Articles

17 August, 22:51
The Agricultural Fund: Between Two Stools

The commitment to supply a certain amount of grain to China each year could undermine the food security of Ukraine and raise food prices. Also, China’s possible acquiring ownership of Ukrainian lands is dangerous.

Last week, Ihor Yakubovych, Chairman of the State Agricultural Fund reported about the foundation of another organization in Ukraine, which may have a significant impact on the agricultural market – PJSC "Agrarian Fund". This news has raised more questions than answers so far, since the functions of the "old" and “new” Agrarian Fund are diametrically opposed to each other. As it is known, Government officials and parliamentarians have an excellent habit to inflate bureaucracy and confer powers to more and more institutions without even considering how they will actually operate. For example, there are talks at the parliamentary agricultural committee about possible financing of projects of the Agricultural Fund by means of money borrowed from China. However, the situation is rather controversial.

State Rural Support Abroad

In developed countries, government interventions in the market of agricultural products are loss-making. They are aimed at maintaining minimum prices for certain agricultural products, that is to ensure that prices do not fall below a certain level and cause bankruptcy of producers. For instance, interventions associated with buyout of products in the USA are carried out in sugar market. Farmers have the right to take a loan against future harvest. Loan amount is calculated based on the minimum price set by the Government. If the market price appears higher than the minimum one, sugar producer has the right to repay the loan and sell sugar at a higher market price. If the market price is lower than the minimum price, the Government is obliged to buy sugar at the lowest price. The EU intervention mechanisms are preserved only for wheat, butter and milk. Thus, if an EU member state has the price of butter falling below 92% of the intervention price within two weeks, the Government comes out with a proposal to buy butter. Therefore, government intervention in the market of agro products in the USA and the EU are made to maintain minimum prices and are loss-making for the state.

Special Aspects of State Rural Support in Ukraine

Unlike Western countries, the State Agrarian Fund of Ukraine is trying to keep agricultural product prices below a certain maximum level. That is why, almost every year, the government restricts exports in many ways and creates a surplus in the local market. It is not about supporting Ukrainian rural population, but a common consumer of goods, a voter in other words. In any case, government interventions both abroad and in Ukraine are loss-making.

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Ihor Yakubovych. Photo by agronews.ua

According to Yakubovych, the main objective for establishment of PJSC "Agrarian Fund" is to transform the AF from a mechanical executive agency of the Government interventions into an entity able to earn money. The PJSC status will allow implementing investment projects and receive profit which cannot be done by a state-funded organization. To make a profit on its activities, the Agrarian Fund should sell the products at a price higher than they purchased them for. Thus, the profitability of the Fund requires constant inflation of food prices being against the policy of the Government and the National Bank of Ukraine (NBU) keeping inflation at a low level. Besides, due to the tight monetary policy of the NBU, interest rates on internal state loan bonds are very high in order to maintain Hryvnia exchange rates. A two-year loan will come out in over 20% p.a. At the same time, currently there is deflation of food commodity prices in Ukraine because of the high yield and export restrictions. It means that buying agricultural products for resale is unprofitable, since the growth in prices is smaller than interest rates. The possibility of financing the Agrarian Fund is also in question. The budget for 2013 stipulates a separate loan for the Agrarian Fund by means of issuing internal state loan bonds amounting to UAH 5 bln. Meanwhile, the financial system of Ukraine is already short of funds for the Agricultural Fund lending. In 2012, the Government was able to borrow UAH 63 bln. from domestic market, and the plan for 2013 amounted to record high 93 bln. This brings up the question: will the Agrarian Fund be able to attract enough money to finance its activities while there is a lending funds shortage? It will be difficult for the Agrarian Fund to invest in agriculture. Obviously, the Agrarian Fund will be able to cultivate new land only in state-owned areas remaining - 10.2 million ha, of which 6 million ha were leased out and the rest is not cultivated often due to poor quality of arable land. Moreover, state-owned agricultural lands are located all over the territory of Ukraine that will complicate investments to the infrastructure.

Chinese Money

According to Forbes.ua, Taras Kutovyi, Deputy Head of the Parliamentary Committee for Agrarian Policy and Land Relations, said: the likelihood that future investment projects of irrigation of the AF will be funded with money borrowed from China is very high.

Taras Kutovyi. Photo by grebenka.com

Looks pretty good, but when you get down to it, the Chinese government loan is associated with significant limitations. Obviously, it will be granted in the currency of the P.R. China – Yuan. This is one of the principles of the state policy of China. Yuan is not a freely convertible currency, so only Chinese goods may be purchased using the borrowed money. In addition, China does not produce modern agricultural equipment. In 2011, China provided Ukraine with only 3% of imports of agricultural machinery, while the United States and European countries gave over 80%. That is, Ukraine will be obliged either to buy low-quality Chinese equipment or to hire Chinese workers. All of this can hardly be called the state support of Ukrainian rural population. The constant strengthening of the Chinese currency as against the dollar is worth noting, as well as the weakness of the Ukrainian Hryvnia against the US currency.

From the end of 2007 till the end of 2012, the Chinese Yuan surged against the Ukrainian Hryvnia by 85%. That is, every year additional costs related to devaluation of Hryvnia would make up 17% p.a. of the loan amount. The China's Central Bank discount rate is 6% and there will be a margin of a few percent. Therefore, the cost of the loan from China reaches 25% p.a., which is by no means cheaper than internal Hryvnia loan or loans in US dollars or euro from Western banks. There is no doubt that China is able to provide additional subsidies for loan use, which may include a lower interest rate and even currency risk coverage. However, it should be noted that China has a constant food shortage. As stated in 2012 by Mykola Prysyazhniuk, Minister for Agriculture and Food, one of the conditions for granting loan by China were guarantees of annual supplies of 2.5 million tons of corn. However, due to sharp fluctuations in yield, Ukraine may not always export grain as food needs of its citizens should be met first. The commitment to supply a certain amount of grain to China each year can undermine the food security of Ukraine and raise food prices. Also, the possibility of acquisition of ownership of Ukrainian lands by China might be dangerous. There is a threat that the Chinese state agencies will claim for land ownership in case of untimely or incomplete loan repayment..

Photo by ropz.odessa.ua 

It is inconsistent with the regulations of the Land Code that forbid acquiring ownership of land by foreign institutions. Currently, there is no reliable information about all terms of the loan. Therefore, it can be assumed what it will really mean for Ukraine. In any case, the foundation of PJSC "Agrarian Fund" seems like a project created to satisfy someone's personal needs rather than a state policy measure.

Volodymyr Makar, expert in agrarian policy and land relations, Head of the Ukrainian Agrarian Association for the Ekonomichna Pravda

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