What will Ukrainian agriculture look like in 2023?
Eleven months have passed since the Russian invasion of Ukraine. To date, the country has lost 17% of its territory. Tens of thousands of Ukrainians, including almost 1,000 children, have lost their lives.
Dozens of cities are destroyed. Hundreds of farms and agricultural enterprises have either been looted or destroyed with Russia stealing four million tons of grain.
Damage to Ukraine's environment is estimated to be at least $50 billion in the form of pollution of land, air, water resources, destruction of forests, and nature reserves.
The GDP of Ukraine in 2022 has decreased by about one third; although, the reduction of GDP by 40% and even 50% was previously predicted. Compared to 2021, the harvest of grain and oil crops in 2022 decreased by 40%.
According to the FAO survey, every fourth enterprise in Ukraine has either closed or reduced its production capacity. Today, businesses are focused on how to save jobs and their production.
Due to a number of problems related to logistics, the increase in the price of inputs, the non-return of VAT to exporter traders, and the exchange rate difference, a number of small grain and oil crop producers (With a cultivated area up to 200 hectares, the share of farms among the total number of grain producers and oil is 70%.) moved into the shadow economy to maintain profitable. According to the Ministry of Economy of Ukraine estimates, about 27% of the income of the agricultural business in 2021 was in the shadows. Some experts claim that before the war, 40% of grain and 10% to 30% of oilseeds were sold for cash without paying taxes.
The exchange rate remains one of the main factors affecting the profits of exporters of agricultural products, since export payments are made in foreign currency. The exchange rate difference can be as high as 13%. Inputs are imported at the commercial rate while products are exported at the official rate, which creates an additional tax burden on producers.
Currently, the National Bank of Ukraine (NBU) has limited the ability of importers to buy currency. First, they must use the currency that is already on their accounts, and only then is it possible for them to purchase it.
As of August 2022, the NBU recorded more than $5 billion earnings by exporters, of which $4 billion has not been returned to Ukraine for the export of grain and oil.
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Since February 24, 2022, when Russia launched a full-scale invasion of Ukraine, the profits of Ukrainian banks have decreased more than fivefold. Of the 67 Ukrainian banks, almost one third or, 21 banks, ended the year with a loss of 19 billion Ukrainian hryvnia (UAH) or about $500 million. The total profit of the Ukrainian banks with a positive balance for 10 months amounted to 30 billion UAH or about $800 million.
The most serious challenges for banks is the mass emigration of Ukrainians, the drop in demand for banking products, the revaluation of old loans, and the devaluation of the national currency.
Some of the borrowers of the banks found themselves in the territory occupied by Russia and cannot pay the loan. Some of the borrowers partially or completely lost their main assets (e.g., elevators, processing plants, livestock farms, machinery and equipment, and warehouses). Due to the blockade of Ukrainian ports before the opening of the “Grain Corridor”, the price of grain and oilseeds fell, due to which producers, primarily of grain and oilseeds, faced a sharp drop in prices for their products. Also, the rapid growth of logistics costs led to a large drop in producers' income, somewhat because the Ukrainian railway was forced to raise tariffs for its services. The last was caused by the fact that the Ukrainian railway provided free priority services to the Ukrainian army.
Against the background of the emigration of at least 4.5 million Ukrainian citizens, the consumer lending sector has also significantly shrunk. From January to November 2022, compared to the same period the previous year, commission income of banks decreased by 8.5%.
The import of agricultural machinery to Ukraine decreased by one third.
Use of inputs
Experts forecast a decrease in the use of fertilizers: nitrate by 3% to 47%, phosphate by 51% to 100%, and potassium by 41% to 100%, depending on the crop. This, in turn, will lead to an average yield drop of 20% to 50%.
The projected reduction in employment at agricultural enterprises engaged in the production of grain and oil crops will amount to 22%, taking into account formal and informal employment.
What can Ukrainian agricultural producers expect in 2023?
Lack of working capital, shortages of seeds and blackouts are the main problems that Ukrainian farmers may face during the spring sowing.
Problems with exports led to a change in the structure of planted areas and cultivation technologies, adapting to the available inputs. Several agricultural producers left fields unsown to avoid risky investments in the time of extreme uncertainty about the near future.
However, there is another set of negative factors.
The mobilization and migration of people within the country and abroad, especially in the first two or three months of the war, changed all production processes. Blackouts and unstable power supply, internet, and mobile communications, especially in rural areas, significantly reduce the efficiency of operations and increase their time.
The financial sector, which had previously supported farmers predictably and stably, although not without problems, has stopped lending during the war. Access to working capital has become extremely limited.
Many grain storage facilities, which were concentrated mainly near the ports of the Azov and Black Seas and were used as hubs for storage and transshipment, were lost. The transportation of products by the Dnipro River to the Black Sea ports, primarily the ports of Kherson and Mykolaiv, has stopped.
According to the forecast of the Ministry of Agrarian Policy and Food of Ukraine, some change is expected regarding the sowing of agricultural crops. So, the area sown under oil crops such as rapeseed, soybeans, and sunflower will increase. This is because the cost of one ton of oilseed is higher, and the cost of logistics per ton is lower. That is, farmers will be able to earn more from 1 hectare.
Wheat production is also expected to decrease, but it will be twice as much as needed for domestic consumption. At the same time, the spectrum of crops aimed at the domestic market will increase, as was the case with buckwheat in 2022.
We will see the drop in the barley production as sown areas under winter barley decreased by 35%.
According to preliminary estimates, the sown area under grain crops in 2023 will be about 8.7 million hectares, which is 22% less than in 2022 and 45% less than in 2021. At the same time, the sown area under oil crops is forecast at about 9.7 million hectares, which is 32% higher than in 2022 and 9% more than for 2021. This is the first time the area sown under oil crops will be larger than under grain.
Considering a 50% to 60% decrease in fertilizer application, significant unharvested areas of corn in the fields, lack of financing and the need for significant decrease in inputs, the expected yield will decrease by 10% to 30%, depending on the region and crop, compared to the average yield of previous years.
As a result, the projected volume of grain in 2023 may amount to 34 million tons, which is 37% less than the 2022 figure and 60% less than the 2021 figure. As for oilseeds, a gross harvest of 19.3 million tons is expected, which is 13% more than the 2022 figure and 15% less than the 2021 figure.
Taking into account the above gross production volumes and domestic needs, Ukraine will be able to export approximately 35 million tons of grain and oil crops in 2023/24, or 3 million tons per month, which is half the exports in the fall of 2021. This means that even with the blocked seaports Ukraine will be able to export all this volume of crops.
Some positive points in this sea of problems for agricultural producers is the inflation forecast for the next year at 24%, which will allow to pay loans at acceptable rates in UAH, for example, 9%. Under such conditions, the effective rate will even be negative.
Finally, the main problem in the agrarian sector of the Ukrainian economy, which has not been solved for decades, is the anticipatory development of the production of raw materials, rather than processing, against the background of an increasing share of agricultural products in the structure of total exports. The emphasis was made on the cultivation of grains and oilseeds. Very little attention was paid to the development of the processing of fruits, berries, and vegetables.
For more than 30 years of Ukraine's independence, no products were created that would distinguish Ukraine on the food market, such as, for example, Gruyère, Parmesan, Maasdam cheeses, jamon sausages, prosciutto, wine, vodka, cognac, beer, etc. There was no work on popularizing Ukrainian cuisine abroad through restaurants, such as Mexican, Chinese, Japanese, Italian, etc.
There were no stress tests of logistical systems before the start of the war, which caused total chaos for several months, though long before there were clear signals.
About the Author: Iurii Mykhaylov is an agricultural journalist in Ukraine.