Business Sense: Nation should not be in rush to lift moratorium on sale of farmland

Nov 11, 2010 at 23:35 | Michael Lee

Michael Lee writes: Many things hold back progress in farm sector, but land ownership is not one.

A moratorium currently disbars foreign entities from buying farm land in Ukraine; instead agribusinesses lease land for five to 20 years.

Each year there is seemingly an increasing number of calls to lift the moratorium on land sales, citing land tenure as a barrier to further investment and development of Ukraine’s promising yet undeveloped agriculture sector.

This may be true in part, but it does oversimplify the picture and is generally the opinion pushed by parties with vested economic interests in the moratorium being lifted.

When the moratorium is lifted and land can be bought and sold, landlords will presumably be offered a substantial lump sum cash payment at the current market value in exchange for the deeds to their land. Many will invest the windfall wisely: start up a small enterprise of their own, fund their children through university or take off on that once-in-a-lifetime opportunity to see the grandchildren.

However, it is fairly certain that in many cases they won’t. The financial windfall will be lost pretty quickly, wasted or just plain conned out of individuals. And once it’s gone, it’s gone.

Under the current system, landlords choose to receive their annual rental income in cash or in a combination of cash, seeds and straw that is used, traded or bartered, according to individual needs. Meager as it may seem when compared to the value of land, this is a regular annual payment made every year.

When the moratorium is lifted, land is sold and the money used up, ex-landowners will no longer receive any regular annual income.

It is also worth bearing in mind that demand for, and therefore the value of land, is increasing as the global population increases and the area of land available for food production declines. This in turn will drive up the rental value of land and increase the income available to landlords.

This may well make the difference between the village thriving or dying a slow death as people migrate looking for opportunities elsewhere.

[pic]
An inefficient and aging Soviet harvesting machine gathers this season's wheat crop in Poltava Oblast. Ukrainian farmers harvested nearly 41 million metric tons of grain from this season’s crop as of Nov. 5. The harvest is down 11 percent, year-on-year, due to poor weather conditions, according to government figures. While still a big harvest and enough to preserve Ukraine’s place as one of the world’s top grain suppliers, the yield remains relatively low, at about 2.8 tons per hectare. Despite having favorable weather and some of the world’s richest soil, Ukraine’s annual agriculture yields remain much lower than that of developed nations, where more efficient fertilizers, irrigation and harvesting technologies are used. Experts predict that if Ukraine attracts billions of dollars of investment into its agriculture sector in the next decade, it could nearly triple its annual harvest, turning the nation into a global agriculture superpower. (Yaroslav Debelyi)

Leasing land and paying rents will not lead to a wider renaissance in rural communities by itself. That would require some initiative from the state, but it will aid the process and should be seen as a part of a wider socio-economic mix.

In a country where more than 26 percent of the population is living below the poverty line, it is an efficient way to filter foreign investment directly to where it can have the greatest impact – namely in people’s pockets.

When land is sold, any future benefits will leave the country to pay dividends and shareholders. Some will be reinvested. But it will be on tractors, machinery, fertilizers and chemicals, much of which is produced by foreign-owned companies and have shareholders of their own.

Most landowners have a vested interest in how their land is managed and maintained as many of them live on or near the land they own. They don’t want inappropriate use of chemicals and fertilizers taking place.

Large businesses tend, at the moment at least, to employ qualified and experienced specialists and do a very professional job. However pollution, habitat destruction and soil degradation are all problems that continue to exist despite efficient technologies introduced by big business. Who can predict what farming practices will take place in the future?

If a landowner continues to own the land, then theoretically they will have some say in how the land is managed. Essentially, if they don't like what the current tenants do, they can kick them out and rent their land to another tenant.

Such a relationship could put pressure on the tenant to manage the land in an appropriate, responsible and sustainable manner. But once the land is sold, the local population will have little leverage in how it is to be managed and how their local environment might be affected.

The current system also suits tenants. From their perspective, not having to find huge amounts of capital to pay for land is advantageous. It opens up the investment market to more but smaller investors, thereby increasing the total amount of investment coming in to the country. Also, as large sums of cash don’t need to be committed to land, it can be put into equipment, inputs and infrastructures where it will have a greater impact on the return on investment.

Many commentators suggest that the lack of land ownership is holding back the development of Ukrainian agriculture. They say yields would improve if businesses owned the land they farmed. But most farm businesses in the United Kingdom, which has higher yields than Ukraine despite less rich land and sometimes tougher weather conditions, do not own the land. It doesn't seem to make much of a difference there. The average United Kingdom wheat yield last year was a shade under eight metric tons per hectare, or several times higher than in Ukraine.

There are many things holding back the development of Ukrainian agriculture, but land ownership is not necessarily one of them.

Read this article in Russian here.

Michael Lee is an independent agricultural specialist with more than 20 years experience in the agricultural sector. He spent 13 years lecturing agriculture and agronomy at a leading United Kingdom university. He has worked extensively in Ukraine, in many former Soviet republics and across Europe. He can be reached at agronomy.ukraine@yahoo.co.uk