Leftist Rhetoric, Market Incompetence
WHO NEEDED THIS?
It is much easier to say who did not, that is, the government leadership with its long-term political plans. This crisis did not play into anybody’s hand and merely resulted from blunders by the agrarian bloc of the previous and current governments. Since February, the Ministry for the Economy has been releasing short-term forecasts pointing to a slight risk of price hikes on the grain market, but the Cabinet of Ministers did not heed the warning. And this is a major problem for the ministry itself, which works in a confined space and cannot influence effectively the policy of other ministries. In May, Pres. Kuchma signed a decree, On Additional Measures to Stabilize the Grain Market, but the Cabinet did not carry out most of its instructions.
Thus, only those who buy grain, thresh it, and sell flour were able to profit from the unexpected crisis. However, the players on this market are not influential enough to have precipitated such a major crisis. Notably, price hikes resulted in the proliferation of traders eager to cash in on the situation. But their behavior is traditionally conditioned by the market situation, and nobody was playing on negative expectations, either.
IN THE BEGINNING WAS THE WORD. TOO MANY
That the Ministry of Agrarian Policy lost control of the flows of information and goods on the grain, flour, and cereals market is the most obvious reason behind the price hikes. It failed to become a major intellectual center to map out government policy in the sector. At a time when stocks had been depleted and the harvest campaign was months away, the government made a series of mistakes that raised eyebrows and alarmed consumers. In this situation, the Ministry of Agrarian Policy adopted the stand of an innocent bystander. For it was the agrarians within the government who were to tell Premier Yanukovych about the rashness of his June 14 nationally broadcast appeal to governors in the regions to prevent bread prices from rising. The population came under a powerful information wave that spawned rumors of forthcoming flour and cereals shortages. In response to this appeal, governors began to speak out about the need to buy grain abroad. It is obvious that high government officials have no right to make statements that could create panic.
KEEPING CLOSE TO THE CASH REGISTER
The panic was exacerbated by two major grain market operators, the Ukrainian Grain Association and Ukrkhliboprom. In early July they began to lobby actively for preferential grain imports until July 2004, speaking of the calamity that would await Ukraine if such steps were not taken. But these two organizations must have known all along the actual size of grain reserves. For some unknown reason it was only after the crisis erupted that the Ministry of Agrarian Policy announced that Ukraine in fact had at least one million tons of grain reserves from the old harvest, which would be enough until the new one. Then why does the country need preferential grain imports? It will take at least a month before contracts are signed and preferential grain imports begin (even if a law to that effect is adopted). By the end of July Ukraine will be flooded with its own grain. Could preferential grain imports have been designed to disguise somebody’s dealings that are not too transparent? Even if the crop of 2003 (estimated at twenty million tons) does not satisfy Ukraine’s demand for bread grain (this demand has been estimated at 6.5 million tons), this was not cause for the grain associations to turn this problem into a major scandal and for the Ministry of Agrarian Policy to calmly watch them do so. After all, in recent years Ukraine has quite successfully endured even worse crops and weather conditions. Incidentally, the special interest of the meteorologists in the future crop on the eve of the crisis merits special note. On June 14 and 17, for some reason weathercasters voiced concern over the future crop, while on June 19 panic-stricken consumers rushed to stores en masse.
Meanwhile, the grain market participants tend to attribute this crisis to government weakness and justified popular fears, whose memories of food shortages, rationing, and famines are still fresh.
Mykola Vernytsky, director of the Pro Agro Company, dismisses any suspicions of a conspiracy by the major grain market players. “There were in fact speculative transactions on the market, but they were performed by rank-and- file businessmen who reacted to the market situation accordingly. Demand exceeded supply, and under such conditions it would make no sense to keep prices low,” said Mr. Vernytsky. In his view, the root cause of the crisis was triggered by the deficit on the grain market that has been discernible since winter. Perhaps this deficit would not have triggered price hikes, if it were not for the unexpected surge in demand by the population. “Only the government can speak of a conspiracy,” believes Mr. Vernytsky.
The government has in fact resorted to radical rhetoric reminiscent of food-rationing periods. In the heat of the crisis, Premier Yanukovych said he intended to examine the nature of receipts of the firms that cashed in on the speculation. A few days later, the government released a statement that inspections of such firms will be performed only as part of routine inspections. Put simply, nobody will be arrested. The crisis lined the relevant pockets before all of threshers had bought grain at old prices and sold flour at hiked prices.
However, it should be stressed for the sake of impartiality that many of the owners of the threshing companies also own bread plants, which have been losing money of late, with flour prices going up and local authorities trying to contain price levels.
Be that as it may, last week Premier Yanukovych promised the bread market will stabilize within the next two weeks: “We have done everything required for its stabilization.” Simultaneously, he stressed that the government has no legal means of controlling price formation. Obviously, other methods of administrative pressure on individual companies are already being employed. The Cabinet of Ministers has initiated checks of commercial entities which, to quote the premier, “conceal goods in the hope of selling them at a higher price.”
POLITICAL HINDSIGHT
Ukrainian politicians responded to the crisis somewhat belatedly, since the week before last most of them were in their districts or on vacation and certainly did not wait in line for cereals. It was only on July 1 that opposition deputies leveled criticism at the “regime in power.” Ironically, that same day marked the end of the crisis, with wholesale prices for cereals and flour taking a dip. However, Communist leader Petro Symonenko still managed to call on the people to take to the streets in protest rallies, Our Ukraine leader Viktor Yushchenko accused the government of losing control of the food market, while Socialist and Agrarian Party leaders Oleksandr Moroz and Kateryna Vashchuk yet again spoke about the need for new privileges for agricultural producers. Apparently, the government will have to put something together on preferential imports of grain and VAT deferrals for agricultural producers. The more so that the Ministry of Agrarian Policy is an active lobbyist for preferential imports. It will pass out licenses for the preferential import quotas to private companies and thereby under our conditions pocket some financial expressions of political gratitude.
In the long term, this crisis could affect the chances of one of the potential candidates for president. The people might just forget who headed the government in the period of price hikes. Political professionals, however never forget such things.
WHAT NEXT?
The Ministry of Agrarian Policy expects grain prices to return to their pre-crisis levels. Most probably, they will continue their decline. The government instructed the Khlib Ukrayiny state company to purchase grain at UAH 660 per ton. “We have allocated UAH 400 million for future grain procurements,” Premier Yanukovych said last week. Grain price reductions will result in lower wholesale prices for flour and cereals. The price hikes forced major buyers to suspend buying grain. Now they await better times. Future grain market trends depend on the competence of the government. The fact that last year’s bumper crop did not last until the new harvest challenges its competence. However, the government has been taught a good lesson in market regulation, which gives at least tentative reasons for optimism. Moreover, if similar crises ever occur, this will put an end to the prospects of many politicians. Let us hope that they at least care about their own future if not that of those they represent.
