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Interview with Leonid Kozachenko, President of the Ukrainian
Agrarian Confederation
Here is the opinion of Leonid KOZACHENKO, President of the Ukrainian
Agrarian Confederation: The "response" was quick: on July 25 [2003] you were dismissed from the post of the Prime Minister's adviser. Should your dismissal be regarded as an end to the market principles which you tried to promote while occupying the post of deputy Prime Minister [in charge of agriculture]?
The Union of Industrialists and Entrepreneurs and the Agrarian Confederation have prepared a plan of urgent measures to stabilize the situation on the food market. We are planning to meet with the Prime Minister before September 1. [Chopenko] What "remedy" for the "bread headache" are you going to offer? [Kozachenko] In the first place, to settle the problem of shortages in food and seed wheat grain, it is necessary to increase the reliance on private capital, and on the business structures which have learned to work successfully on domestic and foreign markets without government subsidies. Prices for food grain on the world market have grown. I would use half of the additional UAH576 million [$108M], which the government allocated to offset the agricultural sector's losses due to this year's adverse weather, to cover the difference between the prices of imported grain and the prices on the domestic market. That would help keep stable prices for bread, flour, cereals, and wouldn't make big holes in the purses of low-income families, whose basic food is bread. The other half would go to compensate the insurances for next year's harvest. I am sure that if this year's harvest were protected by an insurance policy, agriculture would be less strained. The situation would be absolutely different, and investors would feel safer. They would trust the predictable agrarian policy and risk their money again and it's not too late to do it now. [Chopenko] It would take some UAH10 billion. To gather corn and sunflower seeds - their harvest is going to be rich. To sow winter crops on 8.3 million hectares. [Kozachenko] It's only possible to draw such large funds from investors. But they are afraid, not so much of the unpredictable weather as the unprecedented pressure from the law enforcers, who have been occupying traders' offices for the last several months. Note this fact: there have been 12,000 checkups, 500 criminal cases have been taken to court. But only 11 people have been indicted in six cases. What's the efficiency of such "battues"? [Chopenko] As low as the efficiency of the first steam engine. [Kozachenko] But these were not the crop-growers that they have paralyzed. The government forgets that about 40% of arable lands are in the hands of powerful integrated structures, which grow, process, and sell agricultural products. And if they are accused of concealing or stealing, it must mean that the traders cheat. only themselves. I don't understand those who fan the conflicts among separate economic subjects. They say: the crop growers are good guys, and the buyers of their grain are bad guys. Those who want to carry their grain to the market are good guys, and the transporters are bad guys, because they charge too much. In market economies with liberalized agrarian sectors there are practically no limitations or bans on production or commercial operations. All economic subjects operate within one legal field, but they are fully liable for breaking the law. So wouldn't it be better, instead of exacerbating the confrontation, to invite private structures with their money and granaries to the mortgage purchase programs? If we really care for domestic agricultural producers, if we really want to support them. Final decisions on distributing mortgage functions should be made by local authorities, not by central government, because local authorities know more about who operates more effectively. The more operators, the more possibilities they have to help one another in force majeure circumstances. [Chopenko] As far as the mortgage purchase of grain is concerned, Kinakh's government and, subsequently, you as his deputy are criticized for not using the rich harvests of the two previous years, which would have helped to start the mortgage mechanisms. You are blamed for not storing enough grain in the State Reserve. [Kozachenko] Without money from the budget? If the State Reserve had received UAH400 million [$75M], we would be better off now. In my opinion, the State Reserve should store just enough grain to secure emergency supplies to the domestic market for three or four months. It's absolutely inexpedient to store grain in amounts which exceed the annual consumption twofold. Such reserves are stored only in the USA. The EU countries and Canada have 6-month reserves. But even that is too costly for Ukraine. In 2002 we consumed almost 28 million tons of wheat. The storage of half that amount would cost more than UAH10 billion [$19M]. Too much for this cash-strapped country! [Chopenko] Then we would have to resort to imports to cope with shortages of grain? [Kozachenko]Ukraine has imported grain for the last decade, mostly the sorts which are not grown on our fields. This year's situation is an exception, like in 2000, when we had to import food wheat. But there were no price hikes, no jobbing or social upheavals. Now, unfortunately, we feel the lack of market instruments in the agro-industrial complex: the government increasingly resorts to administrative means. We badly need a concept of agricultural risk insurance. We have developed such a concept jointly with the World Bank. If it were adopted, by 2004 Ukraine could have a modern system of the so-called weather index insurance. This progressive instrument would embrace 35% of the country's territory. It would help to draw substantial capitals from international insurance companies, since the domestic resources are insufficient. Thanks for the most part to this method, Western Europe has the lowest rate of insurance payments - 0.6% - 0.7%! Ukraine could reduce its exorbitant 10% down to 1.5%. Isn't that a reserve? [Chopenko] Futures trade is pigeonholed, although it is a reality: Ukraine already has a futures stock exchange, similar to those operating in the United States and Canada. [Kozachenko] It's just what helps producers to hedge their bets. Using futures contracts, a crop grower who has sown winter wheat can sell his future harvest in advance. Besides, he knows the guaranteed sum he is going to get under any circumstances. Futures trade is a clear reference point which helps agricultural producers to see their prospects. Also, having a futures contract and an insurance policy against a loss of harvest, agricultural producers can receive credit resources. There is no risk for banks, because they can retrieve their money from insurance companies through hedging. The agricultural producer benefits, too. When the time comes to sell the ordered amount of grain at the futures exchange, but the spot price is higher than the price stated in his contract, he can sell his contract and supply his grain at the real price. The benefit is obvious. But if, on the contrary, the price at the exchange is lower than in the futures contract, he simply gets the sum guaranteed by his contract. [Chopenko] These mechanisms work smoothly only if the agrarian market is completely liberalized. Separate supply orders to administrative regions, which restrict the movement of grain within the country, fixed prices for agricultural products, spontaneous interventions in amounts exceeding 10% of the product available on the market reduce to naught the principles of futures trade. With such a vagueness, no analyst can make a forecast for the food market. [Kozachenko] I am against chaos. But the agricultural sector should be regulated through the market, rather than administrative, mechanisms. To use the latter is extremely dangerous. In the agricultural sector, administrative cuffs don't match at all its market collars at all. Structural steps toward administrative management require sufficient reserves for budget resources, which are not available. Sporadic moves may lead to lasting systemic problems, and the government will have to spend a lot more to stabilize this sector. Zerkalo Nedeli On The Web, Mirror-Weekly, 31 (456) Kyiv, Ukraine, Saturday, 16 - 22 August 2003 http://www.mirror-weekly.com/ie/show/456/41320/ FOR ACADEMIC AND PERSONAL USE ONLY |
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