January 2: Can Ukraine’s Wheat Game Get Stronger?

In a past FarmLead Insight article, we’ve discussed the rise of Ukraine’s wheat game (just behind that of Russia).

Is that all about to change?

In a past FarmLead Insight article, we’ve discussed the rise of Ukraine’s wheat game (just behind that of Russia). 

Is that all about to change?

We know that the global grain markets have an albatross around their necks… and it’s called the Black Sea.

Exports from the Black Sea have exploded over the last decade, and nations like Russia and Ukraine have ramped up exports.

The result has been an encroachment on long-time customers of EU, US and Australian farmers. Here’s the thing: It could be worse.

While land investment has exploded around the globe, Ukraine has ignored calls from global financial watchdogs to liberalize their economies and sell farmland.

Farmers aren’t allowed to sell land – a policy dating back to 2001.

An area roughly the size of Florida was awarded to Ukrainians after the fall of communism. But the best case scenario isn’t selling the land — it’s a mandated series of short-term leases.

Meanwhile, buyers aren’t allowed to step in and develop some of the richest soil in the world.

Ukraine’s government believes that foreign investors would flood the nation. They’re probably right, but the alternative has been a miserable status quo of low wages and the country’s economy has suffered.

The World Bank recently explained that the Ukraine’s farming problems are linked directly to this law.

Ukraine is still one of the top producers in wheat, corn, barley, and sunflower oil.

But even though soil quality is exceptional, yields remain low compared to the nation’s European peers. Its wheat yields are less than 50% of land in Germany.

Now — what about the law itself and its impact on global supply?

Lawmakers recently extended the moratorium on sales of land to January 1, 2019.

A movement exists on both sides. One group wants to extend it to at least 2024. The other wants to extend it through 2024.

The others argue that politicians have fooled the people into believing that international investment will cause poverty — in a place where poverty is already common.

If the moratorium were lifted — international investment would flood the country. But the process of bringing land and operations online is a tedious one.

This will be a critical story as we move toward the end of 2018. It’s important to wrap our minds around it right now, as any change would only fuel an uptick in Black Sea exports.

Ukraine’s Ban on Selling Farmland Is Choking the Economy

The 1,400 acres of snowy farmland being churned into thick black mud by grumbling trucks and house-high red harvesters could be a picture of rural prosperity.

Instead, the early winter scene about 250 miles west of Kiev illustrates Ukraine’s failure to drag its most historically significant industry into the 21st century and help its economy recover from the country’s violent conflict.

Mriya Agro Holding Plc, the company hauling away the last of the sugar beet crop, owns none of the wide-open field. Under the snow, it’s a patchwork of 270 individual plots that the company leases for three to five years each. The peasants, who were bequeathed the land after the fall of communism, aren’t allowed to sell, and the company isn’t allowed to buy, so it has little incentive to spend any money to increase the harvest.

“If the company is the owner, it would be possible to invest more,” says Viktor Tarchynskyi, a foreman for Mriya. “Germans put in complex fertilizers every five years. We can’t afford to do that.”

Few things define Ukraine more than farming. Its people have lived, toiled, and starved on the land for centuries, and their economic and political struggles are dug deep into the soil.

It is here that Stalin’s forced collectivization drive exacted its heaviest toll. More than 6 million Ukrainians perished in the 1932-33 famine. One enduring legacy of that painful history is that land reform has been too sensitive for successive governments to tackle.

Ukraine tallied $13 billion in agricultural exports in the January to September period, equal to about 40 percent of total exports. The country is among the world’s top producers of sunflower oil, barley, wheat, and corn. Still, there’s  huge untapped potential: While Ukraine boasts one of the world’s richest concentrations of fertile black soil, its crop yields are among the lowest in Europe.

Like so much in the region, it all harks back to the messy transition from communism to capitalism. Following the dissolution of the Soviet Union in 1991, Ukrainians whose forebears had been victims of collectivization were awarded parcels of land averaging four acres and together totaling 166,000 square kilometers (64,000 square miles), or an area almost the size of Florida. In 2001, Kiev passed a law prohibiting the sale and purchase of these plots, a ban that has been extended nine times.

More than 4 million Ukrainians—most of whom are now beyond retirement age—earn an average of $190 a year, or the equivalent in grain, sugar, or other commodities, by leasing out a four-acre plot.

The government has been under pressure from the International Monetary Fund and companies such as Mriya Agro to lift the ban. “This is a huge challenge for all of us,” says Simon Cherniavsky, Mriya’s chief executive officer. “We are all farming on short-term leases, which is not in line with the long-term returns that everyone expects to get in agriculture.”

Ukraine’s parliament voted on Dec. 7 to extend the moratorium through Jan. 1, 2019, while some argued for an extension to 2024. Without it, foreign companies from the European Union or the U.S. would flood into Ukraine, lawmakers say.

“Land will be taken from people for pennies,” said Oleh Lyashko, the leader of the Radical Party, in the debate before the vote. “And the land that is supposed to feed their grandchildren and children will feed large property barons and representatives of power structures.”

Nevertheless, calls to rescind the moratorium are getting louder as Ukraine’s economy continues to lag such other former communist countries as neighboring Romania and Poland. Gross domestic product contracted by a cumulative 16 percent in 2014 and 2015 because of the conflict in the east with Russian-backed separatists and growth has been tepid since.

Though agriculture is the largest single contributor to goods sold abroad, a World Bank report published on Oct. 3 said that farm productivity and yields in Ukraine are a fraction of what they are in other European countries, blaming the land law. Wheat yields are less than half of those in Germany, it noted.

Larysa Hrynevych, 42, a Kiev resident, inherited two plots an hour outside of the capital from her grandparents about a decade ago. She says she is happy to lease out the land to a small company that plants sunflower, corn, and soybeans, as she is not about to move to the countryside to become a farmer. The arrangement earned her 11,500 hryvnia ($410) last year. “It’s good support for local people,” she says. “They can choose how they get paid.”

Agroindustrial companies say they would be able to boost yields and make higher profits if they owned the land they farm. Myronovskiy Hleboproduct SA, a Ukrainian poultry producer that also grows wheat, sunflowers, and other crops, says the cost of having to manage hundreds of individual leases is a drag on investment, particularly at a time when wheat prices are depressed.

“Given the present level of grain prices, the cost of leasing land, and the headache associated with extending lease agreements, it’s very expensive to expand the areas we farm,” says Yuriy Kosyuk, its CEO. As long as the ban remains in place and the wheat market stays depressed, the company is unlikely to expand its farming operations, he says.

Agrotrade Group in Karkhiv lost 120 hectares of arable land in 2017 because of the vagaries of the leasing system, says CEO Vsevolod Kozhemyako. Hired thugs have been known to strong-arm small land owners into switching partners on leasing contracts, giving rival companies and local political officials tied to them an unfair advantage, he says.

“Politicians have fooled people with the myth that an open land market will lead to poverty and destitution,” Kozhemyako says. “But people are not getting the money they are entitled to if they could sell the land.”

Institutional corruption remains a key concern for Ukraine, which fell in the Transparency International’s corruption index to 131, down four notches from 2013.

As the first of the winter’s snow quietly blanketed a farmyard dotted with idled tractors and other equipment, Nazar Terekh, a crop specialist who works for Mriya, sought the warmth of a barracks used to house seasonal workers.

As other workers in dirty overalls filed past, Terekh quickly flipped through multicolored maps on his tablet to show visitors a cluster of sunflower land with blacked out squares, because some local owners decided not to renew their leases.

That complicates issues for Mriya harvesters, which have to be carefully maneuvered to avoid those plots, says Tarchynskyi, the foreman. “We always need large areas of land given our machinery is designed for a wide sweep,” he says. “It’s difficult to work because we have this checkerboard effect.”

H/T: Bloomberg Businessweek
About the Author
Garrett Baldwin

Garrett Baldwin is a content strategist and editor at FarmLead. He covers the global grain markets and public policy issues related to the agricultural industry. He is a graduate of the Medill School of Journalism at Northwestern University. He also holds a Master’s Degree in Economic Policy from The Johns Hopkins University, an MS in Agricultural Economics from Purdue University, and an MBA in Finance from Indiana University.