Wartime food balance in Ukraine Part 1. Formation of planted areas and production structure

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APK-Inform

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Part 1. Formation of planted areas and production structure

After Russia's invasion in Ukraine, almost the entire agricultural sector of the country found itself at risk. The most burning issue is the planting campaign.

Hostilities endanger the planting campaign in 9 Ukrainian oblasts – Chernihiv, Sumy, Kyiv, Kharkiv, Luhansk, Donetsk, Zaporizhzhia, Kherson and Mykolaiv. Partially risky areas are located in the Zhytomyr, Poltava and Dnipropetrovsk oblasts.

Taking into account the military danger as well as the influence of the agro-climatic factor, regional analysis of the long-term dynamics of crop yields and other factors, APK-Inform analysts made their first forecasts of the next harvest of grains and oilseeds in Ukraine under military conditions.

Formation of planted areas

Estimation of planted areas under grains and oilseeds in Ukraine for the harvest of 2022 was based on a detailed analysis of the traditional regional crop structure, determining the level of safety of these areas, the impact of key factors of crop formation and communication with agrarians (over 700 agrarians in 17 oblasts).

Grains

A significant share (more than 40%) of grain production in Ukraine is formed by winter crops of wheat, barley and rye. Given the fact that these crops were planted before the war, it is better to start with the prospects of the winter production. Over the past 3 years, the winter crops averaged 51% in the structure of grain crops and ranged from 7.6 to 8.2 mln ha. 7.6 mln ha were sown with winter grain for the 2022 harvest, down 7% y/y and virtually unchanged compared to 2020. Including 6.5 mln ha under winter wheat (-5%), 969 thsd ha under winter barley (-15%) and 108.5 thsd ha under rye (-39%). Unfortunately, military action in Ukraine is likely to lead to a significant reduction in the area available for harvesting. Many fields cannot be harvested physically. First of all, these are the territories of Kherson, Donetsk, Luhansk, Zaporizhzhia, Mykolaiv, Kharkiv, Sumy, Chernihiv and Kyiv regions. According to our estimates, the losses of winter grains can reach 41%, which corresponds to 3.1 mln ha.

The winter crops to some extent forms the structure of spring grain crops. Those fields, where the condition of winter crops is unsatisfactory in the spring or no seedlings at all, can be replanted with spring crops, if possible. However, this season, the winter agro-climatic conditions were quite favorable for crops. Accordingly, even if the loss of crops was recorded in some regions, these losses do not compare with the loss of land from hostilities.

In the period from 2019 to 2021, the planted area under spring grains in Ukraine ranged from 7.5 to 7.8 mln ha. However, this year, the war and its consequences will lead to significant adjustments in the structure of sown areas. When planning the structure of crops this year, farmers should first of all pay attention to those grains which will be in higher demand from processing enterprises to ensure food security in Ukraine. These are wheat, barley as well as buckwheat, millet, oats, etc. As for the key grain crop – corn, we estimate the stocks at record 13.5 mln tonnes, up 6.6 times from 2020/21 MY, even with high losses, as it is impossible to fully perform the export potential in 2021/22 MY with a record crop of 41.9 mln tonnes. Given the low exports, such volume of supply will be quite difficult to sell, which will lead to lower prices on the domestic market. External demand for corn can return to high levels only if seaports are reopened and accessed that will not happen soon given the risks to shipowners and damage to Ukraine's transport infrastructure.

A more detailed regional analysis of the distribution of planted areas under the main crops shows that almost 51% of the total area under winter wheat located in the most dangerous regions. That is why the projected losses of areas under winter are so significant.

According to the results of the planting campaign in the previous season, the total share of spring wheat in hazardous regions is estimated at 30%. Accordingly, there are prospects for expanding the area under spring wheat in relatively safe regions. This is especially true of Zhytomyr, Ternopil and Vinnytsia oblasts, which usually have close to average spring wheat yields and are among the TOP-6 regions in terms of spring area, which indicates the developed technologies.

Analysis of the distribution of corn area in 2021 shows that dangerous regions account for more than 36% of the total area. Chernihiv, Sumy and Kyiv oblasts are the most critical, where more than 25% of corn area located in 2021. It is obvious that this year these regions will not be leaders of corn production. Given the low market incentives and high energy consumption of corn production in relatively safe areas, it is unlikely that we will see an expansion of corn area in safe oblasts.

The situation in barley segment is rather difficult as well. Firstly, the distribution between winter and spring crops was formed in the ratio of 45% to 55% respectively. Secondly, a significant share of both winter and spring area is located in hazardous regions. Thus, the total share of winter barley area in dangerous regions is estimated at almost 44% out of the overall area under winter barley. The share of spring barley area located in dangerous oblasts reached almost 49% in 2021. Moreover, crops are very consolidated, and 5 of the TOP-6 regions for spring barley area are currently dangerous. This is a significant constraint for the expansion of spring barley area across the country. Poltava, Ternopil, Vinnytsia and Khmelnytskyi oblasts are the key regions where expansion is possible. They usually have a quite high yield of spring barley.

We should note cereals separately. The increase of planted area under these crops may to some extent compensate for the expected reduction of areas under corn and sunflower seed. However, in this segment as well, a significant share of areas is formed in regions that are now dangerous.

In previous years, most of the oats production was concentrated in the northern Ukraine - Zhytomyr, Volyn, Chernihiv, Rivne and Sumy oblasts. This year, the crop losses in Sumy and Chernihiv oblasts due to the military activity can be compensated by expanding the planted area in Khmelnytskyi, Poltava, Ternopil and Vinnytsia oblasts, where high yields of oats have been recorded in recent seasons.

Millet production in Ukraine can be increased by widening of planted areas in Khmelnytskyi, Vinnytsia, Cherkasy and Poltava oblasts, where the highest yields were recorded in previous seasons – 3.2-2.5 t/ha - with an average yield in Ukraine at 1.9 t/ha.

Losses of area under buckwheat due to the impossibility of its production in Sumy, Kyiv and Chernihiv oblasts can be compensated by increasing the area, for example, in Khmelnytskyi, Rivne, Vinnytsia oblasts, which have high yields at 1.36-1.64 t/ha in recent years.

In general, we estimate the planted area under spring crops at only 4.7 mln ha in 2022, down 39% y/y. In particular, we expect that corn area will decrease by 43% to 3.1 mln ha, spring barley area by 27% to 972.1 thsd ha, spring wheat area by 23% to 147.3 thsd ha.

Also, a significant reduction in planted areas under cereals is expected so far: oats – by 28% to 127.4 thsd ha, buckwheat – by 41% to 49.4 thsd ha, millet – by 24% to 59.4 thsd ha, peas – by 51% to 119.2 thsd ha. However, it is possible that farmers will still increase the area under cereals.

Oilseeds

In 2022, the oilsed segment will face not only a significant reduction in planted area, but also a decrease in yields and, consequently, production volumes. Below are estimates of the possible planted area of ​​oilseeds both in terms of crops and in terms of oblasts.

Sunflower seed

Given the new realities for Ukrainian farmers due to the war, sunflower seed, like corn, loses its "strategic matter". This is primarily due to a significant reduction in sunflower oil exports and the temporary shutdown of oil production plants. Usually, Ukraine exports about 93% of the total production of sunflower oil. However, Ukrainian ports remain blocked that cut significantly the export potential of sunflower oil and. As a result, refineries are reducing processing volumes or even are not sure that they should to resume their work.  

Unfortunately, it is likely that the next season the prices for one of the most high-margin crops of the last decade may "sink" in the amount of supply that may result from large stocks plus the new harvest.

Sunflower oil is an important product both for the Ukrainian market and for many countries. Therefore, after breaking the supply chain from Ukraine, the rush of demand in the world will stimulate the extension of sunflower seed area in other key producing countries. However, it will not be possible to completely offset the absence of Ukrainian oil, as the country supplies about a half of total global exports during the season. Therefore, the demand for Ukrainian sunflower oil and seed will remain, but significantly limited by logistical difficulties.

At the same time, a survey conducted by APK-Inform revealed that there would not be any significant changes in farmers' plans for sunflower seed planting. After all, most farmers have bought the seeds before the war or paid for it and are waiting for delivery. So, they do not intend to change plans. In addition, with some shortages of seeds, the supply of sunflower seeds is most common among oilseeds and the deliveries are expected during the first decade of April.

The situation is different in the oblasts that are temporarily occupied, and even worse across those areas under constant fighting. The situation changes every day and it is very difficult to predict where farmers will be able to plant at least partially, and where it is too dangerous.

As of the end of March, a significant part of hostilities is concentrated in the key sunflower seed producing regions – southern (Mykolaiv, Kherson, Zaporizhzhia oblasts) and eastern (Kharkiv, Donetsk and Luhansk oblasts).

The planting is partially planned in Kyiv, Mykolaiv or Zaporizhzhia oblasts, while it is extremely dangerous (fighting, mined fields) across almost the entire territory of Sumy or Chernihiv oblasts. At the same time, there is information that the farmers of the temporarily occupied Kherson region are preparing for planting campaign, according to available resources. The planted area will be much smaller than the potential of the regions, and the yields and harvested area can be severely affected.

According to updated estimates by APK-Inform, in 2022, the planted area under sunflower seed in Ukraine may be reduced to the lowest in almost 15 years of about 4.2 mln ha (-38% y/y).

The planting campaign in the central and western Ukraine is also at risk due to logistical problems as well as some difficulties with the labor, as a significant number of people have joined the regional defense or the Armed Forces of Ukraine.

According to rough estimates, 2022 sunflower seed production in Ukraine could reach a little over 9 mln tonnes. This is more than enough to meet domestic sunflower oil needs as well as export shipments.

At the same time, the significant reduction in production can be partially offset by sizable stocks of sunflower seed that will be formed in the current marketing year due to the decline of processing volumes.

Soybeans

The planted area under ​​soybeans may decline to less extent, as the main growing regions are located in central and western oblasts. Very difficult or almost impossible sowing is expected across the area, which is slightly more than 20% of the total area last year. Soybeans are important for providing the livestock industry with protein feed. In a critical situation, it can be partially replaced by sunflower meal or feed grains. However, the number of animals in Ukraine suffers significantly from hostilities as well.

Given that a significant number of farmers were provided with seeds in advance, and the current provision in the western regions is not as difficult as in other regions, the area under soybeans may decrease by only 11% to about 1.2 mln ha in 2022. However, it may be the lowest in 11 years.

Soybean production can reach about 2.7 mln tonnes, which is enough to cover the domestic needs in soybean meal. In the last 5 seasons, soybean processing did not exceed 1.5 mln tonnes tons on average.

Rapeseed

Rapeseed is traditionally a winter crop in Ukraine. Only 2-3% of the total area is sown with spring varieties. Therefore, the situation with rapeseed is more complicated. For the 2022 harvest, Ukrainian farmers have planted the largest area in 12 years – 1.4 mln ha. About 36% of this area is in the regions under active hostilities. Thus, a significant share of crop may be lost due to military factors.

The area under spring rapeseed, according to our estimates, may be about 20 thsd ha. However, due to the expected reduction in the harvested area and yields, the total production of rapeseed may not exceed 2.5 mln tonnes in 2021, down 21% y/y, that will be the minimum in recent 5 years.

At the same time, rapeseed is an export-oriented crop. Almost whole volume of rapeseed and rapeseed oil is exported. Given the shortage of rapeseed supply on the world market this season, Ukrainian rapeseed was in great demand. However, without the resumption of ports functioning, potentially possible volumes cannot be exported within the timeframe in which Ukrainian rapeseed is usually traded (July-November). There will be some exports, but it will be significantly complicated by capacity of land checkpoints. Moreover, rapeseed is harvested during a period of active trade and transportation of grains.

Flaxseed

On the market of flaxseed, the situation is not very positive. Main oblasts of production are concentrated on the south (75% from the total areas in 2021), and among them only in Odessa oblast is expected full-scale planting. 

Usually, very small percentage of farmers in Ukraine plant this crop due to its specificity of cultivation, the presence of export duties, as well as small target market. However, they crop this oilseed systematically, meaning that seeds are provided in advance, so there is a possibility that having a fuel and other components planting campaign will take place in the temporarily occupied territories of Mykolaiv, Kherson and Zaporizhzhia oblasts.

Some areas under flaxseed can be compensated due to western oblasts, where until 2017 flaxseed was planted on around 4 thsd ha but later was replaced by more marginal crops. Given the increase in flaxseed planting in Volyn, Zakarpattia, Ivano-Frankivsk and other oblasts the total planting areas under flaxseed in 2022 in Ukraine may be about 5-6 thsd ha compared to 21 thsd ha last year. 

It should be noted that flaxseed in Ukraine and other niche oilseeds are not included to the list of strategic crops in wartime and even before war its share in the total oilseed production was quite small in Ukraine (only 0.2% in 2021), and in the world (around 1%). At the same time, it is important to mention that globally in 2022/23 MY as a result of war in Ukraine there is a significant deficit of flaxseed because main oilseed producers – Russia (33% in 2021), trade with which will be complicated by sanctions, and Kazakhstan (25%), which has been delivering significant part of its export via Russian seaports and now suffers from sanctions intended for Russia, which complicates exports.

Thus, demand on flaxseed, as well as prices in a new season, can increase significantly, which should be taken into account during planting campaign. Besides, export of this crop from Ukraine, as a rule, is being carried out by automobile transport, which makes it more attractive against background of the expected load of rail transport.

Mustard seed

The situation with mustard seeds is similar. Due to the war and military activity in the main regions of oilseed production – southern (58% of the total areas in 2021) and eastern (25%) oblasts, planting areas of mustard seeds in 2022 in Ukraine can be only around 5 thsd ha.

Increase of planting areas under mustard seeds is possible in Zhytomyr, Cherkasy, Khmelnytskyi, Vinnytsia and other oblasts, where production was higher up to 2018 compared to 2021. But, taking into account the logistical problems, considerable increase of demand on niche grains and some problems with seeds, the rise is unlikely and therefore some compensation for the reduction in mustard seed planting in the southern regions at the expense of the western and central oblasts should not be expected.

So, taking to account all the above factors, the total planting areas of oilseeds in Ukraine in 2022, according to our estimates, can decline to around 6.8-6.9 mln ha, taking into account already planted areas under winter rapeseed (1.4 mln ha), which will be the lowest figure since 2020. The main share will traditionally remain for sunflower seeds – 61% (73% in 2021). Around 21% and 17% can be planted under rapeseed and soybeans (12% and 15% in 2021). 

In general, the formation of spring crops of both grains and oilseeds for the new season will be mainly situational and will depend on the provision of resources and support for business and the government.

Government support

During the martial law in Ukraine the government is trying to stimulate farmers to conduct planting campaign for food security of the population. Among the main points:

  • The Verkhovna Rada of Ukraine amended the Land Code, according to which the lease of agricultural land of the state and communal property will be carried out without online auctions.
  • A resolution has been adopted that significantly simplifies the import of seeds. It should be mentioned that import of seeds, such as wheat or soybeans, is practically absent, the Ukrainian seeds are used. At the same time, the import of sunflower seeds or corn largely shapes the future of the harvest.
  • In order to avoid the deficit of the fuel at gas stations to curb the rise of cost of resources in Ukraine, the Cabinet of Ministers of Ukraine adopted two decision: the excise tax was temporarily abolished, and the VAT rate of fuel was reduced to 7%.
  • The banking system simplifies the access of farmers to credit resources – loans are provided at 0%.
  • In March the Ministry of Agriculture of Ukraine launched a platform to support farmers during planting campaign, identifying deficit of resources and thus providing them. At the same time the ministry’s recommendations during the planting campaign note that attention should be pain to crops that can ensure food security in our country – barley, peas, oats.
  • With the assistance of the Ministry of Finance, the EBRD is considering providing credit lines to Ukrainian farmers. At the same time, the European Commission has already decided to provide financial support to Ukrainian farmers, who have suffered from the results of Russia’s invasion of Ukraine.

However, it should be noted that not everyone will receive the support, and there is no clear timeframe for financial support. Meanwhile, planting campaign in Ukraine has already started in 11 oblasts, and the main problems remain the lack of fuel, seeds, fertilizers and labor.

Resource provision

In the current conditions spring planting campaign will depend on such factors as:

  • further development of the situation in Ukraine due to Russia’s military aggression;
  • active hostilities in the southern, eastern and northern regions and the constant change of front lines;
  • mining of a significant part of the territories, including agricultural land;
  • logistics – in particular destroyed roads and fuel and drivers deficit, which will make the delivery of seeds or fertilizers much more difficult;
  • financing – many farmers expected to sell existing stocks of grains or oilseeds in spring before the planting campaign in order to replenish working capital. This issue is particularly acute in regions close to the front line, where trade is very weak;
  • availability of resources – without the possibility to prepare properly and taking into account the logistical problems, farmers will use the resources available in their region.

Given all these, the decision to give preference to plant crops which will provide food security of the country will be made last. 

At the same time, it should be mentioned that many farmers prepare for planting campaign in advance and as a rule seeds or fertilizers are being bought since autumn or are paid for on conditions of delivery in specific time, thus significant adjustments in the plans of farmers may not be.

If we look closer at the resource provision, first of all we should look at seeds provision. This issue is critical for corn and sunflower production, where imported corn seeds share in a total seeds fund is around 15-20%, and sunflower – 50-60%. At the same time, high time for import is around October-April and mainly from the EU countries.

According to the Customs Service in October-February of 2021/22 MY Ukraine importer 20.6 thsd tonnes of corn seeds, which is up 85% year-on-year (11.2 thsd tonnes). Accordingly, if last season seeds imported in October-April accounted for more than 12% of projected seeds fund, then given expected decline of areas for 2022 crop, the share of imported seeds in October-February alone reached 28% of the total seeds fund. Thus, we can speak about the high level of imported seeds provision, but the open question is the delivery of booked seeds to farmers. Besides, currently the work of domestic seed producers, especially in dangerous regions, is uncertain.

Speaking of seeds of sunflower, the import in October-February of 2021/22 MY reached 14.1 thsd tonnes which is almost the same as last season (14.3 thsd tonnes). Bit, considering the decrease of areas under sunflower, even this volume of seeds is enough to cover 67% of demand.

In addition, we should note again, that seeds of corn, as well as sunflower, are imported mainly from the EU countries, and having stable land connection the volume of deliveries can be increased until the end of planting. Moreover, seed companies have announced possible support to Ukrainian farmers with seeds.

If we assess the situation with seeds in general, then according to survey of farmers, around 25% of respondents answered that they await seeds delivery. The vast majority of them paid for seeds in advance. At the same time, only 18% of farmers have not fully formed their seeds fund and need help with this resource. Thus, more than 80% of farmers in relatively safe regions are generally provided with seeds, and the existing problems are mostly due to complicated domestic logistics.

According to market participants, there are usually difficulties with the supply of fertilizers, but along with the question of availability, there is also the problem of their delivery. According to customs statistics, in the pre-war period a significant reduction in the supply of complex fertilizers was not observed. Thus, in 2021 calendar year, imports of these products reached 1.9 mln tonnes, which is 12% higher than in 2020 (1.7 mln tonnes). At the same time, deliveries in January-February this year amounted to 262.3 thousand tons, which was 16% lower than the previous year.

An important factor in this segment is the cost of fertilizers, which has increased significantly (for some species in 3 or more times relative to the cost in 2020). Therefore, there are two tactical approaches of farmers. Those who sold their crop in the first half of the season and in anticipation of further price increases bought the main amount of fertilizer, and those who traditionally sell crops during the season and replenish fertilizers as needed. Accordingly, in the current environment, the second segment has significant security issues. Currently, given the uncertainty of the structure of crops and the functioning of domestic enterprises, it is very difficult to determine the real level of fertilizer supply. And key challenges also arise with internal logistics.

As for logistical difficulties, according to the Ministry of Economy, the loss of infrastructure during the war reached 119 bln USD. Almost 8,000 km of roads were destroyed and dozens of railway stations were damaged. This makes it much more difficult to move goods, including key resources for the agricultural sector. There are also significant problems with fuel supply for both transport companies and farmers themselves. The main volumes of fuel are spent for the needs of the Armed Forces. Many farmers reported giving up their available diesel fuel supplies. In addition, the destruction of fuel supplies due to shelling is increasingly being reported.

Thus, today we can talk about a sufficient amount of resources for the initial stage of spring field work with the projected reduction in the area under cultivation. But the level of security is very uneven in the regions and complicated by the problems of transportation of resources within the country.

Production forecasts
Grains

Taking into account the above information and analysis of the long-term dynamics of the main indicators of grain production in Ukraine, analysts of APK-Inform forecast crop production in 2022 which for grain and pulses at 38.9 mln tonnes, which is 55% lower compared to 2021 (85.7 mln tonnes). At the same time, yield of grains is expected to be 42.6 c/ha, which is 21% lower y/y (53.8 c/ha).

Expected decline of total grains production is caused by not only lower planting areas under spring crops and considerable losses of winter wedge crops, but also by forecasted decrease of yield due to difficulties in providing basic resources, such as seeds, fuel, fertilizers, pesticides, crop protection products, etc. Moreover, there are climate risks. Lack of productive precipitation and strong winds have a negative impact on the formation of crops of early spring crops and the restoration of vegetation of winter crops.

As a result, production of wheat this year can reach only 14.9 mln tonnes (-54% y/y) with the yield at 37.8 c/ha. Production of barley we expect at 4.6 mln tonnes (-51% y/y) with the yield at 28.2 c/ha. Corn production is forecasted at 18.5 mln tonnes (-56%) with the yield at 60.4 c/ha.

Oats production is expected to reach 256.1 thsd tonnes (-46%) with the yield at 20.5 c/ha, millet – 79 thsd tonnes (-61%) with the yield at 13.5 c/ha, buckwheat -52.7 thsd tonnes (-50%) with the yield at 10.9 c/ha, and peas – 203.3 thsd tonnes (-64%) with the yield at 17.2 c/ha.

Thus, Ukraine may have a shortage or critically low stocks of domestic production of crops such as buckwheat, oats, millet, food wheat and barley. So, the domestic consumption of wheat in 2022/23 MY can reach 8.5 mln tonnes which is 57% of the future crop and 41% of the total supply of the grain, domestic consumption of barley – 3.6 mln tonnes which is 76% of the total production and 63% of the total supply. For some cereals, the expected domestic consumption even exceeds the possible future harvest, whereas demand on corn can reach 8.5 mln tonnes which is 47% of production and 27% of supply.

So, farmers should pay attention to these issues when planning the planting campaign and move from growing export-oriented crops to those crops which are critically needed to meet domestic needs of the country. 

Oilseeds

Yield of oilseeds is also expected to decline because of limited access to relevant resources in some oblasts, and also the decrease of harvest areas which in turn will depend on the situation in the region. Accordingly, oilseeds production is expected to be the lowest in the last decade.

In the oilseeds segment a minimal production decline is forecasted for rapeseed (-19% y/y) and soybeans (-23%).

Total production of grains and oilseeds in 2022 is forecasted at 53.3 mln tonnes which is 51% lower compared to record crop in the previous season. At the same time, this volume of production is enough to meet domestic needs of Ukraine. Taking into account the fact that prospects for resumption of export to pre-war volumes are not clear, this decline will significantly reduce export revenues, which is extremely negative for the Ukrainian economy and global food security.

Summarizing the above estimates and forecasts, we can note the following:
  • key factor in shaping the structure of crops of grains and oilseeds for the harvest of 2022 will be the physical unavailability of more than 30% of the area due to hostilities and their consequences;
  • business and the government are actively helping Ukrainian farmers to conduce the most effective planting campaign during the war, which may form positive changes in estimates and forecasts in the near future;
  • difficulties in receiving seeds of the crops, which depend on import deliveries (wheat, corn), will lead to even greater reduction of crops;
  • the lack of exports via seaports of corn and sunflower oil forms considerable stocks of this production in Ukraine in terms of low demand, which will reduce margins and interest in growing;
  • difficult access to basic resources (fertilizers, CPP and fuel) makes it even less attractive to grow energy-intensive crops (especially sunflower and corn);
  • compensation in spring wedge should be carried out by crops for which seeds are available, that require less resources for production and which will be in demand in wartime and postwar times. Such crop among grains include wheat, barley and cereals – buckwheat, peas, oats. Among oilseeds we can include soybeans and to a lesser extent flaxseed;
  • also, when forming the planting campaign, it should be taken into account the peculiarities of storage of crops, planned for production, in order to minimize the expenses.

The issues of stock formation and domestic processing and distribution will be considered in the second part of the analytical trilogy “Wartime food balance in Ukraine”, which is being prepared by APK-Inform Agency analysts and will be available next week.

 

Wartime food balance in Ukraine: Part 2. Formation of domestic consumption 2.2. Grains and by-products

Wartime food balance in Ukraine: Part 2. Formation of domestic consumption 2.1. Oilseeds and by-products

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