Chapter 26. Ukraine
Support to agriculture
Producer support in Ukraine, as measured by the PSE, has been volatile over the past three decades, mostly reflecting changes in market price support (MPS).1 Since 1991, MPS has been negative in most years, reflecting average producer prices below international reference levels, but with significant variation across commodities and time. Protected by import tariffs, prices for most meat products and, depending on the year, sugar, have been aligned with or above international price levels. Those for several grains, sunflower seeds and milk have generally been somewhat below reference prices. However, the impact on prices of the state-owned Agrarian Fund and the State Food and Grain Corporation activities, and the annual MoU on grain exports is likely to be limited. Due to adverse political and economic conditions, producer support overall has been negative since 2014 as budgetary support in the form of tax benefits and input support has only partly offset this overall negative MPS.
Support for general services has been growing since 2015 but remains small compared to other countries. During 2016-18, the GSSE averaged 1.5% of agricultural value added, well below the level during the mid-1990s but twice the 2015 level. Most of these expenditures go to inspection and control services and agricultural schools.
Main policy changes
After the temporary replacement of the former VAT accumulation system by a (much smaller) “development subsidy” proportional to the VAT for a subset of agricultural commodities, neither of the two support measures was in place in 2018.
Taking effect in the 2018/19 marketing year, the sugar quota regime together with its minimum prices have been abolished.
In turn, funding for support related to the purchase of breeding animals or agricultural machinery and equipment increased significantly. Within those envelopes, specific payments were targeted towards smaller farmers. For the first time since 2013, livestock producers received significant support for the construction and reconstruction of animal farms and complexes, as well as per head payments for cows and young cattle.
In the context of aligning with EU legislation within the Deep and Comprehensive Free Trade Area, the State Service of Ukraine for Food Safety and Consumer Protection resumed official controls and veterinary checks. Funding for this service has grown five-fold in 2018. Drafting and adoption of sanitary and phytosanitary legislation has also accelerated, and 17 EU legal acts were adopted. Ukraine has also adopted relevant laws on animal welfare, consumer information related to food, and the production and marketing of organic food products.
Assessment and recommendations
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Producer prices in several of Ukraine’s export oriented sectors, notably for sunflower seed and milk, remain substantially below world price levels. Uncertainties related to the VAT treatment of exporting enterprises, the market activities (although limited) of state-owned enterprises as well as limitations in export infrastructure may contribute to this negative support. Ukraine could take more advantage of its agricultural competitiveness and should take additional steps to facilitate exports, including continued investments into the logistics and transportation system in line with growing export volumes.
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The abolishment of the VAT accumulation system and the “development subsidy” that followed in 2017, should help increase the efficiency in the sector. Both types of support were linked to VAT receipts and used by farmers for various production inputs. Ensuring well-functioning input markets, including for agricultural credits, remains key for improving farmers’ access to agricultural inputs.
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The repeated extension of the moratorium on the sale of agricultural land continues to put rigidities on the land market that prevent this key agricultural resource from being optimally allocated. The improvement of the economic viability and efficiency of the sector will also depend on overcoming these rigidities.
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Productivity in agriculture has grown at impressive rates over the past decade, but deteriorating capital stocks, likely caused by economic and political uncertainties, threaten future productivity growth. A return to macroeconomic and political stability will be critical for maintaining and developing a productive agricultural sector.
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Ukraine’s Nationally Determined Contribution to the 2015 Paris Agreement on Climate Change commits the country to greenhouse (GHG) emissions in 2030 not exceeding 60% of its 1990 levels, including from all agricultural and other land use sources. The recently approved Action Plan should help implementing a multi-sectoral monitoring, reporting and verification of GHG emissions. With agriculture responsible for more than 12% of national emissions, specific reduction targets and related policy action will need to complement this Plan for achieving the overall ambition.
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Public expenditures for general services have started to recover after the economic depression of 2014-15. Most importantly, this concerns the resumed inspection and control activities by the State Service of Ukraine for Food Safety and Consumer Protection, a key service for the export-oriented sector. To ensure high performance even under climate change of sector already sensitive to weather variability, Ukraine will need a well-functioning and sufficiently funded knowledge and information system. The government’s commitment to develop recommendations for adaptation to climate change and related advisory services will be important in this regard.
Note: * Share of potentially most distorting transfers in cumulated gross producer transfers.
Source: OECD (2019), "Producer and Consumer Support Estimates", OECD Agriculture statistics (database), https://doi.org/10.1787/agr-pcse-data-en.
Support to producers (%PSE) has been slightly negative for the past five years, averaging -2.1% of gross farm receipts during 2016-18. Negative market price support (MPS) for several exported products, worth 4% of total gross farm receipts, is only partly compensated by some positive MPS for pig meat and sugar, and some limited budgetary producer support. On average, producer prices are some 4% below the reference prices: the Nominal Rate of Protection (NRP) was 0.96 for the 2016-18 average, slightly higher than during 2000-02. As a consequence, more than 90% of gross producer transfers (whether positive or negative, i.e. expressed in absolute terms) are implemented in forms that are potentially most distorting, a share that has barely changed from the early 2000s. The negative MPS also drove the total support negative: the TSE corresponded to -0.4% of GDP during 2016-18 (Figure 26.1). Producer support has increased year-on-year (i.e. has become less negative) in 2018 mainly due to falling export prices for non-fat dairy products (Figure 26.2). Single commodity transfers (SCTs) mirror the MPS across commodities, with some grains, sunflower seed and milk being implicitly taxed while pig meat shows positive SCT worth 10% of its commodity gross farm receipts (Figure 26.3).
Source: OECD (2019), "Producer and Consumer Support Estimates", OECD Agriculture statistics (database), https://doi.org/10.1787/agr-pcse-data-en.
Source: OECD (2019), "Producer and Consumer Support Estimates", OECD Agriculture statistics (database), https://doi.org/10.1787/agr-pcse-data-en.
Contextual information
Ukraine is classified as an upper middle income country. It features a large area of fertile arable land, making agriculture a major sector of the economy compared to most other countries in this report: it accounts for 10% of the country’s economy and 15% of its employment. Agro-food exports represent more than 40% of Ukraine’s total exports.
Most of Ukraine’s agricultural area is arable, and crops represent some three-quarters of agricultural output, up from two-thirds in the mid-1990s.
Between 2013 and 2015, real GDP had fallen by 16% while inflation rates had risen to almost 50%, due to adverse political circumstances. Since then, the economy has grown steadily at rates between 2.4% and 3.3% per year while inflation rates have come down. Unemployment also rose in 2014 and continues to be high at almost 10% (Figure 26.4).
Ukraine is among the world’s leading exporters of grains and vegetable oils. Its agro-food exports have grown rapidly between the late 1990s and 2012, and export growth has resumed after the drop between 2012 and 2015, again due to adverse political circumstances. Most of Ukraine’s agro-food exports are intermediary, mainly primary, products for further processing. Imports, in turn, are more mixed, with primary and processed products for final consumption representing almost 60% of agro-food imports (Figure 26.5).
Sources: OECD statistical databases; World Bank, WDI and ILO estimates and projections.
Note: Numbers may not add up to 100 due to rounding.
Source: UN Comtrade Database.
Both agricultural output and total factor productivity grew at rates significantly above global averages, at more than 4% and 3.1% per year in the decade ending 2015, respectively. Output was also driven by intermediate input growth, while the use of primary factors, notably of capital, shrank. The shrinking capital stock may pose a risk for continued productivity growth in the future (Figure 26.6).
Despite the declining importance of agriculture within the economy, agriculture’s shares in the country’s energy use and GHG emissions have increased since the mid-1990s. In contrast, nutrient balances are much lower today than back then (Table 26.3).
Note: Primary factors comprise labour, land, livestock and machinery.
Source: USDA Economic Research Service Agricultural Productivity database.
Description of policy developments
Main policy instruments
Ukraine’s agricultural policy measures are formulated in a number of major laws and decisions. The law “On State Support of Agriculture in Ukraine” defines priorities and measures of agricultural policy. The “Concept of Rural Development in Ukraine”, approved in 2015, provides priorities for the development of rural areas in Ukraine until 2025. Ukraine’s policies are increasingly influenced by the Association Agreement with the European Union, ratified by Ukraine in 2014. Finally, the financial scope of agricultural policies is defined in the annual law “On State Budget of Ukraine”.
The “Comprehensive Strategy of Implementing Legislation on Sanitary and Phytosanitary Measures” was approved in 2016 and provides for a process of harmonisation of Ukraine’s SPS legislation with EU requirements, and stipulates the objective to emulate in Ukraine, by 2019, a system of food quality control similar to the European one.
Ukraine’s legislation provides for a range of instruments to intervene in agricultural markets. These include tariff protection, non-tariff trade regulation, and various forms of domestic price measures. The state agency Agrarian Fund can implement domestic price interventions through the operation of the State Intervention Fund. Initially dealing only with grain, the Agrarian Fund has become progressively involved in other activities, such as sugar commodity interventions, state purchases and sales of a broad range of agricultural and food products, forward-contracting, flour processing and wholesaling.
For purchases by the Agrarian Fund, official minimum and maximum intervention prices are set, and cover commodities that are “objects of state regulation”. The exact list of such products and the periods during which these administered prices will be in effect are defined by specific government decrees. Minimum prices do not play a role of guaranteed prices but are regarded as a floor-price reference for private market operators. Minimum intervention prices should not exceed domestic market price levels to comply with the Ukraine’s WTO domestic support commitment. While until 2016, the Agrarian Fund has continued to procure grains under this mechanism, during the 2016/17-2018/19 marketing years no budgetary funds have been allocated to state interventions, and corresponding minimum prices have not been set.
Agricultural producers are eligible for a Single Tax (the Fixed Agricultural Tax before 2015), which is set as a percentage of agricultural land value, established on 1 July 1995 and adjusted since with the general consumer price index. Introduced in 1998, the Single Tax originally replaced twelve taxes for which agricultural enterprises were liable as business entities. The implied benefits from this tax have been narrowing since then. At present, the Single Tax replaces only three taxes – profit tax, land tax (for land used in agricultural production), and special water use fee – with agricultural producers liable to all other taxes due on agricultural businesses. The Single Tax regime generates implicit tax benefits to agricultural producers which for recent years were estimated to be around UAH 4.3 billion (USD 158 million) annually.
Since 2002, a moratorium on the sale of agricultural land bans selling farmland in Ukraine, although leasing for cultivation is permitted. In December 2018, this moratorium was extended again for 2019.
On 27 June 2014, the European Union and Ukraine signed the Deep and Comprehensive Free Trade Area (DCFTA) as part of their Association Agreement. It became provisionally applied from 1 January 2016 and formally entered into force on 1 September 2017. The liberalisation of trade between the European Union and Ukraine is to be implemented within a transition period of seven to ten years. The European Union opens zero-tariff rate quotas for Ukraine’s principal agro-food products, such as grain, meat and milk products, and sugar, and grants free access for the others. Ukraine reduced import duties for a number of goods imported from the European Union. About 40% of agriculture-related import duties were reduced to zero immediately after the Agreement entered into force, and around a half of import duties will be eliminated during the transition period. However, about 10% of tariff lines covering selected products in such product categories as dairy and eggs, sugar, miscellaneous edible products, animal oils and fats, feeding stuff for animals will preserve non-zero tariffs. Since 1 January 2016, Ukraine applies three TRQs with zero in-quota tariffs for imports from the EU of pig meat, poultry meat and poultry meat preparations, and sugar, respectively. Ukraine has secured the right to use safeguard measures and additional trading conditions (e.g. to apply entry prices for a certain number of tariff lines). The parties committed to apply no export subsidies for mutually traded agricultural goods.
The DCFTA incorporates fundamental WTO rules on non-tariff barriers, such as prohibition of import and export restrictions, disciplines on state trading etc. The main barrier for trade integration remains Ukraine’s difficulty in complying with EU food safety, veterinary and phytosanitary requirements. Thus, the DCFTA contains provisions for technical regulations, standards and conformity assessments to harmonise with those of the European Union, as well as for technical co-operation in the field of technical regulations, standards and related issues between Ukraine and the European Union.
Ukraine signed the Paris Agreement of the United Nations Framework Convention on Climate Change in April 2016, and ratified it in September 2016. Through its Nationally Determined Contribution, Ukraine committed to total emissions across sectors, including agriculture, not exceeding 60% of those in 1990 (equivalent to not exceeding 140% of those in 2012). In December 2016, the Cabinet of Ministers of Ukraine (CMU) adopted the National Concept of State Policy in the Field of Climate Change up to 2030. The “Strategy for Low Carbon Development of Ukraine up to 2050” (SLCD) has been approved by the Cabinet of Ministries of Ukraine in July 2018. The SLCD defines a co-ordinated approach by various parties concerned and provides a national vision for separating economic growth and social development from the increase of greenhouse gas emissions. The Action Plan for the implementation of this Concept was approved by the CMU in late 2018 (see below). In addition, the Ministry of Agrarian Policy and Food (MAPF) is developing measures to improve environmental practices related to the adaptation of agriculture and forestry to climate change, in line with the obligations under the Association Agreement with the European Union.
Domestic policy developments in 2018-19
Ukraine’s legislative framework has seen a number of developments: The “Concept of Development of Farms and Agricultural Cooperatives for 2018-20”, approved by the Cabinet Ministers of Ukraine (CMU), provides the relevant conditions for the implementation of support programs for concessional loans and for the encouragement of agricultural co-operatives. The “Action Plan of the Strategy for the Development of Small and Medium Enterprises”, adopted in May 2018, allows for specific support measures for SMEs and addresses the modernisation of the relevant regulatory framework, following up on analyses undertaken by the EU-financed Better Regulation Delivery Office.
The Law “On the State Control for Conformity with Legislation on the Safety and Quality of Food and Feed, Animal Health and Wellbeing” adopted by the national Parliament in May 2017, and in force since April 2018, regulates the state’s control of production facilities to ensure the desired level of protection of human health and consumer interests. It also provides for reduced physical inspections of imported agricultural and food products into the customs territory of Ukraine subject to certain requirements regarding the type of product imported and its origin, and conditional on a prescribed set of documentation.
The Law “On Feed Safety and Hygiene”, adopted by the national Parliament in December 2017 and in , is to come into force in January 2020, sets legal and organisational principles for production, circulation, labelling and presentation of feedstuff, and regulates the relations between executive authorities2 and feed market operators.
After substantial reductions, the state budget for supporting the Ukrainian agricultural sector was significantly increased since 2016. In 2018, total expenses by the Ministry of Agrarian Policy and Food of Ukraine for direct subsidies to agricultural producers amounted to UAH 4.2 billion (USD 154 million), up from UAH 0.3 billion (USD 12 million) in 2016 when most of the support had been provided through public revenues foregone.
Livestock producers benefitted from specific support programmes in 2018: UAH 1 340 million (USD 49 million) were allocated for the partial reimbursement of costs related to the construction and reconstruction of animal farms and complexes. Another UAH 512 million and UAH 320 million (USD 19 million and USD 12 million) were directed to agricultural enterprises as a subsidy per head of cows and to rural households as a subsidy per head of young cattle, respectively.
As in 2017, the programme “State support of animal husbandry” provided partial compensation to agricultural producers purchasing high breeding animals. Allocations in 2018 significantly exceeded those in 2017 and amounted to UAH 215 million (in 2017: UAH 11.7 million) (USD 7.9 million and USD 0.4 million, respectively). In contrast, no allocations were made for debt repayment under the same programme, which had provided UAH 158 million (USD 5.9 million) to livestock producers in 2017.
Similar to the programme “Partial compensation of interest on commercial bank credit”, re-activated in 2015, the Ministry continued to support agricultural enterprises through the programme “Financial support in agriculture through preferential credits” to the tune of UAH 266 million (USD 9.8 million) in 2018. In addition, the state programmes “Financial support for farm development” and “State support of livestock sector”, transferred UAH 8.5 million and UAH 3.7 million (USD 0.3 million and USD 0.1 million) to support short-term loans, respectively. The state programme “Financial support for farm development” additionally included a subsidy of UAH 6.4 million (USD 0.2 million) to partially compensate costs for seeds for smaller farmers.
Funding of the “Subsidy for partial compensation of agricultural machinery and equipment” has been increased almost eight-fold from its 2017 volume, comprising a total of UAH 1 020 million (USD 34 million), including UAH 108 million (USD 4 million) specifically earmarked for smaller farms3.
Specific support also continued to be provided for planting material and the construction of refrigerators for orchards, vineyards and berry fields. At UAH 394 million (USD 14 million), this support was slightly smaller in 2018 than in the preceding year, when funds were also available for debt repayments.
From 1999 to 1 January 2017, significant support to agricultural producers had been provided through unpaid VAT, which was accumulated on special accounts and used for input purchases. In 2017, the VAT accumulation system was abolished, with the payment of a “Development Subsidy” with similar characteristics of being based on VAT receipts and spent for various production inputs having been paid instead. Since 2018, this form of support has ceased to be provided to agricultural producers.
The sugar production quota system has been abolished since September 2018, and minimum prices for sugar beet within the sugar quota no longer exist, putting an end to a system developed in the late 1990s. The sugar quota regime had been another element of price support policy. Reflecting domestic beet production, a national marketing quota for sugar produced from sugar beet and sold on the domestic market used to be set annually, together with the minimum in-quota prices for sugar beet and sugar. This quota, allocated to individual sugar plants, had not accounted for sugar processed from imported raw cane sugar, which had been subject to a Tariff Rate Quota (TRQ).
During 2018, the State Service of Ukraine for Food Safety and Consumer Protection resumed its official controls and veterinary checks, following the entry into force of the “Law on State Control for Food, Feed, Animal Health and Animal Welfare” in April 2018. Furthermore, the drafting and adoption of sanitary and phytosanitary (SPS) legislation has accelerated, with 17 legal acts compatible with EU legislation adopted and more than 140 others put in the legislative process during 2017-18.
The Law “On Foodstuff Information”, adopted in December 2018, establishes the legal and organisational groundwork for providing food information to consumers, aiming at a high level protection of citizens’ health, well-being, social and economic interests. In particular, the law defines relevant terminology and specific obligations of food market operators, including regarding the specific placement of information, labelling and others.
The Law “On the Basic Principles and Requirements for Organic Production, Circulation and Labelling of Organic Products”, adopted in July 2018, provides the main framework for the production of organic food products and the functioning of the market for organic products. It also defines the roles and obligations for public authorities and organic market operators, and lays out further public policy directions for the development of organic product markets.
Budget allocations for land reforms have more than tripled in 2018 compared to 2017, and reached UAH 342 million (USD 12.5 million). Among the financed work was a normative monetary valuation of agricultural land for all of Ukraine. The results of this valuation are used for the State Land Cadastre and made available to users online and free of charge.
Smaller farmers benefitted from the compensation of up to 90% of costs for extension services. A total of UAH 0.2 million (USD 7 300) were allocated to this support in 2018.
Ukraine made further steps towards implementing its commitments under the 2016 Paris Agreement of the UNFCCC. In December 2018, the CMU approved the Action Plan on the implementation of the Concept for the Implementation of the State Policy on Climate Change for the Period up to 2030. The multi-sectoral Action Plan foresees constant monitoring, reporting and verification of greenhouse gas emissions, emissions trading, the application of financial instruments for emission reductions, and mechanisms towards public-private partnerships. The Government also commits to develop, during the 2019-20 biennium, recommendations for the adaptation of agriculture to climatic changes and as well as a medium-term action plan for the adaptation of forestry. Both the recommendations and a corresponding allocation of budgetary funds are conditions for public activities on spatially specific advice for agricultural producers regarding the risks associated with future climate change.
The Laws “On Environmental Impact Assessment” and “On Strategic Environmental Assessment” adopted in May 2017 and March 2018, respectively, provide for the legal basis for environmental assessments in Ukraine. The former establishes the principles of environmental impact assessments (EIAs) which aim at preventing environmental damage, ensuring environmental safety, environmental protection, efficient use and renewal of natural resources in the political decision-making process related to economic activities with potentially significant environmental impact. In turn, the latter law mandates strategic environmental assessments, including mandatory public consultations, for a variety of projects including in agriculture; among others, it establishes relevant procedures for the implementation and approval of such strategic environmental assessments.
The Ministry of Agrarian Policy and Food is being restructured, giving specific attention to the sustainable management of forestry and fisheries resources.
Trade policy developments in 2018-19
Ukraine has been a member of the WTO since 2008. The country charges import tariffs on most agricultural products, with applied MFN tariffs averaging at 9.2%. While most imports face ad valorem tariffs, Ukraine maintains a global tariff-rate quota for raw cane sugar which, however, has not been used since 2014. Export duties are applied to some oilseeds, live animals, raw hides and a few non-agricultural products. Furthermore, Ukraine has suspended VAT refunds for exports of soybeans from September 2018, and for exports of rapeseed from January 2020; both suspensions are scheduled to last until December 2021.
The Canada-Ukraine Free Trade Agreement (CUFTA) came into force in August 2017 as Ukraine’s fourth trade agreement, adding to those with the rest of the Commonwealth of Independent States,4 with the European Free Trade Association, and with the European Union. The FTA with Israel was signed in January 2019 but is yet to be put in force, pending ratification of the signatories. Negotiations on a FTA with Turkey are ongoing.
In response to a suspension by the Russian Federation of its free trade regime with Ukraine under the Agreement on Free Trade in the Commonwealth of Independent States (CIS) Area and the implementation of a ban by the Russian Federation on imports of agro-food products from Ukraine, Ukraine in turn has suspended trade preferences for imports from the Russian Federation foreseen by the CIS FTA. Ukraine has banned imports of a list of 43 agricultural goods from the Russian Federation. This list includes meat and meat by-products, fish, milk and dairy products, tea, coffee, grain and its processing products, vegetable and animal oils, confectionery, baby foods, beer, vodka, ethyl alcohol, cigarettes and others. In December 2018, the suspension of trade preferences and the ban on specific imports were further prolonged until the end of 2019. Anti-dumping duties for chocolate and other cocoa-based food products produced in the Russian Federation, effective from 20 June 2017 for a period of five years, continue to be in place.
In August 2018, the Ministry of Agrarian Policy and Food and main associations of grain exporters signed the traditional Memorandum of Understanding (MoU) on recommended volumes of grain exports. This non-binding agreement puts maximum export quantities of wheat and meslin (including flour in grain equivalent) during the 2018/19 marketing year at 16 million tonnes, slightly less than agreed for the preceding marketing year (16.5 million tonnes). These quantities can be revised during the marketing year, and actual exports have repeatedly exceeded agreed volumes in the past. Export targets for other grain types were not set by the 2018 MoU.
The new Export Promotion Office has been established in 2018 as a consultative and advisory body under the Ministry of Economic Development and Trade of Ukraine, to help Ukrainian exporters in opening new markets. It provides assistance to both Ukrainian exporters and foreign importers.
Moreover, and per request by the CMU, a new Export Credit Agency was created in late 2018. This new agency is to facilitate Ukraine’s transition from a raw material exporter to a supplier of value added goods and services.
Notes
← 1. Market price support data have been revised backwards for a number of commodities, including for all grains, sugar, pig meat, poultry, and milk. Revisions relate to updated transport and processing margins, changed trade status, the choice of reference prices, and zeroing market price differentials in the absence of relevant policies. Revisions affect the whole time series since 1986, with adjustments being most significant for the years from 2013 onwards, for which MPS estimates (and, hence, PSE estimates) are less negative than before.
← 2. Cabinet of Ministers of Ukraine (CMU), Ministry of Agrarian Policy and Food (MAPF) and State Service of Ukraine for Food Safety and Consumer Protection (SSUFSCP).
← 3. In Ukraine, the term “farm” is used for privately owned agricultural enterprises, as opposed to other legal forms such as business partnerships, co-operatives or state enterprises. “Smaller farms” are those using up to 500 hectares of agricultural land and with net revenues of the preceding year not exceeding UAH 15 million (USD 0.55 million).
← 4. Other members and associate members include Armenia, Azerbaijan, Belarus, Kazakhstan, Kyrgyzstan, Moldova, the Russian Federation, and Turkmenistan.