Business in Ukraine

Unlike the devastating flood in Western Ukraine, the surplus of grain did not catch the government unaware. The rich grain harvest had been announced beforehand, with forecasts varying between forty and fifty million tons. The government reassured farmers, saying it would employ the State Reserve, the Agrarian Fund, state holding Khlib Ukrainy, and regional food funds to cope with the amount and prevent a price dive.

So far, however, the government has not intervened, leaving grain traders to their own. This marketing year, they have already exported 1,500,000 tons of grain. The price of feed wheat has dropped to a bargain-basement UAH 700 – UAH 650 per ton [$1 = UAH 4.845 ].

As the harvesting campaign was getting into full swing, Khlib Ukrainy President Ivan Rishnyak assured the public that his holding would play a role on the grain market. He had good reason to say so: Khlib Ukrainy has the capacity to store 6,230,000 tons of grain and process about 4,700,000 tons into flour, cereals, mixed feed, etc. It has grain elevators in geographically advantageous places – at commercial ports in Odessa and Mykolaiv, with capacities of 1,500,000 tons and 600,000 tons, respectively.

According to Rishnyak, due to the oversaturation of the grain market and shortage of free granaries this marketing year, Khlib Ukrainy gives preference to storage and plans to purchase 1,500,000 tons. The storage price at Khlib Ukrainy granaries has risen by a quarter – up to UAH 10.57 per ton, but other companies have doubled their price, so the prospects appear to be bright, but Rishnyak’s previous managerial experience calls his statements into question.

Rishnyak has only recently regained the post he occupied in 1999-2002. He said a lot of good words then about Khlib Ukrainy as “the locomotive force of the national grain market”, but almost all his steps turned out to be wrong. It looks like this time he will also not be able to follow-through, considering the heavy burden of numerous debts. Khlib Ukrainy owes traders and government-run structures UAH 670 million and has to clear the debt if it wants to become a full-fledged operator of grain purchasing, storage and a powerful exporter.

The holding has been experiencing financial problems since late 1998. In 2006 it even planned to sell some of its non-processing facilities for UAH 130 – UAH 170, but it only transferred a high-liquidity granary worth USD 25 million to a Dutch creditor – HSH Nord Bank. As a result, Khlib Ukrainy reduced its debt to the bank to USD 10.5 mln and got better sanation prospects, but nothing more than that.

However, the debt is not the only reason why grain producers keep away from Khlib Ukrainy. They remember how its daughter structures made millions by understating the class of grain and writing off “waste”. Almost all granaries do that, though…

On June 25, a few days before the harvest started, the government permitted the State Reserve to purchase grain directly from exchanges, bypassing lengthy tender procedures. One week before, the State Reserve had announced a tender to purchase 200,000 tons of new grain. The bidders were to supply it exclusively to state-run enterprises. The auction never took place because there was only one bidder.

The alternative way – purchase grain through accredited exchanges, which might prove to be effective, but even then the State Reserve would hardly purchase more than 400,000 tons of food grain.

With the holding’s financial and managerial problems, the government wanted to entrust the “first fiddle” to the Agrarian Fund. The fund was supposed to accumulate a grain reserve equal to 14 percent of domestic consumption: 803,000 tons of wheat and 78,000 tons of rye. The money was supposed to come from repaid credits and proceeds from the sale of land. The Verkhovna Rada standing committee on agrarian policy and land relations found such a source unreliable and obliged the government to allocate UAH 1.3 billion for the Agrarian Fund directly from the Treasury. In the revised version of the 2008 national budget, the government offered UAH 818 million, but President Yushchenko found the sum insufficient and demanded to increase it to UAH 1.5 billion.

As of July 1, however, the Agrarian Fund was penniless since parliament had not passed the budget amendment bill. It had to hold the first auction with the money provided by the Agrarian Ministry at the expense of outlays for other programs. The ministry also promised to give the fund another UAH 250 million later, but even that sum was far smaller than UAH 1.5 billion.

The government looked high and low for a way out: Agrarian Minister Yuri Melnyk proposed to disburse money allocated for the Agrarian Fund three months ahead of schedule, and MP Ivan Kyrylenko of the Tymoshenko Bloc suggested a loan that the fund would return immediately after the adoption of the revised budget.

The plans, if any, were canceled by force majeure – the devastating flood that hit six western and southwestern regions in late July and made lawmakers interrupt their summer vacations for an extraordinary session. They were forced to pass a budget amendment bill (which they had turned down during the regular session) in order to fund flood relief operations, repair and restoration works, and compensation to affected people. Along with the emergency allocations, they also “granted” one billion hryvnyas to the Agrarian Fund.

It should be noted that since the Agrarian Fund started functioning on July 6, 2005, it has never received enough money from the government.

Meanwhile, excessive supply is flooding the national grain market. Farmers are pushing out their new grain. They badly need money for harvesting late crops and plowing land.

The current price drop affects mid-sized farms most: unable to influence the grain market, they have to put up with the terms and prices set by the lessees of their land. They have to sell their grain cheaper now in order to save money on storage.

And that is where traders “come to the rescue”. In fact, they save the rest of the world from the global food crisis and leave Ukrainian farmers high and dry, buying grain from them for less than the input costs.

The imminent result of sharp price fluctuations and the government’s indifferent passivity is quite predictable: next year, the area under winter wheat is likely to shrink considerably. Then, if the harvest is poor and the country is short of grain, the same traders will sell it, but this time to the world.

In Russia, the situation is different: six companies, mostly transnational, control 60 percent of grain exports, and this year a state-run company is going to join the grain export business. The Russian government is founding the new trader on the basis of a state-run public corporation named Agency for Food Market Regulation. By 2011, its share in Russian grain exports (which are currently estimated at USD 4.5 billion - USD 5.5 billion) is expected to reach 40-50 percent. Twenty-eight companies with government stakes in the statutory funds and some private commercial structures are also expected to fall under the agency’s wing.

The Ukrainian government does not know what to do about its three interveners and the interveners do not know what to do about the surplus of grain. They accuse transnational companies of “cartel collusion”, but aren’t those companies among the most active exporters of Ukrainian grain?

Ukrainian producers of meat are concerned about increasing imports of American chicken legs and appeal to the government for help. Didn’t Ukraine strive so long and hard for WTO membership? Didn’t its leaders promise the people liberal trade and wider access to foreign markets and goods? Didn’t they say that the national agricultural sector would gain more from WTO membership than it would lose? Now they have received this “grain warning” – hopefully, not the last…

Tags: Agrarian Sector by Vitaliy Tretyakov
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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 by Vitaliy Tretyakov
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By Glen Willard
Many people still think of Ukraine as the breadbasket of Europe or of the former USSR. And indeed, with a third of the world’s richest black soil (locally called chernozem), Ukraine was at the turn of the 20th century a world leader in agricultural production.

True chernozem, according to the Columbia Encyclopedia, is black, but there are various gradations into gray and chestnut-brown soils. It forms in areas that have cold winters, hot summers and rapid evaporation of precipitation. Generally only tall grass is found native on chernozem. It has large quantities of nutrients, excellent structure, and good water-holding capacity, making it very suitable for agriculture. It is most widely distributed in Ukraine, where it forms a large part of the good agricultural soil.

In the late 1920s, Stalin and the collectivization of Soviet agriculture eliminated many of the peasant agrarian reforms that the Czarist government had begun as early as 1906 under P.A. Stolypin, who served as Interior minister and prime minister between 1906 and his death in 1911. Even after Stolypin’s assassination in Kyiv, reforms during his tenure produced great agricultural harvests and the country was a world leader in grain production into the early 1920s.

While Ukraine contributed greatly to agricultural production to the whole of the USSR, its production potential was severely limited by Soviet agricultural methods and practices. Further, Ukraine’s agricultural production, like that of all other production, particularly industrial, fell precipitously in the years following the breakup of the Soviet empire in 1989. It was only at the beginning of the late 1990s that Ukrainian agriculture began to recover and make progress.

Background and purpose

For the past several months, and of late on a somewhat ad hoc basis, I’ve been attempting to acquire some knowledge and understanding of the present status of the agricultural industry in Ukraine. That knowledge, I believed, would then allow me to form some opinions as to the future potential and importance of the industry to the overall economy of Ukraine. Admittedly, in advance, I was hoping to come to a conclusion that, at least at some point in the future, Ukraine would again be the “breadbasket of Europe” (or of the FSU, Asia, Eurasia, or wherever). In short, I began predisposed to look for and find a happy ending to a story or stories on agriculture in Ukraine. My research continues. I plan more articles on the subject as I discover more.

I am presently in the middle of my studies. Beginning with little knowledge or background in farming in Ukraine or of the agricultural industry in general, I have not yet reached the point where I can draw conclusions. While I’ve interviewed many in the industry, including professionals, academics and some in government, I must continue my education. As yet, my shortcomings I fear lie in the area of how it all works together. This is partly caused by not having spent enough time analyzing statistical information, laws and regulations, governmental subsidies that may exist and agricultural loan programs.

I have, however, seen some bright spots, and I’ve met a lot of interesting, talented and dedicated people. As I progress, I’ll try to bring some of their stories and experiences together.

No-Till Agriculture Conference

I saw a truly remarkable event occur between November 18 and 23 at the Agro-Soyuz Corporation’s agricultural facility headquarters in Dnipropetrovsk region. A conference, “NT-CA, Sustainable and Effective Agriculture” was held at the site. This was an international conference to educate Ukrainians and others concerning the benefits of a no-till systems approach to profitable and environmentally sound farming.

Before discussing no-till farming, I’ll describe what I felt was most remarkable about the event. First, it was a gathering of approximately 600 participants, each of whom paid $300 to attend, plus the cost of their food and lodging in nearby Dnipropetrovsk. Most of the registrants were from Ukraine and Russia, which had 280 and 200 participants respectively. Kazakhstan was well represented with 70 participants and the others were from a number of other countries including Belarus and Armenia.

The quality of the international experts, with their years of knowledge, expertise and practical experience was also impressive. Speakers came from the United States, Canada, Australia, France, Germany, Brazil, Chile and Paraguay. Some of the experts were academics, some came from government and research institutes, and others were farmers with advanced degrees. All had extensive practical farming experience and most provided lectures on very specialized subjects.

The facilities provided by Agro-Soyuz were superb from any standpoint one could imagine. Located on a farm, the infrastructure was truly impressive. The 9,000-hectare farm had fields dedicated to various crops, a large grain-storage facility, a swine operation, a dairy herd and even an experimental ostrich farm. The campus also boasts a 124-hectare Concept Farm, where a nine-crop rotation system is being studied over a 10-year period. Agro-Soyuz has also operated a Farm Resources Center for several years, where farming applications are both studied and taught. The teaching is mostly through inexpensive or free seminars for Ukrainians as well as for those who come from throughout the world.

For the international conference, a new office building and teaching facility was built. It contains classrooms, an auditorium, telecommunications and Internet connections, and audiovisual systems. In addition, the center has a complete press facility with all that visiting journalists might require.

No-Till Farming

No-till farming has been around for several decades. Its use has rapidly spread for the last decade. No-till brings biological and environmental considerations to the farming process, as it helps prevent soil erosion, helps retain soil fertility and moisture. It also requires fewer and more environmentally safe fertilizers and chemicals, resulting in greater crop yields. It is profitable partly because it saves labor, because there is little need to repeat plowing and furrowing. Other benefits include a “greenhouse effect” benefit, in that less carbon dioxide is released.

Though no-till is used throughout the world, it has not gained much popularity in Europe and Asia. My understanding is that it might wreak havoc with governmental processes in Western Europe, where farming is heavily subsidized and EU-regulated. In many other countries however, no-till has taken root and is expanding. In the United States along, no-till farmining is practiced on 22.4 million hectares, or more than 19 percent of all agricultural land. More than 45 percent of Brazil’s agricultural land uses no-till methods, and in Paraguay, no-till usage has reached 60 percent of that country’s farmland.

In Ukraine, Agro-Soyuz and other companies are the European pioneers in the application of no-till cultivation. The methods may help Ukraine regain its status as a “breadbasket” nation.

Tags: Agrarian Sector by Vitaliy Tretyakov
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