Development of Agricultural Commodity Exchanges in Ukraine

DEVELOPMENT OF AGRICULTURAL COMMODITY EXCHANGES IN UKRAINE

ABSTRACT

The paper presents analysis and assessment of the current situation with Ukrain-ian agricultural commodity exchanges and their development prospects. Today, there is a need for an efficient market infrastructure, capable of ensuring trans-parent sales of agricultural commodities. In the developed countries, exchange trading in agricultural commodities is the most efficient way for determining market prices. However, most Ukrainian exchanges function as superstructure at the spot agricultural market. The government does not actually participate in the exchange trading. Because of relatively small sizes of exchanges, they are not able to create the material basis, necessary for implementation of progres-sive technologies of exchange trading. Forward and futures transactions are not popular, because they are associated with collateral, which should be provided by the supplier (producer) in case it fails to honor its obligations. In general, development of agricultural commodity exchanges is related to the institutional setting of agricultural market.

Keywords: commodity exchange, agricultural market, market infrastructure, market transparency

1 INTRODUCTION

With elimination of the state system of contracts for sale of agricultural commodities, the old marketing infrastructure became unable to provide effi-cient functioning of agricultural market. Though many commercial intermediar-ies appeared, they did not possess any material and technical basis, and they also used non-transparent schemes of trade in agricultural commodities. So, the need arose for an efficient market infrastructure, capable of ensuring transparent sales of agricultural commodities by agricultural producers.

The problem of market non-transparency became very acute in the mid-1990s. In order to solve it, in 1995 President's edict introduced the agricultural commodities exchange trading, which became the main reason for positive grain price index in 1995. However, later on the activities of commodity ex-changes have been cut down.

In 1999, the volume of trade at agricultural commodity exchanges was four times less compared with that of 1995. The price fluctuations strengthened. Right after harvesting, grain prices equaled UAH 300-350 (USD 56-66) per ton, and in spring 2000 grain prices skyrocketed to UAH 600-700 (USD 113-132) per ton. In developed countries, the seasonal difference equals 20-30%.

The fluctuations in trade volumes were even stronger. During the period between harvesting and the end of the year, 11 million tons of grain had been sold. As a result, in spring 2000 the food market came under intense pressure, the bread prices and inflation rates increased, while the purchasing power of the population decreased.

Now the Ukrainian agricultural market eventually functions according to the liberal market model, from which all CEE countries started their transition to the market economy. However, these countries rejected this model in the early 1990s and started to implement governmental regulation of agricultural market, creating necessary institutions.

2 DEVELOPMENT OF AGRICULTURAL MARKET IN UKRAINE AND CURRENT SITUATION ANALYSIS

In 2000, President's edict set up two main tasks Ð'- creation of market infra-structure, forms and mechanisms of organized wholesale trade and channeling of agricultural commodity flows through transparent procedures of agricultural market. As a result, in 2003 the market witnessed the same situation as in 1999-2000. This situation had been caused not just by decrease in crop yields, but also by serious deficiencies in the functioning of agricultural market, including miscalculations concerning formation and use of the state grain reserve. Wheat prices increased by 2.4 times, while the prices of bread (the main "social" prod-uct) increased only by 20-60% (Figure 1).

Figure 1: Dynamics of Prices of Bread and Related Products, 2003 (UAH per ton)

Source: GAIDUTSKIY, P. (2004): Formation and Development of Agricultural Market, in: SABLUK, P. (ed.): Formation and Development of Agricultural Market, Materi-als of VI Congress of Ukrainian Agricultural Economists, January 16-17, Kiev, pp. 5-24.

Current situation with the market infrastructure is shown in Table 1.

Table 1: Development of Agricultural Market Infrastructure

Infrastructureelements 1998 2000 2003

Agricultural commodity ex-changes 34 43 34

Trading companies 95 353 435

Food markets 77 415 863

Service coops 725 1030

Source: GAIDUTSKIY, P. (2004): Formation and Development of Agricultural Market, in: SABLUK, P. (ed.): Formation and Development of Agricultural Market, Materi-als of VI Congress of Ukrainian Agricultural Economists, January 16-17, Kiev, pp. 5-24.

However, the level of use of the newly created infrastructure is extremely low. Concerning agricultural commodity exchanges, we might say, that sales, conducted by agricultural producers, constitute only 0.3% of total sales.

It should be mentioned that since the beginning of agricultural reforms sales by agricultural producers to processing enterprises decreased, and the commercial channels became the main sales conduit for sale of agricultural products (Table 2).

Table 2: Main Channels of Sales by Agricultural Products (% of total sales)

Sales 1999 2000 2001 2002 2003

To processing plants 53 21 20 17 23

At markets 24 37 21 19 16

To the population 11 23 14 10 7

To commercial enterprises 12 19 45 54 54

SABLUK, P. (ed.) (2003): Agro-Industrial Complex of Ukraine: Situation, Trends and Development Perspectives, Institute of Agricultural Economy of Ukrainian Acad-emy of Agrarian Sciences, January 16-17, Kiev.

At the same time, commercial channels are the least organized and trans-parent ones. For the most part, agricultural commodities are sold directly from the field, warehouses etc. to commercial companies and intermediaries, which control large flows of agricultural commodities. The Ukrainian Statistics Com-mittee does not contribute a lot to increasing the transparency. For example, the statistical bulletin concerning commodity sales