How Europe can overcome the fear of Ukrainian agricultural holdings and help Ukrainian farmers survive until Ukraine joins the EU
Yuri Shchuklin, logistics expert, member of the Logistics Committee of the European Business Association
Governments of the neighbouring EU countries have introduced embargo on Ukrainian agricultural produce in reaction to the fears of their voters. However, these actions had not removed what European farmers are afraid of most of all but rather brought it closer. It was the petty Ukrainian agricultural producers who suffered the most because of the embargo, while their volumes and approaches to pricing were not a major threat to European markets. These agricultural entrepreneurs, who do not own means of transportation, infrastructure or logistics routes were forced to sell their grain to those who could take the grain to the markets. And this could be done by those who were in control of one or more important logistics resources: access to railway cars or to reloading, or to sea-going vessels allowed through the grain corridor. Big agricultural holdings in possession of their own optimized logistics system were more stable and have every possibility to take over the weaker players on the market. This corresponds to the logic that those who are the strongest will survive in business but speaks of the inevitable “latifundisation” of Ukrane’s agricultural sector, its radical growth and absorption and disappearance of smaller players who are responsible for half of the market as of today.
But this is exactly what Europe is afraid of most of all: our agricultural oligarchs, as they call them! Even now, European officials say that they want to admit Ukraine to the EU but they don’t know what to do with Ukraine;s agriculture. This issue is the major stumbling block in the future Eurointegration. It would be bad not to admit Ukraine, but to admit Ukraine would be even worse for themselves. Why are we beyond competition? Because the size of our smallest production entity does not match the size of theirs, so production costs of our worst production entity does not correspond to production costs of their best. The only reason is the volumes, because the big always works more efficiently. This is why the Europeans are stretched to the utmost: how to integrate Ukraine without violating the main principles of free trade; how to allow Ukraine to enter their markets but not to admit Ukraine there at the same time? So I suggest a solution when bans would not be necessary, yet it would be possible to avoid the agricultural holdings’ influence on the European market.
First of all, it is necessary to remove the drawbacks that hinder Ukraine’s accession to the civilized market. The United States Department of Agriculture is monitoring sowing areas around the globe, as well as yield rates and what is left of the tradable produce. On the basis of this data, the agency advises the US farmers what to sow and what not to, and also warns them on the risks of overproduction and the impossibility of sales. There’s also the institute of insuring against the risks of bad crops, as well as against the impossibility to sell. This is why the US farmers feel assured, while the country avoids shock and fall of prices at the domestic market. In addition, producers both in the USA and in Europe have access to a sufficient amount of shipping capacity: this means that the situation is impossible when the produced volume of commodities will lack infrastructure to reach the markets. Even if the limits are exceeded because of the excessive crop yield, it is certainly easier to jam this lesser unplanned part between the planned big volumes than to jam the big unplanned within the undetermined time (which is what is happening in Ukraine every year).
However, there are significant barriers to the civilized planning of sowing and logistics campaigns both in the USA and in Europe. First, our agricultural producers have no habit of insuring against risks. Second, we have a very big proportion of “black” and :gray” markets. Nowadays, everyone has switched to cash, and the question how to overcome this should be addressed to our officials. There is another peculiarity which distinguishes us from civilized countries. Ukrainian producers want to work at the forward market (sometimes, its share reaches 60 percent). However, when a first opportunity arises, when the market or prices have significantly changed as compared to the time of signing the contract, a significant part of producers would announce default. Let’s say, a producer has signed the forward contract in the spring with one price but the market in the autumn went up. So if the price difference reached US$50.00, it was small producers who would refuse to fulfill their obligations and would sell their reputation for 50 dollars. This was done because they had not suffered any consequences, and there were always those who were ready to buy for 50 dollars more. How to stimulate these producers to be honest and disciplined? The default on forward contracts should be made unprofitable, so that producers lose their opportunities to sell. Second, conditions should be introduced when businesses allowed to travel through Europe are “white”. Then, “the white” would gain the competitive advantage over “the black”, while at present there is no such thing. This could be appealing to Europe because then the competitive advantages of Ukrainian producers become equal to those of European producers, so there won’t be the reason to be afraid of our producers. This would be the same small and medium-sized business as they have in Europe, the business that pays taxes, works cash-free, and so on.
Europe is interested in developing a common logistics structure with Ukraine: significant European investment is proof to this, in particular, the CEF (Connecting Europe Facility), Solidarity Lanes, etc. Along with this, Europe does protect its farmers. Their production is not the most effective but it is acceptable for Europeans as this segment of the population manages their problems and does not ask for alms. So, in view of our inevitably common future, the EU has to equally think of our farmers, so that this segment of our population does not vanish before we are integrated.
The Solidarity Lanes’ capacity, as well as those of other infrastructure transit ways between Ukraine and the EU will be insufficient for the aggregate volume fo the Ukrainian agricultural export. The matter is, however, that all Ukrainian exporters do not need them. These ways have to be used only by those businesses which have already become integrated within Europe’s economy since the war had started. Next to the EU borders, where the narrow rail track reaches, Ukrainians have already implemented a number of infrastructure projects which provides opportunity to deliver produce to European processing businesses. Even these days, Ukrainian businesses are using for shipping their produce not Ukrainian but Polish railways leading to the port of Swinouijsci where they are trading like they used to do from the Black Sea ports. So, this segment of the Ukrainian business is already integrated into European economy. There’s no way back for this business, as there’s no way back for others like it, and even open ports won’t turn it back. Apart from infrastructure, it has, let’s say, gained experience and the markets that it won’t abandon.
Europe has to realise that the Ukrainian agricultural holdings, targeting the Chinese market, and small and medium-sized agricultural producers are of different business models and profess different pricing. What do I mean? One way of setting prices is linked to the average market price, and the other is linked to setting the rate of profit. Say, the business model of small and medium-sized producers who have already become integrated into the European market, does not anymore monitor the current market and the current global prices. They have already agreed with their clients that they will have their 20-50 Euro per ton, growing in return a certain amount of grain. One guarantees purchase, another guarantees production. If their crop yield fails, such a business is obliged to go to the market, buy as much as necessary and deliver to the stipulated point using the infrastructure and the logistics that is already in action. The producers of this segment have already left former relations when they were first growing something and then waiting for the price set by traders, and then competing at auctions for a piece of infrastructure. The question is how to detach this segment of producers from agricultural holdings and speculators? Elementary: early responsible planning, as if travel through Europe were planned today for a year'’ time from now. Only a producer knows whether they will sow or not, and on what areas. Speculators, of course, have options of whether to buy or not. But if those who produce and those who process already have the volumes of purchase from the producer, contracted in advance, the speculator cannot be sure that he will buy the commodity in every case. In contrast, those who process, may contract producers directly: I want to buy your future crop from you and I want you to confirm to me that you will sow a certain amount of land for me. It is at this stage that the planning of logistics happens, as well as the planning of export transit, and everything else. This means that European consumer and transit markets confirm to Ukrainian producers the volumes that they can reload, transport, or process.
The reat of the market does have the right to existence, too. It targets Africa, China, the world markets, and an unbelievable number of traders work there, and this is the realm of agricultural holdings! You, the Europeans won’t let this amount in, and this is understood. You, however, need a way of protecting your market without bans. So you don’t need bans: just the early responsible planning! The agricultural holdings market, working for Africa and Asia, does not necessarily have to join in this planning, it may retain the earlier situation. The agrarian businesses, however, have to have a choice: whether to merge into groups, into agricultural holdings, and play in the market, or remain a medium0-sized or small business and work with planned profit, planned sales, guaranteed transit, or guaranteed consumption. I think that these two systems have the right to coexist and not to impede each other’s development.
This year’s situation with the embargo on the Ukrainian agricultural produce had put Europe facing the dilemma: how to close markets in a way that this does not look like an open contempt of the principles of free trade. The answer is you can plan this free trade by planning your resources. And you can do this long-term, not necessarily for a month but for a year, or two, or three years. Thus, you will exclude shock. . You won’t openly ban anything for anyone. However, at the same time you will regulate not only the amounts but also the origin of the grain. It is understood that there is no sense in helping traders, big agricultural holdings enter the EU markets: they have big markets of their own: Africa, Asia, China. Meanwhile, the volumes from small agricultural producers will be sufficient for the European infrastructure. You can tell those small producers even now: all right, we have opened everything for you, just buy your tickets, and we will look at the load, we’ll calculate, and if we see that the load is huge, we won’t ban you from taking the train, we just won’t sell you the ticket. How do hotels and airlines operate? They do not forbid anything, they just say “You can’t book this for tomorrow but you can for the day after tomorrow.”
Shocks in economy result from insufficient of absent planning. Taking into account the volumes and speed of economic processes, there has to be constant monitoring of infrastructure’s data for today, for tomorrow, for the day after tomorrow, so that we see the shocks in store for us and, to use a phrase, put some cushion under ourselves. European consumers of Ukrainian produce could increase their processing capacities in advance, informing us on what they are prepared to purchase and having an understanding that they won’t inflict damage on their countries. This would mean integrating the Ukrainian agricultural sector without shocks. It would be best that we, together with European infrastructures, processing industry, could even now begin the planning from understanding that Ukraine is integrating into the EU at this time. It is necessary to at this time update data on enterprises, regions, owners, the infrastructure. In order to speed up information exchange and improve the analysis and infrastructure data with the data on planning production and trade, our IT team has already created a communicative environment. This technology of early production planning, of early [lanning of infrastructure load will untie the most complicated issues of Ukraine’s European integration.