Wilting Harvest

KIEV, Ukraine -- Not only people are suffering under the hot sun and drought that affect parts of Europe. Crops are also drying up, prompting Russia to ban grain exports, while Ukraine is considering its own restrictions. What will happen to the price of bread?
Ukraine’s grain harvest is forecast to be at least 10 percent lower this year, due to the heat wave and drought in some areas. For politicians, the shortfall is focusing their minds on how to prevent sharp hikes in the price of bread.

Bread, which has practically a sacred status in Ukraine as a symbol of prosperity, has long been kept artificially cheap through subsidies by a succession of Soviet and post-Soviet governments.

Preventing bread prices from skyrocketing, despite an increase in grain prices, could be one of President Viktor Yanukovych’s toughest challenges ahead.

The daily staple – which figures prominently in meals, wedding rituals and in welcoming guests – needs to be kept affordable for average citizens, who on Aug. 1 had their natural gas utility bills hiked 50 percent. Now, the most commonly purchased white bread – a loaf of “baton” – costs as little as Hr 3, less than 40 cents.

A backlash from voters over price hikes – however justified or market-driven – could be felt in the Oct. 31 local elections.

After drought-stricken Russia banned grain exports last week, the Ukrainian government announced that it may introduce export quotas.

Analysts and traders’ organizations accuse the authorities of already imposing a de facto export ban through additional inspections at ports, as the government builds up its emergency stockpile of milling wheat.

“If quotas are introduced, then first of all [it will be] on wheat, to guarantee the security of the food supply in the country,” Agriculture Minister Mykola Prysyazhnyuk said on Aug. 11. “They will be adjusted with grain traders, and they will be moderate and reasonable.”

Severe frosts last winter and a scorching summer have hit Ukraine’s grain harvest hard, causing analysts to slash forecasts to 42 million tons, compared with 46 million tons in 2009, and a record 53.3 million tons in 2008.

Analysts expect Ukraine to export only about 15 million tons of different types of grain, in contrast to 21.5 million in the 2009-10 season.

Grain exports, which are vital to Ukraine's economy, were expected to bring in more than $3 billion this year, before talk of restrictions. The sales are the second-largest export revenue source, after steel.

The crucial wheat harvest is forecast to drop to 17.5 million tons, compared with 20.9 million tons last year. Ukraine’s annual domestic consumption of wheat is about 12 million tons, cutting export potential for the grain to 5.5 million tons.

“If the export [of wheat] is uncontrolled and too high, then Ukraine may face a shortage of milling grain,” UkrAgroConsult analyst Elisabeth Malyshko said. “I think the government will work out some legal methods in order to somehow control the export process.”

Since Ukraine, unlike Russia, is a member of the World Trade Organization, experts say it cannot ban grain exports without risking sanctions. Introducing export quotas on some types of grain could be a solution.

World Bank officials came out this week urging nations not to restrict exports, warning that such protectionist measures could trigger a repeat of the 2007-8 global food crisis.

Traders complain that informal export limitations are already in place, leaving them potentially facing hefty penalties for failing to fulfill export contracts. They are calling on Ukraine to introduce a formal export ban that would allow them to avoid penalties.

Volodymyr Klymenko, president of the Ukrainian Grain Association, an umbrella union of Ukraine’s biggest exporters, said on Aug. 10 that the transportation of grain from Ukraine’s ports was practically impossible due to additional checks by customs authorities over the last three weeks.

The State Customs Service said the checks had been ordered “to defend the economic interests of the state.”

According to Klymenko, up to 15 cargo ships carrying grain are waiting for permission to leave ports. The customs service blocked two ships from leaving on Aug. 12, ostensibly because of incorrect documentation.

At a government meeting on Aug. 11, First Deputy Prime Minister Andriy Klyuyev accused traders of using “shady schemes.”

“Some [traders] are exporting good quality wheat under the guise of feed grain; others overvalue grain type in order to receive reimbursement of value-added tax,” he said. “State control of the grain market should be increased.”

Some experts join Ukraine’s government in blaming traders for fueling the crisis to spike prices and generate higher profits.

“It is the task of the traders to exaggerate the crisis,” said Jean-Jacques Herve, an agriculture expert.

Andriy Yarmak, an agribusiness consultant, said the government is interferign with exports to keep the bread price down. "Our customs service is acting this way because the government is trying to keep its populist promises that bread prices will not rise. They are basically trying to gain some electoral points at the expense of Ukrainian grain growers,” Yarmak said.

But analysts said attempts to prevent bread price hikes by controlling exports are doomed.

“As the price of bread is a social and political question, it will be decided not so much by the price of grain, but by agreements between the authorities and bread makers,” said Mykola Vernitsky, an analyst at ProAgro consultancy. “In 2006-7, the export of grain was banned, but prices were still quite high despite the high supply of grain on the market.”