5.1. Production Structure in Ukrainian Agricultural Enterprises
The volume of production in organic enterprises is higher than it is the case for conventional enterprises in Ukraine (Table 2
). In 2012, on average, an organic enterprise generated revenue of €2104.8 thousand from the sales, whereas an average conventional enterprise generated just €1269.6 thousand. In 2017, these figures went down to €1776.5 thousand and €1075.7 thousand respectively. Thus, the ratio of these indicators virtually did not change with time. The share of the livestock output is much lower than that of the crop output in organic enterprises of Ukraine.
In regards to the agricultural land area, organic enterprises are approximately 1.5 times larger than conventional enterprises in Ukraine. The areas sown under organic soybean, winter wheat and sunflower increased during 2012–2017, whereas that under organic corn for grain fell. The number of workers remained rather stable, although the declining trend persists for both conventional and organic enterprises. The organic farming showed growth in the number of livestock, yet the rate of growth was lower for milk cows and cattle. The structure of the agricultural output of conventional and organic enterprises of Ukraine is presented in Table 3
. Even though the share of the livestock output is rather low in organic enterprises, it shows an increase during 2012–2017, whereas the opposite trend is observed for conventional farms. In the output of the organic sector, the share of grain and legume crops shrunk by 2.5 p.p. and that of soybeans increased by 5.1% p.p. during 2012–2017.
There has been an increase in the share of areas sown under winter wheat, sunflowers and soybeans (Table 4
). At the same time, the share of corn for grain and cereals and legumes decreased. The largest difference between organic and conventional enterprises in terms of land use structure was noted for soybean. In 2017, its share in conventional enterprises amounted to 8.0%, while there was an 11.6% increase for organic products. These changes are related to the relative prices of the agricultural products and the changing patterns in the international markets. Particularly, the transition towards winter wheat is evident. Indeed, Ukraine and countries in the neighboring region may exploit their competitive advantage in wheat production, due to favorable geoclimatic conditions.
The differences in the production structure of the Ukrainian organic agricultural companies can be illustrated by considering particular cases. Table A2
summarizes data on some of the Ukrainian organic producers. In general, the increase in the livestock output would increase diversification and ensure the generation of higher agricultural value-added.
5.2. Profitability in Ukrainian Agricultural Enterprises
The differences in revenue can be due to land intensity (per labor unit) and labor productivity. In this sub-section, we further analyze the differences in the input use intensity and the profitability of both conventional and organic enterprises in Ukraine. Table 5
presents the cost, revenue and profit indicators per hectare of agricultural land for conventional enterprises.
The increasing input intensity corresponds to the increasing cost per hectare. As a result, there exists an almost linear dependence between the cost and revenue per hectare: At the cost level of 70 €/ha, the revenue is 24.6 €/ha, whereas, at the cost level of more than 704.1 €/ha, the revenue approaches 1,031.6 €/ha. The relationship between costs and profit per hectare is not that straightforward. Indeed, the profit is maximized at the cost level of 493–704 €/ha and declines thereafter. The largest share of the profit per hectare is generated from crop farming (99.3% on average in Ukrainian enterprises).
Cost profitability follows an inverted U-shape curve with cost per hectare. Therefore, the lowest profitability is observed for the lowest and highest cost intensity. The land area varies with the cost level, whereas the number of employees keeps increasing. This suggests that labor costs comprise a substantial share of the total costs. Crop farming profitability exceeds that of the animal husbandry for conventional enterprises in Ukraine.
The same kind of analysis is carried out for the organic enterprises (Table 6
). The organic enterprises show higher levels of revenue per 1 ha of agricultural land (658.5 €/ha against 519.6 €/ha in conventional enterprises). The same applies to the profits: Organic enterprises show the average value of 218.8 €/ha, whereas 148.9 €/ha is observed for conventional enterprises. The profit per hectare fluctuates with the cost level. Again, the influence of the labor intensity is evident.
In the case of Ukraine, we can note the declining returns to labor if comparing different groups of conventional and organic farms once the most optimal scale size is exceeded (Figure 2
a). The results suggest that the economies of scale exist in the production of both organic and conventional products. Indeed, the largest farms (in terms of the labor force) show decreasing returns to scale. Nevertheless, another observation is that organic farms operate at an inferior technology compared to conventional farms, in the sense that the same amount of labor can produce a lower profit, in general. A deeper analysis of data in Table 6
suggests that there are two options for organic farms in terms of the optimal scale size as the declining profit per hectare is observed for medium- and high-intensity organic farms. Furthermore, organic farms are more labor-intensive than conventional farms, which further reduces the profitability.
The previous findings indicate that there exist differences in the levels of input use intensity (as indicated by the cost per hectare) and profitability. Therefore, Ukrainian organic enterprises are further analyzed in the regional aspect as different regions may be associated with differences in soil quality. Table 7
presents the distribution of the organic enterprises across different levels of cost per hectare and regions they operate in.
The data on costs levels per hectare in organic enterprises are further summarized in Figure 3
. The regions in northern and central Ukraine show the highest cost per ha. In addition, the largest areas of agricultural land under organic farming are also found in these regions.
In order to further explain the differences in profitability of conventional and organic enterprises in Ukraine, we compare the crop yields across these two types of enterprises. The yields for 2017 are presented in Table 8
. The organic enterprises how higher yields (with the exception of wheat) if compared to conventional farms. This counterintuitive result can be explained by (i) higher level of development of enterprises embarking on organic farming, and (ii) generally low crop yields in Ukraine.
The results indicate that organic farming should be promoted in regions with favorable climatic conditions and soils. The crop structure also needs to be adjusted to increase the profitability of farming. The scale of operation also plays an important role in terms of cost intensity.
Besides the input intensity and productivity, price level also determines the profitability of farming. The organic production features high rates of output growth (10–20% per year) and higher prices for products if compared to conventional enterprises (30–50% on average) [40
]. At the same time, production costs increase, due to energy consumption corresponding to a large number of mechanical treatments of soil and high costs of the organic fertilizers. In European countries, the level of prices for organic products is often 1.5–2 times higher than usual, which compensates for additional costs [41
]. The supply chain is also longer for the organic products, which further adds to the prices of the organic products [42
In Ukraine, organic enterprises receive higher prices than conventional enterprises (Table 9
). For example, the price for organic corn is 29% higher than for a conventional one—moreover, it is 26% higher for winter wheat, and 45% higher for pork. The smallest difference of 7% is observed for milk. The difference in milk price is significant at the 10% level, whereas the other prices are significantly different at the 1% level. As the previously discussed differences in the profitability suggest, the price differences are still not high enough to support the development of organic farming.
The low difference in milk prices can be explained by the fact that livestock production is primarily directed at the domestic market, whereas the largest share of crop production is oriented towards the external markets. Successful integration into foreign markets requires direct contracts with European companies. The dairy sector of Ukraine has not yet managed to increase its productivity or provide products to foreign markets [44