Mixing in a new way: why grain exporters lose profits

22/ 09/ 2017

In the grain market, the previous marketing year was marked by a record grain export indicator, which for the first time exceeded 40 million tons. For several consecutive seasons, there has been a steady tendency to increase crop volumes. And as a result - an increase in grain exports. Ukraine has a very large potential of the agrarian sector and claims to be the world leader in grain production. According to some forecasts, grain exports could reach 60-70 million tons in 2020. But further development of the grain industry is possible only if the proper legal and regulatory framework in the country is created. One of the acute problems holding back Ukraines export potential is the ban on mixing grain, which we inherited from Soviet times. Because of the prohibition of mixing, Ukrainian agrarian companies actually receive less profit, and the state budget - taxes. For example, to fulfill an international export contract with a demand for a mass share of 12% protein, Ukrainian farmers are forced to export second-class wheat. The mass fraction of protein in it, according to our standards, is at least 12.5%. At the same importer, the quality of wheat is not improved by 0.5%, therefore Ukrainian farmers do not receive a premium for the best quality. At the same time, with the possibility of mixing, they could add fodder wheat to the second class and thus increase the protein figure to a contracted 12%. As a result, for a share of added feed wheat, they could receive a higher price and, accordingly, pay taxes in Ukraine from a higher price. The main document that introduced the prohibition on mixing was the Instruction on the Accounting and Processing of Operations with Grain and Products of Its Processing at the Grain-Receiving and Grain-Processing Enterprises of the Ministry of Agrarian Policy. The history of this document has been stretching since the Soviet times, since first in the territory of Ukraine this Instruction was applied in the edition of 1978 under №55. In independent Ukraine, it was re-confirmed with some changes in the 2005 version under No. 310, and until recently it was applied in the version dated October 13, 2008 under No. 661. Two years ago, the European Business Association (EBA) Cereals and Oilseeds Committee came up with an initiative to amend the Instruction in order to adapt it to the current realities and market needs. In close cooperation with the Ministry of Agrarian Policy, a draft of the corresponding changes was developed, but consideration of the matter stopped due to the difference in the views of the Ministry and business on grain mixing issues. On March 10, 2017, by decree 116-r, the government abolished Order No. 661, which has lost its relevance and establishes regulatory barriers. Minagroprod prepared a draft of the new Instruction and proposes to allow the mixing of grain for export only at port terminals. Unfortunately, this will create advantages only for individual market participants, and river terminals and linear granaries will be in non-competitive conditions, which may lead to a deterioration in the work of such enterprises. In addition, the proposed draft so far contains the provisions of the 1978 regulations, which at the current stage of economic development are already outdated. This does not correspond to modern practices of conducting a grain business. To ensure the functioning of the industry, a new system of quantitative and qualitative accounting is needed, which will include arbitrage in the quality of grain, the rate of natural loss, but will not limit the market in the formation of mixed grain classes and will meet the current market needs. The improvement of obsolete standards, their integration into the realities of modern business and business practices will give a new impetus to the development of grain logistics, the increase in the added value of exported products and the increase in the competitiveness of national products abroad. Source: Latifundist

Because of the prohibition of mixing, Ukrainian agrarian companies actually receive less profit, and the state budget – taxes. For example, to fulfill an international export contract with a demand for a mass share of 12% protein, Ukrainian farmers are forced to export second-class wheat. The mass fraction of protein in it, according to our standards, is at least 12.5%. At the same importer, the quality of wheat is not improved by 0.5%, therefore Ukrainian farmers do not receive a premium for the best quality. At the same time, with the possibility of mixing, they could add fodder wheat to the second class and thus increase the protein figure to a contracted 12%. As a result, for a share of added feed wheat, they could receive a higher price and, accordingly, pay taxes in Ukraine from a higher price.

The main document that introduced the prohibition on mixing was the Instruction on the Accounting and Processing of Operations with Grain and Products of Its Processing at the Grain-Receiving and Grain-Processing Enterprises of the Ministry of Agrarian Policy. The history of this document has been stretching since the Soviet times, since first in the territory of Ukraine this Instruction was applied in the edition of 1978 under №55. In independent Ukraine, it was re-confirmed with some changes in the 2005 version under No. 310, and until recently it was applied in the version dated October 13, 2008 under No. 661.

Two years ago, the European Business Association (EBA) Cereals and Oilseeds Committee came up with an initiative to amend the Instruction in order to adapt it to the current realities and market needs. In close cooperation with the Ministry of Agrarian Policy, a draft of the corresponding changes was developed, but consideration of the matter stopped due to the difference in the views of the Ministry and business on grain mixing issues.

On March 10, 2017, by decree 116-r, the government abolished Order No. 661, which has lost its relevance and establishes regulatory barriers. Minagroprod prepared a draft of the new Instruction and proposes to allow the mixing of grain for export only at port terminals. Unfortunately, this will create advantages only for individual market participants, and river terminals and linear granaries will be in non-competitive conditions, which may lead to a deterioration in the work of such enterprises. In addition, the proposed draft so far contains the provisions of the 1978 regulations, which at the current stage of economic development are already outdated.

This does not correspond to modern practices of conducting a grain business. To ensure the functioning of the industry, a new system of quantitative and qualitative accounting is needed, which will include arbitrage in the quality of grain, the rate of natural loss, but will not limit the market in the formation of mixed grain classes and will meet the current market needs.

The improvement of obsolete standards, their integration into the realities of modern business and business practices will give a new impetus to the development of grain logistics, the increase in the added value of exported products and the increase in the competitiveness of national products abroad.

Source: Latifundist