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So, the introduced duties have just deteriorated conditions for export of grain. Still, after their abolition in April export of wheat started to expand at a high rate.

Table Export of basic agricultural and food products (thousand tons)* 9 months As % of Export/ 2000 2001 2002 9 months import 2003 ratio Fish, frozen 290.6 324.1 292.8 255.0 67.8 0.Wheat and wheat/rye mix 419.0 1635.7 10259.3 7587.9 43.6 3.Wheat flour 165.7 n.a. 122.8 288.6 46.2 1.Sunflower oil 194.8 115.3 74.2 84.1 195.3 0.Sunflower seeds 1114.9 n.a. 86.8 292.1 117.8 16.Bread, bakery products 34.3 36.9 38.6 52.6 123.6 0.and confectionery Milk and cream, con 73.7 45.6 35.0 11.3 121.4 0.densed Chocolate products 25.7 35.1 35.1 42.2 132.4 0.* Less trade with Byelorussia.

Source: Customs statistics of FR foreign trade.

Table Import of basic agricultural and food products (thousand tons)* 10 months 2004 as% of 2000 2001 2002 10 months 2003** Beef 282.3 459.2 504.6 507.89.Pork 212.9 369.6 602.0 535.Poultry meat 687.2 1383.3 1375.2 1190.0 89.Butter 45.4 81.4 94.1 114.0 98.Sunflower oil 149.5 182.8 175.7 200.8 79.Wheat and wheat/rye mix 2631.3 916.2 264.8 640.7 2.3. fold Raw sugar 4546.6 5410.4 4441.0 4112.0 62.White sugar 271.4 143.1 163.2 151.1 179.Citrus fruits 472.2 562.1 701.3 781.1 105.Coffee 20.3 21.6 25.7 32.0 90.Tea 158.3 154.4 165.3 168.9 99.* Less trade with Byelorussia.

** Including trade with Byelorussia.

Source: Customs statistics of FR foreign trade, Federal Service of State Statistics.

The import duty on rice and rice products remained in force for the second year. This measure resulted in smaller import supplies and higher import prices. In April June Section 3.

The real sector the average contract price for imported rice was 30%12 above the January March indicator and continued to grow in the second half of the year. In the past two years this is the larg est increase of price within a 3 month period. Within 2 years (from December 2002 to Sep tember 2004) the retail price for polished rice grew by 128% while the aggregate retail price index for food products within the same period was below 120%. Still, the mecha nism is preserved.

Table Import of raw meat and meat products after the introduction of meat quotas (%) 2003/2002 I IX 2004/I IX Total CIS Total CIS 106.2 119.1 93.6 69.Frozen beef:

100.3 101.9 71.5 71.Carcasses and half carcasses 25.9 100.0 17.7 1.Other cuts, non boned 119.4 162.8 99.8 67.Other cuts, boned 88.8 1007.7 82.3 78.Pork:

138.8 n.a. n.a.

Carcasses and half carcasses, fresh or chilled 96.5 1140.0 64.8 30.Carcasses and half carcasses, frozen 53.2 n.a. n.a.

Pork hams, bladebones and cuts, frozen 88.5 500.0 95.0 405.Other 87.1 145.5 83.4 15.Poultry meat:

61.7 60.0 n.a. n.a.

Broilers, frozen 93.0 12.9 83.4 25.Broiler parts and sub products, frozen 66.3 n.a. n.a.

Turkey parts and sub products, frozen 109.5 286.7 152.5 226.Meat products:

50.9 60.9 n.a. n.a.

Sausages Finished and canned products out of meat and 192.2 522.7 152.5 226.sub products Source: calculated using data of the RF State Customs Committee.

Table Average import prices for meat (dollars per ton) 1997 1998 1999 2000 2001 2002 2003 I IX non CIS Red meat 1436 1471 958 1072 925 1099 1061 Poultry meat 709 691 651 535 546 589 586 CIS Red meat 1134 1724 1151 1284 1687 1463 1437 Poultry meat 1782 657 1243 816 1340 1108 899 Source: calculated using data of the RF State Customs Committee.

RF State Customs Committee.

RUSSIAN ECONOMY in trends and outlooks Less trade with Byelorussia.

Source: Customs statistics of FR foreign trade.

Fig. 56. Foreign trade in agricultural and food products (million dollars) February March April May June July August September October ---average import price import price in case of effective tariff (time span - 2 months) import price in case of estimated tariff (time span - 1 month) Source: Customs statistics of FR foreign trade, Federal Service of State Statistics, IET estimates.

Fig. 57. Increase of average import price for granulated sugar in (as % of the previous month) Section 3.

The real sector 3.4.4. Food markets In 2004 the retail price rise was the highest for the following products: red meat (es pecially beef and pork) and poultry, bread, macaroni products and eggs. Price indices for most other products did not deviate much from the aggregate consumer food price index (112.3%), and for some products (sunflower oil, fruits and vegetables, granulated sugar) were even well below it.

Market of bread and bakery products In 2004 the market of bread and bakery products was greatly influenced by govern ment regulation triggered by accelerated growth of prices for bread and bakery products.

This growth started as far back as in April 2003 when price index for these products sur passed the aggregate food price index (Fig. 58).

The growth of prices for bread served the cause for a quite noticeable government intervention in this market in 2004. It was effected in two ways:

Government Resolution No. 749 of December 11, 2003 for the first time since the start of reform introduced temporary export duties on wheat, rye and their mix;

From February to June 2004 trade interventions were carried out on the grain market in order to lower prices for food grain and thus to constrain growth of prices for bread.

Overall, about 1.5 million tons of soft wheat No. 3 and No. 4 and rye no. A were sold the volume almost equaling monthly consumption of food grain in the country. This means that each month the market received additionally from 20 to 25% of grain.

The period when prices for bread grew faster than prices for food products at large was rather long and lasted till June 2004. In 2003 prices for bread and bakery products were up 30%, in 2004 16.7%.

Despite all the efforts made the growth of prices for bread and bakery products was above the aggregate food price index both in 2003 and 2004 (Table 37). At the same time if we look at the dynamics of bread prices beginning from 1997, well see that these prices were the most constrained ones: during this period food prices grew 5.7 fold while prices for bread 4.4 fold. Its quite natural that at some moment they had to catch up with the general price trend (Fig. 67).

The process was triggered by poor grain crop in 2002 and growth of grain prices in 2003. Besides, rising personal incomes, larger GDP and high oil prices formed positive ex pectations in the economy and to some extent weakened political control of federal and regional authorities over consumer prices. Bread market agents seem to have used grain market fluctuations for liquidating the accumulated arrear of bread prices from the general trend.

The most common explanation for growth of bread prices in 2003 2004 was the growth of prices for grain in poor crop 2003. Indeed, in March December 2003 prices for wheat No. 3 did rise 2.5 fold (Fig. 59).

Growth of grain prices continued in 2004 and by March they reached their maximum level about 6500 rubles per ton of wheat No. 3 which is 2.6 fold above the corresponding indicator of March 2003 (Fig. 60).

Such an upsurge of grain prices could be an explanation for higher prices for bread and bakery products but following this logic the latter should be lowering in the second half of 2004 after grain prices started to fall (Fig. 60). But no such trend was observed. Growth of prices for bread in this period slowed down but hasnt become negative. This is an evi dence that the mechanism of price transmission between the market of grain and the mar ket of bread and bakery products is more intricate than a simple linear one.

RUSSIAN ECONOMY in trends and outlooks Noticeable differences between grain and bread price trends are quite natural and comply both with the basic economic postulates and the world practice. Prices on the markets of raw commodities especially the ones quoted on the world commodity ex changes (such as wheat) are much more volatile than prices for perishable day to day goods (such as bread) and are shaped by different factors.

The possibility of direct influence of grain prices on the retail prices for bread is also very slim. According to data of the Federal Service of State Statistics the cost of raw mate rials does not exceed 37% of the retail bread price. In its turn, the cost of raw input (i.e.

grain) accounts for only 43% of the cost of flour.

So, even presumed that flour is the only input used for producing bread (such a sup position overvalues the factors importance), the share of grain cost in the retail price for bread is not more than 16%. This implies the minimum possibility to influence retail prices for bread through regulating grain market in order to cut down prices for grain.

In other words, the cause of higher prices for bread is not the growth of prices for grain due to its shortage. The trend is attributable to factors of other kind, i.e. the specifics of market development and its structure. This conclusion is supported by the fact that pro duction of all other grain products except bread demonstrates quite a steady growth.

Summing up the effect of government regulation of grain market, the introduction of export duties fails to achieve its goal but notably undermines positions of Russian grain traders on the world market that strengthened markedly in 2002/2003. These traders launched large investment projects aimed at creation of export port infrastructure and got support of the government that allocated funds from the federal budget to subsidize inter est on credits for construction of port grain loading facilities13.

So, export duties on grain, on the one hand, deteriorate positions of Russian export ers and, on the other hand, have minimal chances to produce an economic effect on retail prices for bread, i.e. are an economically senseless measure.

Lets examine some specifics of the market of bread influencing situation thereon.

Bread is an inferior commodity characterized by negative income elasticity of demand. As incomes grow its consumption reduces in favor of meat and dairy products, vegetables and fruits.

The comparison of dynamics of bread and bakery production and production of other food products during the period from 1997 to 2003 proves the negative correlation between personal incomes and consumption of bread in the Russian Federation (Fig. and Fig. 62). For instance, in 1999 bakery industry noticeably grew while meat processing declined following the sharp drop of populations real disposable incomes. In 2000 higher personal incomes entailed growth in meat production and decline in production of bread and bakery products.

Consumption of bread greatly differs by income groups. For instance, families with per member income above 7 thousand rubles are likely to eat bread once a day while fami lies with lower incomes do it much more often (several times a day) (Fig. 63).

Smaller consumption of bread in the richest income groups goes in line with higher quality and packing requirements and readiness to pay more for the product that better conforms with their preferences. The demand for such products is largely satisfied by mini bakeries, own bakeries of large trading networks (Ashan, Ramstor, etc.) and modernized bakery plants. The price for them is at least 1.5 fold, and sometimes even ten fold above the average published by the Federal Service of State Statistics.

Supplement No. 36 to Federal Law On 2003 federal budget.

Section 3.

The real sector People with monthly per capita income above 7 thousand rubles tend to buy high quality and respectively more expensive bread and bakery products in supermarkets and large general stores while the poorest consumers prefer to do it at street outlets, city mar kets and small shops offering standard products of standard quality at an affordable price (Fig. 64).

One should note the growing share of better quality products at higher prices in the total sales of bread and bakery products. According to data of RBC (Russian Business Consulting) the share of supermarkets in the total retail trade turnover in Moscow was up from 0.2% in 1999 to 30% in 2003.

The growth of segment of superior quality products results in higher average prices.

However, this process contributes to better satisfaction of solvent consumer demand and signifies a qualitative improvement and development of food market basing on advanced production technologies and innovations, up to date packing and product promotion.

Market of meat The mechanism of foreign trade quotas enforced in the middle of 2003 continued to be the factor determining basic trends on the market of meat.

The principal goal of introducing restrictions on import of meat from non CIS coun tries was the encouraging of its domestic production.

Given the high share of import in the national consumption, foreign trade measures targeted at the support of domestic producers should be thoroughly elaborated and bal anced in order to achieve the declared goal and not to deteriorate situation on the con sumer market.

The introduction of quotas was supposed to foster recovery in the livestock sector that suffered the most in the process of reforms. While the contraction of planted areas remained below 30% even in the worst 1998, the number of livestock on the average more than halved and no positive trend can be observed after 1998.

However, in case of a simple reduction of import supplies no due regard is paid to the sectoral and institutional structure of the market resulting in failure to achieve the desired goal. First of all, corporate farms accounted for only 52.3% of the domestic meat output in 2004 while the rest was dispersed by household plots and individual private farms. This production structure remained rather constant throughout recent years. The share of households produce equals 44.8% of the total output but due to some reasons (first of all the institutional ones) is rarely used by processors. Production in household plots is mostly subsidiary and intended for satisfying family demand rather than supplying to the market, and thus this producer segment is less responsive to market signals.

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