Lo­co­mo­tive in ac­tion: What are the prospects for Ukraine's agro-in­dus­trial com­plex?

What are the prospects for Ukraine’s agro-in­dus­trial com­plex?

The Ukrainian Week - - CONTENTS - Lyubomyr Shava­lyuk

If you travel even a lit­tle around Ukraine, then you have prob­a­bly no­ticed the changes in ru­ral ar­eas over the last few years. Fields are be­ing ag­gre­gated, they are be­ing worked seem­ingly ac­cord­ing to sched­ule, the wheel tracks on them are even as seams, farm equip­ment is look­ing newer and more pow­er­ful, and in some vil­lages, even the so­cial in­fra­struc­ture is be­ing up­graded. These are vis­i­ble signs and the re­sult of de­vel­op­ment in the farm sec­tor. This agri­cul­tural in­dus­try is the sub­ject of high­level dis­cus­sions, it is re­ferred to as the en­gine driv­ing the do­mes­tic econ­omy, and great ex­pec­ta­tions are be­ing placed on it. Why? Be­cause the farm sec­tor is mak­ing money: hard cur­rency for the coun­try, rev­enues for the bud­get, in­vest­ment cap­i­tal for the en­trepreneurs, in­ter­est pay­ments for the banks, and a slice of bread and but­ter for those liv­ing in the coun­try­side.


The ques­tion is whether this will con­tinue or will agribusi­ness turn into a bub­ble of the type that has been all too com­mon, both in Ukraine and else­where. To an­swer this ques­tion, it’s im­por­tant to un­der­stand what’s go­ing on with prices for farm prod­ucts, fi­nan­cial re­sources for farming busi­nesses, and the fun­da­men­tals of the in­dus­try it­self. Let’s start with prices. World prices for food have been slid­ing pretty much since 2011 (see Five-year slalom). Ac­cord­ing to IMF data, at the end of this past sum­mer, the con­sumer price in­dex for food­stuffs, a bas­ket that in­cludes grains, veg­etable oils, meat, seafood, sugar and fruit, was 21% be­low its peak in April 2011. Although prices have risen 16% since the end of 2015, as the chart shows, this dy­namic is not caused by those com­po­nents of the bas­ket on whose pro­duc­tion and ex­ports Ukraine spe­cial­izes. For in­stance, the av­er­age price of wheat in mid-Septem­ber was 22% be­low last year’s av­er­age and maize was down 11%. In short, world prices are ex­ert­ing down­ward pres­sure both on hard cur­rency in­come that Ukraine earns from ex­port­ing agri­cul­tural prod­ucts, and on the in­comes of agribusi­ness in hryv­nias and kopiykas. It’s hard to say whether a global sit­u­a­tion that is dis­ap­point­ing for Ukraine’s farm­ers will con­tinue for long. But the fact that since the be­gin­ning of 2016 prices for some farm prod­ucts have been quickly re­cov­er­ing sug­gests that things have pretty much bot­tomed out. Sim­i­lar trends were seen in the late 1990s: over 1997-1999, the con­sumer price in­dex fell by nearly a third and prices be­gan to re­cover grad­u­ally and by dis­crete groups. The first to re­cover were prices for oil and other fu­els—prices for farm prod­ucts re­turned to pre-cri­sis lev­els only in 20052007, that is, on av­er­age 8 years af­ter they fell. If this hap­pens again this time—a slow­down in de­vel­op­ing economies tends to sup­port this hy­poth­e­sis—farm­ers may have to suf­fer for a few more years. Given that land is Ukraine’s global com­pet­i­tive ad­van­tage, the farm sec­tor is not re­ally un­der threat and it re­mains in the black, even if not by that much. But if world prices for food­stuffs con­tinue to fall, then some of the least ef­fi­cient pro­duc­ers will have to leave the market—and, to­gether with them, some of the least ef­fi­cient grain-ex­port­ing coun­tries.

How­ever, Ukraine’s grow­ers have not been sit­ting on their hands. They be­gan even ear­lier to switch to more ex­pen­sive and more prof­itable prod­ucts and are now do­ing rather well with them. In the last 10 years, ter­ri­tory sown with soya has nearly tripled: 15 years ago, it was barely even known in Ukraine. Sun­flower has ex­panded 150%, among oth­ers be­cause farm­ers have learned how to grow it ef­fi­ciently. To­day, the yields of nearly all grains are at least 150% higher than they were then and they con­tinue to rise. The Agri­cul­tural Pol­icy Min­istry says that this year, record yields since the coun­try be­came in­de­pen­dent were seen among both grains and legumes: 43.9 cent­ners/hectare. Although the do­mes­tic har­vest was not quite as good as the peak har­vest of 2014, farm­ers cer­tainly aren’t about to leave it at that.


The other fac­tor that can make the dif­fer­ence be­tween suc­cess and fail­ure when the global mar­ket­place is down is the right use of lo­gis­tics. Although the record crop was in 2014—63.8mn t of grains—, the 2014/2015 mar­ket­ing year saw only 34.8mn t ex­ported. In 2015, the crop was smaller, 60.1mn t, but ex­ports in the 2015/2016 mar­ket­ing year were no­tice­ably higher, at 39.5mn t. In other words, Ukraine’s farm sec­tor has de­vel­oped solid lo­gis­ti­cal in­fra­struc­ture in the last few years, which has made it pos­si­ble to store grain while prices are down and sell it quickly the minute the price is right. The in­dus­try has learned to take ef­fec­tive ad­van­tage of the sit­u­a­tion to max­i­mize prof­its.

This opens the way to an un­der­stand­ing of the cur­rent fi­nan­cial stand­ing of do­mes­tic agribusi­ness. Ac­cord­ing to Derzh­stat, last year, farming, forestry and fish­eries, among which farming dom­i­nates, earned record prof­its and demon­strated record prof­itabil­ity (see Pos­i­tive trend). In the last two years, net prof­its at profit-mak­ing farm en­ter­prises grew five­fold—de­spite the nega­tive sit­u­a­tion on world mar­kets. The first fac­tor was that part of the crop pro­duced two years ago at an ap­pro­pri­ate pro­duc­tion cost was sold only last year.

The sec­ond fac­tor was the de­val­u­a­tion of the hryv­nia. In­deed, this time around, farm busi­nesses took ad­van­tage of the lo­gis­tics in­fra­struc­ture to wait out, not so much the fall in world grain prices—even if a pri­ori this was part of the orig­i­nal cal­cu­lus, prices have not yet re­cov­ered while sur­plus in­ven­tory has been sold—, as the in­sta­bil­ity of the hryv­nia at home, un­til such time as there was a more-or­less clear ex­change rate in the con­text of a new macroe­co­nomic equi­lib­rium.

With prices for farm goods tightly tied to the dol­lar while part of the pro­duc­tion cost re­mains hryv­nia-based— wages, a small por­tion of the seed funds, de­pre­ci­a­tion of equip­ment pur­chased in the past, and so on—, prof­its were sky-high last year. Thus, the fi­nan­cial state of the in­dus­try is the best it has been for many years. And it’s quite pos­si­ble that it will con­tinue to be so for many more years, as costs will climb while the de­val­u­a­tion of the hryv­nia on such a scale might be the last such de­val­u­a­tion, so there won’t be much pur­pose to hold­ing back prod­uct.


These super-prof­its in the farm sec­tor have had a num­ber of con­se­quences, both good and not so good. Firstly, grow­ers have be­gun in­vest­ing ac­tively. Last year, cap­i­tal in­vest­ment in agri­cul­ture rose 26.1%, to UAH 27.1bn, de­spite the fact that the coun­try was still in cri­sis. By con­trast, to­tal cap­i­tal in­vest­ment in the en­tire do­mes­tic econ­omy shrank 1.7%. In the first six months of 2016, cap­i­tal in­vest­ment in the sec­tor sky­rock­eted 74.0%, com­pared to only 9.6% in the en­tire econ­omy. That huge flow of cash to farming had to be spent on some­thing, and so Ukraine is at a cross­roads: if it is spent un­pro­duc­tively—on price wars for market share, yachts and ex­pen­sive build­ings for farm­ers, un­eco­nomic pur­chases of com­po­nents of the pro­duc­tion cost—, this could all turn into a bub­ble, which will greatly cost the AIC in terms of de­vel­op­ment. Oth­er­wise, the sec­tor is set to con­tinue grow­ing apace.

Se­condly, the super-prof­its be­ing en­joyed by farm­ers have pro­vided a solid ba­sis to can­cel the sec­tor’s tax breaks. Such a de­ci­sion is timely, but it’s not quite ripe, be­cause the live­stock in­dus­try will suf­fer a lot as a re­sult. Fur­ther­more, the pro­por­tion of large hold­ings among those en­joy­ing these super prof­its is high, so the ben­e­fit for small and medium farm­ers could be lim­ited. This means that the strong sup­port for farm­ers ini­ti­ated by the Ag Min­istry should make it pos­si­ble to elim­i­nate this dis­tor­tion.

Thirdly, in­ter­na­tional fi­nan­cial in­sti­tu­tions are start­ing to more con­fi­dently pro­vide cred­its to the sec­tor. De­spite a gen­er­ally dif­fi­cult sit­u­a­tion in the bank sec­tor, the NBU says that the agribusi­ness credit port­fo­lio slipped 0.9% over Jan­uary-July 2016, while the en­tire port­fo­lio con­tracted by 4.6%. Need­less to say, fun­da­men­tals such as the lack of a land market and the low qual­ity of col­lat­eral, which make agribusi­ness less than at­trac­tive for banks to lend to, have not dis­ap­peared. But over the last year or two, a num­ber of IFIs have be­gun to look for op- por­tu­ni­ties to fi­nance agri­cul­tural en­ter­prises and have been no­tice­ably ex­pand­ing credit port­fo­lios fo­cused on the in­dus­try.

It’s clear that Ukraine’s agri­cul­tural pro­duc­ers have spare cash to­day and will likely con­tinue to have it for at least a few more years. The ques­tion is how much of a hori­zon they have to ex­pand into, that this cash is placed to as­sist with. What about struc­tural prospects? Much here will de­pend on the reg­u­la­tor, i.e., the state. The lat­ter, through the Ag Min­istry, has been ini­ti­at­ing largescale re­forms, the main one be­ing set­ting up a market for leas­ing land in or­der to re­solve the coun­try’s land woes. Con­cep­tu­ally, this is the right de­ci­sion. But the fact that the farm sec­tor has a lot of spare cash right now means that the cost of leas­ing land could quickly be­come too high. This risk is some­thing the state needs to an­tic­i­pate. At the same time, a market for leas­ing land should un­tie the hands of the banks, which will then have ac­cess to a class of valu­able, qual­ity as­sets that can be used for col­lat­eral. Could this lead to an ex­ag­ger­ated boom of lend­ing in the AIC—and even­tu­ally to prob­lems for many com­pa­nies who bor­rowed to ex­pand and then dis­cov­ered that the po­ten­tial for growth was far less than the money they had bor­rowed?

The sec­ond re­form is tar­geted sup­port for SMEs in the farm sec­tor. Judg­ing from the concept that has been pre­sented so far, this as­sis­tance is meant to help farm­ers fill those niches that are not be­ing sup­plied to­day. This of­fers con­sid­er­able po­ten­tial for growth for at least a few years.

In any case, to­day agribusi­ness has money and the state seems to have good ideas for qual­ity re­forms and is ready to carry them out. This com­bi­na­tion should foster sharp growth in the sec­tor over the next few years. And the state, as the reg­u­la­tor, needs to con­trol the sit­u­a­tion so that this phase of ac­cel­er­a­tion is dom­i­nated by ef­forts to be ef­fi­cient, not a dash for cash that threat­ens to cause a bub­ble and the in­evitable crash. Some skep­tics say that this is all just to turn Ukraine into Europe’s farming arm with room for only 10-20 mil­lion Ukraini­ans to live com­fort­ably. The hope is that the AIC will be­come the driver to pick up re­lated sec­tors: heavy ma­chin­ery, chem­i­cals, fu­els and so on. But re­gard­less of this, Ukraini­ans need, above all, to take ad­van­tage of the God-given po­ten­tial of their soil. To­day, they have ev­ery­thing they need, to do so.

Newspapers in English

Newspapers from Ukraine

© PressReader. All rights reserved.