Archive for June 3rd, 2011

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Ukrainian agriculture – DFI or Ukrainian best interests?

June 3, 2011

Well dear readers, Mark Twain once said “Buy land, they’re not making it any more.”

If there is one thing Ukraine has, it is a lot of land. Good agricultural land. The best black soil on the continent of Europe in fact.

Much of it is unused and what is in use is poorly managed, under producing and supported by an infrastructure that oft allows quality foods to rot before export or consumption.

Needless to say the likes of Cargill, Budge, Drayfis and Glencore are here together with smaller companies are here, just as they are with any commodity that they can flip title of at a profit.

Since 1996 there has been a moratorium on foreigners owning agricultural land. It was hoped that this would be lifted under the current government by the foreign nations and companies but this is not going to be the case.

What will happen is that next year, land can be bought by private Ukrainians.

Thus the cycle of leasing farmland will have to continue for foreign agricultural interests in Ukraine for a few years yet.

There are of course two schools of thought and that very much depends if you are a Ukrainian or a foreigner.

Foreigners will rightly argue that the best way to improve yields and dramatically upgrade the agricultural infrastructure is through DFI which would be actively encouraged if they owned the land rather than leased it. A good and valid point. It is far more of a risk to invest tens of millions (and more) in farming in Ukraine if you are in effect the tenant on the land than the land owner.

From the Ukrainian point of view, everyone knows it is the best agricultural land and soil on the continent of Europe, however the agricultural land market has been very much managed since the collapse of the USSR. This has had the effect that th market value of agricultural land here, despite being the best, is valued at less than that of the worst in other European nations.

To simply allow foreigners to buy agricultural land immediately would mean the largest part of the best land could be bought in Ukraine for the sum of $30 billion. In effect, such is the current value system, companies like Cargill and Glencore etc, could buy all the land within 24 hours such is their ability to get lines of credit with the worlds leading lenders.

The average estimates when using the average European agricultural land pricing would dictate that Ukrainian agricultural land, in a developed market is around $400 billion. That does not take into account that Ukrainian agricultural land is the best you can find on the continent.

Now the Ukrainian economy may not be in the best of health, but successive governments have kept the moratorium on agricultural land, knowing that when it is lifted for foreigners, it will be bought up very quickly and at a song.

Whether it is a cynical view point or a practical one, by allowing Ukrainians to buy the land from next year, it will automatically generate a market condition that will allow for a rise in pricing prior to the foreigners piling through the door when it is opened.

It will also mean deals will have to be done with numerous land owners rather than State and regional administrations for huge conglomerates to buy large areas of Ukraine, if the land owners are of a mind to sell. There are plenty of rich people here too that can generate the financing for the necessary infrastructure.

That would open the pathway to joint ventures or stock swaps to allow foreigners to own agricultural land here (and Ukrainian companies elsewhere on the globe) once the moratorium is lifted but would undoubtedly stem the wholesale of Ukrainian agricultural land to absolute foreign ownership. It would be far more risk management friendly for the foreign entities than the current leasing arrangements that nevertheless does not put off the big investors today.

Ukraine is, after all, not the only nation to have concerns and rules about foreign ownership of agricultural land and feeding its nationals first at local economic norms rather than global costs.

There is also the global historical legacy of broken promises, under employment and under development when large scale agricultural land sales have taken place. There is no end of lamenting and bewailing to be found from NGOs and charities over such issues, amongst them Oxfam and the UK Institute of Development Studies.

The common claims are that organisations buy much more land than they can ever effectively use, manage or produce from whilst the local communities do not benefit from the envisaged jobs or community development associated with a major local investment.

How all of this sits under the WTO rules is a difficult. Ukraine joined the WTO whilst the current moratorium was in place and gave no explicit timetable upon joining about its removal. It can hardly be accused of market manipulation or protectionism relating to something that already existed when allowed to join.

Both sides of the argument to allow (or not) direct foreign ownership of Ukrainian agricultural land have valid points to make, as do the NGOs and charities who have raised serious issues over other global agricultural matters of a very similar ilk.

One can only assume that both sides will be neither content nor unhappy about the small step to private Ukrainian ownership. Of course internally of Ukraine, the allegations of corruption and vested interests will abound when those who are rich enough to buy large swathes of agricultural land start to do so.

I bet you didn’t think you Cornflakes would cause so much trouble did you!

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