Promises forgotten?

Ukraine’s prime minister said recently that grain export quotas may be lifted after the Ministry of Agricultural Policy reports to the cabinet about fulfilling the grain procurement plan for the country. Evidently the ministry has still not completed this assignment. In any case, Ukraine has finally set new grain export quotas. Until the end of 2006 grain traders will be allowed to sell 1,106,000 tons of grain, including 3,000 tons of wheat, 3,000 tons of rye, 600,000 tons of barley, and 500,000 tons of corn.

In the same breath the government scrapped the previous quotas introduced by a decree of Oct. 17, 2006, for a total of 1,603,000 tons of grain, including 400,000 tons of wheat, 600,000 tons of barley, 600,000 tons of corn, and 3,000 tons of rye.

According to an earlier statement by the Ministry of Agricultural Policy, the new quotas disregard the previous ones unless the latter were utilized. The government has also set up an eight-member commission headed by Serhii Romaniuk, Deputy Minister of Economics, to review applications for grain export licenses and to distribute quotas. His deputy on the commission is Ivan Demchak, Deputy Minister of Agricultural Policy. Other members are representatives of the Ministry of Justice, Chief Control and Auditing Administration, State Customs Service, Ministry of Finance, MP Serhii Ryzhuk, and Volodymyr Klymenko, president of the Ukrainian Grain Association.

The same decree prescribes the order of licensing and quota distribution: companies that exported grain during the past three years will receive 80 percent of the quotas, their size being proportional to the companies’ actual exports over this period as confirmed by a statement from the State Customs Service. The remaining 20 percent are proportionally distributed among the other applicants based on the amount of grain declared for export. For companies that have already obtained licenses, the new quotas will be reduced by the volume of the previously received ones.

Within 15 days after the launch of the application procedure at the Ministry of Economics’ Web site, the commission has to make a decision on quotas and publish it on the same site. It is noteworthy that the commission’s resolution has a recommendatory character for the Ministry of Economics, which makes the final decision. However, if the ministry chooses to ignore the commission’s opinion, it has to present to the applicant a justification its refusal.

The exporters think quota volumes are deliberately understated. The government’s decision has also drawn criticism from the president of Ukraine and international financial organizations.

A day before the decision was adopted, the World Bank published its report on export grain quotas in Ukraine. Prepared in collaboration with the German Advisory Group to the Ukrainian government, the report studies how quotas affect domestic prices for grain, consumer rights protection, revenue from exports, and investments in the grain sector. The World Bank contends that quotas are ineffective in protecting the Ukrainian consumer from surges in world grain prices. They lead to significant drops in grain export revenue and are especially vulnerable to corruption, which will have an adverse impact on Ukraine’s investment attractiveness.

According to the World Bank, the introduction of quotas is unjustified because the domestic supply fully meets all domestic needs and is sufficient for much higher export volumes than those estimated by the government. This year’s grain production has greatly exceeded the average in the last 10 years. Furthermore, large initial reserves are stimulating efficient grain supply in 2006-07.

Experts at the World Bank believe quotas will not bring great benefits to Ukrainian food consumers. Even though wheat prices remain stable, prices for flour and bread have actually increased since the introduction of quotas. In practice the wheat price is only one part of the final price for bread. At the same time, forage prices, according to experts’ forecast, will not affect prices for meat and dairy products.

The report also emphasizes that the quota system entails great losses for grain producers and significantly affects export revenue. By the end of 2006 total losses in grain export revenue will reach $300 million, whereas the expected $25 reduction in producer prices may lead to hundreds of millions of dollars in cumulative losses. The proportion of low-income workers employed in the agricultural sector exceeds the average figure for Ukraine.

This leads the World Bank to conclude that a reduction in grain producers’ revenue may actually raise the poverty line, rather than lower it. The bank’s experts believe that management of the quota system lacks transparency, which leaves room for corruption. Companies that are now able to meet the export quota can make $25 on each ton, which is the amount the producer loses. Possible additional losses are connected with existing incentives for smuggling grain out of the country. The adverse effect of the quota system on grain producers and traders, as well as the risk of corruption, diminish Ukraine’s investment image.

“Our recommendation is to cancel the quota system as soon as possible,” said Paul Bermingham, World Country Director for Ukraine, Belarus, and Moldova. “Even though these market interventions were implemented with the good intention of guaranteeing food safety and protecting domestic consumers from increases in world grain prices, they will misfire. In contrast to this, we would recommend using alternative measures, including money transfers to underprivileged citizens, which would protect the low-income population from food price increases.”