Ukraine’s Cabinet of Ministers has dropped all limitations on the export of grain after a lengthy campaign by international organisations and local grain market players to free up the strategically important market. Despite the good news, the timing of the decision has cost the industry dearly and with the marketing year ending, is likely to prove of little use in the short term.
Delaying a difficult decision
The removal of grain export quotas has been expected by market participants for a long time. Traders and international organisations have consistently tried to make officials aware of Ukraine’s opportunity to profit from the situation on other European markets and the losses which the country was creating by limiting export volumes. They tried to persuade the government to remove all quotas for grain exports by pointing to world shortages and commitments to end state interference in the market. Advocates of abolition have also repeatedly stated that keeping sales restrictions in place would lead to further losses in the agricultural sector and not allow farmers to raise the capital they desperately required for the new sowing campaign. Though while in opposition Yulia Tymoshenko was critical of quotas, after returning to office in December 2007 her government refused to lift the existing quota system, arguing that quotas were needed to gain control over grain exports in order to avoid having heavy foreign demand raise domestic grain prices and become yet one more factor fuelling inflation growth.
At the end of April Prime Minister Yulia Tymoshenko said that the government was ready “to liberalise” the grain market because of forthcoming harvest and announced that changes would finally be made in restrictions for grain exports. “Today the grain export market is open and the quota for sunflower oil export is increased.” However, in reality the government only increased all quotas instead of abolishing them. The export quota for barley rose from 500,000 tonnes up to 900,000 tonnes, and changed from 200,000 tonnes up to 1.2 billion tonnes for wheat and wheat and rye mixtures. Also, the government prolonged the quotas to July 1 - the end of this marketing year. However, on May 8 Yuriy Melnyk, the Minister of Agriculture, sent a letter to President Viktor Yushchenko, suggesting Ukraine abolish quotas before the end of the marketing year.
In the middle of April, Mr. Yushchenko obliged the government to meet and negotiate with agricultural producers and traders on abolishing quotas while maintaining sufficient stocks for domestic use. “I am sure that these steps will help Ukraine improve the investment and entrepreneurship climate as well as strengthen the positive international image of the state as a reliable and predicted partner,” Mr. Yushchenko wrote in his letter to the Prime Minister. The government has now followed the President’s instructions and abolished quotas for grain export.
Lost opportunities
Commenting on the removal of the quotas, Mr. Melnyk predicted that Ukraine could export 2 million tonnes of grain until the end of the season in July.
Nevertheless, analysts continue to doubt the relevance of the government’s decision. “Traders weren’t able to export even the grain volumes that the quotas allowed. I don’t see any sense in this,” the news agency Reuters quotes Mykola Vernytskiy, the director of the analytical company ProAgro as saying on May 8. In the middle of the month the Minister of Economics, Bohdan Danilishin, admitted that exporters could not cope even with the amount of grain that the quotas allowed.
The General Director of the analytical centre UkrAgroConsult, Serhiy Feofilov, argues that the abolishment of export quotas is better than nothing but he agrees that a significant opportunity has already been lost. “The prices [for grain] are going down both inside of the country and on the world market. Three-four months ago Ukraine could sell its grain for the very high market prices found at that moment but it didn’t happen because there were quotas and so the storehouses continued to accumulate grain,” he explains.
A bumper global harvest
At the end of April world prices for wheat dropped to the lowest level in the last six months. Bigger quotas for Ukrainian grain export and forecasts about future good grain harvests in western Europe, Canada and the countries of the Black Sea region caused this fall. According to the forecast of the International Grains Council, the world grain harvest will be 645 million tonnes this year, compared with 603.5 million tonnes in 2007. Ministry of Agriculture analysts in Kyiv said last week that including carry-over stocks remaining from this year’s harvest total grain production for the 2008/09 season could reach 46 million tonnes.
Traders state that because of the difference between grain prices on the domestic and world markets, producers have already lost over USD 1 billion, while Mr. Yushchenko hikes the figure up to USD 1.4 billion. “Prices on the domestic market are lower than prices on the world market by USD 100-12 [per a tonne] so far but this gap is narrowing all the time because the world prices are going down, while farmers refuse to reduce domestic prices because they took out expensive credits they need to return,” says Mr. Feofilov.
Meanwhile, Prime Minister Tymoshenko said last week that the agricultural land being employed in wheat and grain production has increased by more than 14% in 2008 compared to figures for the previous year. “This means that we will not simply have bread but a very good harvest,” said Mrs. Tymoshenko with trademark optimism.
