Who will reap the gains from Ukraine’s harvest?

by Simon Pirani

Thanks to this season’s record post-Soviet harvest, Ukraine has become a big agricultural exporter again. But there are fears in Kyiv that the biggest benefits will go to multinational grain traders and agricultural groups.

In 2001 Ukrainian farmers harvested 39.7 million tonnes of grain, up from 24.8 million tonnes in 2000 – an increase attributed not only to the weather but also to higher yield and expansion of sown land. The fact that Ukraine’s huge collective farms have usually been privatised wholesale or turned into co-operatives, rather than chopped into tiny small holdings as has happened in Moldova and Romania, helped too.

Exports soared from 1.8 million tonnes in 2000-01 to a projected 8 million tonnes, or at least $400 million worth, in 2001-02. About half Ukraine’s exports this season have gone to western Europe: the keenest buyers were France, opened to Ukraine for the first time in half a century, Spain and Portugal. Significant quantities also went to the Middle East and North Africa.

But the farmers’ success in producing crops strained to breaking point both Ukraine’s physical infrastructure (grain elevators, warehousing and transport networks) and its financial networks (the provision of credit for agricultural production and for trade). Big international players have stepped in, with the support of the international financial institutions.

The first problem exacerbated by the big harvest was lack of storage facilities. Those among the hundreds of small grain traders who could afford to buy grain elevators did so: Kompanion business magazine reports that traders control 344 of Ukraine’s 544 elevators. But warehousing space in the ports is in shorter supply, and directly after the harvest, the queues of grain stocks trying to get on board ships grew longer and more chaotic.

Svetlana Beledana, senior trader at Olimpeks, one of the largest Ukrainian grain traders, said that the company built its own 50,000-tonne elevator at Dnepropetrovsk, but still suffers from the warehousing bottleneck at larger ports. “In the summer, we brought 3-5000 tonne vessels up the Dnepr river and loaded straight on to them,” she said. “But in the winter we have to move the grain to the Black Sea ports. Many terminals have no proper loading schedule. One’s time and money can often be wasted.”

Ilyizhevsk near Odessa is the only Ukrainian port equipped to dock panamax cargo ships. Nikolai Vernitsky of the Pro-Agro research centre warns: “It is urgent for government, together with private business, to develop a proper strategy for the ports.”

Into the gaps in the supply chain are stepping foreign-owned transport companies and multinational traders. Instead of just buying grain at the ports, they are building networks of suppliers and some domestic infrastructure.

For example UK-based Swan Overseas, which has for the last three years owned and operated a grain export terminal at Kherson port, now buys grain from Ukrainian farmers and takes it through its own inland drying facilities and then to the terminal. Masoud Alikhani, the ceo, says: “Grain quality is not standard, because of a lack of modern equipment, so we have increasingly become involved in providing equipment to farmers and in financing production.” Swan started life as the grain division of Middlesex Holdings, a UK company which, with former foreign secretary Lord (David) Owen at its head, bought into Russian steel and gas in the early post-Soviet days.

The international grain trading companies are also moving up the supply chain – with strong support from international financial institutions. The largest exporter of all, German-based Toepfer, is on course to receive a euro 90 million loan from the EBRD in May to purchase agricultural products, transport and store them, and then export them or process them in Ukraine on a tolling basis. About euro 40 million of the loan, which goes for EBRD board approval on 8 May, will be syndicated to commercial banks. Some of the money will go to sorting out logistical problems. In its project document for the loan, the EBRD mentions Toepfer’s commitment to reform the grain storage sector and introduce warehouse receipt legislation.

As well as missing physical links such as elevators and warehouses, there are missing financial links. The soon-to-be-privatised former Soviet grain monopoly, Khlib Ukrainy, through which agriculture used to be financed, has a unique rural infrastructure and links with farms … but no money. It is badly indebted to energy companies that provided inputs to its production subsidiaries on a barter basis during the 1990s slump.

Ukrainian banks provide some finance to farmers – they lent 863 million hryvna in the first quarter of 2002, from an estimated 2.8 billion total annual borrowing requirement, but that’s less than last year, because they turned away small clients in western Ukraine who failed to repay.

These gaps are being filled by the international traders, who have already achieved dominance in the export market, and banks. The Pro-Agro research centre says that this season, the first since the collapse of the USSR in which Ukraine has had substantial grain exports, the largest exporters were all multinational grain companies: Toepfer, Cargill, Glencore’s Ukrainian subsidiary Serna, Ramburs and Nibulon.

Western commercial banks also take a strong interest. Fortis Bank (Netherlands) works with international traders and local traders/producers; Bank Austria does about $2 million per annum worth of grain trade finance business from its Kyiv office; BNP Paribas and West LB are active. And while deputy prime minister Leonid Kozachenko said this month [April] that the government would like to sell Khlib Ukrainy to a domestic bank, sources in Kyiv say foreign buyers are in talks about the privatisation.

But banks and multinational traders are reluctant to provide pre-crop finance to farmers. Some banks sustained heavy losses trying to do so in the mid-1990s. And traders usually prefer to buy grain inland rather than at the port, but have so far limited their involvement in agricultural production.

This season also saw the emergence of a handful of large Ukrainian traders, such as United Grain Group and Olimpeks, who want to move downstream and build sales directly to western customers rather than to the big traders. A western European banker working in Kyiv said: “The Ukrainian traders are moving towards selling directly to foreign customers, and that trend will continue.” And they have working relationships with agricultural producers that international groups are hard-pressed to replicate: they are acquiring port facilities, forwarding activities and silos. Increasingly they are financing production and buying farms.

Vernitsky at Pro-Agro says the three biggest problems the Ukrainian traders have to contend with are margins (big players can live with smaller ones, and the big harvest of 2001-2 brought margins on exports down to as low as 10%, from 23% the year before); return of VAT on exported goods, a duty the state notorious fails to fulfil (“and while large traders who are also importing commodities, especially sugar, may be able to make a deal to offset payments, Ukrainian traders often have to write off the loss”, says Vernitsky); and lack of accurate information on price movements and other changes on world markets.

The dilemmas over who will control the future of Ukrainian agriculture are highlighted by the long-running dispute between parliament, government and the International Monetary Fund about the export tax on one of the country’s most valuable crops – sunflower seeds that are crushed to make sunflower oil.

The tax, first levied at 23% and last year reduced to 17%, makes export prices higher than the multinational traders are prepared to pay. The farmers are thus compelled to sell to the domestic sunflower oil crushing plants, who this season effectively acted as monopoly buyers and were able to push prices down. The farmers suffered.

The IMF has made abolition of the export tax a key condition of successive loans to the Ukrainian government during its recent years of financial instability, and the World Trade Organisation has made clear that repeal of the tax is a condition of Ukrainian membership. But a majority in Ukraine’s parliament – strongly influenced by the domestic grain-crushing plants and the Ukrainian, Russian, Swiss and other industrialists who control them – strongly supports the tax. The grain-crushing plants contribute handsomely to district budgets that keep local elites strong.

The IMF claims that it is motivated by concern for the farmers. “Domestic oilseed crushing plants are able to increase profits at the expense of the farmers’ standard of living,” it said in a special statement about the export tax dispute last year. “This ability of powerful groups to bend the tax system to their advantage at the expense of weaker members of society is an important obstacle to reforms in Ukraine.”

That’s hypocritical, say industry observers in Kyiv, because the IMF is also speaking for rich, powerful interests: the multinational traders, who would rather buy the sunflower oil and either process it in Ukraine on a tolling basis (under which the traders pay the processing plants a fixed fee to crush the sunflower seeds, and do not have to invest in production assets) or process it outside the country.

Vernitsky at Pro-Agro says: “The government opposes the export tax primarily because it wants to receive IMF loans. Parliament supports the tax because it favours the industrialists. But from the point of the view of the farmers, and of the development of Ukrainian agriculture, a seasonal export tax, adjusted depending on the market conditions to give the farmers choice and help our processing industry, would be ideal.”

There seems little doubt that Ukraine, once known as the “Soviet bread basket”, will soon become a bread basket again. Whose hands will be carrying the basket remains to be seen.

2001 grain harvest (ministry of agriculture figures)

21.3 million tonnes of wheat

10.2 million tonnes of barley

1.8 million tonnes of rye

1.1 million tonnes of oats



Wheat exports, Jul 01 – Feb 02, 4,000,000 t, up from 63,000 t year-on-year

Barley exports, July 01 – Feb 02, 2,400,000 t, up from 869,000 t year-on-year

Corn exports, Oct 01 – Feb 02, 173,000 t, down from 241,000 t year-on-year

Sunseed exports, Oct 01 – Feb 02, 64,000 t, down from 707,000 t year-on-year

Sun oil exports, Oct 01 – Feb 02, 196,000 t, down from 346,000 t year-on-year

(Source: UkrAgroConsult 18.3.02)

A version of this article was published by Gemini News Agency.
Posted April 2002; © 2002 Simon Pirani

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