The year of unbreakable strength: Ukrainian agro-industrial complex managed not only to survive but even to show surprising results for "peaceful" countries
However, it will take at least 3–5 years to restore the industry from the current to the pre-war level
A year has passed since russia's full-scale invasion of Ukraine. The campaign, which started at 4 a.m. on February 24, 2022, and was supposed to last "three days," is still far from over. Although its outcome is clear in advance and the defeat of the aggressor is undisputed, Ukraine will emerge from this war with enormous losses.
Any estimates at this stage are preliminary. The figures can be updated several times a day depending on the intensity of air raids and bombing. Nevertheless, a year is a period for which it is customary to summarise, albeit interim, results.
Mind continues the Year of Unbreakable Strength project to analyse the impact of war of aggression on various sectors of the national economy. This time, we're focusing on how mobile operators withstood this war year.
"It could have been worse" is an infantile argument, though it very accurately characterises the results of the war year for the Ukrainian agro-industrial complex. The full-scale invasion has begun on the eve of the new production cycle, when farmers start working on forming the spring crop group in normal years. In March 2022, some farmers could not physically go to the field. Those who could do so did not understand the prospects in the context of a zero planning horizon, which led to intermittent business interruptions.
Read also: The year of unbreakable strength: 25 figures to characterize Ukraine's economic losses during the war
Therefore, for the agricultural sector, any result of the past 12 months that differs from zero and is calculated not by the federal state statistics service could be perceived as a success. However, the agricultural sector, even in the realities of the war, has reached indicators that are objectively considered good for Ukraine and unattainable for most countries in the world. The fly in the ointment of this undoubted victory is that all the problems of the industry have been transferred to the new season, and the tectonic changes in the agricultural sector provoked by the war may become a new reality for a long time.
The harvest
Given the equal spread of assets across the country, there is not a single sector in the agricultural sector that has not been affected by the war. Even companies located in relatively calm regions not affected by active hostilities have fully felt the effects of the invasion in the form of falling grain prices due to overstocking, blocked export, power outages, employee mobilisation and resource shortages.
The agricultural sector is dependent on its main resource, land, and this is where it has suffered the greatest losses. The decline in the harvest in 2022 is almost equal to the delta of the decline in the territories controlled by Ukraine in the spring, when the sowing campaign has begun.
The sown area decreased by 7 million hectares, meaning that about 25% of the arable land traditionally used in sowing campaigns was immediately taken out of circulation
Until April 2022, the government gave a clear instruction: sow even in the occupied territories. It was not possible everywhere, but the calculation was justified at least in Kherson oblast, which was the first to be seized and liberated just in time for the harvest of late grain crops.
Besides the physical reduction of the area due to the temporary occupation, the indicator was affected by the constant shifting of the front line, which made field work impossible, as well as contamination with explosive devices in the liberated territories.
Agrarians, not understanding the prospects of harvesting the crops and experiencing an understandable shortage of operating funds, reduced their investments per hectare, which, amid unfavourable weather, led to a significant decline in yields. The weather factor in general proved the saying "it never rains, but it pours." Climatic conditions worked against Ukrainian farmers almost all year round, and in the fall, prolonged rains delayed harvesting to a record and forced them to leave some corn in the field for wintering. Basically, the weather helped only once, at the beginning of the sowing campaign: due to the cold March, the start of work was extended to April.
Yields were also adversely affected by disruptions in production cycles and delays in the supply of inputs due to hostilities and occupation. As a result, crop production decreased by 37% year-on-year to 54 million tonnes of grain (67 million tonnes including oilseeds). Ukraine harvested the same amount 10 years ago.
"However, despite the decline, the harvest is still good," says Denys Marchuk, Deputy Head of the Ukrainian Agrarian Council
In terms of livestock, the decline was smaller, due to the effect of a low base. This sub-sector had not been the flagship of the agricultural sector even before the war. According to the State Statistics Service of Ukraine, last year the production of all types of meat products decreased by 11% compared to 2021, to 3 million tonnes, while milk production fell by 12% to 7.7 million tonnes.
Egg production dropped the most – to 11.6 billion eggs, or -18%. It is due to active hostilities in the immediate vicinity of the largest production site of Ukraine's largest egg producer, Oleg Bakhmatiuk's Avangard Agroholding, the Chornobaivka and Chornobaivka New poultry farms. "It is the largest poultry complex, where 4.5 million birds have died," Bakhmatyuk said in an interview with Ekonomichna Pravda.
The Areal-Snigurivka poultry farm (Mykolaiv oblast) and the Kyiv poultry farm were also bombed. The Makariv poultry farm was damaged. Production in Mykolaiv, Volnovakha and Bakhmut was suspended. "As a result, Avangard fell by 60% of its pre-war egg production. The group has lost 35% of its land. In physical terms, the decline in production is about 100 million eggs per month," says Bakhmatiuk.
Due to the disrupted production cycle (provision of young livestock and the understandable failure of this stage at the beginning of the war), the problem of egg shortage will be solved throughout the current season.
Read also: Golden eggs: Prices for the basic product are historically high. What is more in it – market reality or profiteering?
The narrow neck of export
The Ukrainian agricultural sector is an export-oriented industry. The domestic agro-industrial complex is one of the few in the world that sells more than half of its output. The share of agricultural products in pre-war foreign exchange earnings exceeded 40%.
In 2022, Ukraine immediately lost its main logistics channel, through which 90% of the agricultural cargo was supplied, seaports. The port of Mariupol was occupied, Mykolaiv was shelled from the Kinburn Spit, and the ports of Greater Odesa were blockaded due to the occupation of Snake Island.
In March and April, grain shipments fell to statistically insignificant levels. As a result, by May, the FAO Food Price Index (FFPI) had updated its multi-year record, and a tonne of wheat was trading at an unprecedented $500. Neither the 'Solidarity Roads' and land export routes (mainly rail) hastily established in the European Union nor the zeroing of export duties could significantly affect the overall picture.
Read also: The end of transit surplus: EU may tighten terms for Ukrainian agricultural exports
"During this period – February, March, April – exports are usually actively growing. However, since the beginning of the full-scale war, when seaports were closed, we were not able to export. And the logistics via land routes were not able to accept the volumes we needed, neither towards Poland nor Romania," recalls Denys Marchuk.
In total, in 2022, Ukraine exported 38.4 mln tonnes of grain crops, which is 24% less than last year; 7.9 mln tonnes of oilseeds (2.1 times more) and 4.6 mln tonnes of vegetable oils (-17%).
The decline in international trade by only a quarter can be considered an excellent result. It was achieved thanks to the overactive exports of pre-war January and February and the unblocking of exports in August under the Istanbul Grain Agreement.
Read also: Ammonia-flavoured grain: What russia got for the extension of the Istanbul Agreement
The significant dynamics in oilseed exports is actually bad news: For the first time in many years, Ukraine started exporting raw sunflower seeds rather than sunflower oil and grist. It was processed at foreign sites, mainly in Turkey, as well as at factories in the border regions of Poland.
Prices
The price of Ukrainian agricultural products is one of the most dramatic elements of the past war year. While global prices were breaking records, promising super-profits to producers, Ukrainian farmers, unable to sell their crops, were selling them at prices that were sometimes below cost price to free up storage capacity and raise operating funds for the sowing season.
As of July, the current price range was as follows: wheat at UAH 5,000 per tonne at a cost price of UAH 8,000 per tonne, sunflower at UAH 9,000 per tonne compared to UAH 22,000 last year and barley below breakeven. In some particularly difficult oblasts, such as Mykolaiv, wheat was offered for no more than UAH 2000.
Depending on the crop, prices were 30-50% lower than last year. They were lower the further away from the western border the farm was located. Thus, while near the checkpoints the price of barley is about $240 (over UAH 8,500)/t, in the South, farmers have been offered less than UAH 1,000 per tonne.
The decline occurred not only in the grain, but also in the oilseed segment, which had been consistently prosperous in recent years. While in 2021 the prices for seeds exceeded 22,000 UAH/t, in 2022 they reached a maximum of 12,000 UAH/t, and in some regions, the supply was recorded at 8,000 UAH/t.
According to the Ukrainian Agribusiness Club, before the war, the gap between domestic and foreign prices was about $40 per ton, while now it is about $150 per tonne for grains.
By the end of the year, the situation had levelled off a bit due to increased sea export. "The price of corn at the elevator is $140 per tonne. It's not free," Yuriy Drobyazko, owner of the Agricultural Technology Company, told Zerno magazine, adding that in the crisis year of 2004, the price of the crop was $65 including VAT. And, if we put aside the human losses and tragedies, from the business point of view, 2022 is not the worst year for the agro-industrial complex in recent history.
Read also: Safety margin: How business managed to withstand the war year
What to expect in 2023 and beyond?
The 2023/2024 marketing season, despite the lower prevalence of hostilities and confidence in Ukraine's victory, may bring a wide range of problems and trends to the agricultural sector that will remain with market participants for a long time.
Let’s list the main ones.
✔ Mine contamination. The most problematic territories are those that have been under occupation and where active hostilities have taken place. These are Kharkiv, Sumy, Kherson, and Zaporizhzhia oblasts. Demining is a slow and expensive process that farmers are now trying to partially carry out on their own, which has already led to casualties.
The Cabinet of Ministers has set up a Demining Commission to organise the demining of not only humanitarian but also agricultural infrastructure and land. As of today, millions of hectares are unsuitable for agricultural work and have been put out of use for a long time.
✔ The grain corridor remains fragile. The political process in Turkey and the upcoming presidential elections have further increased the level of uncertainty. Ukrainian farmers, learned from last year's experience, are now forming a wedge based on the principle of what is easier in logistics. It is bad news for corn.
✔ Rents will be driven down. Rates that have been inflated in the struggle to build up the land bank have now become an unbearable burden, and rents of $300/ha are a thing of the past. Being one of the top twenty largest landowners is no longer a cause for pride, but only a promise of unbearable land payments.
✔ Corn is no longer the queen of the fields – it is expensive to produce, dependent on fertilisers, and inconvenient to export.
✔ The new favourite is soy. It is unpretentious in cultivation and has a convenient market in Europe and Turkey.
✔ No crops will bring in excessive profits anymore due to excessive logistics costs.
✔ Investments in autonomous power supplies for elevators and solid fuel boilers in case of gas interruptions will be relevant in the coming season.
✔ Switching to earlier hybrids to minimise drying costs.
✔ Three crops that have a virtually unlimited market are rapeseed, soy and sunflower. The main choice will be made between them.
✔ Agricultural enterprises with a land bank of 5000-10,000 hectares remain the most stable and conditionally autonomous.
Read also: Agrarian 2023: Five trends that will determine the agribusiness performance this year
All Ukrainian businesses face unprecedented challenges in 2022, and agriculture is no exception. However, after 12 months of the largest war on the European continent in recent history, this industry remains one of the most powerful in the world. And it has all chances to maintain and strengthen this status in the years to come.
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