Ukraine: tariff cuts are favorable for the agricultural industry
According to the international rating agency Fitch, the European Union's decision to cut customs tariffs on Ukrainian commodities may help Ukraine's agricultural exporters in the long-term prospect to reduce their reliance on Middle Eastern and Asian markets and ease the currency mismatch between their debt and revenue, declared the press-service of the company on April 17.
In the near term, however, any benefit will be limited and is overshadowed by the risk and uncertainty created by the political and economic situation in Ukraine, which caps corporate foreign-currency ratings at the country ceiling of 'CCC'. The current week approval of favorable tariffs and quotas is a step towards the signing of the Deep and Comprehensive Free Trade Area, which would support long-term growth of Ukrainian exports to EU. Almost all Fitch-rated Ukrainian agricultural companies (MHP, Ukrlandfarming, Mriya, Avangard, Kernel, Creative) have substantial export sales. But most of them are focused on exports to Middle East, Asia and CIS countries.
According to the announcement, the reporting companies see the European Union as rather attractive market for further export growth and diversification. But the companies should not expect for a significant immediate impact on the volumes, especially as the EU is largely self-sufficient in wheat. Greater opportunities may arise in maize, or barley, or in southern/eastern European countries that are easier to service from Ukraine. Some companies that export products on which tariffs will be cut to zero (for example sunflower oil exporters Kernel and Creative) are likely to see their revenues and operating margin benefit if they maintain their prices.
Increasing export revenues should reduce the existing foreign-currency mismatch as long as companies are able to direct an increased portion of grain to the export markets once domestic needs have been satisfied. Most Ukrainian agricultural companies have a substantial part of their debt denominated in hard currency, while a large portion of sales are conducted through wholesalers and traders at "dollarized" but distorted domestic prices. The reporting mismatch is one of the major risks for the sector.
Fitch informed that significantly lower cost of production along with high soil productivity could make Ukrainian cereals more competitive than produce from other regions. Therefore, longer term Ukrainian agriculture firms may see further opportunities for exports growth.
Temporary tariff cuts are expected to take effect before the end of April following their adoption by the EU's Foreign Affairs Council this week. They will apply until November, by which time the EU hopes free trade elements of the Association Agreement with Ukraine will have been signed and come into force.
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