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21 August 2017
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Tough year for Ukraine’s agrarians

The sharp jumps of the dollar, unprecedented drought and African swine fever – this is not a complete list of problems faced by Ukrainian farmers in the past year. Opening a series of articles on the year’s results and forecasts for 2016, UNIAN examined, whether the situation would improve the next year and what it will depend on.

Ukraine will be provided in full with grain and oil until the next harvest / market.korupciya.com
Ukraine will be provided in full with grain and oil until the next harvest / market.korupciya.com

Ukraine’s agrarian sector, key to the country’s economy, fell by almost 5% over eleven months of 2015 and is expected to end the year with the same result. The decrease was observed in all areas, and grain production is no exception. In the past year, record crops for the past several years were recorded in Ukraine, with 61 million tonnes harvested. Of course, it's more than the Ministry of Agrarian Policy and Food initially projected (60 mln tonnes), but less than the country’s historical record of 63.8 million tonnes in 2014.

Grains and oilseeds are the backbone of Ukraine’s agricultural exports, which comprise the lion's share of foreign exchange earnings [according to the Agrarian Minister Oleksiy Pavlenko, it was nearly 37% in 2015]. The State Statistics Service reported that in the last five years, the gross grain harvest ranged from 38 million tonnes to 63.8 million tonnes, but in general, it showed a clear upward trend. However, foreign currency earnings from this type of commodity have been on steady decline since their peak in 2012 with $17.9 billion. In the first 11 months of 2015, the profit amounted to only $13 billion. This proves once again that Ukraine, as well as all countries specializing in the export of raw materials, is very sensitive to the level of grain prices on world markets.

Anyway, Ukraine’s internal demand of grains and oilseeds will be covered in full, at least until the next harvest season. More than 36 million tonnes will remain for exports, against 34.8 million tonnes in the last marketing year (July 2014 to June 2015).

Apparently, in 2016 Ukraine will not beat its 2014 grain harvesting record. The devastating drought, which lasted from July to late October, delayed sowing. The farmers could not sow canola, rye, wheat and barley within the optimum period for the plants to be able to fully develop before hibernation.

According to the Agrarian Ministry, 7.1 million hectares has been sown instead of the planned 7.4 million hectares as of December 17. By happy coincidence, the negative impact of the drought was mitigated by favorable weather in November and December, which helped farmers see the seedlings on 86% of the sown area. But one-third of germinating crops is sparse and in poor condition, which casts doubt on the plants successfully surviving through the winter.

Under-sowing and the loss of crops in cold weather will force farmers to replant the free areas in the spring, which would entail additional costs. The large agricultural holdings cannot afford to draw additional financing for this purpose while the smaller-scale farmers face an even direr situation. The farmers are outraged with the unaffordable cost of loans in the Ukrainian banks – the loans are issued at a 20-30% annual rate in hryvnia and 10-15% in foreign currency. The Agrarian Ministry expects that the so-called agricultural bills of debt will help with funding as they allow getting the loans secured on the upcoming crops. A pilot project was launched in the Poltava region in 2014, helping the farmers raise nearly UAH 40 million. This year, the mechanism of agricultural bills of debt started working in Vinnytsia, Cherkasy and Kharkiv regions, and in 2016, the Ministry intends to expand it across Ukraine.

The problem of finding funds for the agricultural business is acute. If there is not enough money for the spring sowing, it will not affect the country's food security, but it may undermine Ukraine's position in the global market.

Not enough veggies for borsch

Ukraine’s
Ukraine’s “vegetable independence” is weakened / www.prelest.com

Ukraine’s “vegetable independence” has been shaken. In the past year, Ukraine started to import vegetables of the so-called “borsch set,” for the first time ever. Experts argue that the need arose due to with the fall of the yield of the most demanded vegetables. The sowing areas have decreased by 5% compared with the previous year, while the yields fell by 10-13%.

"We, ourselves, are in the need for imports. In October, we have already begun to import these products. Nothing of this kind has ever happened before," said Tetiana Herman, the project manager at APK-Inform: Vegetables and Fruits.

But the Ukrainians will only have to rely on imported vegetables to cook a favorite national dish only until next autumn. According to experts, the companies selling seeds have recorded a significant increase in sales of seeds of late cabbage, onions and carrots, which signals of the farmers’ plans to increase production in 2016.

As for fruit, the gardeners in the past year focused on the search for new markets, being affected by the closure of the Russian market, which until 2014 had been the main export destination. Experts point out that in 2015, the gardeners took full advantage of the unilateral abolition of trade barriers by the EU for Ukraine. According to Hetman, in the past year our producers exported to Europe a record number of melon (shipments increased by 85% compared to the previous season), frozen apples (up 30%) and apple concentrate (plus 70%). The main advantage of Ukrainian fruit is a relatively low cost due to the dramatic fall of the hryvnia exchange rate in the last year.

Trade defense and offensive

The Ukrainian producers profited from devaluation of the hryvnia / Photo from UNIAN
The Ukrainian producers profited from devaluation of the hryvnia / Photo from UNIAN

As we are assured by the Ministry of Economic Development and Trade, the devaluation of the hryvnia has an advantage for the Ukrainian producers. To a certain extent, it will protect the internal market from the influx of European foodstuffs that could happen starting January 1, 2016, after the removal of Ukraine's import duties for goods from the EU would be removed.

"We can’t say that the European products will push the Ukrainian produce out of our market. In the context of the devaluation of the hryvnia we don’t see much of a threat, because our goods are quite competitive in terms of price and reasonable quality," said Deputy Minister of Economic Development and Trade, Ukraine’s Trade Representative Natalia Mykolskaya.

While the European goods are unlikely to flood the Ukrainian market, Turkish producers of fruit and vegetables are already increasing their supplies to Ukraine, due to Ankara’s escalating political confrontation with Moscow.

Russia banned from January 1, 2016, imports of Turkish tomatoes, cucumbers, tangerines, apples, strawberries and other fruit and vegetables. Experts expect that most of these products will be forwarded to the Ukrainian market, at a discount, which will please the Ukrainian buyers and upset domestic producers.

At the same time, the Ministry of Agrarian Policy says that, if the Turkish side resorts to the mirror measures against Russia, Ukraine will be ready to compensate the loss of the Russian suppliers of agricultural products. So far, Ukraine and Russia’s exports to Turkey are mainly corn and sunflower oil. If Russia leaves the Turkish market, this will open up prospects for Ukraine to increase the supply of grain to Turkey nearly fourfold (up to 4 million tonnes) and sunflower oil - fivefold (up to 900,000 tonnes). Experts say that Ukraine is capable of satisfying this demand.

Milky way down

Ukraine’s dairy industry is going through some hard times / Photo from UNIAN
Ukraine’s dairy industry is going through some hard times / Photo from UNIAN

The principle of "the fittest one survives" has gained special relevance for livestock farmers in the past year. As experts predict, we will also be able to observe in 2016 a tighter version of natural selection among producers of dairy products and meat.

In 2014, the Ukrainian dairy producers suffered a painful blow when Russia closed its market. Throughout 2015, they have been looking for an opportunity to sell the surplus product within the country. The long-observed excess of dairy products in the market did not give producers an opportunity to raise prices to cover the costs of production which rose dramatically on the yeast of inflation. While the increase in consumer food prices was at 45% in January-November, the price of milk only rose by 27%. The impoverishment of the Ukrainians is not the least limiting factor for the price growth, as people simply cannot buy expensive products.

To survive and to work without losses, dairy producers had to optimize production. With difficulties, the farmers managed to accomplish this task -- over 11 months they have increased yields by 1% compared to last year. But regular village households that produce nearly 70% of Ukrainian milk, have lost ground, reducing production by almost 6%.

According to the forecasts of Andriy Yarmak, who is an economist at the Technical Cooperation Department of the Food and Agriculture Organization (FAO) milk production in Ukraine decreased by 4.5% in 2015, while the processing fell by 8.5%. The processors are already experiencing the shortage of raw materials. The decrease in milk production by private households across the country will also continue in 2016.

"It should not be expected that the trend for reduction of milk production will be broken," said Yarmak.

In the near future, we should not expect lower prices of dairy products, according to the chairman of the board of directors of the Union of Dairy Enterprises, Vadym Chaharovsky. He predicted the increase in the supply of dairy products processed from Europe to the Ukrainian market in 2016. "From 2016, a free trade area starts working, and we expect the increased imports of dairy products," said Chaharovsky, noting that the imports of cheese, butter and cheese products will increase in the first place.

Meat abundance

2016 will be comfortable for consumers, and problematic for producers of pork / Photo from UNIAN
2016 will be comfortable for consumers, and problematic for producers of pork / Photo from UNIAN

Meanwhile, the Ukrainian meat market will be absolutely protected from the competition of European manufacturers. Experts predict that there will be plenty of pork and bacon in the Ukrainian market, and the price will please the consumers throughout the next year.

"Next year will be relatively comfortable for consumers, but for the producers of pork, it will be quite problematic. For many, it will be a year of taking tough decisions to withdraw from the business," said Artur Loza, head of the Association of Pork Producers of Ukraine (APP).

Pork producers have long suffered from the fall of demand. Once a cult product, it has been increasingly giving way to chicken in Ukraine. Chicken accounts for 50% of meat consumed in Ukraine, while sales of pork were down 25% compared to 2013. The decline in demand and the low purchasing power of Ukrainians do not give producers an opportunity to raise prices, so they survive on the verge of profitability. According to the APP, many breeders will take the decision in 2016 to close their farms, which will lead to increased supply of meat and lard to the market. Some inefficient dairy farmers will have to take same decisions, so they will fill up the stores with beef.

The next year’s risks for pork producers are not limited to low profitability. African swine fever is another serious threat. The disease is not dangerous to humans, but it’s 100% fatal to pigs. All infected pigs and all pigs who were in contact with a sick animal must be euthanized and their carcasses - burned. In the summer of 2015, the first ASF case was recorded at a pork producing company. This was an extraordinary incident, given the level of biological protection, introduced at such facilities. The owner of the company lost more than 60,000 animals. Unfortunately, the Ministry of Agrarian Policy does not hope to tackle the the epidemic before 2017, and in the meantime the disease keeps the entire industry in anxiety, being one of the main reasons for quitting the business.

Inevitable taxes

In 2016, farmers are waiting for the tax innovations / dun.at.ua
In 2016, farmers are waiting for the tax innovations / dun.at.ua

In the past year, farmers have experienced a significant increase in taxes. The fiscal burden on the agricultural enterprises has jumped several times, taking UAH 20 billion from the farmers. Another blow to the farmers was the signing of a memorandum between the Ukrainian government and the International Monetary Fund (IMF) in March, requires the abolition of a special regime for payment of value-added tax in 2016.

The decision spurred the hike of protest moods and numerous rallies. Since 1998, the farmers did not pay VAT to the treasury, leaving the money in special bank accounts to be used for production development. Being deprived of this money, the agrarians are likely to raise the prices of foodstuffs by 10-20%, according to various experts.

Not only food but also alcohol and cigarettes will rise in prices in 2016, as the Ministry of Finance is committed to increasing the excise tax rate. The details are yet unknown, at least until the Rada adopts a new Tax Code.

Initially, the Finance Ministry proposed a twofold increase of the excise tax rate on alcoholic beverages. Ukrvodka association calculated that in this situation, the minimum price of a half-liter bottle of vodka would be UAH 90, and of a three-star brandy – UAH 150, which would devastate honest producers. Other professional associations forecast similar consequences of growing excise tax rate on cigarettes, beer and wine.

With the proposed amendments to legislation, the Ministry of Finance plans to increase state budget revenues from the excise tax, which in 2015 are expected to reach UAH 60 billion. But most manufacturers of excisable goods warn that the government will fail to implement its plans. Raising taxes will lead to a drop in production, at least, the legal one. The thing is that the demand for the cheapest, although counterfeit, goods is likely to remain at the same level.

How much for the land?

In 2016, deputies will have to decide on the opening of a land market / zn.ua
In 2016, deputies will have to decide on the opening of a land market / zn.ua

The government said that Ukraine should devote the year of 2016 to resolving the issue, so important for the economic development: whether there will be a legal market of agricultural land. In December, the president signed a law extending the moratorium on the sale of agricultural land before 2017. This again gave the Ukrainian authorities a year of delay (15th in a row) to reflect painfully on the issue of the land market.

In fact, there is a lot to think about, because more than 6 million hectares of land, belonging to the villagers, is excluded from the turnover. Expert assessment of the economic benefits from the launch of the land market range from a few billion to hundreds of billions of hryvnias, because it is difficult to predict how many villagers will want to sell their parcels, if given such opportunity, and at what price.

"The worst thing is that the decision on whether the villagers should have the right to sell or dispose of their property is taken not by them, but by politicians," said a board member of the Union of Land Surveyors of Ukraine, doctor of economic sciences Andriy Martyn. He also stressed that today about 15% of the population are owners of land parcels, obtained as a result of dividing the territory of Soviet-era collective farms. And these people are completely deprived of the opportunity to dispose of their land.

State Agency for Geodesy, Cartography and Cadaster has already drafted a bill "On circulation of agricultural land." According to the chief of the agency, Maksym Martyniuk, the draft suggests a phased abolition of the moratorium. At the first stage, the agency proposes to allow the sale of public lands, and only after the market price is formed will the market be fully open. The bill is now being agreed with the central authorities of the executive branch, but Martyniuk doubts that its adoption will pass easily.

"I have no optimism that even such a smooth model of market introduction will be supported by the Verkhovna Rada. The bill is balanced enough, but to understand it, you need to read it, which is more difficult than getting political dividends," said Martyniuk.

Whatever interests the MPs pursue, by the end of next year they have to decide how the land market will operate, if there will be one.

The past year has been eventful and challenging for Ukraine’s agriculture. All of this forced agricultural producers to squeeze out the maximum of their businesses, to stay afloat and maintain the country's economy. The coming year promises to be no less interesting. Development of trade relations with the EU will help open access to new markets for our producers. Any success abroad will depend on whether the business has learned to quickly adapt to the rules of the game within the country, which the Ukrainian authorities and the various interested parties dictate with enviable frequency.

Alina Zymenko (UNIAN)

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