Interests of Agricultural Producers: to Recognize or to Ignore?

Oleksandr A. Shyshkanov

Contrary to predictions, agricultural producers have more concerns than positive expectations concerning the future completion of the land reform. On one hand, lifting of the moratorium for sale of agricultural land is a long-anticipated event that is viewed by experts and market participants as the attribute of the further development of the agro-industrial complex. On the other hand, the Draft Act On Land Market that was passed by the Verkhovna Rada of Ukraine in the first reading in December 2011 does not meet the relations that prevail at present in domestic agriculture. The Draft contains a number of restrictions as to the possibility to purchase and use agricultural land that do not reflect the real state of the industry. In addition, inaccuracies and deficiencies inherent in the Draft may make it impossible to apply such provisions if they are ultimately approved.

Currently, the facade of domestic agriculture is formed by large agricultural holdings owning large land banks. The dominance of that business form became an outcome of both domestic and global factors. The former may include the lack of a real government support to agriculture during the dire crisis in the country’s economy in the 1990s, as well as Ukrainian farmers having no access to financial resources. As a consequence, Ukrainian peasants failed to become real masters of their land. Global factors include the growing global demand for agricultural products, as well as the global financial crisis, under which agriculture has demonstrated itself as a “safe haven” to save investments.

As mentioned above, the Draft On Land Market ignores realities of the domestic agricultural sector. Not only it keeps agricultural producers away from land ownership, but it also sets up additional restrictions for their activities.

Implications of the Draft in its current edition may become the destruction of entire agricultural sub-sectors such as sugar production, growing grapes, etc.

One of the most notorious is the norm that deprives legal entities of the right to acquire agricultural land. This right will be granted only to citizens of Ukraine, the state, and territorial communities represented by local councils. However, deprivation of agricultural producers of land ownership will lead to inferior turnover of agricultural lands, since the demand for land should be formed by agricultural enterprises, for which land and the ownership rights are the main asset. Leaving the main users of land without the right to buy arable land will replace 6.5 million owners of land plots with a few dozen or hundreds of thousands of such owners. And one of the main goals of the reform has been to merge owners of the land and those who work on it. It will become nothing more than a beautiful slogan from the past.

If agricultural producers are not allowed to be owners of farmland, the land would cease to be of any value for commercial banks as collateral. Indeed, in the case of foreclosure a bank will be able to sell a land plot to a very limited number of people — citizens of Ukraine, the state, or a local council. This would imply a significant reduction in demand for land plots and prices.

In addition, the Draft contains a provision that obliges a bank to sell a land plot that is subject to collection for debts at a land auction within 6 months. At the same time the draft does not specify what would be the consequences if it is impossible to sell the land plot.

Thus, forecasts by some officials that agriculture will be able to attract credit resources in excess as secured by agricultural land are unlikely to become true.

Special attention should be given to the state land bank as a subject of the land market.

The Draft On Land Market provides that the primary function of such a bank is crediting farmers against pledged land. The institution would form an agricultural land fund, made of the land plots provided by the state, land plots purchased by the bank from individual owners, or land plots collected for the failure to fulfill credit obligations by borrowers.

The bank would manage the fund of the state-owned agricultural land through selling and leasing land plots. Thus, the state-owned bank would assume functions that are not inherent to a banking institution. Firstly, it contradicts the On Banks and Banking Act of Ukraine, according to which banking is the only business a bank can do. Secondly, it casts doubts on the possibility of efficient management of land resources.

One cannot but be concerned about intentions of people’s deputies to impose restrictions on the area of farmland that can be leased to one person. Thus, the Draft On Land Market provides a limit of 6,000 hectares to be leased to a person within the same district and no more than 5% of farmland in a region. This innovation would first and foremost be detrimental for entities specializing in sugar production. Market participants are quite right pointing out that full-fledged operation of a sugar mill requires large areas of land to grow sugar beets in the immediate vicinity of the mill. Given the need to ensure crops rotation, the area of such land should be increased at least threefold. Larger distances between beets production sites and the location of sugar mills will increase the cost of transportation and significantly reduce profitability of the mills.

More stringent restrictions are contained in the Draft Act On Changes to the Act of Ukraine on Land Lease (on certain restrictions concerning lease of agricultural land). One of the authors of the Draft is the Chairman of the Agricultural Committee of the Parliament Kaletnik G.N. The Draft provides that one person can lease no more than 10% of farmland in one district and no more than 50,000 hectares in the territory of Ukraine. At the same time, agricultural producers are obliged to bring the size of the leased areas in accordance with the mentioned norms before 1 January 2013.

Most likely, the Draft’s authors forgot one of the basic norms of the Constitution — law cannot be retroactive. Transactions concluded in accordance with the applicable regulations are valid and continue to have effect if such regulations change. Thus, obligation made of agrarians to reduce their land area completely contradicts the Constitution.

One should favorably assess the desire of Ukrainian MPs to settle the order of land auctions, as the absence of such order has almost paralyzed the primary land market. Thus, since 2008, due to the unregulated order of auctions, state and community land is not sold or leased out, with some exceptions established by the Land Code of Ukraine. A consequence of the artificial restriction of access to land for businesses has been the emergence of many semi-legal schemes of land ownership registration.

The Draft Act On Land Market regulates preparation and holding of land auctions in great detail. A new feature is a possibility to hold auctions in the form of bidding with the established terms that could include categories of potential participants, further use of the land, etc. Competitive bidding may be used for the sale of certain categories of public and communal land, including for mass agricultural production and individual farming. On one hand, land auctions in the form of bidding may become a factor stimulating development of some forms of economic activity, such as farms, as well as efficient use of arable land. On the other hand, in view of the corruption of government bodies, bidding can become a tool to eliminate competition and to hold auctions in favor of a specific person.

While the Draft Act On Land Market tries to resolve the long burning issue of land auctions, it contains another provision that would curb the sale of agricultural land owned by the state and communities and property rights thereto. The Draft provides a norm that makes sale or lease of such land subject to the availability of a land use plan and a feasibility study for land use and land protection. In the condition of the budget deficit, only a few communities and districts can afford to develop the above-mentioned documentation. A consequence of such provision would be impossibility to dispose of, and to lease state and communal land for agricultural purposes in most parts of the country.

The Draft Act On Land Market proposed to amend the Civil Code of Ukraine as to the possibility to judicially recognize private agricultural land plots outside communities, which were not inherited, as escheat. Currently, there is an acute issue of allotted land-shares missing owners. In some regions, the share of land, whose owners have died and which was not inherited, reaches 30-40%. According to the Ministry of Agrarian Policy of Ukraine, the area of such land is 2 million hectares in the country. The reasons include absence of heirs, their residence outside the relevant community, the lack of money to probate, etc. In fact, the status of such land plots remains unregulated. Since such land plots are “staggered” in the fields, farmers are compelled to work on them without any proper rights thereto. In this case, if an agricultural producer obeys the law and stops to use such land plots it means that he would need to abandon the whole area. Because treatment of the field with modern, highly productive equipment detouring each randomly scattered unclaimed spot is not only economically unfeasible, but it is practically impossible.

If the Draft Act On Land Market is adopted, the escheat agricultural land outside communities will be transferred to state ownership. Subsequently, such land plots within the same array can be merged into a single land plot by developing a consolidation project, which is also envisaged by the Draft. Thus, the state will be able to significantly increase the area of its own agricultural land in the future.

The escheat procedure has a number of inherent risks for an agricultural producer who leases the majority of land plots within a field. Indeed, after a court transfers land plots into state ownership and until the consolidation is completed, the land plots may not be used other than pursuant to a lease agreement entered into with the state on the basis of a land auction. Otherwise, a company manager will be subject to administrative or criminal liability for unauthorized use of land. However, the lengthy procedure of preparing land auctions, the probability that other persons without a real objective to cultivate the land would win not only creates the possibility of temporary suspension of agricultural use of large areas of land, but it would also mean a potential loss of land assets by agricultural producers. And one should take into account a possible lack of budget funds for consolidation of state owned land plots, a land use plan and a feasibility study for land use and land protection, as discussed above. In other words, the probability exists that over a long period of time land plots in state ownership would not be consolidated, and in many regions they could not be leased at all.

To prevent the above situations, the Draft should provide for a simplified procedure for the land plots that are judicially recognized escheat — without bidding for a short-term lease, and only to agricultural producers who lease adjacent land plots.

The nebulous future of lifting the moratorium on sale of arable land, controversial nature of many provisions of the Draft Act On Land Market cause concerns among agricultural producers and scare away potential investors. In such circumstances, MPs should finalize the Draft, taking into account the interests of all market participants. Indeed, since 2006, domestic agriculture has attracted significant investment, including in international markets, which first of all require stability of commercial, land, and tax laws. Swift changes of regulations along with additional obligations for market participants like, for example, to reduce the area of leased land, cannot only destroy the industry, but also become a failure for Ukraine’s reputation.

In order to protect attracted investments, the Parliament should ensure a stable land-use by all categories of farmers after completion of the land reform. This may include a specific legislative norm on the minimum term of land lease for agricultural purposes, including with perennial plants. In such case, an investor will be able to understand what is the minimum guaranteed period for implementation of the project he invests in. Another way could be a detailed legislation provision on a preferential right of a lessee to extend a land lease agreement. Such a right is already provided by the Civil Code of Ukraine and the On Land Lease Act of Ukraine. However, more specific norms pertaining to land lease will secure stable use of land by bona fide farmers and will to some extent protect them from encroachments on their land assets.

Finalizing the draft act On Land Market with regard to interests of land owners, agricultural producers and the state is a prerequisite for the further development of domestic agriculture.

On the other hand, hastiness and superficiality in adoption of this core regulation may be too costly for the agricultural sector of the economy.