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The Sunflowerseed Export Tax in Ukraine

The Sunflowerseed Export Tax in Ukraine. Presentation by James Fry LMC International, Oxford, UK June 2004. Outline of the Presentation. History of the export tax Overall impact of the export tax Impact of the export tax on farmers

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The Sunflowerseed Export Tax in Ukraine

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  1. The Sunflowerseed Export Tax in Ukraine Presentation by James Fry LMC International, Oxford, UK June 2004

  2. Outline 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

  3. 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.

  4. 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.

  5. Impact 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.

  6. 300 Export duty on seeds Imposition of 23% 250 export duty on seeds cut to 17% 200 Sunflowerseed Exports 150 100 50 0 Monthly Sunflowerseed Exports 1998/99-2001/02 (‘000 tonnes) Oct-98 Oct-99 Oct-00 Oct-01

  7. Impact of the Export Tax on 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.

  8. Farm-gate Sunseed Price in Ukraine vs. the Tax-free Export Parity Price Imposition of Export tax cut to 17% and tolling 23% export 350 exports banned tax on seeds 300 250 200 US$/tonne 150 100 50 0 Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Actual Farmgate Price Export Parity Farmgate Price

  9. Impact of the Export Tax on 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.

  10. Impact of the Export Tax on 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.

  11. Impact of the Export Tax on 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.

  12. Impact of the Export Tax on Local 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.

  13. Export tax cut to 17% Imposition of 23% export and tolling banned 1,200 tax on seeds 1,000 800 US$/tonne 600 400 200 0 Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Domestic Sunoil Ukraine FOB Sunoil Sunoil (NW European Ports) Sunflower Oil Prices in Ukraine Compared to EU

  14. Impact of the Export Tax on Small 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.

  15. Conclusions • 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.

  16. Recommendations Regarding 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%.

  17. Recommendations Regarding 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.

  18. Thank You!

  19. Thank You!

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