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Business opposes the introduction of state regulation of grain prices

13/ 11/ 2020
  Recently, the Verkhovna Rada registered the draft law №4277, which proposes to introduce state regulation of grain prices. The EBA business community is convinced that its adoption may offset the important results achieved in deregulation. Besides, the provisions of the document contradict the norms of current legislation and the development strategy of the state as a whole. Ukraine produces about 90 million tons of grain a year, while last marketing year the harvest reached a record of 98 million tons. As domestic consumption accounts for about 30 million tons, it is obvious that Ukraines grain industry is mainly export-oriented. The draft law №4277 proposes that the Government set a minimum price for grain transactions in the domestic market. However, the mechanism for setting the minimum price is unclear because the level of profitability of producers differs significantly depending on the area, weather conditions, region and production characteristics, the calculation methodology - respectively. In practice, this may mean that producers in one region will potentially operate on the verge of profitability, and those in another region earn super-profits. Besides, given the export orientation of the industry, the price formula in the domestic market is based primarily on world prices. Therefore, price regulation can potentially have an overall negative economic effect. The question remains of how the minimum price will consider the factor of logistics costs. After all, if the minimum price for farmers located far from processing facilities is formed without considering the cost of storage and transportation of grain, they could potentially lose their market and suffer losses. In addition, it is not clear how the minimum price will consider the quality of grain and seeds, in particular, moisture, weediness, and other indicators of quality and safety. Irina Dushnik. EBA Grain and Oilseed Committee Executive Director. It should be noted that for more than ten years the state has gradually abandoned the policy of price regulation, which is a relic of Soviet times. Price restrictions have proven ineffective because they do not reflect real market conditions and have negative consequences for both producers and consumers. According to market experts, the experience of previous years and administrative intervention in pricing in the agricultural sector have led to lower profitability and minimum profitability of producers. Price regulation distorted competition and allowed less efficient, but more cost-effective businesses to stay in business. State pricing also had a negative impact on the investment attractiveness of producers of those goods for which prices were regulated, as it limited the return on investment. Therefore, this often prevented the modernization of production. Thus, it is fundamentally important to carefully analyze the directions of state policy in the grain sector, which is important for the economy of Ukraine, and to ensure the financial stability of the state to prevent the implementation of practices whose ineffectiveness is proven by time and experience.   Be the first to learn about the latest EBA news with our Telegram-channel – EBAUkraine.

Recently, the Verkhovna Rada registered the draft law №4277, which proposes to introduce state regulation of grain prices. The EBA business community is convinced that its adoption may offset the important results achieved in deregulation. Besides, the provisions of the document contradict the norms of current legislation and the development strategy of the state as a whole.

Ukraine produces about 90 million tons of grain a year, while last marketing year the harvest reached a record of 98 million tons. As domestic consumption accounts for about 30 million tons, it is obvious that Ukraine’s grain industry is mainly export-oriented.

The draft law №4277 proposes that the Government set a minimum price for grain transactions in the domestic market. However, the mechanism for setting the minimum price is unclear because the level of profitability of producers differs significantly depending on the area, weather conditions, region and production characteristics, the calculation methodology – respectively.

In practice, this may mean that producers in one region will potentially operate on the verge of profitability, and those in another region earn super-profits. Besides, given the export orientation of the industry, the price formula in the domestic market is based primarily on world prices. Therefore, price regulation can potentially have an overall negative economic effect.

The question remains of how the minimum price will consider the factor of logistics costs. After all, if the minimum price for farmers located far from processing facilities is formed without considering the cost of storage and transportation of grain, they could potentially lose their market and suffer losses. In addition, it is not clear how the minimum price will consider the quality of grain and seeds, in particular, moisture, weediness, and other indicators of quality and safety.

Irina Dushnik EBA Grain and Oilseed Committee Executive Director
It should be noted that for more than ten years the state has gradually abandoned the policy of price regulation, which is a relic of Soviet times. Price restrictions have proven ineffective because they do not reflect real market conditions and have negative consequences for both producers and consumers.

According to market experts, the experience of previous years and administrative intervention in pricing in the agricultural sector have led to lower profitability and minimum profitability of producers. Price regulation distorted competition and allowed less efficient, but more cost-effective businesses to stay in business. State pricing also had a negative impact on the investment attractiveness of producers of those goods for which prices were regulated, as it limited the return on investment. Therefore, this often prevented the modernization of production.

Thus, it is fundamentally important to carefully analyze the directions of state policy in the grain sector, which is important for the economy of Ukraine, and to ensure the financial stability of the state to prevent the implementation of practices whose ineffectiveness is proven by time and experience.

 

Be the first to learn about the latest EBA news with our Telegram-channel EBAUkraine.

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