Thanks to a record-breaking harvest of seed and oil plantations, on top of a favourable conjuncture on global markets, the Ukrainian agricultural sector was once again one of the market leaders. The GDP generated from this sector exceeded the GDP of the Defence Industry of Ukraine by almost 700 million $, and superseded many others as well – only the trade department fell above agriculture. From a broader perspective, the trend outlines the relative decline of the defence industry.
However, the agricultural sector plays a crucial role in light of the Russian invasion as it replaced many of the struggling service sectors, which could not operate under shelling, martial law and chaos in general, that was endured by many cities. Furthermore, manufacturing industries, including non-military ones, were becoming more and more of a target for Russian rocket fire. Not to mention that 7 regions (Luhansk, Donetsk, Kharkiv, Zaporizhzhia, Kherson, Sumy and Chernihiv Oblasts), where Russians forces were present and continue their aggression, reported a massive 30% of the total national output in manufacturing last year. More than 20% (in total) of the output was situated in the Zaporizhzhia and Donetsk oblasts.
Meanwhile, last year’s agricultural performance of the Kherson, Zaporizhzhia, Kharkiv, Donetsk and Luhansk oblasts was only 18.2% of the total agricultural output. In more specific domains, the figures were similar in other related sectors – 10% of the livestock and poultry sectors, 13% of dairy and 17% of egg production. In the meantime, agriculture land and livestock suffered less from the war due to their relatively dispersed location over wider territories. Even in the Kharkiv oblast, as stated by the Kharkiv regional state administration, the expected yield from the harvest in spring would be around 60 to 80% of the planned one, in terms of land. This is in addition to a favourable climate during winter and the spring harvest going (terriotiraly) according to plan. Hence, the agricultural recession is relatively insignificant in relation to the economic recession as a whole.
The Raw Material Trap
Despite the logistical issues in delivering oil and gas, fertilisers and other crucial material, the agrarians alongside local governors are so far able to carry out most of their tasks. The most urgent problem in this regard will be the ability to sell the end product here. Before the invasion, food products totalled around 40% of the total Ukrainian export, and the current stock of unsold agricultural products amounts to 8 billion $. This is a significant problem for a country in war.
From the first day of the Russian invasion, the main export route of Ukraine was blocked by the Russian navy. On the UN Security Council meeting proceeding, the US secretary deputy of state Wendy Sherman stated that Russia is blocking 94 civilian ships in the black sea, ships that were designated to transport grain and other food products. At least one of such ships was destroyed. Not to mention the countless sea mines cast along the Ukrainian coast and ports.
According to the predictions of some experts, the fully re-established export through sea would not take place quickly even if the war would abruptly stop. Not only is the export of current production in doubt, but tens of millions of tons of last year’s. The end result may be that there will be no where to stock the combined production of last year’s and this season’s products by next winter.
The previous year, Ukraine had accumulated a record-high yield of grain and oilseeds. According to government statistics, after its processing, the weight of grain was estimated to be 85.7 million tons (in 2020 it was 64.9 million), that of oil – 22.8 million (18.5 million in 2020). According to estimates by the ministry of agriculture, the yield dropped to 43 million tons from the opening of the market season in 2021/22 and was 1.7 million tons less than that of the 2020/2021 market season.
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Nevertheless, The first deputy of the Minister of Agriculture Taras Vysotsky declared that the state initiated a buyout of grain and food reserves from agrarian businesses. Furthermore, according to Prime Minister Denys Shmyhal, the government will issue a buyout of processed agricultural goods in volumes that meet those of the standard annual consumption. Despite this, the end result does not look good. This is due to the fact that Ukraine is reaping the fruits of its fragile export oriented agricultural system, which cannot be easily adjusted to satisfy domestic needs.
When taking into consideration the diverse strategies deployed of the export oriented system and its reserves, this accelerates the problem. For example, on the 23rd of February, wheat experoted had exceeded the yield of the previous year of 2020/2021 (18 million tons in total, an increase by 1.3 million), despite the fact that total harvest had a much higher increase (increase by 7.2 million tons to a total of 32.1 million). This shows that the reserves that cannot be immediately shipped (especially wheat and barley), which are mostly used for domestic purposes, are not significantly higher than before. This is despite the current excess of agricultural yields when compared to the same point last year. Wheat reserves, for example, if not exported, would be enough to suffice the population until the end of 2023. This holds even in the scenario that nothing will be cultivated in the current and next year.
Furthermore, other grain reserves situated in Ukraine, also can contribute to feeding the population for some time. Buckwheat yielded 106 million kg last year (in 2020 this was 97.6 million, 2019 – 85 million), rye – 594 million kg (in 2020 – 457 million, 2018 – 335 million), legumes (mainly peas) were 681 million kg (subsequently in 2020 – 600 million and 2019 – 710 million). Besides this, from the moment of the opening of the 2020/21 market season around 128 million kilos have been exported in total, compared to the current season with 68 million. Before the invasion, the production yield was performing as well if not better than the season before (when looking at the same months of 2021 versus early 2022). By early february there was already about 67.7 million kg of flour and the monthly production reached a whopping 97.7 million kg – 6% more than at the same point last year.
At the same time, corn, upon getting extracted from fields later than other crops, has yielded approximately 19 million tons – 4.1 million less than in the 2020/21 season. Even though in this regard, domestic consumption is not such a large part of the entire production and will probably stay that way for a while. Corn was always an export-oriented product, as well as sunflower oil, turnip and soy. These products are also around 70-90% export-oriented. Taking into account their record-breaking harvest of last year, which superseded this year's by 11.6 million tones (41.9 million in 2021 and 30.3 million in 2020), current corn reserves are at least sufficient for three years of domestic consumption. The same problem exists with sunflowers. In early March in relatively safe areas (safe from the war), the reserves stood at around 4 million tons. When considering the rate at which export occurs (currently 112,000 tons of oil), the reserves can only be fully exported by the summer of 2023. This is if we do not take into account new sunflower oil production that would occur.
As the data from the State Customs Service of Ukraine from March has not been published yet, it is possible to use only estimates based on the figures present in the ministry of Economics in Ukraine. The ministry states that throughout march, Ukraine exported more than 1.1 million tons of corn and 0.3 million tons of wheat. This, according to the ministry, is 4 times less than in February. This is also taking place considering the forced alternative routes of exporting goods to the EU: by train, and by river transportation of the Danube and even vehicular transportation – as stated by Taras Vysotsky. However, these trade routes are limited and cannot be increased to the potential of sea transportation.
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Around 20-30 thousand tons of grain get transported by rail every day. To compare this with the scale of sea transportation – around 150,000 tons daily – some months had significantly higher rates. According to the head of Ukrzaliznytsia, the main state rail transportation company, stationary terminals in the west of the country need about a year to become fully operable on such a scale. Another problem that becomes relevant here is that European seaports are not capable of receiving such quantities of grain for further export and their domestic consumption will also not get rid of it. Logistic problems also consist of the fact that trains must be switched after the border (as Ukraine has a wider rail gap than the EU), as well as the inability of customs passages to handle such quantities of goods while simultaneously trying to compete with EU production. The river ports in the Danube river also have a limited capacity, as there are not enough barges, quays and terminals.
The minister of agrarian policy and food Mykola Solskyi has recently negotiated with the ministry of transportation of Romania regarding the transportation of Ukrainian goods through the Romanian port of Constanta. However, this is the very port that is used by Romania to export its own agricultural production, so what significance will a new Ukrainian agricultural route have there is unknown. Besides that, the threat of Russian attacks on cargo ships remains. To resolve this issue, the government issued a law that ensures compensation for the owners of cargo ships that have taken damage in the region of the Danube – as well as operators of the railway system (exceeding a tracks above 1435 mm in Ukraine).
There is no evil that does not lead to something good?
Transportation of goods outside of the EU makes the logistics a lot more expensive, and thus makes Ukrainian exports less competitive. The production of raw material with a lower added value is very sensitive when it comes to additional costs in logistics. When seaports along the Ukrainian coasts were operating in pre-war times, alongside normal railway transportation costs internally, the producers and traders profited immensely. However, re-orienting from the traditional logistics to the expensive European railways and ports, the complexity of the new transportation system (especially in exporting to the Mediterranean Sea and the Indian Ocean) will deliver a hard blow for the profitability of the raw material sector of agriculture. To a certain degree, this can be compensated with the general price increases observed on the world markets (for grain, sunflower oil etc.) caused by the war in Ukraine. The question is whether the price increase will compensate for the transportation costs as well as the increased gas prices. At the moment, it is difficult to tell.
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From another viewpoint, issues with logistics upon exporting raw agricultural goods from Ukraine, nevertheless can help develop the processed sector of agricultural goods domestically. Becoming an influential factor in an environment of urgency, it can really be developed given the demanding circumstances. For example, in the second half of 2020 until early 2022 in Ukraine, there was a visible discrepancy between the value of farm animal food and animal food products (already processed and prepared for internal use). As a result from the subsequent record-breaking exports of grain and oil, soy or turnip, there was a simultaneous reduction in the quantities of animal products produced. These products were becoming less accessible to Ukrainians. The victims of some of this tendency were also the food processors, as a result of rising gas prices in the second half of 2021.
So when the issue of logistics in transportation of plant-based raw material dictate the condition of the export of already processed agricultural goods, the processors as well as the animal-based producers gain an advantage in terms of price and purchasing in the domestic market. In wartime and the subsequent reduction of domestic consumption due to the departure of almost 4 million consumers to other countries, it is illogical to forecast any increases in consumption of any agricultural products which are domestically produced. Although, the increasing discrepancy between global and domestic prices for grain and oil products are likely to alleviate some of the problems of food producers who rely on more processing of their foods. With the unresolved issue of the black sea (being unavailable for trade), one must also consider the possibility that the overall structure of harvest may be subject to change – in the direction of satisfying more animal-based agricultural industries (farm animal food). After all, the demand for an increased transport and logistics system for the adaptation to a new system of exports will likely lead to a more active investment climate in this field in particular even in times of war)
Ukrainian consumers will probably have the opportunity to (for a certain amount of time) pay for domestically produced foods, which have typically been 40-50% of their expenditures before the war, at a much lower price than what would be observed on the global market. At the same time, agricultural producers may be able to compensate for some of their wartime losses (caused by expensive changes in logistics) by taking advantage of the skyrocketing global prices for food as a result of the war in Ukraine.
Written by Oleksandr Kramar