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Ukrainian companies would benefit from exporting more value-added finished food products than raw agricultural commodities, as it does today. But outdated infrastructure and a poor investment climate are among the reasons that the agricultural industry is not fulfilling its potential.
Statistics
In 2010, the total export of all products from Ukraine represented $50.7 billion. This number reached $67.8 billion in 2012 and fell as low as $38.1 billion in 2015, the year after the EuroMaidan Revolution ousted former President Viktor Yanukovych. In 2018, the number rose again to $47.3 billion.
Meanwhile, exports of food products have been steadily growing with the exception of 2015. The export of agricultural products reached $18.6 billion in 2018 — the highest figure of the last eight years.
Raw over processed
In 2014, the export of raw materials stood at $9.3 billion against $7.3 billion of processed food — a ratio of 56 to 44 percent, according to Ukraine’s State Statistics Service. In 2018, the ratio was unchanged. Some $10.6 billion worth of raw materials (57 percent) were exported against $7.9 billion in processed food (43 percent).
In 2018, the largest share of exports was sunflower seeds, safflower or cotton-seed oil, constituting 22 percent of exports, followed by maize or corn (19 percent) and wheat (16 percent).
The main regions of destinations were Asia (45 percent), the European Union (33 percent) and Africa (13 percent). Post-Soviet countries made up only 8 percent of Ukrainian export destinations in 2018; they were Ukraine’s main trade partners prior to the EuroMaidan Revolution.
But how can Ukraine export more processed food products that are worth more than raw materials?
Outdated infrastructure
Daria Grytsenko, head of the analytical department at the Ukrainian Agribusiness Club, said that much has to do with Ukraine’s revolution five years ago.
“Until 2014, most of (Ukraine’s) partners were mostly from (ex-Soviet) countries and Russia… after the EuroMaidan and the war with Russia though, our producers and exporters diversified their trade,” she said.
This, in turn, had an effect on switching to value-added products.
But first Ukrainian companies had to meet higher standards so that they could sell their products abroad in markets like the European Union or Asia.
“For this you need to invest in quality by investing in basic input and equipment… most of the equipment today in Ukraine dates form the Soviet Union… the quality of the equipment is pretty low because it is outdated…,” she said. “The EU standards do not focus only on the product itself but on the technology and the production process.”
Most Ukrainian agricultural exports are raw materials and not value-added finished goods, meaning that most of the economic value of what is produced ends up outside of the country.
Long-term investment vs. quick cash
In order to cope with this issue, most of Ukrainian enterprises that produce grain or oil seeds sell their harvest to intermediaries who then resell the produce abroad.
“If you want to sell something on the Ukrainian market you can do it directly without intermediaries,” Grytsenko said. “If you want to export, you do it through traders.
“This is also one of the key obstacles to increasing the share of processed food because producers want to make quick money… I harvest the grain then I sell it immediately… The majority of producers sign contracts in advance in order to sell their grain at a set value, regardless of the market’s fluctuation… the price is set by future and forwards contracts.”
One of the key issues that forces farmers into short-term planning is the land market, Grytsenko said.
“Only once the market will be free will producers be able to fully develop these lands. For example, when talking about vegetables of horticulture, I could not cultivate these high-margin crops if I don’t own the land — to cultivate apples you need eight to 10 years, but my land is rented for four to six years and there is no certainty for the future.”
Wheat types
Although when it comes to crops such as wheat, producers could export on their own if there was not an issue with the type of wheat being cultivated in Ukraine, which does not correspond to foreign markets’ demands.
“There are hard types and soft types,” Grytsenko said.
Hard wheat types are most commonly used for products like pasta, but the issue is that in Ukraine we produce mostly the soft sorts… 40 percent is hard wheat, 60 percent soft, and they cannot export it because most countries want hard wheat, especially in the EU because hard wheat is of a higher quality.”
Ukraine’s finished products, therefore, tend to use soft types of wheat, making it less attractive for EU importers.
Ukrainian producers’ finished products are therefore not so common to see in other countries and used mostly domestically.
Unfavorable environment
Ukrainian producers are learning now how to be more effective on the world market and seem more willing to invest in their businesses, but key obstacles remain.
“Some companies among our members produce tomatoes and vegetables that they now process into tomato paste and ketchup that they export to the EU,” said Grytsenko.
This is largely thanks to important investments in production technology that certain companies have decided to make because they understand that valued-added products are more beneficial.
Even though most entrepreneurs go for short-term investments in Ukraine, Michael Bertram, the manager of NCH Capital in Ukraine, says that long-term investments are still possible.
“If you want to go into added-value products, you need to invest in fixed assets… facilities and infrastructure… and that means that as an investor you need to make a 10-year forecast of the market… this is a bigger challenge to do it for Ukraine than it is for Norway,” he said.
But “the big problem is perception… Ukraine is better than 10 years ago, but the perception is worse than it was 10 years ago.”
“The investment environment today is better than ever before… but even under Yanukovych, (foreign direct investment) was $6 to $7 billion (compared to $2.5 billion today), so investors had more trust in Yanukovych than they have today, which is ridiculous… it is a lot about psychology.”
