Europe

Ukraine’s Next Casualties Could Be Its Farmers


A combine harvester rolls through a wheat field in Mykolaiv, Ukraine

Photograph by Vincent Mundy/Bloomberg

A combine harvester rolls through a wheat field in Mykolaiv, Ukraine

After taking part in protests that toppled President Viktor Yanukovych in February, some Ukrainian farmers rushed back to their land to prepare for spring planting.

The question now is whether they can afford to grow what they plant. A 25 percent decline in the hryvnia currency this year has pushed up the cost of fertilizer and other essentials, while the government’s deteriorating finances are choking off farmers’ access to credit. Russia is adding to farmers’ woes by canceling discounts on fuel it sells to Ukraine—and by annexing Crimea, the site of several Black Sea ports that are important for agricultural exports.

“Neglecting these problems can cause the country another crisis—food,” Alex Lissitsa, president of the Ukrainian Agribusiness Club, said on March 18. The Kiev-based industry group is predicting that 20 percent of acreage set aside for grain and oilseed planting will go unsown this year.

Until recently, Ukrainian farmers were preparing for what looked to be one of their best years ever. “Ukraine is set to become the world’s third-largest exporter of corn and sixth-largest exporter of wheat in 2013-14,” London-based analysts Michael Lewis and Michael Hsueh of Deutsche Bank (DB) wrote earlier this year. “Despite the weakness in other parts of the economy, the agricultural sector has been a success story.”

The effects of the turmoil won’t be seen immediately, since most farmers had ordered seed and other supplies for spring planting beforehand. Indeed, early sowing has accelerated to the fastest rate in six years, according to the research group UkrAgroConsult in Kiev.

The problem will come later in the growing season. Devaluation of the hryvnia will raise the cost of imported fertilizer, fuel, and pest control by as much as 25 percent, London-based analysts at Macquarie Research estimate in a March 25 report. Diesel prices have already spiked more than 10 percent since the beginning of the year, while the cancellation of discounts on imported Russian gas will drive up the cost of domestically manufactured fertilizer. With the government’s finances in shambles, “Loans are still expensive, and banks don’t feel confident in giving credit,” the analysts say.

In recent years, many farmers obtained financing through a mortgage-like agreement backed by their future harvests, says Igor Ostapchuk, an agricultural-markets expert at the Ukrainian Agribusiness Club. “This mechanism is not functioning now.”

Aid from the International Monetary Fund and other Western donors could help ease credit woes. But there may not be relief on other fronts: The IMF has recommended in the past that Ukraine allow the hryvnia to weaken and energy prices to rise.

Russia’s annexation of Crimea only adds to farmers’ anxiety. The peninsula has five deep-water ports that account for 11 percent of Ukraine’s export capacity, according to Macquarie. And many Ukrainians fear that Russia may make further incursions into eastern Ukraine, which has some of the country’s richest farmland. “Political instability makes people cautious,” Kees Vrins, a sunflower-oil trader in Kiev, told Bloomberg News on March 21. “It makes them delay decisions, such as investing in new machinery.”

Matlack is a Paris correspondent for Bloomberg Businessweek.

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