Over the last 20 years an increase in investments in Ukraine´s agricultural sector has been observed. These investments are often made by a new type of large-scale agricultural company, called “agroholdings”. In this section the literature on the phenomenon of large vertical integrated agroholdings and their status in Ukraine´s agricultural sector will be examined.
2.2.1 Forming of Large-Scale Agricultural Companies
The emergence of large-scale agricultural companies was explored by Wandel (2011) and Balmann et al. (2013). Wandel (2011), investigating the origin of agroholdings in the Russian Federation, analysed factors determining the formation and development of agroholdings. Wandel also formulated a general definition of an “agroholding” as a vertical incorporation of several enterprises in the agricultural value chain (Wandel 2011, p. 62). The author pointed out a need for future research on such phenomenon as large farms, above all because of their relevance for economic theory of industrial organisations. As an important factor of their emergence he identified transition processes from the command to the free-market economy in post-Soviet countries (Wandel 2011, pp. 643–644). The consequences of the transformation processes18 in Eastern Europe and Central Asia have been investigated in numerous publications (Kimhi, Leman 2013; Stange 2010; Zinych 2009; Zinych, Odening 2009; Biesold 2004; Schulze op. 2003; Heinrich, Hinners-Tobrägel 2002; Poganietz 2000; Tillack, Schulze ©1997). All these authors concluded that the transfer of property rights from the state to private hands increased manager´s focus on profitability and economic efficiency.
Koester (2005) analysed reasons behind the domination of large farms in Russia´s agricultural sector with an eye toward transition processes. He concluded that agroholdings´ domination of the sector was based to a lesser extent on comparative advantages (economies of scale), and was instead “a consequence of embedded institutions and [an]
inadequate institutional framework” (Koester 2005, p. 112). Balmann (2014) provided an international overview of existing agroholdings in Latin America, Asia and RUK (Russia, Ukraine and Kazakhstan). He emphasized the importance of professional management in agroholdings for gaining long-term benefits from large arable areas. Focusing on Ukrainian agroholdings, he investigated advantages and disadvantages of company size from an entrepreneurial viewpoint and concluded that factors in the formation of large farms may include corruption, a lack of infrastructure and market imperfections. The most recent study on the formation of agroholdings was published by Granzhan (2015), who conducted a qualitative analysis of the main agricultural regions in Ukraine, developed a classification of agricultural enterprises and explored the structural changes, caused by transformation of the agricultural sector.
In addition to the research investigating the formation of agroholdings, scholars have also studied agroholdings´ strategic management (Gerasin et al. 2003), operations management (Luka 2003) and financial analysis (Pirscher, Tillack 2000;
Galushko, Bruemmer 2003). Several authors found that farm size alone has little impact on the agroholdings´
profitability (Demyanenko 2003; Protchenko, Pugachov 2003). To a much greater extent, the profitability appears to depend on the effective strategic and operations management of agroholdings. The scientists also identified agroholdings´ high production inefficiency in crop and arable farming as a challenge (Balmann, Kataria K. et al. 2013).
The researchers acknowledged the need to improve the labour productivity of agroholdings to become competitive in an international context. Finally, the scholars identified the tendency of agroholdings to intensify vertical integration to produce goods and services with a higher added value (Kovalchuk 2014). Kovalchuk suggested that the absence of governmental support forces agroholdings to seek financing abroad; therefore, recently the need for foreign investment in Ukraine has become urgent. In the next section the current development of Ukrainian agroholdings will be investigated.
2.2.2 Current Development of Agroholdings
Agroholdings are a relatively new type of enterprise in Ukraine´s agricultural sector. Official statistical data on agroholdings are not easily available, and there is no official information to describe the vertical integration of
18 Under the transformation processes scholars understand the collapse of collective farms (kolkhozes) in the post-Soviet countries.
agroholdings, their investment activity, energy management, etc. The information in this section is based on the annual publication of the Ukrainian Agribusiness Club (2015). This report summarises the recent development of Ukraine´s agricultural sector. To gain a better understanding of the present situation relating to agroholdings, the Ukrainian Agribusiness Club took a historical perspective and suggested three stages in the development of agroholdings in Ukraine:
• 2005-2009: This period was characterised by the rapid growth of agroholdings. Newly created companies tried to cultivate as much arable land as possible. Another trend was attracting external financial resources for company´s development. Several agroholdings undertook Initial Public Offering (IPO) on European stock exchanges: Warsaw, London, Frankfurt (Balmann 2014, p. 26). Capital gained through the IPOs equalled to $ 1.4 Bn or 25 % of all IPOs of Ukrainian companies. However, the development of agroholdings was negatively affected by the global financial crisis between 2008 and 2009.
• 2010-2014: The second stage was characterised by improving the agroholdings´ operational efficiency and slowing down the arable land growth. Figure 2.14 illustrates the decline of land cultivated by agroholdings after 2013. Due to the worsening economic situation in this period in Ukraine, attracting investment became difficult. Many agroholdings diversified their businesses and invested in production of agricultural goods with higher added value.
Because of the increasing energy prices, several agroholdings invested in pellet and biogas production, biomass use and energy efficiency (Latifundist.com 2013). However, the trend toward sustainable investments has not become a mainstream in Ukraine´s agricultural sector.
• 2014-present: This period has been negatively affected by the geopolitical uncertainty in Ukraine. A portion of agroholdings´ arable land has been left uncultivated and capital investments have been placed on hold due to the Crimea annexing and the military conflict in East Ukraine. However, due to the export orientation of agroholdings and national currency devaluation, profitability of the agroholdings´ main business - crop cultivation - has increased (Ukrainian Agribusiness Club 2015, p. 21).
In 2014 the agroholdings´ utilized agricultural area (UAA) was approximately 5.64 M ha and equalled to 26 % of the UAA of all agricultural producers in Ukraine (Figure 2.14). The UAA of agroholdings climbed between 2007 and 2013, and declined from 2013 to 2015.
Figure 2.14: Agroholdings´ arable land between 2007 and 2015 in Ukraine, M ha (Author´s calculation based on Ukrainian Agribusiness Club (2015, p. 6))
The Ukrainian Agribusiness Club estimated the overall number of agroholdings at 112 in 2014 (Ukrainian Agribusiness Club 2015, p. 12). However, neither this organisation nor the State Statistics of Ukraine provide a clear number of the currently operating agroholdings and their definition. In terms of Ukraine´s gross agricultural production, agroholdings had a 22.1 % share in 2014 (Figure 2.15), which was the lowest share among the three main categories of agricultural
8%
2007 2008 2009 2010 2011 2012 2013 2014 2015
M ha
Arable land of agroholdings, mil ha % of arable land of all agricultural producers
producers in Ukraine: agroholdings, small farms and private households19. While small farms were responsible for 33.2 % of production, the largest share was obtained by private households in rural areas with 44.7 %. The share of agroholdings in crop production equalled to 19.6 %, while small farms and private households took the first position with 39.7 % and 40.4 %, respectively. In animal production, agroholdings´ share equalled to 28.1 %, and this share is reported to have grown since 2014. However, this growth does not compare to an increase of agroholdings´ absolute animal production. Against the background of a strong overall decline of the animal population in Ukraine, the agroholdings´ animal production might be decreasing too, although slower than the animal production of small farms and private households. This may explain the relatively high share of agroholdings (28.1 %) in Ukraine´s animal production.
Figure 2.15: Agroholdings´ share in gross production of agricultural goods in Ukraine, 2014 (Author´s calculation based on Ukrainian Agribusiness Club (2015, p. 12))
Considering the agroholdings´ gross agricultural production, crops retained long-term leadership with 63.0 % in agroholdings´ total revenues, while animal husbandry had a share of 37.0 % in 2014, indicating that agroholdings´ key business activity is arable farming (Figure 2.16). However, the data on agroholdings´ gross production does not include any figures of food processing and other businesses agroholdings may have.
Figure 2.16: Structure of the agroholdings´ gross agricultural output in Ukraine, 2014 (Author´s calculation based on Ukrainian Agribusiness Club (2015, p. 16; 51))
By further analysing the agroholdings´ gross agricultural output I observed that in 2014 cereals (wheat, maize, barley) equalled to 62.4 % of agroholdings´ revenues in arable farming, while the share of oil seeds (sunflower, soya, rape) was
19 There is no clear legal distinction between these three classes of agricultural producers in Ukraine.
Agroholdings Agroholdings
Agroholdings
Small farms Small farms Small farms
Private households Private households Private households
0% 20% 40% 60% 80% 100%
Animal farming Crops Gross production
Crops 63%
Animal husbandry 37%
29.7 % (Figure 2.17). Other crops, e.g. sugar beet, had 8.0 %. Regarding the animal business, the production of poultry20 with a 56.9 % revenue share dominated, while pig and dairy farming (milk and beef) had 25.5 % and 17.5 %, respectively.
Figure 2.17: Agroholdings´ production structure in arable and animal farming, 2014 (Author´s calculation based on Ukrainian Agribusiness Club (2015, p. 17; 52))
20 The value of eggs is not included, because the data did not provide it. If the revenue from egg production were included, the share of poultry business might have been larger.
Poultry Pig farming Dairy farming
Cereals Oil seeds
Others
0%
20%
40%
60%
80%
100%
Arable farming Animal farming
3 Theoretical Background
This section provides the theoretical foundation for the present work. Three conceptual frameworks, relevant for the empirical study, will be presented: adoption of innovative agricultural technologies, organisational decision-making regarding investments in agriculture, and behavioural economics of organisations. The first section reviews how scholars have investigated the process of new technology adoption in agriculture, relating to biogas technologies. Second, theoretical approaches explaining organisational decision-making will be presented. Third, I will explore how behavioural economics may be applied to study the organisational investment behaviour regarding biogas.