concern a potential expansion by Hleb Investbud, the project would guarantee profitability and would not be objectionable to international investment funds. But in the end, it is probable that all is not as transparent as it seems, and that only a small portion of the capital would be available against financial investment of naturally massive dimension?
Under these new conditions, what will happen to the already announced Ukrainian farmland “privatization”, since the President has said that 2011 would undeniably be the “last year during which farmers could not sell their land”? Besides, the latest modifications to the privatization law already specify that such “privatization” will not available to foreigners, who, for the most part, have been quite discouraged from investing in Ukrainian agriculture recently. Will this European and world “breadbasket” become a major strategic weapon in the hands of a small number of traders closely linked to the Ukrainian authorities or to more opaque Russian interests?
Considering these recent developments, I feel it is urgent for the international community––on which Ukraine relies for its economic and financial stability and with whom it has entered into very vital obligations––to now address this issue.
1 An Ukrainian corporation that produces natural fibers (hemp and flax).
2 Please see momagri May 9, 2011 article http://www.momagri.org/UK/points-of-view/Summary-of-Workshops-Dakar-Agricole-_902.html as well its February 14, 2011 press release http://www.momagri.org/UK/press-reports/-Senegal-is-Organizing-the-International-Forum-DAKAR-AGRICOLE-on-18-and-19-April-2011-with-its-Keynote-Topics-Regulation-of-Agricultural-Markets-and-World-Governance-_838.html