Administrative measures could lead to bread subsidies for the poor

The US Agriculture Department recently published a forecast that Ukraine will produce 9.5 million tons of wheat, the most important food crop, in 2003 against 20.5 million tons in the current season. This will reduce the consumption of wheat in this country to 12.3 million tons, down 1.3 million tons from the previous marketing year, while its transient stocks will be a mere 0.41 million tons at the beginning of 2003/2004 vs. 3.6 million tons in the 2002/2003 marketing year. In addition, Ukraine is supposed to export 1 million tons of wheat in 2003-2004 vs. 7.5 million tons in the current year. Similar losses are also being forecast for rye. Simultaneously, US experts predict a slightly higher production of fodder grain.

Ukrainian agrarian officials, including Vice Premier Ivan Kyrylenko, who still trust in a salutary rain, and Ukrainian statisticians, who have inherited the best Soviet standards of this science, have to thank their colleagues who gaive realistic forecasts in spite of unexpectedly biting frosts in December, icy ground in January-March, or dry winds in May. Our “reminiscences of the future” are as follows: harvesting not more than 35 million tons of grain, including 12-14 million tons of wheat. Hence a new initiative about direct subsidies on bread for the low-paid strata of the population advanced in early May by Agrarian Minister Serhiy Ryzhuk.

A drop in grain exports is sure to affect the inflow of foreign currency and, accordingly, could threaten the hryvnia’s stability. Reduced grain production could bring about discrepancies and hectic demand on some regional markets, which will entail administrative measures, as is often the case, and thus further exacerbate the situation and even boost bread prices. This is a stone’s throw away from an upsurge of inflation...

To ward off such a scenario, President Leonid Kuchma has signed, as it became known last Tuesday, the decree, On Additional Measures to Stabilize the Grain Market. The document is aimed at stabilizing and revitalizing the food market, eliminating discrepancies in commodity flows and prices for grain and grain products, establishing mechanisms for governmental regulation of the grain market, and strengthening the protection of consumers’ rights. The Cabinet was instructed to purchase grain for the State Reserve, organize market interventions, form regional resources exclusively by way of accredited stock exchanges, and use the latter to reduce commodity and price fluctuations.

The national leadership seems to have mapped out very timely measures because the grain market situation is beginning to deteriorate. In May the Ukrainian regions stepped up buying flour from the State Reserve. Chairman of the latter, Mykola Pesotsky, said, “May has seen a very serious increase of flour sales from the State Reserve as well as of requests from the regions.” (Yet, when bread interventions started, the regions were reluctant to purchase flour from the State Reserve, preferring to buy food grain.) The State Reserve Committee plans to increase purchases of the 2003 harvest grain by at least 2.5 times in the next season with an eye to intervening the grain market during the period when prices rise. Mr. Pesotsky believes grain prices could double in the 2003-2004 marketing year due to expected poor harvests. With this in view, the State Reserve Committee head even suggests that all kinds of governmental regulation of this market be concentrated in his office and that funds be appropriated for the state reserve to buy the new harvest grain, instead of financing collateral purchases by the Khlib Ukrayiny state company.

Yet, the government seems to have chosen a different road. It has already decided to set up a state-run enterprise called Agency for Rescheduling the Debts of Agricultural Businesses in fact designed to revitalize Khlib Ukrayiny. The agency’s duty will be to service all the debts of the maternal company and force indebted farming units to clear their arrears. The only question is whether they will have to set up a similar agency next year... Also involved in the “battle for bread” is the Antimonopoly Committee. As Committee Chairman Oleksiy Kostusev told The Day, this organization has been conducting, on instruction from the president and cabinet, a comprehensive study of the markets of grain, flour and bread items since early April with the goal of spotting and suppressing monopoly abuses and thus stave off any rise in bread prices. So far, these prices are under control. Mr. Kostusev believes this was caused by rigid governmental regulation and the fact that bakeries have cut their expenses.

Simultaneously, Mr. Kostusev denies that Ukrainian grain exporters have resorted to unfair monopoly practices in the current marketing year. 557 companies, including some renowned foreign facilities, were involved in exporting grain. Still, Ukrainian firms account for the lion’s share of exports, with three largest grain exporters occupying less than 25% of the market.

In sum, the authorities have in fact found or averted minor violations which could not be very conspicuous on the grain market as a whole. So far, all “grain-related offenses” have been blamed on former agrarian Vice Premier Leonid Kozachenko. The Prosecutor General’s Office of Ukraine has finished investigating the criminal case and accuses him of abuses of power and office that have damaged the interests of the state, individuals and legal entities by inflicting UAH 1.5 billion in losses in exporting the 2002 harvest grain; UAH 21.6 million national budget revenue losses resulting from reduced export-oriented grain examination rates; and causing the state $6.8 million in damages. Moreover, he is being charged with undermining the prestige of public administration bodies and the food security of Ukraine. Of course, all this is up to the courts to decide.

Meanwhile, it is unclear whether it is in compliance with or in contravention of government decisions that Ukraine retains its customary system of market and price management. For example, Kharkiv Governor Yevhen Kushnariov has recently reported to the president that bread prices are stable in his oblast. How did they manage to achieve this? Kharkiv-based flour and bread producers, as well as the bread-selling facilities, were advised not to raise prices for these items. According to Mr. Kushnariov’s instruction, market operators were recommended “to keep unchanged the prices effective as of March 2003 — temporarily until January 1, 2004.” Meanwhile, the practice of market relations in this country has convincingly shown that purely administrative measures more often than not cause just the reverse of what is intended.