Economic activity brief: Agriculture
Oleksandr Zholud (Kyiv, Ukraine)
The agricultural potential of Ukraine has been recognized
for ages. Indeed, Ukraine has all key ingredients to be successful in this
area: fertile land, plenty of water, and mild climate. Many believe that agribusiness
can be the next best thing in Ukraine, especially when Ukraine ratifies the
association agreement with the EU. However, the recent track record of the agricultural
sector in Ukraine is hardly impressive. For example, productivity in the sector has been
chronically low. This post briefly reviews challenges and prospects of the growth
in Ukraine’s agricultural sector.
Agriculture generated 7.6 percent of Ukrainian value added
in the last five years (for comparison, the share is about
1-2 percent for developed countries like the U.S., the Netherlands, Germany or
France and about 3-4 percent for countries like Poland and Hungary). Average
annual growth during this period was 5.2 percent year-on-year, which is above
the overall GDP growth. Crop production and raising livestock (husbandry) have
roughly equal shares in the output of Ukraine’s agricultural sector. The growth
is highly volatile because it greatly depends on weather conditions: real
growth rates of over 15% and similar declines in a given year have a moderate
chance. Grain yields are notably lower than in the EU, which suggest a huge potential
for further growth of the agricultural output in the future.
Ukrainian crop production is highly export-oriented: the
average grain production is 50 million tons per marketing year (there is a
clear growth trend) of which about 20 million tons are exported. The EU is one
of the major buyers and current FTA agreement should strengthen Ukrainian
position on this market, but its effect should not be overestimated, because a
lot of non-tariff barriers remain in place. Another important crop is sunflower
seeds: Ukraine is the world leading exporter of sunflower oil with over a half
of total world exports.
The government actively intervenes in this market, formally
as a measure for country’s food security, but is reality this is a fertile
ground for corruption. Most important interventions during the previous several
years were export quotas on wheat and sunflower oil and non-transparent
distribution of quotas between exporters.
The sale of agricultural land is currently banned,
therefore, a land plot cannot be mortgaged, which limits access to bank credit.
Another major problem is predatory farming, when a farmer plants crops, which
exhaust the soil (e.g. sunflower) and then moves to the next plot. Formal
owners of the land are rural households that predominantly rent their plots to
large agricultural companies. If the ban on sale of land is lifted, these
companies will have right to purchase these plots.
There are serious logistics problems, which can hamper the
growth of output, both legal (e.g. large number of certificates needed for
transportation of grain), structural (over a half of grain storages are
state-owned and often act as a monopoly) and physical (lack of modern storage,
transportation and transshipment capacities). Therefore, in order to increase
the agricultural output, transport and storage capacities should be improved to
prevent a bottleneck.
Husbandry works chiefly for domestic consumption and to a
lesser extent for exports, mainly to Russia. Among the major categories of
production are poultry, eggs and dairy products. Up to 80% of milk is currently
produced by rural households, which usually have only one or two cows. This
makes impossible to control the quality of the milk, which impedes export of
dairy products to the EU. The small number of dairy as well as beef producing
farms is due to the relatively long-term low interest investment needed for
such a project, which is not available in Ukraine.
In summary, Ukraine’s agribusiness can do a lot better.
Specifically, Ukraine can notably increase the agricultural output if it
decreases the number of necessary administrative documents, improves access to
long-term investments, makes land a tradable asset, and allows more equal access to logistic capacities.
Perhaps, Ukraine should actively attract foreign direct investment in this
sector to radically improve productivity, bring new technologies, and get
around the EU’s non-tariff barriers to conquer the EU’s market as soon as possible.
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