July 27 2004, 11:35 APK-Inform

Restrictions of trade pulling grain prices further down - Ukrainian Grain Association

Ukrainian Grain Association (UZA) has issued a press-release concerning current situation on Ukraine's grain market. Some excerpts of the release read as follows:

"According to the information, arriving from members of Ukrainian Grain Association, a practice of grain trade restriction on a regional level has been renewed on the grain market of Ukraine".

According to the press-release, it concerns the mechanism of obligatory grain sales through the so called "exchange commodity market", i.e. regional commodity exchanges. The authors of the press-release emphasise that with account of the fact that it is state purchasing prices which are often set as price benchmarks by such exchanges and which do not correspond to actual market prices, such "obligatory registration" at the regional exchanges is to a certain degree blocking the entire grain trade in Ukraine.

Besides, says the association, grain owners are obliged to pay certain price (1.5 hryvnia per tonne of grain) for an absolutely formal procedure - contract stamping with exchange seals. Noting for the forecast volumes of grain exports in this season at the level of 8 million tonnes, this will lead to removal of 12 million hryvnias (5.33 hryvnias = $1) from the grain market, which could otherwise be a part of agricultural producers' income.

"Obviously, these measures are aimed at keeping the price level on Ukrainian grain market [at a sufficient level] and providing for an acceptable profitability of grain production. However, in practice they may yield directly opposite result. The funds, allocated to the state grain market operators for [state sponsored] purchases, will not be enough to buy out grain excess from the market. And the producers' inability to legally sell the grain to private purchasers at market prices will force them to conceal of a part of crop with its subsequent sales to shadow or semi-shadow structures. In such case, the producers' selling prices will be still lower", warns UZA in the press-release.

According to UZA management, a much more efficient measure of countering the sharp drop of export prices would have been a financial support of agricultural producers, which would have enabled them not to sell grain at improperly low prices.

The state purchases are doing this job only partially, as the allocated funds are insufficient and cannot be accessed by all the grain producers. Besides, the high price of the grain, purchased by state, will make it impossible to sell the grain without losses already in 3 or 4 months, i.e. after a drop of market prices for flour. Thus, this grain will be either a loss-generating stock, stored within the state resources for a long time, or the flour, produced from this grain, will have to be sold, again, with losses, the UZA management believes.

At the same time, if at least a part of the funds being allocated for grain purchases had been re-directed for compensation of banking rates under farm loans and attraction of additional funds from banking sector, this would have given a much more tangible result, the press-release stresses.

Another negative consequence of such a policy will be discrediting of the very idea of exchange trade in this country, as in the aftermath it will be difficult to convince the agricultural producers that one of the main functions of commodity exchanges is formation of market prices, but not affirmation of the administratively established ones.

In its release the association refers to last year's experience, when the market started to be filled with grain only after removal of unjustified price benchmarks.

"Now the situation is opposite" - the pres-release continues. "Until the grain excess is not removed from the market, positive price dynamics will not be restored. The blocking of sales in this case leads only to extension of the period of low selling prices on domestic market, i.e. to cutting supplies from the producers", thinks the association.