Grain traders on their knees

The price of Futures markets on grain were rising. It was a reaction on the Russia’s ban on its grain exports. The Day discussed the situation on world and domestic markets with Leonid KOZACHENKO, president of the Ukrainian Agrarian Confederation (UAK), and head of the Council of Entrepreneurs attached to the Cabinet of Ministers of Ukraine.

What poses a greater threat to Ukrainian grain growers: the current heat wave or the Ukrainian bureaucrat who uses it as an excuse to stop grain exports?

“If we transfer this question from today’s specifics to a more general level, based on the experience of the past couple of years, it can be said that the bureaucrat, the state official, is a bigger threat, because agricultural enterprises lost an average of 25 billion hryvnias annually due to the actions of government structures. No drought or weather conditions caused such losses, with the possible exception of strong frosts in 2003 which caused us to lose nearly 70 percent of crops. However, in recent time bureaucrats definitely claim the first place by causing colossal losses in the agricultural sector.”

Bureaucrats always carry out someone’s orders. So who are they playing for now as they block Ukrainian grain exports?

“Honestly, bureaucrats are mainly playing to fill their own pockets. I can speak about this not only on behalf of the UAK and the Council of Entrepreneurs. I have recently been very disturbed by the number of complaints from businesses against illegal actions of officials, who force businesses to pay kickbacks, which greatly hinders entrepreneurial activity and creates big problems for future development.

“I don’t see this as caused by some orders from above, from the leaders of the state, and the government in general. However, I assume that officials involved in this have come from certain political forces as a result of a compromise on the highest level. It is these political forces that delegated them that are, perhaps, setting such requirements… Understandably, this does not facilitate business, improve the situation in the state, or strengthen our economy. So I believe that this requires involvement of the highest leadership and, above all, the president, in order to fight such phenomena.”

There is much talk about grain contraband. Is it just a cover for stopping exports, or are such cases indeed possible? Or is the VAT at stake here, whose compensation is more dangerous for the country than contraband?

“When we speak about contraband and the VAT, we need to understand that these things are incompatible. To receive VAT compensation from the government, you must not engage in contraband. You need to ship real products and show the maximum price for them, and then you get a right to the maximum VAT.

“Theoretically, contraband takes place in both exports and imports. In the past month alone the Council of Entrepreneurs, held four meetings with representatives of associations that import fruits, light industry goods, and providers of transportation services. They all complain against the actions of customs offices. It turns out that entrepreneurs are forced to engage in contraband and pay significant sums as bribes to representatives of government organizations. The leadership of the government has been informed about this, and meetings with the respective organizations have been held. They received instructions from the Vice Prime Minister Serhii Tihipko. We will continue helping business to fight contraband and corruption, which often involve precisely the bodies that should be fighting them.”

What has the Ministry of Agricultural Policy (MAP) done in this situation? Whose interests is the “headquarters of the sector,” as it was once called, defending?

“We have no information that the ministry has caused or urged any actions on the part of the customs administration aimed at stopping grain exports.

“However, there was recently information that the work of the State Qua-rantine, a unit of the MAP, had been stepped up. Higher requirements were set for this body in what regards the inspection of products to identify allergic substances or quarantined plants. This needs to be paid for through the purchase of the appropriate certificates.”

However, there was an impression that the minister learned about hurdles on the borders later than others. Isn’t it strange?

“I personally spoke with Minister Mykola Prysiazhniuk, and he said that he had not given any orders to limit exports. I also spoke about this with Vice Prime Minister Viktor Slauta. He did not give any such orders, either. Moreover, both condemned such steps.”

In what direction did the delays with exports push domestic and international prices?

“Because of dubious actions of our government bodies, the world prices went up, while the domestic prices started to go down, because an exports ban blocks the market. Some politicians even started saying that this is a conspiracy among traders. And this at a time when grain traders were nearly on their knees and pleading to be allowed to export grain, because their losses in only four days amounted to approximately four million dollars (this accounts for idle time of the ships and train cars only). Meanwhile, politicians pointed their fingers at traders who allegedly want to deceive farmers for the umpteenth time and not give them an adequate price.”

How is the Agrarian Fund working this year? Has it learned the art of re-gulating the grain market through commodity interventions?

“Unfortunately, we have a lot to say against this body. It is not fully fulfilling its functions, especially during this season. Take, for example, ill-advised measures to sell nearly 400,000 tons of bread grain, which the Agricultural Fund bought at a fairly low price (as compared with the current one), for the purpose of buying newly harvested grain on the open market. Instead, it should have use this amount of grain to control domestic prices in the country by selling grain to bakers. Meanwhile, prices are going up today. Bread grain is already priced above 1,600 hryvnias per ton, while those 400,000 tons were bought at 1,200 hryvnias per ton.

“According to our forecasts, sooner or later the price of bread grain will reach 2,000 hryvnias. When will the Agrarian Fund buy? The government issued five billion hryvnias to it, but we are convinced that this money would be better used to purchase grain against a pledge, while the previously purchased grain should have been kept. Apart from this, we suggested that the government give compensation for credit interest rates to bakers to enable them now, until the price has not yet reached the highest level, to purchase about 500,000-600,000 tons of bread grain. This is precisely the amount they lack to secure production throughout the entire season. They cannot purchase this much grain at the moment for lack of liquidity, while the credits offered by banks are very expensive.”

You named the sum of five billion. Is it enough for the next year?

“Yes, it will be enough to prevent a threat on the domestic market and a deficit on the grain market. However, don’t forget that we also have the State Reserve which has to fulfil its legally mandated functions. So if the Agrarian Fund buys five billion worth of grain on the market and the State Reserve has some grain at its disposal, the state will never have problems with grain. Let me reiterate that is all based on present conditions.”

Is it possible that the Agrarian Fund has an interest in stopping grain exports in order to cut the domestic prices and buy grain from farmers on the cheap?

“I cannot say that for sure, but there is a lot of talk about this among experts. They are saying that the Agrarian Fund should abandon the habit of carrying out some dubious commercial transactions parallel with grain purchases, as was the case in the past couple of years. If it intends to this again, it will be interested in bringing prices down. However, traders are paying more to farmers today than the Agrarian Fund, and that is why it cannot fulfill these dubious schemes. The Agrarian Fund wants something else in addition to the contract price (a hint at kickbacks – Author), while traders do not demand anything from you in addition to the contract price. Therefore, if prices continue to fall, the Agrarian Fund can buy grain on its conditions, while if the price goes up, it will have no other option but to work transparently and in good conscience.”

How do you picture the future market of VAT obligations and its role in the economics of agricultural producers and grain traders?

“Obligations and VAT itself are very serious instruments which influence the prices on the domestic market to a great extent, and especially the losses of agricultural companies from exporting their products. According to our calculations in the last season these losses were nearly five billion hryvnias. Grain traders did not pay this because they lost any hope to receive compensation from the state for this tax. Traders paid agricultural producers 250 hryvnias less for a ton of grain than they should have. The grain traders once again do not have any guarantees from the state on receiving VAT refunds. It means that our agricultural sector remains, just as it was in the past years, a social donor.”

We know that you’ve just recently returned from London. How does Ukrainian agricultural sector look from the shores of England?

“England views our agricultural complex as very promising. However, unfortunately, they say that we are not re-levant at the moment. Things may be different in ten years or so. There are uneasy economic reforms ahead of us. We are advised to put fighting against corruption on the first place among those reforms. The president of Ukraine has already spoken publicly about the this program. However, the whole world thinks that we should be getting rid of this shameful phenomenon more actively. If this wouldn’t be done, it will be impossible to implement the necessary reforms in any branch of economy because all of them need investments. However, there will be no investments until we get rid of corruption completely. It is impossible to realize the necessary reforms on the resources of the domestic financial system.”

There were many discussions about the common grain market for Ukraine, Russia, and Kazakhstan. What is your opinion about this project?

“One could not forbid theoretical discussions on this topic. However, it is extremely difficult to implement those ideas. It is very risky to give an enormous common market in a form of transnational interstate company into the hands of a state official. I am convinced that a state official would never be a more effective business manager than an entrepreneur. It is, no doubt, possible to create extremely favorable conditions by concentrating the potential of three or four states in hands of one person, and by doing so to put the whole world on its knees. But this does not mean that as a result the producers will win from their products being sold abroad by state officials. Today there are also propositions to create a state company in Ukraine that would sell grain. If such company will be privatized right away it would make sense.”