1. UKRAINIAN AGRICULTURE: POLICY TARGETS AND REALITY. THE ROLE OF SMES.
Anna Kuznetsova (e-mail: gkuznetsova@kse.org.ua, independent researcher, Kiev , Ukraine)
Vladimir Yefimov (e-mail: vyefimov@gmail.com, head of Ukrainian Association of Exporters and Importers,
deputy director of Center of universal ecological innovations, Kiev, Ukraine)
ABSTRACT
Since early 2014 Ukraine went into its turbulent and challenging times. The government was abruptly
changed, the territorial integrity was put under threat, accompanied by numerous death, causalities,
internal displacement of people, destruction of infrastructure, economic downturn and respective
social consequences. The only possible way out from this situation for Ukraine was to call for
international support that requested fast start of wide reforms in all economic spheres. Agriculture
was one of few economic sectors that demonstrated growth over the last few years, being potentially
attractive for investors. Therefore, the government created 24 working groups to implement reforms
in agriculture.
The article consists of two parts. The first part called policy targets summarizes the work process
[description of problems and possible solutions] of above-mentioned 24 working groups in 8 sub-
spheres of agricultural policy (approximation of Ukrainian legislation to the EU’s, deregulation of the
sector, improving production environment, market organization, food security, developing
agricultural policy for the spheres of science, education and innovations, developing rural territories
and managing agricultural resources, as well as reforming state support and tax mechanisms in
agriculture). The second part describes two business cases: production of pellets and production of
walnuts in Ukraine – to show the reader the possibilities for business development in agriculture
under challenging policy environment.
KEYWORDS: agriculture, policy, legislation, reform, production, business, pellets, walnuts.
I. POLICY TARGETS
On March 15, 2015 the Ministry of agricultural and food policy of Ukraine published the Strategy of
agriculture and rural development for 2015-2020. The objective of this strategic document is to improve
competitiveness of the sector and contribute to development of rural territories in line with European and
international standards. In particular, the strategy aims:
(1) To approximate Ukrainian agricultural legislation to the EU’s ones. The emphasis here will be put on food
safety, sanitary and phytosanitary measures, as well as on other key points in the government action plan
2014-2017 to implement EU-Ukraine Association Agreement (quality issues, organic agriculture, GMO
labeling, trade standards for seeds, reproductive material, animal products, etc.)
Box 1: State of affairs with approximation of legislation
As a member of World Trade Organization since 2008, World animal protection organization since 1994,
Codex Alimentarius Commission since 2004, International Plant Protection Convention since 2006 and
European and Mediterranean Plant Protection Organization, Ukraine has already passed many measures to
protect animals and plants in line with WTO sanitary and phytosanitary (SPS) agreement. A high stimulus for
Ukraine to approximate its SPS legislation is the aim to fully use its agriculture and food export capacity for
the EU market. EU estimates current approximation of Ukrainian SPS legislation as B (estimation: A, B, C).
The challenges for Ukraine are a large quantity of legislation to be harmonized as compared to limited
qualified human resources, lack of practical knowledge, difficulties to optimize laboratory network,
prioritization for the legislation in the sub-sectors that can first bring added value, etc.
(2) To deregulate the sector. Here the government aims to address (review) the issues where government
interference was more than required, as well as to implement reforms in the sphere of state property and
activities of state enterprises.
Box 2: Somefacts of state regulation of agricultural market
Ukraine is rated 96 by the World Bank by the easiness of doing business. About the same places Ukraine
has in its gross national product and purchase power. Much research shows the link between regulatory
environment of doing business and corruption levels, national income, investment attractiveness, economic
stability, etc. Ukrainian agricultural market players find currently complicated administrative procedures the
lowest difficulty for them in comparison to bribes required, delays during transportation of products due to
procedural obstacles (that can f.e. result in spoiling of food products), high market monopolization,
unfavorable investment climate etc.On April 2, 2015 the President of Ukraine signed the Law of Ukraine on
easiness of doing business in Ukraine with the purpose to deregulate economic activity (in particular in

2. agriculture, f.e. to stimulate rational use of agricultural land and improve lease relationship) that is expected
to improve the position of Ukraine in Doing Business Rating. The Law also eases the procedure of opening
and running business, decrease administrative burden and influence of state bodies on business entities,
better protects rights of investors, improves the financing mechanism of State registration service.
However, since beginning of 2015 amendments to the Tax Code of Ukraine and other legislative acts
increased the fiscal burden on population, middle class and SMEs. Excise taxes, land taxes, taxes for real
estate were increased; taxes for bank deposits and war tax have recently been introduced. Single-tax payers
and private entrepreneurs got additional property tax as well as increased tax on dividends. Only charity
organizations that implement projects to support internally displaced people are tax exempted; other NGOs
have to pay a tax from now on. Overall, according to the State Budget Law 2015, income of the state budget
is expected to increase among others for the expense of value-added tax (VAT) for the goods produced or
imported to Ukraine, as well as its cash reimbursements (in total for UAH 15.8 billion), as well as for the
expense of income tax by UAH 2.3 billion, and import duties – by UAH 2.1 billion. Against the background
of economic downturn, these developments create additional challenges for SMEs to survive.
On the other hand, there are amendments to the legislation that aim at increasing the transparency of
Ukrainian economy. Among them are so-called tax compromises until April 2015 proposing legal entities to
pay hidden income and VAT taxes in the amount of 5% of the accumulated tax debt, or introduction of
obligatory official labor contracts, “white” wage payments and increased social security, or introduction of
electronic VAT administration, or ease of registration procedure etc.
Concerning agricultural producers, in particular, they were included into a special, the forth , group of single
tax payers, and existed for them before fixed agricultural tax was cancelled. Single tax was decreased from
3(5)% to 2% for VAT-payers and from 5(7)% to 4% when VAT is not paid. Also agricultural sphere got the
preference in property taxation receiving tax exemption for non-residential property used in agricultural
sphere (small buildings at markets and used for small businesses were also exempted from the property
tax). VAT exemption for grain and technical crops exporters (not producers) have been prolonged until
December 31, 2017. Additional import tax of 10% was introduced (on February 25, 2015) for live animals,
products of animal and veg-origin, food and other production of 1-24 groups temporary for 12 months.
Another aspect is relationship between state-owned and privately owned companies. Above 1800 registered
state companies have share in agriculture; 56 of them are corporations with 5-100% state share (the largest
of them are State food-grain corporation and State agrarian fund). Not saying about often artificially created
preferences for state-owned companies, also these companies are often loss-making and a number of cases
show ineffective use of attracted loans under state guarantees (f.e. state agricultural enterprises owe about 1
billion USD loans to the state budget that they were not able to give back on their own; this amount is much
more than the total sum of budget allocated tax privileges to the whole agricultural sector or about 17 years
of profile ministerial budget).
(3) To improve production environment (i.e. land market reform, access to finance, modernization of
production and processing capacities, infrastructure and logistics).
Box 3: General agricultural production environment
Access to finance. According to ministerial data, 75% of agricultural companies have limited access to
finance that is the key obstacle to expansion and innovation. The internal financing from theown capital is
prevailing for agribusiness (i.e. about 60% from profit accumulation and 13% from shareholder capital). The
external financing was very limited even before the economic, financial and political crisis currently taking
place in Ukraine (28% could be accessed via bank loans and 11% - via supplier trade credits); now banking
system is in a very poor condition that made access to bank loans almost impossible for agricultural SMEs.
About half of agricultural producers sell more than 80% of their harvest right after the harvesting campaign
due to necessity to refill their working capital. SMEs are the most vulnerable category here, who has very
limited access to short-term loans to refill working capital and almost no access to long-term loans. On the
other hand agriholdings succeed in attracting short-term loans, while long-term loans remain the challenge
for them as well. Agricultural crop receipts are currently seen by many market players (incl. international
financial institutions (IFIs)) as a good instrument to decrease the gap between demand and supply for
external financing.
Land market.Ukraine possesses 41.6 million ha of agricultural land (69% of the whole territory of Ukraine)
with 32.5 million ha of arable land. About a half of arable land of Ukraine and 1/3 of world stocks are black
soils. With the annexation of Crimea and start of the armed conflict in Donetsk and Luhansk oblasts, the
stock of Ukrainian agricultural land started to decrease. Anyway the land reform that has been ongoing over
two descents is very needed for Ukraine. Up to date achievement of the land reform is (i) reallocation of
Soviet kolkhoz land to private owners (30.8 million ha) and to the state property (10.7 million ha), and (ii)
creation and improvement of legislative basis that is currently consists of the Constitution of Ukraine, Land
Codex, and relevant laws such as on land lease, state land cadaster, land management, land evaluation and
land protection. However, the Moratorium on land sale and purchase is still in place, cadaster and property

3. rights registration/ protection systems are complicated and incomplete; the imbalance of interests of
landholders (especially small ones) and landlords is highly present, annual land degradation reaches more
than 500 million tons of land (or about 5 billion USD), land property is highly fragmented (6.92 million of land
owners; 84.5% or 20.3 million ha of their land is leased by agricultural enterprises that increase transaction
costs), poor administration and public involvement as well as high corruption are observed (existence of
black market for land sale, bribes, lack of transparency, inefficient or no use of many land plots). Also
agriholdings are very influential in Ukraine; their land bank is continuously growing (f.e. the largest Ukrainian
agriholding owns 670 thd ha of land, top 10 largest –over 3 million ha) decreasing the possibilities of
development for SMEs in agriculture.
Technical capacity.Mechanization of Ukrainian agricultural sector is outdated and low in quantity and quality
(f.e. to replace the outdated agricultural machinery Ukraine annually needs to renew about 40 thd tractors
and 7 thd grain combines for more than 35 billion UAH). Also Ukraine has not enough and outdated
processing capacities to efficiently process grown in the country crops and animals, as well as to deliver it to
final consumers (due to high transportation and storage costs). The sector is export oriented.
Infrastructure and logistics. About 2/3 of grains in delivered to ports via railway, 1/3 via autotransport and
only 3% via rivers. Grain and oilseeds total storage and daily load capacities are continuously growing and
today constitute about 36 and 1.5 million tonsrespectively. About 15% of storage capacity is state owned.
Before the start of conflict Ukraine had 16 state-owned sea ports and 7 privately owned. The logistic costs
due to inefficiency of logistics in Ukraine are about 30% higher than in other countries of the World. Also the
quantity of wholesale and local markets, as well as information infrastructure is not sufficient to meet the
demand (especially from SMEs and households). Small farmers and households produce up to 80% of
market share for raw milk and cattle meat, about 50% of pork, and above 20% of fruits and vegetables;
however, the infrastructure to effectively and transparently sell their production is not properly developed.
Also the remaining challenges are low quantity and effectiveness of use of elevators and storages, outdated
equipment, complicated access to railway transportation (86% of grain bunkers are state owned, average
age of wagons is 26 years, low turnover of wagons (9-13 per day as compared to 55 per day internationally),
low stimulus to develop private railway transportation (tariff for private wagons is 3-7 USD/t higher)), low
loading/unloading railway port capacities), infringement of rules during auto transportation (overloading of up
to +55% to norm of 38 tons per truck, seasonal truck deficit, regulation obstacles (f.e. today import barriers
increased transportation costs 2 times), limited access to river transport (outdated river infrastructure, low
height of bridges, shallow bottom, water frozen), corruptive quarantine, veterinary, sanitary and phytosanitary
control, absence of market information infrastructure, low stimulus to develop agricultural cooperatives.
(4) To develop agricultural policy for the spheres of science, education and innovations. The objective here
is to integrate agricultural research, education and consulting services to have a better impact on/ fit to
agricultural sphere and provide a better response to global challenges, as well as to develop good analytical
tools for agricultural monitoring and reporting, provide market transparency and increase the effectiveness of
national expenditures for agricultural research and education.
Box 4: Contribution of the National Academy of Science of Ukraine to agricultural research and
innovations
The National Academy of Science of Ukraine includes 48 research institutions with 4400 scientist. Applied
research is concentrated on 152 state enterprises – farms with 12500 employees.The Academy owns (i) 449
thd ha of land (incl. 364 thd ha of arable land), (ii) a large number of breed animals (i.e. 32800 cows and
bulls, 22900 pigs, 9900 sheep). The Academy has a prevailing share on local agricultural innovations market
(i.e. 95% in crops, 67% in winter wheat, 90% in breed cows, 75% in pigs). The Academy coordinates 11
scientific entities (with world value) and 44 different programs for agricultural research that annually produces
about 1500 papers in agriculture. However, national agricultural science, research and education in Ukraine
is very bureaucratic and is still under high influence of the Soviet past, as well as it has inefficient
organizational structure.
(5) To contribute to agricultural management and marketing.The objective here is to review current
mechanisms of state support and price regulation, eliminate inefficient ones and support those economically
justified, as well as to improve food safety and security (incl. the reform of State food reserve and State
agrarian fund).
Box 5: General agricultural management and marketing
Food security.According to global food security index (GFSI) in 2014 Ukraine was 52 out of 109 countries
(i.e. it was 50
th
in food affordability (+3 positions since 2012), 65
th
in food availability (-20 positions since
2012) and 42
nd
in food quality and safety (+2 positions since 2012). In 2014 Ukraine appeared to be in the
group of 10 countries where food security declined the most versus 2013.
1
Therefore, despite Ukraine is a
net exporter of food (incl. top positions in grain and sunflower exports), certain vulnerable population groups
with low income can suffer from hunger. Until today Ukraine have not developed a comprehensive food
1
Global Food Security Index 2014. Available from http://foodsecurityindex.eiu.com/[22March 2015]

4. security strategy/ policy. The government still focuses on goods and their prices (but not on people) and may
unexpectedly intervene in case a food security risk appears (f.e. the burning issue is bread prices vs. grain
export that repeatedly resulted in grain export quotas and taxes). The food prices are administratively
controlled (mostly on local level), the upper limits as well as control over margins (no more than 20%
allowed) are present. Also State agrarian fund may intervene with spot or forward contract purchases/ sales,
and collateral grain purchases. State food reserve purchases a list of agricultural products as well. In
general, during state interventions market principles are not held.
Market organization. Gross agricultural product (GAP) is generated by 30% production from households on
38% of arable land, 45% from agricultural enterprises on 44% of arable land, 8% from smaller farmers on
13% of arable land and 1% from state enterprises on 2.5% of arable land.Household production dominates
in milk, cattle meat, potatoes, vegetables and fruits; while agricultural enterprises prevail in export-oriented
crops production (f.e. grains, sunflower seeds, rapeseed, sugar beets). Farmers are mostly involved in crop
production (grains, sugar beets, sunflower and rape seeds, soy beans).
As of 2014 78% of agricultural production sold to traders and retailers and 15% to processing enterprises
(however, certain products such as milk and products, sugar beets, fruits and berries, live cattle were mainly
sold to processing industry). Despite the growing network of supermarkets, Ukrainians prefer to purchase
food at small food stores and markets.
Ukraine exports about 28% of its agricultural production and 27% of food. At the same time agriculture and
food industry highly depend on import of inputs. External delivery of goods is mainly done via sea transport
infrastructure, in internal supply railway and auto transport are preferred; storage capacity is improving,
however, its quality is still low (see Box 3). Also small producers have difficulties with access to modern
resources and technologies, as well as finance, and to long-term contracts. Additionally they face high
competition from large agricultural enterprises (f.e. agriholdings); at the same time membership in business
associations (that are quite active on the market) and agricultural production cooperatives (still at the
earlydevelopment stage, only 1% of GAP) help them to better protect their interests.
Ukraine has 16 free trade zones, as well as implementation of deep and comprehensive free trade with EU
(DCFTA) is expected to finish by January 2016. Today average import duty rate for agricultural products is
9.2% (while for industrial products its 3.8%); 40% of agricultural imports are tax free, 20% are taxed with up
to 5%, 30% - with 5-10% rates. Animal and milk products, as well as grains and sugar are protected the
most.During DCFTA negotiations Ukraine agreed to eliminate export duties within 10 years. As of 2014,
export taxes for agricultural products remained for cattle and sheep of 20%, and for (false) flax and sunflower
seeds of 10%.
(6) To reform state support and tax mechanisms in agriculture. The aim here is to provide more transparent,
simple and effective state support and taxation systems in order to use the available budget as maximum as
possible for the benefit of agriculture.
Box 6: State support and tax mechanisms in agriculture
Taxation. As already touched above (see Box 2) there are two direct taxes in agriculture: (i) income tax for
agricultural producers (rarely used) and (ii) single tax (with which existing earlier fixed agricultural tax (FAT)
was replaced). Agricultural producers can be included into a separate group no. 4 of single tax payers and in
this case become free from (i) income tax, and (ii) property tax (both agricultural land tax and buildings/
constrictions used for agricultural production). In 2014 single tax was increased by 12-21 times and its base
(the base for FAT) was changed from normative land value of 1995 to current period. By the results of 2014
total sum of the single tax paid by agricultural producers was above the income tax (in case accumulated/
paid); however, agricultural producers preferred to use single tax to avoid administrative procedure.
Special regimes for VAT and subsidies can be included in the group of indirect taxes. In general VAT of 20%
is paid by agricultural producers on the territory of Ukraine; however, export of grain and technical crops is
exempted from VAT and also agricultural producers during 2004-2017 are exempted from VAT payments to
the budget but can accumulate it and use for own purposes. Also in case agricultural producer has land and
constructions not used for agricultural production, property taxes should be paid for them. Additionally
agricultural producers have to reimburse pension costs and pay excise taxes (i.e. only for alcohol and spirits,
tobacco, and alternative motor fuel).
State support. In 2010-12 only 8% of gross agricultural production was used for subsidies in Ukraine (as
compared to OECD countries with 12%). On the other hand, fiscal support for agriculture in Ukraine amounts
to 2% of GDP while in OECD countries it is 0.34%. However, this data does not say if such support is
beneficial for agricultural producers. There are a lot of cases when VAT is not reimbursed to grain and
oilseed exporters that in the end result in lower sale prices for producers to traders. In case to recalculate the
presented above statistics accounting for cost-benefit analysis of state support on agricultural producers,
then it’s 3% of gross agricultural production in Ukraine and about 30% in OECD [estimation of the ministerial
working group on evaluation of effectiveness of state support mechanism for agriculture and its reform]. Also
agricultural producers associate state support in agriculture with low trust, non-transparent schemes and
high corruption levels. SMEs are often deprived here. In general, decoupling of state support is ongoing (i.e.
yellow box support by WTO definition is decreasing and green box is increasing; for 2015 almost nothing but

5. support of State agrarian fund is foreseen in the State Budget 2015). In 2015 agriculture will receive the
lowest state support for the last 10 years that, as expected, will not influence the sector in negative way but
will allow to decrease corruption level.
2
(7) To develop rural territories. The general aim here is to overcome negative aspects at institutional,
economic, ecologic, demographic, social, cultural, etc. levels that define and influence level and quality of life
of rural population and poverty level instead of creating the mechanisms for better living in poor conditions.
The aim is going to be achieved in three pillars, i.e. by (i) support of small farmers, by (ii) improving the
quality of life in rural territories, and by (iii) reforming local self-governance of rural territories.
Box 7: Topical issues of rural development
Small farmers. 40.7 thousand of small farms are functioning in Ukraine (incl. 20% or 8.1 thousand with the
cultivated arable land of less than 10 ha) and 4.2 million of households with average land plot size of 1.5 ha.
Together they provide about 50% of gross agricultural production of Ukraine, including 97% of potatoes, 82-
86% of vegetables, fruits and berries, 80% of milk and above 40% of meat. In majority of cases they work for
internal market. Households are usually family type businesses; however, Ukrainian legislation does not
provide legal, economic and social grounds for them to become agricultural producers that limit their
participation in the agricultural market and pension accumulation. In particular, they face unfavorable
institutional environment (deprived status, low perspectives for development, inequality versus preferences
for large agricultural producers, individualism in work approach and lack of policy influence), economic
discrimination (absence of special programs to support small farmers’ competitiveness, very limited access
to state support, complicated access to finance, to land resources, to production inputs and to sale
channels), social-demographic limitations (low educational and professional level of rural population, low
labor potential of rural territories, social insulation of villages, absence of programs to build human and social
capital, low motivation of youth to become farmers), low legislation maturity (absence of state, regional and
local programs of rural development and building of household competitiveness, gaps in legislation).
Life in rural territories remains very poor, f.e. the wages in rural territories are only 69% of Ukrainian average;
rural household incomes are 25% lower than of city ones; the income from agricultural household production
is decreasing (about 30% in 2000 vs. about 11% in 2013); 23% of rural households live under the poverty
level. The access to high quality medical and educational services is absent; the level of death is 40%
higher. High level of labor migration creates family breaks, uncared children, spreading of alcohol and drug
addiction, social unrest. Only about 30% of rural population has access to district water supply; also the
uncontrolled landfills are growing.
Challenges for rural self-governance. Due to low government attention to rural territories, population there
has very low belief that they can change something. Therefore, they do not want to put effort to solve their
own problems as a community; either they do not have leadership abilities. Also local governors tend to
solve the issues on a central level without community involvement, and local budget money is not used
transparently. The policy to support agriculture and rural development goes together, while it has to be
separated.
(8) To manage agricultural resources.The aim here is to manage agricultural resources in a sustainable
wayaccounting for ecological effects, efficiency of their use, development of bioenergy.
Box 8: Current use of agricultural resources
Water resources. Despite Ukraine is reach in water resources, still many its regions feel difficulties in access
to uninterrupted (drinking) water supply of good quality. The quality of water used in agricultural production
purposes does not meet hygiene and sanitary requirements. The anti-flooding constructions and
technologies are not always effective; agricultural producers often suffer from seasonal floods. In most of
rural territories the water cleaning facilities are absent, and water supply for production needs is made from
upper layers where water is highly contaminated. The irrigation systems are outdated and energy inefficient.
Land resources. There are no economic stimulus for rational use of land resources. Therefore, about 20
million ton of humus and about 500 million ton of land due to erosion are annually lost. The legislative and
control systems have a lot of gaps.
Use of pesticides, nitrates and application of ecological standards. Ukrainian enterprises purchase about 100
thousand tons of pesticides annually (with internal production being only about 6 thousand tons). About 20%
of them come via black market. The level of nitrates in underground and surface waters of Ukraine is high.
Ukraine aims at conservation agriculture; however, there are still a lot of gaps in legislative and control
systems, as well as principles of resource efficient land cultivation are among the secondary objectives for
agricultural producers.
Organic agriculture in Ukraine is on its initial stage of development, however, about 0.4 million ha are already
occupied by this kind of business. The quantity of organic certified agricultural producers is about 200.
Internal organic market has been developing since 2008 and organic products are sold via supermarkets
2
Nivievskyi Oleg (2015). Budget 2015: an opportunity to decrease corruption in agriculture? Available
fromhttp://www.ier.com.ua/ua/publications/articles/?pid=4775 [21 March 2015]

6. (mostly milk products and grocery). Most organic agricultural producers export their products (grains,
oilseeds, beans, berries, mushrooms, nuts, medical herbs). The majority of organic producers are certified
according to EU or US organic legislation; the Ukrainian legislation is under development.
Forestry and bioenergy.The territory of Ukraine is 603.6 thousand sq m with 71%of agricultural land and 18%
of forests (10.4 million ha). The forestation of Ukraine is divided by three regions: Polissya (6 oblasts), forest-
steppe (10 oblasts) and steppe (9 oblasts). About 50 government bodies and community organizations
manage forest sector of Ukraine (f.e. the State forestry agency manages about 73% of forests, local state
bodies – about 13% and village councils – about 8%. About a half ofUkrainian forests were artificially created
and therefore require tighter supervision.
Wood stock is estimated at 2102 million cub m. with annual increase of about 25 million cub m (while only
66% were used in 2013 meaning the stock is growing). The biomass stock is 24.5 million toe with its annual
consumption of about 6%. The potential of solid biofuel in Ukraine is about 33 million toe; annually Ukraine
produces about 200 thousand tons of pellets with up to 97% of them going to EU market. About 30
enterprises are active in this industry. Bioethanol can be produced at 16 factories of Ukraine. The annual
internal demand for bioethanol is about 250 thousand tons with about a half being satisfied with its internal
production. Annual demand for biodiesel in Ukraine is 250 thousand tons while the capacity of constructed
14 plants is 50 thousand tons higher (the plants do not work on total capacity). The biogas potential is about
3 billion cub m per year from animal residues and about 32 billion cub m from plant residues. 11 biogas
plants have been constructed in Ukraine; 9 of them are operating.
Fish production. The fish industry urgently needs modernization. The demand for fish is growing and it is by
most satisfied with imported fish. The imports were 5% in 1991 and reached 95% in 2014. Fish production
from local waters decreased to 1% and from sea waters to 5%. This happened due to bad care from the side
of government and small budget allocations for this industry.
24 working groups with involvement of different stakeholders (including international organizations) were
created by the government to reform these 8 spheres of agricultural policy.
3
II. REAL BUSINESS CASES
Usually practical cases better demonstrate the state of affairs, challenges and problems that are faced by
agricultural producers in Ukraine. Therefore, in this chapter we are going to describe two different kinds of
businesses.
Production of pellets.
4
Pelleting is a way of making use of biomass residues that would otherwise remain
unused. Biomass pellets are often produced from wood residues (the most widely used pellets are wood
pellets) or agricultural crop waste. Pellets can replace fossil fuels and, thus, cut greenhouse gas emissions
and create the conditions for sustainable economic development.
Internal demand for pellets in Ukraine is not big enough yet. However, due to high demand for pellets in the
EU, the production of fuel pellets is annually growing in Ukraine. Until 2010 Ukrainian pellet market was
growing very fast and reached about 624 thousand tons in 2010. Then, the EU introduced new quality
standards that created new challenges for Ukrainian producers (incl. the time and ability to adapt) and
decelerated market growth. In 2015 the production is expected to reach about 707 thousand tons, from
which about 636 thousand tons or 90% will be exported.
Box 9: How will implementation of Free Trade Area with the EU influence Ukrainian SMEs
Small and medium-sized industrial enterprises in Ukraine trade with the European Union less than do larger
ones. In 2014 the Institute for Economic Research and Policy Consulting conducted a survey among 314
industrial firms that showed that only about 17% of medium-sized enterprises and 3% of the small ones work
on European markets. SMEs expect fewer gains from the Association Agreement of the EU and Ukraine and
from the enactment of the Free Trade Area (FTA) compared to big enterprises. In particular, only 39.3% of
medium-sized firms and 35.9% of small ones believe that they will benefit from the introduction of the FTA
with the EU. For the most part, SMEs do not expect any changes from Ukraine’s broader access to the
3
Ministry of agrarian policy and food of Ukraine, 2015,
SingleandComprehensiveStrategyforAgricultureandRuralDevelopmentin Ukraine 2015 – 2020 Available
fromhttp://minagro.gov.ua/node/16017[21 March 2015]
4
Kuznetsova Anna, 2012,Pellet production in Ukraine: a profitable option
for sustainable development?Policy Paper Available from
http://www.ier.com.ua/files/publications/Policy_papers/Agriculture_dialogue/2012/PP_37_Pellets_ENG_f.pdf[22
March 2015]
Pro Consulting, 2014, How to organize production of pellets, Available from http://pro-consulting.ua/press/analytics-
and-finance/kak-organizovat-proizvodstvo-pellet/[21 March 2015]
InVenture (Investment Portal), 2014, Pellet market in Ukraine, Available from
https://inventure.com.ua/analytics/investments/investicionnyj-obzor-rynok-pellet-v-ukraine[28 March 2015]

7. European market. Then again, the prospect of the deterioration of trade relations with Russia doesn’t seem
as hazardous for small and medium firms as for the big business.
Source: http://www.ier.com.ua/en/publications/comments/?pid=4800
Since 2010 sunflower seed pellets dominated in Ukrainian pellet production; however, by 2013 wood pellets
came to first positions (about 377 thousand tons produced in 2013). The main buyers of Ukrainian pellets are
Poland, Germany, Czech Republic, Italy and Austria. Straw pellets are mostly used as technical fuel to heat
industrial enterprises and combined heat and power stations (CHPs). Wood pellets are used to heat private
houses, cottage districts and partially enterprises. Large CHPs prefer to make direct contracts with the
producer, while rayon and local boiler houses and smaller CHPs use market intermediaries that can
guarantee the continuity of the supply. Private households use different sales channels.
As expected, the world demand for wood pellets during 2014-2020 will grow about 1.7 times (from 27 million
tons to 47.3 million tons per year). In the EU the demand will grow 7% annually and achieve 23.8 million tons
by 2020. The EU is a net-importer of pellets. The average price for pellets remains the highest in the EU
(about 146 EUR/t vs. 105 EUR/t in Ukraine), and is expected to further grow. These developments create big
incentives for expanding network of pellet producers and suppliers in Ukraine.
Usually new companies operate about 6-1.5 years on Ukrainian market, and then just stop their activities or
sell their businesses. Among largest failure factors are (i) not stable and well-established feedstock supply,
(ii) incorrect placement of production facility, (iii) poor connection to the EU market. There are 5 big players
on this market with annual production capacity from 9600 tons per year to 75000 tons per year each and
market shares from 2.7% to 11.5%. The production facilities are in most cases situated in Polissya (see Box
8).
In most cases, pellet producers sell their production via large traders who purchase small quantities from
different producers and then export large amounts to the EU. The average price for exported pellets is 85-
120 EUR/t depending on the quality and terms of trade; the price for internal market does not exceed 80
EUR/t. The unit cost of produced in Ukraine pellets does not exceed 60 EUR/t.The payback period can be as
up to 1 year and also much longer depending on initial investment.
Previously, fossil energy tariffs in Ukraine were low and did not stimulate consumers to use alternative fuel.
The situation has started to rapidly change since 2014, and now private consumers (who has individual or
cottage district-heating) thoroughly study the source of heating to adapt (f.e. on average the efficiency of
pellet boiler is 95%, wood-fired boiler – 60% and coal boiler is 75%; however, the price for pellet boiler is 3-5
thousand EUR, up to 50% higher than boilers using fossil fuels).
The main challenges for pellet producers in Ukraine are continuous feedstock and buyers’ availability. The
competition comes from substitutes such as unprocessed wood, fossil fuels, etc. but not from the
appearance of new pellet producers on the market. The main issue is to meetEuropean high quality
requirements and strict standards.
Production of walnutsin Ukraine.The world production of walnuts is annually growing and Ukraine follows
this tendency. In 2013/14 Ukraine produced 95 thousand tons of walnuts (75 thousand of which were
exported). This year a slight decrease is expected due to crisis in the country, however, it will still remain
among the 8 World leaders taking no. 2 and no.4 in the ratings of main walnut exporters and producers
respectively.
5
Walnut production in Ukraine is spread throughout the country. Various regions have been producing
walnuts as well as hazelnuts for many years. Climate conditions and soil in Ukraine are suitable for growing
nut trees. About 85% of all walnuts harvested in Ukraine are produced by small private family farms. During
Soviet Union times, walnuts were produced by collective farms. Some of them still bear walnuts, though at
much lower yields.
Starting from 2009, Ukrainian agrarians began developing walnut orchards for commercial purposes. The
size of plantations ranges from 0.5 ha to 100 ha. Total walnut planted area in Ukraine reached over 3,500 ha
in 2014. Some regions, especially in central and southern Ukraine require irrigation to ensure expected
yields, while orchards in the northern part of the country may not have as high of yields as a result of cooler
climates.
New walnut orchards are expected to start bearing fruit in 5-7 years after being planted. At the start of the
production age, walnut tree yields are low; they increase gradually and will reach their prime between 15-20
years. While a new influx of orchards has been planted since 2009, older orchards from the Soviet period are
being cut down gradually and offsetting an overall growth in production. Average yields of the newly planted
trees (upon maturation) are expected to be higher than that of the older stock.
5
United States Department of Agriculture, Foreign Agricultural Service, PSD Online (Custom Query), 2015, Available
from http://apps.fas.usda.gov/psdonline/psdquery.aspx[28 March 2015]

8. The seeds of Ukrainian origin are mostly used; however to meet the growing demand, some new seed
varieties are imported from Moldova and Belarus. Harvest season in Ukraine varies from year to year
depending on climate conditions and on proper production techniques. Most of Ukraine’s walnut producers
do not even treat trees for diseases. However, with the growing competition, newly established producers
pay greater attention to production technologies (beyond irrigation) to increase growing efficiencies (f.e. they
conduct research, invest in nurseries to improve genetic stocks, and apply fertilizers and pesticides).
By majority, walnut production in Ukraine remains a labor intensive business with the majority of walnuts
harvested by hand or rudimentary nut picking devices used by the previous generation of growers. Other
types of businesses resulting from walnuts growing are sales of (i) walnut wood for furniture (locally and for
exports), (ii) treated leaves for medicinal use and walnut (green/young nut) preserves, (iii)walnut oil
(especially for the EU market). The domestic market in Ukraine has also generated some demand for walnut
oil as a gourmet food and a key ingredient in the premium segment of natural cosmetic products.
Domestic walnut consumption is not constant year to year. Depending on the economic situation in the
country, local consumers may choose from a variety of tree nuts (almonds, cashews, pistachios, etc.)that are
widely available in local retail outlets and are higher priced than walnuts. In addition, domestic chocolate
producers and other candy manufactures use walnuts in their recipes. Many of these confectionary products
are exported.
Walnuts are widely available in the market place as well as exported in large quantities. One can purchase
walnuts easily in food stores around the country or in farmers’ markets. Walnuts are sold in-shell as well as
shelled. Large industrial size sales also are common especially by the food processing industry and by
exporting enterprises.
The price of walnuts in Ukraine fluctuates over the growing season, dropping to the lowest point shortly after
the harvest and gaining back ground during winter and spring holidays and at the time when stocks are
dwindling (usually in the late spring). No data is collected on walnut prices at the national level in Ukraine.
Exports of walnuts are in most cases managed by private enterprises. A business association/industry group,
the Ukrainian Tree Nut Association, was established several years ago to assist walnut market entrants. The
Association serves as a consultant to growers in various stages of the business cycle and has had some
success in raising production standards in orchards as well as targeting export markets around the
world.
6
Large quantities of walnuts from Ukraine have been sold to the EU and Middle East destinations.
Walnut production is not expected to receive support from the national government. With regards to
subsidies from the State Budget, crops with higher priority in the agricultural sector are traditionally
designated for grain, sugar, and livestock production.
7
6
Ukrainian Nuts Association, 2015, Available from http://www.ukr-nuts.org[28 March 2015]
7
AgroChart, 2014, Ukraine.Tree Nuts Annual. Sep 2014.Available from
http://www.agrochart.com/ru/news/news/011014/ukraine-tree-nuts-annual-sep-2014/[28 March 2015]