Cul­ti­vat­ing change: Pro­duc­tion and ex­port trans­for­ma­tions in Ukraine's agri­cul­tural in­dus­try

New growth ar­eas in the Ukrainian agri­cul­tural sec­tor are grad­u­ally chang­ing the in­dus­try

The Ukrainian Week - - CONTENTS - Olek­sandr Kra­mar

The dy­namic growth of the Ukrainian agri­cul­tural sec­tor in re­cent years has raised fears that the coun­try will turn into a sup­plier of only a few types of agri­cul­tural prod­ucts to the world mar­ket. How­ever, cur­rent trends in the devel­op­ment of Ukraine’s agroin­dus­trial com­plex in­di­cate that these wor­ries are ex­ag­ger­ated. The coun­try is de­vel­op­ing the po­ten­tial to pro­duce and/or ex­port new prod­ucts, which un­til re­cently seemed un­com­pet­i­tive. Over time, these new growth points for Ukrainian agri­cul­tural can change or sub­stan­tially di­ver­sity its cur­rent im­age of the pro­ducer of oil and grain pre­dom­i­nantly. They can also sig­nif­i­cantly in­crease added value in the sec­tor.

OVER­COM­ING MONOCULTURE

The struc­ture of the Ukrainian econ­omy has changed greatly over the last decade. Me­tal­lurgy, chem­i­cal in­dus­try fo­cused on the sup­ply of once cheap Rus­sian gas, and the re­main­ing frag­ments of ma­chine man­u­fac­tur­ing, all en­ergy-in­ten­sive mon­sters in­her­ited from the Soviet past, out-of-touch with the needs of the do­mes­tic mar­ket and in­creas­ingly less com­pet­i­tive in­ter­na­tion­ally, are in de­cline. In­stead, agri­cul­ture and re­lated fields (pri­mar­ily the food in­dus­try) have al­ready taken lead­ing po­si­tions in the man­u­fac­tur­ing sec­tor. Mean­while, the econ­omy in gen­eral has been char­ac­terised by the growth of the ter­tiary sec­tor (trade, var­i­ous ser­vices, etc.), as in most other coun­tries around the world. In 2007, be­fore the global eco­nomic cri­sis, the share of agri­cul­ture in the GDP of Ukraine was only 6.3%, while the man­u­fac­tur­ing in­dus­try ac­counted for 18.4%. In 2016, these fig­ures were 11.6% and 12.0% re­spec­tively. At the same time, around 33% of cur­rent man­u­fac­tur­ing is the food in­dus­try, which pro­cesses raw pro­duce of agri­cul­ture and is also a part of the agroin­dus­trial com­plex.

Ac­cord­ing to pre­lim­i­nary es­ti­mates, in the 2016/17 mar­ket­ing year, which ended on June 30, Ukraine ex­ported 44 mil­lion tonnes of grain, which is 4.9 mil­lion more than last year, set­ting an­other record. More specif­i­cally, Ukraine ex­ported 20.7 mil­lion tonnes of corn, 17.5 mil­lion tonnes of wheat and 5.4 mil­lion tonnes of bar­ley. As a re­sult, in terms of grain ex­ports, Ukraine ranks first in the Eastern Hemi­sphere and sec­ond in the world, be­hind only the US, which ex­ports around 1.5 times more. At the same time, Ukraine has passed the sym­bolic fig­ure of 1 tonne per in­hab­i­tant, which is al­most un­prece­dented on the in­ter­na­tional level. Only Aus­tralia with its 24 mil­lion pop­u­la­tion can ex­port the same amount, and only in the most pro­lific years. More than half the sup­plies of sun­flower oil to the world mar­ket come from Ukraine.

At the same time, Ukraine is now unique among grain ex­porters. It ranks from third to fifth in the world by the sales of each in­di­vid­ual type (wheat, corn, bar­ley). How­ever, as the coun­try is a ma­jor sup­plier of all three of these crops, it has an over­all grain ex­port vol­ume that is sec­ond only to the United States. Other ex­porters fo­cus on one, less of­ten two, crops, which makes them more de­pen­dent on the world mar­ket con­di­tions. By con­trast, large wheat or bar­ley crops in Ukraine are ac­com­pa­nied by lower corn har­vests and vice versa, which acts as a coun­ter­bal­ance. The sow­ing, har­vest and ex­port of pulses, es­pe­cially peas, are also grow­ing rapidly. From 2013 to 2016, the pro­duc­tion of legumes in­creased from 0.35 mil­lion tonnes to 0.88 mil­lion tonnes, and this year there are no rea­sons to ex­pect that this trend will not con­tinue. They are pop­u­lar in the tra­di­tional cui­sine of South Asia, so Ukraine has re­mark­able prospects for grow­ing sales. The price of 1 tonne of peas is at least twice as high as the price of wheat, corn or bar­ley. Re­cently, how­ever, the coun­try is in­creas­ingly see­ing an in­crease in the pro­duc­tion and sup­ply of a num­ber of other types of agri­cul­tural and food prod­ucts with sig­nif­i­cantly higher added value.

SWEET EX­PAN­SION

One of the most no­tice­able trends in re­cent years has been the ac­tive re­turn of Ukraine among the largest ex­porters of beet sugar. For decades, there was a need to pro­tect the do­mes­tic mar­ket with du­ties and quo­tas, but now this prod­uct has once again be­come com­pet­i­tive on the world mar­ket. In the com­ing years, this could sig­nif­i­cantly change the face of the agri­cul­tural sec­tor in a num­ber of re­gions around the coun­try that spe­cialise in grow­ing beets and pro­duc­ing sugar. From 2013 to 2016, its pro­duc­tion in the coun­try in­creased from 1.26 mil­lion to 1.97 mil­lion tonnes. Ukraine has been steadily in­creas­ing gran­u­lated sugar ex­ports for two con­sec­u­tive years. For the in­com­plete 2016/17 mar­ket­ing year (which lasts from Septem­ber to Au­gust on the sugar mar­ket), the Ukrainian Sugar Com­pany es­ti­mated ex­port vol­ume at 0.74 mil­lion tonnes, which is al­most 37% of to­tal sugar pro­duc­tion this sea­son and 50% of the coun­try's do­mes­tic de­mand. This gives rea­son to be­lieve that soon Ukraine’s sugar in­dus­try will also be­come ex­port-ori­ented.

The vol­ume of world trade in sugar is about 60 mil­lion tonnes, so Ukrainian pro­duc­ers and ex­porters of the sweet­ener have good prospects of main­tain­ing

com­pet­i­tive­ness. In the past, Ukraine used to pro­duce 3-3.5 times more sugar than now and ex­ported more than 70% of this out­put. Af­ter the col­lapse of the USSR, this mar­ket closed for us, the Rus­sians found a sub­sti­tu­tion in their own pro­duc­tion and the ex­por­to­ri­ented fo­cus of the Ukrainian sugar in­dus­try seemed to have be­come a thing of the past. In re­cent years, how­ever, Ukrainian sweet prod­ucts are again in­creas­ingly pop­u­lar in for­eign mar­kets, but now ex­ports are go­ing to dif­fer­ent coun­tries (from Sri Lanka and Myan­mar to a num­ber of African coun­tries). Sup­plies to Cen­tral Asia and the Cau­ca­sus are also in­creas­ing.

Cur­rent growth is mainly due to in­creas­ing beet yields: 40 tonnes per hectare in 2013, 48 tonnes by 2016, and an al­most 100% in­crease com­pared to the 27.6 tonnes in 1990. At the same time, the land area ded­i­cated to sugar beet in 2016 was more than five times smaller than in 1990 (0.29 mil­lion hectares and 1.61 mil­lion re­spec­tively). Tak­ing into ac­count that the price of sugar is about three times higher than the price of grain, this sec­tor could po­ten­tially play a role com­pa­ra­ble to that of wheat, corn or oil in Ukrainian agribusi­ness and ex­ports.

The ex­port of other sweet prod­ucts from Ukraine also shows a pos­i­tive dy­namic. For ex­am­ple, the ex­port of honey in Jan­uary–June 2017 al­most dou­bled to 30 mil­lion kg com­pared to the first half of 2016. The largest buy­ers are the US ($18.9 mil­lion), Ger­many ($10 mil­lion) and Poland ($5.6 mil­lion). Ukrainian con­fec­tionery pro­duc­ers are grad­u­ally gain­ing ground on the Euro­pean mar­ket too (see Not by grain and oil alone).

HIDDEN GROWTH

The sit­u­a­tion is more am­bigu­ous in the live­stock in­dus­try. The pro­duc­tion and ex­port of poul­try meat is grow­ing at the fastest rates. This is grad­u­ally be­com­ing an­other ex­port-ori­ented sec­tor of the Ukrainian econ­omy. In the first half of 2017, its for­eign cur­rency rev­enues were al­most dou­ble of those from the same pe­riod in 2015 ($196 mil­lion and $103 mil­lion). Fur­ther­more, the pro­por­tion of ex­ports in the to­tal sales of large pro­duc­ers is al­ready ap­proach­ing 50%, while the an­nual growth rate of sup­plies to for­eign mar­kets is mea­sured in dou­ble dig­its.

Out of the to­tal 284 mil­lion kg sold in the first half of 2017 (14.3% higher than in the same pe­riod in 2016), the com­pany My­ronivsky Hli­bo­prod­uct (MHP) sold 123 mil­lion kg (or 43.3%) of its chicken abroad – an an­nual ex­port growth of 44%. The pro­duc­tion of eggs is also be­com­ing more ex­port-ori­ented.

Ag­gre­gate pro­duc­tion fig­ures for other live­stock prod­ucts that are reg­u­larly pub­lished by the State Statis­tics Bureau in­di­cate stag­na­tion and even the de­cline of vol­umes in most types. How­ever, when looked at closely, two trends can be no­ticed: the pro­duc­tion and ex­port of meat and dairy prod­ucts by mar­ket-ori­ented agri­cul­tural en­ter­prises grows while house­holds are pro­duc­ing less and less of that at home. As for meat, the re­duc­tion in re­cent years since 2013 is 60.6 mil­lion kg (from 894.3 to 833.7 mil­lion kg). This con­cerns all types, al­though the great­est de­cline was in the pro­duc­tion of beef and veal (from 305.1 mil­lion kg to 276.4 mil­lion kg). Milk yields in house­hold farms also de­creased from 8.63 mil­lion tonnes to 7.68 mil­lion tonnes.

Nev­er­the­less, there is a pos­i­tive ten­dency in com­mer­cial mar­ket-ori­ented agri­cul­tural en­ter­prises. From 2013 to 2016 the pro­duc­tion of pork in­creased from 352.7 to 397 mil­lion kg, or 12.6%, and poul­try meat from 904.5 to 992.4 mil­lion kg, or 9.7%. Milk yields grew from 2.56 mil­lion tonnes to 2.71 mil­lion tonnes, i.e. by 5.8%. This is de­spite a de­crease in the num­ber of cows, as the pro­duc­tiv­ity of those that re­mained grew rapidly: on av­er­age, a cow in 2016 gave 40% more milk than in 2010 (5.64 tonnes and 4 tonnes re­spec­tively). Re­cently, more and more dy­namic growth in the pro­duc­tion of beef and veal by com­mer­cial en­ter­prises is ev­i­dent – from 93.7 mil­lion kg in 2015 to 99.2 mil­lion kg in 2016, i.e. 5.9% growth in just one year. In Jan­uary–May 2017, this be­hav­iour ac­cel­er­ated and beef pro­duc­tion in­creased by al­most 19% to 26.4 mil­lion kg com­pared to 22.2 mil­lion kg for the same pe­riod in 2016. Its ex­ports are also grow­ing swiftly (see Not by grain and oil alone).

The pro­duc­tion of milk and beef by pri­vate farms is grow­ing the fastest. They ac­counted for 183.6 mil­lion kg of milk in 2016 com­pared to 155.4 mil­lion kg in 2013, or 18.1% more, and 10.1 mil­lion kg of beef in 2016 com­pared to 8.1 mil­lion kg in 2015, in other words, 24.7% more in just one year. They also greatly ex­panded their pro­duc­tion of eggs (from 67.3 to 95.3 mil­lion eggs in three years, or 42% growth). While the share of pri­vate farms in this mar­ket is min­i­mal to­day, the pos­i­tive dy­nam­ics are ev­i­dent in light of the over­all drop in egg pro­duc­tion in the coun­try.

Fur­ther in­creases in pro­duc­tion are mainly re­stricted by lim­ited mar­ket. How­ever, there has been a shift here too. On May 22, 2017, fol­low­ing a trade mis­sion to Ukraine, the Ad­min­is­tra­tion of Qual­ity Su­per­vi­sion, In­spec­tion and Quar­an­tine of the Peo­ple's Repub­lic of China and the State Ser­vice of Ukraine for Food Safety and Con­sumer Pro­tec­tion signed a pro­to­col on the in­spec­tion, quar­an­tine and vet­eri­narysan­i­tary re­quire­ments for frozen beef to be ex­ported from Ukraine to China. It is pro­jected that de­mand for meat prod­ucts in China will grow faster than the ca­pac­i­ties of lo­cal pro­duc­ers. Fore­casts show that their im­port of meat will in­crease to 10 mil­lion tonnes by 2020 (to­tal con­sump­tion in China is 100 mil­lion tonnes).

Ex­ports of pork col­lapsed af­ter the clo­sure of the Rus­sian mar­ket, which ac­counted for up to 50,000 tonnes a year. How­ever, con­sump­tion of pork around the world has re­cently been in­creas­ing by al­most 1 mil­lion tonnes an­nu­ally. Trade is also grow­ing. So in this seg­ment Ukraine has some­thing to fight for on the world mar­ket. For ex­am­ple, ex­ports of pork from Spain grew from 1.06 mil­lion tonnes to 1.47 mil­lion tonnes in 2014-2016. Most of it goes to EU coun­tries, but ex­ports are also sig­nif­i­cant out­side of Europe, mainly to East Asia (252,000 tonnes to China, 81,000 tonnes to Ja­pan and 62,000 tonnes to South Korea). In 2016, Canada also ex­ported 1.25 mil­lion tonnes of pork. Again, China and Ja­pan re­main the ma­jor mar­kets. For Ukraine, es­pe­cially if we look at ex­port vol­umes from the times when the coun­try was ori­ented to­wards the Rus­sian mar­ket, even reach­ing a level of to­tal in­ter­na­tional ex­ports close to Span­ish sup­plies to South Korea alone would qual­ify as suc­cess. The po­ten­tial is much larger.

The pro­por­tion of semi-sub­sis­tence house­hold farms in the man­u­fac­ture of the vast ma­jor­ity of live­stock prod­ucts is still very high, which af­fects the over­all per­for­mance of Ukrainian live­stock pro­duc­tion. They help a large num­ber of ru­ral res­i­dents to sup­port them­selves and pro­vide con­sid­er­able vol­umes of agri­cul­tural pro­duc­tion, but are far less ef­fec­tive and pro­duc­tive than the com­mer­cial sec­tor. More im­por­tantly, it is dif­fi­cult to mon­i­tor the qual­ity and safety of prod­ucts

made from their raw pro­duce, so it is be­com­ing more dif­fi­cult for them to ac­cess mar­kets with high food safety stan­dards. Re­cently, how­ever, home farms are be­ing ac­tively pushed out of the food pro­cess­ing in­dus­try, which will in­crease the sup­ply of ready-made food prod­ucts to for­eign mar­kets.

THE DAIRY RE­NAIS­SANCE

Milk pro­duc­ers are also find­ing a new lease of life. In­creas­ing quan­ti­ties of their pro­cessed prod­ucts are cross­ing the bor­der. In this way, Ukraine is slowly but surely over­com­ing the con­se­quences of the clo­sure of the Rus­sian mar­ket for its dairy prod­ucts. To­day, dairy im­ports are nine times smaller than ex­ports.

Mini milk fac­to­ries are spring­ing up around the coun­try, fo­cused on pro­cess­ing the pro­duce of in­di­vid­ual farms, which should pre­vent them from be­ing dic­tated to by in­dus­try gi­ants. For in­stance, in Poltava Oblast a mini-plant pro­cesses 2 tonnes of milk daily. The raw milk comes from a lo­cal farm that only has 60 cows. The business is al­ready op­er­at­ing suc­cess­fully. It has the ca­pac­ity to pro­duce al­most the en­tire range of dairy prod­ucts, ex­cept for hard cheeses. A sim­i­lar fa­cil­ity should be launched by the end of this year in Vin­nyt­sia, also de­signed for pro­cess­ing milk ex­clu­sively from one farm, which has 185 cows. For now, these mini fac­to­ries are ori­ented mainly to­wards the do­mes­tic mar­ket, but in the long run they are also con­tem­plat­ing the pos­si­bil­ity of ex­port­ing.

The emer­gence of mini fac­to­ries, in spite of what would seem to be their ob­jec­tively lower eco­nomic ef­fi­ciency in view of the small scale of pro­duc­tion, brings to light the prob­lem that is the oligopolis­tic dic­ta­tion of prices for raw dairy prod­ucts by large man­u­fac­tur­ers. This al­lows them to make ex­or­bi­tant prof­its but re­stricts the in­dus­try's devel­op­ment po­ten­tial. Ukrainian ex­ports of dairy prod­ucts are also re­viv­ing. Af­ter the heavy losses that the in­dus­try suf­fered as a re­sult of nu­mer­ous "cheese wars" and other eco­nomic con­flicts with Rus­sia, end­ing with a com­plete ban on the im­port of Ukrainian dairy prod­ucts, there has been a grad­ual shift to

Pro­duc­tion of but­ter from 2013 to 2016 in­creased from 92.7 to 101 mil­lion kg. This year, the pos­i­tive trend is con­tin­u­ing: in Jan­uary–May, pro­duc­tion reached 40.8 mil­lion kg, com­pared to 39 mil­lion kg in the same months of 2016. In the first half of 2017, the ex­port of but­ter grew 3.1 times over – to 12.3 mil­lion kg – in com­par­i­son with the same pe­riod in 2016, while in mon­e­tary terms there was a four­fold in­crease – from $ 10.93 mil­lion to $ 44.8 mil­lion. Cheese ex­ports are also re­cov­er­ing: in the first half of the year Ukraine sup­plied 4.1 mil­lion kg to for­eign mar­kets, which is 21.3% more in phys­i­cal vol­ume and 47% more in for­eign cur­rency earn­ings than for the same pe­riod in 2016. The ex­port vol­umes of a num­ber of other dairy prod­ucts are also grow­ing (see Not by grain and oil alone).

VEGGIES, BERRIES AND ROSES

Ukrainian veg­etable farm­ing is also de­vel­op­ing suc­cess­fully. Ar­ti­fi­cial ir­ri­ga­tion plays a spe­cial role in this. From 2013 to 2016, the pro­duc­tion of veg­eta­bles on ir­ri­gated land in­creased from 0.73 mil­lion to 1 mil­lion tonnes, fruit and berries – from 74.4 to 153.8 mil­lion kg. In gen­eral, de­spite the loss of con­trol over a part of the coun­try's ter­ri­tory, dur­ing this pe­riod the amount of open-ground toma­toes cul­ti­vated in mar­ket-ori­ented Ukrainian farms in­creased from 382 to 612 mil­lion kg. The in­fra­struc­ture of Ukrainian veg­etable grow­ing is also de­vel­op­ing (the largest to­mato pro­cess­ing plant in Europe is be­ing built in Myko­laiv Oblast), as well as the cul­ti­va­tion of berries for ex­port.

Ac­cord­ing to the lat­est cus­toms statis­tics, the ex­port of canned toma­toes in the first half of 2017 was 2.8 times higher than in the same pe­riod two years ago. Sales of fresh toma­toes abroad in­creased by al­most 1.6 times over this pe­riod and cher­ries by five times. In June 2017 alone, Ukraine ex­ported more than 2.5 mil­lion kg. Pre­vi­ously, Rus­sia con­sumed al­most the en­tire ex­port vol­ume, and de­liv­er­ies to it in re­cent years were car­ried out through Be­larus, but in 2017 the share of Be­larus in to­tal ex­ports de­creased to 60%. In­stead, ship­ments to Poland have in­creased. It im­ported al­most 500,000 kg of Ukrainian cher­ries. Among the other buy­ers were Ger­many, Great Bri­tain and Hong Kong. Each year, mil­lions of kilo­grams of rasp­ber­ries and other berries, the list of which is con­stantly ex­pand­ing, are sup­plied to the for­eign mar­ket.

For­eign coun­tries are in­creas­ingly in­ter­ested in Ukrainian horticulture and berry pick­ing. To­day, most Ukrainian berries are shipped to EU coun­tries. At the same time, China is also in­ter­ested in pur­chas­ing them (it does not have enough to sat­isfy its do­mes­tic mar­ket). In ad­di­tion, it is look­ing to gen­er­ate prof­its from the growth of this promis­ing in­dus­try in Ukraine. Ac­cord­ing to the Ukr­sad­prom, the state gar­den­ing as­so­ci­a­tion, the Chi­nese state cor­po­ra­tion China Haisum En­gi­neer­ing in­tends to in­vest $515 mil­lion in Ukrainian horticulture over the next two years. $170 mil­lion will be al­lo­cated for the devel­op­ment of fruit pro­cess­ing, $120 mil­lion for the con­struc­tion of pro­duc­tion and lo­gis­tics com­plexes, $53 mil­lion for im­prov­ing ir­ri­ga­tion sys­tems and $30 mil­lion for the con­struc­tion of fruit stor­age fa­cil­i­ties. Ap­par­ently, 18 projects from vir­tu­ally all over the coun­try – in 16 oblasts – worth from sev­eral hun­dred thou­sand to sev­eral hun­dred mil­lion dol­lars each have al­ready been se­lected for fund­ing.

Fi­nally, the pro­duc­tion of flow­ers in Ukraine is grad­u­ally find­ing its feet and de­mand is in­creas­ing in in­ter­na­tional mar­kets. In­deed, ac­cord­ing to Ukrainian Agribusi­ness Club data, Ukraine ex­ported 2.89 mil­lion roses in 2016, which is 29 times higher than in 2014 and three times larger than the 2015 fig­ure. The price of one Ukrainian rose on the for­eign mar­ket in 2016 was about $0.40, while the main buy­ers were Poland (50% of the to­tal), Be­larus (29%) and the Nether­lands (20%). Ukraine ac­tu­ally still im­ports many more roses (24.4 mil­lion units), but the sit­u­a­tion may im­prove in sev­eral years if the cur­rent dy­namic is main­tained.

FOR­EIGN COUN­TRIES ARE IN­CREAS­INGLY IN­TER­ESTED IN UKRAINIAN HORTICULTURE AND BERRY PICK­ING. TO­DAY, MOST UKRAINIAN BERRIES ARE SHIPPED TO EU COUN­TRIES

AGRI­CUL­TURE | ECO­NOM­ICS | 11 Bees on the march. The ex­port of honey in Jan­uary–June 2017 al­most dou­bled to 30 mil­lion kg com­pared to the first half of 2016. The largest buy­ers are the US ($18.9 mil­lion), Ger­many ($10 mil­lion) and Poland ($5.6 mil­lion)

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