Agricultural Staticulation

Staticulation is a manipulation of statistics (ht Darrel Huff). Here is an example. Since 2009 production of corn has doubled in Ukraine. The output of corn increased from 10.5 to 21 mln. tons between 2009 and 2012. Great news! It looks like "free market" economy allocated resource efficiently in Ukraine. 

Wait a sec. The corn yield, however, declined slightly from 5 to 4.8 tons per hectare. If the corn yield declines, the total output of corn must decline too, right? Yes, unless the harvested area increases enough to offset the decrease in the crop yield. Indeed, the harvested area has also doubled since 2009. The harvested area increased from 2.1 to 4.4 mln. hectares. Something tells me that farmers foregoing the conventional crop rotation in Ukraine. To double the cropland area for corn, you need to decrease the harvested area of other crops. Otherwise, where did the additional 2.3 mln of arable land come from? 

Black Harvest

The Ukrainian government announced that grain harvest was 20% lower than it was anticipated. Though bad news came as a surprise to the Ministry of Agrarian and Food Policy, the UN's Food and Agriculture Organization (FAO) talked about it for a couple of last months. In June the FAO predicted that Ukraine's grain production will fall to 46 mln tons, 18% below the previous year, because of unfavorable weather conditions. 

I am sure that Ukraine's total grain output will be lower than it's anticipated now due to drought and lack of irrigation system. Needless to say, most Ukrainian farmers still rely on the two-rain rule to harvest their crops despite all advancement in the modern agricultural technology. They rely on favorable weather conditions because they lack funds to rebuilt irrigation system that was dismantled in the early 1990s during the transition period. 

But I am afraid that Ukrainian farmers suffer more from lawlessness than from the current drought. The main issue is the so-called black harvest. In a nutshell, small-scale farmers are forced to load trucks with their grain for free. It's the so-called black harvest. The black harvest trucks operated by thugs, allegedly from Donetsk region, show up when a farmer harvests his crops. Thugs take grains by force and load them in their trucks. Farmer is left with nothing. If farmer cannot recuperate his losses, he will go bankrupt. 

If you wonder why farmer doesn't call police, the answer is quite simple. It does not change anything. If the local police receives this call, they have to check with their headquarters whether someone is behind the stickup operation. Their headquarters has to check with other law enforcement offices at district level, city level, and province level. By the time they are done with the so-called background check, thugs are gone. But you cannot blame cops for their inefficiency. Cops and farmers have to play by the same rules.If cops arrest well-connected thugs, they will loose their jobs and they will be also fined. 

What causes these unfavorable business environment? It's also drought. Other kind of drought. The Ukrainian elite is running short on cash that it needs for the upcoming parliamentary elections. To get cash, they do what they do the best - rob hard-working people.

Black Market in Agricultural Land is Booming in Ukraine

with Oleg Peregon, Vice President, NGO Green Front, Ukraine

A sale of agricultural land has been illegal in Ukraine since the Moratorium Act of 1992. Despite many promises, neither administration liberalized a market in agricultural land. Nonetheless, a black market in farmland has thrived. Now it is becoming one of the largest illegal markets in farmland, with approximately $900 million in annual sales, in Eastern Europe. The black market has a backing of local state officials. Corrupt bureaucrats embezzle their power to stuff their pockets with cash while they are stripping the nation of important natural resource and robbing poverty-stricken rural population of their private property. The black market causes environmental degradation and undermines sustainable economic development of Ukraine, one of the major world grain exporters.

The moratorium has never stopped the black market in Ukraine. According to Ukraine’s State Committee on Land Resources (SCLR), almost 20 percent of farmland changed ownership in the last decade. And it seems that the black market is booming now more than ever. Kharkiv-based environmental NGO Green Front reports that a number of sales advertisements featuring farmland has increased in local newspapers recently. The popular local newspaper Premier went from 58 to 300 weekly sales ads in less than a month. The black market has also made it to the internet. Now you can find hundreds of listings of farmland sellers online. For example, online store AllBiz that is popular in Ukraine has almost 200 listings of farmland sellers. Many sellers’ websites even guarantee a one-day delivery of farmland.

The black market in farmland is going strong with no questions asked. The buyers are farms, greenhouses, flower shops, landscapers, and house owners who can afford landscapers. The sellers are either firms subcontracted by the local government or local state officials. The black market quantity is equal to a capacity of one truck (e.g. Russia-made Kamaz truck). A single Kamaz truck carries, on average, ten tons of soil. The black market price is seasonal with its high in spring and summer ($80-100 per ton) and its low in fall and winter ($150-180 per ton). According to the Green Front, the projected annual sales are almost $900 million in Ukraine.

This is how the black market works. An excavator digs out fertile soil, on average, up to four feet deep. Then an excavator loads a soil into a truck that delivers a product to a buyer. To double their profits, infamous entrepreneurs bring garbage from urban areas and dump it in the excavated areas. Thus, the damaged farmlands are converted into illegal landfills. This black market activity causes irreversible soil depletion and environment pollution. The SCLR reports that almost 32 percent of farmland is degraded and 20 percent of arable farmland is low-yield due to soil erosion. It is obvious that the black market could not reach the current volume of sales without backing of state and law enforcement officials. 

The state officials abuse law even when it comes to private ownership of their constituency. The black soil is extracted from two main sources: abandoned land and retiree-owned land. A so-called abandoned land is a land parcel whose heirless owner is deceased. Abuse of the abandoned land is just another proof of the government embezzlement because ownership of the abandoned land is transferred to the local authorities automatically in Ukraine. The magnitude of the power abuse is mind-boggling. When the NGO Alternative interviewed deputies (Party of Regions) of the Pesochyn village council in Kharkiv province, the second largest province of Ukraine, the Regionals said blatantly that the farmland sale is only legal in their county while it is illegal elsewhere.

Retirees who own farmland also suffer a great deal from the government abuse. The SCLR reports that 53 percent of land owners are retirees and 30 percent of them have no heirs. The Green Front reports several cases when the soil was extracted from the land parcels owned by pensioners in Kharkiv province. Several local residents tried to stop the illegal extraction of their land. However, the local government silenced the whistleblowers. The Green Front also submitted evidence of illegal extraction of land, including these pictures, to the Kharkiv department of law enforcement. The law enforcement officials considered available evidence insufficient to open a case. 

                                                                   NGO Green Front copyrights.

                                                                    NGO Green Front copyrights.

Right now it is too early to predict the impact of the black market in agricultural land on Ukraine’s economy, one of the major world grain exporters. It is clear that the current black market activity causes irreversible damage to the environment and retards economic progress. And the government embezzlement not only undermines a fundamental institution of capitalism and democracy – secure private property rights but also erodes trust and accountability in political order.

Ukraine's Agriculture Policies

Ukraine is moving to liberalize its land market, but, according to recent statements by the country's agriculture minister, foreigners will be prohibited from purchasing agricultural land.
That was the topic of my interview with the World Politics Review. We discussed Ukraine's agricultural land policies. Click here if you want to read more.

FYI, here is a Russian version of my article "Robbing the Breadbasket" in the KyivPost. If you can read Russian, please, check it out and leave comments.

MORE ON UKRAINE'S "GREAT GRAIN ROBBERY"

Here is my article in the Kyiv Post. The russian version of my article will come out on Wednesday.

The Ukrainian Weekly (June 5, 2011) has three articles, including mine article, about Ukraine's trade policy. I highly recommend you reading the current issue.  

ROBBING UKRAINE'S GRAIN MARKET: EXPORT QUOTAS AND EXPORT DUTIES

Ukraine, one of the top grain exporters in the world and nicknamed the bread basket of Europe, is being robbed by its government. A post-Soviet country located in Eastern Europe on an area slightly smaller than Texas has become a hostage of its mercantilist government. In October 2010 the Ukrainian Cabinet of Ministers presided by a former apparatchik, Prime Minister Mykola Azarov, enacted a resolution requiring quotas and licenses for exporting grain. The objective is to stabilize food prices and prevent a food shortage caused by last year’s poor harvest. While the protectionist policy came under harsh criticism from both foreign and domestic observers, the government extended the export grain quotas until June 30, 2011. Moreover, the government used corrupt practices of allocating export quotas and licenses wherein an unknown company Khlib Investbud received a lion’s share and gained the market power in the grain export industry. The grain industry generates 15% of Ukraine’s exports - $7.5 billion. The controversial regulation killed the spirit of competition in the domestic grain market and pushed it towards monopolization. Foreign observers express concerns that the monopolization of the export-oriented Ukrainian agriculture will contribute to higher food prices around the world. If the current trade policy is not reversed, surging grain prices will affect each of us negatively.


Quota and license are usually imposed to limit the quantity of a product and raise its price. The grain export license is given to a company by the state to buy the grains from domestic farmers at the domestic price and resell these grains at the world price to foreign buyers. Since the world price is higher than the domestic price, whoever receives the export license is guaranteed a profit of a middleman. Moreover, the export grain quota limits the quantity of export that results in a price markup. For all grains exported with the quota, the markup could total to billions of dollars. Thus, a licensed company that has an export quota receives a profit that is not earned through market competition. The government regulation creates the profit for the middleman which causes market inefficiency such market monopolization and wastes society’s resources.


Foreign observers have criticized the current trade policy on the grounds of its inefficiency. Morgan Williams, the President of the U.S.-Ukraine Business Council, estimated that losses in the domestic food industry could reach $5 billion as a consequence of the protectionist policy. According to Martin Raiser, the World Bank's Country Director for Ukraine, Belarus and Moldova, the present grain export quota system is inefficient and restricts the inflow of investment. Even with these sharp criticisms from foreign observers, the Ukrainian delegation in the World Trade Organization (WTO) defended the current export quota system by referring to Article 9 of the GATT (General Agreement on Tariffs and Trade) and Article 12 of the Agreement of Agriculture. The Ukrainian government promised WTO that “an export quota system was introduced in order to prevent a critical shortage in the domestic market resulting from a poor harvest in 2010 of certain agricultural products and eliminate a significant imbalance in the domestic grain market that is essential for food security and stability in the grain market”. Grains that fall under the regulation are crops produced by most domestic farmers: wheat, buckwheat, corn, barley, and rye.


In fact, the Ukrainian government lied to the WTO and the rest of the world to defend the protectionist policy. A “poor harvest in 2010” was a big fat lie. According to Ukraine’s State Statistics Committee, the “poor harvest of 2010” was above the average if you looked at the record of Ukraine’s grain production in the last two decades. On average, Ukraine’s agricultural sector produced 36,1 million tonnes of grain between 1990 and 2010. Ukraine’s agriculture hit the bottom in 2003 with a harvest of 20,2 million tonnes of grain while it reached the peak in 2008 with 53,2 million tonnes of grain. Thus, the “poor harvest of 2010” that was 39,2 million tonnes exceeded its average by 3 million tonnes. Nonetheless, in his controversial interview to the Kyiv Post, Ukraine’s Minister of Agriculture Mykola Prysyazhnyuk stuck to his guns and reiterated that the main reason for the regulation was the shortage of grain in Ukraine.

The current protectionist policy is an absolute failure because it hurts Ukraine’s economy. The protectionist policy that brought back the oligarchic “old family values” such as corruption protectionism, and nepotism sent a clear signal to foreign companies that Ukraine’s economy went back in the domain of the oligarchs. Foreign grain traders accused the Ukrainian government of corruption and nepotism because the distribution of quotas was not transparent. Grain traders had only seven days to apply for the export quota after the Resolution of the Cabinet of Ministers was enacted. As a result, most of the companies were unable to receive the grain availability certificate while an unknown company, Khlib Investbud, received the lion’s share.


Moreover, the export quota system that was designed to stabilize food prices failed to keep food prices from rising. Domestic food prices have increased by 20% since the quota system was introduced. Ukraine’s State Statistics Committee reports that prices of bread, sunflower and corn oil have increased by 12% since January 2011. The grain prices rose by 15% in the first quarter of 2011. The domestic consumers are outraged with surging food prices. The current economic situation is actually very drastic. In Ukraine an average pensioner receives around $100 per month. Given rising food prices, a large number of the elderly Ukrainians find themselves below the poverty threshold.


Furthermore, the protectionist policy hurts domestic farmers. The cash-strapped farmers are forced to sell their grain at lower than expected prices because the Khlib Investbud company uses its market power to dictate the prices in the domestic grain market. Remaining independent grain traders are fighting over left over crumbs. The Ukrainian government needs to understand that the current protectionist policy hurts both sides of the international trade, exports and imports. Lower profit margins do not allow the cash-strapped farmers to purchase essential machinery and fertilizer that are mostly imported from Russia, Belarus, and USA. Higher food prices forces the domestic consumers to devote a large part of their income towards food items and spend less on other imported goods.


The protectionist policy hurts everyone except the Khlib Investbud that seems to be the only winner from the whole situation. However, any criticism of the current trade policy or questioning the role of the Khlib Investbud is suppressed by the state. The editor of the English-speaking newspaper Kyiv Post, Brian Bonner, went on strike after the Ukrainian government tried to prevent the release of the hotly debated interview with Ukraine’s Minister of Agriculture. So far the Ukrainian government made only two changes to the controversial regulation. In March 2011 the government dropped corn from the original list and increased the total size of the quotas by 1.5 million tonnes to 4.2 million tonnes or 10% of the last year’s harvest.


Of course, I must mention that the Ukrainian government said today that it would replace the grain export quotas with export duties of 9 to 14 %. Replacing export quota with export duties is an old trick. The export duty has the same effect as export quota. The imposed export duties discourage exports, reduce quantity of grain exports, and raise grain prices. By the way, the Ukrainian delegation in the WTO has not yet submitted the official documents about replacement of export quotas with export duties.



It sounds logical that the government replaces quotas with duties now. Since October 2010 the Khlib Investbud backed up by the Grain Ukraine has used its market power to accumulate around 2 million tonnes of grain (5% of the last year’s grain production) at low domestic prices that the company dictated. It gives the Khlib Investbud a handicap that the company can use to compensate the imposed export duties. Other grain exporters have to play by the new rules of game. Moreover, the Khlib Investbud had exported 800,000 tonnes of grain before the government imposed export duties. If you look at the whole situation, it is clear that the Khlib Investbud is still the only winner. They have still robbed the domestic grain market!


The current trade policy signals domestic grain producers and foreign grain traders that the Yanukovych administration sticks to the protectionist policy. It also shows that the government can change policy without any legitimate economic reason at all. Ukraine's economic policy is a puppet in the hands of the Donetsk interest group. The backwardness of the current trade policy undermines Ukraine’s potential economic growth. The current protectionist policy can destroy the agricultural sector of Ukraine. If this policy continues, we will see capital leaving the agricultural sector for other industries. If this outrageous grain robbery is not stopped, the European breadbasket will be completely emptied out for the benefit of a single company. If Ukraine is still a democratic state, the government must explain why the benefit of a single company comes at the cost of the whole nation!


P.S. The edited version will appear in the Ukrainian Weekly.

Legal Fusion: Annotated Codebook of Ukraine’s Agriculture

Here is my op-ed in the Kyiv Post.

Ukraine's Land Reform in Cartoons

Here is my Op-Ed/cartoon in the Kyiv Post: http://www.kyivpost.com/news/opinion/op_ed/detail/102164/