Ukraine is struggling to protect its agricultural producers from the effects of the credit squeeze, which could impact both short-term inputs purchases and longer-term infrastructure investments while Russia is using some of its oil wealth to boost grain exports.
Another good harvest is forecast in both Ukraine and Russia, and grain exports have been boosted by local currency devaluations. But both government and international agencies fear that the financial crisis could impact production.
Pessimists fear output could fall sharply. A sombre US Department of Agriculture report forecasts a 20% drop in production of grains and pulses in Ukraine, as the credit crunch may result in decreased input application, possibly lowering crop yields and grain quality.
Prime minister Yulia Timoshenko announced on Thursday that 2.2 billion hryvna ($295 million) of spending on agriculture-related programmes. Oleksiy Blinov, analyst at Astrum Investments, said the disbursement is a top priority, since agricultural producers are facing huge problems in obtaining loans they need to start the season.
The agriculture ministry warned last month that out of 5 billion hryvna required to finance the harvest, only 1 billion hryvna had been found. Although most of Ukraines farmers traditionally finance inputs from their own resources, the shortfall is still serious.
The National Bank of Ukraine has signed a framework agreement with Raiffeisen Bank Aval, Ukraines largest foreign-controlled bank, to make available up to 1 billion hryvna for pre-harvest financing. A Raiffeisen spokesman said this week that 79 million hryvna had been disbursed so far.
Artur Iliyav, chief executive of Raiffeisen Bank Aval, said outstanding loans had been rolled over in such a way that the proceeds of sales have been used for inputs in the new season, with monitoring by the bank.
Gilles Mettetal, head of agribusiness at the EBRD, said: Many farmers in Ukraine have never had access to finance; they finance their own inputs through equity. The EBRD has offered to share the risk with traders who offer pre-harvest finance to farmers, but had seen no strong demand for such financing.
Another mechanism designed to help farmers is forward purchasing by the states Agrarian Fund, which plans to spend 742 million hryvna on grain this year. Viktor Andrievsky of the Agrarian Markets Development Institute in Kiev said: The fund is a far from perfect mechanism, because it is restricted to buying and selling at fixed prices. The industry is talking to the government about altering the rules.
Vipul Prakash, manager in IFCs global agribusiness department, said that, internationally, last years food crisis has given way to a potentially equally serious liquidity crisis. Falling prices have hit traders and others who built up inventory, and they had to sell at a loss, he said.
But at the beginning of the chain, the costs of inputs, and especially of fertilisers, have not gone down as quickly as one might have expected. We therefore do not expect harvests to be at the level they have been in previous years.