Ukraine: Land market, formation, development trends

Farmland now remains almost the only big asset that is not actually privatized yet.

The position of both executive and legislative authorities of Ukraine on a land sale moratorium cancellation is vague for now. 

For 2-3 months after coming to the power, the Yanukovych team vividly declared their intent to lift the moratorium in the near future. However, these statements suddenly ceased from summer 2010. This may suggest that serious decisions and a breakthrough are being prepared in the field of land relations, or that it has been decided to delay the start of farmland sales and purchases for uncertain time because this is an issue of extreme social sensitivity.

Nonetheless, the statements made by Ukraine’s top officials in early 2011 give the ground to predict a possible soon lifting of the land sale moratorium.

In the period from July till December 2011, Ukrainian Parliament will very likely pass three laws needed to lift the land sale moratorium. The laws adoption will be accompanied by a sharp political struggle on tactical matters (obviously, a strategic decision to open the land market as soon as possible has been already made) of various financial and industrial groups. However, even if these laws are not adopted for political reasons, the opposition will be unable to gather 226 votes needed to pass a law on extending the moratorium into 2012. In fact, this will mean the beginning of land sales and purchases.

According to quite reliable sources, a decree on farmland relations regulation is being drafted in the Presidential Administration. Simultaneously, rumors persist about possible dissolution of Ukraine’s Parliament and holding a new parliamentary election in summer of 2011. 

Reasons for accelerated solution of the land issue

In early January, Ukraine’s President made a series of resolute statements suggesting a possible cancellation of the land sale moratorium in 2011. Opening the land market is considered here as a means of attracting foreign investment and technology. Another mentioned goal is combating corruption. It seems to us that the declared goals have little to do with the real motives. 

An important factor that contributes to making this decision can be the extremely poor condition of Ukraine’s economy, whose recovery from the crisis increasingly protracted.

Another probable reason for a possible acceleration of the land issue solution may be falling margins in Ukraine’s industrial sector along with a slow pace of this sector’s recovery in the conditions of declining global demand (including that for Ukrainian goods). Under these conditions, the owners of industrial assets quite reasonably try to raise the average return on capital through acquiring lands and expanding agricultural production. Widely spread forecasts about steadily strong demand for agricultural produce and high farming margins over the next decade also prompt the owners to make this decision.

It seems that Ukrainian financial and industrial groups presently consider agricultural production (crop production and livestock raising) as a main tool for reducing own investment risks. Under the conditions of the existing threat of global (hyper)inflation, land also becomes a reliable means of insurance and “escape” from money.  

The possibility of land speculation can also be attractive, but UkrAgroConsult forecasts that the comparatively low volume of such operations will limit their appeal in the long term.

Land market: behavior after lifting the moratorium  

The prospect for lifting the land sale moratorium still remains uncertain.

The forecasts for the Ukrainian farmland market development are very closely interrelated with the world food market. If food demand continues increasing as we see it now, this will consequently strengthen the factors contributing to the land market development to raise farming performance and meet this global demand. UkrAgroConsult estimates that demand for comparatively cheap Black Sea grain will steadily increase as the pattern of global demand will shift towards cheaper commodities and suppliers of expensive cereals and oilseeds will be washed out.

Either step (extension or cancellation of the moratorium) will provoke a rush in the land market. First of all, this will manifest itself as difficulty in establishing the market itself. At the first stage we predict a strong disbalance with an enormous predominance of sellers and a shortage of buyers. As a rule, potential buyers will not have financial resources to purchase offered thousands of hectares. Therefore the minimum number of buyers will considerably complicate land pricing.

The start of land sales and purchases will actually lead to property redistribution. This is exactly what in many respects explains the difficulty of making a moratorium lifting decision in the conditions when agroholdings have already accumulated quite vast land expanses in their hands. 

The market will most likely see massive dissolution of lease agreements. Such a course of events will immediately affect, first of all, small lessees (leasing 200-2000 ha of land) because they have no money to buy out the land they lease.

The market will be flooded with small middlemen who will seek margins and thereby distort pricing and complicate the arrangement of large land areas. There is a threat that this will give a rise to so-called “chessboard” fields, i.e. fields comprised of plots belonging to different owners. 

Large enterprises (40-200 Th ha) will also be forced to take special measures for keeping owners of land shares. Anyway, in short-term prospect, the land market vagueness will imply higher costs and lower performance of farming.

A trend towards splitting of agricultural enterprises will possibly manifest itself. Nevertheless, the so-called “European” scenario (farms with 200-300 ha of land) is unlikely to develop as there are no conditions for a sharp increase in the capitalization of agricultural enterprises.

Most agroholdings will no doubt suspend the expansion of their land banks in the conditions of a vague land market. Nevertheless, further development will be given exactly to agroholdings having better access to finance or able to lobby their interests at corresponding levels. Most likely, the splitting and consolidation of agricultural enterprises will be simultaneous processes.

We estimate that solely “pearls” – land plots with the best natural and climatic conditions – will be purchased first. This concerns land within the so-called black belt of Ukraine – from Khmelnytsky and Vinnytsya regions to some districts of Kharkiv region. Lands of poorer quality will gradually come into the turnover, too.

Any significant inflow of foreign investment in land is unlikely in short-term prospect, although many hopes are now pinned on this. The reverse side of high profitability of agriculture in Ukraine (40-60% against 10-15% in South America and Africa) is high risks. UkrAgroConsult experts suppose that, at the time of land market uncertainty, foreign investors will prefer working on international exchange floors with those agricultural companies that will place their shares via the IPO mechanisms.

The government may apply some measures to alleviate the market shock after the start of land operations. The opening of the land market will probably be gradual. Ukraine’s top officials, up to the Vice Prime Minister in charge of agriculture, have said this not once before. In particular, 10-15% of land may come on sale within the first year after a moratorium cancellation and nearly as much during the second and third years. The desired goal of such an approach may be limiting land supply under the conditions of a money shortage.

Land market: pricing trends

The statements about a land demand decline after the 2008 crisis are not always grounded. UkrAgroConsult believes that in reality the market became more stable, grounded during 2009 and 2010 following its overheat in 2006-2007. The land market is stable and well-balanced now. The interest in land is only seen from companies using this key resource as a means of production.

Land price varied considerably in 2010 depending on the plot quality and region. The strongest demand is for lands of the so-called black belt. Their prices ranged from $150 to $450/ha (excluding the cost of equipment and production assets). This price level is real in the sense that it reflects prices buyers are ready to pay. Seller price limits are not reflected in this range.

Sergey Feofilov, PhD in Economics