Are investments in Ukrainian agribusiness successful?
By Thomas Otten, Director Otten Consulting
Ukraine is known all over the world as a large agricultural country with huge potential and opportunities that attract both large international agro-industrial holdings and private entrepreneurs to invest in its development. More than 50 German farmers have already acquired Ukrainian agricultural enterprises from Germany alone and are successfully developing their business here, creating new jobs and involving new modern technologies. Preference is given to the central and western regions because of the fertile soils and favorable climatic conditions.
All investors are interested in how successful the investment in Ukrainian agribusiness will be. Today we have both positive and negative examples. The decisive factor for successful agribusiness is the direct presence of the investor at the enterprise and applying his experience in practice. If business management is carried out remotely, then in most cases this does not have the desired success.
Very often farm management is entrusted to German agronomists who are the investor’s official representatives on the ground and perform the functions of the executive head. At the same time, investors are willing to use the services of large agricultural holdings and Ukrainian agronomists with extensive experience and high skill levels. But because of the difference in mentality and management style the investor, at least, in the first years of the enterprise’s existence, entrusts management to proxies from Western Europe.
Land leases still remain one of the weaknesses in Ukrainian agribusiness. There is no opportunity to acquire agricultural land in the country. Land shares are leased. In this situation, it is much easier to buy an existing business with lease agreements. When acquiring such an enterprise, it is necessary not only to check land leases in the State Register, but also to conduct technical and financial audit of the enterprise to reduce risks.
In Ukraine agricultural lands were privatized in the early 90s, mainly due to the distribution of land among collective farm workers. State ownership is only about 10% of all agricultural land in the country.
Land rents have so far increased, previously it amounted to 3% of its normative monetary value per hectare taking into account the inflation index, now it fluctuates on average from 5 to 10%, sometimes higher rates are also found.
Since 2014, the local currency has greatly devalued. This also affected the rent which grew faster than the inflation rate. In Euros rent remains relatively low, 30-60 Euros per hectare per year depending on the region. When determining the company total purchase price, rent is estimated based on the terms of the lease and is about 250-500 dollars per hectare. 25 years after the collapse of the Soviet Union, the yield level in Ukraine is still low due to small investments in agribusiness. The average yield of winter wheat, for example, in Ukraine is 43.7 centner per hectare.
Experience has shown that the yield level in Ukraine can reach the levels of Western Europe. But climatic conditions are at higher risk. Therefore, on average, the yield level is projected for 5 years in the ratio of 80% of the yield level in Western Europe.
According to experts, by increasing investment in Ukraine’s agriculture and amount of the cultivated land, yield may increase from the current 63 million tons to 80 million tons per year. Taking into account the expected increase in income in other countries, one can talk about an increase in world exports by 20%. For Ukraine this means an opportunity to become the number one grain exporter in the world. In production of sunflower seeds, for example, Ukraine is already a world leader, which makes up 20% of the total world production.
In general, Ukraine has 43 million hectares of land that can be used for agricultural purposes, which is 71% of the total area of the country.
32 million hectares are currently used in agriculture. For comparison, in Germany 12 million hectares are used for the same purpose. 24 million hectares of these 32 million hectares are leased. About 5 million hectares are rented by the 30 largest agricultural holdings, which is approximately 300,000 hectares per company.
Small and medium-sized agricultural enterprises with a size of 1000-3000 hectares are interesting for a foreign investor. Today in Ukraine 6 million hectares of land are available in 2000 enterprises, which represents a huge potential for investment.
«PRO» AND «CONTRA»
Due to the relatively low production costs in comparison with Western Europe Ukrainian farms larger than 1000 hectares are very often profitable, and this is without any subsidies from the state.
Low production costs, relatively cheap labor, as well as simplified taxation for agricultural enterprises can be incentives for investment.
One of the main barriers for the development of farm entrepreneurship in Ukraine is the difficult access to funding. This is mainly due to the impossibility of selling agricultural land. Such lands cannot serve as collateral for lending which impedes long-term investments.
In addition to the lack of collateral opportunities, interest rates on loans in Ukrainian banks are quite high: 7-10% per annum in foreign currency and 22-25% in national currency.
Furthermore, a company without income in foreign currency (for example, through exports) has no access to loans in foreign currency at Ukrainian banks.
In general, a very optimistic conclusion can be drawn. I would say that this is only a matter of time when Ukraine will become one of the main players in the agricultural production market.
This is due to both the general increase in global demand for foodstuffs and the implementation of the latest developments in agriculture in Ukraine. Certainly, the current political situation does not contribute to development, but it cannot stop it.