Round table July 9: Abstracts and presentations

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This week witnessed another scheduled Round table under the auspices of the State Service of Ukraine for Geodesy, Cartography and Cadastre of Ukraine, which was devoted to another aspect of land reform – namely, to foreign experience: “The history of reform and transformation of the land market in the US as well as Germany, France and other European countries.”

This essential topic gathered in the courtroom a number of leading scientists in agrarian sphere, including:

  • Mr. Thomas G. Johnson, a professor, Professor of Agricultural Economics and Public Affairs, Director of Analytic and Academic Programs, Rural policy Research Institute (RUPRI), University of Missouri, Columbia,

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and

  • Mr. Henk Moen, Consultant on Land Management on behalf of RVO-NL (Netherlands).

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Largely, participation of these experts is due to the support from Twinning Project and USAID, which promote cooperation with foreign experts.

Thus, the discussion began with a presentation by Mr. Thomas Johnson on “Changes in US agriculture over the past sixty years” (presentation). The very title of the speech showed that the expert had extremely briefly analyze the huge amount of unique experience and present the audience with the quintessence of his knowledge, backed by numerous facts.

For example, there is a trend of decrease in the number of households while their size increases. Distribution of households engaged in crop production is by their size. The average size of farms (total area divided by the total number of farms) is 234 acres (94.7 hectares). Half of all households handle less than 45 acres (18 hectares) and the other half works on more than 18 acres. Half of the area is handled with households of 1100 acres (445 hectares) and the other half is with more than 445 hectares.

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The expert also shared a visual infographic on the size of farms in Ukraine, compared them with the size of their livestock in the US (various types of cattle that is grown) and presented visual dynamics of the crop and livestock products in the US for the past five decades. Speaking of the plant, Mr. Johnson, above all, provided the statistics on yields of cotton, corn, soybeans, tobacco, and of course, wheat.

Professor shared with the audience the following generalizations:

  • average nominal and real price of real estate has increased in the US economy during the years 1970-2014 from $ 150 per acre to 3000 dollars per acre (taking inflation into account);
  • the period from 1967 to 2011 also changed the ratio between the value of agricultural land and rent for it – towards the reduction of rent.

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The overview of the US agricultural center was especially detailed and therefore particularly interesting for the audience, as it included the following indicators: the number of households, number of grants received, the average household income, the average cost per hectare of land, the average income of farm land in the United States and other.

Immediately after the presentation, Mr. Johnson received a number of questions from the audience, the first of which was the question from Mykhaylo Kukhar, the moderator of the event: if you could go back in time and change anything in the architecture of the US agricultural market, what would it be (despite the fact that the average American household currently pays 20 thousand dollars of taxes and receives 12 thousand dollars of subsidies per year)? It is obvious that today the whole profitability is supported by grants, and the average income is negative. Mr. Kukhar explained the feasibility of this issue today in Ukraine with very low taxation of agribusiness and virtually zero subsidies, compared with Western Europe or the United States.

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So, to paraphrase the question, Mykhaylo Kukhar asked whether Professor Johnson would recommend such a model of development when the whole agricultural sector would actually be unprofitable and its level of profitability depended on government subsidies?

Professor Thomas G.Johnson: If I could go back in time, knowing what changes expect us in the agriculture my country for the next fifty years, I would say that it is the high level of subsidies made possible to establish such a large number of small farms. In addition, large subsidies rather significantly affect the value of the land. Smaller farms that do not receive significant subsidies often have problems with paying taxes.

As for the rent, it doesn’t seriously depend on the size of farms, but rather on the quality of the soil. Approximately 40% of land owned by small landowners is given for rent.

Pavlo Koval, an independent consultant in the field of Financial Economics and Management, Deputy Director of the Institute of Economics and Management of Kyiv National Economic University, asked American experts to describe the most striking trend of the past 10-15 years in the agricultural business in the following economic parameters: efficiency of farms, subsidies and taxes.

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Professor Johnson said that productivity per worker in agriculture is very high – higher than in any other sector of the American economy (except for some of the newest branches). The volume of production in agriculture has increased many times per population and the share of agriculture declined from about 20% to less than 2% percent. This does not mean low performance; a margin of these companies is quite small. The problem is that the rural population decreases, jobs become fewer and far between. Most of the income received from the lease and land use, is taken away outside rural areas, mostly because the owners do not live in the villages themselves.

Thomas G. Johnson: the farms often don’t include those items that manufacturers in other industries are obliged to include in their taxable income. Their tax base is calculated a little bit differently.

Ms. Olga Zhovtonoh, head of the Ukrainian-Dutch MATRA project, asked whether there are any restrictions in the United States to land or lease land (concerning the number of hectares) – for a Ukrainian agrarian it is quite important, because we have repeatedly had draft laws that provide for such limitations.

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Professor Johnson: the US government does not impose any restrictions on the area and on leased land rents – neither minimum nor maximum performance. This situation in the sector stabilized seriously, but also there also is an increased concentration of agricultural land.

Chairman of the State Service of Geodesy, Cartography and Cadastre Maksym Martyniuk, continuing this theme, asked, who often becomes a lessor of agricultural land in the US.

Professor Johnson: indeed, as I have already mentioned, about 40% of agricultural land is leased. Within one family it often happens so that the senior family members step away from the business, the younger ones move to the city, and often neighbors take the lease.

The second part of the round table was devoted to agricultural market of the Netherlands, which, according to Mykhaylo Kukhar, is justifiably considered one of the most “advanced” of European markets. A report on this topic was presented by Mr. Henk Moen, consultant on Land Management on behalf of RVO-NL. His presentation entitled “Monitoring of the land market in the Netherlands” has caused a new series of questions and another round of lively debate.

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Mr. Moen listed the following principles of agricultural market in the Netherlands:

  • Sale and purchase of land ownership is a natural manifestation of the free market contract, and there are no control systems for the market there;
  • Rent of land is based on the Law on lease, in order to protect the legal status of the tenant and the landlord;
  • The lease is registered in the Chamber of lease and, while the ownership is registered in the inventory;
  • Rent rates are relatively free (compared with other countries).

The main players in the land market in the Netherlands are agricultural entrepreneurs (about ¾ of rural areas), individuals and legal entities engaged in sale, purchase and lease, as well as ministries, provinces and municipalities (about ¼ rural areas) that deal with roads, railways, waterways, buildings, lakes, natural objects and objects of defense.

Moderately high mobility of land in the Netherlands is proved by the fact that, on average, about 1% of the total rural land area is transferred into property. If the sale and purchase parties happen to have land disagreements, they usually employ evaluators to propose reasonable, adequate market price, and then go to the notary (he registers the deed in the inventory).

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In 2004 and 2007, a number of European countries joined the EU, and several of these countries have opened their land markets, not allowing the foreigners to enter them for the first 7 years. In this period, due to such measures, the average selling price of land was EUR 700-1000 per hectare. After about 10 years, the average sale price rose to 2000-4000 euros per hectare, depending on the economic outlook specific to a particular state.

By 2015, the Netherlands operated with the old system of monitoring the land market, organized by the land bank. Data for all transactions on agricultural land was given to Cadaster; data analysis was carried out by non-governmental expert evaluators. They determine whether a given transaction is done between members of the family or just the two farmers; whether the price of land is moderate; which agricultural land is sold in this case, and a number of other issues. Such data is transferred from the Inventory for publication on government and parliamentary resources and in the media. Other parties may use and disclose this information at their own understanding.

In January 2015, all the land of the former State Land Bank was transferred to the twelve provinces. The highlight was given to a special category of land, “intended” to implement the agreed public purposes in integrated projects of land consolidation and development of nature. In the Netherlands there are now twelve relevant provincial land revolving funds, which decide how they want to buy land – voluntarily or sometimes forcedly. Still under consideration is the system of land monitoring, which is advisable to introduction or change.

Thus, as the expert in the end, the free the land market in the Netherlands is working satisfactorily, but it should stimulate sales and lease transactions. According to Mr. Moen, this can be achieved with a simple “anti-bureaucracy” process. It is also desirable to monitor the sales and rental market in one organization or institution.

Mr. Maksym Martyniuk mentioned that while he listened to reports of foreign experts, he came across the idea that “you can endlessly buy and sell land, but it is both a territorial basis for allocation of production and at the same time, land is itself a means of production”. Attempts to get added value from operations of sale of land look ridiculous in comparison with the performance of agricultural production in the Netherlands and Ukraine. In parallel with the launch of the land market, we need to focus on integrated rural development towards increased productivity and increased cost of land that we want to buy and sell.

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Mr. Alexander Mulyar, representative of USAID “Agroinvest” project, in the context of the new Ukrainian law on the introduction of a minimum lease term of land (seven years) asked about the available foreign experience of such situations and the possible consequences of such decisions.

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According to Mr. Moen, lease term of seven years fits perfectly into European standards in different states because the EU minimum lease terms range from 6 to 12 years, and this is an adequate resolution. If we take into account the land (especially in terms of irrigation), we can assume the efficiency of an even longer period of rent – for more sensible use of land. Agriculture is an extremely diverse sector, and we need to set the bar for the necessary time, based on a large number of characteristics of the land.

Mr. Alexander Kaliberda, Deputy Chief of USAID “Agroinvest” project, said that he noticed a contradiction in Mr. Moen’s report, which concerned state intervention in the rental market. Mr. Kaliberda wondered why the expert believes that state control in this sphere useful for Ukraine while the Netherlands rejected this.

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In his turn, Mr. Moen replied that he did not mean binding government control over rental market of agricultural land. He only said that the transition from one model of the market to another under such control gives quite interesting positive results. This period is long enough to carry out serious investments.

Mr. Martyniuk commented on this paradox as follows:

A minimum of seven years of land lease enables farmers to reorient from one- and two-year crop cultivation towards long-term harvesting cycles. Thus, the plant breeding develops more intensely; extensive use of soil is reduced as well. In Europe, the state does not interfere in the lease issues, but has a rather rigid control of the quality of soil, and this criterion is indirectly linked to the duration and manner of land use. Responsibility for the reduction of soil fertility it is very difficult to avoid. The same system of control over the use of land virtually absent, because what inspection for agriculture used to do before is not done by anyone now.

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Other experts participated in the discussion of this issue: Vitaliy Stepaniuk (Ministry of Agrarian Policy and Food of Ukraine) and Yuriy Patyk (“Ukrainian Agribusiness Club” Association), moderator Mykhaylo Kukhar, Alexander Kaliberda, Deputy Chief of USAID “Agroinvest” project and Alexander Mulyar, representative of USAID “Agroinvest” project.

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Mr. Alexander Mulyar took the word to explain why the minimum term of the lease was just seven years. The result of any agrarian entity in terms of the economy can be adequately assessed only at fourth or even fifth year of operation. This caused introduction of chronological standards for leases in European countries and the USA. In turn, before investing in the farm project, investors require information about which term is intended for business activities in this sector. In terms of soil fertility, a seven-year lease term is the best solution.

When asked about the ownership structure of the agricultural sector, Professor Johnson said that the US government is the largest landowner in the country. It also allowed foreigners to participate in land sales. Mr. Henk Moen described the situation on this issue in the Netherlands, where a very low percentage of agricultural land is owned by the state. Land banks own mostly non-agricultural lands.

According to the announcement of the next meeting of the round table discussion, the participants will continue to discuss the experience of land markets in Europe and the most successful ways of introducing concepts into Ukrainian realities.

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