VZCZCXRO9782
PP RUEHDBU RUEHIK RUEHLN RUEHVK RUEHYG
DE RUEHKV #1422/01 1591047
ZNR UUUUU ZZH
P 081047Z JUN 07
FM AMEMBASSY KYIV
TO RUEHC/SECSTATE WASHDC PRIORITY 2653
INFO RUEATRS/DEPT OF TREASURY WASHDC
RUEHRC/USDA WASHDC
RUCNCIS/CIS COLLECTIVE
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEHZG/NATO EU COLLECTIVE
RUEHBI/AMCONSUL MUMBAI 0052

UNCLAS SECTION 01 OF 03 KYIV 001422 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
TREASURY FOR ALIKONIS 
DEPT PLEASE PASS USTR FOR CKLEIN/LMOLNAR/SOWEN 
USDOC FOR 4201/DOC/ITA/MAC/BISNIS 
USDOC FOR 4231/ITA/OEENIS/NISD/CLUCYK 
USDA/FAS/OCRA/FOR J FLEMINGS 
USDA/FAS/OCRA/FOR A THOMAS 
USDA/FAS/OGA/ FOR J LAGOS 
USDA/FAS/OGA/ FOR J TAYLOR 
USDA/FAS/PECAD FOR M LINDEMAN 
MUMBAI FOR WKLEIN 
 
E.O. 12958: N/A 
TAGS: EAGR ETRD PGOV UP
SUBJECT: Ukraine: Grain Export Quotas Lifted, but New Controls In 
Store 
 
 
KYIV 00001422  001.2 OF 003 
 
 
¶1. (SBU) Summary:  Citing crop damage from drought, the GOU appears 
poised to institute a new regime of export restrictions on Ukraine's 
grain market for the 2007/2008 market year.  According to a June 4 
decree, as well as the statements of GOU officials, the GOU will 
build up its reserves of wheat while limiting exports.  The reserves 
are to be used to moderate bread price increases -- an important 
issue for voters in an election year.  The GOU meanwhile published a 
resolution on June 8 allowing export of grain left over from the 
current market year.  Grain traders expect that they will be able to 
export 300-400,000 tons before the market year ends on June 30. End 
Summary 
 
Bread Prices in an Election Year 
-------------------------------- 
 
¶2. (U) Although recent rains have helped crops in northern and 
western Ukraine, crops have suffered significantly from drought in 
the oblasts of southern Ukraine.  While agronomists all agree that 
the lack of precipitation has significantly affected probable 
yields, their estimates of the impact are not as severe as the 
GOU's.  After the drought, the GOU reduced its projections of the 
wheat harvest from 19 down to 12.5 million tons.  The consensus 
projection by Ukrainian agronomists on June 4 was for a harvest of 
15.4 million tons though Cargill's estimate is slightly more 
pessimistic at 14.8 million tons. 
Although the government claims that there are ten drought- affected 
regions, Cargill sees crop yields as average or better in all 
oblasts but four: Odessa, Nikolayev, Zaporizhya, and Kherson. 
 
¶3. (SBU) In a sign that the campaign for the September 30 election 
has begun, Prime Minister Yanukovych traveled On June 3 to 
drought-stricken agricultural lands near Odessa where he publicly 
pledged his government would help affected framers and ensure that 
bread prices will not rise.  According to a Cabinet of Ministers 
press release, the PM charged Economy Minister Kinakh with keeping 
bread prices in line.  In like manner, President Yushchenko traveled 
on June 5 to Kherson, where he met with leaders of oblasts affected 
by the drought, endorsing relief to farmers, but intimating that 
they should be allowed to sell grain at market prices.  According to 
Cargill, Deputy Prime Minister Slauta and Minister of Agrarian 
Policy Melnyk have openly told the company that political concerns 
over bread prices were behind the GOU's intention to continue 
intervening in the grain market. 
 
¶4. (SBU) First Deputy Prime Minister Mykola Azarov made clear to 
Ambassador in a June 4 meeting that the GOU would institute controls 
on grain exports for the 2007-2008 market year.  Accompanied by 
Deputy Prime Minister for agrarian policy Victor Slauta, Azarov 
claimed that drought conditions in Ukraine's "bread basket" -- the 
south-central and south-eastern regions -- made the step necessary. 
He said the GOU would permit traders to honor already existing 
contracts for wheat and load ships already en route, but, he intoned 
gravely, that was "the maximum we can allow."  Only a few days 
earlier, on May 31, Minister of Economy Kinakh had assured the 
visiting Staffdel Singh that grain export controls would not be 
re-introduced. 
 
2006/2007 Wheat Export Quotas Finally Lifted 
-------------------------------------------- 
 
¶5. (SBU) Consistent with Azarov's statements, the GOU finally 
published on June 8 the Cabinet of Ministers resolution of May 16 
lifting the wheat export quota.  In expectation of that resolution's 
publications, traders already in May moved around 250,000 tons to 
the ports and contracted ships to prepare for export.  Although the 
grain traders now are holding 960,000 tons of 2006 wheat, USDA 
estimates that they will only be able physically to get 300-400 
thousand tons out of the country by before the end of the market 
year (June 30). (Comment: In meeting with Ambassador, Slauta feigned 
surprise that grain traders had not yet taken advantage of the May 
16 resolution, though he was well aware that the resolution was 
still unpublished--and thus not in legal force--at that time. End 
Comment.) 
 
 
KYIV 00001422  002.2 OF 003 
 
 
2007/2008 Plan: Export Limits and State Purchases 
--------------------------------------------- ---- 
 
¶6. (U) The best indication of the GOU's current intentions toward 
the grain market came in a June 4 Cabinet of Ministers resolution on 
measures to address the drought currently affecting up to ten 
oblasts.  While parts of the resolution discussed relief measures 
for drought-stricken farmers, it primarily comprised steps to 
prevent grain exports (presumably beginning July 1) and to increase 
government grain reserves.  Key features of the resolution are 
instructions to agencies to: 
 
-- draft a resolution banning grain exports until the state can 
replenish national and regional grain reserves (MinEcon and MinAg); 
--  conclude forward contracts for 710,000 tons of milling wheat at 
recent average spot market prices (Agrarian Fund) 
-- conclude additional (amount unspecified) forward contracts for 
purchases of milling wheat, paying 50% in advance (State Material 
Reserve); 
-- find funding through amendments to the budget and other sources 
to finance grain purchases (MinEcon, MinFin, MinAg, and the State 
Material Reserve); 
-- recommend that local authorities establish 3-month supply grain 
stockpiles by August 17, 2007; and, 
-- consider adding corn and barley to the list of goods subject to 
price regulation (Note: wheat is already on the list). 
 
¶7. (SBU)  In meetings with grain producers and traders, GOU 
officials have been exploring ways of ensuring the government would 
be able to maintain a reserve without resorting to renewed export 
quotas.  At the most recent meeting, on June 4, DPM Slauta and 
Minister of Agrarian Policy Melnyk called on industry to make its 
own proposals on how to meet the government's objectives.  Slauta 
and Melnyk laid out three conditions for industry's plans:  1) that 
the state and millers be able to build up reserves in order to keep 
bread prices at "reasonable market prices"; 2) that the grain 
traders maintain their role as provider of liquidity to the 
agricultural sector (by purchasing grain); and, 3) that the traders 
commit to not "over-exporting" wheat, by submitting crop estimates 
and a target for export quantities.  (Comment: In the eyes of some 
grain traders, these three conditions were tantamount to the GOU 
telling them, "We want you to keep buying grain, but we want you to 
sell it to us at discount prices, and meanwhile, you can't sell much 
to world markets." End Comment.) 
 
¶8. (SBU) The Ministers discussed with industry representatives in 
more detail the GOU's intent to use state reserves to keep bread 
prices low.  Currently the Agrarian fund held 1 million tons of 
wheat, and the government was looking to acquire another 1.5 to 2 
million tons, they told the agricultural industry reps.  Having 
built up this reserve, the state would sell the grain at a discount 
to millers (and perhaps meat producers) to keep prices low.  The GOU 
could also subsidize credits to the millers in order to finance 
grain purchases, they said.  Newspaper reports also reveal that the 
GOU intends either through jawboning or through administrative 
measures, to limit markups charged for transportation, and profit 
levels at bakeries.  (Note: Oblast governors already have authority 
to regulate prices and markups on three basic types of bread, 
produced by large bakeries.  Most oblasts only limit the retail 
markup over wholesale prices, though some fix retail prices and/or 
explicitly limit profits of bakeries.  End Note.) 
 
Can Ukraine Build Reserves on the Cheap? 
---------------------------------------- 
 
¶9. (SBU) It will not be easy for the GOU to finance such large 
purchases of grain.  At current F.O.B. prices, even the 710,000 tons 
of wheat the GOU has officially decided to procure would cost $149 
million.  Amendments to the Ukrainian budget passed on May 31 
allocated $20 million for grain purchases.  The June 4 resolution 
envisions further budget amendments amounting to $40 million, as 
well as an undetermined amount of funding from sales of inventories 
of the State Material Reserve.  (Note: The State Material Reserve 
stockpiles a variety of materials for strategic or emergency use.) 
 
KYIV 00001422  003.2 OF 003 
 
 
Grain traders are skeptical that farmers will willingly extend 
credit for forward grain sales to the government, which has shown a 
willingness to insist on delivery, while delaying repayment.  In his 
meeting with the Ambassador, Azarov hinted that the state had enough 
leverage to ensure compliance from the farmers: he stated flatly 
that the GOU offered enough agricultural subsidies that he was sure 
grain prices would be acceptable.  (Comment:  Azarov is notorious 
for his fiscal hawkishness and his statist instincts.  The policy 
described in the June 4 resolution is almost certainly his 
handiwork.  End Comment.) 
 
Isn't There a Better Way? 
------------------------- 
 
¶9. (SBU) Both the Ambassador in his meeting with Azarov, and the 
grain traders in their meetings with other GOU officials have 
suggested that the least disruptive way for the government to 
address the threat of rising bread prices would be to subsidize 
bread purchases by the needy.   Cargill estimated that if wheat were 
sold at world prices in Ukraine, the cost to the government of 
subsidizing the difference in bread prices for needy consumers (60% 
of the population) would be approximately $100 million/year. 
Cargill estimated the loss to farmers of restricting exports and 
maintaining a differential between Ukrainian and world wheat prices 
would be $1 billion.  Azarov responded to Ambassador that 
subsidizing bread consumption for a huge segment of the population 
(he estimated that 80% of Ukrainians would require assistance) was 
beyond the GOU's capacity.  Slauta and Melnyk have likewise rejected 
proposals for bread price subsidies as too costly for the budget. 
 
Comment: Is This the Whole Story? 
--------------------------------- 
 
¶10. (SBU)  Building up state wheat reserves in order to provide 
cheap grain for basic bread production would not be the most 
market-disruptive option, if the GOU intended to buy at market 
prices and to allow unrestricted exports.  Since it appears the GOU 
will do neither of those things, the likely policy will disrupt 
trade and shift costs onto farmers and grain traders.  The 
beneficiaries of this policy will be those who receive subsidized 
sale of state grain (millers and quite possibly meat producers) as 
well as the voters spared higher bread prices.  Since this is 
Ukraine, the allocation of discount sales of state-owned grain 
provides an attractive opportunity for corruption.  Likewise, any 
limitation on exports other than an outright ban could create 
opportunities for moneymaking among those charged with allocating 
export quotas or licenses. 
 
Taylor