The Ukrainian government is seriously considering the possibility of an economic experiment on the eve of creation of a free market for agricultural land. Business can be offered some land currently managed by state agencies. This is almost 27% of arable land - 11 million hectares. From the sale of such a scale, state budget can get at least $3 billion, according to experts. However, whether state-owned agricultural land to be sold and who will be interested in it, depends on the method of sale the authorities choose.
What government is going to offer?
Prime Minister Arseniy Yatseniuk supported the initiative to conduct an economic experiment, which will procede the introduction of a full-fledged land market, the press service of State Service of Ukraine on geodesy, cartography and cadaster reported that at the end of the Cabinet of Ministers open meeting. "We propose to start sale of state owned agricultural land through auctions," the press service stated. It will allow "to get a benchmark, to see how sellers and buyers behave, to prevent subsidence of rates on the first phase of sales”, State Service for land registry predicts.
Now the sale of agricultural land, both of state and private ownership (land shares), is prohibited by the moratorium, which has been valid in Ukraine for last 25 years. Last time the moratorium was extended in 2012 - up to January 1st 2016.
For the moment, state agencies own almost 11 million hectares of farmland, or 27% of the land bank which in total amounts almost to 42 million hectares. "This is incomplete data, the last inventory check was held during Yanukovych and likely it does not reflect the true picture," the president of Association of Ukrainian Agribusiness Club (AUAC) Alex Lissitsa says. If simply multiply this amount by the minimum price of $300 (based on the assessment of rents), it can be calculated that from the sale country's budget may receive almost $3 billion, the analyst of agricultural markets Tamara Levchenko says.
More than half of all state`s agricultural land – 7.3 million hectares - are the so-called "reserve lands." For various reasons, they were not divided into land shares and were not transferred to private owners in the 1990s. Approximately, up to 10% of the area of each collective farm remained in state ownership at that time.
For the moment, most of the farming land is controlled by different ministries and organizations. For example, one of the largest owners is National Academy of Sciences, which manages 429.5 thousand hectares of arable land. In addition, approximately 200 thousand hectares are managed by enterprises of Ministry of Agrarian Policy. As well as other structures, state owned arable land also is administered by the Ministry of Defense, forestry companies, enterprises and organizations of transport and communications.
The use of state-owned land is an endless scope for abuse and corruption. The entire family clans of current and former officials feed off the rent of land as well as of its farming. According to the head of State Service for land registry Maxym Martyniuk, almost all the land of state-owned enterprises remains in shadow sales turnover. Budget losses from that are estimated at nearly 2 billion USD annually.
Who is plowing for state?
The Ministry of Agrarian Policy told 112.ua that they intend to pursue the division of state owned land for shares. "We advocate that these lands should be divided into shares. We have a law on peculiarities of privatization of agricultural enterprises, according to which employees of enterprises, pensioners are entitled to receive their share of land. These are the people who work or worked for a lifetime for the state. According to social justice, they have right to receive 2-3 hectares of land," the member of working group on the privatization of state enterprises of the Ministry of Agrarian Policy Oleksiy Zubritskiy claimed.
There is no final decision yet about whether to divide into shares the state-owned land before the sale, experts say. And, according to them, that is the main starting point, after which it will be possible to say who might be interested in buying the farming land.
Large agricultural holdings with experience in farming and necessary financial resources are unlikely to consider buying small pieces of land of no more than 5-6 hectare. Agricultural holdings may be interested in buying a cluster in the range of 10 thousands hectares, the director of investment group TAS Anton Kernasovsky says. "Agricultural holdings are not interested in land allotments of less than 2 thousands hectares. Collecting the land by fractional pieces is a very complex and, what is important, expensive activity," Alex Lissitsa says. It is even worse, if due to the problematic land shares (involved in litigation over their ownership) agricultural holding having risked and bought these small plots of shareholders, they can be left with a "hole" in the field and not even one.
In case of the sale of state-owned land after dividing into smaller land units, businessmen-brokers may come to the market, who will buy the shares cheaply, knocking out the attractive farming land units and selling dear to agricultural holdings legally cleared and large pieces, experts say.
In addition to the size of the allotment, probably, the location will be the main factor that will influence the decision of the agricultural holdings on whether to buy the land or not.If the small share of farming land is located at a considerable distance from the main body of land of agricultural holding, it is unlikely to be interesting because it will be unreasonably expensive to cultivate it, Lissitsa notes. According to him, buyers also will make the decision on the basis of quality assessment of the proposed land.
In addition to agricultural holdings (some of which are controlled by the oligarchs), the most likely buyers are foreigners. However, the question of whether the government allows them to participate in the purchase of Ukrainian agricultural land, remains opened. That is a point which caused the most heated debates in Parliament during the discussion of the draft law on land market. The document regulated the rules of the game in case of cancellation of the moratorium and the opening of free market for agricultural land and yet to the initial version of the law was proposed nearly 400 amendments!
It is known that foreigners have been interested in the Ukrainian agricultural sector for a long time. They understand that in context of world population growth, the demand for food products in the world will be increasing annually. Thus, a well-functioning farming on the fertile soils will bring stable high income. And although there are no official statements yet, it is unofficially known that the governments of land-poor countries, particularly Saudi Arabia, are willing to promote and subsidize local companies which purchase farming land overseas.
Even now representatives of large multinational companies lease large areas of agricultural land in Ukraine. They are growing grains and oilseeds on it. The direction develops a subsidiary of the holding company Glencore International - Ukrainian company Serna, which leased 80 thousands hectares. The American investment group NCH Capital rents approximately 430 thousands hectares of land in 16 regions of Ukraine. American company Cargill purchased 5% of Ukrlandfarming - the largest agricultural holding in Ukraine, which rents 670 thousands hectares.
When land market starts
If the government's decision to start the sale of state owned agricultural land shares is approved, the time of introduction of a free market for all Ukrainian arable land will be relegated on indeterminate future. State Service for land registry predicts that in case of this scenario a complete annulment of the moratorium on sale of agricultural land will be in 2018.
Back in April, the head of the Presidential Administration Boris Lozhkin optimistically believed that the market for agricultural land could begin to function starting from January 1st 2016. "The land market should appear very quickly. You know, all the talks around the fact that someone will come and buy all our land... There is a lotof land in the world. From Russia to Argentina there are many places where one can buy the ground absolutely free in any quantity. Not everyone in Ukraine understands we are the only one of the players who have a lot of competitors around the world,” Lozhkin said in an interview to the online edition “Liga”. Prior to this, deputy head of the Presidential Administration Dmitro Shymkiv told the media that Petro Poroshenko considers the creation of a land market as one of the key components of the reform in agriculture. For the abolition of moratorium on farming land sale were deputies' of Petro Poroshenko Bloc at the time of negotiations within the coalition at the end of last year. Against the sale were Tymoshenko's Motherland and Liashko's Radical Party.
Whichever scenario is realized, there is no threat of provision security in the country, experts say. Moreover, legalized ownership of agricultural and, perhaps, the most important condition for attracting investment to agricultural sector, Tamara Levchenko stressed.