The lifting of the moratorium on the sale of agricultural land will change the conditions of doing business. What threats will farmers face? EasyBusiness study
The issue of the moratorium is discussed from the perspective of different stakeholders. Some of the most heated discussions are held around the potential losses of small businesses from implementing government-proposed initiatives.
Everyone states that lifting the moratorium is a pain in the rear for farmers and that they are bound to lose.
The lifting of the moratorium on the sale of agricultural land will indeed change the conditions for doing business in the agricultural sector.
However, the opening of the land market may bring not only losses. In addition to potential threats, it will bring many new opportunities that will allow the business not only to lose its efficiency but also to get more benefits.
We have tried to investigate the likelihood of the threats that are being discussed in society and what business should do so that land reform could have an exceptionally positive impact.
To do this, we have considered the issue of opening up the land market through the example of an imaginary farmer Ivan and an agricultural holding Rapeseed Capital.
Despite the stereotypes of large-scale land grabbing by big players, the biggest risk of opening up the land market to businesses is increase in land plot prices. Initially, farmers will compete with big players for the opportunity to buy or lease land. And then farmers and agricultural holdings will encounter the issue of maintaining or increasing their margins.
Risk 1: Competition with agricultural holdings and foreigners
The word “foreigners” has recently caused a negative response from farmers, as they fear big players will buy up land without giving any chance to others. Foreigners (subject to the registration of a legal entity in Ukraine) or agricultural holdings are scary only because they can offer land owners a higher price. Farmers fear that farmers will demand urgent termination of current lease agreements: landowners will feel the opportunity to earn more and will not even think about the development of small business in Ukraine.
This risk lies on the surface and is understood not only by farmers who may be affected by it, but also by the government, which has assumed responsibility for launching the process of opening the land market. That is why draft laws that are registered with the Verkhovna Rada include provisions that will minimize or counterbalance this risk. Such initiatives include the pre-emptive right to purchase land by its current lessees and various financial instruments, including the reduction of land purchase loans.
However, farmers shall not live by protection alone. They bear sole responsibility for their further destiny.
Risk 2: Margin reduction
No matter how substantial the state support is, the lifting of the moratorium on land sale will sooner or later lead to higher costs for businesses as a result of rising land prices: either after the expiration of the lease under current agreements or after early agreement termination. This will have an impact on the margin of doing business and, potentially, make it less profitable or even unprofitable. Maintaining an optimal level of production margins is possible provided that the company’s revenue is further increased or its costs are optimized.
At the same time, the possibility of buying land, rather than a permanent extension of the lease agreements, will give an impetus to the growth of agricultural enterprises, as it will facilitate the transition to long-term planning and activate investment in land. Declining profitability will encourage companies to look for ways to optimize and drive their development.
Let’s try to understand in detail the opportunities for businesses in the agricultural sector. In general, we propose to consider 4 options, namely export of products, processing of products, cultivation of crops with high margin, increased use of agricultural technologies.
Option 1 – Products export
The domestic market is very limited and, with constant demand, every additional ton of production will lower the price. One solution to this problem is to start exporting. Although exporting unprocessed crops to the foreign market is not the best option for the economy of the country as a whole, it is often the only way for farmers to increase their income. Exporting products can bring an enterprise an increase in sales, higher profits due to higher prices in the international market and lower risks due to diversification of sales geography.
Option 2 – Products processing
Cultivation of crops and their subsequent sale in the form of raw materials is the simplest model of doing business in the agricultural sector. It requires minimal effort from a farmer, and often involves only finding buyers. However, this model is the least profitable. The processing of agricultural products is an opportunity to create added value and earn greater profits. Installing capacity and moving on to each subsequent processing step adds value. In particular, processing soybeans into oil and subsequently into margarine can bring the enterprise more than $ 1,000 in value added per tonne of produce.
Option 3 – Cultivation of high-margin crops
The share of high-margin crops in the overall structure of cultivation is a mere 7% in Ukraine, while in the Netherlands it reaches 88%. The most common crops on the Ukrainian market are cereals and oilseeds, including wheat, sunflower, corn, barley, soybeans, etc. And more marginal crops such as vegetables, fruits and berries are unpopular in the domestic market.
High-margin crops tend to be more demanding and require more start-up investment, but they yield significantly higher profits and other market benefits at the market. This is what makes this model profitable for businesses, because it brings higher margins, allows us to enter the markets with less competition and improve the plant health in the fields.
Option 4 – Increased use of agricultural technologies
The development of agricultural technologies is stimulated by new global trends, in particular population growth and the gradual depletion of water resources. Today, agrotechnology can improve the production of agricultural products by increasing the efficiency of growing or optimizing the costs of the enterprise. Even now, agricultural enterprises worldwide are feeling the need to invest in AgTech (using modern technology in agriculture to improve agribusiness). Acceleration translates into the 27% annual growth in investment in the industry. Common advantages of agricultural technologies: increase in cultivation performance; decrease in the cost of cultivation by saving on seeds, fertilizers, fuel, etc. and more efficient planning of activities by using production data analysis.
As we can see, with the right policies in place to launch the land market in Ukraine, lifting of the moratorium will have a positive impact on business activities. Reducing margins will stimulate agricultural development and will serve as an impetus for the transformation of the Ukrainian agricultural sector.