Thursday, February 19, 2009

Why I believe in production destruction...

Ukraine may be about to "Iceland". 

Bank analysts predict that Ukraine is heading for a historic default on its national debt, in a scenario that could complicate EU-Ukraine relations and have an impact on the recent Russia-Ukraine gas transit deal.
"The market is pricing in a probability of sovereign default of almost 90 percent," Commerzbank analyst Ulrich Leuchtmann told EUobserver on Monday (16 February). "It could happen in the next couple of quarters."
Ukrainian industrial production has plunged 26 percent compared to last year. The hryvna has lost over a third of its value against the US dollar and the International Monetary Fund is hesitating on payments of a rescue loan as Kiev declines to keep down public spending. [More]

Now imagine how this will affect their up-and-coming agricultural development, which was supported by credit from government as well as private sources.

In most cases, funding is available for normal short-term farm operating costs.  However, it is the lack of long-term credit that seriously constrains Ukrainian farms of all sizes from purchasing major farm equipment.  Today, there is no adequate legal infrastructure within for equipment leasing. This factor limits the options available for small farms.  Ukrainian Government policies aimed at protecting local equipment manufacturers have substantially increased equipment prices while limiting the availability of foreign equipment.  For example, high import duties limit access to reliable and reasonably priced spare parts for foreign equipment, while at the same time causing new equipment prices to be prohibitively expensive as compared to prices in nearby countries.
Domestically manufactured harvesters, coupled with the limited supply of imported equipment, can only partially replace the ever-increasing volume of spent farm equipment retired each year.  New equipment is 2-3 times more productive than what most farmers currently use.  Unfortunately, total equipment availability, and thus harvesting capability, has declined in recent years.  Despite no change in harvested area, total harvesting capacity has been declining over the past five years. Only increased per hectare yields, not higher harvesting efficiency, have allowed overall production volumes to rise. [More] [Note this information was last year]
It is one thing to moan about how bad our economy is here, another to be unable to get an operating loan under any circumstances.  That could be the case in Eastern Europe right now.

Looks like their ag output is in for a significant decline.

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