Unlike the devastating flood in Western Ukraine, the surplus of grain did not catch the government unaware. The rich grain harvest had been announced beforehand, with forecasts varying between forty and fifty million tons. The government reassured farmers, saying it would employ the State Reserve, the Agrarian Fund, state holding Khlib Ukrainy, and regional food funds to cope with the amount and prevent a price dive.

So far, however, the government has not intervened, leaving grain traders to their own. This marketing year, they have already exported 1,500,000 tons of grain. The price of feed wheat has dropped to a bargain-basement UAH 700 – UAH 650 per ton [$1 = UAH 4.845 ].

As the harvesting campaign was getting into full swing, Khlib Ukrainy President Ivan Rishnyak assured the public that his holding would play a role on the grain market. He had good reason to say so: Khlib Ukrainy has the capacity to store 6,230,000 tons of grain and process about 4,700,000 tons into flour, cereals, mixed feed, etc. It has grain elevators in geographically advantageous places – at commercial ports in Odessa and Mykolaiv, with capacities of 1,500,000 tons and 600,000 tons, respectively.

According to Rishnyak, due to the oversaturation of the grain market and shortage of free granaries this marketing year, Khlib Ukrainy gives preference to storage and plans to purchase 1,500,000 tons. The storage price at Khlib Ukrainy granaries has risen by a quarter – up to UAH 10.57 per ton, but other companies have doubled their price, so the prospects appear to be bright, but Rishnyak’s previous managerial experience calls his statements into question.

Rishnyak has only recently regained the post he occupied in 1999-2002. He said a lot of good words then about Khlib Ukrainy as “the locomotive force of the national grain market”, but almost all his steps turned out to be wrong. It looks like this time he will also not be able to follow-through, considering the heavy burden of numerous debts. Khlib Ukrainy owes traders and government-run structures UAH 670 million and has to clear the debt if it wants to become a full-fledged operator of grain purchasing, storage and a powerful exporter.

The holding has been experiencing financial problems since late 1998. In 2006 it even planned to sell some of its non-processing facilities for UAH 130 – UAH 170, but it only transferred a high-liquidity granary worth USD 25 million to a Dutch creditor – HSH Nord Bank. As a result, Khlib Ukrainy reduced its debt to the bank to USD 10.5 mln and got better sanation prospects, but nothing more than that.

However, the debt is not the only reason why grain producers keep away from Khlib Ukrainy. They remember how its daughter structures made millions by understating the class of grain and writing off “waste”. Almost all granaries do that, though…

On June 25, a few days before the harvest started, the government permitted the State Reserve to purchase grain directly from exchanges, bypassing lengthy tender procedures. One week before, the State Reserve had announced a tender to purchase 200,000 tons of new grain. The bidders were to supply it exclusively to state-run enterprises. The auction never took place because there was only one bidder.

The alternative way – purchase grain through accredited exchanges, which might prove to be effective, but even then the State Reserve would hardly purchase more than 400,000 tons of food grain.

With the holding’s financial and managerial problems, the government wanted to entrust the “first fiddle” to the Agrarian Fund. The fund was supposed to accumulate a grain reserve equal to 14 percent of domestic consumption: 803,000 tons of wheat and 78,000 tons of rye. The money was supposed to come from repaid credits and proceeds from the sale of land. The Verkhovna Rada standing committee on agrarian policy and land relations found such a source unreliable and obliged the government to allocate UAH 1.3 billion for the Agrarian Fund directly from the Treasury. In the revised version of the 2008 national budget, the government offered UAH 818 million, but President Yushchenko found the sum insufficient and demanded to increase it to UAH 1.5 billion.

As of July 1, however, the Agrarian Fund was penniless since parliament had not passed the budget amendment bill. It had to hold the first auction with the money provided by the Agrarian Ministry at the expense of outlays for other programs. The ministry also promised to give the fund another UAH 250 million later, but even that sum was far smaller than UAH 1.5 billion.

The government looked high and low for a way out: Agrarian Minister Yuri Melnyk proposed to disburse money allocated for the Agrarian Fund three months ahead of schedule, and MP Ivan Kyrylenko of the Tymoshenko Bloc suggested a loan that the fund would return immediately after the adoption of the revised budget.

The plans, if any, were canceled by force majeure – the devastating flood that hit six western and southwestern regions in late July and made lawmakers interrupt their summer vacations for an extraordinary session. They were forced to pass a budget amendment bill (which they had turned down during the regular session) in order to fund flood relief operations, repair and restoration works, and compensation to affected people. Along with the emergency allocations, they also “granted” one billion hryvnyas to the Agrarian Fund.

It should be noted that since the Agrarian Fund started functioning on July 6, 2005, it has never received enough money from the government.

Meanwhile, excessive supply is flooding the national grain market. Farmers are pushing out their new grain. They badly need money for harvesting late crops and plowing land.

The current price drop affects mid-sized farms most: unable to influence the grain market, they have to put up with the terms and prices set by the lessees of their land. They have to sell their grain cheaper now in order to save money on storage.

And that is where traders “come to the rescue”. In fact, they save the rest of the world from the global food crisis and leave Ukrainian farmers high and dry, buying grain from them for less than the input costs.

The imminent result of sharp price fluctuations and the government’s indifferent passivity is quite predictable: next year, the area under winter wheat is likely to shrink considerably. Then, if the harvest is poor and the country is short of grain, the same traders will sell it, but this time to the world.

In Russia, the situation is different: six companies, mostly transnational, control 60 percent of grain exports, and this year a state-run company is going to join the grain export business. The Russian government is founding the new trader on the basis of a state-run public corporation named Agency for Food Market Regulation. By 2011, its share in Russian grain exports (which are currently estimated at USD 4.5 billion - USD 5.5 billion) is expected to reach 40-50 percent. Twenty-eight companies with government stakes in the statutory funds and some private commercial structures are also expected to fall under the agency’s wing.

The Ukrainian government does not know what to do about its three interveners and the interveners do not know what to do about the surplus of grain. They accuse transnational companies of “cartel collusion”, but aren’t those companies among the most active exporters of Ukrainian grain?

Ukrainian producers of meat are concerned about increasing imports of American chicken legs and appeal to the government for help. Didn’t Ukraine strive so long and hard for WTO membership? Didn’t its leaders promise the people liberal trade and wider access to foreign markets and goods? Didn’t they say that the national agricultural sector would gain more from WTO membership than it would lose? Now they have received this “grain warning” – hopefully, not the last…