December 16, 2003
Ukraine 2003 Grain and Feed Wheat Review
According to the current USDA estimate, Ukraine will import 3 million metric tons (MMT) of wheat during the July 2003-June 2004 marketing year (MY) for wheat. Ukraine has already imported an estimated 1 MMT in July-October 2003 and expects to import another million tons in November - December 2003. Another 1.0 million tons is anticipated to be imported during January-July 2004. Price control measures employed by the Government of Ukraine (GOU) caused an interruption in wheat imports in the beginning of the marketing year, which resulted in a lost opportunity to import wheat at lower prices. Private grain traders are expected to conduct most of the import business this year. However, with increased financing available to State grain trading enterprises, the GOU has become an important player in the grain market this year.
A Short Crop Results in Political Disarray
During the current grain marketing year, Ukraine is making the painful adjustment from a position as the sixth largest wheat exporter in the world during the two previous years to a net importer of wheat. Some GOU policymakers saw the 2003 short wheat crop as a national disaster. However, looking back in time, short crops and wheat imports are nothing new to Ukraine. The bumper crops of 2001 and 2002, mainly a result of extremely favorable weather conditions, were the largest wheat harvests since 1990 and reflected a 50% increase in wheat output over the previous decade's average. While lower wheat production in 2003 was expected, the combined deep winter freeze and spring drought caught GOU officials by surprise. Rather than allowing the market to determine internal prices and the pace of trade, agricultural officials over-reacted with administrative and price controls over the domestic grain market which adversely affected farmers, millers, bakers, consumers and commercial traders.
Changes to VAT Law Encourages Imports
On November 6, 2003, the President of Ukraine signed a law extending the zero import duty on wheat and rye until July 1, 2004. Earlier in the marketing year, legislation was passed which allowed wheat imports with a zero import duty only until December 31, 2003. This new grain import legislation allows importers to use promissory notes to defer their value-added tax (VAT) payment for up to 180 days from the date of import into Ukraine until July 1, 2004. Prior to adoption of this law, importers were required to pay the entire amount of the VAT prior to customs clearance of imported wheat. Eligible importers who are also exporters can now offset their import VAT obligations with outstanding export VAT due. While traders have reported problems with the current VAT payment scheme, it appears that this legislation is facilitating wheat imports.
MY 2003/2004 Import Pace to Date
Wheat imports into Ukraine began in March 2003, near the end of the previous marketing year as domestic stocks were rapidly declining and the extent of the winter wheat loss was becoming apparent. From July through October 2003, Ukraine imported an estimated 1 MMT of the 3 MMT required for MY 2003/2004. The GOU has forecast that the country will import 1 MMT in November-December 2003 and an additional 1 MMT in January-July 2004.
Imports began slowly during the current marketing year and actually stopped in September when GOU price controls took effect. Ukraine lost valuable time tinkering with market control mechanisms while the average world price for wheat increased 17-20% from July to the beginning of October 2003.
Ukraine's monthly demand for milling quality wheat is generally estimated at 550,000 MT but has declined in recent months due to high prices and low supply. During July-October 2003, Ukrainian wheat from the new harvest met most of the demand. However, by the end of October, 65% of the 4 MMT of wheat produced in 2003 had already been utilized for food consumption and planting seed. Wheat imports must maintain an average pace of 210,000 MT per month in order to meet demand from local millers through July 2004.
The leading suppliers of wheat to Ukraine during the current marketing year to date are Kazakhstan, Russia, Germany and Canada. The main importers of this wheat were United Grain, Cargill, Glencore and Toepfer.
U.S. Wheat Expected to Land in Ukraine in 2004
Given current wheat prices in Ukraine, imports from the United States are now feasible. Post estimates that U.S. wheat imports into Ukraine could reach 500,000 MT between January and July 2004. So far, none of the many rumors of sales contracts have been confirmed by official U.S. weekly sales reports. That said, on November 7, 2003, USDA reported that 110,000 MT of U.S. wheat were sold to unknown destinations. It is believed that this wheat is on its way to the Black Sea with the destination either Ukraine or Romania, Ukraine's major competitor for wheat purchases in the region.
Price is not the only factor working in the favor of U.S. wheat exports to Ukraine. Diminishing supplies from Kazakhstan, Russia, Western Europe, Central Europe and Canada indicate that Ukraine will be required to look to the Western Hemisphere in December 2003-January 2004. Argentina should not be overlooked as a potential supplier in 2004.
GOU Grain Purchases
The State Joint Stock Company Khlib Ukrainy and State Committee of Ukraine on the State Material Reserves (Derzhreserve) are the two state agents for grain purchases. The GOU has charged the two state agents with the purchase of up to 1.3 million MT of food grains (milling wheat, rye, food grade barley, oats, buckwheat and pulses) by January 1, 2004. It is doubtful, however, that this quantity of grain will actually be purchased by the GOU state agents, considering the constantly rising price of wheat. Sources indicate that both GOU agents have purchased imported wheat on CIF Ukraine terms from major international grain traders, but they have not yet directly imported any grains.
Khlib Ukrainy received UAH 70 million ($13 million) for pledge and intervention grain purchases this year. The Ministry of Agrarian Policy has admitted that the system of pledge purchases in MY 2003/2004 did not work due to high grain prices. The price for 3rd class wheat established by the GOU on July 3, 2003 (UAH 550/MT or $104/MT) was already 40% below the market price. Using GOU financing, Khlib Ukrainy purchased 114,000 MT of Kazakh wheat and approximately 150,000 MT of Ukrainian wheat as of the end of October. It is interesting to note that the GOU's pledge purchases scheme did not work for the previous two marketing years either, as there was no funding available to purchase grain from farmers.
On September 16, 2003, the GOU approved UAH 400 million ($75 million) in financing of grain purchases by Derzhreserve. This State Committee is tasked to purchase 1 million MT of food grains by January 1, 2004. According to the Committee, it purchased 301,000 MT of grain, including 236,000 MT of imported milling quality wheat, as of the end of October 2003. Derzhreserve has already declared its intention to buy U.S. and French wheat.
It is unlikely that the government-to-government agreement to import wheat from the Russian Federation will fulfilled. As of September 29, 2003, the Russian State Reserves Committee sold only 12,500 MT of wheat to Derzhreserve under the intergovernmental agreement. The agreement was approved in August 2003 and envisioned delivery of 166,000 MT at a price of $110/MT.