INTERNATIONAL AGRICULTURE AND TRADE (Former USSR Update)--Summary March 18, 1996 Approved by the World Agricultural Outlook Board ----------------------------------------------------------------------------- This summary is published by the Economic Research Service, U.S. Department of Agriculture, Washington, DC 20005-4788. WRS-96-S1. The complete text of the report is available 2-3 working days following release of this summary. ----------------------------------------------------------------------------- State No Longer Dominates Russian Grain Marketing Reduced State procurement and the subsequent increase in private grain sales have heightened the influence of market forces on Russian grain prices, moving them closer to world levels. State grain procurements were more than halved between 1993 and 1995, with a near collapse of procurements at the federal level and a shift towards regional procurements. For the first time in decades, the State is no longer Russia's dominant grain marketer. This trend is in stark contrast to the Soviet era, when State procurements were intended to maintain control over the USSR's grain market to ensure food security and to guarantee low and stable prices for bread. The decline in State grain procurements has been accompanied by the emergence of alternative marketing channels, including private grain traders and commodity exchanges. While commodity exchanges were the first private marketing alternative to State procurement to emerge in 1992 and 1993, they were eclipsed in 1994 and 1995 by private grain trading firms. Although private grain traders, led by OGO in Moscow, have expanded their share of the Russian grain market in the past 2-3 years, they are constrained by insufficient capital to finance large-scale grain purchases, and by continued State control of regional markets and influence over most grain storage and processing facilities. Non-State marketing channels that rely on non-cash transactions, such as barter and in-kind payment, have also become widespread because of high inflation and shortages of cash in Russia's economy, further eroding the importance of the State in Russian grain marketing. Despite progress in deregulation of Russia's grain market, barriers remain to the creation of a genuinely free market for grain. For example, many localities continue Soviet-era practices of artificially maintaining local grain prices at below-market levels through subsidies, State procurements, and restrictions on free grain movement. Another barrier is the burden placed on Russian grain producers by the country's poorly developed physical and institutional infrastructure. While only minimal progress in reducing these barriers can be expected in the near term, over the next 10-15 years they should be largely removed. Russian farmgate grain prices have risen sharply in recent years and have become more subject to market forces due to increased free market sales. For instance, non-State prices for food wheat sold on commodity exchanges or by Russia's private grain traders more than tripled in dollar terms from around $50 per ton in late 1992 to $150-200 per ton in late 1995. From a mere fraction of world market levels in 1990 and 1991, average Russian State procurement prices for food wheat had moved to within 20-40 percent of international prices by late 1995, while non-State prices were even closer to world market prices. Russian grain prices, including food wheat, have also demonstrated increased seasonality in the last 2-3 years, suggesting greater impact of supply and demand conditions on price formation. Barring major reversals in economic reform this year, reduced inflation may help hold the increase in Russian non-State food wheat prices in nominal ruble terms to around 100 percent. In dollar terms, 1996 Russian grain prices are unlikely to rise as much as in 1995, and any increase should have only a minimal impact on bread prices, since grain comprises less than 20 percent of the retail price. It is also expected that domestic Russian grain prices will more closely track movements in the world market price, due to the increased importance of private grain trade. Over the next 10-15 years, Russian farmgate grain prices should move to levels close or equal to world market prices as progress is made in creating a more modern and efficient grain market. State procurements should decline further in coming years, though many regions are expected to continue various practices to support them. Private grain traders are likely to take the lead in developing non-State marketing channels, using capital from commercial banks and accumulated expertise and contacts by private grain trading companies. Barter and in-kind marketing of grain should wane over the next decade or so as private grain traders offer farmers more attractive sales opportunities. Higher Russian grain prices will probably mitigate any sizable increase in imports by stimulating domestic output and reducing waste. Moreover, a large share of Russian grain imports should continue to come from Ukraine and Kazakstan, where domestic grain prices are relatively lower. However, high domestic transportation costs will continue to make it more economical for Russia's Far East region to import grain from Western suppliers such as the United States, Canada, and Australia. Also, higher grain prices and the relative inefficiency of Russia's milling sector could further depress grain imports by encouraging flour imports in their place. Printed copies of Former USSR Update will be available in about a week. For more information, contact Jay K. Mitchell, Sharon S. Sheffield, or Christian J. Foster (202) 219-0620. Text of the full report also will be available electronically. For details, call ERS Customer Service (202) 219-0515. END-END-END