(Business New Europe – bne.eu – Sergei Kuznetsov in Kyiv – April 22, 2015)

While Ukraine’s steel, heavy engineering and power sectors have been crippled by the war in the east and the economic crisis, agriculture has become the country’s leading source of export revenue and the only sector putting in a positive performance. Even so, farmers are facing difficulties from the sharp devaluation of Ukraine’s currency and a lack of access to credit markets.

“Since [Russia’s] aggression against Ukraine destroyed the industrial potential of Donetsk and Luhansk regions and caused a reduction in exports from the mechanical engineering and metallurgical complexes, the agricultural sphere has become a locomotive for export revenues,” Petro Poroshenko, Ukraine’s president, said on March 30 during a meeting of the country’s advisory body on reform.

Indeed, last year agriculture became the leading source of export revenue for Ukraine, worth $16.7bn. Despite agricultural exports falling 2% from the year before, this sector surpassed metallurgy, whose exports dropped by 13% to $15.2bn. “Such a dynamic was the result of a record harvest, which led to an increased volume of exports that cancelled out the negative [global] price environment,” Ivan Dzvinka, research associate at Kyiv-based Eavex Capital, tells bne IntelliNews.

Agriculture was also the only economic sector showing a positive performance in 2014, at 2.9% growth, whilst the country’s economy as a whole shrank by 6.8%. “Other sectors demonstrated contraction by 10% and more,” Dzvinka notes.

However, 2015 will not be so positive. Kyiv-based experts expect agricultural exports to decline by 5-10% as a result of a predicted smaller harvest and “sluggish” global prices for agricultural products. Ukraine, which is the world’s sixth largest grain producer and third largest exporter of corn, produced 63.8m tonnes of grain in 2014.

Reap what ye shall sow

The annexation of Crimea by Russia seems not to have had too serious a negative impact on this year’s harvest, due to the peninsula being an insignificant area for grain cultivation (up to 30,000 hectares). However, the situation in eastern Ukraine, wracked by fighting between pro-Russian separatists and Kyiv-controlled troops, is more complicated. “Sowing is under way in the part of Donetsk region that is under government control,” Dzvinka says. “The situation in the equivalent part of Luhansk region is worse. There is a higher risk that these territories will be seized by the terrorists [pro-Russian rebels], and their close proximity to the border with Russia is also a cause for uncertainty. These factors will, probably, lead to low level of land use in Luhansk region.”

Meanwhile, up to 200,000 hectares of farmland are under the control of the Russia-backed separatists. Eavex Capital predicts that the area for spring grain sowing could be reduced by 5-7% this year as a result of the crisis. On the other hand, the Ukrainian Agribusiness Club, a Kyiv-based farmers’ association, estimates that the sowing area will be reduced by 9%. In such a scenario, this year’s harvest could fall to 50.5m tonnes, the association said in a press release published in March.

The Donbas crisis will add to the challenges faced by Ukraine’s farmers, who are struggling with low prices for agricultural products on global markets amid rising production costs due to the devaluation of Ukraine’s domestic currency and a lack of access to debt markets. “When it comes to crop nutrition, Ukraine is dependent on imports [of fertilizers]. That is why the farmers are very much affected by the devaluation [of the hryvnia], which has practically doubled the cost of nutrition and crop protection. This is one of the reasons why farmers will rely on organic agriculture and extensive technologies [using small amount of labour and capital],” Jean-Jacques Herve, counselor for agriculture to the board of directors at France’s Credit Agricole Bank in Ukraine, tells bne IntelliNews.

The Ukrainian Agribusiness Club underlines that up to 39% of Ukraine’s farmers are experiencing a deficit of mineral fertilisers. “Due to the devaluation and the lack of sufficient loan resources, agrarians are suffering from a significant shortage of funds,” the association also said, adding that small and medium-sized producers are facing the biggest problems, having sold forward the majority of their production at the beginning of the season and failed to convert their revenues into either foreign currencies or production resources.

Herve also believes that Ukraine’s agriculture sector will have to endure a serious lack of investment for at least the next two years.

However, some small farmers who are experiencing funding shortages may get some relief in the form of financial support from larger traders, which can cover some of the expenses for sowing, cultivation and harvesting in exchange for the farmer’s commitment to sell the harvest to these traders at a discount, Dzvinka notes.

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