We would like to share with you the presentation of the Kherson region of Ukraine that was shared with the CUCC during the International Council of Business Associations and Chambers (ICBAC) where our Managing Director-Ukraine Emma Turos is currently serving as a General Secretary.
Should you have any questions regarding the presentation or would like to contact Kherson region investment office, please contact our team at email@example.com
In the recent years, economic growth of Ukraine has become critically dependent on the agricultural sector’s prospects. In 2010-2016, the industrial share in the country’s GDP dropped from 31.3% to 26.3% (down 5 p.p.), while the agriculture’s contribution grew from 8.3% to 14.4% (up 6 p.p.). Over the three years (2014-2016), the export share of agricultural produce expanded from 31% to 42.5% (up 11.5%!). According to preliminary assessment, the agricultural sector accounted for almost one-third (28%) of currency receipts in 2016.
Further growth of the agricultural sector requires affordable and sizable financing. The financing goals may include the following:
expanding the production volume and assortment of agricultural products,
improving their quality and increasing the added-value share,
major overhaul of production facilities and technologies
optimization of the production-sale cycle
Indeed, growth of capital investment in the Ukrainian agriculture has far outpaced growth of agricultural output. The gain in investment was 27.1% in 2015 and 49.5% in 2016, while gross agricultural output sank by 4.8% in 2015 and increased 6.1% last year.
At the same time, the agriculture’s portion in the total investment volume steadily grew from 6.1% in 2012 to 13.8% in 2016.
Taking into account that Ukraine’s economy is an open economy and much of necessary modern agricultural equipment and technology are imported, the assessment of real possibilities of capital investment must be dollar-based.
The investment volumes and production growth are indicated or calculated above in hryvnia value terms. However, these indicators are far less impressive in dollar equivalent. Hryvnia investments in the agricultural sector rose from UAH 18.8 Bl in 2014 to UAH 30.2 Bl in 2015 and UAH 45 Bl in 2016. In dollar terms they dropped from $2.4 Bl in 2012 to $1.4 Bl in 2015 and increased by $500 Ml to $1.9 Bl in 2016.
Remarkably, in hryvnia terms, annual investment in the food industry actually stayed unchanged at some UAH 13.5 Bl from 2012 till 2015. This amount grew to UAH 16.9 Bl last year. In dollar terms, as the diagram shows, investment dropped more than by half, from $1.7 Bl in 2012 to $0.7 Bl in 2016.
This trend shows that the agriculture development was not supported with an adequate gain in food processing capacities. “Excessive” agricultural produce added no value from domestic processing and was sold abroad as feedstock.
Sources of investment in the agricultural sector
A peculiarity of the Ukrainian agricultural economy is that the investment burden is carried mainly by producers, actually financing production from own revenues. The share of producers’ own money in the total investment volume went up constantly throughout 2012-2016 and reached 69.4% last year.
The next source of investment is the State Budget. Its share in capital investment decreased from 6.3% to 2.3%.
The most important source of finance for the development is bank loans, but the share of banks in investment fell from 16.1% to 7.1%, or almost by half.
Targeted agricultural loans from the international market (a €400 Ml loan program from the European Investment Bank in 2016, a $150 Ml loan program from the World Bank in 2017 etc.) support Ukrainian banks in crediting investment projects. But these loans do not solve drastically the problem of insufficient domestic resources for investing into growth points – they just put it off for some time, doing this on indemnity basis.
A multitude of reasons can be cited why the bank share in the crediting of company investment is miserable. However, this does not negate the fact that the banking system fails to fulfill one of its key roles – crediting the development of the economy’s real sector, specifically the agriculture as a locomotive of the present economic upturn in Ukraine.
The insufficient crediting horizon prevents farmers even from envisioning and planning large and break-through investment projects. For instance, to the National Bank of Ukraine reports that only 20% of 2016 loans to agricultural companies were provided for more than 5 years.
The development and implementation of medium- and long-term projects are possible with participation of foreign capital. The above table shows that the share of foreign investors’ money in investments generally expanded from 1.6% in 2013 to 2.9% in 2016 in view of the overall decline in capital investment.
Direct investments (share capital) in Ukraine’s agriculture also actually dropped. The volume of direct foreign investment into the sector reached $776.9 Ml by January 1, 2014, shrank to $502.2 Ml by January 1, 2016 and did not actually change by January 1, 2017 ($500.1 Ml).
One of the conclusions of UkrAgroConsult’s study is that, in fact, all of the three system non-government finance sources for enhancing growth and competitiveness of the Ukrainian economy’s key branch – growers’ own profits, bank crediting and foreign investment – are now losing their position as an agriculture development resource. As mentioned above, financing the production development and growth from own profits has actually exhausted its potential and, at best, it will be only able to maintain agricultural production at the previous level.
Reforms and investments
In this stalemate situation, it is understandable why the IMF, as a creditor, insists on conducting reforms by the Ukrainian government as soon as possible. The reforms are to be focused on ensuring mid-term outlook for the debtor’s solvency. One of their key points should be opening the land market.
The overwhelming majority of experts believe only this step can solve the investment shortage problem of the agriculture in the near-term without fundamental changes in the nation’s social and economic set-up. The land market will bring long-awaited significant investment to the Ukrainian agricultural sector that will cause its growth and a greater financial effect for the State Budget.
Once the land market opens, the following investor groups will most probably arise:
investors from offshores, who know very well the mechanisms of market relations in the country, including procedure nuances of land purchase / sale and use, and who do not mind investing in the promising asset;
transnational capital, which holds a dialogue on equal terms with the central authorities and is interested in the “Ukrainian” link for its technological chain;
Medium-sized foreign investors (primarily ones from EU countries) interested in boosting production by developing the local economy will sit out for one or two years to better assess their risks (both commercial and legal ones).
The risks related to property rights observance, judiciary system effectiveness, state authority actions etc. are unlikely to get practically offset over this period.
UkrAgroConsult’sstudies indicate that a substantial inflow of investment into the real agricultural sector can be expected at best toward 2020. However, it is not yet clear if agribusinesses and farmers, like Bolivar, will be able to “carry double”: 1) the burden of capital investment for stabilizing and/or expanding agricultural production; and 2) the government’s aspiration to increase fiscal payments to the State Budget.
Ukrainian start-ups are rushing to stake out the most profitable market niches in the agricultural sector, while venture investors foretell a bright future for agro-technologies, though showing no haste to invest in them. Meanwhile, some agro-corporations are already building their businesses on IT solutions of local developers. So, what is going on in the agtech market – a sector of agricultural technology, which is both new for Ukraine and rather controversial?
The agricultural sector has long remained on the periphery of IT entrepreneurs and venture investors’ attention due to certain skepticism as for agtech, which is traditionally associated with agro-companies owners’ conservatism and low market reach of basic information technologies. However, in 2014, the situation started changing owing to one-off successful projects and growing interest from innovative agro-companies.
It took only one year after the launch for Drone.ua to become the main airborne prospecting provider for Kernel, the largest agro-corporation in the country. Starting in 2015, it uses five quadrocopters and two drones, while forecasting the yield and receiving vegetation indexes and information on evaporation/nitrogen via an IT-solution of the Pixel Solutions start-up.
Created in 2014, Petiole, a “smart” tracker for plant growth, hit the top 20 hot start-ups in 2015 according to CNBC, an American business TV channel.
Although agtech still cannot compete with mainstream niches in a number of top projects, IT entrepreneurs’ interest in the agricultural sector has been growing from year to year. This is caused by an enormous share of the agro-industrial complex in Ukrainian economy. In 2014, the agro-industry became the largest source of the country’s foreign currency earnings. According to the State Fiscal Service, in 2015 Ukraine got $14.5 billion from the food and agricultural products export, which made up 38% of the total exports, while the metallurgical industry was left far behind with its share of 24.8%. Based on the Ministry of Agrarian Policy, in the 2014-2015 seasons Ukraine ranked third among the world’s leaders of grain exports, following the US and the EU.
Also, agtech is attractive for Ukrainian IT entrepreneurs since this is one of the world’s trends and agtech projects are in demand among large agrarian corporations, though sometimes this demand doesn’t get corresponding financial support. In general, local IT entrepreneurs don’t tend to overestimate the current Ukrainian market readiness, often considering the domestic agtech a testing ground.
The top-100 farming companies, known as ‘Agri-Holdings’, collectively farm 6.4m hectares (15.8m acres). These holdings range in size from 14,000ha (34,600ac), to the largest farming corporation in the country with 654,000ha (1.6m acres).
Below this there are 5,400 farms managing, on average, farms sizes of 1,950ha (4,815ac).
Rounding off the commercial farming sector are 42,700 farmers farming, on average, 108ha each (267ac).
Long known as the ‘bread-basket of Europe’, Ukraine boasts 33% of the world’s fertile chernozem soils (a fertile black soil – rich in humus).
The country claims the following distinctions in the global agricultural league table:
Top producer of sunflower seeds and sunflower oil.
Second highest exporter of grains.
Third highest producer of barley.
Fourth highest exporter of barley.
Fifth highest producer of corn.
Sixth highest exporter of wheat.
Seventh highest exporter of flour.
Eighth highest producer of soy bean.
Ninth highest producer of wheat.
Looking forward to 2017 Bohdan Chomiak, of consulting agency Ukragroconsult, is confident of another good year for Ukraine’s agriculture sector.
“We expect continued growth in output, as deregulation and reforms have made it simpler for Ukrainian producers to access international best technologies.
“As producers learn to effectively use these technologies this will lead to further growth,” he said.
Meanwhile, Ukragroconsult is also running its annual grain conference at the beginning of next month. One of the largest grain conferences in Europe, the event is expected to bring together over 700 executive delegates from 500 companies – representing 50 countries.
The popularity of this event further demonstrates Ukraine’s growing influence in the agricultural sector – within and outside its own borders.
Ukraine is starting to live up to its reputation as Europe’s breadbasket.
Exports of wheat, barley and sunflower oil are at or near all-time highs, part of an agricultural revival that began to take hold in 2013. The industry’s rise coincides with declines in export mainstays such as steel and iron ore, which are produced largely in the nation’s east and have suffered amid the conflict there with Russian-backed insurgents. Trade data due Tuesday are set to underline the shift.
Agriculture has become “a locomotive of the Ukrainian economy,” central bank Deputy Governor Dmytro Sologub said in an interview. “The numbers are really stunning.”
Agriculture’s ascent may only be starting. Irrigation projects could help boost the grain harvest to 100 million metric tons from 66 million tons, according to Agriculture Minister Taras Kutovyi, who hasn’t provided a timescale for the increase. Other potential drivers include canceling a ban on selling farmland, a requirement of the nation’s $17.5 billion bailout from the International Monetary Fund.
The shift can be seen in Ukraine’s goods exports, more than 40 percent of which are now agricultural products, while the share of ferrous metals has shrunk to a quarter. Ukraine, a country of 45 million people, could one day produce enough food to feed half a billion, Kutovyi predicts.
There are downsides. There are already record stockpiles of wheat globally. Also, an over-reliance on one group of commodities can sabotage economic growth when their prices decline. But global demand for grains and food is set to advance in the long term, making demand less vulnerable than for metals, according to Olena Bilan, an economist at Kiev-based investment bank Dragon Capital.
Agriculture has been key to Ukraine’s recovery from a two-year recession, with the economy surging 4.7 percent from a year earlier in the fourth quarter, the most since 2011. While the government is lagging behind in some reform efforts, favorable rainfall in the fall and winter mean there could be another record harvest this year, according to Tetiana Adamenko, head of the National Weather Center’s agriculture department.