In the capital-intensive world of farming, this formula is well-tested: the more money invested, the more bountiful the harvest.
And as the new season approaches, many farmers struggle with that formula in their need for seeds and fertilizers, or to upgrade machinery. Lack of affordable financing is among the factors holding back the sector’s potential.
Yet most farmers, especially the small- and mid-sized ones that still make up the sector’s majority, often aren’t aware of available options or are discouraged by high interest rates.
Most Ukrainian banks consider agriculture an up-and-coming, but risky, sector. They are more comfortable with large agricultural holdings.
A recent market survey commissioned by AgroInvest, a U.S. government-funded project, found that only four percent of the banking sector’s loan portfolio in 2012 included agriculture. Although the share of agricultural loans is increasing, only 20 or so of the nation’s 176 banks accounted for 80 percent of all loans issued to agribusinesses, the same survey found. A few dozen credit unions had also issued small loans to farmers.
As of early March, 13 Ukrainian banks offered loans to small- and mid-size agribusinesses, according to a ranking compiled by Prostobank Consulting, a marketing firm which surveys Ukraine’s banking services (see table). Average loan rates in hryvnia ranged from 22 to 24 percent for loans up to seven years. The down payment varied from 15 to 50 percent.
But with average profit margins at Ukraine’s farms running at an astonishingly high 18 percent in 2012, according to Holger Wiefel of the European Bank for Reconstruction and Development, they’re still not enough to cover the higher loan interest rates.
The only option left is to look for special financing programs.
Late in 2012, the European Bank for Reconstruction and Development, together with Austria’s Raiffeisen Bank Aval and global agricultural equipment producer John Deere, started a lending program for the purchase or lease of high quality farming machinery.
EBRD said that over 70 percent of agricultural equipment operating in Ukraine is obsolete, cutting the efficiency of production, the quality of collected grains and crop yields.
Interest rates in this program start from 13.6 percent in hryvnias.
“Interest in this program is very high,” said Viktor Horbachov, deputy head of Raiffeisen Bank Aval. “Since the beginning of the new business season we have consulted hundreds of clients from different parts of Ukraine.”
Farmers on the market for crop protection agents produced by Bayer CropScience can take advantage of a program launched by the German producer together with Raiffeisen Bank Aval and France’s Credit Agricole.
Farmers receive the product they need today, and pay for it in six to nine months. The banks will guarantee the deferred payment to the producer with a promissory note a farmer has to sign. The cost of the promissory note is up to 0.4 percent per month. And for products worth up to Hr 160,000, Credit Agricole is ready to guarantee the payment without collateral.
A similar financial instrument may become available sector-wide this year since a law on agrarian notes takes effect on March 19.
“The note is an agreement to deliver agricultural products or to pay an amount of money in the future in exchange for money or services and goods needed by farmers now. The instrument is secured by a pledge over future harvest,” said Zoya Mylovanova, senior associate at Beiten Burkhardt law firm. “It is expected that the use of the notes will result in up to a 30 percent increase in financing available in agricultural sector.”
A government interest rate compensation program for farmers has existed since 2010. Farmers provide their local agribusiness development departments with justification for partial reimbursement of interest rates. The initial lending rates should not exceed 20 percent this year.
“Interest rates offered by most banks are much higher than 20 percent,” said Iryna Mudra, head of corporate sales department at the All-Ukrainian Bank for Development. “But we are ready to work with such a state program.”
Yuri Miniaylyk from the Ministry of Agrarian Policy and Food said that farmers received Hr 13.5 billion of financing last year, Hr 11 billion of which were loans partially compensated by the state program.
“I hope there will be changes to the state budget,” Miniaylyk said. “But at the moment we lack money even to pay compensations to entrepreneurs for the previous year.”
The Ukrainian State Farmers Support Fund also provides financial support for agribusinesses, mostly to startup farmers, some of which is free or must be repaid depending on the program.
Kyiv Post staff writer Oksana Faryna can be reached at [email protected].
