Who will reap the gains from Ukraine's harvest?
by Simon
Pirani
Thanks to this
season’s record post-Soviet harvest, Ukraine has become a big agricultural
exporter again. But there are fears in Kyiv that the biggest benefits will go to
multinational grain traders and agricultural groups.
In 2001 Ukrainian
farmers harvested 39.7 million tonnes of grain, up from 24.8 million tonnes in
2000 – an increase attributed not only to the weather but also to higher yield
and expansion of sown land. The fact that Ukraine’s huge collective farms have
usually been privatised wholesale or turned into co-operatives, rather than
chopped into tiny small holdings as has happened in Moldova and Romania, helped
too.
Exports soared
from 1.8 million tonnes in 2000-01 to a projected 8 million tonnes, or at least
$400 million worth, in 2001-02. About half Ukraine’s exports this season have
gone to western Europe: the keenest buyers were France, opened to Ukraine for
the first time in half a century, Spain and Portugal. Significant quantities
also went to the Middle East and North Africa.
But the
farmers’ success in producing crops strained to breaking point both
Ukraine’s physical infrastructure (grain elevators, warehousing and transport
networks) and its financial networks (the provision of credit for agricultural
production and for trade). Big international players have stepped in, with the
support of the international financial institutions.
The first problem
exacerbated by the big harvest was lack of storage facilities. Those among the
hundreds of small grain traders who could afford to buy grain elevators did so:
Kompanion business magazine reports that traders control 344 of Ukraine’s 544
elevators. But warehousing space in the ports is in shorter supply, and directly
after the harvest, the queues of grain stocks trying to get on board ships grew
longer and more chaotic.
Svetlana
Beledana, senior trader at Olimpeks, one of the largest Ukrainian grain traders,
said that the company built its own 50,000-tonne elevator at Dnepropetrovsk, but
still suffers from the warehousing bottleneck at larger ports. “In the summer,
we brought 3-5000 tonne vessels up the Dnepr river and loaded straight on to
them,” she said. “But in the winter we have to move the grain to the Black
Sea ports. Many terminals have no proper loading schedule. One’s time and
money can often be wasted.”
Ilyizhevsk near
Odessa is the only Ukrainian port equipped to dock panamax cargo ships. Nikolai
Vernitsky of the Pro-Agro research centre warns: “It is urgent for government,
together with private business, to develop a proper strategy for the ports.”
Into the gaps in
the supply chain are stepping foreign-owned transport companies and
multinational traders. Instead of just buying grain at the ports, they are
building networks of suppliers and some domestic infrastructure.
For example
UK-based Swan Overseas, which has for the last three years owned and operated a
grain export terminal at Kherson port, now buys grain from Ukrainian farmers and
takes it through its own inland drying facilities and then to the terminal.
Masoud Alikhani, the ceo, says: “Grain quality is not standard, because of a
lack of modern equipment, so we have increasingly become involved in providing
equipment to farmers and in financing production.” Swan started life as the
grain division of Middlesex Holdings, a UK company which, with former foreign
secretary Lord (David) Owen at its head, bought into Russian steel and gas in
the early post-Soviet days.
The international
grain trading companies are also moving up the supply chain – with strong
support from international financial institutions. The largest exporter of all,
German-based Toepfer, is on course to receive a euro 90 million loan from the
EBRD in May to purchase agricultural products, transport and store them, and
then export them or process them in Ukraine on a tolling basis. About euro 40
million of the loan, which goes for EBRD board approval on 8 May, will be
syndicated to commercial banks. Some of the money will go to sorting out
logistical problems. In its project document for the loan, the EBRD mentions
Toepfer’s commitment to reform the grain storage sector and introduce
warehouse receipt legislation.
As well as
missing physical links such as elevators and warehouses, there are missing
financial links. The soon-to-be-privatised former Soviet grain monopoly, Khlib
Ukrainy, through which agriculture used to be financed, has a unique rural
infrastructure and links with farms ... but no money. It is badly indebted to
energy companies that provided inputs to its production subsidiaries on a barter
basis during the 1990s slump.
Ukrainian banks
provide some finance to farmers – they lent 863 million hryvna in the first
quarter of 2002, from an estimated 2.8 billion total annual borrowing
requirement, but that’s less than last year, because they turned away small
clients in western Ukraine who failed to repay.
These gaps are
being filled by the international traders, who have already achieved dominance
in the export market, and banks. The Pro-Agro research centre says that this
season, the first since the collapse of the USSR in which Ukraine has had
substantial grain exports, the largest exporters were all multinational grain
companies: Toepfer, Cargill, Glencore’s Ukrainian subsidiary Serna, Ramburs
and Nibulon.
Western
commercial banks also take a strong interest. Fortis Bank (Netherlands) works
with international traders and local traders/producers; Bank Austria does about
$2 million per annum worth of grain trade finance business from its Kyiv office;
BNP Paribas and West LB are active. And while deputy prime minister Leonid
Kozachenko said this month [April] that the government would like to sell Khlib
Ukrainy to a domestic bank, sources in Kyiv say foreign buyers are in talks
about the privatisation.
But banks and
multinational traders are reluctant to provide pre-crop finance to farmers. Some
banks sustained heavy losses trying to do so in the mid-1990s. And traders
usually prefer to buy grain inland rather than at the port, but have so far
limited their involvement in agricultural production.
This season also
saw the emergence of a handful of large Ukrainian traders, such as United Grain
Group and Olimpeks, who want to move downstream and build sales directly to
western customers rather than to the big traders. A western European banker
working in Kyiv said: “The Ukrainian traders are moving towards selling
directly to foreign customers, and that trend will continue.” And they have
working relationships with agricultural producers that international groups are
hard-pressed to replicate: they are acquiring port facilities, forwarding
activities and silos. Increasingly they are financing production and buying
farms.
Vernitsky at
Pro-Agro says the three biggest problems the Ukrainian traders have to contend
with are margins (big players can live with smaller ones, and the big harvest of
2001-2 brought margins on exports down to as low as 10%, from 23% the year
before); return of VAT on exported goods, a duty the state notorious fails to
fulfil (“and while large traders who are also importing commodities,
especially sugar, may be able to make a deal to offset payments, Ukrainian
traders often have to write off the loss”, says Vernitsky); and lack of
accurate information on price movements and other changes on world markets.
The dilemmas over
who will control the future of Ukrainian agriculture are highlighted by the
long-running dispute between parliament, government and the International
Monetary Fund about the export tax on one of the country’s most valuable crops
– sunflower seeds that are crushed to make sunflower oil.
The tax, first
levied at 23% and last year reduced to 17%, makes export prices higher than the
multinational traders are prepared to pay. The farmers are thus compelled to
sell to the domestic sunflower oil crushing plants, who this season effectively
acted as monopoly buyers and were able to push prices down. The farmers
suffered.
The IMF has made
abolition of the export tax a key condition of successive loans to the Ukrainian
government during its recent years of financial instability, and the World Trade
Organisation has made clear that repeal of the tax is a condition of Ukrainian
membership. But a majority in Ukraine’s parliament – strongly influenced by
the domestic grain-crushing plants and the Ukrainian, Russian, Swiss and other
industrialists who control them – strongly supports the tax. The
grain-crushing plants contribute handsomely to district budgets that keep local
elites strong.
The IMF claims
that it is motivated by concern for the farmers. “Domestic oilseed crushing
plants are able to increase profits at the expense of the farmers’ standard of
living,” it said in a special statement about the export tax dispute last
year. “This ability of powerful groups to bend the tax system to their
advantage at the expense of weaker members of society is an important obstacle
to reforms in Ukraine.”
That’s
hypocritical, say industry observers in Kyiv, because the IMF is also speaking
for rich, powerful interests: the multinational traders, who would rather buy
the sunflower oil and either process it in Ukraine on a tolling basis (under
which the traders pay the processing plants a fixed fee to crush the sunflower
seeds, and do not have to invest in production assets) or process it outside the
country.
Vernitsky at
Pro-Agro says: “The government opposes the export tax primarily because it
wants to receive IMF loans. Parliament supports the tax because it favours the
industrialists. But from the point of the view of the farmers, and of the
development of Ukrainian agriculture, a seasonal export tax, adjusted depending
on the market conditions to give the farmers choice and help our processing
industry, would be ideal.”
There seems
little doubt that Ukraine, once known as the “Soviet bread basket”, will
soon become a bread basket again. Whose hands will be carrying the basket
remains to be seen.
--
2001 grain
harvest (ministry of agriculture figures)
21.3 million
tonnes of wheat
10.2 million
tonnes of barley
1.8 million
tonnes of rye
1.1 million
tonnes of oats
Exports
Wheat exports,
Jul 01 – Feb 02, 4,000,000 t, up from 63,000 t year-on-year
Barley exports,
July 01 – Feb 02, 2,400,000 t, up from 869,000 t year-on-year
Corn exports, Oct
01 – Feb 02, 173,000 t, down from 241,000 t year-on-year
Sunseed exports,
Oct 01 – Feb 02, 64,000 t, down from 707,000 t year-on-year
Sun oil exports,
Oct 01 – Feb 02, 196,000 t, down from 346,000 t year-on-year
(Source:
UkrAgroConsult 18.3.02)
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