The twilight of agro-holdings: how the war transforms the agriculture of Ukraine

Despite the war, vast damage, and curtailing the scale of production, the loss of one of the leading sectors of the Ukraine’s economy would hardly threat to the agriculture. Though, the business landscape and alignment of forces in the agro-business will change irreversibly during the first years after the war, and precursors of this change are already apparent. The biggest players – agro-holdings – gradually go to oblivion or transform radically, and a new leader will emerge and increase its presence on the market – the government that will obtain maximum of benefits from Ukraine and its agriculture’s integration to the European Union.

Mind Intelligence analyses how the war and related factors transform one of the most crucial branches of Ukraine’s economy. 

War losses

Evaluating the impact of hostilities on the agro-sector is hampered by the lack of comparable precedents. Since the Second World War, there haven’t been any case when a country with as vast and critical for the world market agricultural sector, as in Ukraine was a party to a war.

The most similar to the current reality in Ukraine is the Syrian conflict where agricultural losses might be the most correct comparison, according to the UN experts. In 2011, the country’s agricultural GDP was close  to $49 billion, or 20 per cent of the total GDP ($252 billion).

In 2017, the FAO assessed the level of overall financial cost of damage and losses in the agricultural sector during 2011-2016 period at about $16 billion which was amounted to the third of the Syrian GDP in 2016. But again, scopes of Syrian and Ukrainian agriculture and their significance for the world market are incomparable. According to FAOSTAT data, the total amount of agricultural production export in Syria was $2,55 billion in 2010 against $22 billion generated by foreign trade of agro-business for Ukraine in 2020.

The preliminary estimate of the potential direct damage to agricultural assets is $6,4 billion. The additional expected economic losses in the sector due to the war in 2022 are estimated at about $22 billion.

The sector is going to draw resources for recovery from two equal-sized sources.

First, a limited one, are own reserves of agro-businesses to which one may reckon attracted investment, including external ones.

The second block is international donor assistance. Its amount and structure are under discussion, but the range of figures is tens of billions dollars. A part of the funds will be directed through the EU programmes for assistance and adaptation of the EU candidate states.  This item in the European budget is expected to be dramatically increased in 2023, namely in the context of Ukraine.

It is more than likely the funds will be accompanied by an auditor and operational management – both external and internal who will exert control on the allocation of funds.

According to FAO data, the cost of mine clearance in Croatia was about 1,25 euro per 1 sq. km., the cost of destroying one stockpiled anti-personnel mine was 0,56 euro. Given such expenditures, the landmine clearance campaign in Ukraine might cost $10 billion.

As for merely agrarian programmes of government support, they rarely stipulate simple direct allocation of money to victims; international donors seek to secure the win-win effect, including suppliers of material resources to the programmes, thus supporting both parties. Within the model of commodity support or “cash+” under which farmers are provided with already formed resource packages through distribution in kind or in vouchers.

The possibility that subsides will apply to large companies is almost excluded. Considering that the access to international assistance will one of the determinant competitive advantages in the agro-business, such discrimination will intensify the half-disintegration processes of agrarian holdings in the coming years, which has already begun.

For more on what losses will suffer the agro-industry and how they could be, at least approximately, counted read the full version of the material

Declining role and political influence of agro-holdings

Agro-hldings’ stagnation started long before the war. Only two companies among the group of holdinds, AST and Epitsentr Agro, have flourished last years, the rest followed the track of optimisation, that is reducing land banks. The war will accelerate this process and make it more painful and partially a single option.

Without the sympathy the farmers may count on by default holdings bear the same burden as other market players – blocked export, ruined assets, sowing and then harvesting campaigns under shelling, scarcity  of circulating assets  . All this combines with external liabilities and huge rent that is a protected expenditure in many holdings.

Before the war, agrarian holdings controlled less that 15 per cent (around 6,5 million ha) of agricultural lands in the country, often had middling EBITDA rates and were under stricter control from regulators. Thus, they were restricted in their capacity to minimise the obligatory payments if compared to farmers.

The primary preference the holdings had due to their largeness and economic civility attributes – audited accounts and foreign management – was their access to the outside funding. As a result, most of them met February 24 with hundreds of millions dollars debt burdens. Creditors, undoubtedly, do not have any goal to ruin  their clients, but in current situation restructing is not able to solve the problem of loan payments, it just drags it out.

In some cases the war literally killed if not the company, then its owner. The founder and CEO of one of the larges grain trading entities in Ukraine, Oleksiy Vadatursky died together with his wife Raisa from a missile attack at Mykolaiv in the night before July 31. The company continues its operation, although Vadatursky will be very hard to substitute, given the superclose integration of business and his participation in operational managemen

Holdings bear the same burden as other market players: blocked export, ruined assets, sowing and then harvesting campaigns under shelling, scarcity  of circulating assets. And in addition, the have got external liabilities and huge rent that is a protected expenditure in many holdings, and lack of prospects for subsides and participation in recovery programmes.

Ukraine’s enshrined and approved status as a EU candidate also cements the farmer-centric model in agriculture. The influence of holdings, which has already been weakening, will decrease without this financial support. Diversified companies with assets abroad will show the highest survival rate. Entities that implement “200 000 ha rented for corn” model become, instead, increasingly less adequate to external conditions.

When a place becomes free on the market, new, more relevant, players occupy it rapidly, the government being the case.

For more on how the domestic agro-holdings will continue their decay read the full version of the material

Increasing role of the government

Nowadays, the government does not play any visible role in the agrarian sector. It bears the burden of supporting farmers at the stage of agricultural production output, conducts the curtailed regulation and does not, in fact, control government-owned enterprises that remain in the sector. The most profitable segment of any business – the trading – was completely assigned to private entities, chiefly multinational ones.

The Khlib Ukrainy State Joint Stock Company set up in 1996, that included 125 subsidiaries at its start, and had facilities for storing over 6 million tons per year, and production of cereals and mixed fodder, and export infrastructure as well, moved from the near-monopoly status to the bankrupt in 10 years. Around the same time needed its successor, the State Food and Grain Corporation (DPZKU) founded in 2010, to reach such status.

Despite the unfortunate history of the government grain trading the appearance of a new state operator is inevitable. This fits the trend for strengthening the governmental institutions we have witnessed in another crucial sector – the power engineering and in soft leadership implemented by the Ministry of Digital in the IT. The existence of an authorized governmental mediator might be necessary due to reshaping of grain logistics. This role could be theoretically placed on the DPZKU, but given the company’s background, the most possible is the variant of just another change of the sign and working from scratch.

For more on how the government will drive superlarge “private traders” out of business read the full version of the material

Post-war microtrends

In the face of the global change in the sector develop several war and post-war short- and medium-term microtrends. Some of them have chances to enshrine and change the of the appearance of the Ukrainian agro-industrial complex.

• Change of the field structure towards high-margin niche crops

Before the war, 57 per cent of Ukraine’s harvest were covered by three export oriented crops: wheat, corn, and sunflower. The situation with ports blockade revealed perils of the raw product high-volume export and benefits of producing niche high-margin crops (legumes – chick-pea, peas, berries, mustard, medicinal herbs etc.) for which there is variability of logistics.

• Deficit in workforce and the need for retraining

According to the FAO, over 150,000 farmers/food system workers were directly hit by the war and/or had to emigrate. Not all of them would be able to return to their pre-war jobs. Forced displacement of population, draft of men to the Armed Forces of Ukraine lead to the lack of workforce and increase of work burden of women. The deficit may be compensated by increasing the technological effectiveness of the agriculture, but such investments would hardly be feasible in the post-war period. Training and retraining personnel is likely to be a more favourable option in the long run.

• Barter arrangements

Floating assets deficit, growing dollar exchange rate in the face of commodity surplus due to the limited export creates the environment for implementing barter arrangement of set-offs. This will concern both agro-industrial complex employees who might receive a part of their salaries in commodity items and plot owners whom tenant farmers will pay with gathered harvest.

• Return to the practice of individual farmlands for personal use

Market gardening practice that existed in 1990s is again relevant now. More and more citizens recall they possess plots of land and begin to cultivate them to grow basic food. In the countryside the trend for self-sustainability may be extended by poultry and farm animals including even horned cattle.

• Increasing import of foodstuff

A significant segment of Ukraine’s food industry has been temporarily excluded from the operational activity with Kherson occupied and Kharkiv under shelling.  Another reason of increasing import apart from domestic scarcity are often more attractive prices for it, which becomes an important factor as far as purchasing capacity of population decreases.

• The beginning of European prospects realisation

Being closer to joining the EU and creating the unified economic space forms clear points of increase and stimulates investments in founding food businesses in Ukraine oriented at export to EU countries. Implementation of these projects may begin right after the frontline situation is stabilised even before the formal peace treaty. The term of 7-9 years estimated as the path of Ukraine toward its membership is just optimal for creating new production facilities and promoting trademarks. The geographic priority is likely to be given to western oblasts of the country.