Advance payment for grain

The approaching planting season forces farmers to seek financing to start fieldwork more actively. Meanwhile, the government promises to help them with this. As Minister of Agricultural Policy and Food of Ukraine Mykola Prysiazhniuk stated during his working trip to Odesa oblast farms, there are proposals to involve grain traders in the cultivation of cereals. According to the minister, the working group, which includes both grain traders and representatives of the EBRD and the World Bank is now working on the appropriate proposals to the bill on forward purchases of grain. This document provides for traders paying farmers 50 percent of their costs total prior to planting, another 30 percent during the growing stage, while the final 20 percent are to be paid after receiving the grain, Prysiazhniuk explains. “Many other countries operate under this principle, including Brazil, which is one of the largest exporters of grain,” he says. According to Prysiazhniuk, the government is ready to provide legislative guarantees ensuring that “grain, which has been grown by joint effort of traders and farmers, will move freely on the market.” That is, in other words, operating on forward contracts will ensure free exports of grain by traders. The Day asked industry experts to evaluate the effectiveness of such a proposal for the market and its participants.

COMMENTARIES

Volodymyr Lapa, general director of “Ukrainian Agribusiness Club” Association:

“At first glance, it is a good proposal, for the farmer obtains guarantees of financial stability for planting.”

“In addition, more investment means greater productivity in agriculture. But there are problematic aspects. Forward contracts imply risks for grain traders and farmers alike. It may happen so that the trader makes a pre-harvest advance payment, but because of increased grain prices the farmer may return the down payment, and sell his grain at a more profitable price. In such a case, the grain trader will be forced to buy it at a high price to meet his international commitments.

“To work effectively with forward contracts on the grain market, we first need to solve two issues associated with the state operator of grain exports. The first is the state share in it, which should be 50 percent or more. And the second condition is that this operator should only buy grain from producers directly. It is also important to create favorable conditions for investments in future crops at the state level: the normal operation of agricultural insurance and the judiciary, making and enforcing contracts.

“Had we done it this way, traders would be happy to finance the future crops, reserving, meanwhile, the future supplies for themselves. So far this has not yet been achieved. Without the changes we talked about being implemented, this initiative will not bring any great benefit to the market. As an expert, I am sad that in the agrarian issue, we pick bad choices and overlook reasonable ones. For example, in other agriculturally developed countries, they have established agricultural exchanges where future contracts are concluded, so that this industry may function properly. There, the farmer may learn the price of grain to be paid for an upcoming crop. And if it suits him, he will sign a contract. This is a system of hedging oneself against financial risks. Besides, with a future contract, it is easier to obtain bank credits, which the farmer needs for productive work. So the farmer can finance his activities independently of the trader or the state.”

Oleksandr Yaroslavsky, deputy director of the Ukrainian Agrarian Confederation:

“For several years now, grain traders have been financing the farmers’ grain planting campaign. The nine companies that have agreed to provide information to the confederation alone invested 2.7 billion hryvnyas in the 2010 harvest. The grand total of all previous advances made by traders to Ukrainian farmers is difficult to assess, but I think it is 10 to 12 billion hryvnias. This is about 20 to 25 percent of the total costs of fieldwork. So I think the government should not make additional regulations to make such practices of forward contracting for future crops compulsory, because every member of the agrarian market (the supplier of petroleum products, fertilizer, and seeds, as well as the manufacturer and traders) wants a free, transparent and predictable business environment.

“Let’s add another point about grain procurement. Now, the government started forward purchases. The state company pays for its purchases by selling cheap fertilizers and petroleum products to the farmers, as it, due to the government’s assistance, is able to do so. But other market actors, even if they will become willing to make advance payment in the like manner, would hardly have that opportunity. This is, in fact, a privileged position of one market player. Therefore it must be corrected. I would recall that during the years 1991-99, there were similar practices of advancing technical and logistic support to grain producers by the state or para-state bodies in Ukraine, but the consequences of such practices were restrictions on the movement of grain across regional boundaries, increasing barter, and the accumulation of large amounts of farmers’ arrears to suppliers of fertilizers and fuels, as well as to the government; those debts were extended for long terms, restructured, and in the end, simply written off.”

Oleksii Vadatursky, CEO of Nibulon Ltd.:

“I regard proposals for compulsory financing of 50 percent of produce price before the planting even starts as an attempt to provoke the market operators — to make them face unfavorable conditions, and then to blame them for alleged refusal to finance the agricultural sector of Ukraine. This situation will allow the government to get a free hand on directly controlling the grain market in the future.

“Our company has invested 7.3 billion hryvnias into the Ukrainian economy in 20 years, including 2.29 billion hryvnias that were invested directly in the development of agricultural production, while the government requires traders to make advances to farmers, but gives no guarantee on whether the agricultural producer or investor will be able to dispose of this grain. And in the case of crop failure, who will pay for the risk? The agricultural sector does not always pay the investor. If the government establishes a quota system and the investor receives no quota at all, who will be responsible for it? This would mean great losses yet again. Therefore, the government should adopt a legislative package quickly, using, for example, the Brazilian experience of a civilized financing system, which has attracted 20 billion dollars to the nation’s agricultural sector in just one year.”