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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.
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, corn, 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 Economics 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.
Over 2014-2015, Ukraine established itself as a world leader in many crops:
• 1st in exports of sunflower oil (4.3mn t)
• 3rd in exports of maize (18mn t)
• 4th in exports of barley (2.7mn t)
• 6th in exports of wheat (11mn t)
• 7th in exports of soybean (2mn t)
• 8th in exports of poultry (170,000 t)
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.
In the 2014/15 marketing year, cereal production, across Ukraine but excluding occupied Crimea, reached another record, 63.8mn t, as average yield increased from 40.6 t/ha to 43.7 t/ha. This was despite a nearly 5% reduction in sown territory compared to 2013/14 MY.
In 2015/16 MY, grain exports are expected to drop about 28%, primarily caused by a reduction of overall production. Maize is expected to be the top exported crop, accounting for nearly 60% of total grain exports.
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 95% 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. In 2013 the production of wheat in Ukraine was 23,01 mn t. which is 59.18% more than in 2012.
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.
Strong profits in 2014 led to an increase in acreage planted by nearly 11%, mainly winter wheat, which brought about 15.6% in US dollar equivalent compared to other crops. An additional incentive for expanding sown areas under wheat was the limited activity of the Russian Federation on international wheat markets and presenting Ukraine with an opportunity to take over Russia’s market share.
An increase in wheat production in 2013-2014 allowed for exports to be expanded and in 2014, the export of this crop increased by 41% over the previous year. The main buyers were in Africa and Asia, but there was also a significant expansion of exports to the European Union. These increased by more than 10 times in 2013-2014, making the EU Ukraine’s second largest foreign trade partner, with the share of 10%. Fully 65% of the 1mn t of wheat exported to the EU was delivered to Spain.
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. Typically planted in April, it is harvested in August in the main barley growing region, eastern Ukraine. Barley is the preferred crop for spring reseeding when winter crops have been damaged or destroyed. The area is inversely related, to some degree, to the area sown with winter wheat. Winter barley is the least cold-tolerant of the winter grains and its production is restricted to the far south. In the 2013/2014 season, the crop yielded 7mn t, a decline of 7.41% over 2012/2013.
High yields in 2014 and restrictions on external markets might lead to an overall reduction in 2015. The acreage of winter barley is now 5.4% less than in 2014. The overall decrease in barley acreage is expected to be 5-10%.
Improved yields made it possible to significantly increase the volume of trade in barley, which was up 44% in 2014, compared to 2013. Still, the export destinations for Ukrainian barley have not changed much. Saudi Arabia remains the main market, taking about 64% of total exports. China moved into the top 10 importers of Ukrainian barley, buying 179,000 t in 2014.
Considering the development of relations with China, trade should expand considerably.
Meanwhile, the volume of sales to the EU increased ninefold.
Maize is the third most important feed grain in Ukraine. The planting zone has increased despite a number of constraints, such as obsolete and insufficient harvesting equipment, high production costs—especially post-harvest drying costs—, and shrinkage. The main growing regions are in eastern and southern oblasts, although rainfall in some oblasts in the extreme south is too low to support this crop. Maize is usually planted in late April or early May.
Harvesting starts in mid-September and is nearly complete by early November. Only 25-50% of the general area sown in maize is harvested for grain, the remainder being cut for silage, normally throughout August. In 2013, yields went up to 30.9mn t, which was a 47.69% increase over 2012.
As in the case of barley, a decrease in acreage is expected, mostly due to a switch to growing soybeans. According to experts, the profitability of maize production in US dollar equivalent was about 8% on average in Ukraine in 2014.
The European Union, with 46% in 2014, and Egypt, with 12%, remain the main markets for Ukrainian maize. Tighter cooperation with China made it possible to increase the volume of exports to that country up to 1.6mn t in 2014, which was 15 times more than in 2013. China rose to third place among the top 10 importers of maize from Ukraine.
Ukraine’s industrial crops are sugar beet, sunflower and rapeseed (canola). Numerous farms specialize in the first two crops.
Sugar beet is primarily grown in central and western oblasts. 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% to GDP. While the area under sugar beets, which are the main raw material for sugar production in Ukraine, declined from 1.6mn hectares in the 1990s to about 600,000 hectares in 2010, sugar beet yields have been increasing since 1999 thanks to better access to financing, the introduction of hybrid seeds, and 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 farms has grown. The share of subsistence farmers in total sugar beet growth has declined dramatically, from 15% in 2006 to 8% in 2010. After a sharp drop in the early 1990s, average sugar production in Ukraine stabilized at about 1.8mn t per year in recent years and largely covered domestic demand. The primary reasons for focusing on vegetable growing are the many opportunities to sell produce, both fresh and for processing, and the availability of manual labor when the necessary equipment is lacking.
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. In 2010, sugar beet planting area continued to shrink, with the exception of Rivne, Vinnytsia and Khmelnytskiy Oblasts, where a slight escalation was registered. In southern regions, no sugar beet production was reported.
In 2014, Ukraine produced 1300 mn t of Beet Sugar, which was 45.83% less than in 2013. An increase by 23.08% is projected by the end of 2015.
On April 14, 2015, the Cabinet of Ministers raised the minimum price of beet sugar for the 2015/16 agricultural year (September – August) 36.7% compared to the current year, to UAH 6,454.73 per tonne, ex VAT.
According to Cabinet Resolution #189 dated April 8, the minimum price of sugar beet next season will be 29.8% higher: UAH 445.87/r, ex VAT. The document also sets the quota for sugar production to supply to the domestic market: quota A was reduced to 1.72mn t from 1.811mn t in 2014/15. The minimum price of sugar for 2014/15 was raised 1% from the previous season, to UAH 4,722.68/t, ex VAT, and the price of sugar beet was raised1.6%, to UAH 343.55/t.
Over recent years, the sunflower market has experienced a simultaneous intensification and extensification of production. UCAB (Ukrainian Agribusiness Club) experts do not expect a significant increase in acreage under sunflower in 2015: marginal growth is estimated at 3-5%. Further growth will be possible as yields improve, but these trends are doubtful in 2015 given the generally negative situation in the economy.
Despite a 4% increase in acreage, output decreased by 7.7% in 2014, to 10.1mn t because of the very dry summer in southern Ukraine. In general, processing companies reported a shortage of seeds because producers held back from selling sunflower seeds because hryvnia prices were unstable. Ukraine’s processing capacity is 13-14mn t of seeds per year, processing companies are starting to switch to processing soybeans and rapeseed.
At the end of February 2015, the Verkhovna Rada registered the bill amending the Law of Ukraine “On rates of export duties on certain types of oilseed” to ensure the competitiveness of oilseed producers. Bill #1837 abolishes the 16% export duty on sunflower seeds. Processing companies, naturally, opposed this, arguing that these changes will support seed exports and even greater under-capacity, and will lead to a reduction in added value, which stays in the country due to processing.
In 2014, the acreage under soybeans expanded by 32%. Agricultural producers gave preference to soybean over maize in MY 2014/15, caused by low profit margins with maize in 2013/14. Favorable weather conditions also resulted in a good harvest.
Ukraine is gradually increasing production of soybean oil, influenced by growing demand for soy meal, and also by excess of capacity for processing oil due to the shortage of sunflower seeds. UCAB forecasts that soybean oil will increase to 165,000 t in 2014/2015, twice what it was in 2012/2013.
However, in 2014, the Verkhovna Rada registered Bill #4693, which was supposed to increase processing volumes of soybeans by introducing an export tax of 15%. In fact, the plan was to introduce a mechanism similar to sunflower seed market, but the bill was rejected. In the last few years, 83-85% of soybean oil was exported. Along with the growth in output, soya’s share of exports growing, too.
The increase of soybean production led to a 57% increase in the volume of exports in 2014, compared to 2013. Despite the reduction in supplies to the EU, this group of countries remains the main foreign contractor for Ukrainian soybean. Also, Asian countries singnificantly expanded their trade with Ukraine. Whereas, in 2013, this region accounted for about 21% of the country’s exports of soybeans, in 2014 this figure reached 46%. There were no deliveries to China in 2014. In the long run, however, trade with China is expected to expand.
The area under rape declined 12% in 2014, but the yields, as in the case of soybean, went up, which led to a harvest only 6% smaller than in 2013. Export is the main distribution channel for Ukrainian rapeseed.
According to the forecast, in 2014/2015, processing will increase its share of distribution to 185,000 t, which is +92.7% compared to 2013/2014, and an increase to 8% of the total supply. As in the case of soybeans, in 2014, an initiative to introduce export duty on rapeseed to increase domestic processing was considered, but it was, too, rejected.
From a technological point of view, a very small share of enterprises in Ukraine can produce canola oil because it contains aggressive erucic acid in its structure, which means equipment has to be resistant to this substance. Also, biofuel programs that stimulate the processing of rapeseed into biodiesel are not available in Ukraine.
The geography of foreign trade in rapeseed is quite concentrated. The top five rated countries among leading external contractors for exports of rapeseed covered 98% of total exports from Ukraine in 2014, up from 97% in 2013. As in the case of soybeans, the importance of Asia is growing, but at a slower pace. In 2013, 541,500 t or 23% of export deliveries went to this region, rising to 686,200 t or 34% in 2014. In 2014, the first delivery of rapeseed to China took place. Although it was only 400 t, further expansion is likely.
Dairy farming is one of the major livestock industries in Ukraine and, before the crisis, this segment was actively expanding after years of head counts going down. In 2014, however, the situation in the dairy sector became more complicated. The biggest problem was the loss of the Russian market, which accounted for about 80% of exports of dairy products. Consequently, the cow herds began to be culled rapidly. In 2014, head counts declined by 3.2% to 2.36mn. Still, milk production was 11.23mn t in 2014, which was 0.4% more than in 2013. There was also an increase in milk production by agricultural enterprises and a decline in its production by family farmsteads. The share of industrial milk production increased by 24% and it supplied dairies with up to 52% of raw milk.
Increased productivity among dairy cows was a significant achievement in the dairy sector. Over the past five years, yields rose steadily, up 32% by 2014 and average annual yield per cow was 5,228 kg. However, productivity tapered off slightly in 2015 possibly because input prices skyrocketed with the decline of the hryvnia. Forecasts are for milk production to drop 7% to 10.4mn t in 2015. Exports of dairy products will decline to 350,000 t in milk equivalent and imports to 150,000 t.
Russia-imposed sanctions have caused exports of dairy products to drop to 500,000 t in milk equivalent. Exports of dairy products from Ukraine were worth US $324mn in 2014, compared to US $515mn in 2013. Cheese exports declined threefold, to 19,500 t. However, sales of powdered milk and butter to foreign markets went up in 2014.
Exports of powdered milk from Ukraine are quite diversified although the Russian market took a major share in previous years. In 2014, after the Russian ban, new markets opened up in Kazakhstan (20%), Bangladesh (12%), Armenia (8%) and Georgia (7%) for this product.
Today, the main challenge for Ukraine’s dairy industry is finding new export markets and expanding existing ones. To do this, a systematic state export policy is needed that fosters work with each potential buying country. One prospect for Ukraine is also in export-oriented organic milk production, as more and more people pay attention to health issues and are willing to pay for quality organic products. Demand for dairy products as baby food is also on the rise around the world, especially in China.
The predictions for dairy market in 2015 include:
• milk production down;
• domestic demand for dairy products in decline;
• high prices for protein feed will affect cow yields negatively;
• farmers and dairies will need to agree on purchase prices for milk.
Once the crisis ends, domestic demand for dairy products should recover, so the key in this sector is to keep milk production and processing potential up for the domestic market.
Ukraine’s meat production has seen a steady growth trend in recent years. Despite the difficult situation in 2014, meat production at all types of farms grew 4.7% compared to 2013, to 2.37mn t in dead weight. Pork production increased by almost 6% to 753,600 t and poultry production increased by 6.6% to 1.17mn t. In 2014, 404,800 t of beef and veal were produced, down 1.8% over 2013.
Growing exports of meat were one of the positive trends in 2014. For the first time in many years, Ukraine had a visibly positive trade balance. In 2010, Ukraine exported only 46,500 t of meat and imported 26,700 t. In 2014, the volume of exports was 205,600 t while imports fell to 93,500 t.
While the share of imported meats in consumption was about 10% in 2013, in 2014 it plunged to 4.2%. Overall meat consumption fell by 2.2% to 2.42mn t in 2014.
The poultry sector gained access to EU markets, which was a major achievement. In 2013, Ukraine received permission to export poultry products to the EU, which was followed by autonomous trade preferences in April 2014 that have made poultry exports under EU import quotas commercially attractive. About 1,700 t of poultry meat were exported to the European Union in 2014, worth US $51.8mn. The best cuts of poultry meat were supplied to the EU market at a higher price. As for beef and pork, permission to supply these products to the European market still has not been granted. Nevertheless, Ukraine is improving this direction, because it now has quotas for duty-free exports to the EU capped at 1,200 t of beef and 2,000 t of pork. In addition, European quality assurance of Ukrainian products facilitates access to other markets.
In 2014, the main export market for Ukrainian beef was Russia, at 64% of all such exports. However, Russia has regularly banned imports from Ukraine and this affected exports of beef, too. Meanwhile Belarus, Azerbaijan, Moldova and other countries imported Ukrainian beef as well.
Ukraine is one of the world leaders in fertilizer production, specializing in nitrogen fertilizers, with 8% of the global mineral fertilizer market. There are 8 major mineral fertilizer producers in the country, with 6 of them specializing nitrogen fertilizers and forming the foundation of the domestic chemical export: plants in Horlivka and Odesa cover around 24% of production, Cherkasy and Dniprodzerzinsk about 22%, and Severodonetsk up to 10%. Annually, they produce about 3.6mn t of urea, some of which is sold on the domestic market. Currently, Ukraine exports about 280,000 t of urea and 130,000 t of ammonium nitrate per month. Projections are for the domestic mineral fertilizer market to double in volume by 2017.
Ammonium nitrate accounts for the largest share of the Ukrainian market of mineral fertilizers. Total consumption of fertilizers is 45-50%. In 2014, the domestic ammonium nitrate market shrank to 1,535,000 t, mainly because nitrate production crashed 34% when the Severodonetsk Azot and Styrol plants were shut down due to war, while Rivne Azot cut production in June and July.
Due to anti-dumping restrictions against nitrate of Russian origin, supplies to Ukraine largely stopped over April-October 2014. However, the annual imports declined only 10%. At the end of the year, the EuroChem company found a way to bypass these restrictions: instead of standard ammonium nitrate, it began to import granular ammonium nitrate.
In 2015, the market volume of ammonium nitrate is expected to increase to 1.7-1.75mn t as domestic production goes up and prices for ammonium nitrate go down. Despite the economic crisis, demand for traditional nitrate remains stable. Small and medium-sized farms, for whom nitrate and carbamide-ammonia mixtures (CAM) are too expensive, will be the main customes for ammonium nitrate.
A cheaper alternative to ammonium nitrate is ammonium sulfate. Its excess acidity is compensated by the lowest price among solid nitrogenous fertilizers and the availability of an easily digestible form of sulfur. In 2014, there was a 77% jump in the consumption of ammonium sulfate, with market volume reaching 188,000 t. One of the factors behind this increase was the shortage of nitrate. In 2015, nitrate production is expected to increase, while demand for ammonium sulfate shrinks slightly but remains at around 160-180,000 t. The biggest share of ammonium sulfate comes to Ukraine from independent importers.
The second largest consumable fertilizer in Ukraine is NPK, a nitrogen, phosphorus and potash-based complex fertilizer of varying formulas, the most popular of which are the ammonium nitrate phosphate fertilizer (NPK 16:16:16), and “diammofoska” (NPK 10:26:26). The Sumykhimprom plant has successfully introduced these brands, which has led to 63% growth in domestic consumption of NPK. In 2015, the Ukrainian market of complexed fertilizers will likely decline somewhat (-5%).
According to forecasts, the market volume of CAM will increase to 50,000 t in 2015. More substantial growth is possible, the key to which is diversifying CAM supply sources. In addition to the two traditional suppliers, OSTCHEM and Eurochem, CAM importers of Belarusian origin and Ukrainian non-industrial producers of CAM, products based on carbamide-ammonium mixture, are going to play a prominent role in the market. Growing competition on the CAM market will put downward pressure on retail prices for this fertilizer by the end of March 2015.
Ammonia is a vulnerable position among the product lines offered by agricultural chemicals companies in 2015. On one hand, the application volume of ammonia is growing year by year, rising 20% in 2014, to 12,500 t. On the other, the cost of ammonia, complicated application procedures and short application period of ammonia will restrain the market growth in 2015. Nevertheless, ammonia’s capabilities make it irreplaceable for autumn fieldwork.
The main expectation is for the agrochemical market to stabilize in 2015 and see volumes return to 2012-2013 levels.
Because the Ukrainian agrochemical industry depends entirely on the imported raw materials and imported fertilizers have a high share of the market, domestic prices depend on world prices. As long as inflation and devaluation rates remain unpredictable, many export-oriented agricultural enterprises calculate their prices for mineral fertilizers in US dollar terms.
World fertilizer markets will see prices mostly go down in 2015. High harvests in previous years, a decrease in the cultivation of “fuel" crops due to declining oil prices, reduced production costs for fertilizers, and a flooded market will contribute to low fertilizer prices during the year.
Investing in agriculture
Investment in agriculture is crucial for both Ukraine’s economic development and its food security. Today, the farm sector is one of the most promising components of the country’s economy: it is a serious player on global markets, it is a source of foreign currency inflows, it covers 8% of GDP and it formally employs 15% of the population. The global food crisis is another good reason to invest in agricultural production in Ukraine.
Investment activity is regulated by numerous laws and amendments in Ukraine, but its regulation is flawed. While legislation de facto establishes how investment is treated, neither foreign nor domestic investments are prioritized. But the greatest shortcoming of investment regulation in Ukraine is the absence of state guarantees to protect foreign investment. Unilateral changes in legislation, an unstable legislative base, unclear legal definitions, the too-often declarative nature of laws and state programs to develop the farm sector, and uneven national statistical data also create obstacles to investment activity in Ukraine.
EU Trade Preferences: First results in the farm sector
The last few years have seen few positive changes in investment regulation in Ukraine, although the signing of the Association Agreement with the European Union brought access to European markets for Ukrainian agri-food products.
The Association Agreement between Ukraine and the EU was simultaneously ratified by the European Parliament and the Verkhovna Rada on September 16, 2014. However, bilateral implementation of the trade component has been postponed for political reasons until January 2016. In compensation, the EU introduced a preferential trade regime within a wider package of economic and financial assistance to Ukraine. This regulation (EC N 374/2014) came into an effect April 23, 2014. Trade preferences are based on the agreement on liberalized access to the EU market under the AA, which should have been implemented in the first year of a free trade regime between the EU and Ukraine.
As Ukrainian legislation is harmonized with EU law, international trade with Ukraine is expected to intensify. Still, harmonization requires stricter regulation of trade with agricultural products by subsistence farmsteads, which could negatively affect these households in the near term.
The implementation of the Deep and Comprehensive Free Trade Area (DCFTA), that is, the bilateral reduction or removal of import duties on the majority of commodities starting in January 2016, should increase competition on Ukraine’s domestic market. The study of the APD showed that reducing import duties could increase imports to Ukraine as much as 7%, largely due to increased supplies of beverages, vegetable oils and fats, meat, mineral or chemical fertilizers, animal oils and fats, and sugar.
In conclusion, autonomous trade preferences brought the first promising results, increased exports to the EU, and contributed to better food quality and safety standards, thus opening international export opportunities for Ukraine. Delayed implementation of the DCFTA is giving the Ukrainian government more time to implement all the necessary legislative changes.
Ukrainian agribusiness needs to start adapting its production processes and raising standards to EU levels to improve competitiveness on the EU market, as well as to maintain and expand on the domestic market.