08:55 GMT +323 October 2017
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    WHY BREAD PRICES RISE IN RUSSIA

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    RIA Novosti

    Bread prices have been rising steadily in Russia since the middle of 2003. Over the last month alone, the price of bread wheat in the country has grown by 360 roubles per tonne on average and of rye by 780 roubles. Accordingly, flour and bread prices have grown as well.

    Bread wheat prices over the period changed as follows: in August a tonne of wheat cost 3,430 roubles, in October - 4,620 roubles, in December - 5,320 roubles. A tonne of bread rye cost 1,580 roubles in August, 2,800 in October and 4,480 in December.

    So why are bread prices rising in Russia? Experts point to several reasons.

    Reason One is crop failure. Grain crops in Russia fell from 86.6 million tonnes in 2002 to 68 million tonnes (while the country's domestic demand is estimated at 70 million tonnes). In late December, Deputy Prime Minister and Agriculture Minister Alexey Gordeyev said that the 2003 gross grain harvest was 73.5 million tonnes, or 67.2 million tonnes in weight after processing, which is generally used to calculate the food balance. Earlier the minister had forecast that the processed crops would be 70 million tonnes, and the Agriculture Ministry used this figure in its forecasts for the grain market situation. The crop failure immediately forced up flour prices, which naturally affected the bread prices. However, the minister believes that bread prices should not rise and if they do, this is due to the trade mark-ups.

    Reason Two is increased grain exports from Russia despite the shortages on the domestic market. In the first nine months of 2003, rye exports grew by seven times in comparison with the previous year. Now the country is exporting grain sold as early as at the beginning of harvesting, in July-August, that is, at minimal prices. According to the Information Technologies Fund, in September 2003 Russia exported about 1.3 million tonnes of grain. On the whole, the September grain exports exceeded those of August by 2-3%. The exports grew due to the increased sales of barley to Saudi Arabia and of wheat to Ukraine and Egypt.

    Since the beginning of 2003, grain exports from Russia have reached almost 9 million tonnes, including 3.5 million tonnes that have been exported since the beginning of the current agricultural year, i.e. July 2003. As they bought up grain crops in August, grain traders left the domestic market empty. By October, prices were no longer acceptable, and all consumers now agree that they are inflated. The bare cost of wheat in Russia is 1,000-1,100 roubles per tonne and a price of 3,000-4,000 roubles is considered normal. However, Class 3 wheat is now being offered at no less than 5,000 roubles, which is a 30% increase against the July price and two times more than in November of the previous year. And it is not a limit yet. "With the most favourable development, by the beginning of the next agricultural year Class 3 wheat will cost $200-220 per tonne," says Igor Pavensky, leading expert at the Agricultural Market Situation Institute.

    On January 14, 2004, a government resolution designed to reduce grain exports came into force. It introduces an export duty on rye and wheat of €25 per tonne. Before January 14th, exporters had no restrictions on grain exports whatsoever. Grain export duties only existed in the "hungry" 1992-1993 period, when the USA and European countries provided Russia with humanitarian aid. One conditions of the contract was that Russia would restrict grain exports in exchange for supplies of cheap foreign food. Later, when the hungry years were over, the duty was abolished, as the country was able to produce enough grain on its own.

    There is an opinion that much will depend on local authorities, who are also trying to influence the situation. There are reports that Bashkortostan, Saratov and some other regions have introduced private bans on exporting their grain.

    Reason Three is grain shortage in the CIS. The situation is aggravated by crop failures in the majority of the CIS member states and the grain shortage there is estimated at 10 million tonnes. Ukraine gathered a 50-year lowest wheat harvest of a mere 4 million tonnes and is forced to import 4.2 million tonnes this season. Even Moldova is now witnessing lack of grain and is receiving humanitarian aid from Russia: the Russian Emergency Ministry has sent 68 carloads of grain to the republic.

    Only Kazakhstan enjoyed a good harvest for a second successive year (15 million tonnes of net weight compared to the 2002 record high harvest of 15.9 million tonnes). Its grain has become an object of increased attention for foreign traders. As a result, Kazakhstan's state grain trader Prodkorporatsiya cannot buy the necessary one million tonnes of grain on the market to refill the state reserve. This is not at all surprising: grain to the state reserve is purchased at $125 per tonne, while at the border it costs $160 per tonne and is sold to Ukraine at $220-240 per tonne.

    As a result, in spring the country will face a shortage of bread wheat and the need to purchase it abroad. Last autumn, the lack of grain already led to a sharp surge in its price. According to the OGO analytical centre, the grain shortage in Russia will become evident in March, and by July 2004 may equal about 3 million tonnes. Kazakhstan will most probably save both the CIS and Russia. "Now Kazakh grain is offered in Russia at high prices and so far the imports are scarce, the sales are made mainly in regions near borders," says OGO analyst Rudolf Bulavin. "But Kazakhstan may increase them in spring, and then the supplies may reach 2-2.5 million tonnes".

    The current situation is also interesting, because the grain shortage in the country has forced producers to purchase flour abroad to keep the price of a wheat-bread loaf at about 5-6 roubles. At the same time, flour is still exported, as the practice is as profitable as exporting oil.

    On January 27, President Vladimir Putin declared that he would not allow any uncontrollable growth of bread prices and instructed Prime Minister Mikhail Kasyanov and his deputy, Agriculture Minister Alexei Gordeyev to work out the relevant measures to this end. Soon Gordeyev reported to the President that in the second half of February the government would organise trade grain interventions. According to the recent governmental resolution, the state will sell 1.6 million tonnes of wheat and grain at an auction, which will allow bringing grain prices down by approximately 10%. Thanks to the elimination of barriers between grain-producing and grain-purchasing regions, bread prices will fall by 25%.

    On January 30, the government issued a resolution on selling the state grain reserve at intervention auctions.

    The government has been making such intervention purchases of grain each autumn since 2001, in order to restrain price falling at the end of the harvesting time. In late 2002 - early 2003, it bought 480,000 tonnes of Class 3 wheat, 786,000 tonnes of Class 4 wheat and 292,000 tonnes of bread rye, spending 2.7 billion roubles.

    The grain reserve is expected to be sold at intervention auctions if prices rise.

    Most experts approve of the Russian government's intention to conduct trade interventions on the grain market. When commenting on the decision, they point out that trade interventions will stop the growth of grain prices and stabilise the situation on the grain market.

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