Costs analysis of grain export logistic chain

(2009/2010 marketing year)

One of the main grain production effectiveness criteria is profit, which is strongly related with production prime cost and selling prices. Practically all deals on Ukrainian grain export are in US dollars. Keeping in mind the world practice grain producers should receive about 80 % from FOB price. Thus, chain costs from elevator to ship should not be higher than 20 % from FOB price. Unadhering of this condition leads to grain production stagnation. Statement that the grain exporters sell Ukrainian grain not at world rates is wrong as the state controls it on export contract level. The rates expertise is executed by Derzhzovnishinform , the subordinate to Ministry of Economy. The best prices for producers are also provided by high competitiveness among exporters and considerable development of export infrastructure. Let’s have a look at data of Table 1.

 October 2007

Exchange rate 5.05

October 2008Exchange rate

5.85

Changes 2008 in % as to 2007

July 2009Exchange rate 7.65

Changes 2009 in % as

to 2008

Rates decrease on

33 %

Handling, UAH/t. 5,00 12,00 140% 12,00

0% 8,04

Drying, UAH/t*% 7,20 14,20 97% 14,20

0% 9,38

Cleaning, UAH/t*% 2,00 7,43 272% 7,43

0% 4,97

Elevator storage UAH/t 12,50 24,80 98% 24,80

0% 16,61

Railway rate, UAH/t 62,44 112,68 80% 107,92

-4% 72,2

Add. duties, UAH/t 8,61 14,86 73% 15,18

2% 10,17

Vet. Cert., UAH/t 3,26 6,09 87% 6,09

0% 4,08

Quarant. Cert, UAH/t 2,88 7,00 143% 6,67

-5% 4,47

SBI, UAH/t 1,64 2,12 30% 2,12

0% 1,42

Lock device (7units/wagon) per 1 t 1,36 1,59 17% 1,89

19% 1,26

Forwarding, UAH/t 8,50 11,50 35% 11,50

0% 7,7

Disinfection, UAH/t 3,33 3,33 0% 3,33

0% 0

Elevator loading, UAH/t 22,00 33,70 53% 38,00

13% 25,4

Port handling rate, UAH/t 34,24 46,75 37% 127,68

173% 60

Fumigation, UAH/t 3,72 2,44 -34% 5,47

124% 5,47

Customs documents drawing up, UAH/t 2,12 7,37 248%

8,55 16% 5,7

Total UAH./t 180,80 307,87 70% 392,84

28% 236,87

Rate FOB $ 207,00 $ 130,00   $ 145,00   $ 145,00

Costs/rate proportion FOB 17% 40%   35%   21,35%

Purchase rate EXW( at 0% VAT) 864,55 452,63   716,41   872,38

Purchase rate EXW ( at 100% VAT) 1038,78 579,38   901,28   1057,255

Grain transportation/certification ratesGrain transportation/certification rates((Forage GrainForage Grain, , LoshkarevkaLoshkarevka-- Mek Mek. . HoryHory 630 630 km km) ) TableTable 1 1

The table shows that October 2007 marketing chain costs equaled 17 % from FOB rate. On October 2008 they increased to unacceptable 40 %, and on July 1, 2009 they equaled 35 % unacceptable as well.. The inner market need in grain is on level of 26-27 millions tones. Thus, the half of the harvest should be exported, and at harvest rate of 80 millions tones two thirds should exported. In such situation grain market pricing depends and will fully depend from world grain prices and no any actions in Ukraine will make any principal changes. The only thing Ukraine can control is firstly prime cost of grain production and its export prime cost. Let’s make the analysis of grain export prime cost within two last years. The tables show that the marketing chain costs from grain elevator handling to ship increased from 180 UAH per tone to 392 UAH per tone (more than in two times).The world prices on grain reduced about in two times as well. It’s here to mention that while we handle the grain at state elevators, practically all main services (listed in table) are provided by state establishments (elevators, veterinary, quarantine and grain inspection, railway, customs, ports) and particularly the rates for their services increased without control. Question is. Which state authority (commission, working group) fulfils the duty of provision the balanced world grain conjuncture and services rate at grain export.The answer is. No any.

Earlier this duty was realized in the frames of Working Group on Grain Market at the Cabinet of Ministers of Ukraine under heading of Vice Prime Minister, responsible for Agrarian Policy.

At the acting government the working group was created, but there were no any meeting yet. We mention a lot about low purchase prices for grain.

The four key factors of pricing on grain are as follows:1. World prices;2. Rate of national currency as of US dollar;3. VAT return to grain exporters;4. Cost of marketing chain from the field to ship;

What can be done in order the grain producer to have 80 % from FOB price? It can be reached by: establishing UAH rate to US dollar at 13,5 (diagram 1); have an increase of the world price from 145 to 258 US dollar per tone (diagram 2); return VAT on the level of 110 US dollar per tone (diagram 3); reduce costs of marketing chain to 220 UAH per tone (diagram 4). It’s known that in our case the positive result can be reached only at complex approach.

What steps should be done firstly:• Fully to pay VAT debt to grain exporters on 1st August 2009 not allowing any debts

in future, and keeping in mind that VAT payment time is in 60 days;• Promote exporters to purchase grain at Agrarian Fund of Ukraine via quickened

VAT return (in 30 days). Solving the issue of in-time VAT return will allow to increase purchase prices from 100 to 150 UAH per tone;

• Not to allow sharp currency movement, keeping in mind the fact that if the rate will be 6 UAH per 1 US dollar the grain purchase prices will sharply go down (approx. 250 UAH per ton of forage grain) and the grain export can be practically stopped and further its production as well;

• Decrease on 33 % the cost for grain services of state authorities (elevators, railways, ports, veterinary, quarantine and grain inspection, customs, etc.). It will allow to increase the purchase prices on more 150 UAH.

Thus, at the moment it is possible to increase the purchase prices for forage grain to 300 UAH per tone for producers.

The same situation is for other crops. It’s important to understand that the proposed measures will lead to price increasing

for all producers (10 000 enterprises and 43 000 farmers),but not only for those who was lucky to appear at Agrarian fund limits. Additional proposals: Create the National commission on transport control; Cabinet of Ministers of Ukraine to make a decision to organize the grain

international conference in Ukraine (Kiev) inviting the countries grain exporters and importers, which participate in the International Grain Council, on June 2010;

Appoint and make a visit on the highest level to Egypt – one of the biggest grain importers with the aim to push out the supply obstacles of Ukrainian grain to Egypt;

Stimulate construction both big and small line elevators to provide high quality storage, and big port complexes to store hundreds of thousand tones of grain. According to USDA data in 2002 in the USA the tanks capacity for grain storage were 11 mlrd. bushels, at elevators - 8,5. Its 280 and 225 mln. tones in grain equivalent (The harvest 430 mln. tones plus 15%).

Handling3%

Drying4% Cleaning

1%

Elevator storage7%

Railway rate35%

Additional duties5%

Veterinary Certificate2%

Quarant.Cert.2%

SGI1%

Lock device(7units/wagon) per 1 t

1%

Forwarding5%

Desinfection2%

Elevator handling12%

Port handling rate19%

Fumigation2%

Custome clearance1%

October 2007

October 2008

Handling4% Drying

5%Cleaning

2%

Elevator Storage8%

Railway rate37%

Additional duties5%

Veter. Cert.2%

Quarant. Cert.2%SGI

1%

Lock device(7units/wagon) per 1 t

1%

Forwarding4%

Desinfection1%

Elevator Handling11%

Port handling rate15%

Fumigation1%

Customs Clearance2%

July 2009

Handling3% Drying

4%Cleaning

2%

Elevator Storage6%

Railway rate27%

Addit. duties4%

Veterin. Cert.2%

Quarant. Cert2%

SGI1%

Lock device (7units/wagon) per 1 t0%

Forwarding3%

Desinfection1%

Port Handling10%

Port Handling Rate33%

Fumigation1%

Customs clearance2%

5,00

7,20

2,00

12,50

62,44

8,61

3,26

2,88

1,64

1,36 8,50

3,33

22,00

34,24

3,72

2,12

12,00

14,20

7,43

24,80

112,68

14,86

6,09

7,00

2,12

1,59

11,50

3,33

33,70

46,75

2,44 7,3712,00

14,20

7,43

24,80

107,92

15,18

6,09

6,67

2,12

1,89

11,50

3,33

38,00

127,68

5,47

8,55

0,00

20,00

40,00

60,00

80,00

100,00

120,00

140,00

October 2007

October 2008

July 2009

Costs/price proportion from US dollar

(FOB=$145, currency rate from $5.0 to $15.0) Diagram 1

Costs/FOB price proportion

(Currency rate 7,65 , FOB price from $130 to $270) Diagram 2

Costs/price from VAT return proportion

(FOB=$145, currency rate=7,65, VAT from $0 to $200) Diagram 3

Costs/FOB price incl. all expenses from 180 tо 400 UAH proportion

(FOB=$145, currency rate=7,65) Diagram 4