Agricuture in Ukraine
Agricuture
in Ukraine
Plan
1.
Potential of agriculture
2.
Major crops
3.
Agriculture machinery
4.
Problems of this sector of economy
5.
Investment in agriculture
1. Potential of agriculture
Ukraine is blessed with rich farming and
forestry resources. According to the Statistical Year Book of Ukraine (1996),
about 71 percent of the country's surface (41 million hectares) was used for
agricultural activities.
About 80 percent of the agricultural area
is arable land, two-thirds of it the agriculturally rich "black soil"
(chernozem). The primary food harvest products are barley, maize, potatoes,
rice, soybeans, sugar beets, and wheat. The primary meat products are beef and
veal, lamb, pork, chicken, horse, and rabbit. In terms of value, the largest
agricultural exports in 1998 were refined sugar, raw sugar, beef and veal,
sunflower seed, and fish. The total value of agricultural exports in 1998
estimated $1.898 billion. The total value of agricultural imports in 1998 was
$999 million. The largest single crop produced in 1999 was potatoes at 15.4
million metric tons. The number-two crop was sugar beets at 13.89 million
metric tons, followed by wheat at 13.47 million metric tons. The main livestock
product was beef and veal with 786,000 metric tons, followed by swine with
668,000 tons, and chicken with 194,500 tons.
In recent years, agricultural production
has declined drastically because of a decrease in the number of tractors and
combine harvesters in working order and to the lack of fertilizers and
pesticides. According to official data, between 1991 and 1997, the number of
tractors in use decreased from 497,300 to 361,000. (In order to operate
efficiently, it is estimated that the country would need 515,000 tractors in
use.) Similar shortfalls exist for harvesting combines. Between 1990 and 1997,
the consumption of pesticides and fertilizers per hectare declined about 78
percent. From 1995 to 1999, crop production declined by an average of almost 10
percent per year, while livestock production declined by an average of 9
percent per year. These shortfalls in agricultural inputs reflect declining
investment in agriculture, and feed directly into declining production.
Under communism, agricultural lands were
held by the government and worked by the people, who owned no land.
Privatization planned to shift most such land into the hands of individuals and
farming collectives (jointly held farming cooperatives). By August 1995, the
transfer of lands into private hands had begun. Over 8 million hectares of land
had been privatized, with plots averaging 5 hectares. By 1996, most of the
agricultural land in Ukraine was in collective and private hands, although 40
percent was still owned by the government. Household plots and private farms
accounted for about 15 percent of the Ukrainian territory and they filled an
important role in the delivery of products to the marketplace.
In general, the agricultural sector is
experiencing serious internal difficulties, due to the transitional nature of
the economy. A new policy and direction for Ukraine's agricultural sector is
necessary. Agriculture poses the greatest challenge to the survival of
Ukraine's political leaders, because almost half of the Ukraine's population live
in rural areas.
About 57% of the total land area is
arable, with another 11% utilized as permanent pasture land. Agriculture
accounted for 17% of GDP in 2001. As in other former Soviet republics, total
agricultural production has dramatically declined since 1990. Although the rate
of decline is slowing, yearly declines still prevail. The average annual
decline during 1990–2000 was 5.8%. By 1999, the agricultural sector was only
producing 47% as much as it had during 1989–91. Production amounts in 1999 included
(in 1,000 tons): sugar beets, 13,890; potatoes, 15,405; wheat, 13,476; dry
peas, 510; fruit, 1,594; sunflower seeds, 2,750; cabbage, 1,015; grapes, 270;
wine, 73; soybeans, 42; and tobacco, 3.
Ukraine's steppe region in the south is
possibly the most fertile region in the world. Ukraine's famous humus-rich
black soil accounts for one-third of the world's black soil and holds great
potential for agricultural production. However, the soil is rapidly losing its
fertility due to improper land and crop management. Ukraine typically produced
over half of the sugar beets and one-fifth of all grains grown for the former
USSR. In addition, two of the largest vegetable-oil research centers in the
world are at Odessa and Zaporizhzhya. Agroindustry accounts for one-third of
agricultural employment. To some extent, however, agroindustrial development
has been hampered by the deteriorating environment as well as a shortage of
investment funds due to the aftermath of the nuclear power plant disaster at
Chernobyl. According to estimates, nearly 60,000 hectares (148,250 acres) of
arable land in the Chernobyl vicinity are now unavailable for cultivation. Out
of 33 million ha (81.5 million acres) of total arable land, more than 17
million ha (42 million acres) are depleted, 10 million ha (24.7 million acres)
are eroded, and another 10 million have excessive acidity. Furthermore, 17% of
arable land is located in areas where there is risk of drought.
2. Major crops
The climate of Ukraine is roughly similar
to that of Kansas: slightly drier and cooler during the summer and colder and
wetter during the winter, but close enough for comparison. The weather is
suitable for both winter and spring crops. Average annual precipitation in
Ukraine is approximately 600 millimeters (24 inches), including roughly 350
millimeters during the growing season (April through October). Amounts are
typically higher in western and central Ukraine and lower in the south and
east.
Of Ukraine's total land area of 60
million hectares, roughly 42 million is classified as agricultural land, which
includes cultivated land (grains, technical crops, forages, potatoes and
vegetables, and fallow), gardens, orchards, vineyards, and permanent meadows
and pastures. Winter wheat, spring barley, and corn are the country's main
grain crops. Sunflowers and sugar beets the main technical, or industrial,
crops. Agricultural land use
has shifted significantly since Ukraine declared independence from the Soviet
Union in 1991. Between 1991 and 2000, sown area dropped by about 5 percent,
from 32.0 million hectares to 30.4 million, and area decreased for almost every
category of crop except for technical crops (specifically sunflowers). Forage-crop
area plunged by nearly 40 percent, concurrent with a steep slide in livestock
inventories and feed demand.
Wheat is grown
throughout the country, but central and south-central
Ukraine are the key production zones. About 95 percent of Ukraine wheat is
winter wheat, planted in the fall and harvested during July and August of the
following year. On the average, approximately 15 percent of fall-planted crops
fail to survive the winter. The amount of winterkill varies
widely from year to year, from 2 percent in 1990 to a staggering 65 percent in
2003, when a persistent ice crust smothered the crop. Wheat yield declined
during the 1990's following the breakup of the Soviet Union and the loss of
heavy State subsidies for agriculture. Farms struggled with cash shortages, and
the use of fertilizer and plant-protection chemicals plummeted. Due to a
combination of favorable weather and a modest but steady improvement in the
financial condition of many farms, wheat production has rebounded in recent
years (except for the disastrous 2003/04 crop which fell victim to unusually
severe winter weather). Ukraine produces chiefly hard red winter wheat (bread
wheat), and in a typical year roughly 80 percent of domestic wheat output is
considered milling quality, by Ukrainian standards. Feed consumption of
wheat dropped sharply during the 1990's, from over 12 million tons to less than
5 million. Meanwhile, food consumption has remained steady at around 10 million
tons.
Barley has been the
top feed grain in Ukraine for most of the past ten years in terms of consumption,
surpassing wheat in the early 1990's. Spring barley accounts
for over 90 percent of barley area, and the main production region is eastern
Ukraine. Spring barley is typically planted in April and harvested in August,
and is the crop most frequently used for spring reseeding of damaged or
destroyed winter-grain fields. Area is inversely
related, to some degree, to winter wheat area. Winter barley is the
least cold-tolerant of the winter grains, and production is limited to the
extreme south. The increasing demand for malt from the brewing industry has led
to a jump in malting barley production and the import of high-quality planting
seed from the Czech Republic, Slovakia, Germany, and France. Consumption of
barley for malting purposes has surpassed 300,000 tons, but still accounts for
only 5 percent of total barley consumption.
Increased production -- specifically,
three bumper harvests since 2001 -- and diminishing domestic demand for feed
grains have contributed to a jump in Ukrainian wheat and barley exports.
The boom in exports was fueled also by relatively low production costs and the
reduction or elimination of price controls and export restrictions in 1994. Most
exports go to the Middle East, North Africa, and Europe. (See attaché
reports: Grain and Feed Annual,
April 2004, and How is Ukrainian Grain
Competitive?, August 2002.)
Corn is the third
important feed grain in Ukraine. Planted area has increased despite several
impediments: obsolete and inadequate harvesting equipment, high cost of
production (specifically post-harvest drying expenses), and pilferage. The main
production region is
eastern and southern Ukraine, although precipitation amounts in some oblasts in
the extreme south are too low to support corn production. Corn is typically
planted in late April or early May. Harvest begins in late September and is
usually nearing completion by early November. Only 25 to 50 percent of total
corn area is harvested for grain; the rest is cut for silage, usually in
August. (The USDA corn estimates refer to corn for grain only.) Corn is used
chiefly for poultry and swine feed, and production and consumption have risen
since 2000 concurrent with a rebound in poultry inventories. Russia and Belarus
are the chief destinations for Ukrainian corn exports.
Sunflowerseed is
Ukraine's chief oilseed crop. Production is concentrated in the southern and eastern oblasts.
Sunflowers are typically planted in April and harvested from mid-September to
mid-October. Because of a combination of high price, relatively low cost of
production, and traditionally high demand, sunflowerseed has become one of the
most consistently profitable crops. (See Sunflowerseed Production in
Russia and Ukraine, June 2004.) Its high profitability fueled a
significant expansion in planted area beginning in the late 1990's. Many
farmers in Ukraine abandoned the traditional crop-rotation practices
recommended by agricultural officials which called for planting sunflowers no
more than once every seven years in the same field. The aim of the 1-in-7
rotation is to prevent soil-borne fungal diseases and reduce the depletion of
soil moisture and fertility. (Because of their deep rooting system, sunflowers
reportedly extract higher amounts of water and nutrients from the soil than do
other crops in the rotation.)
Sugar beets are grown
primarily in central and western
Ukraine. Beets are planted in late April and early May and harvested from
mid-September through the end of October. Production has been on the decline
since the early 1990's due chiefly to low profitability compared to grains and
sunflowerseed. Between 1994 and 2003, planted area declined by 50 percent to
less than 0.8 million hectares, and production from 28.1 to 13.4 million tons. Large
farms are sometimes encouraged by the local administrators to plant sugar beets
not so much to make money but rather to provide a social safety net or to
supplement to pensioners or farm workers. A family may be responsible for
weeding a specific section of a field and the workers in turn receive 20
percent of the sugar processed from the beets harvested from its section. Sugar
also frequently serves as part of farm workers’ salaries.
On private household plots, meanwhile,
sugar beet area has increased. Sugar beet production requires a significant
amount of hand labor and remains a viable option for small household farms with
limited access to agricultural machinery. Household plots now account for
approximately 25 percent of Ukrainian sugar beet output compared to only 3
percent in 2005.
Farms in Ukraine employ a variety of
crop-rotation schemes, some including four or more crops, some only two. A
six-year crop rotation in the winter grain region will often include two
consecutive years of wheat and one season of "clean fallow," during
which no crop is sown. The chief reason for including fallow in the rotation is
to replenish soil-moisture reserves, and it is more widely used in southern
eastern Ukraine where drought is not uncommon. A typical crop sequence might
be: fallow, winter wheat, winter wheat, sunflowers, spring barley, and corn.
Wheat almost always follows fallow. According to farm directors, this enables
the wheat -- which is typically the priority crop -- to benefit from the
reduced weed infestation. (Fields are cultivated several times during the
fallow season.). Some crop rotations include several consecutive years of a
forage crop. An example of such a rotation would be: fallow, two years of
winter wheat, and four years of perennial forage. The perennial forage is
usually alfalfa; farmers will get three to four cuttings per year, five if the
crop is irrigated. In southern Ukraine, clean fallow is frequently omitted and
a crop rotation will likely include sugar beets and/or sunflower, the region's
chief industrial crops. A typical seven-year rotation might be: winter wheat,
winter barley, sugar beets, winter wheat, winter barley, sunflowers, and corn. The
vast majority of field crops, including grains, sunflowers, and sugar beets,
are not irrigated. Traditionally, irrigation is used only on forage crops and
vegetables. Roughly 5 percent of grains and 10 percent of potatoes, vegetables,
and forage crops are irrigated.
3. Agriculture machinery
According to various resources, an
immediate demand to replenish the physically depreciated farm and processing
equipment in Ukraine is estimated at $5-10 billion, with an annual supply of
$1-2 billion worth of farm equipment.
Experts estimate the current level of
physical depreciation of agricultural machinery and equipment at 70-80 percent,
compared to 55-60 percent in 1999. Approximately 40 percent of tractors are
15-25 years old. The need to replace basic farm machinery is becoming critical.
There are about 40 manufacturers of
agricultural machinery in Ukraine, which still supply a significant part of
Ukraine agricultural machinery, in particular, ploughs, harrows, cultivators,
seeders and sprayers. Production facilities at most agricultural machinery
plants are currently being utilized at levels ranging from 15 to 30 percent.
The price of domestically produced agricultural machinery is not cheap, because
of inefficient and outdated manufacturing technologies. All this makes local
machinery less attractive for agricultural companies.
Western European firms actively operate
in the Ukrainian market. They understand that despite the obstacles to doing
business in Ukraine, the potential for hard currency agribusiness exports is
great. U.S. agricultural machinery has a good reputation in Ukraine. The list
of U.S. manufacturers includes AGCO Corporation, Massey Ferguson, John Deere,
Caterpillar, and Case/New Holland. They offer a full range of equipment and
parts, including spare parts, for cultivating, growing, harvesting and
transporting, as well as equipment for livestock production. While U.S.
machinery is well represented in Ukraine, there are still good opportunities
for U.S. companies to enter the Ukrainian agricultural machinery market.
Existing critical demand for reconditioned (used) machinery is worth mentioning
as well.
4. Problems of
this sector of economy
The production of grain and oilseed crops
is dominated by large agricultural enterprises that were established when
Ukraine’s agricultural sector was restructured in April, 2000. (In contrast,
nearly 90 percent of the country's vegetables and virtually all of the potatoes
are grown on private household plots.) State and collective farms were
dismantled and farm property was divided among the farm workers in the form of land
shares. Most new shareholders leased their land back to newly-formed private
agricultural associations, under the leadership of a director who was
frequently, but not always, the manager of the former State farm. Consolidation
of small farms into larger and more viable enterprises has been the prevailing
trend, similar to what took place in Russia several years earlier. (For a brief
discussion of Ukraine’s agricultural restructuring, see June 2001
report.) The conversion to a more market-oriented environment has
progressed relatively well according to most observers. Many farms are
succeeding, under shrewd leadership, in spite of fluctuating grain prices and
constraints on the availability of credit. The transition of Ukraine's
agricultural sector from a command economy to a more market-oriented system has
introduced the element of fiscal responsibility, and farm managers are striving
to make their enterprises as efficient as possible. Decisions on crop
selection, fertilizer application, harvest method, grain storage, and all other
aspects of farm management are made with an eye toward boosting farm profit. Ukraine
agriculture is going through a winnowing process whereby unprofitable, usually
smaller farms will either collapse or join more successful farms.
Most farms are able to receive credit,
but interest rates and collateral demands are high. Since many farms are
already heavily in debt to banks or suppliers of fertilizer and
plant-protection chemicals, and since agricultural loans are not guaranteed by
the government, banks are largely unwilling to make long-term loans. Most
credit is extended in the form of seasonal loans (six to ten months) used
almost exclusively for the purchase of fertilizer and plant protection
chemicals. Commercial interest rates typically range from 25 to 30 percent. The
State provides assistance to farms by paying 50 percent of the interest on
agricultural loans. Banks typically require 200 to 300 percent collateral,
depending on the farm’s credit history and the risk level. Future crop usually
serves as collateral, but collateral can also be offered in the form of
livestock, farm machinery, or the personal property of the farm director. Under
current legislation, land cannot be used as collateral. Farms' difficulty in
obtaining anything other than short-term, high-interest loans places severe constraints
on their ability to invest in long-term capital improvements, such as
agricultural machinery or storage facilities. Using land as collateral would
enable farms to receive longer-term loans, but many farm directors remain leery
of the Ukrainian banking system – which is not yet as stable as in Russia – and
are reluctant to risk losing their land in default. Furthermore, many
agricultural enterprises are comprised of hundreds of shareholders, whose
permission would need to be obtained before the farm director could use the
land as collateral.
In many cases, the best option is for a
farm to attract an investor who can provide market expertise, operating
capital, and collateral to enable the farm to secure loans. The potential “down
side” of investor arrangements, from the farmer's perspective, is that farm
directors to some extent lose control of farm operations. Often the investment
company, or “holding company,” insists on maintaining control over every aspect
of production and essentially takes over the farm, equipment, and land. Farms
are forced to enter into extended leases of five to ten years, sometimes
longer, because they depend heavily on cash from the holding company.
The consensus of most observers is that
already-successful farms will continue to expand as shareholders pull out of
failing farms and lease their plots to stronger ones. Clearly, many farms will
not survive the transition to a market economy, and high-risk farms with few
liquid assets, heavy debt, bad credit history, and poor management will
collapse.
The loss of State subsidies following the
collapse of the Soviet Union in 1991 increased feed and production costs and
reduced profitability for livestock enterprises. As prices for meat products
increased, consumer demand declined, thus establishing a downward spiral that
continued throughout the decade. Livestock inventories,
and demand for forage, continued to shrink. The increasing inability of large
agricultural enterprises (i.e., former State and collective farms) to maintain livestock
operations, due largely to inefficient management and farms' inability to
ensure sufficient feed supplied, resulted in increased dependence on private
producers and household farms to satisfy demand for beef and pork. Furthermore,
the involvement of investor groups (holding companies) in agricultural
production has had an impact on livestock numbers. Many farms who entered
agreements with investment firms killed off their herds because livestock is
not quickly profitable and not as attractive to investors. Although the
freefall in livestock inventories has slowed since 2000, a rapid recovery in
beef production is unlikely. Cattle inventories are increasing on private
household farms, which typically have two to three head of cattle per farm, but
large industrial farms are shifting away from cattle and toward crop production
and total cattle inventories continue to decrease.
5. Investment in
agriculture
Investment in agriculture land in Ukraine
is conducted under farmland lease agreements. Lease contracts are closed
directly with pai-holders for different periods averaging at 10 years and going
up to 49 years. Farmland pai lease contracts enable contractors to consolidate
large fields of 50-200 hectares located close to each other for the ease of
crop rotation planning, cultivation and harvesting.
Ukraine’s agricultural land cannot be
purchased, but lease agreements for agricultural land enable as much freedom
for performing farming operations as ownership while also providing a primary
right of purchase in case of the agricultural land sale moratorium lift and
given that pai holders would be willing to sell off their property.
Cost of investment in Ukraine’s farmlands
is the lowest in Europe while it provides the highest return potential given
the high soil fertility and unrealized agri-ecological potential of Ukraine’s
soils. The cost of investment is composed of the lease rights acquisition cost,
annual lease fees and annual cultivation (actual farming operation) costs.
Land lease rights acquisition cost in
2009 has ranged from USD 120 to USD 300 per hectare depending of the region and
soil quality. Lease rights are normally acquired through the transfer of
corporate rights from the current lease holding company to the new owners.
Lease rights can also be transferred through re-registration of land lease
agreements.
Annual land lease fees are legally fixed
at a minimum 3% of the land plot value level but may vary from region to
region. Lease fees in 2009 have ranged from USD 25 to USD 45 per hectare.
Agricultural land lease agreements carry
a legal obligation of land cultivation which inevitably requires a lessee to
perform actual farming activities. Since agricultural equipment lease is not
very common in Ukraine, most farms invest in tractors, tillage equipment,
seeding equipment, harvesters, etc. Capital investment into agricultural
equipment in Ukraine may vary from USD 350 (locally produced equipment or
mixed) to USD 800 (high-end Western equipment) per hectare.
Calculated per annum with fuel, spare
parts, seeds, fertilizers, crop protection, labor costs, etc. included, annual
cultivation cost from USD 200 per hectare using organic farming
methods up to USD 500 per hectare with conventional/chemical farming. Organic
farming, as opposed to intensive conventional farming, provides a better
investment opportunity in Ukraine due to high natural fertility level in the
soils. In most of the cases, there are no yield losses when growing organically
in Ukraine compared to what most of the Western European farms experience
during the transition period.
Optimal investment cost in Ukraine’s
agricultural land in 2009 is one of the lowest at USD 600-800 per hectare
compared to Americas’ (USA and Argentina) USD 4,000+, and Western European
level of USD 12,000+. At the same time, the current harvest yields in Ukraine
suggest that the agro-ecological potential of 6.2 metric tons per hectare can
be easily obtained under proper farm management and with the use of optimal
organic technologies. Besides, the land lease price is expected to double in
2010.
Ukraine’s soil quality is subject to
bonitet valuation system. Most of Ukraine’s soils boast a bonitet above 40.
Chernozem (black soil types) have a bonitet of 70-80 and more. Soil fertility
is a complex quality of soils and not limited by bonitet. Land valuation in
Ukraine has no standardized system and in most of the cases is based on the
yeilds history for particular farms or individual fields.
Soil quality tests are easy to obtain in
Ukraine and cost USD 200-450 per measured field (50-200 hectares). Such tests
often include detailed recommendations for further soil treatment making it
very easy to draw cultivation and fertilization plans per each individual
field.
Farm management, on the other hand, is a
more complex issue. Many Ukrainian farms lack new equipment or sufficient
knowledge of modern farming technologies and sustainable farming methods.
An optimal size of an individual farm in
Ukraine is 5,000 to maximum 10,000 hectares. The farm volume is considered
optimal when any commercial crop can be harvested and sold at the minimum
export volume of 3,000-5,000 metric tons.
Harvest storage is a critical
consideration for operational independence and financial stability of a farm
not only in UKraine. A capital investment of USD 120-150 per metric ton of
storage should be considered to secure long-term performance of a farm.
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