Going With The Grain

Economic News

22 Jul 2010
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Ukraine's decision to abolish export quotas for the remainder of the season reflects an expected record harvest and represents sound economic judgement.



On May 23, the Ukraine government lifted export restrictions on grain for the 2007/2008 season with immediate effect. It appears unlikely to re-impose them for the next season, which commences on July 1. The only exception will be sunflower seeds, which are used to make cooking oil, on which export duties remain.



Large grain stocks and an expected excellent harvest this year were the rationales behind the decision, Prime Minister Yulia Tymoshenko had indicated in an earlier statement. The week before, President Viktor Yushchenko, who has a tempestuous relationship with Tymoshenko, had threatened to step in to cancel the constraints if the government did not.



This year's harvest is expected to reach 40m tonnes of grain, up from 29.3m in 2007 and 34.25m in 2006. Last year's poor crop caused the government to ban exports outright from July 1, 2007 to January 1, 2008, the first half of the current season (an export duty on sunflower seeds has existed since 1999). Then, in October last year, quotas were imposed for the first three months of 2008, putting a cap on the quarter's exports at 400,000 tonnes of barley, 200,000 tonnes of wheat and only 3000 tonnes of rye. This April, the quotas were raised to 1m tonnes of wheat and 900,000 tonnes of barley.



Like many food producing countries, Ukraine imposed export restrictions on crops partly in an attempt to bring down inflation, which topped 30% year-on-year in March. A major factor driving prices up worldwide has been the rising cost of food, driven by climatic changes, consumption trends and the increasing popularity of biofuels, which has led to agricultural output being diverted from food.



The rationale behind the quotas is that exports decrease the supply of food available in the domestic market, thereby putting an upward squeeze on prices, an effect which is particularly acute if harvests are poor, as they were in Ukraine last year. Now that the supply is more plentiful again, the government apparently thinks there is enough to export without a detrimental effect on the domestic inflation rate - though it shows little sign of dropping significantly. However, another factor is probably the negative impact that the quotas have had on the Ukrainian agricultural sector, which accounts for 9% of Gross Domestic Product (GDP) and perhaps a quarter of employment.



Thus far this season, Ukraine has only exported around 2m tonnes of grain. The cancellation of the limitations is expected to increase the total to 4m by the end of the season on June 30. Nonetheless, this will be significantly down on the 8.3m exported last season and Yushchenko (who admittedly has a political point to make) estimates that the quotas have cost the agricultural sector some $1.4bn. Barley exports may fall from 5.14m tonnes in 2006/07 to 1m tonnes this season, and wheat from 3.3m to 1m.



However, beyond the official measurement of the July-June season, exports are expected to rise to normal levels relatively swiftly. "Ukraine will come back to stable and large grain export shipments," Mykola Vernytsky, director of ProAgro agriculture consultancy told the international press. According to government officials, exports may jump to 13.5m tonnes in 2008/09.



While quotas are an understandable response to soaring prices, they can have an adverse effect on supply. They may disincentivise the cultivation of crops by limiting farmers' and potential investors' access to lucrative foreign markets. Given the large proportion of Ukraine's population that is supported by agriculture, curtailing a major source of that sector's income in export earnings also seems unwise. Furthermore, the country's growing current account deficit (which was 4.2% of GDP last year), limiting foreign currency earnings, needs extremely convincing justification.



It is, therefore, fortunate that the strong harvest has given a political window for the quotas to be abolished.

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