The EU is not happy with Ukrainian grain, and this is not purely a market issue

"It is only a matter of time before the grain 'corridors of solidarity' narrow to the cracks," we wrote in February, hoping that our government officials will eventually realize that cheap Ukrainian grain is not only our problem.

Now the situation is as follows: Slovakia, Poland and Hungary have unilaterally suspended the import of Ukrainian grain, and Bulgaria has announced similar intentions. Of course, the European Commission (EC) reacted immediately, noting that EU member states cannot unilaterally resolve such issues. And the Ukrainian side quickly started negotiating with its neighbors to rectify the situation. However, will it be possible to do it? The degree of tension has been rising since the autumn of last year, local producers literally stopped trucks with Ukrainian grain by themselves (see Fig. 1), blocking the roads. Local governments promised manufacturers that they would find a solution to the problem and in the end found nothing better than blocking imports from Ukraine. We are used to the fact that corruption is only our internal problem, but here it has led to very real and significant "external" consequences. Our country is literally accused of the non-market behavior of its business, and they are partly right.

What is the problem?

Even last year, it was obvious that, despite the global increase in wheat prices and food risks for a number of countries, half of Ukrainian grain, which is so difficult to export from the country, is exported at an inadequate discount. Super-cheap Ukrainian grain, finding itself on the European market, has significantly reduced the profits of local producers, they are simply unable to compete either in price or in quantity with Ukrainian grain. At the average price of wheat on the global market of USD 362/ton, our wheat was sold to Poland for USD 222, to Hungary for USD 233, and to Bulgaria for USD 200. (see Fig. 2). And although from the very beginning it was about the transit of grain through the EU countries, the difference in the price turned out to be too attractive for schemes not to be built around it. However, they would have been impossible if the schemes for the export of suspiciously cheap grain from Ukraine had been blocked in time, and the agreement on transit had been fulfilled.

According to Rzeczpospolita, the Polish prosecutor's office is already investigating the cause of damages to the largest Polish mills, which were supplied with Ukrainian grain of the lowest quality instead of Polish grain under forged documents. Having previously earned 1.5 million zlotys from such an exchange. Unfortunately, this is not the only investigation of this kind.

In the search for additional arguments to protect our own market, the issue of the quality of our products was also raised. It was said that apparently Ukrainian grain is grown using "chemistry", which has long been banned in the EU. Well, there can be such cases. And the regular mention of "Ukrainian grain with prohibited pesticides" in the headlines of the Western media is definitely not in favor of foreign trade.

However, there are questions not only about pesticides. In the materials of the Polish prosecutor's office, Ukrainian grain is called "technical" with a note "used for burning and production of pellets (granulated material for heating private and industrial facilities)." It's hard to believe that such a thing was invented! The exporters wrote in the documents that they are transporting technical wheat, not even hard or soft wheat, not spelled, not wheat of any other varieties, not even fodder one, but just technical wheat. According to the investigation, this classification was invented by Ukrainian suppliers with one goal — to avoid quality checks, because even fodder grain usually passes veterinary inspection, not to mention consumer grain, and technical grain is not subject to any control. This is an interesting detail, if only because of the fact that we, analyzing our wheat deliveries, did not see any "technical" grain there, it is not in the codification. This means that goods are leaving Ukraine with at least two packages of documents, one for departure and the other for entry. I am sure that the Polish prosecutor also understood this. The consequences will not be delayed.

In fact, we will all feel them when the question of the expediency of "supporting corrupt Ukraine at the expense of European taxpayers" comes up again.

How is this problem solved?

Noticing the inadequately low prices for our grain, we appealed to the relevant Ministry of Agrarian Policy and Food of Ukraine, asking to explain the situation. Of course, we were not worried about the fate of the Polish farmer, we were worried that the Ukrainian farmer, whose production and logistics have become more expensive, and receives a meager profit for the grain. We worried about the Ukrainian farmer, who often does not even cover the cost of harvesting.

The ministry's response was striking with blatant economic illiteracy and indifference to the problem. This can be precisely explained by the fact that the current Minister of Agrarian Policy and Food of Ukraine Mykola Solskyi is one of the co-founders of the Ukrainian Agrarian Holding, which, among other things, is engaged in grain trading. And therefore, the minister may well lobby the interests of traders, regardless of the interests of some small producers there. On a global scale, the problem is that the export value of grain is of little interest to the state. This is not an import from which it is possible collect customs duty, and in our case, one also need to pay money for VAT reimbursement. And since the transfer of profits to other jurisdictions with the aim of underpaying taxes in this sector for some reason is still of little interest to anyone in Ukraine, the maximum that the authorities paid attention to was the return of foreign exchange earnings. At the same time, not worrying too much that in general, even this revenue can be much more, if the grain is not sold at a discount. We calculated that if the amount of wheat that was sold in the second half of 2022 at a price of 50–150 dollars/ton was exported at the average market price, only foreign exchange earnings in the country would be 750 million dollars more (see Fig. 3).

However, let's forget about lost profits, in the current situation it is important to avoid at least direct losses. But the government is still in no hurry to make effective decisions to avoid this.

The brutal story about the "black grain", with an open crime, ended in literally nothing. We will remind that the tax office warned the customs officers about hundreds of suspicious companies that exported grain, but the customs officers, like the Economic Security Bureau of Ukraine, did not react and released the consignments from the country. As a result, the specially developed schemes were openly called "suspicious negligence". Customs officials and employees of the Economic Security Bureau of Ukraine were threatened with dismissal, and all participants were called to work groups and fruitful cooperation.

No one mentions the healing reference prices. However, even the government's initiative to introduce a minimum export price for grain tied to the exchange price on the global market has also ceased to be discussed. Exactly one month ago, we wrote that the Cabinet of Ministers of Ukraine was working on this issue, but so far there have been no changes in this matter. We have a kind of selective "turbo mode" of the government's work, and it is turned on exclusively for the implementation or solution of some nonsense. We even have an explanation as to why this is happening and why issues are resolved in this way, namely because market participants are involved in the initiative. No, they did not involve farmers, from whom they buy grain for nothing, but traders who created the current problem. Well, of course, how without a comprehensive discussion with the players.

And so our minister of Agrarian Policy and Food of Ukraine with his trader friends is currently "looking for a consensus on the basis of which sources of information and how exactly the minimum price will be determined." If simple things, namely the exchange and the price, are deliberately made difficult, trouble is expected. The offers we know are excellent, for example, to take the average market price with the condition CIF-port without VAT at the rate of the National Bank of Ukraine (NBU) minus 40%. In this way, it is possible to see that a 40% discount is immediately included in the formula. However, this is probably not even the main thing, the main thing is that the connection to the CIF delivery condition is not about grain transportation by land at all, road transport deliveries are mostly carried out under Carriage Paid To (CPT) conditions. That is, the solution to the existing problem with the neighboring countries, to which we deliver grain by rail and cars, was lost somewhere in the process of discussions. By the way, they are ongoing, soon the representatives of agricultural associations will submit proposals and... specific versions of the law, and then the Ministry of Agrarian Policy and Food of Ukraine, the State Tax Service of Ukraine, The Ministry for Development of Economy and Trade and the National Bank of Ukraine will work on them in search of an optimal solution. So, sometime before the summer, this issue will be resolved.

The effect of the temporary simplified access of our goods to the EU markets is about to end. We started asking for the extension of temporary trade preferences, including with the help of the Minister of Agrarian Policy and Food of Ukraine, at the beginning of this year. Just at the moment when we should actively stop our grain schemes and monitor the "transit" of export supplies in order to preserve the reputation of a reliable partner. Will we get this extension given the quality and speed of the current response to the issues? I will only say that Article 4 of Regulation 2022/870, which opened the European market to us, allows for the possibility of an investigation in the event that goods are sent from Ukraine that create serious difficulties for certain EU markets. According to its results, both duties and quotas may well be restored. And not only for agricultural exports, by the way.

Read this article in russian and Ukrainian.