A new class of farmers is on the rise in Ukraine. They’re fast gaining the moniker as the new kings of agriculture among experts, insiders and investors. Agribusiness holdings are driving output and growth by leasing and cultivating huge swaths of farmland, vertically integrating their operations and applying modern farming techniques.
International agribusiness giants like Cargill and ADM of the U.S. and Hamburg-based Toepfer International have made a big market investing billions of dollars into Ukraine’s agribusiness sector since entering in the 1990s. Following in their footsteps are domestically-owned agribusiness holdings that only started to sprout up around 2003-2004, growing up from the pieces of collective farms that collapsed after the breakup of the Soviet Union.
Some are modernized Soviet enterprises like London-listed poultry giant Mironivsky Hliboprodukt, while others started almost from scratch like Mriya Agro Holding, the Ternopil-based farming titan which has over recent years quadrupled in size to include nearly 200,000 hectares of farming land.
They are setting a standard as “more efficient than your average and other smaller farms,” said Oleksandr Paraschiy, senior analyst with investment bank BG Capital. “They have large growth prospects, better cash flow and they can sell their goods at higher profit margins. This means they can use these proceeds to invest in infrastructure and boost their efficiency,” he added.
Still, there is much room for growth and new companies to develop yet untapped opportunities. Agriculture experts estimate that the 30 largest agribusinesses control less than 10 percent of Ukraine’s 32.5 million hectares of arable land. But they’re expanding and the trend is region-wide.
The Institute for Economic Research and Policy Consulting, a Kyiv policy center, estimates that in four to five years more consolidated agribusiness holdings will cultivate at least 50 percent of arable land in Ukraine.
As they grain strength and market share, the farms’ harvests and nations’ harvests will growth, possibly doubling in size within a decade or so. Similar processes are at play in regional markets. Larger agribusiness companies control an estimated 40-50 percent of grain production in Russia where farmland has been sold since 2006. They also control 80 percent of grain production in Kazakhstan, according to experts.
Ukraine still has a moratorium on the sale of farmland in effect until 2012 but that hasn’t stopped the industry from being one of the few economic sectors to grow during the recession-plagued year of 2009 and for being the second largest contributor to Ukraine’s gross domestic product.
Many budding agribusiness groups are backed by foreign capital as investors are drawn to the long-term prospect of strong agriculture and financial yields. They hope to cash in on the vast long-term agribusiness potential in Ukraine, home to a fertile soil, diverse climate for crops and close proximity to import markets.
Already two domestic groups have held initial public offerings this year: AgroGeneration, a grain and oil seed producer, and Avangard, an egg producer.
“Investors are interested to put their money into big companies that have huge growth potential,” said Anna Dudchenko, deputy chief executive officer of Sintal Agriculture, an agribusiness holding that controls nearly 100,000 hectares.
“In Ukraine, the growth potential of agriculture is almost unlimited thanks to rich land resources. A big company can, with investments, increase its land assets and business dramatically. These are all the factors that make Ukraine’s agriculture sector so attractive for investors,” she added.
And more, smaller farms are popping up. Ukraine’s largest soybean producer, Soyeviy Vik located in Kirovohrad region, started with only hundreds of hectares in 2001 but now farms thousands.
While land is still in abundance and there is little competition to lease more land, agribusinesses have encountered other growth impediments. They include problems accessing capital. Lending rates are still too high. There is also a shortage of qualified labor versed in modern farming techniques and the know-how to operate newer equipment as well as entrepreneurship, according to Roman Makukhin, a partner with Ethnoproduct Group, which engages in organic livestock.
Additionally, agribusinesses, the majority of which export a sizable portion of their produce, have problems getting value-added tax refunds from the government.
Yet the rise of domestic agribusiness groups isn’t a welcome sign for everyone. According to Makukhin, the organic farmer, large agribusiness holdings sometimes economically aggravate the small rural communities where they lease. They cut down on jobs when scaling up on economies of scale. They are often registered in larger cities, meaning the tax revenue doesn’t end up in the rural areas.
“While economically justified, this trend raises concerns about the social and environmental implication of such land redistribution and about the possibility to reform agriculture in a pro-poor manner,” said Elena Voloshina, country manager in Ukraine for the International Finance Corporation, the private sector financial arm of the World Bank. Makukhin expressed concern about the tradeoff and potential imbalance between the interests of large and small farms arising from agribusinesses accumulating more farmland.
Makukhin also said agribusinesses often chemically saturate the land to obtain higher yields, and this further damages soil. He it is often a toss-up as to how socially responsible they are when operating in villages to improve infrastructure, schools and other socially added benefits.
Although the prospect of Ukraine turning into Argentina or Brazil where 50large hacienda farms dominate agriculture is real, BG Capital’s Paraschiy said that is only a long-term possibility and belongs to the sector’s different development cycle.
Staff writer Mark Rachkevych can be reached at [email protected]
