On December 7, 2017 the Verkhovna Rada of Ukraine voted for a draft law of Ukraine "On amendments to the Tax Code and some legislative acts to ensure the balance of budget revenues in 2018". The people's deputy of Ukraine V.V. Sidorchuk introduced the amendment #180 to the draft law, which provides cancellation of the budgetary repayment of the VAT on oilseed crops exports (soybeans, rapeseed and sunflower seed) since March 1, 2018. Deputies of the Committee on Agrarian Policy and Land Relations applied to cancel the amendment, which provides cancellation of the VAT on the exports of oilseeds and industrial crops, because it can make agrarians to lose nearly 10-12 bln UAH per year.
Therefore, oilseeds producers, processors and exporters in Ukraine shared their opinions on the further impact of the draft law on the market segments of sunflower seed, soybeans and rapeseed.
Opinion of agricultural producers of Kherson oblast
If the authorities to apply the reporting draft law, it shall cover oilseeds of the harvest-2018 only, due to the fact that agrarians already completed the harvesting campaign of 2017. For several recent days, prices for soybeans in Ukraine decreased by 300-400 UAH/t, and it is not the limit yet, in my opinion. The freight costs somewhat increased and foreign prices for agricultural products continued declining. Soybean is one of the most profitable crops, in particular in Kherson oblast it requires irrigation works, and agrarians will change towards cultivation of other highly-profitable crops, like sunflower seed and corn. Despite the fact that the reporting law also provides cancellation of the VAT on the exports of sunflower seed, most likely the current situation will not significantly affect in the market segment. To date, Ukraine faces a defcit of sunflower seed production (13-14 mln tonnes), and sunflower seed processing capacities are estimated at nearly 18 mln tonnes. Therefore, the prices of oilseeds will not significantly decrease due to high competition rates for raw materials between various processing enterprises.
Agrarians will continue planting soybeans, and the major issue is how the prices to decrease on the domestic market. As far as we understand the prices will lower by nearly 20%. And even taking into account the planned reduction of prices by 20%, Ukraine will continue charging 20% VAT at the remaining sum to the tax office.
Ukraine usually exports nearly 75-80% of produced soybeans, and uses 20-25% only for domestic processing. In order to reach the soybean processing capacities which exceed the produced crop volumes, it is necessary to invest in construction for nearly 2-3 years.
The situation in the rapeseed segment is similar – Ukraine mainly exports the oilseed than provides domestic processing.
It would become more fair if the law concerns the oilseeds harvest of 2018. Because agrarians still have to cultivate and harvest the future oilseed volumes. And the current 2017/18 MY was not already completed, and agrarians recently finished the harvesting campaign, but the market rules changed in too fast way. Soybean requires significant financial resources for production, therefore the refund sums were quite high.
Opinions of oilseed processors
Bogdan Koroviy, Head of sales department at Vioil company
We consider that the decision to cancel the VAT refund in the exports of oilseeds and industrial crops is definitely advantageous for the economy of our country.
Making of proper protectionist policy is absolutely standard practice for the countries which take care of their economies: the USA, Australia, the EU, China, India, Argentina, etc.
In the 90-ies, imposition of the duties on sunflower seed exports not only ruined our fat-and-oil industry, but also gave a brand new qualitative stage to its further development:
- Ukraine increased the planted areas under sunflower seed in more than 2.5 times. At the same time, production volumes of the oilseed increased in more than 6 times. During 15-17 recent years, Ukrainian farmer turned to the largest producer of sunflower seed in the world (and one of the most effective ones). And sunflower seed is one of the most marginal crops for production in Ukraine.
- The processing capacities increased in more than 8 times, and it provided the corresponding increase in the number of jobs, social guarantees and projects, tax revenues to the state budget, foreign currency earnings, etc.
Development of the fat-and-oil industry provided a huge support to the satellite branches of our economy. The country constructed a completely new industry of sea terminals, which contributed to more effective shipment of our goods for exports. The country constructed new enterprises working in the fat-and-oil complex.
In the short term outlook, prices for oilseeds will become adjusted, because the processing capacities (20 mln tonnes) still exceed the general harvest volumes of oilseeds and industrial crops. It means that oilseed processors will still compete for raw materials to load the capacities of their plants.
The agrarian lobby, which needs amendments to the Tax Code, does not care the position of the Government in the current situation, and only commercial interests have the most significant role. We believe that the further development of the fat-and-oil industry will provide a good opportunity to raise additional investments, capital funds, additional foreign exchange earnings.
Oleg Domanov, Commercial Director at the company Falcon-Agro
The Verkhovna Rada decision to cancel the VAT refund on sunflower seed, soybeans and rapeseed exports should have a positive impact in the agricultural sector, especially for oilseed processors. To date, Ukraine sells all raw materials for exports, instead of producing of several types of value added by-products and exporting them, which would conquer additional markets, create new jobs for thousands of Ukrainians, increase revenues to local budgets, develop the whole country, build new production facilities with advance processing of oilseeds, modernize the production, making it more efficient, develop the port and transport potential for bulk cargoes, receive new products, improve product qualitative features, etc.
We agree that in the first year it may seem painful for farmers, but Ukraine still needs to do it. Therefore, the Government should make some preferential transition period, as many farmers need to understand what oilseeds to plant in a new year.
Opinions of traders
Alexei Guyvan, Director at the company APK Sodruzhestvo Ukraine
Development of the reporting situation can be rather unpredictable. To date, it is difficult to forecast how far the VAT non-refund for oilseed exports can affect the prices, but it is clear that in such manner they are trying to reduce the domestic purchasing prices for raw materials. Also, the reporting situation will not cover oilseed by-products at all. First of all, the reporting law provides increasing of rapeseed and soybeans processing volumes, because Ukraine prefers processing sunflower seed rather than exporting the oilseed. As an exporter, I consider that it is unfair competition because the officials removed the VAT refund from certain crops only, without any discussion with crop producers who will face losses from those innovations. Therefore, the reporting law takes some share of money from the producer, taking into account all nuances of the VAT administration. Generally, the unfolding situation provides an adverse effect on the fat-and-oil industry, because the decline of oilseed prices will contribute to reduction of the planted areas under crops, which mainly concerns soybeans and rapeseed, due to the similar reduction of profitability of their production. Also, there are doubts that the situation may cause any increasing of soybean and rapeseed processing volumes, as soybeans and rapeseed in Ukraine are mainly export-oriented crops, but not their by-products. Of course, in the current season until February-March of 2018 the rates of oilseed exports will continue increasing, and companies-exporters will try supplying the major volumes of soybeans till the law comes into force.
Ivan Cherevko, Director at the company Cardiff Trading
Initially, domestic prices for soybeans will slightly decrease, because they would not be calculated in UAH in comparison with foreign currency export prices, due to 20% VAT, which traders previously calculated for oilseeds exports. Therefore, exporters will lower their bid prices in UAH for soybeans. Oilseed processors will announce the higher bid prices than the prices of exporters. Since the Government did not cancel the VAT refund for soybean by-products, oilseed processors will also have some benefits, due to the fact that purchasing of raw materials takes place on the domestic market, and then they export the by-products, and will be able to receive the VAT refund. It should be noted that in recent years the processing industry of soybeans was not marginal and most enterprises were working with incomplete loading of production facilities. To date, only one oil extraction plant is loaded at 100%.
Most importantly, agricultural producers should not switch from growing of soybeans towards other more profitable crops. Therefore, it is important that domestic prices for the oilseed not lower below 20%, but at least 10%. So, on the domestic market oilseed processor will be interested in purchasing of raw materials, and agricultural producer will declare somewhat higher offer price and keep down its sales, waiting for more favorable pricing environment.
As for the situation on the Ukrainian export market, the situation will not significantly impact on the global market processes, because Ukraine takes the 8th position in the world by soybean exports only.
At the same time, in the current season the local market (the EU, Belarus, Hungary), which purchases Ukrainian soybeans, already started increasing its demand and export rates to prevent any possible risks. Due to the situation, in the nearest future the market will demonstrate a slight decrease of bid prices on the export market. Summing up, despite increasing of the domestic consumption of soybeans in Ukraine, soybean exports will still continue developing!
Opinions of experts
Andrei Druzyaka, Grain market expert
Due to the possible cancellation of the VAT refund on the exports of oilseeds since 1.03.2018, the prices of the oilseed group will definitely decrease. But it will not be obvious 16.67% VAT in the product price. Most likely, the prices will reduce by 5%, or the maximum level will reach 10%. The market of sunflower seed will face the less significant impact of the VAT refund cancellation – the prices will not even change. Sunflower oil and meal/cake are the main export products in the segment, but not seeds themselves. Also, the export duties at the oilseed exports provide support to oilseed processors.
In the current MY, such VAT-innovation will not affect rapeseed market. To date, the country already reached the planned target of 2 mln tonnes of rapeseed exports, and the export season of the oilseed is almost over.
At the same time, Ukraine exports almost 3 mln tonnes of soybeans from 4 mln tonnes of its general production. The processing industry covers nearly 1 mln tonnes. The available capacities allow processing almost the while soybean harvest in Ukraine, as well as there are newly-built capacities and new projects.
Julia Ivanitskaya, oilseed market analyst at APK-Inform Agency
There can be several consequences of the current cancellation of the VAT refund on oilseeds exports, both positive and not really positive ones. First of all, it is reduction of UAH bid prices for all oilseed crops: both export and domestic ones, which is unfavorable to agrarians. But experts do not forecast any significant price changes.
On the other hand, the innovation will support domestic processing of oilseeds, especially soybeans and rapeseed.
Р.S.
The Committee on Agrarian Policy and Land Relations of Ukraine, people's deputies, industry associations, etc. are trying to find a compromise in the current situation. They report about various draft laws to postpone the cancellation of the VAT refund on oilseeds exports. It should be noted that on December 14 the Verkhovna Rada of Ukraine registered a draft law #7403 "On several taxation issues related to the value added tax for export operations of oilseed crops from the customs territory of Ukraine". The draft law offered not to restore the VAT refund on the exports of soybeans, rapeseed and sunflower seed in March 2018 only.
Prepared by Viktoria Zelenaya, APK-Inform Agency
