Louis Dreyfus Suisse SA and Brooklyn-Kyiv own this grain terminal in the Port of Odessa in Ukraine.
Although some analysts say its goals are too bold, the Ukrainian government is standing by its claim that the country is going to nearly double its grain production by 2020.

Agricultural Minister Alexei Pavlenko recently forecast that Ukraine expects to increase grain output to 100 million tonnes by 2020, up from 60.2 million tonnes in 2015, with exports rising to 70 million tonnes from 31.6 million tonnes during that period.

Despite the huge potential of the country’s grain industry, some analysts say the dramatic increase will be difficult to achieve given recent taxation reform in the industry, which significantly increased valued-added tax (VAT) payments on grain production and reduced the profitability of market players. It appears this factor already has had a negative impact on production, as preliminary forecasts show Ukraine’s 2016 grain harvest is likely to be smaller than last year.

According to a report from the Ukraine Club of Agricultural Business (UCAB), Ukraine will harvest 59.8 million tonnes of grain in 2016, 300,000 tonnes lower than in 2015. As a result, in 2016-17 exports should reach 34 million tonnes, about 2.5 million tonnes less than a year ago.

The drop off in production partly is associated with changing trends in crop planting. The UCAB’s report indicates a 6% reduction of wheat planted area on year-to-year comparison to 6 million hectares, due to unfavorable weather conditions in the period of winter crops sowing.

Corn planted area rose 9% versus last year’s rate to 4.5 million hectares, while planted area for barley remained unchanged at 2.8 million hectares. Planted area for soybeans reached 2.14 million hectares, roughly the same as 2015.

Ukraine’s ‘shadow’ market

In July, Ukraine’s Sovecon consulting agency, referencing a U.S. Department of Agriculture (USDA) report, said up to 80% of soybeans and 10% of corn in Ukraine is being produced by illegally using genetically modified (GM) seeds, primarily Monsanto’s Roundup Ready breed. Lack of state control in the area of grain cultivation in Ukraine results in some grain getting on the market illegally by bypassing state bodies and without paying taxes.

“Now, unfortunately, shady schemes in the grain market of Ukraine have quite favorable conditions,” Alexey Vaidatursky, chief executive officer (CEO) of Nibulon, a major Ukrainian grain company, told World Grain. “There is a desire on the part of some agricultural producers to receive cash in U.S. dollars on the day when they sell goods, bypassing the tax invoices and official paperwork. We are talking about agricultural producers who are not respecting laws of Ukraine and growing grain illegally.”

According to a Ukraine Association of European Businesses report, since 2015-16 a hike has been observed in the shadow trade of grain and it has caused significant problems for grain storage facilities, since the shadow market is supplying grain directly from field to ports without first being stored. As a result, in the near future some storage facilities might be closed due to the lack of inventory. The report said this situation also may have a negative impact on Ukraine’s food security.

“Ukraine’s grain market is significantly influenced by the shadow market, since illegal manufacturers are used to selling grain with a just-in-time system, beating down prices,” Igor Braginets, spokesperson for Ukraine Agricultural Union in Kherson Oblast, told World Grain. “At the moment, we have up to 35% of all grain manufacturers who are working in these shadow markets and are significantly cutting prices at the market.”

An aerial view of Nibulon Ltd.'s grain export complex at the Port of Nikolaev in Ukraine. 

Increasing yield without GM

In April 2016, the Ukraine government adopted the Program for Development of Agro-Industrial Complex until 2020. Instead of partially removing restrictions on cultivation of GM grain, which has been awaited by a number of market participants, the government took steps in the opposite direction by setting the target to increase area for organic grain cultivation, which should be coupled with the rise of average grain yield as well.

Agricultural Minister Pavlenko said average yield in Ukraine is 2.2 times lower compared to European Union countries. He said the grain industry’s goal in the coming years is to increase yield with the modernization of its combine harvester fleet. Today, it accounts to 50,000 machines, 72% of which are 16 years or older.

UCAB analysts said from 2010-15 in Ukraine, yields rose in corn to 6.05 tonnes per hectare from 4.5 tonnes, in sunflower to 1.92 tonnes per hectare from 1.5 tonnes, and in rapeseed to 2.4 tonnes per hectare from 1.5 tonnes. Similar growth was observed in the E.U. from 2000-05, so it could be said that Ukraine is lagging by nearly a decade behind European countries in terms of yield. Average yield for wheat is 3.1 tonnes per hectare, while for soybeans it is 1.8 tonnes per hectare.

Ukrlandfarming CEO Oleg Bahmatyuk said yield improvement may help Ukraine boost grain production to 100 million to 120 million tonnes by 2020. He said Ukraine farmers use nearly half the mineral fertilizers and several times less plant protection products compared to their E.U. colleagues, and the situation is worsened with the deteriorated fleet of agricultural equipment. He suggests the country’s grain industry will require investments of $20 billion to $25 billion in the coming years to bring yield to the European level.

Ukraine must boost yields, but not by using GM seeds, said Parliament member Nikolay Lushmyak, who hopes to add to already adopted restrictions on GM growing in Ukraine with a new law providing a complete moratorium of GM products until 2023. He said Ukraine consumers are not willing to consume GM products.

“Despite this, domestic farmers buy GM seeds and grow mutated cultures without receiving permission from officials,” he said. “The government is simply unable to provide adequate control of this market. As a result, it is simpler to fully ban any use of GM products rather than to watch its uncontrolled application.”

Production costs a problem

Meanwhile, the task of increasing the level of mineral fertilizers use is complicated due to the continuing fall of the country’s currency (hryvnia). Over the last two years the currency drop has caused a significant production cost increase per tonne of grain. Ukraine is not producing a lot of fertilizers or plant protecting products, so it must rely on imports, primarily from the European Union.

An opinion poll from the consulting agency APK Inform indicated that for 51% of farmers in 2016-17, the cost of mineral fertilizers rose 30% compared with the previous season. About 25% of farmers expected the price to rise 30% to 60%, while 24% of respondents expected the cost to rise by 60% to 100% or even more. For other key resources, growth is expected to be within 60%, the study found.

In addition, the Ukraine government, beginning in January 2016, cancelled advantages on VAT payments for grain producers, which had been available since 1998. Previously, farmers were subjected to a fixed tax of 0.45% of the value of land they operated. Payment of this tax allowed them to avoid VAT payments.

However, the system has been changed, so farmers have to transfer 85% of VAT to budget and another 15% to their own special accounts for future spending on modernization. This decision caused several protests in which hundreds of farmers gathered outside the Parliament. The increase of tax payments to the general budget amounted to 5% to 15%, according to market participants and significantly undermined the profitability of many companies.

“The transition from 100% non-taxable income on VAT to 15% is a strong hit on profitability,” John Shmorhun, head of agricultural holding AgroGeneration, told World Grain. “But there is also another question, as instead of one tax account we have five. We regrouped and can deal with this situation, but we really do not know how these problems are solved by small-scale farmers.”

Exports drive up demand

At the same time, the Ukraine Agricultural Ministry forecasts suggest that the share of export supplies of grain producers should rise to 70% in 2020 from 50% in 2015.

Officials explained that this will require the opening of new markets for Ukraine grain as well as upgrading of relevant infrastructure.

“Ukraine got significant benefits after establishing a free trade zone regime with the E.U., so in 2016 European countries are the largest purchasers of our grain,” explained Eugene Goncharenko, spokesperson for the Agricultural Ministry. “At the same time, we have very diversified grain exports, since the largest purchasers of our wheat this year are Thailand, Egypt and Indonesia, while most barley is delivered to Saudi Arabia. We have great opportunities for the further increase of wheat exports to China, the Middle East, and, of course, Europe.”

Goncharenko said the rise in exports should be coupled with the modernization of infrastructure; there are already some projects under way in this regard. Ukrlandfarming is planning to invest $2.5 billion in the construction of a new terminal at Yuzni Port, with an annual capacity of 10 million tonnes of grain.

Cargill is investing $100 million for the construction of a grain terminal at Yunzi Port, the company announced in February. According to representatives of the Agricultural Ministry, there are also some other infrastructure projects under discussion.