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Policy issues plague Ukraine ag sector

Despite the existence of the Ministry of the Agricultural Policy and Food of Ukraine, there was not and still there is no the coherent agricultural policy that could describe goals, means and outcomes to be expected. Since the independence of Ukraine in 1991 the agricultural policy consisted and still consists in distributing the limited amount of budget funds among the selected group of thieves. Such policy inevitably had the number of negative impacts on the Ukrainian agriculture.

Though the agricultural land in Ukraine nominally was distributed among and privatized by 6.3 million peasants till now it is not allowed to sell/buy the agricultural land. When the collective farms had been disbanded their assets practically were looted by the top managers of that farms and local authorities. Peasants received land, but without the means to cultivate it the majority of them in order to survive had been forced to lease their plots (2-10 hectares depending of the regions) to newly founded enterprises.

At the beginning of the 2000-ties ostensibly in order to facilitate the accountancy for the small farmers there was introduced the so-called “fixed tax” for agricultural producers that combines 19 other taxes including the income tax. The fix tax rate is only 0.15 percent of the “nominal” price of land the average price of which is about 2,500-3000 USD per hectare. So regardless of what is produced on that land and what income is obtained the producer pays practically nothing in the form of taxes (excluding the tax on labor force).

Also agricultural enterprises were (and still are) taxed by the VAT (value-added tax) with the zero rate. This means that they actually do not pay the VAT and moreover they receive the VAT accrued on the previous stages of production. This is considered as the indirect subsidy to Ag producers. As the result the state budget does not get the VAT from the agricultural activity but has to refund the VAT to exporters.

Such governmental “care” towards small farmers caused the dashing emergence of the agricultural companies that rent hundreds of thousands of hectares of land.

In most cases such companies are registered in off-shores for the two reasons. First, to get some safety from the despotism of the Ukrainian power. And second, to secure their huge profits from the taxation abroad.

Also some companies registered in off-shores made IPO on the European financial markets (London, Frankfurt, Warsaw) and thus got access to foreign capital in the forms of direct investments or credits.

  1. The performance of the huge agricultural companies called “agroholdings” (since they incorporate a number of smaller agricultural enterprises) is far from perfect. Of the 15 companies that made IPO three had already busted and one is in the default situation. During the last year most of the Ukrainian agroholdings lost up to 40 percent of their market value.

  2. The bad performance of agroholdings has several reasons. There is no world experience of the management of such big agricultural enterprises land of which is scattered all over Ukraine. The gap between the salaries and bonuses of the owners and top managers are several orders higher than the wages of the hired workers who try to compensate their small wages with stealing of the resources (pesticides, fertilizers, fuel, spare parts etc.). To prevent this companies install the expensive sophisticated accounting systems, hire large security personnel, costly control and monitoring systems etc. The idea that skilled labor force must be adequately paid is on its very early stages of comprehending.

  3. The low wages for labor force caused its drain from the agriculture. Agricultural companies complain that it becomes very difficult to find skilled workers to operate expensive and sophisticated modern agricultural machinery. Also the miserable condition of the hugely underfunded Ukrainian agricultural universities and colleges makes it impossible for them to meet the needs of the agricultural companies in the skilled labor force.

  4. The agricultural companies also experience the problems with the rent of the agricultural land that is scattered among numerous small land owners. Companies have to spend a lot of efforts to set the rent agreements with tens and hundreds thousands of land owners. So there arose the idea to set the minimal term of land rent at about 10-15 years. At the moment this idea is under the discussion.

  5. Business is very wary about investing in long-term projects on the rented lands such as irrigation systems, animal farms, and perennials. The current judicial system does not guarantee the ownership rights which at any moments may be violated.

  6. The Ukrainian middle-size producers (the cultivated land up to 10,000 hectares) prefer to buy second-hand machinery (5-10 years old) from the EU. While its price may be 2-3 times less than that of brand new machinery the technical conditions of second-hand machinery from Europe are comparable to a brand-new machinery after 1-2 seasons of operation in Ukraine (the average modern grain combine in Ukraine harvests about 1,000 hectares per season).

  7. The corruption in Ukraine is unbelievable. There are more than 70 state institutions that can stop the activity of any business (police, prosecutors, tax authorities, fire inspection, sanitary inspection etc.) of which more than 40 state institution are in the field of the agriculture. Just in order to normally operate the agricultural business has to pay huge bribes that may constitute up to 50 percent of its cost of production. This also is one of the reasons of the small wages in Ukraine.

  8. Recently there had been passed the law according to which agricultural producers must agree with the local and central authorities the five years’ schemes of the crop rotation for each field that cannot be changed without the authorization. That puts the producers in a very awkward position where they cannot adequately respond to the volatile market conditions.

  9. The credits in Ukraine are inaccessible and unacceptable. The rate is amounting 25-30 percent annually. The crediting in foreign currencies (that could allow get credits on the lower rates) is prohibited. This makes practically impossible the development of milk industries and orchards.

  10. There are no commodity exchanges in Ukraine. It is very difficult to hedge the price on commodities, inputs and currency exchange rate in Ukraine. Some companies that are registered in off-shores may hedge their risks on the foreign exchanges. Some input suppliers (mostly foreign pesticide and seeds companies) develop their own programs for the producers either barter-based or based on bank instruments like guarantees, bills etc. The machine-building companies develop the leasing schemes involving foreign and local banks.

  11. The logistics in Ukraine is in the terrible state. Most of the roads look like after a massive bombardment. The majority of agricultural commodities are transported by the railroads. The number of grain railroad cars continually decreases. Some grain producing and trading companies begin to develop their own railroad car fleet. The “Nibulon” company develops its own fleet of barges to transport the grain and oilseeds by the Dnipro river.

  12. The transaction costs connected to logistics are order higher than in the USA and Europe. Exporters must supply a lot of unnecessary documents and certificates in order to export Ag commodities. Captains of ships in Ukrainian ports have to pay huge bribes to border control, customs and environment officials.

  13. The recent political events in Ukraine will not significantly affect the agricultural production in Ukraine (at least this season) since most of producers have already accumulated necessary amount of inputs for the next season. But since the Ukrainian grain and oilseeds production is export oriented there may arise problems if Russia will put forward its military force. In the case of the military escalation the export from the Black Sea region may be paralyzed. As a result the Ukrainian Ag producers may achieve huge losses.

  14. This may also have the adverse effect on the Russian export, not only of the Ag commodities but also on the export of oil to Middle East.

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