The introduction of a Bank Guarantee for forward contracts on the Ukrainian grain market for price growth risk will bring the Ukrainian grain export market a premium one. After all, with the introduction of this market tool, all small and medium producers will become the first-class grain suppliers with high reliability of contracts, which in turn will significantly strengthen Ukraine’s reputation among international grain importers, Mykola Gorbachov, the President of the Ukrainian Grain Association and the initiator of the introduction of a Bank Guarantee mechanism for forward contracts in the grain market, is convinced of this.
This year, Ukraine will receive a new record harvest of grain and oilseeds – about 110 mmt, and exports could reach 70 mmt. However, the Ukrainian grain is traded at $5-10 less per ton than other grain from the Black Sea region. Foreign buyers and importers offer a lower price for Ukrainian grain due to the risks of supplies and deadlines. Last year’s defaults in the grain market due to rising prices added to this problem, which had a very negative impact on the reputation of Ukrainian grain suppliers.
“We in Ukrainian Grain Association thought over a lot about how to solve the problem of defaults in the grain market on the one hand, and make each producer a reliable supplier, and on the other – to bring the Ukrainian grain market to the premium one, where our grain would be priced higher or at least like others in the Black Sea region. So we came up with the idea of introducing such a tool in the grain market as a Bank Guarantee for a forward contracts to avoid the risks of disruption of grain supply due to significant price growth,” said UGA President Nikolay Gorbachov.
According to the President of UGA, with the introduction of the bank guarantee mechanism, every Ukrainian producer will become a first-class, reliable supplier, so we can expect a higher price for Ukrainian grain. Thus, with the export of 70 mmt, Ukraine could receive an additional $700 mln from the export of the same amount of grain, which will have a positive impact on the exchange rate and budget of the country, as well as on producers’ incomes.
The Ukrainian Grain Association recently presented a bank guarantee mechanism for forward contracts for the banking community at the Independent Association of Banks of Ukraine, which was attended by Minister of Agrarian Policy and Food Roman Leshchenko. The Minister expressed full support for the idea of introducing a bank guarantee mechanism for forward contracts for the grain market. EBRD and IFC representatives, who were at the meeting, also expressed full support to the bank guarantee mechanism for forward contracts.
According to Minister, the proposed by UGA mechanism equalizes the capabilities of all producers and will allow them to get a higher price through a reliability premium, reduce the risk of potential losses to buyers and guarantee the reliability of suppliers. He also added that the new mechanism will allow Ukraine to reach a qualitatively new level of exports and even better develop the positive dynamics the agricultural sector is showing today.
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