Easing Export Quotas

Economic News

22 Jul 2010
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Last week Ukraine's government relaxed export quotas on feed grains that had been in place since last autumn. Though some believe the move is a step in the right direction, quotas for wheat exports remain in place, and many believe the government should adopt a more consistent approach to agricultural regulation.

The government stated it enacted the quotas to protect domestic consumers in an environment of growing global grain prices and to help overcome food security concerns following a shortfall in last year's harvest. The move to ease these controls is good news to Ukrainian grain producers and traders, but the market still has some way to go before it reaches maturity.

Ukraine's agricultural sector has several assets that position it for long-term growth as an exporter of grains, oil seeds and meats. It has an abundance of black soil, a strategic, centralised location ideal for export into multiple markets, and an experienced workforce.

However, the general consensus is that Ukraine's sector does not live up to its potential. Dexter Frye, managing director in Ukraine for US-based agriculture company Bunge, told OBG, "Agriculture in Ukraine is not nearly as productive as it is in a lot of other countries. If you reach the same levels of productivity here as in Western countries, there will be a huge exportable surplus even with good levels of local consumption."

One of the primary challenges is the need for modernization of the farming sector. To invest in modern seeds, equipment and fertiliser, farmers need capital, but Ukrainian farmers currently have limited means to access funding.

Part of the problem is the current land ownership regime. Under the present rules, land transactions must be approved by parliament. This effectively cuts off the ability to transfer ownership of property and therefore prevents farmers from borrowing against their land to access capital. Andreas Rickmers, general manager in Ukraine of American agriculture firm Cargill told OBG that land reform would provide, "the necessary stability and predictability for landowners to make long-term investments in infrastructure."

Other channels to fund modernisation are limited. Some multinational companies offer advances to farmers for investment, and select banks have begun allowing easier terms for credit. But high costs have also meant that money often goes less toward capital investment, and more toward consumables such as petrol. Said Frye of Bunge, "There is a huge opportunity for Ukrainians to modernise the farm sector, to increase efficiency...but they need money to do it."

Though figures vary, the World Bank estimates the total lost export revenue is $300m, just for 2006. Moreover, the quotas sent the wrong signals to the investment world, and may encourage grain traders to scale back operations and discourage investment. Said Rickmers, "The export restrictions had a severe impact on the grain industry with lasting consequences. The abolition of the quotas did not really help. Even today the wheat export restriction remains, and we are not sure of the government's plans for the future."

The good news is that many think the earlier quotas will not affect total production later this year. Planting for this year's August harvest had already occurred when the restrictions were introduced.

Going forward, industry insiders seem to agree that what the sector needs more than liberalisation is consistency. One of the primary industry complaints surrounding the quotas was the fact that they were introduced mid-season. By that time, grain traders had already bought grain, positioned it for export and, in some cases, sold it to foreign buyers. This forced companies to renege on contracts and much grain ended up going to rot.

Industry insiders do not expect that relaxing export controls will usher in more liberal agriculture measures, as most expect a more controlled regime in the near term. According to Rickmers, "Power has been changing so frequently that there have been no long-term trends but I think so far the trend has been away from free markets. This is bad for the market if it is not predictable. Most countries regulate their agricultural market in one way or another, but most of these also have a clear framework for how these operate."

Frye agrees, "I'm hopeful that it will be more consistent. In reality, people don't crave liberalism or a tightening of controls, what they want is consistency - they need to know what to expect if they follow the rules."

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