Apartments for Rent in Odessa, Ukraine
A growing future for Ukrainian agriculture
FAMOUS FOR ITS BLACK SOIL AND FAVORABLE CLIMATE, UKRAINE FACES CHALLENGES IN FACILITATING THE DEVELOPMENT OF AGRICULTURAL INFRASTRUCTURE, SUPPORTING FARMERS AND AGRI-BUSINESSES IN A SUSTAINABLE FASHION, ATTRACTING ADDITIONAL FOREIGN AND DOMESTIC INVESTMENT AND ENSURING THAT MODERN TECHNOLOGIES ARE UTILIZED TO INCREASE EFFICIENCES AND CAPTURE COMPETITIVE ADVANTAGES.
Jorge Zukoski (President American Chamber of Commerce in Ukraine): Gentlemen, thank you very much for joining our table on the Ukrainian agriculture sector, which as we are all aware, is of vital importance to the Ukrainian economy. Much has happened over the years and there remain many things that can be done to ensure that Ukraine regains their competitive advantage as a provider of foodstuffs for the domestic population as well as a net exporter of quality products to realize their potential in helping to feed the world. I would like to ask you to start with, from your perspective, what are the greatest strengths and weakness in Ukraine's agricultural sector?
Andreas Rickmers (President Cargill Enterprises, Inc. Chairman of the Board of Directors of the American Chamber of Commerce in Ukraine): The greatest strengths of Ukraine's agriculture sector are pretty well known. On one side - its famous black soils and favourable climate , but as well its strategic location, bordering Russia and the EU and having, contrary to Russia, deep water access to the Black Sea. But as well as the natural resources, a great number of well educated people and ultimately an existing good infrastructure which helps to transport commodities.
Dexter Frye (Managing Director Bunge Ukraine Agricultural Committee Co-Chair of the American Chamber of Commerce in Ukraine): I think Andreas mentioned some key points and I would add, with respect to deep-water access in Black Sea ports, the fact that Ukraine is so centrally located to key markets, [such as] the European, Asian and North African markets - key markets in the world. Andreas mentioned infrastructure as strength and I think that is exactly right. If you think back to where Brazil was 15 years ago, when everybody said: "you know their cost of production is very low, but they can never catch up with the United States because they don't have the infrastructure." Ukraine already has this infrastructure built, but of course they have to invest into it to maintain it. In addition, you've got other issues like problems with productivity. There is no question that Ukrainian agriculture is not as productive as it could be as farmers have limited access to high quality inputs and modern farming techniques. Another impediment hampering increased production is that the market players deal with inconsistent policy from local authorities. Unfortunately, to date, the government has not consistently applied market-oriented policies to agriculture, land reform hasn't taken place, there is the constant threat of price controls and then in some cases the implementation of actual price controls. You've got the State as a major player through the State reserve, and ultimately you need investment I order to get the productivity gain, and in order to get improvement in the infrastructure. But the investment climate here, at the end of the day, is not as good as it could be.
Yuri Zastavny (CEO, Chamber Member Syngenta): I think that it is important to mention that more and more Ukraine is becoming part of the world market. It used to be a pretty closed economy, part of the former Soviet Union. Now, it is a more active participant in the global marketplace and the world will come to challenge Ukraine domestically.
Around fifty years ago, one hectare of farmland could feed two people, and if you make a modest projection for twenty years from now, one hectare will have to feed five people - and that is one of the biggest challenges that the world''s population is facing in the future. Ukraine, having excellent black soil will be part of the solution to that challenge. It is very important to realize that Ukraine as a separate country will not be able to solve any of its internal problems [on its own], because it depends on demand for its commodities from the east, such as [from] China, where as the Chinese grow more wealthy they will eat more bread than rice and that has direct implications for Ukrainian wheat exports. So in the future to adjust to the new global realities, Ukraine will need to be less internally focused and will have to take into account world trends in food and challenges in manufacturing edible products. I think the earlier the government here realizes that the better off they will be.
Andreas Rickmers: We all basically agree that Ukraine has great potential, but I think we all agree as well that Ukraine is not fully utilizing its great potential. Our business starts with the farmer. Our business will do better, and Ukraine will do better, if farmers do better. Despite advantageous natural resources, Ukrainian agricultural productivity is lacking behind the rest of the world. How can farmers do better in this sort of environment? The long awaited land reform, which keeps being postponed, would be a step in the right direction. A successful land reform would give farmers easier access to funds and to cost efficient financing. Farmers could use these funds for investments in building up farmers, buying agricultural equipment and inputs to ultimately increase yields and profitability. A land reform would give the required planning stability for long-term investment decisions.
Jorge Zukoski: Mr. Rickmers mentioned that land reform would be one of the key drivers for the development of the agricultural sector. What needs to be done to accomplish land reform? Other than allowing land to be privatized, what else needs to happen to make the privatization of land work? Why is it being held up, and what needs to be done to make it work?
Dexter Frye: There is a belief that if the farmers are allowed to own the land and are allowed to use the land as collateral for loans, it will be the first step toward big companies being allowed in and essentially taking over the land form the farmers, taking it away from the people. I think quite the opposite: allowing farmers to use land as collateral will be the first step toward allowing them to improve their farms because it will allow them, as Andreas said, to begin getting the working capital to invest into their farms. It will allow them to invest in better farm machinery, better seeds, and better crop chemicals, better fertilizers - and that's going to improve their output, which will again theoretically allow them have better outputs. They can generate more revenues to pay off the loans and to continue to build up their farms.
Andreas Rickmers: Farmers really do need predictability in the future in order to convince them to make long-term investments, because most of the investments you mentioned are not investments which are paid off in a year, or two years - these are long term investments. The only way farmers will be willing and able to make these long term investments is if they have, A - a predictable system, and B -if they have assurance that they will own what they own today. Only this will make them feel comfortable about making long-term investments in increasing the profitability of their business.
Yuri Zastavny: If you have the political and economic readiness in country, and the people who decide can allow agricultural land to be owned privately, then a whole other string of things will happen. But the first thing to start the whole process of is to accept the notion of private agricultural land.
Every great accomplishments starts with a great vision, and I think this vision should be: where is Ukraine going to be a powerful manufacturing country with high yields, with great efficiency of is it going to be a little bit like Kazakhstan, with huge areas being farmed with low efficiency producing bulk average to low quality commodities? I think before doing something, the government needs to decide on that future vision, on where Ukraine is going to go. Because whatever you do before that, whatever documents you try to put before the Parliament, whatever strategy you accept and whatever actions you execute will depend on that future vision. I think that's one of the biggest concerns I have - that the government seems not to have a clear vision of where the Ukrainian agriculture industry should be.
Jorge Zukoski: What is the current situation with land in Ukraine? Do farmers own it? Do they have lease rights to it?
Dexter Frye: I'm not the lawyer, but I'll tell you the way it has been explained to me. Farmers do own land, but they don't have the right to sell it, and they cannot mortgage it, or use it as collateral.
Jorge Zukoski: Form our discussions there seems to be lack of vision and a lack of long term strategic thinking in regards to policy in the agricultural sphere. How with this kind of lack of vision, can Ukraine enter the World Trade organization, which has very complicated agricultural issues? How can it effectively move and negotiate in this type of arrangement without having a clear vision? And what kind of impact will that have in the future, if they enter the WTO without really understanding where they want to be strategy in the future?
Dexter Frye: Ukraine needs a clear vision, and Ukraine also has understand that it has an opportunity right now, because right now we are seeing a huge build up oil seed consumption in Europe, the United States and South America, and it is coming at the same time as China is turning into an importer of feed instead of exporter, and India might consume more. This is coming at time when there could be a void to be filled in the world agribusiness, in he world edible oil trade. That means the opportunity is now. If we develop a vision for five years from now, it may be for Ukraine to get up and say: "It's our time, and if we don't do it, we're going to be in trouble." That's what we need do to get ready for the WTO of the EU or whatever organizations that Ukraine takes part in it.
Andreas Rickmers: Ukraine is able to completively produce grain and oilseeds. Ukraine should also be able to produce meat competitively, given its natural resources; these we've already spoken about. Ukraine is already a big exporter of agricultural commodities, but has the potential to become even bigger. A successful accession to the WTO will allow Ukraine to market their products all over the world without any barriers.
Yuri Zastavny: I fully support the competitiveness point. But what we have witnessed for the last five years as a company is a surprising situation - Ukraine has experienced difficult years in regards to challenging weather conditions. 2005 brought with it a bad autumn and we've had a very harsh winter this year. I believe that 2003 was a very difficult year as well but at the same time we saw a 40% increase in our business, and we had a 20% increase this year and last year. I think one of the biggest drivers for the success of Ukrainian agriculture, apart from the government's actions, or may be even despite the government's actions, will be the entrepreneurship of people here, based on efficiency. Going back to what I said before, Ukraine will not only face the global market on the world market, but Ukraine will also face the world market at home. There will be products here in the supermarkets coming from everywhere, and Ukrainian farmers and food processors that are not able to produce competitively and efficiently; they will not even have to go to the world market to lose, they will lose on their own home base.
Jorge Zukoski: At this point would like to step back and come at this from a bit of a different direction. There are two main groups of players in Ukrainian agriculture, as in any industry sector - foreign and domestic investors. What role do you see yourselves as having as foreign direct investors in this market? What are some of the competitive advantages, what are things that will attract additional foreign investment into this country? Is foreign investment necessary? Is it positive driver for the agriculture sector? How do you see your organization's role in developing this important sector of the economy?
Dexter Frye: I think foreign investment primarily can be expected to increase the effectiveness of the agricultural industry in Ukraine by bringing in capital for investment. There has to be a reliable source of capital for investment in inputs and infrastructure. Both Andrea's company and my company have been investing heavily in processing locally, building plants and refineries. It's necessary to process agricultural products here in Ukraine and export these products from Ukraine.
Andreas Rickmers: Today you have foreign investors in all parts of the supply chain. Reaching from farmers from Western Europe coming to Ukraine to run and manage farms, all the way to multinational companies coming to Ukraine and investing money in processing facilities. Multinationals, with their global presence, provide access to the world markets. Beside the actual investment, multinationals bring best practices, technologies and procedures to the country, which is ultimately beneficial. What is important as well is that most agricultural investments are investments in rural areas, which are lacking far behind the fast development of the Ukrainian cities. We, or companies like ours, are investing in regions with little growth and little alternatives beside agricultural investments in general.
I also think international companies enrich communities, given their global standards, global citizenship standards that they adhere, so I think that's valuable, besides the effect of employing ordinary people.
Dexter Frye: Talking about working with farmers - this is something our company also is pretty much involved in, and I know Cargill is as well - let me give an example of how this works somewhere else. In Brazil, we are a prime resource for financing farmers with over billion dollars out in the fields and this is possible through various market based collateralization mechanisms. It's a company-specific example, but nevertheless it's an example of how foreign investment can come into a country and really make a difference. This is one of the forces that help to drive the growth of the Brazilian market. But there is no question that we also bring a completely different culture to the business. You know, I'm proud of the safety record of our plant in Dnepropetrovsk and unfortunately, that is not something that you see as well in local companies - [concern for] safety in the environment or the welfare of their employees, I think you see that much more from western companies.
Jorge Zukoski: Going back to what Mr.Rickmers said earlier about the importance of foreign investor's bringing with them best practices and international standards and corporate citizenship to the countries in which they operate. During our discussion we keep coming back to the farmers. The farmers are key to the industry, as without farmers nothing is grown. In this market farms tend to be both big and small, so what does the average farm look like in Ukraine? Is there way that you can categorize them? My understanding going by the example of the United States is that farms tend to be rather large.
Dexter Frye: My understanding here is that there are several different sizes, you see maps you see large totally corporate farms, farms which could be thousands of hectares, and you see smaller units that can be no more than a hundred hectares that are generally purely family run, and then there are smalls one that are family operated and tend to be quite small.
Yuri Zastavny: In Soviet times there was a drive to economies of scale, to big amalgamations, and I think that's not a bad thing from the economic point of view. I think [another problem] is not having the right State subsidies. There are hidden subsidies everywhere. They do help when frost damages the fields, they do help a little bit in paying a part of the interest rate [on loans], if you are a manufacturer. But I think at the beginning of the new agricultural world of Ukraine, it's good to rely only on efficiency, not to rely on the right government subsidies, like they have in Europe, and I think that's a good thing.
Dexter Frye: This comes back to your question about WTO. One of the things that will be an advantage for Ukraine, when coming into an organization like WTO, is that it will not nave to eliminate a lot of farm subsidies that had been built up over decades, and generations, as in countries like the United States. Here in Ukraine there is support for farmers and they have some relief from some taxes. But it comes back to what a lot of western companies are saying now, which is to support farmers and not prices, it's farm support rather than crop support.
Jorge Zukoski: Traditionally in this market, the government and those in charge tend to fall back, in times of crises, on the old command and control mentality, and someone mentioned earlier price controls. Are you seeing a decrease of an increase in government interventions within the agricultural sector over the years, as a trend since independence?
Andreas Rickmers: A lot of governments in the world intervene in order to support their agricultural sectors - some more than others. But I think we cannot forget that most of the time any intervention is rather complex, and it might have very unintended consequences at the end of the day. So, I believe that we are better off, instead of looking at government support, to use that money to develop more efficient infrastructure. Investments in infrastructure are beneficial for the entire sector and not just for certain farmers in certain segments. Most of the times support is given with the best intentions, but it gets out of control and it gets very difficult to manage and to reserve if necessary.
Jorge Zukoski: Does policy tend to change with each new Cabinet of Ministers or does it tend to remain relatively stable?
Andreas Rickmers: Well I think with the exception of sugar, Ukraine has been very disciplined in terms of government interference (Question: Are we comfortable with the implication expressed here?). When we had crisis situations because of very small crops, the government tried to intervene with limited success. Most of the time, because Ukraine is an exporter, they have refrained from interference in a big way.
Dexter Frye: I'd like to add to that, the biggest difficulty with agricultural policy is the lack of predictability. If you want to invest, I think you have to have predictability on the government's part, stability, I should stay.
Jorge Zukoski: From the private sector perspective, what can we do in this market to assist the Ukrainian government in creating a favorable environment that will allow this important sector of the economy to develop?
Yuri Zastavny: I think it goes to back to strategy question. In a lot of ways I wouldn't regard the government's efforts over the last five years as entirely negative. It's at least been a good change from the late 1990s. But, there are still issues and in the industry that I represent, [this concerns] intellectual property rights. Over the last several years the government has taken big strides to address intellectual property and movies but our industry continues to experience a less than aggressive stance form the government when it comes to protecting agricultural chemicals. The generics market in Ukraine brings in cheap, often uncontrolled imports from various sources that have a very relaxed registration process, one year instead of three years. We are seeing the whole generic market growing rapidly and that worries us because about 80 percent of this market is not legitimate. It's not one you can compete with, it's not one that has a niche, but it's something that is either fake or smuggled or simply repacked without the permission of the property rights owner. So, there is a big change that is still needed in the government's attitude toward the chemicals market of Ukraine. That's one of the areas that need improvement and companies like ours are working to assist the government in understanding the dangers of uncontrolled generics on the environment and health of consumers.
Andreas Rickmers: You asked what we can do in order to help the government. We've established already that Ukraine is a competitive and very attractive place for agricultural companies to invest money. So, Ukraine has a lot to offer to agricultural companies. That's why speaking about multinational agricultural companies, more of less every one of them is here. So, I think companies realize that Ukraine is a place where you want to be and want to be in the long run, because it has the natural resources, the people and the infrastructure. But I think it's more of a question of what we actually do as companies. We can bring of course, our best practices, our values into the country, but what can the country do, what does the government do in order attract us here? If I'm talking to my management about possible investments in the Ukraine, I am competing with projects in other parts of the world. I need to convince them that yes; the project in Ukraine should be preferred over the project in China of in the Brazil of the one in any other place in the world. So, what we require here is very basic and very simple: we require a stable economy, we require a clear legal framework, and ultimately we require to be treated in a fair way, so that we, as international companies, are treated in the same way local companies are treated. And I think once these three things are given, the rest will follow easily.
Dexter Frye: When I go back to my management with a new investment package I would like to execute, the first question they ask is whether it is safe to invest more money in Ukraine. They say you've got already a lot of money invested here already, and you've got money hung up in un-reimbursed VAT. We have all kind of issues that we have to deal with in Ukraine, and before we are ready to give you the next hundred million dollars, we would like to know that the first hundred million dollars is safe. We as an organization, through the American Chamber of Commerce, need to continue to educate the different branches of government to the fact that is important, and that ultimately Ukraine will not grow to achieve its rightful place as reliable business partner if they don't recognize all of these problems and begin to fix them.
Yuri Zastavny: To add one more thing. My feeling is that most direct of indirect investments in agriculture comes as advances. You know, we bet on potential that is not realized yet. We are putting money down now for something that will take place in the future, and I think that is also an important aspect for the government to take into the account. The government should realize that probably all of our companies are making money now, but the investments we are making of are about to make now, are scheduled for the future, and they may not materialize if the companies don't see good security for them. That's also about competitiveness and welcoming foreign investors here.
Jorge Zukoski: What are some of the financial instruments that are utilized in other markets that would make Ukraine more competitive and efficient in the future?
Andreas Rickmers: You mentioned that we are getting closer to the world market, but in fact we are already facing the world market here. But due to a rather weak legal system, it is difficult for Ukrainian farmers to manage price risks. We don't have a futures exchange here, which would allow farmers to better manage price volatility.
Coming back to your question on what international companies can contribute, I think this would include our experience of exchanges around the world, to see what can be copied what and can be learned from other exchanges in the world, to establish a ware house receipt program here and to establish a futures exchange, which would be beneficial to the agricultural sector. You know an American farmer; for example, at time of preparing the soil for sowing the grain and making the decision first of all what grain to sow, then putting all the crop inputs on the growing crop: he, at that time, can hedge his risk. He can sell his crop ahead of time and be able then to lock in a margin, whereas the Ukrainian farmer has to hope that the price for grain six months down the road of nine months down the road is good enough for him to cover all expenses he had.
Yuri Zastavny: I would like to add insurance to this point as well. We are in a very risky business, and farmers can either get rich pretty quickly or be very poor next year. And I think that the security line protecting them from being very poor is not there yet, in the form if insurance mechanisms that are affordable and reliable.
Jorge Zukoski: Warehouse receipts and futures markets are things that have been discussed and debated and worked on by organizations like ours over the years with limited success. Why is that?
Andreas Rickmers: I think we have to go back to the legal system. At the end of the day, you can only have working futures exchange if the person who owns the warehouse receipt or owns the futures contract is one hundred percent sure that he has got full owner ship of the commodity, and that he can go with that piece of paper to the bank and turn it into cash. Today, in the current legal system, we are far way from being there; the very basic first step of ownership rights has not been taken.
Dexter Frye: Maybe one other thing to add is from the point of view of companies other than the three of ours. Chamber Members who are reading this and are involved in the agricultural industry in Ukraine should continue to communicate with the Chamber's Agriculture Committee so that the Committee and Camber Policy Team can more effectively represent you interests and actively assist in the development of a globally competitive industry sector in Ukraine. We certainly know what the issues are for Cargill, Bunge and Syngenta, but we don't necessarily know what everybody else's issues are and they need to be communicated to us because, as I said, we can work together towards a growing future for Ukrainian agriculture.
Jorge Zukoski: Thank you gentlemen for your time and insights. As Mr. Frye pointed out, it is important that our members engage with our agriculture Committee to continue to work on the issues that are impediments to the further development of a strong and vibrant agricultural sector in Ukraine. Our organization represents many of the leading players in this sphere and we will continue to dedicate the time and resources necessary to move issues forward, help with the development of a clear strategy and policy direction and bring international best practices to the table for the benefit of our Members and ultimately Ukraine and her people.
Commerce
July / August 2006
Page 28 - 33
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