The land ownership saga
Ukraine declared independence on Aug. 24, 1991. The collective state farms, once managed by the Soviet Union, were dismantled into group agricultural enterprises. Each employee of the former collective state farm now owned a land share of the enterprise. However, agricultural output slumped from already low levels as yields and grain production plummeted without a central agency to help organize inputs and direct farming practices.
Barley, corn, and wheat production fell by 25, 19, and 66 percent respectively from 1990 to 2000. In the same period, corn yield fell from 62 bushels per acre to 47 bushels per acre. In 1988, Ukraine harvested over 8 million tonnes and was eighth-largest corn producer in the world. Production slumped to just 1.5 million tonnes in 1994 and Ukraine's ranking dropped to 23rd in the world.
By the end of 2000, it was clear that the decline in Ukrainian agriculture had bottomed. The government issued a decree forcing the liquidation of collective farms in order to completely privatize agricultural land. Each employee received equally subdivided plots of the collective. The moratorium was introduced in 2002 to give time to draft laws and regulations on the agricultural land market. The most recent renewal period marks the eighth time the government voted to prolong the ban on agricultural land sales.
Agricultural production was reignited after collective farms were dismantled and state-owned land was allocated to its citizens. Ukraine’s government liberalized agricultural prices in 2000 further incentivizing newly independent producers to adopt better practices and equipment. Additionally throughout the 2000s, corporations began to consolidate individual farms into larger agricultural land holding companies, or agroholdings. Big agricultural businesses, like UkrLandFarming and Mriya Agro Holding, started to enter lease-to-buy contracts with landowners.
These contracts, often paid in full for the complete duration of the lease, guarantee the lessee the right to buy the property when the moratorium is lifted. Ranging from 20 to 50 years, these agreements essentially gave agroholdings ownership of the land without the actual deed. Highly fragmented land ownership and devaluation of the Ukrainian currency hryvnia have allowed poor rental rates to persist. Some of the most fertile land in the world sat at just $37 per hectare per year in 2015. Rental value is estimated to increase to $455 per hectare per year if the moratorium is lifted. Perhaps shrewd operators should hurry to stake a claim on Ukrainian land.
Despite the disarray of the Soviet break-up, the agroholdings consolidation of leased land spurred the recovery of Ukrainian corn production. From 2006 to 2016, corn production increased from 6.4 million tonnes to 28 million tonnes. The 2012 US drought drove Ukraine to plant more corn, and its 2013 corn harvest of 30.9 million tonnes was fourth-best worldwide excluding the EU.
This spike created a market for Ukrainian corn, with export values soaring from $500 million in 2010 to $3.8 billion in 2013. Additionally, Ukraine’s geographic position creates opportunities to export corn to North Africa and Europe. While Ukrainian corn production will most likely never reach the heights of Brazilian, Chinese, and US corn production, the country’s relatively small population lends to a robust export trade. Ukraine’s small labor supply also favors a shift to more mechanized corn production.
Farmers are planting more corn in Ukraine, but accelerating yields are the root of the success. Corn yields in Ukraine doubled from 2000 to 2011, overtaking both Brazil and China. If Ukraine’s corn yield had climbed at a slow pace similar to that of the Chinese, 2016 corn production would be lower by approximately 35 percent.
The surge in yields is attributed to increased efficiency on Ukraine’s extremely fertile chernozem soil, or black earth. Chernozem has dense humus content and high soil moisture retention. Ukraine contains about a third of the world’s supply. It starts in the area of northern Odessa and southern Vinnytsia, and then slices northeast through the country. The region of Sumy has boosted its output from a meager 470,000 tonnes in 2010 to 2.6 million tonnes in 2016. In the same timespan, Poltava increased output by 2.5 million tonnes to produce a Ukraine-best 4.2 million tonnes in 2016.
Ukraine’s corn boom is largely a result of agroholdings consolidating parceled land. When the land was divided among citizens, some plots didn’t even have access to roadways. Through the use of leased land, these agroholdings are gaining ground. As of 2016 the two largest by revenue, Kernel and Nibulon, claim about 390,000 and 82,500 hectares, respectively.
Yet, the 10 largest by revenue owned just 6.2 percent of all Ukrainian agricultural land in 2016. A third of private agricultural land is cultivated by small-scale producers—those with less than 200 hectares. With no formal or reliable loan system, these farmers are unable to expand operations and agglomerate land. At the height of Ukrainian disorganization and inefficiency in 2000, agroholdings and households produced roughly equal corn quantities. In 2015, agroholdings produced 72 percent of Ukraine corn compared to households’ 19 percent.
This dichotomy is most evident in the widening gap between the yields of agroholdings compared to the smaller producers. Agricultural enterprises registered a 115-bushels-per-acre corn yield in 2016. Comparatively, private farms and households produced yields of 88 bushels per acre and 73 bushel per acre, respectively. The land sales moratorium continues to impede increased efficiency and production, further highlighting the investment opportunity.
The moratorium, friend or foe?
Ukraine agroholdings will continue to invest in land, regardless of the state of the moratorium. However, the economic potential of the small-scale producers will be unrealized if the moratorium persists. Most of corn’s acreage is planted on farms around 500 hectares. Farmers in this middle-range also have substantially lower yields than those on plots over 3,000 hectares. In the world of corn, machinery and hybrid seeds are the keys to big production. The average farmer does not have access to the capital necessary to invest in these inputs. An end to the moratorium will more easily allow foreign investment into these smaller scale operations, but at the same time, increase costs for investors.
The argument in favor of the moratorium stems from the rapid growth in GDP in Ukraine over the last decade. Aside from pauses in the recession of 2009 and heavy conflict in 2014-15, Ukraine’s GDP has increased each year since independence. Agriculture’s percent of GDP has grown since 2007. The recent spike to 14.19 percent is largely due to the fall in GDP caused by the unrest in eastern Ukraine. However, the growth from 7.46 percent in 2007 to 10.03 percent in 2013 represents legitimate agricultural sector expansion.
A majority of Ukrainians are against lifting the moratorium, fearful that oligarchs and foreign investors will snatch up their land and profits. While this fear is not unfounded, the moratorium delays investment into these rural areas. Those surveyed firmly believe that the moratorium protects Ukrainian nationalism and economic prosperity for the nation. In reality, the moratorium is allowing the slow absorption of land and profits to these agroholdings without substantial return to societal development.
Ukraine is a top 10 target country for land investment in recent years at around 2.5 million hectares, according to Land Matrix, an independent land monitoring initiative. Cargill bought a five percent stake of UkrLandFarming, and more recently invested $100 million in a new grain terminal at the Black Sea port of Yuzhny. These investments will continue to trickle in for Ukraine agroholdings under the moratorium, but will not spread as freely to the general population.
The bulk of corn acreage is still farmed by medium-sized operations, representing a huge upside to corn production if yields are brought up to par. Compared to wheat and barley, corn requires more capital investment in machinery. If the moratorium persists, medium producers will not have access to necessary capital. Without reform, the government will continue to stifle the untapped potential of their private and household farmers.
Land reform is a specific requirement of Ukraine’s $17.5 billion debt bailout from the IMF and a beginning step to EU membership. It would show international groups that Ukraine is taking steps to fight corruption and implement a market system. Additionally there are both presidential and parliamentary elections in 2019. Current officials are motivated to finish major legislation prior to campaigning.
The now 16-year ban helped to organize a country rife with conflicts and shifting power, but its useful lifespan has ended. Given the region’s political climate, an investment in Ukraine will always be relatively risky. Depending on one’s risk appetite, this can be accomplished either directly through a land holding investment or indirectly via publicly-traded companies.
With another chance for reform at the start of 2018, land investors are on the edge of their seats. In addition to a hike in agricultural rental rates and prices, a moratorium repeal will likely come with stricter laws on foreign investment and holdings in Ukraine. Pre-reform, Ukrainian farmland is relatively inexpensive and its output continues to grow. So while investing in Ukraine remains a gamble, at least the potential payoff is large.