The Ukrainian Grain Association proposed an evaluation of the grain export situation during a meeting of the National Security and Defense Council. “The decision to curtail exports has notably affected the future state of affairs in the grain sector. Explosions in Ukrainian ports, caused by the spontaneous heating of grain, may occur and lead to fatalities,” said the association’s president, Volodymyr Klymenko, at the meeting attended by the president of Ukraine and business representatives.
“Companies working on the grain market are forced to wrap up investment projects and lay off workers,” said Klymenko. He also believes that the new restrictions will cause massive defaults in export contracts, loss of credibility on world markets, a deterioration of Ukraine’s investment attractiveness, and a decrease in foreign currency receipts, and will affect the trade balance and national currency rate.
So far, the grain traders’ pleas and requests to the government have fallen on deaf ears. Last week Minister of the Economy Volodymyr Makukha announced the intention to adopt a decision on export grain quotas by the end of the week. “It is now being adjusted. I believe it will be out this week. Unfortunately, the quotas remain,” the minister said a week ago.
But things haven’t changed one iota. The situation with grain exports is verging on chaos. Even Makukha mentioned that the cabinet has still not determined quota sizes because it does not have definitive data on current grain stocks.
Agriculture minister Yurii Melnyk believes that imposing quotas on grain exports is necessary because the Agrarian Fund has not finished stocking the state food reserve. “Grain reserves are still not fully formed; we are continuing to work on this. As of yesterday, the Agrarian Fund purchased 132,000 tons of this year’s grain but we need to have 565,000 tons,” the minister said. “We need to have a clear understanding of how much we are exporting. We must not do it spontaneously. In previous years the capacity of port elevators was a limiting factor, but now all the leading exporters have built up their facilities,” said the minister, explaining the need for export quotas.
Prime Minister Viktor Yanukovych said that grain export quotas may be canceled after the Ministry of Agricultural Policy reports to the cabinet about fulfilling the grain procurement plan for the country. Furthermore, during his visit to the US the prime minister had to explain to his vis-a-vis the situation with the export quotas. Ex-foreign affairs minister Kostiantyn Hryshchenko, who is an adviser to the prime minister, said that in the US the Ukrainian government is going to explain a series of measures to secure a “calm” situation on the grain market irrespective of the grain harvest yield.
However, it appears that the government will have an even tougher time explaining these non- market prohibitive measures to producers and traders in Ukraine that have found themselves on the verge of bankruptcy because of this decision. Here is what Yurii HUBANKOV, general manager of Bruklin-Kyiv, told The Day about the current situation on the grain market:
“I went into business in 1990. Already then we all understood the advantages of Ukraine’s geographical position. Our country also has at its disposal huge resources for becoming a really civilized country able to compete with all European countries. At the time our country had the biggest ports, an extensive railway system, and large shipping companies, not to mention the world-famous black soils. And we had the human factor. At that time the level of education in Ukraine was probably the highest in Europe. So it seemed that Ukraine could soon be transformed into one of the most powerful countries on the European continent.
“But after 15 years nothing was left of these potential opportunities. The soil stayed in place but it did not start to produce more, even though it could have. The Black Sea steamship company, for example, does not have a single ship. Ship-repair factories are barely operating. Oil-processing plants are privately owned but they are not in Ukrainian hands. This is how it happens in uncivilized countries. Civilization means that no group, once it has come to power, is able to ruin the economy. But in our country they did. Moreover, this process is still continuing.
“No matter how much longer we keep saying that we are striving for a market-regulated economy, we will not have a free market as long as we use administrative methods. Let’s take as an example the government’s actions on the grain export market. Ukraine’s agricultural output by far exceeds its consumption volume. Therefore, it should sell agricultural products to other countries where they are in demand, and earn from this.
But those purely administrative measures such as were used in licensing, quotas, export curtailment, and export prohibition have affected the structure of our exports and, most importantly, the businesses of hundreds of thousands of people. The consequences of this are unpredictable. This is, roughly speaking, like Chornobyl because no one knows exactly what may happen tomorrow and how it will affect our descendants.
“Likewise, no one can unequivocally predict how the current export ban will affect agricultural producers and in general the whole sector, including trade businesses in Ukraine. Here in front of me I have graphs showing the change in prices for wheat, forage wheat, barley, and rye. I can assert that with the introduction of quotas and licenses, there has been a clear increase in purchase prices since Oct. 2, 2006. Maybe they have stabilized more or less in the last three or four days.
“As far as the world price is concerned, all our actions have also greatly affected this market because the prices for agricultural products spiked and Russians can simply thank Ukrainians because now they can sell, let’s say, barley at a price that is $5 to $25 higher than it was four or six weeks ago, or before that. Thanks to us, agricultural producers in Russia suddenly received a giant boost. The reasoning from the top officials in the Ministry of Agricultural Policy is simply primitive, in my opinion. They remind us of 2003, when the country purportedly sold all the wheat it had and then was left without this most important product. Wheat supposedly had to be imported at a triple price later. But in fact that year we had an extremely poor harvest. In 2002-2003 all the winter wheat froze and later, after we planted spring wheat, it dried up because of a drought. True, there was almost no bread-wheat in the country. It had to be imported.
“The prime minister at the time, Viktor Yanukovych, struck a deal with Russia. In general it was a fairly sensible and competent move. We bought over 166,000 tons of bread- wheat from Russia at a favorable price of $180, although on the market it cost around $150 to $160. But for the Ukrainian government this was a solution that suited both the country and the political leaders. Interestingly, at that time Russia did not resort to bans, licenses, or quotas. They did it simply and, in my opinion, fairly. An export duty was set for all those who wanted to export agricultural products.
“Now we are saying that the budget lacks funds for purchasing grain to be kept in reserve. Set an export duty and the money will come. This will allow for the full compensation of the difference between the purchase price on the domestic market and the price a seller would get on the world market. This would easily provide the country with a full measure of grain and there wouldn’t be any problems. The export duty could be used to regulate everything, whether it is more profitable to sell on the Ukrainian market or abroad. Traders would have a choice of whether to export and pay the duty or not to export and not to pay.
“But what happened? In early October licensing was introduced. This led to an embargo by the chief officials of the agricultural and economy ministries on ships that were being loaded in ports and contracted for concrete fairly large volumes. The main customs administration sent instructions to regional customs departments, ordering them to stop processing papers for exporting grain. As a result, all cargo ships that were being loaded paid huge fines. The total sum because of demurrage alone exceeded $1.5 million.
“Moreover, during those one and a half months, the temperature, sea water, and less-than-perfect environmental conditions naturally caused the quality of this grain to deteriorate. One can only guess what expenditures and losses traders will incur because of this. Traders failed to fulfill contracts that were signed six months before these events.
“Someone may say, “We are not sorry for them. They are foreigners; they want to rob Ukraine. But this is not true because traders do not simply buy grain. They also invest. They invest in Ukraine and create jobs for our citizens. They have made huge investments in land and port elevators to construct additional storage capacity. They invest in agriculture, enabling producers to buy seed, new equipment, and fuel. We are destroying them, but we don’t know what consequences this step will entail. Now they are not noticeable, but they will show up without fail in March and April, when the grain that wasn’t sold today begins to spoil.
“The government does not buy grain because it lacks money and because it thinks the prices are too high, and traders do not buy grain because they are not allowed to export. The producer, who is often also the trader, used his own finances to buy seeds, tractors, harvesters, and diesel fuel, then sowed and invested in fertilizers and herbicides and, finally, harvested the crop. And then he is forbidden to export the crop. Where is civilization? This situation brings vastly different words to mind. But the problem really does reside in the human factor, i.e., in incompetent administration and management of the economy, which is unacceptable in a civilized country.
“But all this is nothing compared with what is still to come. The most damaging blow will be inflicted on producers next spring and fall. They will need to sow, harvest, and sell crops, but the traders-the top five companies in the world-will naturally no longer offer the same price as yesterday. There is a political risk, which typically entails a reduction in price. I am more than convinced that they will estimate the risk at 10 to 15 percent.
“What will this lead to? Agricultural production in Ukraine is known to be expensive because the crop capacity of our fields is not very high, unlike the cost. Crop capacity may be increased only with the help of new technology, new equipment, and high-quality grain. All this requires financing. But, unfortunately, in Ukraine there is no state policy at all that would be aimed at helping agricultural producers, not to mention compensating for their losses.
“The current situation has proved this once again. I have court decisions saying that the actions of our customs administration are unlawful. But these decisions are not being enforced. With great difficulty we managed to free one of our two ships that were in an anchorage area. They still have the other ship there, citing direct instructions from above.
“In what country of the world is such a situation possible, where they introduce licensing, cancel it after ten days, then after companies acquire licenses, they introduce quotas, after three days they start talking about stopping grain exports, and in another five days they tell us about a new procedure for issuing quotas. The most interesting thing is that even now no one really knows how to obtain these quotas. As a result, the market has been standing still for over two months. People employed at elevators are not receiving their salaries, and elevators have stopped operating. Everything is at a standstill.
“It is very easy to calculate the losses incurred, for example, by Odesa oblast alone because of the decrease in expected profits. In this region there are three elevators that over the last 15 to 20 years have been purchasing barley and wheat from producers in absolutely normal market conditions and at some of the highest prices. They can ship almost 1.5 million tons of agricultural products. Every land elevator charges $3 per ton, a total of between 3 and 4.5 million dollars. Railway transportation from land to port elevators costs around $10 per ton. The total now is $15 million. Port elevators charge $4 per ton, which makes $6 million. Stevedore companies charge another $2 per ton for transporting to Illichivsk, Pivdenny, Odesa, and Mykolaiv ports. That’s another $3 million plus shipping by trucks and various losses because of the overall stoppage. The total figure of $36 million is the profits that the companies failed to receive. Do we have this kind of money lying around?
“I very much appreciate the courage with which the prime minister acknowledged the mistake and promised to fix it, and use only market methods in the future. But this has to be done immediately. Otherwise, we may be so late that no one on the world market will need our grain because it will receive crops grown in other latitudes, where they are harvested a lot earlier.”
