The twilight of agroholdings: how the war transforms the agro-industrial complex

Evaluating the impact of hostilities on the agro-sector and, respectively, the level of expenditure, both time and financial, 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.

According to the FAO, the UN agricultural division, during the first three years (1996 – 1999) after the war in Bosnia and Herzegovina international donors allocated $5,1 billion (equivalent to $9,2 billion today) for the reconstruction of the country. Although, agriculture played a limited role in the local economy then and, therefore, demanded limited investments in its recovery.

One more case is Yugoslavia where agriculture produced 18% of the GDP (12% in Ukraine) as of the year-end 1999, but the output was only $2,4 billion in absolute terms, which was several times less than in pre-war and even wartime Ukraine. Direct damage from the 1999 bombardments were assessed as $3,8 billion and total damage including consequential economic damage, reduction of human capital assets, and decrease of the GDP exceeded $29 billion by 2006.

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 scale of losses delivered to Ukraine’s agriculture and food industry is going be much bigger than that of the countries which participated in war conflicts of the last years, given the meaning of the country as a world supplier, complexity and development of food systems, cost of damaged infrastructure, reduction of agro-production output and loss of export income.

Until the hot phase of the conflict is not over, losses can only be estimated with a great deal of error and with reserve about possible changes in the short term.

In money terms these losses amount to $4,4 billion to $15 billion fall of income in the agriculture and related sectors, or 10 to 30 per cent loss in the GDP. The current damage to the infrastructure is estimated in the $68 billion to $199 billion range. The expected GDP reduction as of the year-end 2022 is 40 per cent.

The previous estimate of the potential direct damage to agricultural assets is $6,4 billion. This figure is formed by destroyed irrigation infrastructure, warehouses, machinery, port infrastructure, greenhouses, filed crops, damage to the food industry and reprocessors.

These include losses of livestock due to indiscriminate shelling and/or deliberate killing; scientific damage to the National Academy of Agrarian Sciences of Ukraine on the south of Ukraine; damaged six grain-elevators; stealing of grain shipped for export from Berdiansk port; damaged ships that have been waiting for loading grain in Ukrainian ports; destroyed food warehouses. 

And also damage or limitation of production at 16 meat-processing enterprises (Kyiv, Kharkiv, Donetsk, Chernigiv); six oil-extracting factories (Kharkiv, Donetsk, Zaporizhzhia, Kherson), 12 bakeries (Chernigiv, Sumy, Kharkiv, Zaporizhzhia, Lugansk, Donetsk), six flour-grinding enterprises (Chernigiv, Kharkiv, Kherson, Kyiv), three milk-processing plants (Sumy, Chernigiv, Kyiv) and six confectionary producers (Kyiv, Sumy, Kharkiv); damage delivered to food retail objects.

Today the World Bank and EBRD have officially confirmed their intention to allocate $3 and $2 billion, respectively, but it is obvious that actual needs for recovery investment will be much higher.

First, a limited one, are own reserves of agro-businesses to which one may reckon attracted investment, including external ones. In pre-war Ukraine, investments to the agroindustrial complex had grown steadily from $1,3 billion in 2015 to $1,8 billion in 2020, and there are grounds to assume that after the war situation is stabilised the sector will regain its investment attractiveness.

Intention to direct war reparations planned to be laid at Russia to the restoration of the economy and agricultural sector in particular, sounds occasionally as a background in the rhetoric of government representatives. But due to the indefinite terms and pure practical troubles with obtaining these funds nobody considers the reparations source of subsides in the medium-term seriously.

The second block of support is international donor assistance that has larger scale and, most probably, is guaranteed.  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 for the EU candidate states. This item is expected to be dramatically increased in the 2023 European budget, namely in the context of Ukraine.

One of the most costly directions of international support is funding landmine clearance programmes. According to the Ukrainian Pioneer Association, about 83 000 sq. km are contaminated with various types of landmines so far. The share of this area that accounts for farmland is unknown, the explosives concentration rate is also unclear.

According to FAO data, the cost of mine clearance in Croatia was about 1,25 euro per 1 sq. km. In its turn, the cost of destroying one stockpiled anti-personnel mine was estimated 0,56 euro. Since 1998, Croatia has spent around $0,5 billion on these works, and their completion is estimated at about the same sum.

Given such expenditures, the landmine clearance campaign in Ukraine might cost $10 billion.

These programmes 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 at their will, thus supporting both parties. To do this they use the model of commodity support or “cash+” under which farmers are provided with already formed resource packages through distribution in kind or in vouchers.

Considering the peculiarity of donors, it is almost impossible that grants would apply to big companies.

Rural households and farmers are the target audience of international donor organisations. Farmers are fairly considered a factor of fighting unemployment and inclusive economic growth in the countryside. This strategy is even more justified, since the small farms are decisive for the local employment, and small producers, by the way, are the key suppliers of food at the local level.

Large agrarian formations that bear the name of agro-holdings in Ukraine are a different story. From the start, they a priori become no-win due to their size: nobody would ever manage to explain the European taxpayer why it is necessary to support not a humble labourer, but a huge conglomerate  with shares that are quoted on the stock exchange, outside shareholders and a beneficial owner who possesses a number of yachts.

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.

In pre-war Ukraine the role of agro-holdings in the agricultural complex and the measure of their influence on the processes in the industry were to the great extent exaggerated and demonised.

Those privileges and preferences that large entities could secure for themselves due to their political impact were balanced by expenditures for the agrarian lobby and PR needed to level reputation issues related to the agroholding status in Ukraine. In the agroindustrial complex, only grain traders are more unpopular in the public conscience than holdings.

In the pre-war reality, holdings, in fact, contolled 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 and thus 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.

Public companies whose shares are quoted at stock exchanges and who also had to consider outside shareholders in their operation found themselves in much complicated situation. The main commodity generated by these public structures is not grain, but news that allow share prices fluctuate and provide job for members of the stock market. After February 24, generating positive economic news in Ukraine is nearly intolerable task.

Agroholdings’ stagnation started long before the war. The format of superlarge players that grow raw crops and seek to enter the corn exchange, the Warsaw one at least, in future, once popular in early 2020s, has lost its relevance closer to 2022s. Gradually, it became obvious that the format of small companies with several tens of thousands of hectares, which are more mobile, more flexible, not burdened with administrative structures and work with their own, not borrowed, resources, is optimal in Ukraine. 

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.

Meanwhile, in the opinion of the state large agroindustrial groups remain the donors for the budget. Given that around 8 million ha, according to various estimates, are cultivated in the “shadow” (mainly by small and medium players), big companies are in the area of special attention.

On the eve of the war, with the heated approval and support from the holdings, the parliament introduced a minimal tax obligation in the agriculture, that is mandatory payment of the 5 per cent from laid-down cost from each hectare of arable land.

This provision had to level conditions for all players and white-wash, at least partly, the operation of small companies. The novelty has to come in force since January 1, 2023. And farmers, referring to hardness of running business during the martial law, have already started the campaign to postpone it. Their argumentation is clear, chances for success high. And this means that the gap between farmers and holdings’ economic activity will remain.

All this is accompanied by general unpopularity 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. This won’t occur within a year or even three, but in the circumstance of unequal support the long game is not possible.

When a place becomes free on the market, as usual, new, more relevant, players occupy it rapidly. After the twilight of agroholdings, farmers and the government (surprisingly) will be rampant at the Ukraine’s agrarian market.

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 level of the governmental agrarian management is exhaustive characterised by the liquidation of the Ministry of Agrarian Policy in 2019, then its partial restoration, and once more expressed plans to merge the agency with the Ministry of Economy.

So as for now, the state has only obligations and no benefits in the agrarian-industrial complex. The most profitable segment of any business – the trading – was completely assigned to private entities, chiefly multinational ones.

The State Joint Stock Company also included the Odesa and Mykolaiv port elevators through which the company exported ridiculous from the present perspective amounts of several thousands tons and even attempted to make foreign trade pass through its hands.

But rapidly becoming influential grain traders and the emergence of private transshipment shaped the status-quo that last by now, and during 10 years, Khlib Ukrainy mutated from the near-monopoly status to the bankrupt. The reason was the uncontrolled steals, increasing competition by international multinational traders, which the state company objectively could not bear, and its subsidiaries’ debts to contractors and the budget.

After President Viktor Yanukovych came to the office, the Party of Regions’ government made another attempt with strong hand to entrench at the grain marketplace. And made it in the first months of their tenure what unequivocally indicated the priority of the issue.

In August 2010, the Cabinet of Ministers founded the State Food and Grain Corporation (DPZKU), giving it the most attractive among the assets of Khlib Ukrainy JSC. Creating a state operator, Mykola Azarov’s government was guided by a player present in Russia – the United Grain Company Joint-Stock Corporation which “provides realisation of the export potential of the Russian grain at the world market”, according to the company’s by-law.

In just one year the DPZKU signed a $1,5 billion credit agreement with the government-owned Export and Import Bank of China with a 15 year-term of repay. Traditionally, China is considered a victim in this contract, since the state corporation’s business affairs went poor soon. But in fact, apart from supplying corn with a substantial discount, the Chinese side for almost 10 years properly received their interest on the credit, which more than exceeded its corpus. Today, the DPZKU actual (but not legal) status is bankrupt and its liabilities had to be repaid from the state budget under the governmental guarantee.

Simultaneously, the KhlibInvestBud, a DPZKU trading subdivision, in which 51 per cent of shares belonged to a Cyprus company Kalasar whose end beneficiaries were unknown, started its activity. The trader that emerged from nowhere raised to the top 5 biggest grain exporters from Ukraine as of the first year-end, focusing mainly on wheat supplies.

This occurred particularly due to the administrative intervention – within the limitations introduced by the Cabinet, the company got almost the half of the half-million wheat exporting quota, and the state trader’s share in 1,5-million-ton corn quota accounted for the third of its volume. Having worked for two seasons, the entity vanished together with Viktor Yanukovych team.

In the midst of grain blockade of Ukraine’s ports Germany raised question of centralised shipping of grain from Ukraine – the German side planned to attract the largest cargo railway transportation operator in Europe, the DB Cargo, that is a subsidiary of the Deutsche Bahn government-owned company.

Not only did the project that failed to be implemented demonstrate the economic and political significance of the presence of an equal-sized partner with state form of ownership on Ukrainian side. This role could be theoretically placed on the DPZKU, but it would be difficult, though possible, to justify such decision for mass media, given the company’s background. But the most possible is the variant of just another change of the sign and working “from scratch”.

As for terms, this matter will become actual for the new Cabinet and new personnel of the Ministry of Agriculture. To be precise – for a department inside the Ministry of Economy that will finally absorb the regulatory function in the agriculture. 

In front 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 Ukrainian agroindustrial 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 population displacement, draft of the men to the Armed Forces of Ukraine lead to the lack of workforce and increase of work burden of women.

• 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.

• 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.

• 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.

The Ministry of Economy reports on mass relocation of enterprises rather seem like concealment of the problem, because entire sectoral segments stopped their production. The Artemsil salt plant shutdown, which accounted for about 80 per cent of the domestic market of this product, is the canonic example here. The effect can be seen on the store shelves – surplus of food goods from Poland, Romania, Bulgaria.

• 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.