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 attache
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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