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Echo of the bread crisis
Anatolii Gudym, 14 July 2004
Many people still remember the troubles of the wheat and bread crisis of 2003: bad wheat harvest, protracted reaction of the Government, "bread mafia", abrupt increase (39.8% a year) of prices for bread, emergency actions of the Parliament, Government and economic units to import wheat. One as well could think the situation is under the control now. The Higher Security Council of the Republic of Moldova under the President V. Voronin examined the facts of the matter twice (February 28 and April 27, 2004) and "demanded the Government to take measures that would allow no more bread crises, to call those responsible to account and establish a strict control over economic units activating in this field" 1.
It should be mentioned though that the main indicator - prices for bread - stabilized in the first half of 2004 (% to the December of 2003) 2:
January February March April May June
First grade bread 99,8 99,8 99,8 99,8 95,0 94,9
Second grade bread 100,2 100,1 100,1 100,2 97,0 96,6
And first of all this is beneficent for the poor (circa 40% of the population) that spend the major part of their incomes for food.
And all of a sudden, when nobody expected it, alarming information came from the "bread frontline" in July:
- mayors of some settlements (Cricova, Sinjera, Ciorescu) stated during a session of the Chisinau municipal council there are bread lines and deficiency of "cheap" bread whose main consumers are pensioners and poor families;
- Franzelutsa SA controlled by the state, the monopolist (about 90%) in the bread production in the municipality, despite the Government recommendations halved (down to 20% instead of 35-40%) production of "cheap" bread since its losses during May alone made up 1,6 mil MDL;
- The harvest has begun and the wheat producers (it is expected that the crop will be good of 700-800 thou tons) worry about its sale and price. While the Government promised that it "will announce terms of purchase of bread grain in the nearest future and intends to buy grain directly from producers for a price that would account for expenditures and revenues" 3. The Ministry of Agriculture thinks that it will most likely be 1,8-2,0 MDL per kg of wheat;
- In the meantime, the neighboring Romania that also expects a good crop set a 25% customs duty on wheat, citing the need to protect its internal market from cheap grain from Moldova, Ukraine and Russia 4.
Actions of authorities
The bread crisis of 2003 that has endangered the country's food security, as it is well-known, has also seriously shaken the whole state machinery. Learning a lesson from the occurrence, the President, Parliament and Government took a series of urgent actions to regulate the situation in the bread and grain market. Among them were:
- decisions of the country's Higher Security Council to monitor the bread and grain market, take control of prices and importers to eliminate illegal schemes with participation of many intermediaries;
- the Parliament prolonged the term of exemption of VAT and customs duties concerning the wheat (as well as of rye, barley and corn seeds) import till September 1, 2004;
- the Government decreased prices for 10-12% on average since May 1, 2004, for bread produced by Franzelutsa SA (in November of 2003 the enterprise increased them by 46%). At the same time, a programme to prevent bankruptcy of this enterprise was elaborated through compensations of its grain purchases from the state reserve and restoration of lost circulating assets;
- the import was monitored; but instead of expected 115 thou tons of wheat there was imported in the first half of 2004 only 19,4 thou tons, but, on the other hand, a lot of flour - 46,2 thou tons; a tender was conducted (the winner is Moldova Druck SA) to deliver to Moldova 12,5 thou tons of wheat from Canada and Latin America at 164,0 USD per ton to Ilyichevsk (Odessa) port, plus another 20,0 USD for delivery to the Floresti grain elevator;
- the Public prosecutor's office brought 8 criminal actions concerning violations revealed at Franzelutsa SA, and there were annulled dubious contracts of this enterprise with intermediary companies.
Are these actions enough? Do they guarantee that errors and abuses in the wheat and bread market, including those in which corrupted officials participate will not happen again?
Transparency and competition are necessary
As one can see, reaction of authorities to the wheat and bread crisis of 2003 showed mainly through administrative and organizational actions. But this is clearly not enough for transparency and competitiveness of the market environment.
Moldova's grain market tends to grow. Over the last years, more than 60% of sown areas have been under grain and in productive years export of wheat, barley and corn exceeds 1/3 of the total export of plant cultivation products. But there still has been formed no stable legal base of this market.
We already have exotic - for many other countries - laws "On wine" and "On walnuts", but no law on a more important thing - "On grain and grain market". Meanwhile, it is this law that - under experience of Russia, Kazakhstan, Ukraine, Romania and Hungary - has to be oriented at creation of legal, economic and institutional conditions for competitive production and formation of a grain market that would provide for the country's internal needs of bread, seed and fodder grain, as well as its export. The main aspects of the law should include: participants in the grain market, state support of grain production and processing, formation and utilization of grain resources, control over quality of grain, grain storage, organization of grain purchases for the state reserve, formation of an intervention fund to stabilize prices, grain export-import operations. Strict execution of such law will raise transparency and restrain voluntarism.
There are other actual problems that require solution. Will there be implemented a mechanism of state grain purchases from peasants on the security of their grain? Will standards of financial and informational service of the grain market be improved? How justified is preservation of the monopolist position of Franzelutsa SA in bread production? Why there were introduced no targeted compensations for bread for the poor instead of the populist, but unprofitable for the state, production of "cheap" bread for everyone?
All these solutions belong to the market arsenal. And unless we accomplish them, a bitter statement will remain topical: "Bad harvest of grain is a misfortune, but the rich one is a burden as well".
1 Нет - повторению хлебного кризиса. "Независимая Молдова", April 28, 2004
2 Source: Department of Statistics and Sociology
3 Government press release, July 6, 2004
4 Ministry of Agriculture of Romania, AP Flux, July 8, 2004