Agricultural Machinery and Equipment in Ukraine (Market overview)
General overview. The agricultural sector plays a significant role in Ukraine’s economy. Possessing a large portion of the world's fertile black soil and being located in a temperate climate, Ukraine is the world’s sixth largest exporter of grains (mainly wheat and barley).
Currently, the farm sector faces many problems, including a lack of working capital, expensive financing, weak state support, and strong governmental control. Low purchasing power among Ukrainian farmers restricts growth in agricultural machinery sales. Industry insiders estimate an immediate demand to replenish the physically depreciated farm and processing equipment in Ukraine at $5-10 billion, with an annual supply of $1-2 billion worth of farm equipment. Experts estimate the current level of physical depreciation of agricultural machinery and equipment at 70-80 %, as compared to 55-60 % in 1999. Approximately 40 % of tractors are 15-25 years old. The need to replace basic farm machinery is becoming critical.
Agricultural machinery is well represented in Ukraine but there are still good opportunities for companies to enter the Ukrainian agricultural machinery market. The supply of second-hand machinery from Europe has gradually decreased, and with the recent dollar exchange devaluation, this opens up more opportunities for exporters of used agricultural machinery. There is currently a critical demand for dependable farm machinery due to the lack of reliable domestic manufacturing. High quality equipment can have a positive impact on Ukrainian agricultural productivity. Ukraine can offer excellent opportunities for investors to expand to other markets nearby such as Russia and other NIS countries.
There are about 40 Ukrainian plants that manufacture a range of agricultural machinery. Generally, production rates at Ukrainian plants are running at 15-30% of capacity. This low percentage is due to a lack of working capital, the poor financial situation of farms, and a lack of new technologies.
The Ministry of Agricultural Policy of Ukraine estimated that the following farm machinery is necessary for the agricultural sector:
Type of machinery (in thousands)
Tractors - 400
Grain harvesters - 100
Fodder harvesters - 25
Tillage and sowing machines - 560
The market demand for tractors is satisfied for 62%, while grain harvesters can satisfy only 54%. Out of these machines, 90,000 tractors and 20,000 harvesters purchased since 1992 are not beyond their technical lifetime.
Here are a few indicators featuring heavy exploitation of harvesters and tractors in Ukraine: the load of one harvester is about 350 ha, while in southern regions this figure increases up to 500 ha, while in the US, France and Germany it is about 50-70 ha per harvester. Arable land per 1 tractor is about 90 ha (for comparison in USA – 28 ha, France –14 ha, Germany - 5 ha).
It should be noted that 70-80% of domestic agricultural machinery is fully depreciated. The demand for basic farm machinery and equipment is quite critical. Ukraine imports about one thousand used harvesting combines annually. The supply of second-hand machinery from Europe has gradually decreased and it opens opportunities for the foreign exporters of used agricultural machinery.
While foreign machinery is well represented in Ukraine, there are still good opportunities for foreign companies to enter the Ukrainian agricultural machinery market. High quality foreign equipment can have a positive impact on Ukrainian agricultural productivity. Ukraine can offer excellent opportunities for foreign companies to expand to other markets nearby such as Russia and other NIS countries.
Ukrainian farmers prefer to purchase foreign grain combines and tractors rather than Russian or Ukrainian combines. John Deere, Case Corporation, New Holland, and AGCO have imported equipment into Ukraine. The demand for grain-harvesting combines and tractors is high, but cultivators, sprayers, ploughs, harrows and other agricultural equipment will also find customers in Ukraine.
End-users of agricultural machinery are former collective farms, private farms, distributors, and machinery-tractor stations. Regardless of specialization, agricultural enterprises and private farms share similar problems that impact the need for agricultural machinery and equipment. Lack of working capital and access to affordable credit, weak state support and governmental interference contribute to problems within the farm sector.
Many suppliers are forced to conclude barter deals, as prohibitions on land as collateral limits access to credit. Since banks only lend against collateral, credit flows only to large agricultural enterprises that have assets other than land, rather than to small and medium size farms. This lack of access to credit is an ongoing problem. Interest rates of 30% and “long-term” loans limited to one and a half years, coupled with collateral requirements for agricultural loans of 200 to 300 % make it virtually impossible for small farmers to gain access to credit.
Competitive Analysis. There are about 40 manufacturers of agricultural machinery in Ukraine, who still supply a significant part of Ukraine’s agricultural machinery, in particular, ploughs, harrows, cultivators, seeders and sprayers. Industry leaders include three plants, which manufacture tractors (Kharkiv Tractor Plant, Pivdenny Tractor Plant and LAN Concern), and two plants, which manufacture harvesters, located in Kherson and Ternopil. All domestic manufacturers of agricultural machinery have similar problems such as old equipment, the absence of modern technologies, low solvency of Ukrainian farms, and a lack of credits. Production facilities at most agricultural machinery plants are currently being utilized at levels ranging from 15% to 30%. Lack of credit and absence of purchasing power have produced a sharp drop in domestic manufacture of agricultural machinery and equipment. The price of domestically produced agricultural machinery is not cheap, because of inefficient and outdated manufacturing technologies. All this makes local machinery less attractive for agricultural companies.
In the beginning of 1990s, Ukrainian farms had 495,000 tractors, 107,000 grain-harvesting combines, and 42,000 fodder-harvesting combines. The agricultural machinery stock is shrinking and is currently less than a half of the level Ukraine had at the beginning of 1990s.
Domestic producers of agricultural machinery have approximately 65% of the Ukrainian market, while producers from NIS countries occupy about 20%, foreign firms 15%. Western European firms actively operate in the Ukrainian market. They understand that despite the obstacles to doing business in Ukraine, the potential for hard currency agribusiness exports is great. Many Western European suppliers distribute agricultural machinery and equipment in the Ukrainian market. The main exporters of agricultural machinery to Ukraine are Russia, Germany, Italy, USA and Denmark.
Major country-importers of new and used grain harvesters into Ukraine are as follows:
Country - Market share (%)
Germany - 45
Russia - 30
USA - 5
Italy - 3
Denmark - 2
Other countries - 15
End-User Analysis. Distributors of domestic and foreign agricultural machinery have been operating in Ukraine since 1991. Most sell machinery through a lease or credit arrangement in exchange for agricultural commodities. Major private distributors supply both Ukrainian and foreign machinery to many regions of Ukraine, and they also deal in used machinery.
End-users of agricultural machinery are former collective farms, private farms, distributors, and machinery-tractor stations (MTS). MTSs were established in each region of Ukraine under a government-sponsored system of state leasing-fund financing. There are now about 1,000 stations, of which 59 are state-owned. MTSs distribute equipment to farms, provide maintenance and repair services throughout the crop cycle and plow and harvest crops. These state-owned stations distribute only locally produced machinery and equipment or imported machines purchased under a government guarantee. Farms pay either in cash or by bartering agricultural commodities, with 3 to 5-year payment terms. Located usually around grain storage facilities or sugar beet processing plants, MTSs provide services to the nearby raw material zones.
Other units that provide machinery services are private households, which during the property distribution of collective farms and write offs of agricultural machinery by a liquidation price obtained some agricultural equipment. Private households have 30% of Ukraine’s harvesters and 20% of Ukraine’s tractors. Still, restructured collective farms remain the main owners and users of agricultural machinery.
In most cases, funding is available for normal short-term farm operating costs. However, it is the lack of long-term credit that seriously constrains Ukrainian farms of all sizes from purchasing major farm equipment. Today, there is no adequate legal infrastructure within Ukraine for equipment leasing. This factor limits the options available for small farms. Ukrainian Government policies aimed at protecting local equipment manufacturers have substantially increased equipment prices while limiting the availability of foreign equipment. For example, high import duties limit access to reliable and reasonably priced spare parts for foreign equipment, while at the same time causing new equipment prices to be prohibitively expensive as compared to prices in nearby countries.
Domestically manufactured harvesters, coupled with the limited supply of imported equipment, can only partially replace the ever-increasing volume of spent farm equipment retired each year. New equipment is 2-3 times more productive than what most farmers currently use. Unfortunately, total equipment availability, and thus harvesting capability, has declined in recent years. Despite no change in harvested area, total harvesting capacity has been declining over the past five years. Only increased per hectare yields, not higher harvesting efficiency, have allowed overall production volumes to rise.
Distributors are more likely to pay for purchased machinery, due to their selectiveness in choosing customers. But if a foreign company decides to work in the Ukrainian market, it is critical to provide a range of financing arrangements (such as discounts, lease and credit facilities, barter transactions etc) because of the lack of working capital of the Ukrainian farms.
Market Access. Ukraine can offer excellent opportunities for foreign companies to expand to other markets nearby such as Russia and other NIS countries. Financing is the most critical issue for end-users, but there are other barriers such as certification, licensing, and taxation.
As certificates issued by other countries are not accepted, equipment must be certified in Ukraine.
The certification procedure is a complicated process and requires translating documentation into Ukrainian. Dealers must have a certificate (UkrSepro - DSTU-ICO 9001-95) for any machinery they sell in Ukraine. The complications start with customs, which does not let in machinery not certified in Ukraine. The certification procedure takes up 90 days and costs about $ 10,000.
Any import in Ukraine requires two mandatory payments: customs duty and value-added tax (VAT). VAT rate in Ukraine is 20%, and it is assessed based on the customs value of the product, plus the customs duty value. In respect to agricultural machinery, custom duties range from 2-40%. Foreign companies normally use the services of a customs broker to customs-clear goods and equipment, as these brokers are experienced with handling the necessary procedures and maintain an all-important network of contacts with the Customs authorities.
The presence of a representative office in Ukraine can make sales easier because the company may use not only direct sales, but leasing and credit systems. In addition, foreign company would be able to export its equipment to Russia and other NIS countries.
Some foreign equipment manufacturers prefer to work through their European subsidiaries from which they can transport equipment to Ukraine. For equipment manufacturers without offices in Ukraine and/or without European subsidiaries, these companies must ensure Ukrainian companies that service and spare parts can be available in a timely manner, as prolonged breakdowns can have a seriously detrimental impact on farm operations.
Finding a reliable local partner will be crucial to business success in Ukraine. Moreover, liaison with an established distributor that operates a network of representatives all over Ukraine, and has contacts in state committees and government institutions in the agricultural sector is invaluable, since the state continues to play a major role in business transactions and certification. Therefore, selecting a quality local partner is a key decision to maximize chances for success in the Ukrainian market.
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