Ukraine capitalizing on food crisis

Kyiv Post | 12.06.2008

As world food prices soar to record levels, Ukrainian farmers this week started reaping what is expected to be a bumper crop, and possibly a turning point for a country eager to re-establish itself as the breadbasket of Europe.

Ukraine plans to secure a harvest of at least 40 million tons of all types of crops this year, 10 million tons more than in 2007.

Looking ahead, experts and politicians predict that if investment continues to pour in, the country could double its harvest, establishing itself as a major international agricultural power amid soaring world grain and food prices.

“I believe that Ukraine will revive its glorious name as the breadbasket not only of Europe, but of the world,” Ukraine’s Prime Minister Yulia Tymoshenko said during the opening ceremony of the agroindustrial fair exhibition on June 9.

“The entire world is looking with hope at Ukraine, which does not use its reserves. And today when the harvest in Ukraine is expected twice larger than last year, we anticipate a critical shift. This is Ukraine’s grand mission,” she added.

Experts say in the near term, Ukraine’s harvests can hit the 50 million ton peryear mark, about the amount churned out during Soviet days. Given domestic consumption stands at an estimated 2527 million tons per year, meeting such a mark would leave plenty for export, according to Svitlana Dryhush, a research analyst at Renaissance Capital Ukraine.

“Ukraine could export as much as 2325 million tons of grains annually, without putting pressure on availability of the domestic supply,” she said.

At a United Nations summit in Rome last week, officials said a 50 percent increase in food production is needed by 2030 to fill rising world demand. The expectation in Ukraine is that billions of dollars of fresh investment and agriculture reforms, namely sanctioning of agriculture land sales, could double or triple domestic grain production to 100150 million tons levels in the long term.

Ukraine can significantly contribute to the current food crisis, because it is one of the few countries that have the potential to increase agricultural production, said Oleksandr Artiushyn, deputy director general at the Ukrainian Agrarian Confederation. Ukraine boasts fertile soil across the country, high labor intensity and low labor costs. Access to Black Sea ports and a good rail network also make the country’s agriculture sector attractive for investment, according to a May agriculture report produced by Renaissance Capital.

The country’s agriculture sector, still recovering from a dramatic drop in agricultural production volumes, from 60 million tons in 1990 to 33 million tons in 2007, is on the verge of a rebound, experts said.

“Ukrainian agriculture has been substantially underfinanced which has resulted in a lower application of inputs (such as fertilizers) and agricultural machinery has become obsolete. Ukrainian agriculture needs sufficient investment in working capital (fertilizers, seeds, crop protection materials), machinery to improve efficiency and increase crop collection, agrotechnology to maximize land effectiveness,” said Anton Usov, a spokesperson at the European Bank for Reconstruction and Development. The bank ranks as one of the largest investors in Ukraine and has pledged to provide record amounts of financing for agriculture sector projects in the future.

Due to insufficient spending on agro infrastructure, fertilizers and quality seeds, Ukraine’s average yield is less than 35 percent of the corresponding yields in Europe, the Renaissance Capital report states.

A total $1.95 billion FDI was brought into the agricultural and food production sectors since 1992, with only 28 percent of that amount dedicated to agrofarming, according to Dryhush. However, at least $40 billion needs to be invested in Ukraine’s agricultural sector, Dryhush added.

“Ukraine faces the need for substantially more capital investments into the sector’s infrastructure and agro technology to become a materially larger supplier of soft commodities to the global markets,” Dryhush noted. “This is a longterm process with material effect expected no earlier than in five or six years after the investment programs are launched.”

One of the main constraints that hold Ukraine’s agriculture from developing is a moratorium banning sale of agricultural land, which President Viktor Yushchenko said this week should be lifted.

“All talk to the effect that Ukraine is not ready for the buying and selling of lands and owners are not ready to manage their lands will lead to one thing: colossal corruption,” Yushchenko said.

Experts said the moratorium restricts longterm planning, which could help boost productivity, harvests and overall economic growth in Ukraine’s poor rural regions. In the last several years, however, agricultural companies have rushed to ink longterm lease agreements on agricultural land. Lease rates have surged as both foreign and domestic agriculture groups have moved fast to build up socalled land banks, grabbing hundreds of thousands of hectares of land across the country through lease agreements.

“Over the past year, lease rates have almost doubled to $6080 hectare per year, and are expected to reach $110120 hectare per year by 2012,” according to Renaissance Capital. “We believe lease rate inflation and the absence of a guaranteed right to buy leased land are the two biggest concerns for Ukraine’s agro companies,” the report reads.

Another substantial obstacle for the development of agriculture in Ukraine is controversial restrictions on grain exports imposed by past governments to keep domestic food prices low. The most recent limitations on grain export were introduced by Viktor Yanukovych’s government two years ago and gradually lifted by Tymoshenko’s government.

The export restrictions have prevented Ukrainian farmers from receiving market prices for their crop. When the government imposed restrictions on food crops, many farmers turned to exportable crops, such as rapeseed, used in the production of biofuels. This trend, and bad weather conditions, significantly hurt production of food grains last season.

In April, Tymoshenko announced that the government lifted grain export restrictions, which caused a 40 percent drop in world prices for wheat. Later, however, news surfaced that many export quotas merely increased. Her government has pledged to lift most restrictions in the near term.

“Ukraine can be a major food basket for itself and the world, if the right laws and regulations existed. Current laws and regulations severely cripple Ukraine’s agriculture market,” said Morgan Williams, president of the US-Ukraine Business Council, which promotes agricultural firms such as Cargill and Archers Daniel Midland.

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