ANALYSIS by Yuriy Mykhaylov, Agricultural Journalist
Published by "UKRAINE REPORT" 2004, Number 28, Article Two
Kyiv, Ukraine, Friday, February 20, 2004

This year opens the sequence of the most disastrous year for Ukrainian agriculture and agribusiness since the country's independence 14 years ago.

The main cause of this years disaster will be not be extremely bad weather as last year but instead the cause will be political, the principal reason will be the upcoming presidential election.

Since a majority of the voters live in urban areas the present power structure in Ukraine will do all it can to control, regulate and maintain very stable and very low prices for the main foodstuffs such as bread, milk and dairy products, meat and pasta.

Since there are no food assistance programs in Ukraine such as food stamps or school breakfasts as well as any other kind of support for agriculture from the governments budget the one and only donor (political victim) to provide for the low prices on food will be agricultural producers and food processors, especially those who operate in the main foodstuffs area or are partially owned or controlled by some level of government.

One may ask why? The answer is simple enough. The government will force producers and processors to provide foodstuffs at very low prices for the urban population, and the only way to do this is to find a way to buy agricultural commodities at the farm gate at very low prices.

Since June of 2003 the government has allowed local authorities to set the prices at will on the principal foodstuffs regardless of the real market conditions. Local authorities have drastically limited the potential profitability of such enterprises as bakeries to only 5 percent.

Governmental bodies in the fall of 2003 began to expropriate grain from growers at arbitrarily set low prices and in many cases they have not yet even paid for the grain.

The grain crop last year suffered major loses due to the extremely cold weather and was only 20.2 million tons (the supply of milling wheat was only 3.6 million tons). But not the last reason of the poor crop was the widespread negligence of the agricultural technologies: most growers used low-quality seed, their application of fertilizers and pesticides was minimal, and their agricultural machinery fleet is almost completely deteriorated.

The majority of agricultural producers could not pay back their operating loans. In most cases bankers agreed to extend loans for one year more so in 2004 agricultural producers will have to pay back their loans from 2003 as well as from 2004.

With the government's negative intervention in the marketplace again in 2004 it is predicted that the prices paid at the farm gate will be very low and when combined with the necessity to pay back farm operating loans for two years the result will be a very disastrous financial condition for the most Ukrainian agricultural producers by the end of the 2004 crop year.

The government states there will be no further price increases on bread and as a result of these rigid governmental controls the types of bread on which authorities have set fixed prices are for the most part now not available in a except for those who do not understand the market places.

A possible solution for the government will be to force grain trading companies to buy, for example rye, at the market price and then to sell it to mills at a very low fixed price. The traders who decline will be chased by the authorities, for example, by the tax administration, whose deputy head is now the brother of the head of the Administration of the President of Ukraine.

And the most recent events are fully acknowledging the above. The Ukrainian government set a number of so called "notes of understanding" with the 15 public associations that represent interests of grain traders and processors of principal foodstuffs (bread, dairy products, vegetable oil, sugar, meat products etc).

According to these "notes" processors promise not to increase wholesale prices. Under the conditions where energy and fuel tariffs go up and the tax level is going up the only way for processors to survive will be to decrease the input prices on agricultural commodities purchased from agricultural producers.

The number of working agricultural machines and implements continues to decline. Last year Ukrainian producers of grain harvesters manufactured only 41 combines. In 2003 they produced only 4,500 tractors while Ukrainian agriculture urgently needs a total of around 240,000 tractors (there are now only available 213,000 tractors of which only 70 percent are in operational condition).

Even in case Ukrainian farm machinery manufacturers would produce the necessary amount of machinery Ukrainian agricultural producers do not have the funds to buy such equipment or the assets needed to borrow the necessary funds.

Since independence Ukraine has not put in place the basic organizational and business structures needed and necessary to support the mid-size to small agricultural producer. Ukraine does not have a working commodity market, or a crop insurance program, does not have a small farmer operating loan program or a farm real estate loan program, or any kind of an effective equipment leasing structure, or a commodities futures exchange and on and on.

The Ministry of the Agrarian Policy of Ukraine forecasts the crop for the year 2004 about 34.5 million tons. But though the winter this year is mild enough there has begun to arrive information about damage to the crop. It means only one thing: in the fall of 2003 there was a huge falsification of the statistical data about the areas planted. Local authorities reported that everything is OK to show their efficiency and now they begin to make steps for an explanation in the summer as to why the expected crop has not been produced.

The situation will get worse when Ukraine joins the World Trade Organization (WTO). The consequences will be disastrous. The main reason will not be the inherited disadvantages of the WTO but instead will be the fact that since 1994, when Ukraine applied for the WTO membership, practically nothing had been done to adjust Ukrainian agricultural and food processors to the world's quality standards.

On January, 1, 2005 the ban on buying and selling agricultural land will be lifted. At that time millions of rural Ukrainian households, faced with huge losses and debts, will be forced to sell their plots of land as the only way for them to survive. Family farms will basically be out of business and large scale, monopolistic agricultural structures will take over controlled by the oligarchs and others in power.