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Analysis & Opinion
23.04.08 Tomorrow’s Modest Menu
By Dmitry Babich

As the inauguration day of the new President Dmitry Medvedev (May 7) draws closer, the new leader may be faced with the old problem – soaring food prices. This time, however, the increase in prices can be quite significant, putting the government of the new Prime Minister Vladimir Putin before a host of hard choices.

On May 1, the six-month-long moratorium on food price hikes is going to expire. This measure has been widely seen as a politically motivated move, aimed at improving the government’s image in the run up to the parliamentary (December 2007) and the presidential (March 2008) elections. But the 14 retail food chains and associations of agricultural producers that signed the agreement back in November 2007 did not cover the full spectrum of food products.

“In fact, it covered several basic food staples, which the poorest people buy in order to survive, namely bread, milk, vegetable oil and eggs,” said Sergei Yushin, chairman of the executive committee of the National Meat Association. “Our association, which specializes in production and processing of meat, did not participate in this PR act.”

Even when the “price freezing” period just began, a lot of experts doubted the effectiveness of this measure, initially meant to last only until Jan. 31, 2008. On Feb. 1 the moratorium was extended until May 1. In an interview to the RIA Novosti News Agency in November, the Russian finance minister Alexei Kudrin stressed that “Freezing the prices by a government order would be a mistake. But we have the right to soften price shocks by sending messages to food producers and food traders. The government fights not against price fluctuations in principle, but against sudden shocks, when a price hike threatens to exceed 40 percent," Kudrin said.

Experts warned that if prices were kept artificially low for a long period of time, the “postponed” price shocks would hit even harder.

In fact, the “moratorium” only softened the blow. By the beginning of April, the price of a minimum food package was already 11 percent higher than in January. The “food inflation” hit Chechnya, Dagestan, North Ossetia, Ulyanovsk and the Murmansk regions the hardest. The Vremya Novostei daily reported that bread production in the country was becoming irrelevant, since the average price of one kilogram of bread ($0.4) is barely enough to cover the price of flour that is used to produce it. “The heads of many bakeries are taking out bank loans in order to pay the wage arrears,” Vremya Novostei reported.

How far will these price hikes go, and can they lead to dangerous social tensions?

Russia’s Agriculture Minister Alexei Gordeyev said that Russia would be largely immune from the international food crisis, if it provides enough support for its producers and shields them from “unfair” international competition. However, Yevgeniya Serova, the head of the agrarian policy section in Yegor Gaidar’s Institute of the Economy in Transition, warned against the illusion of “self-reliance” in food production.

“Self-reliance is one of the most reactionary theories, willingly supported by ineffective agricultural producers and their lobbyists,” Serova said.

In reality, over-reliance on food imports, as well as poor economic conditions for domestic producers, may in fact both contribute to the soaring of prices.

In the experts’ opinion, there are two reasons behind the price hikes. Firstly, the global dwindling of food stocks leads to price hikes on international food markets. Russia, where imports cover some 35-40 percent of daily consumption in some sectors of the food market (notably beef and pork), is naturally vulnerable to these price shocks. Secondly, the growing fuel, electricity, and fodder expenses, as well as the negative tendencies in the fodder prices, also translate into higher expenses for Russian food shoppers.

“During the last 6 months, the price of beef grew by 30-40 percent,” said Yushin. “The problem is that this increase did not make the cattle-breeders any richer. On the contrary, the gap between the production costs and wholesale prices became even thinner, eating into the producers’ profits. This happened because the price of fodder grew by 150 percent since 2006, since livestock became more expensive, and for a number of other reasons. Entrepreneurs who went into the pig breeding business in the last few years may reconsider soon.”

Yushin noted that in 2003-2006, the average production cost of one kilogram of pork was 34 rubles ($1.5), while the average wholesale price was 70 rubles ($3), which made the pig breeding and meat processing businesses attractive. The Russian meat processing and poultry industries showed an especially robust growth, as returns on investments in these spheres come faster than in cattle breeding or in agriculture in general. However, the recent negative trends may undercut this generally positive phenomenon.

“If production costs continue to grow, people will simply stop going into that [beef and pork production] business,” said Boris Gutnick, deputy director of the Moscow-based Meat Industry Research Institute. “On the other hand, if the government decides to improve our producers’ situation by imposing higher customs dues on imported meat, this will lead to an explosive growth of prices. What we need is support for domestic producers without dramatic cuts in imports. Banning the imports is not a way out.”

Despite the widely held perception of Russian agriculture as ineffective, experts note that some of its sectors showed tremendous growth potential during the last few years. In 2003-2008, poultry production grew by 15-16 percent per year, and Russia currently produces all kinds of poultry meat. In regard to pork and especially beef, there are still some lucrative kinds of meat which need to be imported, but in recent years these “blank spots” on the domestically produced meat menus have been disappearing quickly.

“It would be very sad if this trend stopped,” Gutnick said. “A lot will depend on the general situation with food prices. I don’t believe in apocalyptic predictions of food prices growing by 30-40 percent by the end of the year. But even if they do grow by 10-15 percent, a lot of people will have to limit their menus and buy less expensive food, and meat will become a sort of luxury.”
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