The Sunflowerseed The Sunflowerseed Export Tax in Export Tax in

UkraineUkrainePresentation by James Fry

LMC International,

Oxford, UK

June 2004

Outline of the PresentationOutline of the Presentation

History of the export tax Overall impact of the export tax Impact of the export tax on farmers Impact of the export tax on

sunflower oil prices in Ukraine Conclusions

History of the Tax (1)History of the Tax (1) Sunflower oil output fell in the 1990s because

crushers could not compete with the prices paid by the export market.

The government imposed an export tax of 23% in October 1999.

However, sunflowerseed could be exported free of tax under tolling contracts with foreign crushers, who were meant to return the oil and meal to the Ukrainian exporter.

Many exporters used these tolling contracts as a means of avoiding the export tax on seeds.

History of the Tax (2)History of the Tax (2) In response to the ease with which

the export tax could be circumvented, in July 2001 the export tax was reduced to 17%.

At the same time, the special exemptions for overseas tolling arrangements were banned.

That remains the situation.

Impact of the Export TaxImpact of the Export Tax It increased the availability of sunflowerseed

on the domestic market. It boosted capacity utilisation in domestic

crushing plants. It decreased sunflowerseed exports, but

increased sunflower oil exports. It increased investment in the production of

sunflower oil and refined products. It reduced the cost of buying seed locally,

making access to credit easier for crushers.

Monthly Sunflowerseed Exports Monthly Sunflowerseed Exports 1998/99-2001/02 (‘000 tonnes)1998/99-2001/02 (‘000 tonnes)

Oct-98 Oct-99 Oct-00 Oct-01

0

50

100

150

200

250

300

Su

nfl

ow

erse

ed E

xpo

rts

Imposition of 23% export duty on seeds

Export duty on seeds

cut to 17%

Impact of the Export Tax on Impact of the Export Tax on Farmers (1)Farmers (1)

The export tax works to the disadvantage of farmers.

The next diagram demonstrates this by comparing actual farm-gate prices with the price that, based on export prices, would prevail in the absence of export taxes.

With a 17% export tax, when there is surplus seed in Ukraine, we would expect the farm-gate price to settle at a level 17% below the tax-free export parity price.

Farm-gate Sunseed Price in Ukraine vs. the Farm-gate Sunseed Price in Ukraine vs. the Tax-free Export Parity PriceTax-free Export Parity Price

0

50

100

150

200

250

300

350

Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02

US

$/to

nn

e

Actual Farmgate Price Export Parity Farmgate Price

Imposition of 23% export

tax on seeds

Export tax cut to17% and tolling exports banned

Impact of the Export Tax on Impact of the Export Tax on Farmers (2)Farmers (2)

It is interesting to note from the previous diagram that, from the imposition of the 17% export tax until mid-2002, the time of the study, the farm-gate price was only 3% below the tax-free parity price.

This was because internal competition among Ukrainian crushers drove the seed price up close to the price that would prevail in the absence of the export tax, and almost no seeds remained for export.

Impact of the Export Tax on Impact of the Export Tax on Farmers (3)Farmers (3)

When the total quantity of Ukraine’s sunflowerseed output is larger than the capacity of local crushers to process it, the farm-gate price of seeds should reflect the full export tax payable on seeds.

This is because there is no need at all for crushers to bid up the prices of seeds above the prices that exporters can afford to pay, which is 17% below the export parity price.

Impact of the Export Tax on Impact of the Export Tax on Farmers (4)Farmers (4)

This may be seen in what happened when the situation changed in 2002/03 and 2003/04 and the sunflowerseed harvest was much larger than in previous years.

In September-November 2002 the farmgate price was as much as 25% below the export parity level that would be expected to prevail in the absence of an export tax, pushed down further by sales by farmers unable to store their crops at harvest time.

Impact of the Export Tax on Impact of the Export Tax on Local Sunflower Oil PricesLocal Sunflower Oil Prices

Although the efficacy of the 23% export tax was undermined by the large scale export of seeds under export tolling contracts, it is nonetheless clear that, since the introduction of seed export taxes, domestic oil prices have moved more closely in line with world prices.

There have also been less dramatic seasonal price swings, as the following chart reveals.

Sunflower Oil Prices in Ukraine Compared to EUSunflower Oil Prices in Ukraine Compared to EU

0200400600800

1,0001,200

Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02

US

$/to

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Domestic Sunoil Ukraine FOB SunoilSunoil (NW European Ports)

Imposition of 23% export tax on seeds

Export tax cut to 17%and tolling banned

Impact of the Export Tax on Impact of the Export Tax on Small TradersSmall Traders

The export tax has changed the structure of the trading sector.

It has forced smaller exporters of seed out of the market.

The balance of advantage in the sunflower market has tended to favour consolidation, with a larger role for crushers, some of which now have ownership links with large multi-national trading companies.

ConclusionsConclusions The export tax reduces the farm-gate price, but by

much less than 17% in times when crushing capacity is sufficient to crush the entire domestic crop, because crushers’ competition for seed drives up local prices.

The evidence suggests that a much lower export tax (of 3%) would be sufficient to protect crushers.

However, during years of high production and an export surplus of seeds, there will be more downward pressure on farm-gate prices, which will end up 17% below tax-free export parity levels.

It should be noted that the failure to refund crushers fully and promptly for VAT on sunflowerseed also discourages exports, since crushers have to face higher costs and more risk than in other countries.

Recommendations Recommendations Regarding the Export TaxRegarding the Export Tax Reduce the Export Tax (1)

Our analysis shows that, when crushers can process the full crop, the seed price settles only 3% (not 17%) below the tax-free export parity price.

Therefore, crushers would remain in business if the export tax were to be lowered to 3%.

Recommendations Recommendations Regarding the Export TaxRegarding the Export Tax Reduce the Export Tax (2)

When there is an export surplus of seeds, beyond the capacity of crushers to process them, local prices fall 17% below the world market level.

In this case, farmers are the big losers and crushers the winners. Lowering the tax to 3% would be of great benefit to farmers, while crushers would be no worse off than they are when there is no seed export surplus.

Thank You!Thank You!

Thank You!Thank You!