How cooperatives can beat large agricultural and trade corporations

Over the past four years, the total number of agricultural cooperatives in Ukraine has hardly changed: at the beginning of 2020, there were 2,279, and at the end of 2023, the State Statistics Service counted 2,292 associations, i.e. an increase of 0.6%.

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But in July 2020, when the law "On Agricultural Cooperation" was adopted after a heated debate, it was pretentiously called a "breakthrough" and a "locomotive."

Why is the "locomotive" not working, and why are Ukrainian farmers joining European cooperatives?

Profit model and exceptions

Cooperatives, particularly agricultural cooperatives, have proven their economic efficiency all over the world, from the United States to South Korea. The NACF/Nonghyup, an association of Korean cooperatives, is one of the largest and most profitable. It has a diverse structure, but agriculture is the mainstay. NACF/Nonghyup includes about 3 million farmers, and its annual profit has reached $60 billion for two years in a row. Such profitability attracts investors – they have the status of associate members, and their number has already exceeded 6 million.

Ukraine is at the opposite pole in this regard. Of the 2,300 agricultural cooperatives, most exist only on paper. The profits of such associations need to be sought with optics, which is what fiscal officials are doing — but even they are not successful.

"Economic feasibility, i.e. profit, is the main thing that should drive farmers to join agricultural cooperatives," says Ruslan Holub, chairman of the TAK group of companies. According to him, access to profit for cooperative members is limited due to existing regulatory requirements.

"The tax burden on cooperatives' profits is higher than that of other companies operating in this industry. This is due to the fact that a cooperative does not have the possibility of any maneuvers to optimize taxes — this is prevented by the collective management structure. First, making such decisions takes a lot of time, you need to spell them out and prove their safety to almost every member. Secondly, confidentiality is lost — and this is very dangerous, given the way tax authorities and related law enforcement officers work," one of the financial consultants in the agricultural sector told LIGA.net.

This is confirmed by another head of a medium-sized agricultural company. According to him, agricultural holdings optimize taxes by transferring the profits generated by their production flagships to a network of related companies that pay the single tax.

As an example, Andriy Dykun, head of the Ukrainian Agri Council, cites the model of agricultural companies associated with the Poroshenko family.

"Sugar factories – despite being industrial enterprises – are a part of companies that have a land bank and are single tax payers of the fourth group," says Andriy Dykun.

Similar networks have been built by several other agricultural holdings engaged in the processing of milk, meat, eggs, and grain.

Therefore, cooperatives cannot compete with them on an equal footing as they must operate under general taxation conditions. However, such "general" conditions seem to be an exception. Deputy Economy Minister Taras Kachka said that 40% of the grain harvest is not taxed – "two out of every five tons of grain harvested bypass the state treasury." So, the result is clear: under the conditions of distorted competition by tax schemes, there are no powerful agricultural cooperatives in Ukraine.

There’s more than one way to skin a cat

In order to level the playing field, a proposal has been prepared to reduce the taxation of part of the profits of agricultural cooperatives.

"We are not asking for tax breaks. We are asking to create equal conditions for both large associations of agricultural producers, i.e. holdings, and ordinary ones, which will be cooperatives," explains Andriy Dykun.

This refers to the preferential taxation of patronage dividends for members of cooperatives, the terms of payment of which are specified in the draft law No. 4457-1.

It comes as no surprise that the Ministry of Finance and the State Tax Service oppose such a tax break. "There is a risk of tax evasion by taxpayers... that is, in fact, business activities will be carried out without proper registration and payment of taxes (in particular, personal income tax and military duty)," the Ministry of Finance noted.

As LIGA.net has learned, a compromise is possible if the parties agree to limit the share of patronage dividends: there is a proposal to limit them to 60% or 80% of the cooperative's profit.

However, it is possible to keep the benefits of participating in the cooperative movement without waiting for the fiscal authorities to agree. Any Ukrainian farmer – both legal entities and individuals – can become a member of a foreign cooperative.

Who benefits from this? Exporters of Ukrainian products as they gain access to markets, as well as technologies and materials.

"We are considering options for joining an Italian cooperative. This opens up new segments for sales, as well as receiving planting material, consultations, and modern gardening technologies in general," Yuriy Strilets, head of development programs at GALS AGRO, told LIGA.net.

Which birds of a feather flock together

According to Sofia Burtak, head of the Cooperative Academy, intercooperation – various formats of international cooperation – is a promising field that gives Ukrainian farmers access to the benefits of industry associations.

"In this case, it is possible to gain access to cooperative supermarkets in Italy, which is a very extensive network," says the expert. But this path is within the reach of large enough companies that are able to develop and implement a long-term strategy for the development of new markets and meet Fair Trade standards (a non-governmental association that develops fair, "ethical" standards of international labor, environmental and social regulation). Although in Italy, such compliance is not mandatory.

Finally, having gained access to the markets and technologies of European agricultural markets, Ukrainian companies see cooperation as an opportunity to scale up their business.

According to Yuriy Strilets, a project is being prepared to create a cooperative for horticultural farmers who are ready to develop hazelnut orchards. Several levels of cooperation are being considered: from purchasing grown nuts to providing advice and technologies for creating modern, intensive orchards and even caring for them.

According to the expert, the business of growing nuts can only reach the required level of profitability if production clusters are created. "An orchard in such a cluster is only the first step. Then there is the issue of sales, maintaining productivity, and keeping track of changes in market trends and technologies. It's difficult to do it alone, and creating a specialized cooperative is one of the best solutions," says Yuriy Strilets.

This is confirmed by another head of a medium-sized agricultural company. According to him, agricultural holdings optimize taxes by transferring the profits generated by their production flagships to a network of related companies that pay the single tax.

As an example, Andriy Dykun, head of the Ukrainian Agri Council, cites the model of agricultural companies associated with the Poroshenko family.

"Sugar factories – despite being industrial enterprises – are a part of companies that have a land bank and are single tax payers of the fourth group," says Andriy Dykun.

Similar networks have been built by several other agricultural holdings engaged in the processing of milk, meat, eggs, and grain.