Regulation of Ukrainian Grain Market

05/07/2013

Trends and reforms of 2012-2013 marketing year

It is the state that determines the rules by which the business has to play. And they can stimulate business entities as well as create material obstacles for them. In my opinion, businessmen are the basis of any society. Natural function of any state is creation of conditions which favor efficient performance of business activities.

Unfortunately, Ukrainian businessmen do not feel real support of their state. Why did it happen? Do Ukrainian grain traders have real chances to get if not support from the state but at least relative freedom of action and predictable state policy? What are the trends of agricultural policy and grain market regulation?

Generally, it is enough to list just a few factors which specifically influence “working” style of the Ukrainian state and in particular the decisions made with respect to agricultural market:

1) lack of strategic planning;

2) budget deficit and lack of “easy” ways for replenishment of the budget;

3) long-standing political crisis which makes the powers that be work not for the future (development) but for political situation (rash and thoughtless changes oriented at becoming more popular for the majority of electorate).

These are only some factors which influenced the style of decision-making in the agricultural sector during the last years and the state policy in this area in general.

It should be noted that the state actively declares entirely different principles and fundamentals for decision-making, at least “on paper”. For example, the program of economic reforms for 2010-2014 approved in Ukraine detected the problem of low investment attractiveness of the agricultural sector, including due to unpredictable state policy. This means that for already 3 years the state has been striving to solve the problems such as (some citations are taken from the Program):

  • ensuring predictable regulatory policy of the state;
  • improvement of land relations;
  • improvement of mechanisms of state support for agricultural producers (“producers are “moaning” because of all the improvements ...”);
  • improvement of efficiency of the state management of the sector.

Thus, one of the main objectives of the state to 2014 is to make the policy more predictable! Unfortunately, the practice differs. Predictable or at least systematic policy is not to be spoken of. Let’s take, for example, the situation with grain certificates. As a result of continuous lobbying, grain certification was finally cancelled for the cases where the products are moved inside Ukraine (due to a great number of efforts made by agricultural lobby). However, after some time passed, grain certification was efficiently, quickly and thoughtlessly restored…

These are the realities of the state policy in which the agricultural business has to operate.

Next, we will analyze what main innovations were brought by the year 2012 and what questions are becoming more and more urgent for the business.

The year 2012 brought many legislative changes; at the same time, reasonable dialogue of business and authorities became more active.

In comparison to notorious problems with export in 2011, administrative measure became less spontaneous.

What are the main changes of the year 2012?

1) Land reform, or rather its absence: market players got certainty as to the land reform. In November 2012, the Law N 5494-?? practically renewed moratorium on alienation of agricultural lands at least for three years, till 1 January 2016. Such postponement will give the market players a chance to plan their future steps with respect to management of land banks and develop medium-term investment plans.

As far back as in the first half of 2012, the experts predicted renewal of the moratorium. Thus, such measure was not a surprise.

Generally, the market players value not hasty adoption of the laws which can do a lot of harm to the business but stability. The members of parliament and society have not yet agreed on the way of the implementation of the reform in Ukraine, though.

2) Guarantee Fund: The principles of creation and operation of such Guarantee Fund were set forth by the Law of Ukraine “On Amendments to Certain Laws of Ukraine regarding Guarantee Fund of Performance of Obligations under Warehouse Documents for Grain” dated 20 November 2012 N 5493-VI. The Guarantee Fund is established for the purpose of creation of guarantees for grain owners in the event of insolvency of grain warehouses.

The law sets forth the main legal principles of activities of the Guarantee Fund, its competence and obligations, procedure for participation of grain warehouses in the fund, methods of influence of the fund on grain warehouses, as well as procedure for reimbursement of grain cost by the fund in the event of insolvency of grain warehouses.

It is provided for by the law that if a warehouse is excluded from the participants of the fund (including temporary participants) it shall be deprived of the certificate.

The companies that purchase grains may benefit from this innovation in the first place. Moreover, the grain storage with guarantees will let the banks increase valuation solvency of grain owners (i.e. it will increase liquidity of warehouse documents for grain).

The law took effect on 19 April 2013.

Given the fact that, in the opinion of the market players, the said law has some flaws that can significantly complicate the functioning of Ukrainian grain market, business community now actively initiates changes to the mentioned innovations. This process also demonstrates that the state made significant changes with respect to the market without considering the opinion of the market players beforehand.

3) Certification: we cannot leave out of consideration the changes in the procedure of certification of grain which were urgent in 2012 and will be still urgent in 2013. Within the framework of announced deregulation, the state formally attempts to simplify the issuance of such certificates. However, in practice, there are still a lot of problems related to issuance of quality certificates for grain and grain products.

Quality certification of grain was cancelled in European Union as well as in Russian Federation. Thus, expenses of bureaucratic procedures related to obtaining certificates borne by Ukrainian agricultural companies have a negative effect on their competitiveness in the international market.

Another draft law that proposes to cancel mandatory certification (N 2459) was registered in the Verkhovna Rada. The exception is the grain purchased at the cost of the state or the grain that is subject to certification under the contract. Moreover, it was proposed to certify grain and grain products in the event of importation thereof into Ukraine. This draft law also proposed to issue certificates of conformity of services related to storage of grain and grain products.

4) Agricultural receipts: Law of Ukraine “On Agricultural Receipts” was adopted on 6 November 2012.

The law implements the agricultural receipt, a document of title which is new for Ukrainian market. By its nature, this is a receipt against the pledge of future yield. According to the definition provided in the law, the agricultural receipt contains an obligation of the debtor secured by the pledge to supply agricultural products or, instead of this, compensate money (taking into account the prices of agricultural products). The agricultural receipts are divided into two types: product agricultural receipts and financial agricultural receipts, according to whether they provide for supply of products or compensation of money.

The initiative of implementation of agricultural receipts is aimed at supporting direct investments into agricultural producers business. The agricultural receipts can be issued exclusively by the persons that have the right to property or use of agricultural land plots.

The said law regulates relationships arising in the process of execution, issuance, circulation, performance of agricultural receipts and sets forth the procedure of registration thereof.

The agricultural receipt shall be executed in writing on the blank and is to be notarized. Moreover, execution of agricultural receipts in non-documentary form shall be prohibited.

Moreover, the law implements the open Registry of agricultural receipts where at the moment of certification of agricultural receipts the information on them shall be entered.

It is foreseen that the adoption of this law will enable the producers to get material technical and financial resources against the pledge of future yield. Some experts expect that introduction of agricultural receipts will give agricultural companies the chance to gradually reach the amount of UAH 45-50 billion per year which they can mobilize through this mechanism. Only time will tell to what extent this forecast is justified. However, in the circumstances of the crisis of financing and critical cost of financial resources, any mechanisms to involve additional agricultural market financing which are efficient in practice are very urgent.

5) Agricultural insurance: On 1 July 2012, the Law of Ukraine “On Peculiarities of Insurance of Agricultural Products with State Support” N 4391-?? dated 9 February 2012 took effect.

The law regulates relations in the area of insurance of agricultural products which is carried out with state support in order to protect property interests of agricultural producers. The law is aimed at ensuring production stability in the agriculture.

The law provides for creation of agricultural insurance pool. This is an organization which will be the union of insurance companies that obtained required license for the provision of insurance services to agricultural producers. The law also determines the functions, tasks, insurance funds of the agricultural pool, as well as insurance products which will be subject to application of the insurance agreement provisions.

In general, subsidizing of the agricultural sector by the state is one of the measures of stimulation of agricultural sector development. It allows reduce the amount of insurance premiums paid by agricultural companies.

At the end of 2012, “Agricultural Insurance Pool” was registered in Ukraine. One of its main tasks will be development and implementation of standard insurance products, development and support of adoption at the legislative level of the documents which will speed up start of the agricultural insurance program and will help to improve the quality of insurance services.

As for now, the scope of insurance of agricultural companies in the insurance pool is insignificant, which is in the first place related to technical issues (continuous registration of the pool, elaboration of standard documents and products). The next marketing year will tell us whether the Agricultural Insurance Pool will enjoy confidence of the clients.

It is worth noting that in 2012 the government and the grain traders signed the Memorandum, which confirmed its relative efficiency in the course of cooperation between the state and business. It is clear that signature of the Memorandum does not mean that the state will not exert influence on the export of grains. Although, it means that the parties began to solve certain issues through negotiations and dialogue.

As the marketing year 2012-2013 has shown, such a form of cooperation between government and business is more efficient than administrative methods applied before. Moreover, in such interaction, the state demonstrates its openness and ability to engage in dialogue (at least formally) that will allow avoiding reproaches of international organizations with respect to non-market regulation measures and negative impact on the image of Ukraine on the whole. Of course, the Memorandum is a "gentleman's agreement" that imposes primarily moral obligations on the parties. However, just that very format of the agreement made it possible in 2012 not to achieve but at least strive for achieving balance between conflicting interests – efficient export of grains and ensuring of food security of Ukraine.

It is expected that 2013 will be not less active with respect to state regulation of agricultural business. The main areas of agricultural policy, in my opinion, will be, on the one hand, deregulation (simplification or elimination of certain procedures or at least striving for such a simplification), on the other hand, increase in pressure from the fiscal bodies and attention from the controlling bodies. The state will balance between short-term interests in regard to replenishment of the budget and long-term interests (related to development of the sector as one of the most important for Ukraine - both in economic and political terms). In addition, the government will actively take measures to develop the cooperative movement and support medium and small size producers.

What have market players to do under such conditions? In my opinion, they have to defend their interests through different organizations, associations and platforms as well as lobby adequate law-making or at least monitor draft laws submitted to the parliament. Since deregulation or at least predictable state policy now seem unlikely the market players need to understand the main trends in the legislative regulation and react to them in a timely manner, as well as by all possible means influence the quality of law-making – in order to avoid or at least minimize the negative effects of state activities.

Thus, everybody understands that the state has to focus on implementing market mechanisms of market regulation, reducing pressure on the sector and improving stability of regulatory mechanisms, involving the best possible and affordable investments, supporting modernization of agriculture, creating conditions for sector financing. Let us hope that our state will finally start fulfilling its functions so that the business can run efficiently.

Authors

Picture of Evgenia Prudko
Evgenia Prudko
Senior Associate, RRH