You're reading: Ukraine yet to plant seeds of success in agribusiness

Cumbersome and inconsistent government policies and regulations are holding the agricultural sector back.

Ukraine’s agricultural sector is that metaphorical grade C student who possesses enormous talent and inherent potential yet doesn’t push itself to achieve.

Part of the reason is the school that Ukrainian agribusiness attends: a cumbersome regulatory framework enmeshed in streams of red tape.

Roughly the size of France, Ukraine is naturally endowed with 42 million hectares of agricultural land, 25 percent of the world’s richest black-earth soil, favorable and predictable climate conditions, and warm sea ports as well as other transportation links relatively close to export markets.

Yet, for example, the nation’s annual grain yields remain below the Soviet era, while former republics Russia and Kazakhstan now exceed those levels, according to the International Finance Corporation, the for-profit arm of the World Bank.

The IFC also said agribusiness in Ukraine has since 1999 been underfunded by some $20 billion with only $5 billion invested in the sector.

Still, agriculture and food accounts for some 15 percent of the nation’s gross domestic product and provides significant employment in Ukraine’s decaying rural areas. Furthermore the U.S. Department of Agriculture projects that by 2020, Ukraine will become a major agricultural player along with Russia and Kazakhstan.

The government agency predicts that in eight years Ukraine will still be a top barley and sunflower producer, raise soybean exports by nearly 50 percent and account for much of corn exports from the former Soviet Union.

But in order to double, even triple, its current 40-60 million tons of annual grain harvests, which market experts say easily could be done, red tape must be slashed and much more burdensome regulation must be streamlined for Ukraine to reach its destined agricultural powerhouse potential.

Experts and farmers alike added that many farmers must focus more on increasing output through the use of technology and modern know-how, and not via production capacity expansion, such as farming additionally leased land.

“Ukraine isn’t competitive on the world market,” said Qimiao Fan, World Bank country director for Ukraine, Belarus and Moldova on May 25 in Kyiv. “There’s burdensome regulation, inconsistent [government] policies and weak quality control.

“Ukraine will be left behind [in attracting foreign investments] if it doesn’t address these issues,” he added.

And with the world’s population growing exponentially, the world’s eyes and capital are focusing on countries like Ukraine, Brazil and Russia to increase agricultural production to feed more mouths and reduce poverty at home.

“We see regulatory barriers and red tape as being one of the top hindrances for the sector’s development because regulations in Ukraine are inefficient and often driven by vested interests,” said Serhiy Osavolyuk, IFC project manager.

“For example, our recent survey found that the system of permits, inspections, and technical regulations in Ukraine was a burden for businesses, costing them nearly $900 million last year. It was the study across all sectors of the economy,” Osavolyuk added.

Only 15-20 percent of Ukrainian farms, including those belonging to blue chip agribusiness holdings Astarta, MHP and Kernel, are operating at an international level, said Heinz Strubenhoff, agribusiness program manager for IFC.

“We want to see 80 percent of farms perform at an international level,” added Strubenhoff.

To do that, regulations for pre- and post-harvest operations, food safety and resource and energy efficiency must be streamlined, the IFC said. These and other factors, according to the IFC, make production costs in Ukraine 40 percent higher than in the EU.

The certification and registration process for new seeds or crop protection agents is too cumbersome and can take three or more years. This along with a bureaucracy that doesn’t want to release power, leads to a market that is flooded with low quality input knock-offs. As a result, production is low, making Ukraine uncompetitive with other countries.

Additionally, said Daniel Sweere, an American farmer in Ukraine, multinational seed producers fear their newest seeds might get stolen or won’t receive royalties.

“Sure Ukraine makes it difficult to bring in seed materials, but the global companies aren’t very thrilled to bring their latest products to Ukraine. This place is a dumping ground for older off-patent material that they have,” said Sweere, a Minnesotan who co-owns Atlantic Farms with his father David.

Moreover, Heinz of the IFC agribusiness project added that Ukrainian farmers pay more for inputs such as, fertilizer and seeds, than their European competitors because of the regulation burden.
Part of the reason is monopolization.

Ukrzernoprom Agro Intensive Technology Agronomist Olexiy Kalyga told the Kyiv Post that ammonia and phosphorus fertilizer in Ukraine is controlled by billionaire Dmytro Firtash. Close to President Viktor Yanukovych’s inner circle and a former partner of Russia’s Gazprom in the multibillion-dollar business of supplying gas to Ukraine, Firtash controls some 100 percent of Ukraine’s market for ammonium nitrate, more than 47 percent of urea output, and more than 62 percent of ammonia output, according to Eavex Capital.

Farmers also suffer because of the lack of post-harvest storage facilities, like having on-farm grain silos. With only 15-20 percent of demand for storage capacity of fruit and vegetables met, according to the IFC, farmers are forced to sell at lower prices immediately after harvest or rely on independent storage operators who use unfair practices like downgrading the quality of produce or failing to promptly provide stored produce on request.

Yet only 14 percent of Ukrainian farmers are channeling investments into on-farm storage facilities, an October 2011 IFC survey found. It takes 375 days to deal with construction permits and 274 days to get electricity, according to the World Bank’s 2012 Doing Business report.

And since Ukraine doesn’t have a single agency approach to food safety, agricultural producers must deal with multiple compliance regulations and messages from various government agencies.
According to the IFC, only 1 percent of 13,000 food businesses have implemented global food standards such as HACCP, and 77 percent of agribusinesses interviewed in the IFC survey had no idea what GLOBAL.G.A.P standards were.

“Outdated product quality standards are one of the main barriers keeping local agricultural commodities and food products from gaining access to foreign markets, European in particular,” stated the IFC survey findings.

Sweere of Atlantic Farms said access to capital also hinders farmers.

“Some of it has to do with banking regulations, but banks don’t have lending programs tailored to farming cycles. They don’t understand farmers,” said Daniel Sweere.
Currently farmers aren’t allowed to use farmland as collateral and banks, in turn, don’t accept future crops as collateral. So farmers like Olexiy Kalyga, intensive technology agronomist for Ukrzernoprom Agro, are faced with double-digit annual loan percentage rates.

“How do you expect to farmers to service 20-22 percent loan rates?” rhetorically asked Kalyga.

And the extra cash large and small farmers have are often used to expand farmland and not for new technologies.

IFC’s survey of farmers showed that 49 percent invested in farmland whereas 8 percent invested in new technologies.

“Those who speculate on land and don’t think long term won’t invest in better equipment or want to utilize better technologies,” said Sweere. “You want to do what you do very well instead of doing it bigger and poorly because it doesn’t rain every year.”

Instead, wise farmers, said Kalyga of Ukrzernoprom Agro, should study their soil content, seed conditions, invest in new equipment and build storage facilities.
The larger holdings get it.

According to Kyiv-based private equity fund manager SigmaBleyzer, one of Ukraine’s largest farming groups, Mriya, plans this year to spend up to $250 million on the construction of grain elevators, modernizing sugar plants and to purchase of farm machinery.

Another domestic farming giant, IMC, plans to construct new elevators and potato storage facilities as well as acquire equipment totaling $72 million.

Kyiv Post staff writer Mark Rachkevych can be reached at [email protected].