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Ukraine grain and feed anual report 2009

Report in PDF format here

Prepared by: Oleksandr Artiushyn, Agricultural Specialist

Executive Summary

Production of grains and pulses (wheat, barley, corn, rye, oats and peas) is expected to decline by over 20% in 2009. Weather conditions have been relatively favorable for crop development so far, but lower credit availability is likely to result in a decrease in input application, leading to lower grain yields and possibly impacting grain quality. Considering a large area of winter grains and their conditions, we expect total grain production to remain at above average levels. Grain exports are expected to decrease to some extent, while relatively large carryover stocks will help Ukraine to stay a large grain supplier in the 2009/10 season.

Ukraine harvested a record high grain and pulse crop in the 2008/09 marketing year. According to State Statistical Committee data, total grain and pulse production increased by 82% year over year and totaled 53.3 million tons in 2008, benefitting from increases in both harvested area (by 14.4% to 15.4 million ha) and yields (by 59.2% to 3.5 tons per ha), particularly due to exceptionally favorable weather conditions. Ukrainian agricultural producers benefited from record-high prices for agricultural commodities in 2007 and early 2008, allowing them to increase input application for the 2008/09 harvest. A record grain crop combined with large carryover stocks (based on previously applied export quotas) increased an export surplus of wheat, barley and corn, leading to a decline in domestic prices. In spite of a relatively high pace of export sales, the bumper Ukrainian grain supply resulted in a plunge in domestic grain prices, especially for feed grains. Increased competitiveness globally and regionally, renewal of protectionism in some foreign markets (EU import duties, lower import subsidies in Saudi Arabia etc) and higher risks caused by the global financial turmoil (e.g. problems with bank payments, lower credit availability) adversely affected Ukraine's grain trade, but a recent 35% devaluation of local currency has had a positive impact on grain export sales.

Amid larger grain availability and low domestic prices, the Government of Ukraine (GOU) switched its policies in regard to grain market from restricting grain exports to supporting domestic prices. In the 2007/08 and 2006/07 marketing years, the GOU applied grain export licenses and quotas to curb grain prices and consequently food inflation, which brought large carryover stocks and significant losses to farmers and grain traders. In the 2008/09 marketing year, the GOU was mostly involved in interventional grain purchases to support domestic prices of grains. Problems with value added tax (VAT) refunding to grain exporters continue, making grain trading companies pass the risks of VAT non-refunding to local producers through price discounting. The GOU adopted a procedure that allows grain exporters to receive a prompt VAT refund if they purchase grain directly from the state-run Agrarian Fund. In the 2009/10 marketing year, the GOU plans to continue interventions on grain market. It has already included some grains, namely wheat and rye, into the list of products to be regulated in the 2009/10 marketing year, but serious state budget constraints may lead to a lack of funds for interventional purchases.

As to export policies, Ukraine became a member of the World Trade Organization (WTO) on May 16, 2008. Ukraine agreed to apply export licensing requirements and other similar export regulating measures in conformity with WTO rules after the accession. However, grain export restrictions, expected to be abolished from the day of Ukraine's accession, were removed only 1.5 month after the accession. Considering the upcoming Presidential elections in Ukraine (in early 2010), the GOU is expected to be alarmed at possible food price increases, and if market conditions lead to high grain prices (which are often considered by the GOU officials as the main source of bread and meat price increases), the GOU is likely to intensify its administrative pressure on the grain market.

The GOU also conducts "mortgage" purchases, which implies providing loans to farmers with the soft commodities used as collateral with a simplified procedure of the withdrawal of this collateral (usually, grains) if loans contracted are not repaid. Both interventional and "mortgage" purchases are performed by the state operated Agrarian Fund. State-operated Agrarian Fund has been an active market player in the 2008/2009 marketing year, but may face problems with direct state budget funding in the 2009/2010 marketing year, as the economic meltdown significantly limited state budget incomes. However, Agrarian Fund has recently said it sold approximately 860 thousand tons of grains purchased previously in the 2008/2009 marketing season (at UAH 956 million, or about $124 million), thanks to the procedure that allows grain exporters to receive a prompt VAT refunding if they purchase grain directly from the state-run Agrarian Fund. The received funds may be used for further grain purchases.

Apart from market regulation with both market and administrative incentives, the GOU provides support to grain growers. However, the GOU cut total spending on agricultural programs and the industry governance by almost 2 times in 2009 compared to the previous year, and the state budget is severely constrained to finance crop subsidy programs in the 2009/2010 marketing year. The GOU has not yet adopted the level of subsidies for grain growers in the 2009/10 marketing year (based on the State Budget in 2009). Domestic grain growers have been subsidized depending on crops they cultivated. In MT 2008/2009, farmers growing wheat, triticale, rye, oats, peas, buckwheat and millet might be able to claim a subsidy of UAH 100/ha (US $ 18.9/ha), rice - for UAH 220/ha (USD 29/ha). The subsidies were provided only for those farmers growing spring crops that insured 20% acreage. As the level for state subsidies in the 2009/10 marketing year has not been adopted yet, and considering serious cut in budget spending, we expect direct subsidies to have only a very slight impact on planting decisions for the 2009/2010 crop.

Ukrainian grain growers will continue to enjoy serious tax benefits that are the same for all agricultural producers. Current Ukrainian tax legislation allows agricultural companies to retain the 20% VAT charged on product they sell. The amount retained is accumulated to a special account and reinvested into company operations. In addition, companies, whose own agricultural production accounts for more than 75% of their gross sales, can apply to be registered as payers of a fixed agricultural tax in lieu of profit tax, land tax, water tax, municipal tax and some other taxes. This fixed tax is calculated on the basis of estimated value of land leased or owned by a tax payer. The GOU also reimburses interest rate payments on the loans contracted by agricultural producers from local commercial banks. In 2009, the GOU repeatedly pressured local commercial banks to extend the loans taken on by agricultural producers, including grain growers, if they are not able to repay them in time. In 2008, the GOU also reimbursed 50% of the premiums paid by farmers to insurance companies for insuring wheat, rye, corn, soy beans and sunflower, but the program was stopped in 2009, due to scarce budget financing.

Grain Storage Capacities

Total grain storage capacity increased by 2 million tons in 2008. According to the Ministry of Agriculture official, total capacity of certified grain elevators that are allowed to provide grain storage services increased by 3 million tons in 2008 and is currently estimated at 28 million tons (690 grain silos). There is no official data on the total grain storage capacity, as grain processing plants or other private companies that store grain for their own purposes may not report on the storage capacities they have. Based on expert estimates, total grain silo capacities (both certified and non-certified) exceed 35 million tons with loading capacity of 1.4 million tons per day.

Most grain elevators are owned by private companies, but the largest operator of grain silos is state-run State Stock Company (SSC) "Khlib Ukrainy". It operates 105 grain handling enterprises with total grain storage capacity of 7 million tons (about 80 certified grain silos). Its grain processing capacity is estimated at 4 million tons (compound feed plants, mills etc). State Reserve owns 21 grain elevators. Thus, approximately 20% of grain storage silos in Ukraine may be considered as state-run, and the rest is privately owned. The largest private grain silo operators include leading grain trading companies, such as Kernel, Louis Dreyfus, Cargill, Bunge, WJ Grain etc. The lack of grain storage capacity during a record grain harvest has been widely discussed over the 2008/2009 marketing year, and grain elevators were reportedly overloaded is some Ukrainian regions (see below the breakdown of grain storage capacities by regions) and farmers faced losses.

Certified Grain Storage Capacities by Regions, 2008 (in thousand tons)
Source: Ministry of Agrarian Policy, FAS-Kyiv estimates

In early 2008, lots of grain growing and trading companies had plans to build new modern grain elevators, but only some succeeded to accomplish their projects, as the financial turmoil has forced most of them to put off capital expenditures due to lower credit availability. Quality of some grain silos built many years ago during the Soviet era is low, and their loading capacity is one of the constraints for prompt grain trade. For example, there are some grain silos with storage capacity of 100,000 tons which load only 10 railcars per day. Some farmers have developed on-farm storage capacities as a response to both the lack of large grain silos and to the increased price of elevator's services.

Port Infrastructure for Grain Export and Transit

Ukraine has well-developed port infrastructure. There are 18 state-run and 7 private sea ports in Ukraine, as well as 12 port terminals on the shores of Black Sea and Azov Sea. Port infrastructure for grain transshipment in Ukraine started growing quickly in the late 1990s and in the beginning of 2000s, as port infrastructure of Soviet times was obsolete and was not able to handle increased grain exports. Moreover, the grain port infrastructure of Soviet Union was import-oriented. In 2001, the capacity of grain transshipment of Ukrainian ports was about 15 million tons per year.

Current transshipment capacity of Ukrainian port grain terminals is estimated at over 26 million tons with grain storage capacity of about 2 million tons, out of which 17 million tons may be transshipped through state ports that have grain storage capacity of about 1 million tons. Ukrainian port infrastructure was able to transship 2.6 million tons per month.

Increased capacity for grain export and transit is attributed to modern private grain port terminals, including Avlita, Traninvestservice, Transbulkterminal, Nibulon, Ukrelevatorprom and others. All the leading grain-trading companies were trying to purchase or build their own grain export facilities. Two port elevators are operated by SSC "Khlib Ukrainy". Panamax-size ports in Odesa, Illichevsk and Yuzhnuy (also called "Big" Odessa Ports) are the primary Ukrainian ports for grains.

Grain Transshipment Capacities by Port Location (%)
Source: Global Shipping Agency

In 2008, Ukrainian ports transshipped approximately 12.8 million tons of grain (10.0 million tons of grain exports and 2.7 million tons of grain transit), 9.2 million tons of which was transshipped in the second half of the year. Share of grain transit decreased from 49% in 2007 (when grain export quotas stopped Ukrainian grain exports) to 21% in 2008.

A bottleneck of grain export infrastructure is railway transportation, particularly weak infrastructure (low capacity) of railway stations located near main grain exporting ports and lack of railways in the areas close to these ports. There is also a lack of railcars to handle increased grain exports and transit. Ukrainian railways, which are state-run, currently use only 12 thousand railcars for grain transportation (based on expert estimates, less than 9 thousand railcars are actually used). Sometimes, the railways administration temporarily bans the supply of grain to some port destinations as the railways are blocked with railcars. Ukrainian railways transported 14.8 million tons of grains in 2008, including over 11 million ton of grains supplied to ports. Total length of railways in Ukraine is estimated at 22.8 thousand km.

The economic meltdown led to a significant drop in exports of metal and some other commodities from Ukraine, which helped grain trading companies export grains. If there were active exports of metal, grain exporters would face much more competition for railway infrastructure. According to Railway Administration (Ukrzaliznytsya) officials, the increase of capacity for grain transportation to Black Sea ports is among the priorities for Ukrzaliznytsya in 2009. The price of grain railway transportation may change in the 2009/2010 marketing year, as tariff plans should be reformed in line with international practices. Currently, Ukrainian railway administration reportedly subsidizes transportation of passengers with transportation of goods, and some railway transportation regulations have not been changed since Soviet times when Ukrainian railway was a part of USSR transportation system.

Truck transport is used for grain that is grown in regions close to grain exporting ports (200-300 km), and some grain producers or traders have already purchased trucks to transport grain. Some grain suppliers are reportedly considering increasing the use of internal water transportation (for example, grain is transported by railway or trucks to river ports and then shipped to exporting sea ports or to importing countries). However, railway transportation accounts for approximately 70% of grain transportation, while truck and river grain transportation accounts for only 27% and 3%, respectively.

Statistical Tables

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Date:  31.03.2009

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