Planting Time Crisis in Ukraine

Planting Time Crisis in Ukraine

The following is an update on the situation heading into planting season in Ukraine. The dire prospects may open opportunities for more U.S. exports.  The views are those of Iurii Mykailov, a Ukrainian agricultural journalist, and are not meant to represent any views AgWeb.  

A year has passed since Russia annexed Crimea and provoked separatist actions in southeastern Ukraine that later grew into a de facto war between Ukraine and Russia. Now, after months of periods of active military confrontations and short truces has the potential to break into a full-scale war with the invasion of Russian troops on the territory of Ukraine. There are strong beliefs that the invasion may start within two or three months. The consequences of this would be disastrous not only for each of the warring parties, but also to the whole world.

Already, the number of refugees from Crimea and the Donbass residing in Ukraine exceeds one million. Several tens of thousands refugees have sought refuge in neighboring EU countries such as Poland, Slovakia and Romania. In the case of full-scale war, the wave of refugees to other countries, primarily to the EU, will be on the scale of a few times higher than the wave of refugees due to the wars in the Balkans during the breakup of Yugoslavia. It should be remembered that Ukraine has the visa-free regime with a number of European countries: Moldova, Serbia, Albania and Montenegro. Ukraine has the visa-free regime also with countries such as Turkey, Israel, Argentina, Brazil, Honduras, Egypt, OAE, Tunisia etc. Even if there is no Russian invasion now, it could occur as a consequence of the collapse of the Ukrainian economy. Currently, there is a contest: which economy will have collapsed first, the Ukrainian or the Russian one.

The economic situation in Ukraine is in ruins. Over the next few months, Ukraine has to pay a debt of $11 billion. The state treasury at the moment has about $6.5 billion. If Ukraine is unable to restructure its debt with the major creditors (IMF, World Bank, private equity funds, such as the American Franklin Templeton, Russia, etc.) in the near future, Ukraine will be forced to default. This can lead to catastrophic consequences in the forms of foreign financing, social revolts and even the disintegration of Ukraine into a number of separate territories. This, in turn, could trigger a military intervention by Russia under the pretext of "preventing the chaos in the heart of Europe," which will lead to "bloodshed" and the greater wave of refugees.

Even putting aside the concerns regarding a Russian invasion and the national debt default, the economy in general and agriculture, in particular, may not survive this year. Over the last year, the local currency fell one-third its level against the dollar and the euro. A year ago, one U.S. dollar was equal to 8 hryvnas and now the official parity is 1 to 25 (on the black market, the exchange rate is 1:30). Recently, the Ukrainian central bank set the refinancing rate at 30% in order to tame inflation, which now is more than 50% on the annual basis. This makes business practically dead. Ukrainian banks stopped providing credit to businesses.

It is now practically impossible for businesses to buy foreign currency though they are obliged to sell 80% of the currency from export operations under the very unfavorable exchange rate (the gap between selling and buying currency reaches 40%).

Major Agricultural Setback

A large amount of inputs for Ukrainian agriculture is imported, including seed  (corn, soybean, sunflower), pesticides, fertilizers, fuel, farm machinery, implements and equipment. Domestic seed production in Ukraine is insufficient to cover the deficit generated due to the high prices of imported seeds. For example, domestic corn seed is enough to cover only 30% of the demand. Although oil prices fell, the price of petroleum products (gasoline, diesel) doubled due to the devaluation of the local currency.

Even if grain producers are able, albeit with difficulty, to pay for the supply of seeds, pesticides, fertilizers and fuel within half a year, the deliveries of the imported agricultural machinery has stopped, as medium- and long-term loans in Ukraine are nonexistent and prices for import tripled.

Because Ukraine is a major grain exporter, a number of foreign manufacturers and suppliers of inputs to Ukraine now offer grain producers inputs on the basis of some barter or clearing schemes under the obligation to sell the harvest later to  designated traders.

The majority of grain producers state they will sharply decrease the use of fertilizers and pesticides. Also, analysts forecast that up to 15% of the arable land will be set aside due to shortage of inputs and financing.

The situation is further aggravated by the uncertainty of the military situation. The territory occupied by Russia will not be able to seed this season [though the major corn and sunflower areas are farther west]. Producers in territories that are still under the Ukrainian control but are close to the military line are now in the deep Hamlet thought: to seed or not to seed?

So, it is very likely Ukrainian grain production in 2015 will not exceed 40 million tons, down from 65 MMT last year, with a corresponding decrease in its export, primarily to Spain and Italy, North Africa, the Middle East and East Asia (China, Japan, Korea).

And yet grain producers are in a better position compared with other industries, primarily livestock. Dairy, meat and egg producers will find themselves in a very difficult situation.  They will be forced to buy feeds at prices that increased three-fold due to the devaluation of the hryvna, while the export of their products is limited, especially after the Russian ban on import of agricultural products from Ukraine. The sharp decline in incomes of the population of Ukraine will not allow the animal-product producers to correspondingly increase prices on the domestic market, with the result that a lot of producers in these industries will go bankrupt.

Editor’s Note: USDA reports Ukraine produced 22.28 MMT of wheat and exported 9.76 MMT in 2013/14 and still shows 24.75 MMT produced and 11 MMT in exports for 2014/15.  Corn production for 2013/14 was 30.9 MMT and exports, 20 MMT. This slipped to 28.45 MMT, with 18 MMT exported in the current marketing year.

Russia’s wheat production was pegged at 52.09 MMT and exports at 18.53, while 2014/15 is estimated at 59 MMT and 20 MMT.

These countries have a transportation advantage to Europe, the Middle East and parts of Asia and have definitely impacted U.S. sales, even to some traditional buyers. A change such as described here undoubtedly would open the  door to added U.S. exports.  



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Spell Check

Western, NE
3/14/2015 09:34 AM

  Time will tell. Even if this does happen as reported, do you think the speculators will change their current perception of oversupply? Probably not.


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