Ukraine Sunflower Sector: 2004 Update

1. Ukraine Sunflower Sector: 2004 Update Presentation by David Jackson LMC International Kiev, Ukraine March 2005

2. Outline of the Presentation • Current sector situation • Government intervention in sector • Export Tax and VAT issues • Conclusions

3. Current Situation - Field • Area is increasing • Yield is decreasing • Overall, production is increasing

4. Harvested Area, Yield and Production for Sunflower Seed, 1990/91-2004/05

5. Reasons for Low Yields • Shorter rotations • Declining inputs • Lack of finance • Low technological input • Land tenure uncertainties

6. Potential Solutions Key: • Finance • Technology

7. Constraints On Credit • Land as collateral • Crop guarantees • Legal enforcement • Farm resources

8. Current Situation - Factory • Rapid build up of capacity • Rapid build up of crushing • Export tax of 2001 increased crushing domestically

9. Oilseed Crushing in Ukraine, 1992/93-2004/05 (‘000 tonnes)

10. 1,200 Imposition 17% Export duty of 23% on seeds 1,000 export duty 800 600 400 200 0 1992/93 1994/95 1996/97 1998/99 2000/01 2002/03 2004/05 Diagram EXEC.2: Sunflower Seed Exports, 1992/93-2004/05 '000 tonnes

11. 7,000 6,000 5,000 '000 tonnes 4,000 3,000 2,000 2001/02 2003/04 2005/06 2007/08 2009/10 Indicative Capacity Sunflower Seed Production Diagram EXEC.3: Crushing Capacity versus Sunflower Seed Production, 2001/02-2010/11

12. Crushing Capacity Surplus Capacity = • Closure of capacity • Increase domestic seed production • Import seed 4 mn tonnes seed = 14*1,000 tpd

13. Government Intervention • Border protection • Reduce agricultural tax burden • Agriculture VAT exemptions • Export taxes

14. Export Tax Impact • Lowered domestic seed price • Increased seed availability • Raised capacity utilisation • Increased oil exports • Encouraged domestic crushing

15. Export Tax Impact • Does it lower seed price? Extent depends on: • Seed surplus (2003/04) – 21% below export parity • Seed deficit (2001/02) – 3% below export parity

16. 350 23% Export 17% Export Duty Duty 300 250 US$ per tonne 200 150 100 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Actual Price Tax-Free Export Parity Price Sunflower Seed Prices in Ukraine (including VAT) Compared with Tax-Free Export Parity Price

17. VAT Refund Impact • 300,000 tonnes of seed = VAT US$12 million When not refunded on exports: • Export margins low or negative • Adds to business risk • Costs of accessing reimbursement

18. Crushing Margins for Domestic Market and Exporters of Oil and Meal, with and without VAT Reimbursements

19. VAT Refund Impact • Export margins low • Domestic margins healthy • Overall margins reasonable if VAT refunded • But - margins boosted by export tax and global market

20. Average Crushing Margins with and without VAT Reimbursements Versus Indicative Tax-Free Export Parity Crushing Margin

21. Conclusions Cautious reform to address: • VAT • Export tax • Direct support to farmers • Access to credit

22. Recommendations: VAT • Reduce seed VAT to zero • Remove farm VAT exemption (but irrelevant at zero VAT on seed)

23. Recommendations: Export Tax • Remain at 17% while VAT reformed, then, if successful • 10% in two years • 5% in five years

24. Recommendations: Direct Support Limited funding from: • Fixed agricultural tax reform • Subsidised interest reform • VAT exemptions reform

25. Recommendations: Access to Credit • Land ownership • Legally enforced warehouse receipts • Subsidised interest reform • VAT exemptions reform