Inflation fight threatens Ukraine grain exports

Ukraine grain exports may fall victim in the 2008/09 season to the government`s fight against the highest inflation rates in a decade, despite projections of a recovery in the harvest after last year`s severe drought, Guardians reports, referring to Reuters.

Inflation accelerated in March to its highest level since 1999. Cumulative prices for the first three months of the year rose 9.7 percent, exceeding the government`s full-year forecast of 9.6 percent within only the first quarter.

"It looks like the fight against inflation is the main task of the government and they may use export limits," a senior agriculture official said. "Wheat is likely to be the subject of the limits, but it would be very difficult to explain why we introduce limits in conditions of a high crop."

Inflation in Ukraine soared last year after a drought destroyed harvests and pushed up prices for food staples, which make up 50-60 percent of the consumer price index (CPI) basket. Food prices rose 5.6 percent this March alone.

After a fall in the harvest to 29.3 million tonnes in 2007, the government introduced strict export quotas, allowing the sale of only 1.2 million tonnes of grain in 2007/08 in an attempt to keep local grain prices far below global levels.

In 2008, the crop is forecast to rise to 40 million tonnes and, together with 2007 grain stocks, the country`s total grain deposits could reach 47-48 million tonnes. The country needs about 26 million tonnes per season.

Analysts said 2008/09 exports of at least 12 million tonnes forecast by government officials might cause a rise in the current artificially low local prices, resulting in a significant increase in bread prices.

"The crop may reach 36-38 million tonnes and there are not many reasons to limit exports. But inflation may interfere and the government may set some softer export limits," said Serhiy Feofilov, director of UkrAgroConsult agriculture consultancy.

Volodymyr Lapa, senior analyst at the Ukrainian Agrarian Confederation grain union, also said free trade would push up domestic prices, paving the way for a fresh jump in inflation.

HUGE CONFLICT

Traders estimate that export restrictions in the past two seasons have reduced local grain producers` profits by at least $1.5 billion and new limits may result in even higher loses.

Nikolay Gorbachov from NWG, a new grain firm established by Australia`s ABB Grain Ltd and France`s Soufflet to do business in Ukraine, said the limits would harm Ukrainian grain production as farmers would have no funds to increase output.

Gorbachov said the government should instead buy 2 million or 3 million tonnes of grain for future grain interventions, which would allow it to keep bread prices under control.

"It would allow the government to control local prices while the agriculture sector would receive additional money," he said.

Another large foreign trader said: "The government is unable to regulate such high exports of some 12 million tonnes. If it introduces new limits, and farmers are forced to sell grain at $100 per tonne, this will cause a huge conflict."

Ukrainian local wheat prices stood at $276-$292 per tonne as of early April while average export price reached $340 per tonne, free-on-board, in March. Local barley is traded at $240 EXW and exported at $327 per tonne free-on-board.

Central Bank chief adviser Valeriy Lytvytsky said the government should avoid export restrictions and allow farmers to collect enough funds to carry the 2008 sowing.

The pace of Ukrainian 2008 spring sowing is about 50 percent slower than in 2007. Farmers have sown 2.4 million hectares so far in 2008.

By Pavel Polityuk

Reuters/Guardian