Crop receipts: Ukrainian experience
Due to high-quality soils and large scope of arable lands, Ukraine is a leader in the top ratings of global agricultural product exporters. Despite high capital intensity of production, investments in agriculture have a long payback period and several risk factors, such as seasonal or weather conditions, law regulation of the industry itself and investment protection. In Ukraine agrarian receipts are treated as one of the most effective instruments for preserving investments in agricultural industry.
Crop receipts: global experience
First agrarian receipts were launched in Brazil, as mechanism for attracting additional financing by agricultural producers, and apply there successfully for over 20 years. Upon receipt of financing, farmer or agricultural enterprise shall issue in the name of investor agrarian receipt, which provides for obligation to return the received funds against pledge of further crops.
Agrarian receipt facilitates receiving loans or entering into contracts on supply of material and technical resources. Agrarian receipt shall be enforced in the form of settlement by grown products (agricultural crops or livestock) or by proceeds from selling thereof.
Due to widespread application of agrarian receipts, Brazil promoted to the new level in global export of cocoa beans, soybeans and corn. A successful example of Brazilian agriculture awoke interest in the instrument of agrarian receipts among other countries.
Under the auspices of the European Bank for Reconstruction and Development, the UN Food and Agricultural Organization and the International Finance Corporation, the Brazilian experience was adapted for launching similar financial instruments in Ukraine.
Crop receipts: flow in Ukraine
In Ukraine, agrarian receipts as financing mechanism for agricultural producers were launched in 2012, by adopting the Law of Ukraine “On Agrarian Receipts” (the Law). However, in practice such instrument has been applicable since 2015, following appropriate amendments to other laws and bylaws and completion of several events aimed at informative and technical enforcement of the adopted Law.
As of spring 2020, nearly 3,000 agrarian receipts were issued in Ukraine, in aggregate amount over 21 billion UAH. It should be noted that first it was possible to apply such instrument in three Ukrainian regions only. Since 2018, agrarian receipts have been applicable in all the regions of Ukraine. As the result, in 2019 farmers issued 1,706 agrarian receipts in aggregate amount of 11.8 billion UAH.
Today we see season-by-season dynamic growth of agrarian receipt market, followed by growth of the interest in such instrument, inter alia, among foreign investors.
Agrarian receipts: how do they operate in Ukraine
As stipulated by the Law, agrarian receipt is a consignment document fixing the Debtor’s unconditional pledged obligation to supply agricultural products or to pay funds in accordance with terms set forth therein.
In practice it operates as follows: agricultural producer and its Creditor shall conclude an agreement, the obligations whereunder shall be secured by pledge of further crops, in the form of agrarian receipt.
There may be various methods of financing secured by agrarian receipts: both by providing funds and in the form of barter (goods supply, work performance, rendering services).
Agrarian receipts are used mainly for security of forwarding contracts, loan agreements or agreements on goods supply with payment deferral/installments. Therefore, agrarian receipt is deemed as convenient instrument for farmers, aimed at purchase of seed materials, agricultural machinery, plant safety facilities, fuels and lubricants etc.
It should be noted that not all agrarian companies may apply such an instrument. Agrarian receipts may be issued only by the person/entity having a title or a right to use agricultural land plot.
The Law does not restrict a scope of persons or entities who may act as Creditors under agrarian receipts. Both natural persons and legal entities may get engaged in agricultural financing. In practice, banks and other financial institutions often act as Creditors.
Since 2019, liberalization of the currency legislation facilitated an option to attract financing from non-residents. Agrarian receipt shall be drafted in writing and shall be notarized.
It should be noted that, despite apparent simplicity of the document, approach to the content of agrarian receipt should be very careful.
Agrarian receipt prescribes obligations of one party only, however prospects for fulfillment of the Debtor’s obligations will depend also on correctness of formulation and on content of the document itself (in particular, description of claims secured by the Debtor, the subjects of pledge). The Register of agrarian receipts contains all the data about agrarian receipts issued in Ukraine. Agrarian receipt shall be deemed as issued following its registration in such Register only, while all further modifications thereof shall be subject to registration.
Depending on the type of agricultural producer’s obligations, there are commodity and financial agrarian receipts. Commodity agrarian receipts shall be enforced by means of agricultural product supply by the Debtor to the Creditor, in accordance with terms agreed thereby, while financial agrarian receipts shall be enforced by means of cost remittance by the Debtor to the Creditor.
Investor’s special rights
Special feature of agrarian receipts, as compared to other security methods, is the Creditor’s lawful right to monitor further crops being the subject of pledge under its agrarian receipt.
In particular, the Creditor shall have access to land plots used for growing further crops. In case of violating production technology, the Creditor is entitled to draft an appropriate act and to request the farmer to eliminate such violation within the term set forth in such act. After harvesting, the process of monitoring shall be carried out by observance of collected crops, with an option for access to storage sites.
The Creditor’s powers facilitate much more opportunities for control over its investments than any other financing instrument.
In case of non-fulfillment of the Debtor’s obligations under agrarian receipt within a duly prescribed term, the Law provides simplified procedure for its enforcement.
Investor does not need to file a claim to the court of all instances, since the fact of agrarian receipt without a note on its enforcement shall be sufficient confirmation of the Creditor’s undisputed claim.
The Creditor is entitled to apply to the notary for issuing an execution writ, which should be enforced immediately. Based on the notary’s execution writ, the Enforcement Service shall, within seven days, secure transfer of the subject of pledge under agrarian receipt to the Creditor.
With regards to specifications of undisputed enforcement of agrarian receipts in Ukraine, there is no judicial practice upon settlement of claims arising from agrarian receipts.
Agrarian receipts provide much better defense for creditors, as compared to unsecured forms of financing before harvesting, such as prepaid forwarding contracts.
Reliability of investments is based on due diligence of agricultural enterprise status and land plots used for growing crops, proper development of investment scheme, expertize of the principal contract and drafting the content of agrarian receipt itself.
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