Ukraine can’t join the EU until the Common Agricultural Policy is reformed

Ukraine can’t join the EU until the Common Agricultural Policy is reformed
If Ukraine is allowed to join the EU, the subsidies it would be entitled to are huge. And much of those billions ends up in the pockets of agro-oligarchs / bne IntelliNews
By Ben Aris in Berlin September 23, 2023

On December 16 the European Council is set to formally initiate accession negotiations with Kyiv to join the EU. But while no one expects the process to go quickly, Ukraine cannot join at all unless the EU first reforms its Common Agricultural Policy. Under current CAP rules, admitting the agricultural powerhouse of Ukraine will put enormous strain on the EU budget.

A third of the EU’s budget already goes on paying subsidies to farms and farmers. Adding Ukraine to the EU will add another 30mn hectares to the EU’s existing 100mn ha, but the subsidies will be proportionately even higher as wages and investment in Ukraine are so low.

In addition to the extra subsidies, Ukraine’s admission will also fundamentally change the make-up of the current subsidy payments. The extra burden of extra subsidies for Ukraine would turn countries like Poland and Hungary from net beneficiaries of the EU budget to net contributors as they take up their share of the bill. As any big decision in the EU has win a unanimous vote, it is currently very unlikely the net beneficiaries will vote to give up the EU cash.

And finally, the mainstay of the EU deal is the free movement of capital, labour and goods. Throwing the EU market open to duty-free imports of Ukraine’s vast agricultural output could knock many of Central and Eastern Europe’s agri-businesses off their feet. 

Under the current CAP set up "normal prices” mean high prices, whereas the lower prices Ukraine can offer mean the rest of Europe’s agricultural producers would require compensation. As Ukrainian production is very cheap that bill would be very large. European farmers have taken high stable prices for granted for 40 years, since the end of the war, and any attempt to reduce the gap between world prices and domestic prices is still felt as unfair and requiring compensations.

Even the temporary transit of cheap and high-quality Ukrainian grain through Central Europe by train in relatively small amounts this year ended in an acronymous row and a five-month European Commission ban on imports after grain prices collapsed on the local Central European markets. Ukraine produces almost enough grain, chickens, eggs and sunflower oil to feed all of Europe by itself.

No one is expecting the process to go quickly and EU leaders are already making it clear the process will take years, if not decades. European Commission President Ursula von der Leyen warned in September there will be no fast-tracking Ukraine’s bid as membership remains “merit based.”

With a population of around 40mn people, Ukraine would become the fifth-largest EU member by population and the largest by land area if it were to join. That could also have serious political implications for the EU if a new axis between Warsaw and Kyiv developed, which would challenge the traditional Paris-Berlin axis, say academics.

Too big to swallow

In 2021, Ukraine had a GDP per capita of $4,800 (€4,451), significantly lower than more advanced European economies like the UK, France and Germany. According to Professor Jolyon Howorth at the University of Bath, integrating a country with such economic challenges could be enormously expensive, potentially straining EU finances and diverting funds from poorer member states like Poland, Greece, Hungary and Romania, which have been net recipients until now.

Ukraine has a rich history in grain exports and vast, highly productive chernozem, or black earth soil of 30mn hectares – the largest agricultural acreage in the European zone and equivalent to one-third of all EU farmland.

The total EU budget for 2021 was €168.5bn in commitment appropriations, of which CAP accounts for 33.1% or €55.71bn. If Ukraine were to become a member of the EU tomorrow, it would get by far the biggest chunk of money from the CAP, since its farmlands are so extensive – an area larger than all of Italy.

On this basis, if Ukraine were to be included in the CAP subsidy system then it would be entitled to circa €16bn a year on its own every year. And that is before any adjustments are made for the additional investments needed for extra investments to bring Ukrainian agriculture up to EU standards, or the extremely low levels of pay.

To put that into context, before the war started, the IMF approved a 29-month Extended Fund Facility (EFF) of $15.15bn as a loan to Ukraine in 2010. That was later reduced to a $8bn, 18-month standby arrangement (SBA). Since the war started, last year the EU committed €18bn in macro economic support to prevent a budget crisis, and the US another $9bn. The latest commitment to Ukraine by the EU is for €50bn support and recovery funding, but for this to be paid out over four years, or €12.5bn per year. CAP subsidies to Ukraine would be more.

Farming favours the big  

The distribution of subsidies consists of two pillars. The first pillar consists of direct payments for farmers, the second of subsidies for "rural development". The latter is very broad and in Germany also includes, for example, payments to state ministries for flood protection. 

Direct payments to farmers are intended to compensate for losses incurred in the sale of agricultural products, for example due to low market prices. The amount is calculated per hectare of agricultural land. So if you have more land, you get more money.

Another unpalatable aspect of CAP payments in Ukraine is the business is dominated by about a dozen oligarchs who would collect the lion’s share of the CAP payments.

According to the Ukrainian Grain Association, only 10 giant companies dominate agricultural and account for 71% of its output between them. These companies will receive the lion’s share of the subsidies.

The Luxembourg-registered sunflower seed producer Kernel is Ukraine’s biggest farmer with 558,000 hectares. It is followed by Ukrlandfarming with 470,000 hectares of land spread across the entire Ukraine to grow wheat, corn, barley and rapeseed. Third biggest is chicken giant Cypriot-registered MHP.

All three are owned by oligarchs. Kernel is owned by Andrii Verevskyi, who was worth $400mn in 2022 according to Forbes. Ukrlandfarming is owned by Oleg Bakhmatyuk, who was worth over $1bn before the war, but has since left the country after his VAB bank collapsed in a scandal. MHP is owned by Yuri Kosyuk, who was worth over $1.1bn before the war, but now is worth $520mn in 2022, according to Forbes.

EU special support for agriculture

In addition to the regular agricultural budget, Brussels is set to dramatically up spending to meet the climate crisis demands.

The Commission proposes to mobilise additional EU funding for EU farmers impacted by adverse climatic events, high input costs, and diverse market and trade related issues. The new support package will consist of €330 million for 22 Member States. In addition, Member States today approved the €100 million support package for farmers in Bulgaria, Hungary, Poland, Romania and Slovakia presented on 3 May. Several other measures, including a possibility of higher advance payments should support farmers affected by adverse climatic events.

The agricultural sector has been under pressure since the Covid-19 pandemic and the surge in prices of energy and agricultural inputs, like fertilisers, following the Russian aggression of Ukraine. The European Commission had already adopted a €500 million support package in March 2022, as well as listed a wide range of actions to ensure the availability and affordability of fertilisers in November 2022.

EU farmers from Belgium, Czechia, Denmark, Germany, Estonia, Ireland, Greece, Spain, France, Croatia, Italy, Cyprus, Latvia, Lithuania, Luxembourg, Malta, Netherlands, Austria, Portugal, Slovenia, Finland, and Sweden will benefit from this exceptional support of €330 million from the CAP budget. The countries may complement this EU support up to 200% with national funds, according to the EC website.

“The national authorities will distribute the aid directly to farmers to compensate them for the economic losses due to the market disturbances, the consequences of high input prices and rapidly falling agricultural product prices and, where relevant, for the damage caused by the recent climate events, particularly acute in the Iberian peninsula and Italy. The aid can also fund distillation of wine to avoid further market deterioration in the sector,” the EC said.

By far the largest amounts will go to Spain (€81bn), Italy (€61bn), France (€53bn), and Germany (€36bn). Where Ukraine to join the EU it would be entitled to similar large grants.

Part of the money will also go to Bulgaria, Hungary, Poland, Romania and Slovakia to compensate them for losses caused by cheap Ukraine grain being dumped on their local markets. If Ukraine is given full and free access to the EU markets as a member, this support will have to become permanent and will be very large.

CAP reforms

In the next funding period, from 2028 onwards, the EU must prepare its CAP to accommodate Ukraine and other EU candidate countries, according to German top farming ministry official Silvia Bender.

The biggest country in Europe in terms of area and an important exporter of grain, oilseeds, and increasingly also poultry meat, post-accession Ukraine would be a major beneficiary of CAP payments – especially the so-called direct payments, which are administered per farmed hectare.

“Of course, the question is whether the accession of the candidate countries will really take place in the next funding period,” Bender said on 21 March.

In Bender’s view the direct payments mechanism will no longer be viable as it will simply be too expensive.

“If Ukraine were to join, then a system of direct payments as we have it today would definitely no longer work,” the State Secretary said, adding there is simply not enough money in the CAP budget to cover the increase subsidy entitlements Ukraine would get.

CAP needed reforms even before the idea of adding Ukraine came into play. At the moment, the focus is on the climate crisis and changes were made to green the CAP in 2021 that have just come into force, and are supposed to help reduce emissions.

However, experts say the subsidy system has undermined these changes. CAP was introduced post-WWII to ensure there was enough to eat. That goal was quickly achieved, but CAP was adjusted to support farmers who saw profits drop in the post-war recovery boom. In the 1970s there was a change of direction as CAP focused more on farming’s economic returns that ended up encouraging the industrialisation of farming, which remains the basis of CAP today. Germany, for example, produces more pork and milk than it can consume and has to export the surplus, but it only produces a quarter of the fruit and veg it needs, importing the rest.

Small farms in Europe are already under pressure, even before huge new Ukrainian farms increase competition further. Germany has 16.6mn ha of arable land and the biggest population in Europe, but 3,500 small and medium-sized farms are closing a year, according to German investigative site FragDenStaat, and up to two thirds of most small farms income are now EU subsidies.

The EU wants to increase the share of organic farms to at least 25% Germany has even set a target of 30%. However, little progress has been made as experts complain the subsidy policy is still stuck in the post-war era, where the focus remains solely on achieving the highest yields.

The EU is aware of all these problems, but it is also acutely conscious that changing the system will be extremely hard.

Von der Leyen said during her state of the nation speech in September: "We need to move past old, binary debates about enlargement. This is not a question of deepening integration or widening the Union," she said. "We can and we must do both."

There is increasing talk of revising the EU’s basic treaty and abandoning the unanimous vote rule and adopting a majority rule instead. A group of six European lawmakers proposed just that in August in a long-shot attempt to bring about the change. But given Ukraine’s size and agricultural power it remains difficult to see how all 27 members will unanimously agree to make it a union member under the EU’s current set-up.