Farmers vs agriholdings

27 July 2017, 19:13

The opportunity to buy and sell farmland has turned into a key factor of political struggle in Ukraine. Few politicians do not lament the threat of modern latifundists “buying up land for peanuts” in case the sale ban is lifted. This rhetoric has been served the interests if big and giant agribusinesses for two decades now, allowing their owners to appropriate a lion’s share of land-generated revenues and concentrate more and more of the land in their hands.

Today, the owners of farmland in Ukraine are forced to lease it to agricultural holdings for at the term of least 7 years and a monthly fee of UAH 1 or 0.03 cents per are (100 m2).  The owners have no opportunity to take a loan collateralized by their land and work on it effectively. Yet the law prohibits them to sell the land. They are thus left with no choice but to lease their land on discriminatory terms to the agricultural holdings that are often monopolies on the local market. If the land stands unused for too long, the owner can be accused of not using his or her patch for farming purposes and deprived of the right to own it based on the Land Code.

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This situation benefits big agribusinesses so much that they have actively resisted the land market for 15 years now. For now, nothing stops them from expanding their latifundia by thousands and, possibly, millions of hectares through cheap rent. They can easily impose their conditions on the poorly informed owners who hold patches of several hectares each and are not united in any associations. Another scary stereotype is that foreigners will come and buy up land if the ban is lifted. However, they have long been controlling extensive patches of farmland in Ukraine through long-term lease and local intermediaries. Finally, all big agricultural holdings in Ukraine work as legal entities through offshore schemes.

Land market as a tool

The country is paying a very high price for the status quo. This is illustrated by the degrading countryside and its infrastructure even as agricultural output, exports and profits grow. The owners of large agribusinesses often live in Kyiv or abroad, so they have little interest in taking care of the land or rural infrastructure.

Unlike big agricultural holdings, small and medium farming businesses have no pocket banks or access to international financial markets. They struggle to get loans. The funding they manage to obtain, collateralized with future crops or equipment, is extremely costly and cumbersome given the high risks. Lending problems hit the development of livestock breeding or storage infrastructure the hardest. SMEs in agriculture lack the funding badly; improvements would expand the prospects for SMEs. The big businesses, by contrast, have the funding and are developing these sectors.

So, the priority question is how to break this trend if the land sale ban is lifted and to transit to a strong competitive national farming business. Among other things, it can protect Ukraine from the prospect of foreign domination in the country’s farmland. Ukraine’s interest lies in converting the success of the agricultural sector into the appearance of resilient and numerous small and mid-sized businesses in agriculture. These will make help make the nation’s social fabric and contribute to the development of the rural territory around their location.

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The farmland market should be launched despite the fact that a lot has yet to be done for it to function properly. The electronic platform of the State Land Register launched in 2013 has flaws. In 2015, the Public Cadaster Map became freely accessible. In 2016, the State Land Committee developed software to automatically exchange data on land plot owners with the Ministry of Justice. The aim was to diminish corruption risks in the process. Today, the map shows 100% of land administration certificates. However, more is to be done for the land cadaster to perform all of its functions. There is no full information on all land plots in it yet. The uniform system of spatial coordinates or plot identification is not used universally. A uniform system of the land cadaster data and its accuracy has not been introduced yet. The cadaster is being filled with data slowly given the amount of work to be done. According to the estimates of the State Geodesy, Mapping and Cadaster Agency, all the lacking information on land plots in Ukraine will be collected in the next 2-3 years.

Producers vs rent seekers

It is important to note the conflict of interest between the producers and the owners of land. Unless they are one entity, physical or legal, they will be in conflict over the distribution of the rent generated by the land. The owners will want to maximize the fee they get while the producer will want to minimize costs in order to generate maximum profit from the final product, so that he can compete with his rivals pricewise and invest more into further production.

After the collective farms were disbanded, their land plots were distributed to millions of peasants so that they could actually live and work on that land and evolve into a new class of landowner farmers. For various reasons, most of those who received or inherited this land have not and will not become these farmers. If these land plots interest them solely as the source of rent fee or an asset that can be sold, the task of the state is to encourage them and simplify the process by ensuring the transfer of the land ownership from the non-producing owners to those who will actually farm on it. 

If the land market evolves in a different manner, Ukraine might soon end up with the owners of land plots and farming companies that are not linked to the rural territories and have no interest in contributing to their development. Instead, they will be trying to squeeze out maximum profit out of them. This will push the degradation of the countryside deeper with every decade. Farmland and the countryside where they are located can only evolve fully if those who own and work on the land reside there, and have interest and resources to help that countryside develop. The best way to accomplish this in a market economy with modern farming technologies is to have small and mid-sized farmers that own the land they work on.

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Another important task is to eliminate the outdated concept of “family farms” as the business that uses little to no hired labor from the legal framework. The Law On Family Farming dated June 19, 2003, defines it as the business based on the labor of the household members. In order to obtain the status of a family farm and more state assistance it is entitled to, the applicant must prove that his or her “household’s business activity uses the labor of the members of that household family as defined in Art. 3 of the Family Code of Ukraine”. Other individuals can be involved exclusively for seasonal work or the work that requires special skills and expertise, the law says.

The current legal framework provides a clear definition of who can qualify as the household: “partner, parents, grandparents, great-grandparents, grand- and great-grandchildren, step-parents and step-children, siblings and cousins, uncles and aunts, and nephews and nieces” of the family farm owner and his or her, as well as their next of kin.  

This archaic patriarchic model does not take into account the fact that modern farming cannot develop without involving the necessary amount of hired labor. What can actually be competitive in today’s Ukraine is capitalistic farming, i.e. the efficient small and medium family business of the size that will allow it to focus on success rather than permanent compliance with requirements to get state subsidies. A more traditional approach could be used in defining the criteria of family farms, whereby entities with less than 50 employers would quality as small and farms with more staff as mid-sized ones.

The existing family farms are poorly equipped. In 2015, 32,300 such farms had only 34.5 tractors, 19,340 sawing machines, 8,770 combine harvesters, and a number of other equipment. 

The government must create instruments to help the farming industry transfer from this distorted model based on the weak “family farming business” to the one that is built on adequately-sized competitive capitalistic farming businesses.

Meanwhile, most existing agricultural holdings are conglomerates comprised of separate businesses, several thousand hectares each, that often do not even share adjacent borders. In 2015, 1,345 biggest agricultural companies with over 3,000 hectares each were altogether processing only 7.3mn hectares out of the total 26.9mn ha of cropland, according to official statistics. The average cropland processed by each was 5,430 ha. By contrast, the biggest share of the cropland that year was farmed by the 6,700 smaller businesses that worked on the plots of 500-3,000 ha each. They planted the total of 8.71mn ha in 2015 (an average 1,300 ha per entity).

A lot of them are part of big agricultural holdings today. The latter are comprised of dozens of such farms. In a proper environment, however, these farms would have all the potential to turn into mid-sized family agribusinesses and be no less effective than the current agriholdings.

By contrast, the farms with up to 100 hectares of cropland (26,700 in 2015) that are the foundation of the modern farming industry in Ukraine had only 836,000 hectares of cropland (an average of 31,300 ha each). This restricted their capacity to demonstrate high economic efficiency. However, this category embraces 82% of all farmers in Ukraine today. The few exceptions are the individuals involved in gardening or vegetable farming in the regions such as the Carpathians or Polissia, the area covered with extensive woods and swamps, where the terrain restricts farmland expansion. The rest of the current farming business hardly has any economic prospects without expanding farmland or reinforcing it with equipment and new technologies.

The Ukrainian agrisector may well have several dozen thousands of small farms, as it does now. But they should have the capacity to farm on hundreds and thousands of hectares each, based on their specialization and other circumstances.

The hired workforce in Ukraine’s agribusiness counts nearly 400,000 employees (this number grew to 438,000 in July-September 2016, went down to 354,000 in the winter of 2017, then began to grow again). If most of them could be employed in the potential several dozen thousand farms, each business would have up to twenty hired employees, which would be perfectly in line with the criteria of a small business. The only exception could be the businesses that grow fruit, berries or other labor intense cultures.

Balancing out the starting positions

Farmers often oppose the introduction of the land market as they fear, for a good reason, that they will not be able to compete with agriholdings and foreigners in the current playing field, whether it is for buying or renting land. With loan interest rates at 20% and higher, small and medium businesses will have no chance to take one to buy land. The only ones who will be able to do so are the entities with their own funding available or those who can draw affordable capital from international financial markets.  The task of the government is to change this. It should set up a special financial facility to lend to small and mid-sized farms at moderate interest rates for the sole purpose of buying land. This is widespread practice. Among other things, it will make sure that the loan money is not spent on any other purposes.

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To begin with, the farmers would have to get millions of hectares of public land from the state under low-interest loans. Then the money that the farmers pay back, along with the funding from other sources, could be channeled into further purchase of private land plots from individual owners. The special facility could also go out the international capital markets and draw money there to further lend it to new farmers on good terms under state guarantee. A major share of Ukrainian agriproduce, ranging from 50% to 90%, is already sold abroad. That means that the revenues it generates are in nominated in foreign currency. This allows the agrisector to draw loans in foreign currency.

Another weakness that smaller farmers have compared to agriholdings is the domination of large produce traders who can dictate their terms to the SMEs that are virtually unprotected from economic pressure. As a result, a large share of benefits from the agribusiness goes to the traders, not the producers. The latter are forced to absorb the hits of price fluctuations on the global market while the revenues of traders are far less vulnerable to such fluctuations. The power of the agriholdings lies in that they often combine all these functions in one entity, being the producers, the owners of storage facilities and the traders that supply the product to the consumers.

If the state policy focuses on incentives for small and medium farms in agriculture, this problem has two possible solutions. On one hand, national commodity exchanges should be set up for the export-oriented agricultural produce at least. These could shape market prices without abuse by large trader monopolies. On the other hand, companies could be set up (by the state or farmer associations with further sale of shares) to store, transport and sell the agriproduce to the end consumers. One way to do this is to support farming cooperatives (after some amendments in the relevant legislation) that would unite dozens or hundreds of producers and cover hundreds of thousands of hectares. This would allow them to compete with large agriholdings and monopoly traders both domestically and internationally.

With the proper state policy to support effective farm businesses sized up to several thousand hectares each, they could give a boost to the Ukrainian agricultural sector. This boost would be accompanied by the establishment of a powerful stratum of national small and medium agricultural business. 

Translated by Anna Korbut

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