Ukrainian producers striving to establish a presence in the large and attractive EU market are not capable of ensuring the relevant products’ quality. European standards, which proved to be unachievable for the majority of Ukrainian agricultural producers, export quotas, poorly developed infrastructure and absence of advanced technologies are to be blamed for this.
During last several years, farmers have been producing less high added value products, as they prefer to cultivate oil and crop cultures which are more popular abroad but at the same time are far less profitable. Unlike agricultural producers in other countries, Ukrainian farmers don’t receive support from the Ministry of Agrarian Policy and Food which forces them to make provisional decisions based on short-term expectations of the market. As a result, Ukraine is globally considered as a «grain basket» which produces a lot of crops and loses a lot of profit.
1. Ukraine loses EU market: even small quotas which were granted to Ukraine were not fully used
The free trade agreement between the EU and Ukraine entered into force on 1 January 2016 and is currently implemented in test mode. Only certain types of products may be sold outside quotas. The situation with quotas for widespread products is different – they are used faster than buckwheat ripe…During last year quotas for crops, honey, apple and grapes juices were fully used. Other products were exported in small amounts (such as sugar and malt) or did not reach European markets at all (milk products, pork, and mushrooms). Other products were exported within existing export procedures with the application of relevant customs tariffs.
Even though the amount of some export quotas was increased for USD 200 millionin October 2016, it does not provide for an automatic increase of export of Ukrainian products to Europe. According to the available information Ukrainian agricultural producers will receive additional export quotas for maize and maize flour (650 thousand tons or USD 110 million), barley and barley flour (350 thousand tons or USD 55 million), wheat and wheat flour (100 thousand tons or USD 16,5 million), crops and processed grain (7,8 thousand tons or USD 3,1 million), as well as for oats, honey, tomatoes and grapes juice. At the same time, European Commission did not approve quotas for chicken and turkey meat, as well as for apple juice.
2. Low competitiveness of Ukrainian agricultural producers makes them disadvantageous as partners
Ukrainian producers of agricultural products are less competitive and transparent compared to their European counterparts. A lot of Ukrainian exporters prefer to make fast money – an approach which very often compromises the transparency of conducted transactions. If to combine outdated technologies, low level of theoretical knowledge and practical skills as well as an absence of strategical perspective you will answer the question why Ukrainian companies are running around in circles. As of 2016, only 226 companies possessing global vision, comprehensive business and planning strategies, machinery and qualitative human resources exported their products to EU.
3. Cancellation of VAT resulted in reduced livestock breeding and increase of sunflower cultivation
Since 2015 the Ukrainian government owes USD 20 billionof VAT to national agricultural producers. In 2016 70% of funds, which agricultural companies received within the special VAT regime, were taking away from them. Only VAT reimbursement for wheat and some technical crops remained available. This approach resulted in a drastic decrease of livestock farming. Compared to 2015 the overall number of livestock decreased by 7%, of pigs – by 5%, of sheep and goats – by 9%. Plants breeding industry also faced some changes: production of beetroot decreased by 34%, potatoes – by 12% other vegetables – by 4%. Only the production of sunflower, as well as fruits and berries, increased by 10% and 8% respectively. The initiative of the Ukrainian government to allocate USD 5,5 billion for the support of agricultural sector looks quite promising but at the same time, it seems that authorities are just trying not to further flare up farmers’ discontent. According to the Minister of Agricultural Policy and Food, in case the Verkhovna Rada of Ukraine will adopt the allocation of funds, they will be directed to the development of the livestock farming sector. Thus, this initiative seems to be rather a populist than a serious one, as in 2015 when farmers were massively slaughtering the livestock, the government did nothing to address the situation.
4. Logistics sector is one of the reasons behind Ukraine’s low performance in FAO’s rating
Despite the fact that Ukraine is among Top-3 world producers and exporters of wheat and is on the list of top 10 biggest producers of crops, it cannot provide proper logistical support for the whole scope agricultural production. Due to the absence of modern infrastructure, the logistical expenses for transportation of wheat from the field to the black sea ports are 40% higher compared with similar expenses in France and Germany as well as are 30% higher than in the USA. Thus, Ukrainian producers, who are not as well-off as their western counterparts, pay additional 20 USD for the transportation of every ton of crops.
In order to conduct an export operation, Ukrainian farmer has to collect 11 documents
In Doing Business 2016 rating Ukraine is ranked 83-rd out of 189 countries. Germany is ranked 15th, Poland – 25th Romania is ranked 37th, while Russia – 51st. To conduct 1 export operation, the Ukrainian farmer has to submit 11 documents, collection of which mill take around 127 hours and will cost approximately USD 667. The majority of time will be spent for the preparation of documents. Nothing of the abovementioned sounds even somehow appealing for foreign investors.
Ukraine will get the chance to leave the «breadbasket» league and enter an elite niche of food producers only after bringing the agrarian sector in line with the European quality standards, improving the machinery and equipment as well as implementing the innovative methods of agricultural production. In order to achieve this goal, the Ukrainian government has to provide support for producers of subsidized cultures, facilitate the provision of grants for agrarians under European standards - that’s to say with 5% interest rate, but not 30% one. It would be also good to invest in livestock and horses breeding – two sectors which Ukraine used to be famous for.