Банкеръ Weekly

Briefs

GRAIN MARKET SURVIVED DESPITE THE STATE'S INTERVENTION

200,000 tons of milling wheat, stored by the State Reserve and Wartime Stocks Agency, were sold on the domestic market from September 2003 till February 2004. The tenders were held on the Sofia Commodity Exchange (SCE) and in the very beginning the Government explained they had a single aim - to stabilize the prices and reduce the deficit of milling wheat after gathering the 2003 crop. Results today could hardly be summarized otherwise than unsatisfactory. Nobody from the entire chain: grain producers - millers - bread-makers has been glad. Farmers protested against the Government's decision for intervention and import, because they were selling at high prices after October, while the Cabinet's meddling was intended to cut prices down. They also disliked the moment picked by the State Reserve for intervention and the way for holding the tenders on the SCE.Millers joined the chorus of discontent people after the New Year. The prices of Bulgarian flour reached BGN750/ton, while duty-free import from neighbouring Turkey was traded at about BGN530/ton. This led to decommissioning of mills, especially in the region of our southern border and decrease of production all over the country. Fodder producers, who had been promised to get some of the quantity form the State Reserve, remained with empty hands still after the first tender. They applied to the Ministry of Agriculture and Forestry but did not get access to the State's grain. And bread-makers were those who got the first blow of the State administration in the autumn when they were forced to sell lower even than their production costs. For the purpose, inspections were organized by all possible structures - the economic police, the Institute of Hygiene and Epidemiologics, the National Veterinary and Medical Service, etc. Most of the small bakeries suffered considerable losses as well due to the dumping prices of several big structures in the branch - Simid, Nilana, Eliaz. In order to survive the small ones moved to the grey economy, began to buy their raw materials without documents and VAT, and to sell as per invoice only part of their output. After January the situation in the sector improved due to the cheaper import of flour and the stable prices of bread as a whole. This, however, will be only temporary because millers already project to hike the price of flour when duty-free import stops. Where was the State's mistake when specifying its strategy for intervention on the market and why did it cause such discontent? First of all it should be said that such an intervention had to be made long years ago, as is the practice in all countries of the European Union, Central and Eastern Europe. But in Bulgaria there is not even comparatively accurate agricultural statistics about what has been cropped, what has been produced, and until when will last. E.g. the difference between various sources (the branch organisations, the Agriculture Ministry, and statistics) for the area put under grain for the 2004 harvest, reaches 3,000,000 dca. According to the most optimistic figures, the cropped plots amount to 9,500,000 dca, while according to pessimistic ones - they total 6,500,000-7,000,000 dca. In that situation, it would be difficult for anyone from the administration (either a minister or an expert) to make the right decision).The second mistake of the State, which is partly also connected with the lack of information, is the delayed reaction. Neighbouring Romania realized back in August that the country would face a grain shortage. Its experts forecast that 1,800,000 tons would be necessary and 1,500,000 tons were immediately imported at the lowest possible price (USD145/ton) after the 2003 harvest was gathered. The Bulgarian Agriculture Minister Mehmed Dikme was for a long time trying to convince us there would be enough grain until finally we had to import the commodity at USD211/ton. The third mistake was made when specifying the way for selling the wheat from the State Reserve. The choice of the SCE is principally right, but it was placed in quite an awkward position due to the numerous restrictions and requirements, not typical of exchange trade. Thus, the grain was practically distributed and not sold out, at that, at prices that have been to a great extent imposed by the Agriculture Ministry and the State Reserve. All that made the results from the State's intervention dubious and gave grounds for serious discontent among people within the branch. Despite the mistakes, the market turned out more supple and survived. Most grain dealers, millers and bread-makers counted on market principles and free trade was not affected significantly by the tender prices. The import of flour, unpleasant as it might be to the millers, is not fatal for their existence, as only 31,000 tons were imported in the first two months of the year, while consumption within that period totalled 110,000 tons. The price of wheat naturally began to go down in February due to the import of 135,000 tons on the part of private firms and mills. In the first week of March trade in Group B milling wheat has been going on at the level of BGN300-305/ton before VAT, which is obviously the equilibrium price at least until the new crop. Flour prices also steadied at BGN510-550/ton before VAT, depending on the quality. Even if duty-free import is cancelled, this won't affect prices significantly. The State also seems glad that bread prices steadied at BGN0.95-1.00/kg and even cheapened over the last week. Therefore, the officials who proposed the strategy for regulation of the domestic grain market will not be probably punished for their mistakes and might be repeated by another government and in other conditions.

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