Business in Ukraine

Who can comprehend the government’s logic? Why does it limit seed-oil exports, causing the closedown of 15 oil-extracting plants and the loss of 15 thousand jobs, when the domestic market supply exceeds demand fourfold? Why did it open the national borders to all sugar based products, in addition to the World Trade Organization (WTO) quota of 260 thousand tons of raw sugar, jeopardizing domestic sugar beet production? Why did it kick up a fuss in the domestic grain market with the belated abolition of export quotas, destabilizing global grain trade?

The government explains thatthe need to curb inflation dictated the above measures. However, they have not had any effect apart from paralyzing the budget-forming sectors and causing a decline in consumer demand.

The usual “fair” distribution

What drove the Ministry of Agrarian Policy to cut seed-oil exports, given that three months before the start of sunflower seed harvesting Ukraine has stockpiled about 800 thousand tons of seed-oil? The domestic consumption is 120 thousand tons. What shall we do with the surplus? Dump it into the Black Sea?

The Agrarian Ministry has problems matching their balances to the actual situation. This time one of the deputy ministers, upon studying the available data, concluded that in this marketing year Ukrainians… did not consume a single gram of seed oil. According to the deputy minister, seed-oil production should be 1.8 million tons, of which 0.5 million tons should be consumed domestically, and 1.3 million tons – exported. So far, so good.

Oil-extracting plants exported one million tons of seed-oil, and 217 thousand tons are stored in tanks. Does it mean the population does not use seed-oil? An obvious mismatch, especially given that the sunflower-seed oil consumption grew from 7 to 17.2 kilograms per capita.

In 2006, the yield of sunflower seeds was 5.3 million tons. How could the industry market 3.2 million tons through all channels and produce 2.4 million tons of sunflower-seed oil? Last year 4.2 million tons of sunflower seeds were harvested, and oil-extracting plants should have produced 1.8 million tons of oil (the figure cited above). As a matter of fact, about 500 thousand tons of sunflower seeds (equivalent to 200 thousand tons of sunflower-seed oil) in the Ukrainian domestic market are unaccounted for. Thus, the real gross yield was almost 4.8 million tons – a glaring difference with official statistics.

Instead of putting house in order, first of all, with regard to business entities’ accounting and declaring their yield of sunflower seeds and next – to oil production and sales, the officials cut exports to 300 thousand tons. As per Resolution #189 of the Cabinet of Ministers dated 12 March 2008, starting 22 March the export of sunflower seeds and oil is subject to licensing.

On 18 March 2008, the Prime Minister held a special stakeholders’ meeting to discuss the situation in the oil-and-fat market of Ukraine. She asked processors to reduce their prices by 15%. The companies agreed on two conditions: first, their VAT (over UAH 1 billion) should be fully refunded; second, the Antimonopoly Committee’s decision to reduce fines for two major producers should be revised. Eventually, each was fined for UAH 1 million instead of UAH 60 million as awarded.

Seed-oil producers thought it practical to distribute the quota amongst exporting plants. The government, however, widened the circle of eligible exporters to include, alongside 25 large oil-extracting plants, 15 other business entities (intermediaries, trading houses, etc).

Every potential exporter estimated its capacity and came up with an export application, the total volume being 703 thousand tons. The difference in permitted and sought amount did not discourage nor antagonize the applicants. Had the distribution been equal, they would have been happy with 0.43 of their sought export volume. Yet the Cabinet of Ministers decided to allocate quotas in its usual “fair” manner.

On 19 March 2008, it passed Resolution #229, reading: “The total export quota for sunflower-seed oil shall be distributed as follows: 60% – proportionally among applicants according to their declared export capacity; 40% – in addition, proportionally among applicants that were selling bottled oil in the domestic market from 1 September 2007 to 1 March 2008, with relevant authorization by the Ministry of Agrarian Policy.”

As a result, five companies supplying the domestic market received a quota of 218 thousand tons, whereas the other 35 companies got as little as 82 thousand tons of seed-oil. Another remarkable fact: Kernel and Bunge Ukraine hold 80% of Ukraine’s seed-oil market. These two companies’ quota is 158 thousand tons out of the total 300 thousand tons of seed-oil.

Of course, the 60:40 proportion was lobbied by the domestic operators that reduced their selling price to UAH 9.3-9.8 per litre. Some of them did not have enough oil to use up the quota, and they had to buy oil from their less lucky peers. From the start, the privileged exporters counted on purchasing seed-oil at a low price from the plants with limited export opportunities. The latter were not tricked with the monopolists’ ruse: they simply suspended production. A trifling price reduction in exchange for export monopoly caused not only financial but also moral damage, both in Ukraine and internationally.

Tarnished reputation

The introduction of export quotas coincided with a series of complaints coming from Europe about the contamination of Ukrainian seed-oil with mineral components. A batch of 40 thousand litres was supplied to Switzerland, France, Spain, Greece, the Netherlands, Italy… Although the tests showed the presence of not more than 0.4—0.74% of technical oils (which poses no hazard to health), the seed-oil was rejected as defective.

There are several versions of how the contamination could have occurred. First, there were traces of petrochemical products in cisterns used to transport seed-oil to the port terminal, wherefrom it was delivered to Europe by sea. Producers dismiss this version as groundless: they do use “petrochemical” type cisterns but those have served to transport seed-oil for years. After the incident a special marking “seed-oil” or something like that will, most probably, be introduced.

The ingress of foreign substances in the process of production is out of the question. Seed-oil is produced employing imported equipment featuring state-of-the-art technology. Over the last five years, investments into the industry have amounted to USD 500 million, and its capacity has doubled. Exporting plants operate on the basis of technical regulations with detailed requirements for all stages and processes of seed-oil production, storage and transportation; critical points are clearly identified and the frequency of checks is defined, together with the personnel in charge of monitoring and supervision.

The plants have accredited laboratories whose experts control the quality of inputs and outputs, certifying the quality of every batch. A sealed sample of produced oil is kept in a special lab room for 1-3 months for arbitration purposes should the sellers’ and buyer’s tests show different results.

The authorized lab representative ascertains that the transportation tank is clean and permits oil to be poured inside. Relevant entry is made in a special log, indicating the number of the vehicle’s sanitary passport, shipment number, date and time. Then the vehicle is sealed. Exporting plants have introduced the international standards ISO 9001, ISO 22000, НАССР and ISO 14000; they are certified within both the national and international accreditation systems.

When seed-oil is exported from sea-port terminals, quality and safety control is exercised by independent surveyor companies in laboratories accredited by FOSFA (Federation of Oils, Seeds and Fats Associations) against criteria set by this organization. Independent laboratories take three samples and seal them. The first sample is tested immediately in the laboratory, the second is kept as back-up and the third is handed over, together with the accompanying documentation, to the vessel captain for delivery to the purchaser.

At the point of destination, the product is taken by another independent FOSFA-accredited laboratory contracted by the purchaser. It allows to trace all transportation stages and, if need be, perform another test so as to establish when foreign components got into the seed-oil shipment. The latter is exactly what concerned Ukrainian ministries and agencies are busy doing at the moment.

So, on the one hand, extraneous materials are effectively screened out due to the above meticulous procedure, but on the other, those materials were, in fact, detected in Ukrainian seed-oil. Our political leads hurried to blame Europe for tolerating unfair competition. It will be extremely detrimental to Ukraine’s reputation and economy if our 55% share of the European seed-oil market shrinks because of the incident. Over the last decade, there have been no serious complaints about Ukrainian seed-oil quality.

One should not look for saboteurs in Europe: it would help to pore over the quota’s opponents. They could have taken revenge for being denied better export opportunities without fully realizing what harm they were doing to their industry and Ukraine as a whole.

One thing is clear: many failed the test of high prices. Some show symptoms of delirium, others – of aberration. Seed-oil producers waged marketing wars against one another and, unfortunately, started loosing professional unity, which had distinguished them from other food-processing industries for years.

Yellow color of dislike

It would be better if Yulia Tymoshenko’s government didn’t interfere with the seed-oil industry. Many previous governments tried to shake this industry. There also were the lovers of yellow color among the MP’s of several cadences, who, as Van Hog, draw their “sunflowers” released from 17% export duty.

Initiators of the abolition of the export duty played into Europe’s hands since the EU is provided with raw materials only for 50% and needs to import Ukrainian sunflower-seeds. We could turn into a raw materials-producing agrarian appendage as Hungary and Bulgaria. The introduction of a 17% export duty on sunflower-seeds saved Ukraine; we also managed to make Russia and Europe buy our seed-oil.

Every Ukrainian government thought that it was necessary to interfere with the seed-oil producing industry, where, unlike other industries, the interests of agricultural producers, traders, seed-oil-processing enterprises and consumers are well-balanced. Last year, Viktor Yanukovych’s government was worried about the quick increase in the price of seed-oil and threatened to establish a 15% export quota beginning November 1^st. Then, as today, Kernel and Bunge Ukraine lowered their wholesale prices on seed-oil by 6-10% and the situation stabilized.

Yulia Tymoshenko also ordered that prices on seed-oil be lowered, although everybody understands that the flexibility of several companies is constituted nothing more than temporary collusion and party solidarity. It is not possible to produce cheap seed-oil from expensive seeds. At present, the price of the seed-oil rose only two times while the price of its raw components rose fourfold. The Antimonopoly Committee calls this situation “cartel collusion”, because world tendencies and world market trends influence the domestic market anyway.

How will the actions of the government affect an obviously export-oriented industry? Due to standstills of the oil-extraction plants, the state budget of our country didn’t receive UAH 100 million in April and UAG 150 million in May. In fact, the seed-oil industry contributes about UAH 2 billion into the state budget every year. And its part in the total export of agricultural products is 25%.

The limitation of exports creates long-term problems in the economic and social sphere. And, as a consequence, will lead to the next increase in the price of seed-oil, margarine and mayonnaise. The President understood this and organized a meeting with representatives of grain and seed-oil industries. His reaction to increased administrative regulation of the sunflower seed-oil production was expressed in the letter to the Prime Minister: “It is necessary to hold a meeting with agricultural producers and representatives of agricultural businesses to discuss the situation in the industry and make a decision about cancellation of limitations of export of grain and seed-oil… I am sure that these steps will let Ukraine improve its investment climate and strengthen its image in the international arena.”

The government responded to the President’s proposal with a draft resolution “On cancellation of some of the resolutions of the Cabinet of Ministers”, which was signed by three ministers: Bohdan Danilishyn, Yuriy Melnik and Viktor Pynzenyk. This document proposed to cancel licensing and the introduction of quotas on seed-oil exports. Unfortunately, this resolution is still just a draft because Yulia Tymoshenko has yet to sign it .

In fact, those “seed-oil manipulations” resemble a complete capitulation of the industry within the WTO. Ukraine should lower the export duty on sunflower products by 1% every year. This means that we should get ready for the flow-out of the sunflower products abroad, where the prices are higher than in domestic market.

Incidentally, officials’ distaste for yellow can be also seen in the rapeseed industry. Ukraine has considerable production capacity for rapeseed processing. However, this strategically important raw material for production of bio-diesel is flowing abroad. From the last year’s harvest of 1 million 53 thousand ton rape seeds, national plants processed only 47 thousand tons.

And the government stimulated agrarians to grow rape by paying them subsidies and compensating added value tax to those agricultural producers that exported rape. The government paid a total UAH 1 billion to supply producers from other countries with raw materials. Perhaps, somebody is happy with such a re-orientation, but not me.

I would like to recall 1998, when the harvest of sunflower seeds was about 2 million tons and the government allowed its export. Then, we had to import low-quality seed-oil from Turkey, which was mixed with dielectric oil. The market was full of counterfeit products covered by famous brands. Is the present Cabinet of Ministers preparing a similar scenario for us?

Tags: Agrarian Sector //