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2017-12-11

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Agriculture

Agriculture in Ukraine secures approximately 10-11% of national GDP and employs a quarter of working population. Ukraine has 42.8 m ha of agricultural land comprising 71% of the country’s total area, of which 32.5 m ha is arable (excl. pastures, grasslands, permanent plantings etc.). Ukraine has favorable climate for large-scale agriculture, rich agricultural soils and access to abundant land and water resources.

Currently, owners of land cannot sell it due to Moratorium on Sale of Agricultural Land. However, a draft law “On Turnover of Agricultural Land” has been already passed to the respective Verkhovna Rada Committee for further consideration. If the Law is adopted, it will open up a completely new market for investors. The price, according to experts, may range between$ 480 at its minimum and  $6030 at its maximum per 1 ha.
   
Ukraine is richly endowed with chernozem (also known as “black soil”), one of the most fertile soils worldwide. Chernozem, a black-colored soil that contains a very high percentage of humus (3% to 15%) along with phosphoric acids, phosphorus and ammonia, occupies 41% of Ukraine’s total area and even more of its agricultural land (54%), and plow land (58%).

Thirty percent of the world's black soil is in Ukraine, and 42 million of the country's 60 million hectares (231,660 square miles) is agricultural land where wheat, barley, rapeseed and sunflowers grow in abundance. The crops constitute about 55% of the total agricultural output. Among the leading crops are wheat, maize, sunflowers, sugar beets, tobacco, legumes, fruits and vegetables. Livestock farming includes cattle, pigs, sheep, horses etc.

By virtue of its unspoiled soil, Ukraine is also emerging as a major producer of organic food. Already, hundreds of thousands of acres are devoted to organic farming and agricultural officials and outside experts believe that Ukraine can become a major exporter and help satisfy the increasing demand in Western Europe for such products.

Annual production of wheat in Ukraine is 15 to 22 million t. The entire cereal production reaches 90-100 mn t. Local needs, even if dramatically increased, take 35 to 40 mn t., making around 50-60 mn t. available for exports in the sphere of agriculture. Ukraine thus occupies sixth place on the world grain export market.

Most of the exported grain is destined for the countries of Middle East and North Africa. The local Ministry of Economic Development and Trade subjects export contracts for certain groups of agricultural products to registration. The key items exported from Ukraine are subjected to licensing and/or quotas where applicable and must be registered prior the export.

In 2016, Ukraine established itself as an export leader in several categories:
•    1st place in world export of sunflower oil, $4.8 billion (32% of total world export);
•    4th place in world export of barley, $653.4 million (8.5%);
•    4rd place in world export of maize, $2.4 billion (8.4%);
•    6th place in world export of wheat, $2.6 billion (7.2%);
•    7th place in world export of soybean,    $645.3 million (1.3%).

The production of cereal and industrial crops tends to be the focal point for agricultural enterprises. Major cereal crops of grain markets in Ukraine incorporate winter wheat, spring barley and fodder maize. Winter wheat is the core crop for both private farms and agricultural enterprises.

Grain crops

According to the Ministry of Agrarian Policy and Food, Ukraine has collected unprecedented66 million tons of crops in 2016. In addition to this, record-breaking productivity of land was achieved: wheat – 42.1 centners per hectare, rye – 27.3 centners per hectare, corn – 66 tons per hectare, peas –  31.3 centners per hectare.

Ukraine continues developing closer economic ties with the European Union. This is displayed in the growth of exports to the EU, both of grains and milling industry goods. Ukrainian government aims to double grain production by 2020, compared to the 2015 level.

According to the data of the State Fiscal Service, the export of agricultural products from Ukraine during January-February 2017, increased by 32.3 percent compared to the same period in 2016 and amounted to USD 2.68 billion. At the same time, the share of agricultural products export level in terms of the general export structure of Ukraine has not changed and remained at the level of 42.8 percent.

Crop products became the driving force for increasing export bringing USD 321.2 million more in January-February 2017 compared to the same period of 2016. Notably, wheat and soybeans constituted the basis for such growth making a profit of USD 107.8 million and USD 120.3 million respectively.

Wheat

Wheat is grown all across the country, but central and south-central regions are the key growing areas of Ukraine. Wheat is planted in the fall and harvested throughout July or August of the following year. About 97 percent of it is winter wheat.

Оnce known as the breadbasket of Europe, Ukraine is about to regain that place as harvests soar. Ukraine produces mostly the hard red winter wheat of bread wheat. Normally, some 80% of domestic wheat crops are considered to be of milling quality according to national standards.

Wheat is widely used for production of pastry and bread. Ukraine’s bakery production has a substantial strategic role in the domestic economy and accounts for 15% of national food industry. In addition, wheat tops the grain prices in Ukraine, being the most expensive grain.

Wheat is produced by both agricultural companies and the private sector. The latter is represented by residents and households of the rural areas and is responsible for 19 to 20% of the annual wheat production.

Production of wheat in MY 2016/17 is expected to decrease. This expectation is based on reduction of wheat crop areas. The crop is expected to reach 26 million tons compared to 27 million tons in MY 2015/16.

The most part of it, approximately 16.5 million tons, is to be exported to India, Egypt, Indonesia and other countries. An additional incentive for the increase of sown areas under wheat is a limited activity of the Russian Federation on international wheat markets and, thus, a possibility to substitute the share of Russia

Barley

Barley has been the main forage grain in Ukraine for most of the past 10 years in terms of consumption. Spring barley accounts for over 90% of the barley crop. It is typically planted in April and harvested in August in the main barley growing region – eastern Ukraine. It is the frequently used crop for the spring reseeding of damaged or destroyed winter harvests. The area is inversely related, to some degree, to the area of winter wheat. Winter barley is the least cold-tolerant of the winter cereals and its production is restricted to the extreme south. In 2016/2017 agricultural season, barley harvest  increased by 13.8 percent compared to the previous year reaching 9.43 million tons.

According to the official statistics, in July-April of 2016/17 season, Ukraine exported 67.86 thousand tons of brewing barley, which is 10.4 times more compared with the same period last MY (6.5 thousand tons).This became the absolute record for the first 10 months of the season.

About half of Ukrainian barley export was sold to Saudi Arabia. Asian countries are also among the main consumers. In MY 2016/17, Libya increased imports of Ukrainian barley twice in comparison with the previous season. At the beginning of April 2017, the share of this country in total volume of Ukrainian barley export was 18.8%.

Maize

Maize is the third most important feed cereal in Ukraine. The planting zone has increased despite a number of constraints, such as obsolete and insufficient harvesting equipment, the high cost of production, especially post-harvest drying costs, and pilferage. The main growing region is eastern and southern Ukraine, although rainfall in some oblasts (regions) in the extreme south is too low to support growth of this crop. Maize is usually planted in late April or early May. Harvest starts in mid-September and is nearing complete by early November. Only 25-50% of general maize area is harvested for grain, the remainder being cut for silage, normally throughout August. In MY 2016/2017, maize production is expected to increase based on the unchanged production area, but higher yields compared to MY2015/16.

In 2016/17 MY, Ukraine increased its export volumes of maize to countries of the Middle East and Asia. This trend developed due to the increased competition rates on the global market in terms of the record high production volumes and carry-over stocks.

At the same time, in the current agricultural season, Iran became a leader of Ukrainian maize purchases. In October – February of 2016/17 MY, the country imported nearly 1.7 million tons of maize from Ukraine, or 17% of the general supplies in the reporting period.

Industrial crops are sugar beet, sunflower and rapeseed. Numerous farms specialize in production of the first two crops.

Sugar beet

Sugar beet is primarily grown in central and western regions. The beet is planted at the end April - beginning of May and harvested from mid-September until the end of October.

The Ukrainian sugar industry contributes about 1.2 percent to national Gross Domestic Product (GDP). While the area under sugar beets – the main source of raw material for sugar production in Ukraine – declined from 1.6 million hectares in the 1990s to about 600 000 hectares in 2010, sugar beet yields have been increasing since 1999 thanks to improved access to capital, the introduction of hybrid seeds, improved application of fertilizer and crop protection chemicals.

Ukrainian farmers obtain higher sugar beet yields today than during the Soviet era. Sugar beet production has also been consolidating and the average size of sugar beet-growing farms has increased. The share of rural households in total sugar beet production has declined dramatically – from 15 percent in 2006 to 8 percent in 2010. After a sharp drop in the early 1990s, average sugar production in Ukraine stabilized at about 1.8 million tons per year in recent years and equaled estimated domestic demand. The primary reasons for focusing on vegetable growing are the many possibilities for selling produce, either fresh or for processing, and the availability of manual labor instead of necessary equipment.

Sugar beet production requires a substantial amount of manual labor and remains vital option for small household farms with limited access to the farming machinery.

In recent years, the traditional zonal pattern for growing major agricultural crops has altered. Thus, for instance, sugar beet, a crop grown principally in the forest-steppe zone, has progressed further south and is now grown by Kherson farmers. However, the areas sown to these crops are not significant and the yields are much lower than in the traditional growing areas.

Sugar production in Ukraine in 2016/17 agricultural year (September-August) increased by 40.5%, to 2.008 million tons compared to the previous season, as national sugar producers association Ukrtsukor reported.

According to the report, 42 sugar refineries processed about 13.66 million tons of sugar beets.

The association reported that this year was favorable for Ukrainian sugar producers. Due to bad harvest in Brazil and India and the favorable situation on the global market, Ukrainian producers managed to supply almost 470,000 tons of sugar to foreign markets, mainly to Sri Lanka, Georgia and Tunisia.

Sunflower

Over recent years, the market of sunflower has experienced a simultaneous intensification and extensification of production.

According to the Ukroliyaprom association`s report, last year the Ukrainian enterprises exported oils and fat products worth USD 4.8 billion against USD 4.2 billion in 2015. In general, as noted by Ukroliyaprom, last year, the sunflower oil production growth rate was 18-19%.

Notably, oil and fat products exports amounted to 13 percent of total exports of goods from Ukraine, 30 percent of agricultural products exports and 70 percent of food industry exports.

The Association also emphasizedthat, in 2016, oils and fats industry of Ukraine showed a significant increase of sunflower production and export of sunflower oil, which is explained by a record-setting  gross sunflower seed harvest in 2016 (13.6 million tons) and by the extension of export duty on sunflower seeds, which indirectly ensures maximum processing at domestic facilities.

India and China remain key importers of Ukrainian sunflower oil in 2016/2017 MY, whose imports account for about 46% of Ukrainian export. From the beginning of MY 2016/17, sunflower seeds and sunflower meal were mostly sold to Ukraine`s neighboring countries such as Belarus, Poland and Turkey. Nevertheless, France remained the largest importer of Ukrainian sunflower seeds in September – December MY 2016/17 which amounts to 44% of total sunflower seeds export volume.   

Soybeans

According to forecasts, in 2017, the acreage under soybeans is to increase by 32%. Agricultural producers gave more preference to soybean instead of maize in MY 2016/17, which was due to low profitability of maize comparing to soybeans. Favorable weather conditions also benefited a good harvest.

In 2014, the Verkhovna Rada registered a draft law No. 4693, which was supposed to increase the processing volumes of soybeans by introducing an export tax of 15%. In fact, the plan was to introduce the mechanism similar to the market of sunflower seeds, but the draft was rejected. In the last few years, 83-85% of the soybean oil production was export oriented. Along with the growth in output the share of exports increases too.

Total exports volume of soybeans in September-December MY 2016/17 exceeded that in the previous year by 41%. Additionally, there was a slight increase in soybean oil exports by 0.2%, while the external shipment volumes of soy meal, on the contrary, decreasedby3.6%. Turkey and Egypt have been major external consumers of Ukrainian soybeans since the beginning of MY 2016/17, while Poland has been the main consumer of soybean oil. France, Georgia and Hungary have been major importers of Ukrainian soy meal.

In June 2015, Ukraine became a part of Danube Soya Association. This organization operates in Europe and provides support to soya producers in cultivation of non-GM soybeans. On February 25, 2016, Association Ukrainian Agribusiness Club (UCAB) and Agency AgriEvent with the support of Danube Soya Association held "Ukrainian Soybean Congress” in Kyiv.

Rapeseeds

From a technological point of view, a very small share of enterprises in Ukraine can produce a rape oil because it contains aggressive erucic acid in its structure and, therefore, the equipment has to be resistant to the substance. Also, biofuel programs that are able to stimulate the processing of rapeseeds into biodiesel are not developed in Ukraine.

France, Poland and Lithuania were the biggest rapeseed and its processed products importers as of MY 2015/16.. At the same time, exports volume in the 2016/2017 season is still far behind the results of the previous marketing year, because of poor crop which results – in a very limited export potential on the market. ADM Trading Ukraine and Cargill became largest exporters of rapeseeds in July – December MY 2016/17 and together accounted for about 33% of foreign trade shipments of these products.

Milk

Dairy farming is one of the major livestock industries in Ukraine and, before crisis, this segment demonstrated a trend towards its active development, but the situation in the dairy sector became more complicated in 2014. The biggest problem for the dairy sector was the loss of the Russian market, which accounted for about 80% of exports of dairy products. Consequently, the number of cows began to decline rapidly. In 2014, the number of cows decreased by 3.2% — to 2.36 million heads. In 2014, milk production in Ukraine amounted to 11,23 million tons, which is by 0.4% more than in 2013. There was also an increase of milk production by agricultural enterprises and a decrease of its production by households. The share of industrial milk production increased by 24% and its supplies to processing — up to 52%.

Growth of productivity of cows became a significant achievement of the dairy sector. During the past five years yields have risen by 32% in 2014; average annual yield per cow constituted 5228 kg.

Along with the reduction of dairy products consumption, exports in February 2017 were quite active, even comparing with the previous year. According to the results of reporting period, Ukraine sold on foreign markets 9.1thousnd tons of dairy products, which equals USD15.9 million. These are quite positive indicators. If we compare with January export level, the increase in actual numbers totaled 2.7 thousand tons. Compared with to February 2016, this increase reached 2.6 thousand tons.

However, milk prices started falling this year much earlier (in particular, in early February), which is an odd market trend. Such a trend has intensified since early March, and prices went down by 0.50−1 UAH/kg.

Today, the main challenge for the dairy industry is finding new export markets and developing the existing markets. To do this, it is important to develop a systemic state export policy that requires work with each particular country of destination. One of the perspectives for Ukraine is also an export-oriented organic milk production, as more and more people pay attention to health and are willing to pay for quality products. The demand for dairy products for baby food is also increasing around the world, especially in China.

On January 10th, 2016 the Ukrainian milk processing companies received the access to the EU market from the European Commission. The first country to receive Ukrainian dairy products was Bulgaria.

After the crisis, demand for dairy products in Ukraine is going to recover, so it is very important to keep potential of production and processing of milk in the domestic market.

Meat

Meat production in Ukraine has demonstrated a consistent upward trend in the last years. In 2017, Ukrainian meat production of all categories equals 2,370 Kilo Metric Tons, which is 2% more than a year earlier. According to the experts, in view the purchasing power of the population, the total consumption of meat and meat products in 2017 is estimated at 2,237 KMT, or 52.5 kg per person (ration allowance is 80 kilograms per person).

Notably, the volume of exports of Ukrainian meat in 2017 will amount to 320 Kilo Metric Tons, which is 6% more than the last year due to increased exports of poultry meat. Import of meat and meat products during the year has been estimated at 196 Kilo Metric Ton or 8% more than in 2016.

It is also reported that, in January 2017, Ukrainian farms produced 215 KMT of meat of all kinds, which is 4% more than in the corresponding month of the last year. Meat exports in January 2017 amounted to 16 Kilo Metric Tons (84% increase compared to January 2016), import – 13 Kilo Metric Ton (17% decrease). It is emphasized that in the reporting month, the share of poultry meat in the total Ukrainian exports share amounted to 50% (11 Kilo Metric Ton or 57% more than the year before).

High demand for Ukrainian poultry in January 2017 was observed in Iraq, the United Arab Emirates and Hong Kong.

A very important achievement of the poultry sector was its access to the European market. In 2013, Ukraine got the permission to export poultry products to the EU followed by the autonomous trade preferences in April 2014 that have made poultry exports under EU import quotas economically attractive. According to the results of 2014, about 17 thousand tons of poultry meat were exported to the European Union, which amounts to USD 51.8 million. It is worth noting that parts of best quality were supplied to the EU market at a higher price. As for beef and pork, the permission to supply these products to the European market is still missing. Nevertheless, Ukraine is improving this direction, because it has quotas for duty-free exports to the EU in the amount of 12 thousand tons of beef and 20 thousand tons of pork. In addition, European quality assurance of Ukrainian products facilitates its access to other markets.

Until 2014, the main export market for Ukrainian beef was Russia, with the share of 64%. However, Russia has been banning exports from Ukraine regularly and this led to a decline in exports of beef. On January 1st, 2016 Russia banned food products import from Ukraine completely.

Mineral fertilizers

Ukraine is one of the world leaders in fertilizers production, specializing in nitrogen fertilizers. Ukraine’s share on the global mineral fertilizer market is 8%. There are 8 big mineral fertilizer producers; 6 of them specialize in production of nitrogen fertilizers and form a foundation of Ukrainian chemical export: plants from Horlivka and Odesa possess around 24% of production; Cherkasy, Dniprodzerzinsk - about 22% and Severodonetsk - up to 10%. Annually they produce only 3,6 million tons of urea. Some part of this urea is sold internally, i.e. on Ukrainian domestic market. Currently, Ukraine exports about 280.000 tons of urea and 130.000 tons of ammonia nitrate per month. It is estimated then the projected volume of domestic mineral fertilizers market will double by 2017.

The largest share of the Ukrainian market of mineral fertilizers belongs to ammonium nitrate. In total consumption of fertilizers its share amounted from 45 to 50%.

A cheaper alternative to ammonium nitrate is ammonium sulfate. The excess of acidity is compensated by the lowest price among the other solid nitrogenous fertilizers and the availability of easily digestible form of sulfur.

The second largest consumable fertilizer in Ukraine is NPK (a complex fertilizer of different formulas, of which the most popular are the ammonium nitrate phosphate fertilizer (NPK 16:16:16), and diammofoska (NPK 10:26:26). Considering that the Sumykhimprom plant has successfully introduced these brands, the growth of domestic consumption of NPK in Ukraine by 63% is natural.

A more substantial growth is not impossible, the key to which is the diversification of CAM supply sources. Besides two traditional suppliers, OSTCHEM and Eurochem, CAM importers of Belarussian origin and Ukrainian non-industrial producers of CAMp (products based on carbamide-ammonium mixture) are going to play a prominent role in the market.

Total dependence of the Ukrainian agrochemical industry on the imported raw materials and the high proportion of imported fertilizers on the market dictate the dependence of Ukrainian prices on the world market prices. Since the inflation and devaluation rate is unpredictable, many export-oriented agricultural enterprises forecast the prices for mineral fertilizers on the basis of the US dollar equivalent.

On the world markets of fertilizers a reduction in prices was a dominant trend in 2015. High harvests in previous years, a decrease in the cultivation of “fuel" crops due to the oil prices decrease, reduction of production costs of fertilizers and surplus of the market will contribute to the low price level of fertilizers during the year.

Investment in agriculture

Investment in agriculture is crucial for the economic development and food security of Ukraine. Today agriculture is one of the most promising sectors of the country’s economy: it is a notable player on the global agricultural market, a source of foreign currency inflow to the country, 8% of the GDP and formal employer for 15% of the population of Ukraine. Global food crisis is also favorable for investment in agricultural production in Ukraine.

Investment activity is regulated in Ukraine with numerous laws and amendments, nevertheless the legal regulations are imperfect. Ukrainian legislation de facto establishes a national treatment regime for foreign investors, i.e. neither foreign nor domestic investments are prioritized, however, the greatest shortcoming of the investment regulation in Ukraine is an absence of state protection guarantees for foreign investments. Unilateral changes of the legislation, instability of legislative base, unclear legal definitions and declarative character of laws and state programs of the agricultural sector development, as well as imperfections of national statistical data also create obstacles for the investment activity in Ukraine.

Autonomous EU trade preferences for Ukraine: first results for agricultural sector

Few positive changes in investment regulation in Ukraine took place over the recent times. Signing of the Association Agreement with the European Union opened an access to European markets for Ukrainian agri-food products.

Association Agreement between the EU and Ukraine was simultaneously ratified by the European Parliament and Parliament of Ukraine on the 16th of September, 2014. However, bilateral implementation of the trade component was postponed for political reasons until January 2016. Instead, EU introduced preferential trade regime within a wider package of economic and financial assistance to Ukraine. Relevant regulation (EC N 374/2014) came into an effect as of April 23, 2014. Trade preferences are based on the agreement on liberalised access to the EU market under the Association Agreement, which should have been implemented in the first year of free trade regime between the EU and Ukraine.

Harmonization of the Ukrainian legislation with the European one is expected to intensify international trade in Ukraine. However, harmonization requires stricter regulation of trade with agricultural products by private households, which might negatively affect private households in a short-term perspective.

Implementation of the Deep and Comprehensive Free Trade Area (DCFTA), i.e., bilateral reduction or removal of import duties on the majority of commodities, starting from January, 2016, will increase competition at the domestic market of Ukraine. The above-mentioned study of the APD demonstrates that reduction of Ukraine’s import duties could increase imports up to 7% largely due to increased supplies of beverages, vegetable oils and fats, meat, mineral or chemical fertilizers, animal oils and fats, and sugar. Hence, it seems that gains obtained by Ukraine are likely to be higher than for the EU at least in the medium- and long-term.

In conclusion, introduction of the autonomous trade preferences brought first promising results in terms of increased exports of to the EU and also contributed to the improvement of food quality and safety standards and, thus, opened international export possibilities for Ukraine. Delayed implementation of the DCFTA provides more time for the government to implement all required legislative changes. The Ukrainian agribusiness should adapt their production processes and standards to the EU requirements to strengthen their competitiveness at the EU market, as well as to maintain and expand their positions on the domestic market.