Investment Opportunities in Agricultural Sector of Ukraine

Does it really make any sense to invest into the agricultural sector of Ukraine? Sounds the same as to ask if it makes any sense to invest into computer technologies in Japan, car building industry in the USA, oil production in UAE, winter tourism in Austria and Switzerland or summer resorts on the Adriatic coast. Hunting after quick, large-scale and often just one-time profits in Ukraine during almost twenty years the investors have actually neglected that Ukraine’s main asset that makes it different from other nations consists in its fertile lands positioned in favourable climate conditions. As the result,  the profit-earning capacities of such attractive sectors as banking, real estate market, erstwhile powerful Ukrainian metallurgy, machine building and even trade have quickly exhausted because of technological aging and the economic recession, and instead of expected industrial breakthrough the country has faced an almost complete deindustrialization. Let deprived of good graces, the agriculture has in fact lost its previous economic importance having, however, preserved its main and eternal profit generating potential – the land which can remunerate the investor even within one calendar year and keep repaying for centuries in contrast to 25-per-cent-interest-rate credits in the financial sector.

Table 1. Some global and internal drivers that influence the investment attractiveness of the Ukrainian agriculture.

Serial # Drivers Facts Favourable Consequences for  Attractiveness of the Ukrainian Agriculture for Investors Unfavourable Consequences for  Attractiveness of the Ukrainian Agriculture for Investors
1 Global population growth The planet population is expected to increase from 6.6 billion in 2007 to 8.3 billion in 2030.  Permanent growth in demand for food stuffs  
2 Urbanization of the planet  population In 2008 urban population on the planet for the first time exceeded 50% and will reach 59% by 2030.  The share of the population able to independently provide themselves with food stuffs reduces; the consumer market extends. Manpower outflows from the Ukrainian countryside.
3 Growth in demand for food stuffs The demand for food stuffs has increased 4 times for the recent 50 years and is expected to grow by 50% again by 2030.   Reliable availability of the target market  
4 Shortage of sweet water The demand for sweet water will increase by 30% by 2030. United Nations Environment Programme (UNEP) forecasts sweet water shortage in Africa, Europe and Asia even by 2025.  Ukraine with its big sweet water resources will have an additional advantage Additional investments might be needed to irrigate fertile lands in the South of Ukraine.
5 Growth of food stuff prices  A significant rise of consumer prices due to increased product costs was observed at the world food stuff market in 2007-2008. Example of the most powerful US Agro-Industrial Sector:  in 1991-2005 the average annual growth rate of prices for agricultural production means was 2.2 %, in 2006 – more than 5 %, in 2007 – almost 9 % and in 2008 - 19 %. Prices of fertilizers, fuel and feeding stuffs are rising particularly fast.   High prices make agricultural production a profitable business. High production cost could restrict the opportunities to sell the products, especially at the internal market. A demand for donations cannot be excluded.
6 Growth in demand for bio fuels According to Food and Agriculture Organization of the United Nations (UNFAO), bio fuel production is expected to increase almost 3 times by 2020 and its prices will rise by 15-20 %. In Europe mainly rape is used for this purpose.  In the nearest future bio fuel production could turn in the most profitable agricultural business in Ukraine. In case of uncontrolled use of land this can cause a quick fertility depletion. It’s possible to expect regulatory restrictions by the State.
7 Lack of resources to expand cultivated land Only 11% of the terrestrial part of the planet are feasible for cultivation, 23% are meadows and pastures, 30% are occupied by forests and the rest consists of lands irreclaimable for cultivation or located in extreme conditions. The total area of the farmland is 4810 million hectares (ha) and includes 1340 million ha of arable land and 3365 million ha of meadows and pastures. Every year the area of cultivated land increases by 2-3 million ha. At the same time a considerable part of cultivated land becomes every year irreclaimable for cultivation. Between 1990 and 2007 the area of yielding land increased by 3% but the population increased by 25%. In 2007 the area of cultivated land per capita was 0.24 ha, but it can decrease to 0.21 ha by 2020.  The importance of the agricultural potential of Ukraine increases significantly. Ukraine has approximately 0.67 ha of arable land per capita which gives considerable advantages on a global basis.   
8 Lack of resources to expand cultivated land means of cutting forests Scientists, politicians, economists are more and more realizing that further deforestation could cause unpredictable environmental and climatic aftermath. Lack of any opportunity to additionally expand cultivated land on the planet makes UA agricultural potential  even more important  
9 Expanding cultivated land by adapting unfavourable regions Theoretically, expanding of cultivated land is possible by means of reclaiming unfavourable regions (taiga, prairies, deserts, mountains, cold regions) that make up 36% of the terrestrial part of the planet.  High costs of reclaiming extremal regions will increase the cost of the food stuffs produced there which will provide the Ukrainian producer with significant advantages.  
10 Inevitability of agricultural production intensification Since 1990 the number of tractors has increased in the world by 1.4 million pieces. The area of irrigated land increases every year by approximately 1%, chemical fertilizers are also wider applied. As the result, the population on the planet increased between 1990 and 2006  by almost a quarter and agricultural production grew by 42%, i.e. agricultural production per capita increased by 14% and per one ha of arable land – by 38%.  Implementation of new technologies will become the main investment target.  
11 Depletion of land fertility Every year more than 8 million ha of erstwhile productive land are excluded from agricultural circulation due to erosion, salification or human activities. The upper fertile layer is depleted at the speed of 7% per decade.  More fertile Ukrainian lands will deplete longer. Additional investments will be needed to protect the soil.
12 High fertility of Ukrainian cultivated land According to land capacity, Ukraine rates third in the world following Malta and Moldova with 75% of its land having no serious restrictions (there 8 of them – erosion, high acidity, shallowness, high humidity, salinity/high Na-level, base exchange capacity, high phosphorus fixation and vertical structure), only 36 countries in the world have this index higher than 40%.25% of the world black soil resources are situated in Ukraine.   Advantages for the UA producer in competing with foreign agricultural producers. Lower production cost of the food stuffs compared to other countries.  
13 Deindustrialization of the UA economy Manufacturing of production tools as well as the volumes of machine building industry in physical indicators are hundreds and thousands times less than before 1991.   This makes manpower and investors to pay more attention to the agricultural sector. Lack of home-made and cheaper agricultural production tools on the market.
14 Importance of plant cultivation in providing the mankind with food stuffs  Arable lands provide the mankind with 88% of the necessary food while meadows and pastures with only 10%.   About 0.7 ha of arable land per capita give Ukraine serious advantages on the world market exactly in plant cultivation. In animal breeding it’s more difficult for Ukraine  to compete with other WTO countries (Brazil, Argentina, etc.) where mild winters allow to avoid building and/or heating  cow-barns as well as large-scale forage conserving for winter
15 Narrowing of biological diversity of the consumed food stuffs Currently 4 plant species, namely  wheat, maize, rice and potato  give more than a half of vegetable calories consumed by the mankind and only a dozen of animal species give 90% of albumin consumed on the planet. Three quarters of genetic diversity of agricultural plants as well as many traditional animal species have already been lost.  Suitability of Ukrainian climate conditions and land resources for cultivating the mentioned basic agricultural plant species and breeding the basic animal species is a significant advantage for Ukraine. Considerable funds might be needed to restore the irrigation system of the Crimea and other southern regions for increasing rice production.
16 Demand for ecologically clean products Only 1% of world agricultural lands are certified as organic fields so far, and the organic product sale does not exceed 1-2% of the total volume. But the organic segment of the world food market increases every year by 20-25%, i.e. much faster than the global market as the whole. According to forecasts, the volume of organic food trade might reach US$ 200-250 billion in 2020. Though the production expenses of organic food are by 20-30% higher those of traditionally produced food, the increasing profits and consumer’s demand for high quality food stuffs contribute to quick expansion of organic food markets which becomes an essential factor or rising food prices.  Fertility of Ukrainian lands and their relative uncontaminatedness with chemicals often due to the lack such chemical fertilizers or to their expensiveness enables the producer to successfully compete in this niche of the market Concerns about the aftermath of the Chernobyl accident might cause some distrust regarding Ukrainian products. The issue of trusted ecological control and informing of the consumer will be of great importance 
17 Lack of confidence to genetically modified products Besides undoubted effect of applying the products of genetic engineering there are fears as to their safety for the human health and to their unpredictable aftermath for the Earth environment. Should further researches prove the genetically modified products to be safe, the genetic engineering might become the innovation development tool that could counteract the tendency of increasing food prices in the world. Growth in demand for ecologically clean products. This could cause social contradictions and confrontations.
18 Growth in production of genetically modified products Currently transgenic plants are cultivated on 60 million ha. The Market of genetically modified products is expected to increase to US$ 75 billion. Biological technologies are also widely applied in cattle breeding. According to UK expert professor J.Beddington, combination of genetic modification with traditional selection might become one of the ways of intensification of food stuff production.        This will allow to increase the efficiency of the agricultural production and to reduce the market prices. It’s difficult to support consumer’s demand because of the lack of confidence in the safety of a certain class of products. 
19 Global economic crisis Financial and economic crisis in Ukraine has already caused cutbacks of industrial production, construction industry and trade and can persist at least until the end of 2010. The demand for foreign labour in Europe has fallen. However, the agriculture of Ukraine appeared to be less exposed to crisis phenomena due to its less dependence on the latest technologies, it even keeps growing in spite of the fact that only 4.2% of foreign investments in January-September of 2008 went into the agriculture.   The agricultural industry can even gain additional advantages against the background of cutting food imports. Many Ukrainians who lost their jobs abroad and in the cities will return to the countryside.   There might be difficulties with attracting foreign investments.
20 Internal political instability Parliament’s inability to act, contradictions between different governing branches, corruption in court and other law enforcement bodies, lack of clear game rules on the agricultural market as well as the absence of mechanisms to enforce such rules harmfully affect the whole agricultural industry.  The land market doesn’t’t function. Commodity exchanges don’t operate. Only about 1% of agricultural products are sold by agricultural companies at market exchanges though 36 commodity exchanges accredited by the Ministry of Agricultural Policy are believed to be functioning on the market.      The land market doesn’t function. Commodity exchanges don’t operate. Unfavourable investment climate
21 Low investment ratings of Ukraine On 25.02.09 the Standard & Poor's (S&P) rating agency lowered Ukraine’s sovereign rating to ‘CCC+’ level which is 7 steps below the investment level and the lowest among European countries.   It’s difficult to attract foreign investments
22 WTO membership Additional requirements arise concerning the product quality, sanitary and veterinary rules and adaptation of agricultural producers to world market conditions Today Ukraine exports to the European market only 4 kinds of animal products: horses for meat, dry milk for fodder production, fish and fish products and honey.   Provides an access to enormous target markets A comprehensive control and certification system has to be developed.
23 Decline of agricultural production efficiency High prices for equipment, energy resources, chemicals and fertilizers significantly affect the efficiency of the agricultural production even in major food producing countries. Of course, the production cost of the products appears to be higher in the most developed countries where the latest expensive technologies are applied. To protect their producers against imports of cheaper food stuffs from developing countries governments of  agriculturally most developed nations provide their farmers with donations and apply high import duties.  However, this contradicts the WTO rules. Negotiations on revocation of financial protectionism have been going on in WTO since 2001 under the name of the Doha Round. In case the negotiations succeeded and the same rules were set for all members, profits of countryside population of Brazil, for example, would grow by 2015 by 44%, those in the South of Africa – by 38%, at the same time EU farmers’ profits would reduce by 18% and those of US farmers – by 7 %. The level of state support of the agriculture in Ukraine is one of the lowest in the world and makes only about 3% of the cost of the total agricultural production volume. In EU countries this index is 12%, in USA – more than 7%, in Canada – 5%. Support donations per 1 ha of cultivated land is in Ukraine more than 20 times less than in developed WTO member states.  If protectionism in WTO countries happens to be recalled, Ukraine will enjoy significant advantages and increase its incomes from selling its agricultural products on the world market at least by 40%. As the probability of recalling protectionism for producers in developed countries is low, Ukraine will have to seriously consider donations for its own producers and protection of internal food market. Moreover, WTO membership is hardly believed to bring Ukrainian agricultural producers some advantages as the foreign markets will do their best to protect their own producers.
24 Harvest loss control Preventing losses is one of important ways to increase land productivity. According to professor Beddington who chairs a special UK governmental committee on agriculture and food safety, 30-40% of the crops are lost because of depredators and diseases.   Concerning Ukraine, this resource of improving productivity could also include harvesting, transportation and storage  related losses. New, effective and safe technologies must be implemented to fight pests and weedage.
25 Chernobyl This factor can cancel out all natural advantages of the Ukrainian agricultural potential.   Rivals can use this factor to discredit Ukrainian products on the world market.
26 Severe winters Average annual albedo value in Ukraine is from 24% in the North to 17% in the South (in winter from 60% to 25% correspondingly). Average annual solar radiation is from 95 to 125 kcal/cm2. Earth radiation balance is 1700 MJ/m2 in the North, 2850 MJ/m2 in the central part and 2650 MJ/m2 in the South. Effective heat sum fluctuates between 3600º in the South and 1600º in Carpathian Mountains. Depth of rainfall fluctuates between 300 mm in the South to 1500 mm in mountains. Growing season length in Ukraine fluctuates between 190 and 245 days depending on the zone. . Some winters can bring temperatures as low as -40º.  Low temperatures are natural tools in fighting many pests and diseases. Construction of stationary cow barn, heating them and supplying them with water, fodder conservation and storage make cattle breeding in Ukraine two or even more times more expensive than in mild climate countries where cattle can stay on pastures round the year.  

Agricultural potential of Ukraine has overwhelming chances. In Europe (without Russia) Ukraine is the second largest country after Turkey. The total land area of Ukraine is more than 60 million ha of which 71.4% make agricultural lands, 17.2% - woods and field woodlands,1.6% - marshland, 1.7% - open bald land and 4% - water surface. 76% of the territory is the land without major restriction for growing agricultural plants – according to this index Ukraine holds the third position in the world following Malta (82%) and Moldova (78%). To compare, in USA this index is 33%, in Canada - 22%, in UK - 5%, in Germany - 9%, in Spain - 3%, in Italy -2%, in Hungary - 11% and the average for Europe is 31%. Particularly valuable soils make almost a fifth of the Ukrainian territory (more than 12 million ha).   An average Ukrainian has approximately 0.7 ha (average for the world - -0.24 ha) of cultivated land with 48% of the land being owned by the state and 46% being in private possession.

Table #2. Some agricultural industry indicators compared against the  pre-market period.

Indicator 2008 (01.01.09) 1990 2008 in percentage against 1990 Reference
Grain 53.3 mln. tons 51.0 mln. tons 105  
Potato  19.5 mln. tons 16.7 mln. tons 117  
Vegetables 8.0 mln. tons 6.7 mln. tons 119  
Sugar beet 13.4 mln. tons 44.2 mln. tons 30  
Fruit and berries 1.5 mln. tons 2.9 mln. tons 52  
Livestock population 5.1 mln. heads 25.2 mln. heads 20  
Cow population 2.9 mln. heads 8.5 mln. heads 34  
Pig population 6.5 mln. heads 19.9 mln. heads 33  
Sheep and goat population 1.7 mln. heads 9.0 mln. heads 19  
Poultry population 177.6 mln. heads 255.1 mln. heads 70  
Milk 11.8 mln. tons 24.5 mln. tons 48  
Eggs 15.0 billion pieces 16.3 billion pieces 92  
All kinds of meat (killed animals) 1.9 mln. tons 4.4 mln. tons 43  
Efficiency of plant cultivation 15.6% (2007) 98.3%          (-82.7%)    
Efficiency of cattle breeding -13.4% (2007) 22.2%          (-35.6%)    

1990 data in Table #2 are presented not to show how the agriculture of Ukraine is destroyed, but just to demonstrate its potential with actual indicators of real achievements in economic conditions that are not believed to be  the most favourable.  On another hand, they give the idea of the real potential one can expect in favourable economic environment. During 19 years of building market-oriented relations in the agricultural industry Ukraine managed to reach the level of the Soviet collective farm agriculture only in some plant growing indices. However, this simple table displays huge opportunities for investing into different fields of agricultural production. According to approximate assessments, in case of implementing the latest available technologies Ukraine could even now produce 70-75 (some experts say 100-150) million tons of grain a year.

Chaos situation in the agriculture at the moment escalated by the economic crisis as well as the lack of budget support create additional opportunities for potential investors. Since the old collective farm agricultural system was destroyed the market mechanisms have not been created yet. The overwhelming majority of joint stock companies once believed to be successors of collective farms have already become bankrupt or are next door to bankruptcy, and private farms are not strong enough even to cultivate their 2-3 ha to say nothing of implementing new technologies. There is no civilized mechanism for product marketing, and ‘compulsive’ services of spontaneous resellers, though making life of small agricultural producers a bit easier, increase consumer prices sometimes 2-3 times which sharply reduces the trade opportunities and volumes of selling agricultural products and consequently hampers the market development. At best only one third of consumer’s money comes to the producer which sometimes is not enough even to cover the agricultural production expenses. Should one take into consideration inconceivable disparity in advance of prices for agricultural equipment, fuel and fertilizers, - it's just getting unprofitable in the Ukrainian countryside to turn the soil and breed the cattle without financial support from the state, affordable credits or investments. On another hand, investing into production, processing and marketing food stuffs in Ukraine will bring the investors stable and continuous profits. Recently, probably to some extend due to the economic and financial crisis, the agriculture in this country has been attracting more and more attention of the business community. This can be proved by the dynamics of the share of agricultural industries (including forestry and hunting) in the GDP structure during 2008: 1st Quarter - 2.9%, 2nd Quarter - 4.3%, 3rd Quarter - 14.1%.

Unfavourable investment climate is one of the main challenges that hinder investments into the Ukrainian agriculture. According to competitive ability, Ukraine is currently rated 72nd in the world with its index 4.1, and according to simplicity of doing business it holds only the 145th position among 181 countries. The existing prohibition on free land trade is another factor that scares potential investors away. It looks like this obstacle is going to persist though the valid prohibition expires early in 2010. And finally, some business groups that make money from importing agricultural products and food stuffs, often by-passing the legislation in force, and therefore are not interested in revival and prosperity of the Ukrainian agriculture, still wield a serious political influence in the country. 

Foreign investments into the agricultural industry are waiting for state reforms at the moment. For the period of Ukraine’s independence no serious investments into the agriculture both by the state and by Ukrainian and foreign investors were observed. Internal investments are mostly of private and single-point character, and foreign investments are negligibly small. The interest in the agricultural sector of the Ukrainian economy has been growing since 2008. Thus, in 2007 only US$ 153 million of US$ 8.3 billion of total direct foreign investments into Ukraine came to the agriculture, i.e. approximately only 1.8%, but this share increased to 4.2% during the first nine months of 2008.  At the beginning of 2009 Sweden declared its readiness to invest 20 billion Euros into the programmes of producing renewable energy sources in Ukraine in particular biogas. EBRD Director on agricultural issues G.Mettetal spoke of the opportunities to invest into the agriculture of Ukraine in the following way: “This country has an outrageous potential. In case of proper political course the investment and production volumes could be significantly increased. And EBRD is more than just ready to support such investments”. Another competent expert, the WB Director on Ukraine, Belarus and Moldova P.Bermingham also spoke in favour of investing into Ukrainian agriculture: “Private and public sectors should undertake joint efforts to implement completely all the advantages of Ukraine’s capacity in agricultural production. The World Bank is ready to assist the government in transition to new market policies and implementation of the State Investment Programme” By the way, WB has already invested into Ukraine’s agricultural sector US$ 677 million for the period of country’s independence. However, it makes only 12% of all DFI made by this bank in Ukraine.

It seems that the snowball has been driven from its dead-lock. In spite of some realia the investment opportunities of the agricultural business are unlimited.

According to investment implementation forms, the agricultural sector of Ukraine can be divided into the following segments: agricultural production (food crops, technical crops, beef stock farming, dairy stock farming, poultry farming, bee-farming, fur-farming, silk farming, fish-farming), storage of agricultural products, processing of agricultural products, marketing of agricultural products, agricultural machinery building, fertilizer production, fodder production, selection, agricultural science and education, providing farmers with different services. According to investment implementation structure, the agricultural sector of Ukraine provides the following opportunities: Complex investments seem to be most successful, i.e. investing not only into production of agricultural products but also into their storage, processing, marketing, manufacturing machines and fertilizers. Such agro-industrial cooperation proves to be effective in other countries, makes it possible to control the cost of the products at all stages of the chain from the field to the consumer and is traditionally acceptable in Ukraine where remains of  economic relations of previous agro-industrial complexes still can be found. As the land cannot be bought so far, a long-term rent, associations of small land owners, joint ventures with existing agricultural companies or buying companies that rent land  shares would the most acceptable ways to invest. The quickest repay, within the first agricultural season or practically within one year, can be expected from investments into plant cultivation. When investing into cattle breeding one should remember that animals must be provided not only with stationary and warm barns during winters but also with sufficient quantity of feeding stuffs which makes production of meat and dairy products more expensive compared to countries of the Central and South America, Australia and even Europe.Investments into agricultural sciences and educational institutions including the Ukrainian Academy of Agricultural Sciences with its 56 research institutes, 22 higher educational institutions, 113 secondary special educational institutions will also be profitable but it will take longer time to wait for the payback.Investments into cultivation of technical crops especially for biogas production can appear to be very profitable, however, it will be necessary to take financial responsibility for land recultivation otherwise such projects might spark protests in the society followed by subsequent, unfavourable for investors, responses by public authorities. In this context, serious reservations among land owners might be caused by short-term project proposals (rend for less than 5 years). Before investing into the Ukrainian agriculture, it would be useful to test the land to be leased for radioactive or other contamination which will allow you to know from the very beginning if it is possible to produce ecologically clean and economicly most efficient agricultural products. On another hand, ‘more contaminated lands’ that could be used for producing biogas will be cheaper to rent. In spite of Ukraine’s WTO membership, protectionism of their own agricultural producers by the leading developed countries will remain a serious obstacle for Ukraine’s full-rate expansion into the world market.