New growth areas in the Ukrainian agricultural sector are gradually changing the industry
The dynamic growth of the Ukrainian agricultural sector in recent years has raised fears that the country will turn into a supplier of only a few types of agricultural products to the world market. However, current trends in the development of Ukraine’s agroindustrial complex indicate that these worries are exaggerated. The country is developing the potential to produce and/or export new products, which until recently seemed uncompetitive. Over time, these new growth points for Ukrainian agricultural can change or substantially diversity its current image of the producer of oil and grain predominantly. They can also significantly increase added value in the sector.
The structure of the Ukrainian economy has changed greatly over the last decade. Metallurgy, chemical industry focused on the supply of once cheap Russian gas, and the remaining fragments of machine manufacturing, all energy-intensive monsters inherited from the Soviet past, out-of-touch with the needs of the domestic market and increasingly less competitive internationally, are in decline. Instead, agriculture and related fields (primarily the food industry) have already taken leading positions in the manufacturing sector. Meanwhile, the economy in general has been characterised by the growth of the tertiary sector (trade, various services, etc.), as in most other countries around the world. In 2007, before the global economic crisis, the share of agriculture in the GDP of Ukraine was only 6.3%, while the manufacturing industry accounted for 18.4%. In 2016, these figures were 11.6% and 12.0% respectively. At the same time, around 33% of current manufacturing is the food industry, which processes raw produce of agriculture and is also a part of the agroindustrial complex.
According to preliminary estimates, in the 2016/17 marketing year, which ended on June 30, Ukraine exported 44 million tonnes of grain, which is 4.9 million more than last year, setting another record. More specifically, Ukraine exported 20.7 million tonnes of corn, 17.5 million tonnes of wheat and 5.4 million tonnes of barley. As a result, in terms of grain exports, Ukraine ranks first in the Eastern Hemisphere and second in the world, behind only the US, which exports around 1.5 times more. At the same time, Ukraine has passed the symbolic figure of 1 tonne per inhabitant, which is almost unprecedented on the international level. Only Australia with its 24 million population can export the same amount, and only in the most prolific years. More than half the supplies of sunflower oil to the world market come from Ukraine.
At the same time, Ukraine is now unique among grain exporters. It ranks from third to fifth in the world by the sales of each individual type (wheat, corn, barley). However, as the country is a major supplier of all three of these crops, it has an overall grain export volume that is second only to the United States. Other exporters focus on one, less often two, crops, which makes them more dependent on the world market conditions. By contrast, large wheat or barley crops in Ukraine are accompanied by lower corn harvests and vice versa, which acts as a counterbalance. The sowing, harvest and export of pulses, especially peas, are also growing rapidly. From 2013 to 2016, the production of legumes increased from 0.35 million tonnes to 0.88 million tonnes, and this year there are no reasons to expect that this trend will not continue. They are popular in the traditional cuisine of South Asia, so Ukraine has remarkable prospects for growing sales. The price of 1 tonne of peas is at least twice as high as the price of wheat, corn or barley. Recently, however, the country is increasingly seeing an increase in the production and supply of a number of other types of agricultural and food products with significantly higher added value.
One of the most noticeable trends in recent years has been the active return of Ukraine among the largest exporters of beet sugar. For decades, there was a need to protect the domestic market with duties and quotas, but now this product has once again become competitive on the world market. In the coming years, this could significantly change the face of the agricultural sector in a number of regions around the country that specialise in growing beets and producing sugar. From 2013 to 2016, its production in the country increased from 1.26 million to 1.97 million tonnes. Ukraine has been steadily increasing granulated sugar exports for two consecutive years. For the incomplete 2016/17 marketing year (which lasts from September to August on the sugar market), the Ukrainian Sugar Company estimated export volume at 0.74 million tonnes, which is almost 37% of total sugar production this season and 50% of the country's domestic demand. This gives reason to believe that soon Ukraine’s sugar industry will also become export-oriented.
The volume of world trade in sugar is about 60 million tonnes, so Ukrainian producers and exporters of the sweetener have good prospects of maintaining competitiveness. In the past, Ukraine used to produce 3-3.5 times more sugar than now and exported more than 70% of this output. After the collapse of the USSR, this market closed for us, the Russians found a substitution in their own production and the export-oriented focus of the Ukrainian sugar industry seemed to have become a thing of the past. In recent years, however, Ukrainian sweet products are again increasingly popular in foreign markets, but now exports are going to different countries (from Sri Lanka and Myanmar to a number of African countries). Supplies to Central Asia and the Caucasus are also increasing.
Current growth is mainly due to increasing beet yields: 40 tonnes per hectare in 2013, 48 tonnes by 2016, and an almost 100% increase compared to the 27.6 tonnes in 1990. At the same time, the land area dedicated to sugar beet in 2016 was more than five times smaller than in 1990 (0.29 million hectares and 1.61 million respectively). Taking into account that the price of sugar is about three times higher than the price of grain, this sector could potentially play a role comparable to that of wheat, corn or oil in Ukrainian agribusiness and exports.
The export of other sweet products from Ukraine also shows a positive dynamic. For example, the export of honey in January–June 2017 almost doubled to 30 million kg compared to the first half of 2016. The largest buyers are the US ($18.9 million), Germany ($10 million) and Poland ($5.6 million). Ukrainian confectionery producers are gradually gaining ground on the European market too.
The situation is more ambiguous in the livestock industry. The production and export of poultry meat is growing at the fastest rates. This is gradually becoming another export-oriented sector of the Ukrainian economy. In the first half of 2017, its foreign currency revenues were almost double of those from the same period in 2015 ($196 million and $103 million). Furthermore, the proportion of exports in the total sales of large producers is already approaching 50%, while the annual growth rate of supplies to foreign markets is measured in double digits.
Out of the total 284 million kg sold in the first half of 2017 (14.3% higher than in the same period in 2016), the company Myronivsky Hliboproduct (MHP) sold 123 million kg (or 43.3%) of its chicken abroad – an annual export growth of 44%. The production of eggs is also becoming more export-oriented.
Aggregate production figures for other livestock products that are regularly published by the State Statistics Bureau indicate stagnation and even the decline of volumes in most types. However, when looked at closely, two trends can be noticed: the production and export of meat and dairy products by market-oriented agricultural enterprises grows while households are producing less and less of that at home. As for meat, the reduction in recent years since 2013 is 60.6 million kg (from 894.3 to 833.7 million kg). This concerns all types, although the greatest decline was in the production of beef and veal (from 305.1 million kg to 276.4 million kg). Milk yields in household farms also decreased from 8.63 million tonnes to 7.68 million tonnes.
Nevertheless, there is a positive tendency in commercial market-oriented agricultural enterprises. From 2013 to 2016 the production of pork increased from 352.7 to 397 million kg, or 12.6%, and poultry meat from 904.5 to 992.4 million kg, or 9.7%. Milk yields grew from 2.56 million tonnes to 2.71 million tonnes, i.e. by 5.8%. This is despite a decrease in the number of cows, as the productivity of those that remained grew rapidly: on average, a cow in 2016 gave 40% more milk than in 2010 (5.64 tonnes and 4 tonnes respectively). Recently, more and more dynamic growth in the production of beef and veal by commercial enterprises is evident – from 93.7 million kg in 2015 to 99.2 million kg in 2016, i.e. 5.9% growth in just one year. In January–May 2017, this behaviour accelerated and beef production increased by almost 19% to 26.4 million kg compared to 22.2 million kg for the same period in 2016. Its exports are also growing swiftly.
The production of milk and beef by private farms is growing the fastest. They accounted for 183.6 million kg of milk in 2016 compared to 155.4 million kg in 2013, or 18.1% more, and 10.1 million kg of beef in 2016 compared to 8.1 million kg in 2015, in other words, 24.7% more in just one year. They also greatly expanded their production of eggs (from 67.3 to 95.3 million eggs in three years, or 42% growth). While the share of private farms in this market is minimal today, the positive dynamics are evident in light of the overall drop in egg production in the country.
Further increases in production are mainly restricted by limited market. However, there has been a shift here too. On May 22, 2017, following a trade mission to Ukraine, the Administration of Quality Supervision, Inspection and Quarantine of the People's Republic of China and the State Service of Ukraine for Food Safety and Consumer Protection signed a protocol on the inspection, quarantine and veterinary-sanitary requirements for frozen beef to be exported from Ukraine to China. It is projected that demand for meat products in China will grow faster than the capacities of local producers. Forecasts show that their import of meat will increase to 10 million tonnes by 2020 (total consumption in China is 100 million tonnes).
Exports of pork collapsed after the closure of the Russian market, which accounted for up to 50,000 tonnes a year. However, consumption of pork around the world has recently been increasing by almost 1 million tonnes annually. Trade is also growing. So in this segment Ukraine has something to fight for on the world market. For example, exports of pork from Spain grew from 1.06 million tonnes to 1.47 million tonnes in 2014-2016. Most of it goes to EU countries, but exports are also significant outside of Europe, mainly to East Asia (252,000 tonnes to China, 81,000 tonnes to Japan and 62,000 tonnes to South Korea). In 2016, Canada also exported 1.25 million tonnes of pork. Again, China and Japan remain the major markets. For Ukraine, especially if we look at export volumes from the times when the country was oriented towards the Russian market, even reaching a level of total international exports close to Spanish supplies to South Korea alone would qualify as success. The potential is much larger.
The proportion of semi-subsistence household farms in the manufacture of the vast majority of livestock products is still very high, which affects the overall performance of Ukrainian livestock production. They help a large number of rural residents to support themselves and provide considerable volumes of agricultural production, but are far less effective and productive than the commercial sector. More importantly, it is difficult to monitor the quality and safety of products made from their raw produce, so it is becoming more difficult for them to access markets with high food safety standards. Recently, however, home farms are being actively pushed out of the food processing industry, which will increase the supply of ready-made food products to foreign markets.
The dairy renaissance
Milk producers are also finding a new lease of life. Increasing quantities of their processed products are crossing the border. In this way, Ukraine is slowly but surely overcoming the consequences of the closure of the Russian market for its dairy products. Today, dairy imports are nine times smaller than exports.
Mini milk factories are springing up around the country, focused on processing the produce of individual farms, which should prevent them from being dictated to by industry giants. For instance, in Poltava Oblast a mini-plant processes 2 tonnes of milk daily. The raw milk comes from a local farm that only has 60 cows. The business is already operating successfully. It has the capacity to produce almost the entire range of dairy products, except for hard cheeses. A similar facility should be launched by the end of this year in Vinnytsia, also designed for processing milk exclusively from one farm, which has 185 cows. For now, these mini factories are oriented mainly towards the domestic market, but in the long run they are also contemplating the possibility of exporting.
The emergence of mini factories, in spite of what would seem to be their objectively lower economic efficiency in view of the small scale of production, brings to light the problem that is the oligopolistic dictation of prices for raw dairy products by large manufacturers. This allows them to make exorbitant profits but restricts the industry's development potential. Ukrainian exports of dairy products are also reviving. After the heavy losses that the industry suffered as a result of numerous "cheese wars" and other economic conflicts with Russia, ending with a complete ban on the import of Ukrainian dairy products, there has been a gradual shift towards alternative markets.
Production of butter from 2013 to 2016 increased from 92.7 to 101 million kg. This year, the positive trend is continuing: in January–May, production reached 40.8 million kg, compared to 39 million kg in the same months of 2016. In the first half of 2017, the export of butter grew 3.1 times over – to 12.3 million kg – in comparison with the same period in 2016, while in monetary terms there was a fourfold increase – from $ 10.93 million to $ 44.8 million. Cheese exports are also recovering: in the first half of the year Ukraine supplied 4.1 million kg to foreign markets, which is 21.3% more in physical volume and 47% more in foreign currency earnings than for the same period in 2016. The export volumes of a number of other dairy products are also growing.
Veggies, berries and roses
Ukrainian vegetable farming is also developing successfully. Artificial irrigation plays a special role in this. From 2013 to 2016, the production of vegetables on irrigated land increased from 0.73 million to 1 million tonnes, fruit and berries – from 74.4 to 153.8 million kg. In general, despite the loss of control over a part of the country's territory, during this period the amount of open-ground tomatoes cultivated in market-oriented Ukrainian farms increased from 382 to 612 million kg. The infrastructure of Ukrainian vegetable growing is also developing (the largest tomato processing plant in Europe is being built in Mykolaiv Oblast), as well as the cultivation of berries for export.
According to the latest customs statistics, the export of canned tomatoes in the first half of 2017 was 2.8 times higher than in the same period two years ago. Sales of fresh tomatoes abroad increased by almost 1.6 times over this period and cherries by five times. In June 2017 alone, Ukraine exported more than 2.5 million kg. Previously, Russia consumed almost the entire export volume, and deliveries to it in recent years were carried out through Belarus, but in 2017 the share of Belarus in total exports decreased to 60%. Instead, shipments to Poland have increased. It imported almost 500,000 kg of Ukrainian cherries. Among the other buyers were Germany, Great Britain and Hong Kong. Each year, millions of kilograms of raspberries and other berries, the list of which is constantly expanding, are supplied to the foreign market.
Foreign countries are increasingly interested in Ukrainian horticulture and berry picking. Today, most Ukrainian berries are shipped to EU countries. At the same time, China is also interested in purchasing them (it does not have enough to satisfy its domestic market). In addition, it is looking to generate profits from the growth of this promising industry in Ukraine. According to the Ukrsadprom, the state gardening association, the Chinese state corporation China Haisum Engineering intends to invest $515 million in Ukrainian horticulture over the next two years. $170 million will be allocated for the development of fruit processing, $120 million for the construction of production and logistics complexes, $53 million for improving irrigation systems and $30 million for the construction of fruit storage facilities. Apparently, 18 projects from virtually all over the country – in 16 oblasts – worth from several hundred thousand to several hundred million dollars each have already been selected for funding.
Finally, the production of flowers in Ukraine is gradually finding its feet and demand is increasing in international markets. Indeed, according to Ukrainian Agribusiness Club data, Ukraine exported 2.89 million roses in 2016, which is 29 times higher than in 2014 and three times larger than the 2015 figure. The price of one Ukrainian rose on the foreign market in 2016 was about $0.40, while the main buyers were Poland (50% of the total), Belarus (29%) and the Netherlands (20%). Ukraine actually still imports many more roses (24.4 million units), but the situation may improve in several years if the current dynamic is maintained.