The end of transit surplus: EU may tighten terms for Ukrainian agricultural exports

The end of transit surplus: EU may tighten terms for Ukrainian agricultural exports

Alternative option are "consolation" subsidies to Polish and Romanian farmers

The end of transit surplus: EU may tighten terms for Ukrainian agricultural exports

The complaints of the agricultural ministers from Eastern European countries against the abundance of Ukrainian agricultural products on their markets have been heard. According to Janusz Kowalski, Poland's Deputy Minister of Agriculture, the EU Council of Ministers of Agriculture is scheduled to discuss the reinstatement of duties on some Ukrainian agricultural exports at a meeting on Monday, January 30. These include corn, chicken, and apples, which are traditionally highly competitive products in Ukraine. They are also going to discuss strengthening phytosanitary control for all grain imports from Ukraine, including feed grain.

As reported by Mind, a week ago, on January 20, during the Green Week international forum in Berlin, ministers of Czechia, Bulgaria, Hungary, Poland, and Romania agreed on a joint appeal to the European Commission to protect their markets from Ukrainian grain. "We call on the European Commission take measures aimed at stabilising the internal market," wrote Hungarian Agriculture Minister István Nagy, "Immediate steps are needed in view of the skyrocketing Ukrainian grain imports."

We see that the response was not long in coming.

Mind analysed how it could threaten Ukrainian farmers and the economy as a whole.

How did Ukraine manage to supply its agricultural products to the traditionally protected EU market without restrictions? In May 2022, Brussels zeroed out duties on agricultural goods from Ukraine. This was done to support Ukrainian agricultural exports, the backbone of the country's economy in the face of the port blockade. The decision was made in an unprecedentedly short time for the European bureaucracy. And it was justified, among other things, by facilitating Ukraine's early integration into the EU.

The scheme stipulates that tariffs and quotas on imports of agricultural products from Ukraine are "suspended" rather than cancelled. This is an important nuance that makes it easy to return to the previous norms.

Initially, it was assumed that the liberal regime would be in effect until June 5, 2023. A lobbying campaign has now been launched to extend or adjust it.

It is worth reminding that the import of a significant part of Ukrainian agricultural goods to Europe was liberalised back in 2016, when the Deep and Comprehensive Free Trade Agreement with the EU came into force. However, the most important items for Ukrainian exports, such as grain, continued to be subject to restrictions.

Is the decision to revise the liberal regime of agricultural exports from Ukraine de facto adopted? No, it is not. There is no consensus on this form of support for Ukraine within the EU member states. Each country's position depends on its own agricultural ambitions in the common market.

Bloomberg, citing First Vice President of the European Commission Valdis Dombrovskis, said that the European Commission is leaning toward extending the liberal trade regime with Ukraine. However, there is no doubt that alternative opinions are becoming more and more pronounced.

Norbert Lins, chairman of the European Parliament's Committee on Agriculture and Rural Development, also stated that the vast majority of MEPs support the course of liberalisation of the European market for Ukraine. However, he acknowledged that there are problems with an excessive influx of Ukrainian goods for a number of countries, including Poland.

How critical is it for Ukraine to maintain this preferential treatment? Extremely critical.

During martial law, the agricultural sector has further strengthened its status as the backbone of the Ukrainian economy. The agro-industrial complex accounted for 53% of all exports (in 2021, it was about 46%). In total, more than $23 billion worth of agricultural products were exported.

"Cancelling the preferential regime for Ukrainian producers in times of war is a blow to the state's economy and a threat to the future of Ukraine. The agricultural sector is suffering from losses due to the aggressor's constant missile attacks, crop losses and the impossibility of a full spring sowing season due to millions of hectares of mined fields amid russia's blocking of the grain deal," explains Andriy Dykun, Chairman of the All-Ukrainian Agrarian Council.

Why did the disagreement on this issue arise? Competition in the European market is traditionally high.

Due to the virtually uncontrolled inflow of inexpensive agricultural products from Ukraine, EU farmers have found themselves at a disadvantage. Ukrainian grain, which was supposed to transit the EU, ends up on the markets of European countries. In December, a total of 3 million tonnes of grain was exported from Ukraine via the "solidarity corridors."

Complaints about this have been received by the European Commission since the summer of 2022, but have now been heard due to the record pressure exerted by EU member states. Among them are Poland, Hungary, and Romania, whose border areas are flooded with grain from Ukraine.

Aside from quantity, there are also questions about the quality of the Ukrainian product. The European Commission is considering revising the regime of phytosanitary inspections, as there is a "potential risk of importing contaminated grain."

When will the overriding decision be made? In the spring.

But the topic has been widely discussed – this issue will be raised at the EU-Ukraine summit on February 3, in particular.

If not tariffs on Ukrainian grain, then what? There is an alternative to reintroducing restrictions on Ukrainian commodities.

Should they remain on the EU market, the losses of European farmers should be reimbursed.

One idea is to use the EU's Common Agricultural Policy Crisis Reserve to help Polish and Romanian farmers, who have been most affected by the inflow of Ukraine's grain.

The Crisis Reserve is a €450 million fund that can be used to finance exceptional measures to counter market disruptions. The fund was created in April last year, after russia's full-scale invasion.

To "unseal" it, the agreement of all EU agriculture ministers is needed. According to Janusz Wojciechowski, the European Commissioner for Agriculture, this issue is currently being discussed.

"We are closely observing the impact of [agricultural] imports from Ukraine. They do not have a negative impact on the whole EU, but they do lead to regional difficulties," he said.

Is everyone in favour of the reimbursement scheme? Globally, yes, but with some reservations.

A number of countries – France and Germany in particular – suggest allowing each state to support their farmers as they deem appropriate at the national government level. For the EU, the issue of national subsidies is very sensitive and usually highly regulated. At the same time, Poland and Finland insist on joint assistance on behalf of the EU, as the financial capacities of individual countries are unequal.

At present, the debate is between these two options – EU-level funding through the anti-crisis reserve or national aid. The other option is to cancel the liberal regime for Ukraine or to narrow it.

Have Ukrainian exports to the EU really grown so much during the full-scale war? Looking at the total exports of goods to the European Union in 2022, it grew by only 4.2%, to $28 billion. But there were dramatic changes in the product and geographic structure. First of all, they include agricultural products.

In total, Ukrainian businesses exported goods worth $44.1 billion in 2022, which is 35% less than in 2021. However, the European Union remained the only destination where supplies increased: In 2022, the country exported 63% of goods to the 63% of goods worth $27.9 billion to the EU.

Among the EU member states, the largest exports were to Poland ($6.6 billion), Romania ($3.8 billion), Hungary ($2.27 billion), Germany ($2.23 billion), Italy ($1.5 billion), and Spain ($1.5 billion).

Outside the European Union, Turkey became the largest export market ($2.9 billion), ahead of China ($2.46 billion). Meanwhile, exports to Turkey decreased by 29% during the year, and to China by 69%.

Corn is the leader in terms of money (and volume). Exports of this commodity group amounted to 24.99 million tonnes, worth $5.94 billion, which was 1% more than in 2021. Sunflower oil ranks second in terms of export value: $5.46 billion. At the same time, sunflower seeds are in the top 10. In 2022, Ukraine exported 2.7 mln tonnes of these products worth $1.255 bln, which is 33 times more than a year earlier.

The domestic agro-industrial complex exported 11.2 mln tonnes of wheat worth $2.6 bln in total. Soybean exports increased by 81.6% to 1.99 million tonnes in physical volumes. The cost was $862 mln, which is 42% more than in 2021.

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