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Carolin Busch

Moldovan agriculture uniquely affected by war in Ukraine

Agriculture is a sector of importance for the Moldovan economy accounting for around 10% of GDP and 45% of exports. As prices for agricultural commodities have spiked due to the war in Ukraine, a key question has become, whether Moldovan farmers could benefit from this. To answer this question, the German Economic Team conducted an analysis of the war-related changes in the cost structure of producing Moldova’s key agricultural exports – wheat, maize, sunflower seed, and rapeseed.

  • Moldova
NL 73 | September - October 2022
Agro-Economics

Our analysis shows that except for sunflower seeds, the production of these crops in Moldova has become less profitable, as the increase in output costs is lower than the increase in production and export costs. An important factor here is the increase in transport cost for Moldovan exporters by 180%, which reduces the profit farmers can make. This is related to the logistics challenges the country faces due to the war and constitutes a negative impact that uniquely affects Moldova.

Agriculture plays a key role in the Moldovan economy

The role of the agriculture sector in the Moldovan economy has been decreasing slowly over the last years but is still significant at around 10% of GDP.

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In addition, the sector accounts for 21% of employment on average. For exports, the role of the sector is even larger with a share of 45% in 2021. The most important agricultural exports include cereals, mainly wheat and maize, as well as oilseeds and vegetable oils. However, exports vary a lot between years, revealing the sectors vulnerability to external shocks such as weather conditions and global market prices. As Moldova’s overall export volumes are small, the country is a price-taker. In addition, storage and processing facilities are limited in the country. As a result, Moldovan farmers have little capacity to adjust their export volumes to market developments – instead, export volumes are mainly determined by harvest volumes, which in turn are determined by weather conditions.

Market prices increased, but so did input costs

Global prices for key food commodities such as wheat, maize and sunflower seed have been increasing since mid-2021. After the Russian invasion of Ukraine, they spiked further upwards in expectation of future supply shortages. The negative impact of such high food prices for consumers, especially vulnerable groups in poor countries, have been widely discussed. On the other hand, the impact of high prices on producers could be positive. However, in addition to output prices for commodities, the price of key inputs used in their production such as fertiliser and fuel oil increased as well. This constitutes an increase in production costs, which is particularly problematic for cereals, where profit margins tend to be small.

To determine whether producers in Moldova, a net exporter of cereals and oilseeds, benefit from high market prices in the context of the war in Ukraine, the German Economic Team conducted an in-depth analysis of the changes in the cost structure for the country’s key agricultural exports – wheat, maize, sunflower seed, and rapeseed. The analysis is based on a series of key stakeholder interviews, which included farmers, wholesalers of agricultural inputs, industry specialists, and relevant authorities in Moldova.

Highly increased input and transport costs

Our analysis compared the 4-year average production costs for the four crops prior to the war in Ukraine with average production costs in 2022. This analysis revealed that production costs in Moldova increased between 53% (for rapeseed) and 99% (for wheat). While these increases in costs are large, they would be roughly similar in other producing countries and should thus not constitute a competitive disadvantage for Moldovan farmers.

However, our analysis also showed that beyond increased cost for inputs, Moldovan farmers face additional challenges due to the war in Ukraine.

The biggest obstacle for the sector is export logistics. Due to the blockage of the Ukrainian Black Sea ports, Ukrainian exporters have to use other transport routes for their exports of agricultural commodities. This includes routes through Moldova. Since Ukrainian export volumes are several times larger than Moldova’s, this has put a strain on the logistics and transport infrastructure in the country such as the relatively small Danube ports, railway lines, and roads, including border crossings. As a result, the cost of transporting cereals and oilseeds from Moldova to the ports on the Danube or the port of Constanta in Romania has increased by 180%. These transport costs, while borne by traders, reduce the final price paid to farmers in Moldova.

Negative outlook for key agricultural commodities

Based on our analysis of the cost structure prior to the war in comparison to this year, we assess for each of the four crops, what level of yield farmers would have to realise to export their crops profitably at pre-war and current market prices.

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For example, in the case of wheat, the current cost structure would require a yield of just below 3 t/ha to break even under the assumption that market prices are 320 USD/t. Prior to the war, a farmer would have already been profitable with yields below 2 t/ha despite considerably lower market prices.

The same research was conducted for maize, sunflower seeds, and rapeseed. The findings indicate that farmers are worse off for each of these crops in case of average yields except for the production of sunflower seeds.

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For the production and export of sunflower seeds our research shows that with average yields, which in Moldova are around 2 t/ha, farmers are better off in the current situation than prior to the war. Only in a situation, where yields drop below 2 t/ha, current high prices cannot compensate for the increased cost of production and export logistics.

Overall, the analysis, in combination with information about expected yields for this season, indicates that farmers in Moldova would have problems with the profitability of wheat and maize exports. On the other hand, the export of sunflower seeds and rapeseeds should still be profitable given current market prices and production costs.

Policy recommendations and outlook

Our analysis shows that while the war in Ukraine has some positive effects on the Moldovan agriculture sector through higher output prices, the negative side-effects predominate. The problems related to logistics and increased cost of transport are unique to Moldova and could thus warrant support to the sector. In the short-term, support for producers to address increased input costs such as tax exemptions or relief could be provided. In addition, improvements in logistics infrastructure, for example additional railway carriages or freight terminals, are needed urgently. In the long-term, measures should include improvements in irrigation, post-harvest, storage, and processing infrastructure. These could increase the capacity of Moldovan farmers to react to external shocks both negative and positive.

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This Newsletter is based on the Policy Study: Impact of the war in Ukraine on the Moldovan agriculture sector – focus on cereals and oilseeds.