Even with quality soils and ample arable
land, Ukraine is not producing anywhere near
its potential. According to Ukraine’s Deputy
Minister of Agrarian Policy and Food of Ukraine
for European Integration, Olga Trofimtseva, the
country harvested 66 million metric tons of
grain in 2016 and 62 million in 2017.5 She believes
this is far from the limit, commenting that Ukraine
could easily harvest 100 million metric tons in
the coming years, subject to the development
and use of new technology and land reforms.
She isn’t the only one who believes Ukraine is
operating at a production deficit. The Organization
for Economic Cooperation and Development
Food and Agriculture Organization’s Agricultural
Outlook for Ukraine projects Ukraine’s grain
export potential could reach 90 million metric
tons. Note that when the below graph was
produced in 2014, Ukraine had already exceeded
grain export projections for 2017 by nearly 20
million metric tons (see CHART 1).

If Ukraine could reach these production
levels, this would give them an exportable
surplus of approximately 50-60 million metric
tons, assuming 40-50 million for domestic
consumptions.6 An exportable surplus is an
indication of country’s ability to supply a lower
cost product to the global market, thereby
increasing their competitive advantage.
The ability of growers to keep production costs
low can have a significant impact on profitability
and growth potential. A direct comparison of
farmland prices in the Ukraine to other markets
on a cost per hectare basis is inconclusive due
to wide variations in farmland productivity
and land prices, therefore, land cost per unit of
production is a more meaningful comparison
metric. The utilization of a production-based
benchmark allows investors to compare land
values using different production characteristics.
The graph below shows costs of production
for wheat and corn in the Ukraine compared to
several other markets (see CHART 2).

Investing in farmland with low land costs per
unit of production can allow an investor to realize
greater capital gains through the application
of things like new technology and modernized
equipment, experienced management teams, and
to the extent possible in the Ukraine, economies
of scale. It is important to note, however, that this
metric does not take into account the logistical
costs/considerations of getting the commodity
from the farm gate to the marketplace.

Ukraine’s geographic positioning to key
European and Asian markets also provides
additional cost-saving advantages. The graph
below shows Ukraine’s advantageous positioning
to key export markets (see CHART 3).

Proximity to these markets helps keep
transportation costs low and also provides
steady demand for commodities as middle
classes in places like the EU and China
continue to grow. Finally, a large labor pool – 25
percent of the Ukrainian population is employed
in the agricultural sector7 – providing another
supporting parameter for low-cost
crop production.

High quality, naturally occurring soil – low-cost
per unit of production as a result of strategic
positioning to key markets and a large labor
pool – are all positive indicators of Ukraine’s
agricultural investment potential. The caveat is
that, because of the severe limitations to land
ownership by foreign investors in the Ukraine,
investors should examine opportunities outside
direct farmland investments that still capitalize on
the land’s productivity potential.

OPPORTUNITIES
As grain production forecasts predict a sizable
increase in output from Ukraine, investments will
need to be made into the country’s transportation
and storage infrastructure to support this
increased supply. Logistic costs for moving grain
from Ukrainian farms to the Black Sea ports are
still approximately 40 percent higher than cost
for comparable services in France and Germany,
and 30 percent higher than costs in the United
States.8 These high costs are often the result
of poor logistics, specifically outdated railway
transportation equipment, underutilization of
river transport, and insufficient storage capacity
leading to higher spoilage. As a result, farmers
receive lower shares of the market prices and
shoulder these logistical costs from their own
balance sheets. These losses in annual revenue
potential can range between US$600 million to
US$1.6 billion.9

CATCHING THE TRAIN
A review of the Ukraine railway system reveals
that currently 60 percent of grain volume in the
Ukraine is transported via rail. The country boasts
the 13th largest railway network in the world
and can easily absorb the increased production
forecasts with proper infrastructure development
and equipment improvements (see CHART 4)

For example, current rolling stock of
Ukrzaliznytsia (UZ), the state-owned Ukrainian
monopoly that controls the vast majority of
railroad transportation in the country, is outdated
and ill-equipped. A recent World Bank study
estimated that a US$64 million investment in
Ukraine’s railway infrastructure, including 8,500
grain hoppers, new wagons, and locomotives,
could yield an Estimated Rate of Return (ERR) of
21 percent.10

While transportation from storage to port is
primarily done by rail in the Ukraine, significant
investment is also needed to improve river
and barge infrastructure and deep water port
facilities. Only five percent of exported grain is
moved along Ukrainian rivers, representing a
formidably untapped opportunity to transport
bulk ag products reliably, efficiently, and at a
low cost, especially along the Dnipro River.
River transportation in the Ukraine is often
less expensive and more environmentally
efficient than railway transport, with unitary
transportation costs of three to 8.9 USD per ton
compared to 10.5 for rail and 16.4 for road.11 The
same World Bank study estimated a US$580
million investment could yield a 21 percent ERR.
This would include dredging the Dnipro River’s
shallow bottom to accommodate larger ships and
prevent freezing during peak production winter
months, lock passages, bridges, and port storage
infrastructure. This type of investment could also
lead to a capacity increase of five to six million
tons of grain annually by 2022 and a 30 percent
reduction in costs associated with road damages
by 2022.

Improvement to rail and river transportation
infrastructure will allow Ukrainian producers
to offer even lower cost per unit of production
to offtakers, but grain storage is yet another
key component of the value chain suitable
for foreign investment. Sufficient and quality
grain storage infrastructure will help Ukrainian
farmers minimize loss and store grain longer. In
2014, Ukraine had a grain harvest of nearly 64
million metric tons, however, existing certified
storage infrastructure allowed for immediate
storage of only 45 to 65 percent.12 Many existing
facilities are more than 50 years old while the
complementary infrastructure supporting drying,
loading/unloading, and testing operations are
energy-intensive and employ little to no recent
improvement from precision technology.13
According to the World Bank, a US$1.5 billion
investment into 6.4 million metric tons of new
elevator capacity could reduce grain loss by
15 percent per annum yield and return early
investors a 24 percent ERR. Without appropriate investment, poor logistics will become a bottleneck to sector development rather than a
vehicle of trade facilitation.

A Fluid Investment
Opportunities exist in the upstream portion of
the Ukrainian ag value chain as well, particularly
in irrigation infrastructure. During the Soviet
era, irrigation was widely used throughout the
country. At one point, irrigation infrastructure
grew by 100,000 hectares per year.14 While
much of this machinery is now dated, proper
maintenance and repurposing on the back of
investment dollars could revitalize millions of
hectares of existing infrastructure. At present,
most Ukrainian farmers use dryland farming
practices which place significant risk at the
mercy of Mother Nature (see CHART 5).

Irrigated land has the potential to produce two
to two-and-a-half times the yield compared to
traditional dryland farming, without the risk of
uncertain precipitation conditions. A recent State
of Nebraska irrigation study showed a yield of
4.7 million tons per acre of corn on irrigated land
compared to a yield of 1.8 million tons per acre
on dryland, resulting in a revenue growth of over
$240 more per irrigated acre. Under the right
structure and management team, this could be
a profitable way to participate in the forecasted
Ukrainian agricultural uplift.

Adding Value with Agtech
Finally, the application of precision technology
to Ukraine’s agricultural sector will further allow
producers to increase yield, reduce production
costs, and optimize input consumption without
the necessity for scale. There should be no doubt
now that agtech is a booming sector across
the globe. According to an August 2018 market
intelligence report released by BIS Research, the
global precision agriculture market is expected
to raise US$10.55 billion by 2025, increasing at a
CAGR of 13.7 percent from 2018 to 2025.15 With only
three to four percent of arable land in the Ukraine
under precision management, there is much
room for growth.16 Early movers to this space
who identify ways to apply precision technology
to Ukrainian farm operations, while limiting their
exposure to country risk, stand to do well.

One such area is soil erosion. According to the
World Bank, Ukraine loses about 50,000 hectares
of farmland every year from soil erosion and land
degradation.17 Groups like AgriEye, a Ukrainian
company founded in 2016, hope to cut this loss
in half through the application of drone imagery,
multispectral remote sensing, and open source
geospatial imaging data. AgriEye uses this
input data to create a precise field map of soil
composition, which it then pairs with algorithms
to analyze yield and provide prescriptive
recommendations on how to irrigate and fertilize.
While they charge for this service internationally,
it’s free to Ukrainian farmers. Other Ukrainian
firms like SmartFarming are applying data-driven
solutions to help Ukrainian farmers reduce
costs by as much as US$3,000 per hectare and
save their producers more than 10 percent of
inventories in a season through the re-equipment
of machinery.18 Associations and accelerators like
AgTech Ukraine, while only a few years old, are
beginning to draw attention to the importance of
technology in the sector.

Adding Value with Agtech
Finally, the application of precision technology
to Ukraine’s agricultural sector will further allow
producers to increase yield, reduce production
costs, and optimize input consumption without
the necessity for scale. There should be no doubt
now that agtech is a booming sector across
the globe. According to an August 2018 market
intelligence report released by BIS Research, the
global precision agriculture market is expected
to raise US$10.55 billion by 2025, increasing at a
CAGR of 13.7 percent from 2018 to 2025.15 With only
three to four percent of arable land in the Ukraine
under precision management, there is much
room for growth.16 Early movers to this space
who identify ways to apply precision technology
to Ukrainian farm operations, while limiting their
exposure to country risk, stand to do well.
One such area is soil erosion. According to the
World Bank, Ukraine loses about 50,000 hectares
of farmland every year from soil erosion and land
degradation.17 Groups like AgriEye, a Ukrainian
company founded in 2016, hope to cut this loss
in half through the application of drone imagery,
multispectral remote sensing, and open source
geospatial imaging data. AgriEye uses this
input data to create a precise field map of soil
composition, which it then pairs with algorithms
to analyze yield and provide prescriptive
recommendations on how to irrigate and fertilize.
While they charge for this service internationally,
it’s free to Ukrainian farmers. Other Ukrainian
firms like SmartFarming are applying data-driven
solutions to help Ukrainian farmers reduce
costs by as much as US$3,000 per hectare and
save their producers more than 10 percent of
inventories in a season through the re-equipment
of machinery.18 Associations and accelerators like
AgTech Ukraine, while only a few years old, are
beginning to draw attention to the importance of
technology in the sector.

RISK FACTORS
In spite of these opportunities, Ukraine is not
a simple place to invest. Perhaps the most
obvious challenge is the civil conflict, centered
in the eastern provinces and Crimea. Notable
conflict began in 2014 when then President Viktor
Yanukovych, a pro-Russian supporter, refused to
sign an association agreement with the European
Union (EU). Opposition groups to the president,
called Euromaidans, supported closer relations
with the EU and ousted Yanukovych through a
series of violent protests. Russia used this as
justification to annex Crimea. The local Ukrainian
government in Crimea, along with Donetsk and
Luhansk provinces, was expunged and while the
conflict has since quieted, it is far from over (see
CHART 6).

This unrest is affecting Ukrainian farmers on
many different fronts. First, the majority of
provinces under Ukrainian government control
have lost access to Crimea and several eastern
provinces and vice versa. If you’ll recall from
the soil map earlier, these eastern and southern
provinces were among the richest in “black earth”
soil and therefore, some of the most productive.
Secondly, as a result of the conflict, farmers in
these affected regions have not only lost access
to the Ukrainian domestic market, but also
internationally, and are finding it increasingly
difficult to access inputs like fertilizer and
seeds. Before the conflict, Russia was a primary
importer of Ukrainian commodities, especially
from the eastern regions. Now, trade between
these regions has all but ceased, putting further
stress on Ukrainian producers. Finally, according
to Raimund Jehle, FAO’s regional coordinator for
Europe, many producers in these highly-fertile
regions have turned to household production
instead to survive the turmoil, and have given
up attempting to sell their products domestically
or abroad.19 Investors in Ukraine’s agricultural
sector need to carefully examine how their capital
may be affected by the ongoing civil conflict
before deployment.

The land moratorium currently in place, which
dates back to the transition from communism
to capitalism, is another barrier to entry. When
the Soviet policy of collectivism in Ukraine
failed in the late 1920s due to drought and snow
levels that resulted in the death of more than six
million Ukrainians, ancestors of the victims were
awarded small parcels of land averaging four
acres each. Then in 2001, Ukraine’s government
passed a law prohibiting the sale or purchase
of these plots, a moratorium that is still in
effect today over 25 years later and has been
extended nine times already.20 Productivity in
these 27 million hectares of distributed land is
severely lagging as there is no incentive for local
producers to improve land quality because they
don’t actually own the land. The moratorium also
prevents them from making any change to the
land’s designating purpose, so transformation to
a higher-value crop in the absence of selling it is
also not an option. Farmers are permitted to lease
their land for as long as 49 years, but since all
adjacent landowners would also have to agree to
lease in order to achieve any semblance of scale,
this is not a viable opportunity. Supporters of the
ban argue that without it, foreign companies from
the EU or the United States would flood into the
region, stripping this land away from generations
of Ukrainian farmers for pennies and providing
it to land developers. Calls for reform are getting
louder as Ukraine’s agricultural productivity continues to lag its neighboring countries.21 Many institutional investors will continue to
watch these policies closely, but until they
change for the better will likely keep their capital
on the sidelines.

Finally, a lack of transparency coupled with a
tendency by the government to emphasis short term solutions rather than pursue long-term fixes are additional risk factors to be considered.
According to the 2017 Corruption Perceptions
Index compiled by Transparency International,
Ukraine ranked 130 out of 180 countries, placing
it in the bottom third of all countries evaluated.
While they took their first steps to fight corporate
secrecy back in 2017 when they agreed to
share data on who ultimately controls Ukrainian
companies, past events such as former President
Yanukovych’s ability to syphon off at least US$350
million of Ukrainian public funds for his personal
benefit, will be challenging to overlook going
forward.22 Even Ukraine’s own Deputy Minister
of Agrarian Policy Olga Trofimtseva admits that
the decision to cancel refunds on export VAT for
soybeans and rape seeds was based on an “ad
hoc policy, when a policy is not based on some
strategy or long-term vision, but a short-term
reaction to changes.”23 Yet another indicator of
the government’s struggles to deal with systemic
issues is the fact that in the Ukrainian agricultural
economy, the investment burden is carried
primarily by producers financing production
from their own revenues. A study conducted by
UkrAgroConsult in 2017 showed that the share
of agricultural producers’ own money in total
investment volume reached 70 percent in 2016,24
indicating that this method of self-financing from
producers’ own profits is nearly exhausted. For
comparison, the next highest source of capital
investment came from bank credit and local
budgets at only 7.1 percent of total volume.
Continued civil conflict in some of Ukraine’s
most fertile regions, the 20-year-old-plus land
moratorium, and a lack of transparency and
financing opportunities for producers will
continue to plague Ukraine agricultural
producers as they search for alternate sources of
investment capital.

FUTURE OUTLOOK
Ukraine’s growth potential as a low-cost,
strategically-positioned grain producer is
an opportunity that must be approached
cautiously and with the right structure. Direct
farmland ownership, at this stage, is not an
option; and while long-term land leasing is
possible, it exposes investors unnecessarily to
naked commodity and legislative risks. While
an increasing number of experts believe that
opening up Ukraine’s land market to foreign
investors will not only solve the problem of
limited access to financing but also provide
incentive for foreign capital to come in, it is
not likely to happen in the foreseeable future.
Therefore, investors seeking to capitalize on
Ukraine’s projected growth in grain production
should seek debt-based investments into parts
of the ag value chain like transportation/storage
infrastructure, irrigation, and precision technology
applications. Finding and building a relationship
with trusted partners who have boots-on-the ground experience and a proven track record are essential for success. It also may be prudent
to consider co-investments with groups like the
World Bank or other NGOs as a way to bolster
credibility and further protect an investor’s
assets. While fortune does favor the bold, in
Ukraine, those first steps must be calculated and
protected, if one chooses to step at all.

SOURCES
1. Ministry of Economic Development and Trade of Ukraine. (2014). INVEST Ukraine Open for U. Retrieved from https://mfa. gov.ua/mediafiles/sites/rei/files/MEDT_ Brochure_A4_View.pdf, pg. 6

2. Latifundist.com, Top Lead. (201). 2016/2017 Ukrainian Agri Business Infographic. Retrieved from https://ukraineinvest.com/wp-content/uploads/2017/12/theinfographics-report-ukrainian-agribusiness-
2017-eng.pdf, pg. 5.

3. Baker Tilly, Credit Agricole and AEQUO. “Agribusiness.” Your Investment Matters: Agribusiness. https://ukraineinvest.com. 2018. Web. 10 October 2018.

4. Ibid.

5. Makarevych, Myroslava. “Olga Trofimtseva Talks about Future of Agriculture in Ukraine.” https://destinations.com.ua/business/ trends-innovations/395-olga-trofimtsevatalks-about-future-of-agriculture-in ukraine, UA Destinations, 31 May 2018. Web. 8
October 2018.

6. Baker Tilly, Credit Agricole and AEQUO. “Agribusiness.” Your Investment Matters: Agribusiness.

7. Ibid.

9. Ibid.

10. Ibid.

11. Ibid.

12. Ministry of Economic Development and Trade of Ukraine. (2014). INVEST Ukraine Open for U. pg. 19

13. World Bank Group. August 2015. Shifting into Higher Gear: Recommendations for Improved Grain Logistics in Ukraine.

14. Baker Tilly, Credit Agricole and AEQUO. “Agribusiness.” Your Investment Matters: Agribusiness

15. Banga, Bhavya. “Global Precision Agriculture Market Anticipated to Reach $10.55 billion by 2025.” https://markets.businessinsider.com/
news/stocks/global-precision-agriculturemarket-anticipated-to-reach-10-55-billionby-2025-bis-research-report-1027473195, Markets Insider, 21 August 2018. Web. 14 October 2018.

16. Gaidai, Nick. “Hot Investment: Agribusiness in Ukraine?” http://whartonmagazine.com/blogs/hot-investment-agribusiness-inukraine/#sthash.sFhG83nv.InVF7Hxr.dpbs, Wharton Blog Network, 21 May 2018. Web. 11 October 2018.

17. Krasnikov, Denys. “How technology is changing Ukrainian agriculture for the better.” https://www.kyivpost.com/ technology/how-technology-is-changingukrainian-agriculture-for-better.html?cnreloaded=1, Kyiv Post, 28 June 2018. Web. 15 October 2018.

18. Belenkov, Artem. “Artem Belenkov about Ukrainian Agricultural Holdings.” https://smartfarming.ua/en-blog/rozvitokagtech-v-ukraini-skladno-ale-mozhlivo, SmartFarming, 11 July 2018. Web. 15 October
2018.

19. [Food and Agriculture Organization of the United Nations]. (16 October 2016). The future of agriculture in Ukraine. [Video File]. Retrieved from https://www.youtube.com/watch?v=fSQrAasTHNo.

20. Gomez, James M & Choursina, Kateryna. “Ukraine’s Ban on Selling Farmland Is Choking the Economy: Kiev keeps putting off land reforms, despite pressure from the IMF and investors.” https://www.bloomberg.
com/news/features/2018-01-02/ukraines-ban-on-selling-farmland-is-chokingthe-economy. Bloomberg Businessweek, 1 January 2018. Web. 11 October 2018.

21. Ibid.

22. Transparency International. “Ukraine Takes Important First Step Towards Ending Corporate Secrecy.” https://www.transparency.org/news/feature/ukraine_takes_important_first_step_towards_ending_corporate_secrecy, Transparency International, 1 June 2017. Web. 17 October2018.

23. Makarevych, Myroslava. “Olga Trofimtseva Talks about Future of Agriculture in Ukraine.” 31 May 2018. Web. 16 October 2018

24. UkrAgroConsult. “Amounts of investment in Ukraine’s agricultural sector.” http://www.blackseagrain.net/novosti/on-investmentin ukraine2019s-agriculture, UkrAgroConsult, 24 May 2017. Web. 9 October 2018.

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