Farmers’ expenses are rising, while their profits are on the decline

The following year, farmers can not be counted profit

Photo: UNIAN

Operating in the agricultural sector is becoming increasingly risky. The Ministry of Agrarian Policy and Food reports that this fall the sowing campaign will cost Ukrainian farmers UAH 56 bn, which is 12–15% more than last year. Minister Ihor Shvaika explained that the increase in costs is due to the rise in price of fertilizers, fuels, lubricants and farming equipment.

Shortage of essential goods

At present, the cost of nitrogen fertilizers this year is much higher than at the beginning of the sowing season last year. In particular, over the year the price of ammophoska has increased by 45% up to UAH 9,000 - 9,300 per ton, the price of diammophoska – by 28% up to UAH 7,200 – 7,500 per ton. Popular brands of complex fertilizers (NPK, ammonium nitrate phosphate) also rose in prices by 35% to UAH 6,000 – 6,500 per ton, according to information of the Infoindustriya company. The majority of farmers – 70% - have already purchased the necessary fertilizers. Those who did not manage to buy them will have to pay more: in August the prices of fertilizers rose by 20–30% compared to July.

Farmers have enough seeding material, but only 87% of the seeds were brought to the required seeding condition. The Ministry of Agrarian Policy is convinced it will not be difficult for agrarians to prepare the remaining seeds for sowing. Devaluation of the hryvnia caused difficulties with fuel – today farmers will have to spend much more on its purchase. Since the beginning of the year the prices of diesel fuel have increased by more than 40% - up to UAH 16 per liter - due to devaluation, say representatives of the UPECO Consulting Company. In addition, grain market analyst at the APK-Inform Consulting Company Andriy Kupchenko says many agrarians have difficulties in servicing the current sowing season due to the high cost of their credits and loans. “On average interest rates on loans have increased by 4%,” he says.

Prices not playing into the hands

In addition to the rising costs this sowing season, farmers are facing a decrease in grain prices, which this season hit a five-year low of US $230 per ton. The reason for the decrease is unjustified devaluation of the national currency from late July to the second half of August, which reduced the value of the hryvnia by more than 16% - from 12 to 14 UAH per dollar, as Governor of the NBU Valeriya Hontareva said at a meeting with bankers. In the last two weeks the rate strengthened and is currently being traded in the corridor of 13.0 – 13.50 UAH per dollar. “This devaluation during the peak of shipments of grains for export has a negative impact on the development of agricultural production in our country. The rise in prices of plant protection products, fertilizers of all groups and fuel is quite threatening,” complains Head of the Analytical Department at the Agrarian Exchange Anatoliy Stoyanov.

The Agrarian Exchange reports that in August Ukraine exported more than 3 mn t of grain. “Due to depreciation of the national currency agrarians lost US $10 mn on wheat, more than US $500,000 on corn and managed to earn some money only on barley – US $1.79 mn – as prices for this grain crop have slightly increased,” counts Stoyanov.

Focus on rapeseed

In order to minimize risks both major farmers and agricultural holdings are switching to a saving mode. “I believe ag producers will be divided into three categories: some will cut crops by 20% just as last year, some will save on fertilizers, reducing the cost of tillage to a minimum, and only a small number of farmers will be sowing in compliance with all technical requirements,” assumes the Head of the Union of Agricultural Service Cooperatives Ivan Tomych.

Kupchenko sees two possible ways of making profits in the current situation: the first is to wait until prices of food grain, which is in short supply, will rise, and then sell it. The second is to gradually switch to more profitable crops. APK-Inform reports that the crops of winter wheat for the harvest in 2015 will fall by nearly 10% to 5.98 mn hectares, but rapeseed crops will increase by 4% up to 969,000 hectares compared to the previous sowing campaign. “The events in eastern oblasts are the main reason for reduction in wheat areas. Almost a third of those regions will not be sown for winter and wheat is the main crop in those regions during this season. But in other regions agrarians will try to return a bit of profit at the expense of more marginal crops such as rapeseed,” says Kupchenko. He adds that in terms of comparable sowing costs a ton of wheat costs UAH 2,100 – 2,500 and a ton of rapeseed – approximately UAH 4,000.

At the same time, agricultural market expert at the Ukrainian Agribusiness Club Association Ihor Ostapchuk warns that the market will not tolerate a mass transition to high-margin species of crops. “While such niche crops as peas or mustard are quite profitable, their production is justified only if there is a market for them,” he says. Increasing supply would lower the price of these products and, consequently, farmers’ earnings.