Grain Gain

Economic News

22 Jul 2010
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A bumper grain harvest this year seems set to boost Ukraine's farming sector and the broader economy. The rebound from last year's weak crop could add momentum to the further development of agriculture in the country.

The Agriculture Ministry forecasts that Ukraine will produce 48.7m tonnes of grain this year, up from a previous expectation of 43-45m it announced in August. This represents an increase of 66% on the 29.3m tonnes produced in 2007, when harvests were particularly poor.

The improved performance will allow Ukraine to export an estimated 22.6m tonnes of grain in the 2007/2008 agricultural season, which commenced on July 1. This is significantly up on previous expectations of 13.5m and a huge jump from 3.7m tonnes in 2007/2008.

Last year's poor crop and high inflation led the government to ban exports outright from July 1, 2007 to January 1, 2008, the first half of the current season, to secure domestic supply. Export quotas were subsequently introduced but summarily lifted in May as the harvest improved.

Export limitations are criticised in some quarters as being counter-productive -arguably undermining increases in output by barring farmers' access to lucrative foreign markets. Furthermore, President Viktor Yushchenko claimed that they could cost the country $1.4bn in export earnings.

The increase in grain production and the restoration of foreign earnings should provide a powerful fillip to the Ukrainian economy. Agriculture generates an estimated 9% of Gross Domestic Product (GDP) and accounts for perhaps a quarter of the workforce. Surging export incomes should also help slow the increase in the country's current account deficit, which hit 4.2% of GDP last year.

Food price rises, which have been a core driver of Ukraine's inflationary spike, should also moderate significantly as supply increases to meet expected domestic demand of 26.5m tonnes of grain over this agricultural year. The 2008/2009 reserve is expected to be 5.6m tonnes, leaving ample space for any unexpected increases in demand.

The government is considering further bolstering the grain sector by setting a minimum price of $160 a tonne for wheat exports. While this would shield farmers from a sharp drop in global wheat prices, it could also undermine export earnings were other countries without such limits to undercut Ukraine's prices. Furthermore, price floors can make industries somewhat less responsive to market forces, in this case perhaps encouraging them to overproduce wheat even as the market turns down.

Nonetheless, prices are still high and there are good indicators of a strong market. December wheat futures on the Chicago Board of Trade (CBOT) are trading at around $7 a bushel - approximately $260 a tonne, so well above the Ukrainian government's price floor.

Therefore, there may well be scope for further growth in agricultural output in the country, through increased investment and an efficiency drive. This could well be aided by the UN Food and Agriculture Organisation (FAO), which is throwing its weight behind the development of agriculture in Eastern Europe and the former Soviet Union, including Ukraine.

"Higher prices can be an opportunity for the farming community," said Charles Riemenschneider, Director of the FAO's Investment Centre in a speech on September 11. "In March we discussed opportunities for enhancing agricultural output, and we can see [...] that benefits are already materialising that could make a real difference on world markets."

The potential has not gone unnoticed by the private sector. Eastern Europe is "absolutely an exciting area of the world for agriculture," Jim Borel, vice president of crop protection and seed in the region at US-based DuPont group, told the international press.

Increasing efficiency of cultivation is important; currently, Ukrainian corn yields are around 40% of those of the US. Development must also be carefully directed, to ensure that overproduction and waste does not occur. Ukraine has "significant exportable cereal surpluses, but more long-term investment is needed to ensure that this supply response is sustainable", said Riemenschneider.

Reforms opening up the process of buying and selling land will also be key to promoting investment. A moratorium on the sale of agricultural land was introduced by the central government in 2002 in order to protect smaller landowners from being taken advantage of by wealthy purchasers. However, the measure constitutes a barrier to the consolidation of land and implementation of economies of scale that would allow for more efficient agricultural production. Currently, though, ending the moratorium does not seem to be a political priority.

With international companies looking to Eastern Europe to increase output, Ukraine's agriculture sector could be on the brink of new expansion.

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