It may surprise you to know that the grilled meat kebab you just ate on your business trip to Jeddah came from a beast that has been grazing on fodder grown in Ukraine. It’s almost a certainty. Ukrainian agricultural products are grown and have expanded exponentially, they are everywhere and yet, barely seven years ago, they were absolutely nowhere.
A meteoric rise to the top
In Kyiv, when you stroll along the boulevards, in the area of the Independence Square and the Ukraina Hotel from which pro-Russian snipers were taking pot shots, you can feel the country’s thirst for Europe.
The experience is pleasantly immersive without being too overpowering. Wherever you turn your gaze, you see two flags intertwined, attached to even the lightest branch of a tree. The European flag, with its yellow stars on a blue background, is intertwined with the Ukrainian flag, a slightly lighter blue, and a flamboyant golden yellow, is very symbolic of the nation’s will to integrate itself with the EU. If you were to direct your gaze more closely at Ukraine’s flag, you will notice a wheat field crowned with a blue sky! In Ukraine, agriculture is like a religion.
But the story does not end here. The erstwhile Soviet state, turned to the West with the signing of the free-trade agreement, which acted as a catalyst, just six years ago.
Since then, Ukraine has mostly chosen to ignore its historical (and forced) partner – Russia. Since the fall of the Wall and the rise of the Commonwealth of Independent States (CIS), Russia had been Ukraine’s largest customer for its dairy, beef, pork and agricultural produce.
But when Russia closed its border overnight, Ukrainian companies were left in the lurch. With their traditional markets closed, they had to move swiftly to find new markets for their non-durable products. Ukraine’s will to forge ahead and leave behind its past and create a separate identity for herself is abundantly clear in the way it surged ahead and created its huge success story.
Jean-Jacques Hervé, a special advisor in Agriculture at Credit Agricole bank in Ukraine who is also a researcher at IRIS (French Institute for International and Strategic Affairs), knows this region like the back of his palm. He is the only Westerner ever named as a Ukrainian Academician and in 2007 he also had published a book on Russian agriculture. Hervé has a panoramic view of what is happening in state structures, in collective structures and in private businesses.
“In 2013-2014, the Ukrainian revolution changed everything, Russia and Ukraine then moved away one from another. Russia then applies to Ukraine the embargo it had decided to apply to Western countries that impose sanctions against Moscow. Suddenly, many Ukrainian companies lose their main foreign trade. This episode forced Ukrainian companies to restructure and move towards the all-out search for new markets,” says Hervé.
Experts affirm that only 50% of the arable lands in the country are used for crops cultivation.
“We are still in this phase. Ukraine is knocking harder and harder on Europe’s door; it has already obtained the Association Agreement with the EU (which was the cause of the dispute with Russia). This has allowed Ukraine to enter the European market, and the situation has pushed Ukraine to seek new markets in third markets. Meanwhile, Russia itself has enacted new laws of agricultural orientation and is boosting its production tremendously.”
“It has brought out a dozen large groups (almost multinational groups), in plant production and animal production mostly. Consequence: Russia has become a challenger of Ukraine on the Black Sea Basin. So we have two sources of grain exports from this same geographic area.”
As for Ukraine, the agricultural potential is still high. Nowadays, experts affirm that only 50% of the arable lands in the country are used for crops cultivation.
Ukraine and Russia share a degree of commonality: both countries have a supply of a high-quality dark-colored soil called Chernozem.
According to Gautier Maupu, analyst for the French consulting cabinet Agritel, “Ukraine is fortunate to be in the best land in the world, that is to say twice as much organic matter (4 to 5%) of what we can have in France”.
He goes on to add, “This very rich land is found in Ukraine, Russia, Romania, Kazakhstan and a little in the United States. Ukraine alone – accounts for 30% of the world’s Chernozem. It’s colossal, and presents a great opportunity. What is really impressive about it is that it can retain water like a sponge. I know Ukrainian farmers who have half the rainfall in France and who have comparable yields. This soil gives back water very well when it is dry: it contains very few rock, it looks like flour to the touch. French farmers who visit Ukraine feel like they are in heaven.”
Incidentally, the strength of Ukrainian agriculture also comes from its structure. It does stick to any one particular model – be it either from Europe or Asia. The country’s agriculture sector is divided between very small farms, some of which feed the black market, as well as giant agro-holdings, which could be as large as 600,000 plus hectares (check at the bottom of this report). It’s super huge.
Ukraine is undergoing a transitionary process. While it continues to grow and shed the remnants of the Soviet era and its privileged relationship with its erstwhile partner Russia, it is also surging ahead and developing new markets around the world while boosting its production which supplies to both, the official and the black market.
In this transitory stage, the gray economy is everywhere. About 30% of Ukraine’s GDP comes from unofficial activities. In fact, the system itself is responsible for a lot of the black market. Despite the government’s effort to fight corruption, like a shadow that refuses to leave, the black market is still clinging on.
All-out exports: sunflower oil superstar
Today in Ukraine, sunflower oil is everywhere. In supermarket shelves of course, but also in ministerial discussions. Sunflower oil is the liquid gold of Ukraine and this is almost by accident.
The story is quite simple: during the 1990s, Ukrainian and Russian methods of agriculture followed different directions, they however had some areas in common. They produced and exported raw products, mostly grains. Even today, some countries followed a different path, as transformation hubs, as in the case of Turkey: it is a major importer of wheat and a major exporter of flour. It surely gave Ukrainians ideas.
In 2004, Ukraine’s government faced an issue of oversupply in sunflowers seeds. In order to prevent crops from being exported, the cabinet decided to levy an export tax. In order to mitigate this hurdle, Ukrainian industrialists developed the country’s crushing industry; this helped them not only to circumvent the export tax but also presented them a processed product – sunflower oil. It was an immediate success.
In only five years, Ukraine has become the #1 exporter of sunflower oil. Today, Ukraine enjoys 57% market share globally, with other countries, including Russia 21%, Turkey 6%, Argentina 6%, EU 4% lagging behind.
India is its biggest customer and takes in 40% of its exports. Ukraine also has business dealings with China.
“China is the main market for Ukrainian corn (3 million tons last year). This is all the more remarkable as China imposes drastic licenses, and few countries can export to China. Ukraine is allowed to export maize and barley, France too, but not Germany, for example”, says Maupu.
According to the French analyst, the main importers of Ukrainian products are:
- Asia (mainly China and India): 45%
- European Union (mainly Spain, Italy and Netherlands): 32%
- Africa (mainly MENA, Egypt): 14,3%
Ukraine also appears well ranked for:
- barley (fodder) : #4
- maize (fodder) : #4
- wheat: #6
- soyabeans: #7
In the last five years, exports to Russia, which although anecdotic are still significant due to the rampant black market.
“Since the embargo, Russia is not even in the top 20 of our biggest partners,” says Olga Kozak, lead researcher at the Institute of Agrarian Economics in Kyiv in a report. “We are not supposed to pursue any trade with Russia, but in reality, there are exchanges via Belarusians who serve as ‘middle men'”.
“Everything goes through Belarus, grains, dairy products… It is a real scourge: Ukrainian products transit through Belarus where they are reconditioned as “made in Belarus”, which allows them to be sold in Russia. This is seen in the official figures: for five years, Belarus imports 4 or 5 times what it could consume. For example, this country announces an annual production of 7.34 million tons of milk produced in 2018, making them appear as one of the largest producers in the world, when in fact they import milk from Ukraine,” she adds.
In real world terms, Belarus appears at an astonishing 13th rank among the world’s largest producers with 7.35 million tons, wedged between Japan and Australia (Ukraine is 10th with 10.07 million tons). Of course, it is impossible to double check with the Russians, who are accused of resorting to encrypted subterfuges. It is very likely that it is the Byelorussians who manage this business. Relations between the two neighbours are always ambivalent.
In direct competition with Russia
Since 1990, the construct of Ukraine-Russia relationship has seen three very distinct phases. From 1990 to 1998, Russia and Ukraine followed different paths.
“Russia became a massive importer,” remembers Jean-Jacques Hervé from Credit Agricole. “It has even transformed its import infrastructure to import ready-made food products. Poultry, dairy products for example. For its part, Ukraine has not made the same choices. It had a very important subsistence farming. It had even more peasants than Russia, 15-20 million peasants who all produced milk, cheese, flour, bread, vegetables, fruits, and so on.”
Despite the differences in agricultural practices between two countries, international institutions opted to impose a straightjacket solution on both countries – privatizations.
“The privatization of Ukrainian agriculture has been very incomplete, with the aim of facilitating the emergence of medium-sized agricultural entrepreneurs, without solving the question of the status of agricultural enterprises and without having a land status of agricultural production,” says Hervé. In 1998, the Asian financial crisis reshuffled their cards.
Upto 1998, the rigid uncustomized formula imposed by Western methodologies worked to some extent: former collective farms were taken over by talented entrepreneurs, which typically turned out to be the former chief agronomist or the former head of livestock.
“But as the land was handed over to the former farm workers as land straw, they rented the land rights of their former employees or colleagues,” says Hervé.
“They have more or less paid rent, more or less recorded the land straws. They divided the land contractually with the peasants. The 1998 crisis strongly undermined all the financial and monetary systems of the CIS area (Commonwealth of Independent States). New operators then appeared: first in Russia with the oligarchs who settled in the agricultural sector to produce locally in order to replace imports, then in Ukraine where everyone began to produce agricultural products and to increase existing productions, poultry, pork.”
“Ukrainians have taken over forage production to feed animals, and arranged logistical bases for their industry. Then large groups appeared. Groups that have generally left the processing industries. They took over the farms and vertically integrated the processing of agricultural raw materials. This Ukrainian production was then intended for both the domestic and the Russian markets.”
“Russia was by far the largest client of Ukraine, the latter selling it a large part of its milk and sugar for example. Russia did not cover all its needs at all, it was very fortunate to be able to buy from its neighbor (with whom it was then on very good terms), many commodities, from poultry to dairy products. For example, some Ukrainian companies had been totally specialized in bringing dairy products to Russia. It is therefore the demand for Russian consumption that has created the Ukrainian holdings with vertical integration.”
Politically, Egypt leans to the East, with Russia cajoling it every now and then, watering its military equipment and especially its cheap agricultural products.
This worked until 2013 when everything was OK between Kyiv and Moscow. Maidan’s revolution changed everything. Since the split, Ukraine and Russia are now competitors in international markets, the most interesting of which is Egypt.
In Cairo, the General Authority for Supply Commodities (GASC) is in charge of picking up the sources of supply. It is seeped in bureaucracy. If you ever decide to visit GASC website (here), it’s a ticket for a trip back in time. Like many things in Egypt, it is as glazed in the past.
The GASC follows the orders of the army, much like the rest of the country. Politically, Egypt leans to the East, with Russia cajoling it every now and then, watering its military equipment and especially its cheap agricultural products.
Gautier Maupu is a commodities analyst specialized on the Black Sea at Agritel, a French firm that is well respected by the industry’s players. Agritel had opened an office in Kyiv in 2009 and Maupu is well versed with the roads leading to Ukraine.
According to Maupu, Egypt is the world’s largest importer of wheat (12 million tons per year). One country dominates the market: Russia, which continues to gain market shares (75% at present).
“There are several reasons for this,” explains Maupu, “the first of which is geopolitical, especially because Russia has locked privileged relations with Sisi’s Egypt; secondly Russian wheat is of high quality and is sold at attractive prices. In addition, shipping from Russian ports on the Black Sea costs $1 or $2 less than from the Ukrainian port of Odessa.”
He went on to add, “Ukraine still exports a lot of wheat to Egypt (2 million tons of Ukrainian wheat in 2017-2018, against 2.5 million two years ago), but Russia’s market share has grown significantly: GASC now provides 80% of Russian wheat (5.1 Mt last year), it was only 20% in 2014/15.”
Russia has out maneuvered Ukraine geo-politically.
According to Nicolas Perrin, advisor in Agrarian Affairs at the French Embassy in Kyiv, there is nothing to be alarmed by this. The Egyptians can be persuaded to see business-sense in dealing with Ukraine; after all the best bidder will win. Further, Egypt also has great needs in terms of agricultural products and does not hesitate to ask for what its requirements.
“Ukraine is competing with Russia on the Egyptian market, but also with Europe. For example, the company Nibulon, the Ukrainian leader in grain trading, is very active in this market: expert in the storage and fluvial transport of grain, Nibulon has announced its willingness to invest two billion dollars over ten years in Egypt, in order to develop all the infrastructures along the Nile and the fluvial fleet,” says Perrin.
Everybody wants to invest in Egypt. But apart from Egypt, Ukraine also wants to cultivate markets further away, such as other Arab countries, including Saudi Arabia and even those in North Africa.
Ukraine also trades a lot with Turkey and Israel (about 500,000 tons of wheat, and 1 million tons of maize), but almost nothing with Lebanon, except for a little bit of sunflower oil. In Asia, it also trades a lot with Iran and India. Ukraine is also eyeing sub-Saharan Africa. In that market too, it will face Russia among other international tenders.
According to Ukrainian statistics, “Saudi Arabia has become one of the priority markets for Ukrainian agriculture. For the period January-September 2018 alone, Ukrainian exports to this country increased by 17% (about $ 360 million). But we have to look for other markets, and we are turning to areas like the MENA countries, Southeast Asia and especially Sub-Saharan Africa.“
Production wise, the match is launched between the two countries: “With 220 million hectares of soil, Russia produces between 75 and 100 million tons of grains; Ukraine, on its 41 million hectares of arable lands, produces almost as much, currently between 60 and 70 million tones, with a potential of 100 million. In addition, Ukraine has greater export capabilities than Russia,” says Jean-Jacques Hervé. The game is on.
In direct competition with European countries
Let’s move to the West. European countries such as France and Germany are pushing to develop partnerships with Ukraine.
“The European Union and Ukraine have signed an Association Agreement, which came into effect in January 2016. This agreement provides a framework for boosting bilateral cooperation and boosting trade,” says Nicolas Perrin. The EU is doing its best to help Ukraine finding business opportunities. Even if it’s on its own doorstep, such as the North African market, for example.
In some other embassies, European diplomats chose to sit on the fence. “We need to develop more partnerships, such as on vegetable proteins for example,” said an English-speaking attaché on the condition of anonymity. “The good performance of Ukrainian agriculture – especially its exports – is a problem for European producers in foreign markets, such as in North Africa where Ukrainians are more competitive than us. We must deal with this new player. As Europeans, we see Ukraine as a threatening power in some foreign markets.”
“The African continent will be our main target for the export of “ready-to-eat” products. Africa must become a real source of value for us,” says Shapoval from Ukrainian Food Export Board.
According to this diplomat, the trade balance in the agriculture sector is largely in favor of Ukraine:
- € 6.5 billion of Ukrainian exports to the EU
- € 3.5 billion in European exports to Ukraine
The remaining $ 3 billion could still grow on both raw and processed products.
The search for new markets has set the pace for signing of the free trade agreements between the two. “Ukraine signed 17 agreements, with 45 countries,” explains Bohdan Shapoval, general manager at the Ukrainian Food Export Board (UFEB). If Ukrainian exporters know that it will be difficult to get a good position in the EU market, they are looking for new markets.
“The African continent will be our main target for the export of “ready-to-eat” products. For now, we export only 14 or 15% of our industrially processed products, we have to do a lot better. Africa must become a real source of value for us,” says Shapoval.
“We therefore wish to develop trade relations with African countries such as Ghana, Angola, South Africa, Namibia…,” says Shapoval.
Shapoval went on to add, “For us as exporters, our main problem is not distance, but the financial guarantee of being paid. In Africa, there are often bad examples because we do not work with the same tools, such as bank guarantees. There are always risks. And only with the Sub-Saharan countries do we have this kind of payment problem, never with countries in Asia or the Middle East.”
Confirming this point on view, Hervé from Crédit Agricole said, “Ukraine is very interested in the development of the African market. So does Russia, which is very present in several countries like Angola, from which it hopes to continue its expansionist policy. Russia also needs to find new markets, it has a flat population, it has 130 million people to feed and it produces more and more, more than for its domestic market. It must therefore export.”
Export, export, export… This very word is on everyone’s lips.
Ukraine has indeed become hugely successful in its quest to emerge as a significant international player. Going by its statistics, its exports strategy is efficient. It will have to gloss over its weaker points if it wants to extend this success further down the road.
To be continued in Agriculture in Ukraine Pt.2: Things that need to be fixed in heaven
Top 10 of the main Ukrainian agro-holdings (by land area)
- UkrLand Farming: 605,000 ha (milk, meat, eggs, sugar)
- Kernel: 603,000 ha (sunflower)
- AgroProsperis Group: 430,000 ha (cereals)
- MHP Mironivsky Hiboproduct: 370,000 ha (poultry, meat, cereals). It’s the company that tried to set up in Brittany
- Astarta Kyiv: 250,000 ha (sugar, cereals, soy, milk)
- Mriya AgroHolding: 185,000 ha (cereals, potatoes, sugar). This company was acquired in 2018 by Salic, a subsidiary of the Saudi company Saudi Agricultural & Livestock Investment Co.
- Agroton: 151,000 ha (wheat, sunflower, poultry, milk)
- IMK: 130,000 ha (cereals, soya, potatoes)
- UkrPromInvest: 127,000 ha (cereals, sugar, milk)
- AGR Generation: 120,000 ha (cereals)