By Melissa Alexander
Ukraine boasts at least one-third of the world’s total acreage of "black soil," the richest in the world, which explains why agriculture has always been significant for the country’s economy. Other agricultural assets include favorable growing conditions, geographic location and year-round access to ports on the Black Sea.
Ukraine began its transition to a market-based economy following its independence in 1991, but reforms in the sector initially were slow. Agricultural production in the past few years has improved, even enabling significant exports, but Ukrainian agriculture continues to perform below its potential.
Low crop productivity, input shortages and a lack of experience in profitable farm management continue to serve as a drag on the sector’s success. Privatization and land reform have gained some momentum in recent years, but an economic rebound is doubtful without a more effective farm credit system, improved market infrastructure, property rights, bankruptcy laws and contract enforcement.
According to the U.S. Department of Agriculture’s Economic Research Service, Ukraine’s economic policy and reform programs continue to be a source of sharp debate, with conflict arising between the executive and legislative branches. For the most part, the Parliament has pursued a more conservative approach to market reforms.
Nonetheless, the country has made comparative strides in the past three to four years. The initial spark was the December 1999 decree that ordered the breakup of almost all of Ukraine’s 10,000 collective farms and their transformation into private farms and cooperatives.
The decree divided collective farms among individual farmers and enabled them to take their shares of land and assets and set up private enterprises. Another provision helped to define land ownership rights more clearly.
The net results on the agricultural sector have been positive, according to the ERS. More than 80% of the new landowners are leasing the plots to large companies in exchange for cash or in kind payment, leading to a land market.
The market for leased land has in turn led to the creation of new businesses and increased lending to agricultural enterprises. During the first three months of 2001, banks loaned U.S.$200 million to agricultural enterprises, which is more than the agricultural investment for all of 2000.
A recent special report by Cargill, Inc., which is the largest overseas investor in Ukraine’s agricultural sector, offers further evidence of improvements. Ivan Miroshnichenko, who grew up on a collective farm and now manages origination and grain trading for Cargill in its Kiev office, said the 1999 privatization decree had a dramatic impact.
"The whole agricultural sector changed in three months," Miroshnichenko said. "We did away with state farms, farm employees got land certificates and industry was privatized. The 1917 revolution that created collective farms involved guns and force and took three to five years. We did away with the old system in three months. The result is excellent."
It was as if agriculture had been put on fast-forward, he said. And since then, Ukrainian agriculture has changed from simply trying to obtain inputs to produce a crop to being concerned about quality and supplier relationships.
Ukraine also has worked to develop a more efficient grain market structure. In mid-2002, Ukraine’s Parliament passed a law setting grain market development as a priority and providing for a set of measures to regulate the market. Under that law, the government enabled free market trading and price discovery, and a commodity exchange is planned for later this year.
In 2002-03, Ukraine is forecast to export 8.5 million tonnes of wheat, making it the world’s sixth largest wheat exporter. About 500,000 tonnes of that total will be exported to neighboring countries via rail, with the remainder shipped through the Black Sea ports of Odessa and Illichivsk.
Those ports are home to the only two large elevators on the Black Sea capable of loading 50,000-tonne vessels. The total storage capacity of all Ukrainian port elevators is estimated at only 340,000 tonnes.
To date, Ukrainian exporters have been quite innovative in utilizing nearly all possible methods of handling and loading grain for export. This includes the intensive use of available port elevators, grain unloading from railcars directly onto vessels and the completion of vessel loading at deep-water ports after partial loading in smaller ports.
Ukraine’s competitive position in grain exports will be enhanced as improvements continue to be made in port infrastructure and private investment. Private investors plan to build an additional specialized grain terminal at Odessa that will include a berth measuring 270 meters long and 12 meters deep, additional storage for 70,000 tonnes of grain and modern equipment capable of loading 15,000 tonnes per day. This new facility will increase grain export capacities by an additional 1 million tonnes.
Certain improvements also have been made to enhance capacity at smaller ports. A 30,000-tonne flat storage facility has been built at the port in Kherson, which has access to both the Dniper River and the Black Sea. The Kherson facility will allow for additional annual grain exports of 300,000 to 350,000 tonnes.
Ukraine’s status as a key player in world grain export markets is likely
to continue. Despite high transport costs, Ukrainian grain is competitive because farmers are producing grain at a relatively low cost.
While production costs probably will increase beginning in crop year 2003, the improvements and resulting efficiencies in port infrastructure and handling are expected to sustain Ukraine’s wheat and barley competitiveness. But policy changes to support farm income and reduce export costs also may play a role.
One of the major factors that will force a drop in domestic prices, and thus reduce profits,
is the government’s failure to refund
the value-added tax to grain exporters. Uncertainty over the status of VAT
refunds has already resulted in traders offering lower prices for grains this
Beginning with crop year 2003, the government also will implement a mandatory insurance program for cereals. This new crop insurance program is expected to increase annual production costs by an estimated 1% to 5%.
Longer term, competitiveness will depend on policy decisions directed at reducing market transaction costs from the farm gate to the port.
For example, all tariffs related to railroad transportation, quality standards, veterinary certificates for feed grains, ecological testing, inspections, port fees and other variables are set by the government, and current estimates indicate that it costs approximately U.S.$11 to U.S.$12 per tonne to move grain from an inland elevator to a port. This cost includes inland elevator handling fees, certification, railroad tariffs and the freight forwarder’s margin. It costs an additional U.S.$6.50 to U.S.$12.50 per tonne to move grain to a FOB position, depending on the port and vessel type.
In some export markets, Ukraine also has an advantage as a "biotech-free" supplier. Initial trials of five GM crops, including two maize varieties, were suspended two years ago based on the absence of national legislation governing the development, use and importation of genetically modified products. This has allowed Ukrainian exporters to make "biotech-free" claims.
WHEAT AND FLOUR MILLING
Ukraine grows both winter wheat and spring wheat, with winter varieties representing 97% of the total harvested wheat area over the last five years.
About 40% to 50% of Ukraine’s wheat consumption is in the form of human food, followed by feed use at 30% to 35%, and the remainder for seed. Traditionally, Ukrainian wheat producers have used their own seed for planting.
About 80% of the winter wheat crop is graded No. 4 (10% protein) and is used for blending in bread production and animal feed. The remaining 20% of the winter wheat crop averages a No. 3 and is considered to be milling quality. Annual per capita consumption of wheat is about 130 kilograms.
According to Ukraine’s Ministry of Agriculture, most flour is produced in Donetsk, Kharkiv, Lugansk and Dnepropetrovsk oblasts. Flour supplies in 2000 were put at 3.7 million tonnes, wheat equivalent, with capacity utilization estimated at 40%.
In recent years, Ukraine’s milling sector has seen an increase in the market share of small "subsidiary" milling enterprises — at 30% of the total in 1999-2000, up from 16% in 1997 — at the expense of large, industrial flour mills. Reasons for this trend include increased use of barter to procure raw materials and in-kind payments to workers, both of which benefit smaller facilities; large debts and lack of credit availability for the large mills; and shortages of milling quality wheat that created difficulties by the large mills in obtaining needed operational volumes.
Imports of milling wheat are expected to remain low in 2002 to 2003 — at 200,000 tonnes versus 690,000 in 2000-01 — as anticipated production levels should ensure an adequate supply for domestic millers and bread producers. Imports of higher quality wheat probably will be sourced from Kazakhstan, which enjoys duty free status under the current Free Trade Agreement.
COARSE GRAINS AND FEED
Feed quality wheat is the major feed grain in Ukraine, followed by barley and maize.
For 2002-03, Ukrainian feed use of wheat is expected to increase to 3.0 million tonnes, up 36% from the previous season, as large wheat crops in the past two years have pushed down domestic feed wheat prices. This has resulted in rapid growth in pork production, which is expected to more than offset decreasing beef production.
Cattle inventories and beef production are expected to continue to decline in 2003. Ukraine’s cattle herd comprises mainly dairy and dual purpose breeds, with only 3% beef cattle.
Hog production in 2003 on commercial farms will be supported by strong demand from both meat processors and the rapidly growing retail sector for uniform quality and guaranteed quantities of pork. Thus, commercial farms are believed to have more capacity for growth in 2003.
Ukraine currently has five vertically integrated hog operations with the capacity to raise 108,000 hogs and five additional operations with the capacity to raise 54,000 head, but only one of each size firm is currently operational.
In addition, a number of 12,000 to 36,000 head hog farms have been running at less than 50% capacity. These facilities were built during Soviet times and now require significant upgrading.
Investment funding has already started to flow to these operations from both domestic and foreign investors. According to industry sources, Danish and Austrian companies have invested in hog production in Ukraine.
Per capita consumption of pork in 2003 is forecast to increase to 12.9 kg per year, or by 2.4% from the revised 2002 level. The major reason given for increased pork consumption is consumer preference for the more tender and fatty pork compared with the less-tender Ukrainian beef. Nevertheless, pork consumption will remain considerably below the 29 kg per year consumed by Ukrainians in the early 1990s.
by Jay Sjerven
Ukraine’s re-emergence as a large producer and exporter of grain and oilseeds seems assured because of its rich soil, the benefits of land reform and current and prospective investments in agriculture and export logistics, Leonid P. Kozachenko, president of the Ukrainian Agrarian Confederation and advisor to former Prime Minister Anatoliy Kinakh, told those attending the Feb. 20 grains and oilseeds luncheon during the U.S. Department of Agriculture’s Agricultural Outlook Forum 2003 in Arlington, Virginia, U.S.
Kozachenko forecast that Ukrainian grain exports should continue to expand in the next few years, from the 12.8 million tonnes he projected for calendar year 2003 to 15 million tonnes in 2005.
"At the end of the 19th Century, Ukraine was the breadbasket of Europe," Kozachenko said. "Almost half of the world’s grain was exported from the Black Sea and Danube region. Ukraine’s techniques for variety selection and grain production were known and distributed all over the world.
"Unfortunately, the October Revolution of 1917 destroyed that dominance in the world and for nearly 100 years prevented Ukraine from being a world leader in grain production. Only in the year 2000, after 10 years of intensive reforms, which resulted from Ukraine becoming an independent state, has the world recalled Ukraine’s illustrious past. In the last couple of years, Ukraine has moved up to sixth among the major grain exporters in the world. He said that there was potential to improve that standing.
He attributed much of the country’s recent success to the implementation of land reform, which resulted in land becoming private property.
"Recently, the commodity trade exchange has been developed, and its importance and use is being accelerated," Kozachenko said. "In May 2003, the trade in agricultural futures will be launched on a newly developed futures exchange. The fundamentals are being established for the introduction of collateral or mortgage banking, and other elements of a market infrastructure are being introduced that are commonly found in developed countries."
Low production costs in Ukraine have traditionally enabled grain traders to offset existing infrastructure inefficiencies, including the high costs of storage, transportation and other expenses, he said. "However, soon we may witness an increase in the cost of production, mainly because farmers will have to replace the obsolete stock of equipment, pay more for leased land and energy, and encounter new types of expenses, such as crop insurance."
Competitiveness of Ukrainian grain also will depend on government policy decisions directed at reducing market transaction costs from the farm gate to the ports. "For instance, now a trader would have to pay on average $32 to export 1 tonne of grain (that is, to change the price basis from ex-works to f.o.b.)," Kozachenko said. "According to some estimates, this is four to five times higher than, for example, in Germany. This sum includes all tariffs related to railroad transportation, quality standards, veterinary certificates, ecological testing, inspections, elevator handling fees, freight forwarder’s margin and port fees."
The long-term competitiveness of Ukrainian grain will be determined by prices, the ability to maintain or improve efficiencies in production and government policies with regard to facilitating trade and lowering transaction costs.
"Now, in Ukraine the application of mineral fertilizers to 1 hectare of arable land is four to five times less than in Germany or France," he said. "The difference in pesticide application is even higher. As a result, in Ukraine, the average yield of wheat from 1 hectare is half that in Germany and France."