1. On Perspectives and Challenges of Ukrainian Agroholdings: Implications of the Political and Economic Crisis Igor Ostapchuk Alfons Balmann Jarmila Curtiss Land and Poverty Conference 2016: Scaling up responsible Land Governance, March 16, 2016

2. www.iamo.de 2 Strong increase in land bank of agroholdings Ukrainian agriculture before the crisis Source: A GRI S URVEY (2015)

3. www.iamo.de 3 Strong increase in land bank of agroholdings Significant investments of agroholdings – in modernization of production technologies – in livestock production – in infrastructure Ukrainian agriculture before the crisis

4. www.iamo.de 4 Strong increase in land bank of agroholdings Significant investments of agroholdings Positive yield trends – driven by growth of agroholdings Ukrainian agriculture before the crisis Source: USDA Yield development in Ukraine mt/ha

5. www.iamo.de 5 Strong increase in land bank of agroholdings Significant investments of agroholdings Positive yield trends – driven by growth of agroholdings Growth of agroholdings financed by – lendings of (international) banks and financial institutions – placement of Euro bonds – IPOs  Relatively high indebtedness of agroholdings!  Booming prices for land and acquisitions! Ukrainian agriculture before the crisis no long-term loans

6. www.iamo.de 6 Political crisis  Political uncertainty  Inflation  Increasing interest rates  Decreasing availability of loans (nationally and internationally) Ukrainian agriculture since the crisis

7. www.iamo.de 7 Political crisis Decreasing international food prices Ukrainian agriculture since the crisis FAO price indexes Source: FAO

8. www.iamo.de 8 Political crisis Decreasing international food prices  Decreasing market capitalization of listed agroholdings! Ukrainian agriculture since the crisis Source: UCAB (2016)

9. www.iamo.de 9 Political crisis Decreasing international food prices  Decreasing market capitalization of listed agroholdings!  Increasing number of struggling agroholdings!  Why are agroholdings so affected? – Booming agricultural prices caused a kind of "gold rush" High costs of land and acquisitions! Fast growth requires enormous financial means! Growth causes adjustment costs! Significant productivity deficits were not resolved! Ukrainian agriculture since the crisis

10. www.iamo.de 10 Analysis of Ukrainian enterprises for years 2008 – 2013 Sample of ~600 enterprises, mainly crop and dairy farms After careful cleaning of outliers we got – unbalanced panel of >400 enterprises with data for a few years only – balanced panel of >200 enterprises with data for all years Approach: Data Envelopment Analysis – Outputs: sales value of (a) crops, (b) milk and (c) other animal products – Inputs: (a) labor units, (b) land in ha, (c) material costs and depreciation  Group-level comparison of agroholding and independent farms  Farm-level identification of efficiency and profitability determinants Economic issues of production

11. www.iamo.de 11 Productivity and profitability issues Wheat production figures (same applies to other crops) Agroholding farms – higher yields at much higher costs – higher profits only in case of high prices Economic issues of production Agroholdings Individual enterprises Ratio agroholdings versus enterprises, 4 years average, % 20102011201220132010201120122013 Yield, dt/ha3039354228342734119 Cost, UAH/t9959761321145984390912871277110 Sales price, UAH/t11361361159613831068130615291366104 Profit, UAH/ha4231502962-318630135065330288 Profitability, %143921-52744197(71) Source: A GRI S URVEY

12. www.iamo.de 12 Analysis of Ukrainian enterprises for years 2008 - 2013  On average, higher profits per hectare for independent farms  Agroholding farms catching up in good years Economic issues of production Balanced panel Mean value Independ. farms Agrohold. farms Profit per ha (all years) (UAH/ha)644273 Profit per ha (only 2008) (UAH/ha)381 -83 Profit per ha (only 2009) (UAH/ha)342 -10 Profit per ha (only 2010) (UAH/ha)594471 Profit per ha (only 2011) (UAH/ha)1045800 Profit per ha (only 2012) (UAH/ha)1060672 Profit per ha (only 2013) (UAH/ha)442-210

13. www.iamo.de 13 Analysis of Ukrainian enterprises for years 2008 - 2013  Agroholding farms pay significantly higher land rental costs!  Land costs more than tripled between 2008 and 2013!  Land costs per ha much higher than labor costs! Economic issues of production Balanced panel Mean value Independ. farms Agrohold. farms Land rental costs (all years) (UAH/ha) 378544 Land rental costs (only 2008) (UAH/ha) 180249 Land rental costs (only 2009) (UAH/ha) 246300 Land rental costs (only 2010) (UAH/ha) 301423 Land rental costs (only 2011) (UAH/ha) 363545 Land rental costs (only 2012) (UAH/ha) 564806 Land rental costs (only 2013) (UAH/ha) 661943

14. www.iamo.de 14 Analysis of Ukrainian enterprises for years 2008 - 2013  No big difference in technical efficiency scores advantage of independent farms (significance on 10%-level) no significant change over time Productivity and efficiency issues Unbalanced panel Mean value Independ. farms Agrohold. farms Technical efficiency (all years)0.6390.625 Technical efficiency (only 2008)0.6280.607 Technical efficiency (only 2009)0.6380.639 Technical efficiency (only 2010)0.6680.660 Technical efficiency (only 2011)0.6800.644 Technical efficiency (only 2012)0.5960.606 Technical efficiency (only 2013)0.6230.593 > > > ~ ~ ~ >

15. www.iamo.de 15 Determinants of technical efficiency Productivity and efficiency issues Technical efficiency Coef.P>|z| Total production value0.2270.003 Share of animal production0.2040.000 Milk production0.0460.000 Subsidies0.0080.043 VAT0.0100.022 Depreciation crop/ha0.0390.072 Material crop/ha-0.0150.016 Labor cost/unit in crop production-0.0040.009 Land rent/ha0.0670.007 Member of agroholding-0.0830.040

16. www.iamo.de 16 Determinants of technical efficiency Size + Animal / milk production + Subsidies / VAT + Higher intensity – – High intensity pays off only in good years Rental price + – Land with high quality soil costs more Member agroholding - Productivity and efficiency issues

17. www.iamo.de 17 Determinants of profitability (Size +) Animal production – Depreciation + Services –  It is superior to operate with own equipment (Higher intensity –) Rental price –  (Aggressive) growth does not pay off in the short-term (Member agroholding –) () not significant Productivity and efficiency issues

18. www.iamo.de 18 Ukrainian agriculture still far away from being efficient, but positive trends Absolute productivity is increasing – driven by higher intensities – partly/mainly driven by growth of agroholdings However: higher intensities – cause learning effects and adjustment costs – require appropriate technologies and know how – only pay off if farms achieve appropriate prices (international and national markets, infrastructure, institutions) and during the years with favourable weather conditions  farms need sound financial basis and access to finance Conclusions

19. www.iamo.de 19 Agroholding farms on average less efficient and profitable  Agroholdings should be aware that – efficiency must have first priority – returns of growth and investments only in the medium- and long-term – growth requires sound financial basis – growth requires appropriate risk management strategies (price, market, policy risk) – aggressive growth has a high price (there may be better opportunities in the future) – efficiency suffers from transaction costs (e.g. theft) – management is expensive (headquaters, IPOs,…) – interests of (rural) society need to be considered Conclusions

20. www.iamo.de 20 Agricultural policy – should acknowledge contribution of agroholdings to economic development – should neither create barriers for agroholdings nor should favour them – should rather focus on improving institutional environment (fight corruption, provide stability,…) – should focus on development of infrastructure rather than subsidies (transportation, education,…) – should strengthen interests of rural stakeholders (economic and political participation) Conclusions

21. www.iamo.de 21 How important do you assess the following strategies? Views of agroholding managers (2012)

22. www.iamo.de 22 Views of agroholding managers (2012) What do do consider as your main risk factors?