Investment opportunities in Ukrainian agriculture
Journal "The In-House Lawyer", #166, December 2008/January 2009
WITH AGRICULTURAL PRICES AND global demand rising sharply over the past two years, Ukraine has encountered new challenges as part of the international community with the potential to gain a global market share. Its natural agricultural assets - a mixture of moderate climate, vast inland waters and sea exits, rich black soil and a cheap labour force - have been modernised by the addition of managers with MBAs who start their days reading stock exchange bulletins rather than the local news.
The figures below remove all doubt. Ukraine has over 40m hectares of agricultural land, of which about 33m hectares are arable, and of those more than half consist of valuable deep black chernozem soils. Today, with financial, energy and food production crises striding over the globe, the few developing countries that happen to have escaped the worst of the troubles could become perfect harbours for investors seeking to protect their assets. In 2008 Ukraine had a record grain harvest: about 51m tonnes, compared to last year's 29.3m tonnes. According to government plans, this year 22.5m tonnes will be exported. From the figures, Ukraine appears to be a country with a well-developed agricultural infrastructure. But is it?
A press release issued by the American Machinery Company on 19 September 2008 states that the agricultural sector of Ukraine needs a global approach, modern technology, more developed stock-raising and processing, and
increased production of crops. The basic problem in Ukraine's agricultural sector today is the absence of facilities for storing the harvest and transporting it to the border. The report concludes that like production, the processing of agricultural products in Ukraine has huge potential, but needs investment for development.
This is the state of the Ukrainian agricultural market seen through the eyes of a company present in it since 1992. We have checked their state-of-the-market report and now present our findings so you can make up your own mind.
Due to Ukraine's geographical position close to Europe, North Africa, the Middle East and Asia, the country is well integrated into world markets, with domestic prices showing close correlation with world reference prices. Russia remains the main country for the export of agricultural produce. As a result of rising population and income in Asian developing countries and North Africa, exports to these countries are likely in the near future. Ukraine has good access to ports and has developed three state of the art deep-water off-loading facilities with a total annual capacity of 25m tonnes per year.
The 2008/og yield of major grains in Ukraine is expected to reach its highest-ever level. About 55% of grain produced is wheat, and its key zones of production are central and south-central Ukraine. Barley is produced in eastern Ukraine. Corn is the third most important food grain in Ukraine. Its main production regions are eastern and southern Ukraine. Sunflower seed is Ukraine's chief oilseed crop. Production is concentrated in the southern and eastern regions. Sugar beet is grown primarily in central and western Ukraine.
Analysis based on statistics from the Food and Agriculture Organization of the United Nations shows that by 2016 grain yields in Ukraine are likely to have increased by 11% from their 2004-2006 levels. These estimates are based on soil quality, climatic conditions and existing production capabilities.
The increase of the export of cereals at best prices on world markets is restricted by a lack of facilities for the drying and storage of cereals, new roads and railways, grain wagons and port terminals. The number of inland grain elevators does not satisfy the demand. This makes farmers sell cereals immediately after harvest, flooding the market and causing large seasonal price reductions in the home market.
The Ukrainian government encourages the export of cereals, since this could prevent a possible fall in domestic prices and counteract the deficit of facilities for storage of the harvest. In 2008 the volume of monthly shipping operations with cereals is expected to be 2.5m tonnes. The Ukrainian Railways provides 11,248 hopper grain cars and controls the readiness of local railways for the carnage of cereals. The ports are capable of unloading 50,000 cars a month, or 3m tonnes of cereals. On the downside, only four ports are able to receive large vessels.
The country's state-certified facilities for the storage of grain can contain about 30m tonnes. There are doubts as to whether this will be enough to handle this year's harvest, taking into consideration last year's carry-over stock of 5.7m tonnes. Besides, farmers often prefer to store cereals in their own facilities. This leads to a loss of quality, since no required conditions of storage are provided there. Besides, some additional processing can only be performed at grain elevators.
Ukraine's ambition to become a major exporter of chicken-meat could be realised, given the following. First, there has been a reduction of chicken-meat production in Europe. Experts explain that in Europe it has become more expensive to rear chickens. In addition, much of Europe is afflicted by a lack of free land, a high level of poultry sickness, and the increasing popularity of bio-fuel. Bio-fuel is made of corn, which is the main ingredient of mixed fodder, and this rising demand for corn has raised its price. Thus Ukraine has a good opportunity to fill this export niche, due to the availability of land, less strict ecological legislation, and the production of wheat, the main source of raw material for the production of feed.
The consumption of chickens in the internal market is 16.5kg per person annually, compared to 20kg in Europe, and 50kg in the US. Domestic manufacturers hope to increase the consumption to 26kg per person in 2008.
Roughly lm turkeys were reared in Ukraine last year, compared to 32m in Germany and 30m in Poland. The turkey market shows a 100% growth each year, an increase grounded on several factors. Firstly, the internal market is not crowded and the competition is not tight. The annual profitability never falls lower than 20%, despite the prices for fuel and forage. Another important thing is that in Europe the increase in turkey production has stopped, and in some countries a decrease has been noticed. Experts explain that today an average price for lkg of live turkey is €1.32, but the cost of production is €1.28. In Ukraine, though, the production cost could be HRN10.5 (€1.21) with an average sale price of HRN13 (€1.49). In Ukraine, with the lower cost of production, there is considerable potential for a gradual increase in the volume of production.
The pork market in Ukraine receives little state support With the increase of cereal prices, the amount of livestock has decreased and many pork farms are now on sale. Only pork farms with their own forage sources and slaughter workshops have remained stable. This has led to an increase in demand for
pork meat, so the profitability of big pork farms remains high.
The inland and coastal waters of Ukraine are no less rich than its lands. Anchovies and sprat are the most populous varieties. In recent years the potential sprat catch has averaged about 45,000 tonnes. The actual catch has been much lower. This is explained by the absence of a stable distribution network and by the lack of necessary storage facilities.
Under the Land Code of Ukraine, farmland may not be owned by foreign natural or legal persons. However, no prohibition exists for the conclusion by such persons of long-term lease agreements with citizens of Ukraine or local state bodies that own farmland. In addition, foreign persons can acquire a Ukrainian company that has lease agreements with a range of small owners of farmlands. Thus, a number of agricultural holdings, most of which are co-owned by foreign investors, have long-term leases of over a hundred hectares of farmland, and continually increase their land banks. These are corporate farms mostly owned by non-agricultural investors. These companies specialise in broiler meat production, exports, and grain and oilseed processing.
Under the Law of Ukraine on the Regime of Foreign Investment foreign investors in Ukraine will be accorded a national treatment of investment and other economic activity. Accordingly, any movable or immovable property may be privately owned by a foreign legal or natural person without any limits, except those especially provided by the law.
INTELLECTUAL PROPERTY ISSUES
Intellectual property rights for plant varieties are regulated by the Law of Ukraine on Protection of Rights to Plant Varieties. It is applicable to varieties of all genera and species of plants. The owner of the variety may be either a natural person or a legal entity. The acquisition of rights to varieties in foreign countries is not recognised in Ukraine for right-protection purposes. Varieties must be registered in Ukraine in order to obtain proper protection. The validity term of the patent and the right of ownership of varieties certified by this patent shall total 35 years for varieties of trees, bushes and vines, and 30 years for all other plant varieties.
In Ukraine trade marks are protected by the Law of Ukraine On Protection of Rights of Marks for Goods and Services. Under this law, the validity of a certificate for a trade mark lasts ten years from the date of submitting the application, and can be extended for another ten years on each application of the certificate holder.
Since becoming a World Trade Organization (WTO) member in May 2008, Ukraine has significantly improved its legislation and brought it itself into correspondence with the requirements of WTO rules. Provisions on subsidies for agricultural manufacturing and free trade have received special attention from Ukrainian law-makers, since the development of agriculture is favoured by its rich resources.
By Lesya Kovtun, Attorney at Law,
Volkov Koziakov & Partners