Ukraine slaps quotas on grain exports, bread price rise feared

Jun 20, 2007, 11:31 GMT

Kiev - Ukraine's government on Wednesday slapped severe quotas on grain exports, undermining yet again the former Soviet republic's past commitments to a market economy.

A Cabinet of Ministers order set a 3,000 tonne limit for all of the country's main grain exports including wheat, corn, and barley, with the restriction effective from July 1 through October 1 2007.

Ukraine in 2006 banned most grain exports in the wake of a poor harvest, a move criticised in the international community as a Soviet-style government intervention in major export commodities.

Viktor Slavuta, Ukraine Vice Premier for Agriculture, argued the new quotas - effectively banning grain exports during the height of the 2007 harvest period - were not aimed at restricting the operation of a free market.

'It (the quotas) does not go into effect until July, so exporters will be able to sell off accumulated (grain) reserves before that time,' he told an Interfax news agency reporter.

Markets reacted rapidly to the announcement but not in the way Slavuta predicted, with the country's major grain exchanges reporting a near total halt to trading.

'The price situation is extremely tense,' said Mykola Vernitsky, a market analyst for the ProAgro trading house.

Buying and selling of grain and grain futures had came to a complete stop shortly before Slavuta's announcment, he said.

Observers pointed to national elections planned in Ukraine at the end of September, and rising prices for state-subsidised bread noted throughout the country in late May and June, as a possible cause for the quotas' imposition.

One of the harshest heatwaves in Ukrainian memory, along with an unprecedented 40-50 days of drought in some provinces, has downgraded harvest expectations on a national level by as much as 20 per cent. Grain production in the hardest-hit regions could be as low as one- third of 2006, Interfax reported.

Ukraine's government subsidises the price of bread, in no small part because practically all Ukrainian consumers consider keeping bread affordable a key priority for any government and have repeatedly punished at the polls governments allowing the price of bread to rise.

The provinces worst hit by the heatwave are concentrated in the east and south of Ukraine, a Russian-speaking region whose votes are critical to the present's government's control of parliament.

Owner of the largest concentration of black earth loam on Earth, Ukraine last year produced 28.7 million tonnes of grain of all types.

Production this year according to Slavuta will be in the 27 to 33 million tonne range, while independent observers generally are predicting the figure will be between 23 to 29 million, and the most pessimistic going as low as 20 million.

Despite its potential as an agricultural powerhouse, Ukrainian grain production has fallen off in recent years, with 34.3 million tonnes harvested in 2005, against 28.7 million last year.

Market analysts blame a government ban on the sale of farmland, and repeated government interventions to limit exports to prop up local food prices, as major causes for low foreign investment in the sector.