Nepershyn R., Mudrenko A.A., Derevyanko M. N.

Oles Honchar Dnipropetrovsk National University, Ukraine

AGRICULTURAL SECTOR OF UKRAINE: RISKS AND PROSPECTS

It is difficult to contest the prospects of the agriculture in Ukraine. 28 million hectares of arable land, most of which are fertile chernozem, make it possible to grow abundant crops with a good export potential. In theory 24-25 million tonnes of cereals may be exported this year. However, there is an extensive, though less profitable, internal market for the agricultural sector.

Unfortunately, despite the great prospects, the agricultural sector of Ukraine has many risks.

The issue of a favourable balance between the necessity of the domestic market saturation and the benefits from export leads to a misunderstanding between the government and business. The state is often called one of the main risks for the industry, along with weather conditions. The most discussed issues are the opening of the agricultural land market and the export duties on grain.

According to the opponents of the land market the bill, as it is now in its draft form, will lead to the situation that hundreds of thousands of hectares will be purchased by oligarchs, because individual farmers just won’t be able to afford to buy land. From an investor’s standpoint, such a law is necessary.

"Investors must be confident in the future and want to be sure of their investment. So, it is vital to have productive resources and therefore, the land reform is necessary. Land is the key for obtaining the credit facilities, which will be a source of an investment in the industry," – said Tamara Levchenko, senior analyst of Dragon Capital.

Disputes over duties imposing on grain export don’t subside. The Export taxes on wheat, rye, barley and maize at a rate of 9-14% were introduced on July 1, 2011 to replace the export quotas. By the law, they will remain valid until 2012. Recently the Ministry of Economic Development has published a bill according to which the duties term will be prolonged till 2013, and the additional duties on soybean, rapeseed and sunflower oil export will be imposed. In turn, the Ministry of Agriculture and the agricultural market participants insist on duties abolishment. 

Indeed, the authorities pursue quite a clear goal – to reduce prices in the domestic market and increase the budget revenues. However, the grain export from July to September 2011 amounted to only about 3 million tonnes – despite the fact that capacities and crop allow exporting 3 million tonnes monthly. As a result, besides reducing the agricultural companies profitability, the flow of the currency in Ukraine decreases because of the increased trade deficit and the riskiness of investments in the agriculture.

But despite the risks, most analysts believe that the agricultural sector has good medium and long term prospects. The high growth rate of the world population, the gradual improvement of living standards in the densely populated countries will ensure a steady increase in demand and, consequently, the rise in food prices. Moreover, in the near future it is expected to sign an agreement on the free trade zone with the EU. As a matter of fact, it won’t be put into effect until 2013, but it will allow farmers to increase export to the EU significantly.

However, most of agricultural enterprises, especially small ones, at first should raise the level of competitiveness, and it is essential to raise considerable resources for the new technologies and a new industrial park.

"Today, the agricultural sector uses about 22-23 million hectares of land. Normal land cultivation is estimated on average $ 400 per hectare. Therefore, it is required 8 billion dollars annually to invest in land efficiently. It will cost additional $ 4 billion for Ukraine to develop the market infrastructure. In addition to this sum $ 4 billion is needed to allocate machinery, which requires annual renewal. Total annual amount is about $ 16 billion. It concerns only crop production. If we speak about livestock, then there is needed much more investment – about 32 billion dollars", – said Bohdan Chomiak, the director of strategic planning of analytical centre "UkrAgroConsult". In this case, if the technique of investing in foreign currency (through cash market or FOREX) and industry (for example, through the "Ukrainian Stock Exchange") doesn’t cause any special difficulties, the situation in the agricultural sector is worse. The largest agricultural holdings carry trade abroad. Warsaw Stock Exchange (WSE) is the most popular with the Ukrainian farmers. Agricultural holdings Kernel, Milkiland, Astarta, KSG Agro, Agroton, Agroliga, Industrial Milk Company are listed at this stock exchange. "MHP", "Avangard", Landkom and Ukrproduct are listed at the London Stock Exchange. The difficulty is that the citizens of Ukraine can’t trade at foreign exchanges without obtaining a special license from the NBU, which is extremely troublesome. Another way is to trade through offshore brokerage companies, which is illegall.

So it’s clear, that Ukraine has great prospects in the agricultural sector. But to realize this prospects our government need to make great efforts to attract foreign investors. Also it’s necessary to issue bills, which allow our citizens to trade at the foreign stock exchanges. In our opinion the next several years will be decisive for our economy, especially for such a sector as an agricultural one and our country can become a leader in foodstuff production.