Key inputs used in crop farming Ukraine`s climate favorable for low-cost agriculture

Ukraine has a temperate continental climate with annual precipitation of 500 mm, 300 mm of which falls during the growing season (April to October). 62% of Ukraine’s agricultural land is covered by superior quality black soil which contains an enriched humus layer (40-60 cm vs. 10-30 cm in neighboring EU countries).

Soil fertility map

Source: Ministry of Agrarian Policy of Ukraine

As in Russia, crops in Ukraine are harvested once per year with a normal growing season from April to October. This is different from Argentina and Brazil, which are located in the Southern hemisphere.

Another difference with Brazil and Argentina is that up to 15% of fields there can deliver crops twice per year (soybean first, corn second), though with a lower yield during the second harvest. Ukraine historically produces one crop per year, though some agronomists argue that southern regions could deliver two crops.

Machinery use far below developed countries

Tractor use in Ukraine is generally on par with Brazil and Argentina, but more prevalent than in Russia. Comparison to the EU and US averages shows significant underutilization of equipment by all four UBRA countries (some part of the gap to the EU figure can be explained by its historical focus on low-scale business models and usage of smaller tractors).

Tractors per 100 sq km of arable land

Source: FAO Statistical Yearbook 2012

Land trade moratorium makes more benefits

Agricultural land is not tradable in Ukraine, unlike in Russia, Brazil and Argentina. The moratorium on the sale of agricultural land was set by parliament more than a decade ago when ownership rights for agricultural land were introduced and has been prolonged on an annual basis, even though the market has been flooded with rumors the moratorium would be abolished for at least the last five years.

Farming companies lease land, primarily from individuals, in small plot sizes (1.5 ha on average) at a cost of USD 35-90/ha, with lease tenors of three to ten years common. Should land become tradable, current leaseholders have a preemptive right to purchase the plot.

Without exception, all public companies we have talked to have said they prefer the current framework where all companies are leasing land. There are several reasons why we agree with the companies and prefer the lease business model:

• Lower capital intensity, with only USD 500-1,500/ha needed for operations on leased land, while its buyout could require additional USD 2,000-10,000/ha

• Farmers focus on operating efficiencies rather than landbank appreciation (all listed Brazil and Argentinean farming companies are more developers than farmers: they plant only 40%-75% of their landbank and derive around 3/4 of their ROE from landbank appreciation)

• Higher growth opportunities, as lease rights acquisition varies in the range of USD 250-1,000/ha vs. the minimum estimate for land prices of USD 2,000/ha