GLOBAL INFORMATION AND EARLY WARNING SYSTEM ON FOOD AND AGRICULTURE 

SPECIAL REPORT : THE RUSSIAN FEDERATION

9 November 1998

 

Highlights

  • Prolonged dry spells and hot temperatures are responsible for a drastic decline in food crop production this year. Total 1998 cereal output is forecast to have fallen by 43 percent from the 1997 level.

  • Commercial cereal imports will be constrained by low profitability. Supplies in the traditional exporting countries are tight. On current projections, cereal stocks will fall to critically low levels at the end of the marketing year, but additional imports could ease the situation.

  • No major declines in national availability of basic foods are anticipated, but internal trade barriers could provoke local shortages in the months ahead. Low-income urban populations are most at risk from food insecurity.

1. OVERVIEW


This report is based on information gathered during an FAO fact-finding mission to the Russian Federation in mid-October 1998. Discussions were held with officials, food traders, research institutes and private market analysts. The report attempts to shed light on the prospects for food and feed supply, demand and trade until mid 1999, highlighting possible areas of food insecurity risk. The analysis is necessarily tentative as much of the existing data is disputed and the food markets are in a state of flux, following the rouble devaluation in August and the financial crisis.

Drought and high temperatures from mid June to August are the main causes of a sharp drop in domestic cereal production this year. The total cereal crop (including 1997/98 winter and spring crops) is provisionally forecast at around 50 million tonnes compared to 86.7 million tonnes in 1997 and a 1993-1997 average of 73 million tonnes. The decline also reflects underlying downward trends in planted area and yields. Large carryover stocks have helped to protect aggregate feed supplies from the production shock, and domestic feed demand is expected to continue its downward course.

The outlook for the cereal trade for the remainder of 1998/99 is uncertain. On current projections, despite the fall in output, commercial imports are expected to rise only marginally. The relatively high quality grading of this year’s crop points to only moderate increases in import demand for food-quality cereals. However, these projections are made on the assumption that stocks will be drawn-down to a bare minimum, carrying the risk of increased costs and/or logistics bottlenecks. Additional imports would help ease the situation. Domestic price and market policies are in a state of flux and, in the light of the rouble devaluation and liquidity constraints, much will depend on the outcome of barter and debt recovery negotiations with the main trading partners and international financial institutions. A substantial decline in imported processed foods is anticipated.

Aggregate food demand for cereals will be largely insulated from the macroeconomic and weather shocks, and might even increase as consumers move away from expensive imported processed foods. The overall picture masks wide disparities in food security status between geographical areas and socio-economic groups. Remote areas in the north and far-east face the risk of erratic food supplies and high prices. Local trade restrictions could aggravate a tight market. The most vulnerable socio-economic groups, pensioners, orphans, the unemployed and households dependent on public salaries, can expect a tough winter, especially in the large, depressed industrial cities.


2. FOOD SUPPLIES



2.1 1997/98 Winter and Spring Production

2.1.1 Planted Area

According to official estimates, combined 1997/98 winter and spring plantings were some 6.7 percent lower than the 1992/93-1996/97 average. Much of the fall this year is explained by a trend decline in cropped area, which began in 1977. Depletion of soil nutrients, which has resulted in more fallow areas and longer fallow periods, and erosion are responsible for the long-term process.

The rate of decline has been more pronounced in the last 8 years, for both structural and market reasons. With massive cuts to input subsidies and frequent changes in the extent of public intervention in the wholesale market, crop production has become more risky and less profitable since the late 1980s. The erosion of profitability, coupled with underdeveloped and inefficient credit, input and marketing services, has led to substantial disinvestment in the crop sector. Despite an overall decrease in cropped area in recent years, average acreage ploughed per working tractor has been on the rise, increasing by five percent from 1997 to 1998. Working tractor stocks have dropped by one third since the mid-1980s. Further, existing machinery is unreliable and obsolete. Stock replacement has slowed to a trickle as domestic production has collapsed and the farm credit system, usually based on forward contracts on output, is unsuited for capital investment. The dilapidated stock has also increased the variable costs of production, pressuring a weak infrastructure for scarce spare parts, fuel and lubricants.

The devaluation of the capital stock goes part of the way to explaining declining cropped area in recent years. Cereal and total annual crop area this year are very close to the 10 year trend so the two processes provide a satisfactory explanation, supporting the conclusion that there were no unusual economic constraints this year. Locally, heavy showers in May were a significant impediment to spring sowing. By contrast, in three oblasts of Povolzhsky Region, sowing was reduced by unusually dry soil conditions.

The downward trend in cereal area (it has fallen by 14 percent from 1993-1998) is despite significant shifts into cereals from industrial and forage crops. The combined area planted to flax, sugar beat and forage areas has shrunk by 27 percent since 1993. The area data, presented in Table 1 below, show that there have also been considerable shifts in the food crop mix. The wheat area has increased from last year’s and is some 6 percent higher than the 1993-1997 average, reflecting a general tendency away from predominantly feed grains (barley, rye and oats) and towards food crops. Sharp declines in livestock inventories and feed demand have enhanced the relative profitability of food grains. This year the shift has been particularly emphatic as there was a large build-up of feed wheat carryovers (over 50 percent of the 1997 wheat crop was graded feed quality).

Table 1: Planted Area of the Main Foodcrops 1993-1998 in ‘000 hectares

Crop 1993 1994 1995 1996 1997 1998 1998 as % of
five-year
average
Wheat 24 666 22 190 23 909 25 707 26 114 26 151 106.7
Barley 15 478 16 404 14 710 11 792 12 619 11 969 84.3
Maize 800 524 643 622 853 1 021 148.3
Rye 6 000 3 903 3 247 4 149 3 994 3 828 89.9
Oats 8 402 8 333 7 928 6 904 6 510 5 290 69.5
Millet 1 464 1 002 698 1 228 1 077 960 87.8
Buckwheat 1 808 1 760 1 618 1 373 1 116 1 214 79.1
Rice 261 193 171 172 152 146 76.9
Total Cereals 58 879 54 309 52 924 51 947 52 435 50 579 93.5
Pulses 2 042 1 962 1 784 1 430 1 402 1 210 70.2
Cereals & Pulses 60 921 56 271 54 708 53 377 53 837 51 789 92.8
Potatoes 3 548 3 337 3 409 3 404 3 330 3 263 96
Vegetables 684 709 758 737 740 738 102

 

Source: Official GOSKOMSTAT.

Graph 1: Planted Area of Wheat and Total Cereals 1988-1998

2.1.2 Food Crop Production

Official estimates of 1998 cereal and pulse production are unlikely to be available before February 1999. The complexity of the data itself (collected from subsidiary plots, household plots, large-scale farm enterprises and private farms), the volume of data and the de-centralised nature of data collection make more timely releases improbable. By late October, harvesting had been largely concluded, but all crop yield and production data contain forecast elements and complete, systematic data on deliveries or samples are not available.

Until the official data are released, all estimates should be handled with care. At the time of writing, the official forecast is of a grain crop of some 48 million tonnes, excluding maize. One unofficial trade source suggested a figure of 65 million tonnes, claiming that gross underreporting had occurred. The main reason cited for underreporting is the desire to evade taxes or farm loan repayment. Large quantities tend to be stored on-farm rather than delivered to elevators where quantities can be monitored more effectively..

Much of the dispute over official data is based on small local samples that cannot be used for national level inference, since both statistical capacity and incentives for under- or over-reporting vary between regions. Hence, there is no objective method for scaling official forecasts to reflect under-reporting, nor is there a systematic and comprehensive alternative source. The official sources have not provided a breakdown by commodity, making cereal forecasts still less tangible. From trade, research and official sources, a consensus is building that the wheat crop (including winter and spring) is in the region of 26-27 million tonnes. Of this, the Ministry of Agriculture and Food estimate that 76 percent is of food quality whereas trade sources put the figure at closer to 70 percent. Some 47 percent of the 1997 crop was graded food quality. This increase can be attributed to lower moisture content this year. Further, quality loss rates in storage will be considerably lower than last year, when much of the crop was stored uncovered and facilities were stretched to capacity.

In the absence of an objective criterion for evaluating and scaling forecasts all data presented below represent a "best guess", corroborated by discussions with informed individuals. The report therefore focuses on more qualitative evaluation.

Table 2: Production of Basic Food Commodities 1993-1997 and Forecast for 1998 (‘000 tonnes)

Crop 1993 1994 1995 1996 1997 1998 % of five
year
average
Wheat 43 547 32 132 30 123 34 883 44 258 26 000 70
Barley 26 843 27 054 15 786 15 908 20 786 11 500 54
Coarse grains 51 960 45 958 31 282 32 215 42 185 23 405 57
Total Cereals 1/ 96 195 78 613 61 867 67 487 86 771 49 685 64
Pulses 2 898 2 677 1 592 1 793 1 250 900 44
Cereals and Pulses 99 093 81 290 63 459 69 280 88 021 50 585 63
Potatoes 37 650 33 828 39 909 38 529 37 040 35 000 94
Vegetables 9 827 9 621 11 275 10 716 11 130 10 500 100

1/ Includes paddy rice Source: 1993-1997 official (GOSKOMSTAT). 1998 indicative FAO forecasts

Graph 2: Wheat and Total Cereals Production 1988-1998

2.1.3 Causes of Reduced Crop Production in 1998

There is little debate that 1998 crop production will be drastically lower than the (relatively good) 1997 crop, nor are the causes of the decline disputed. The winter wheat crop was hit by extensive winter-kill and yields are expected to be some 15 percent down on the five-year average and marginally lower than in 1997, when winter-kill was particularly high. This, combined with a decrease in winter wheat plantings, points to a significant decrease in production.

Until May/June 1998, government analysts expected spring crop yields to be close to those of 1997. Fertiliser utilisation was similar to that in 1997. A substantial farm credit package was in place, mostly based on forward contracts on output. Note that the financial crisis and decline of the rouble occurred too late in the season to have a fundamental impact on production. The main cause of the precipitous decline in spring production is drought.

After generally favourable conditions in May, when spring crops were in emergence and early development stages, hot dry weather persisted over much of the cereal area from early June through mid-August. A prolonged period of high pressure over the principal growing areas in the south brought a heat wave across the Volga valley, Urals and Western Siberia. By the third dekad of June, parts of North Caucasus and Central Black Soils regions were also experiencing drought. A weak cold front brought some rainfall and cooler temperatures in Central, Black Soils and Western Siberia regions in the third dekad, but the Volga Valley, North Caucasus and Urals remained hot and dry. Rains and cooler temperatures in late June and early July brought limited relief to parts of Northwest, Central and Volga Vyatsk Regions. High temperatures and low precipitation were recorded in most areas for the remainder of July, although some rains were received in western and north-western areas. In the main producing areas, spring planted crops were stressed at the reproductive or heading stages. In Volga, Central Black Soils, and North Caucasus warm, dry conditions prevailed through to mid August. Cooler temperatures and scattered showers over much of the area in late August and early September came too late to influence the outcome.

Late season weather conditions were generally favourable for harvesting. Temperatures in September and October were mild (2-3 degrees above normal), with light and scattered showers. In Western Siberia heavier rains and early snow were an impediment to harvesting and resulted in substantial quality losses.

The early forecasts suggest that all Regions of the Russian Federation face a reduction in crop production. The Urals and Povolzhsky Regions are likely to record the most dramatic drops (to around 60 and 50 percent of the five year mean respectively), followed by Volga-Vyatka and Northern Region. Eastern Siberia and Central Chernozem Regions are expecting less dramatic declines, in the region of 15-20 percent.

It should be noted that cereal yields have demonstrated a weak downward trend in the past 8 years, with the strongest downward trends in wheat and barley. These trends reflect the historic concentration of cereal production in the large-scale enterprises, which have failed to restructure in response to the change to a market driven system. Even before the financial crisis, most large-scale enterprises were operating at loss-making or break-even levels, kept afloat only by soft loan terms and ineffective debt recovery. Low efficiency can be attributed to many factors, including weak development and penetration of upstream and downstream market structures, unfavourable local land and price policies and poor farm management.

The upstream services are erratic and constrained by poor management and high risks (of non-payment) associated with the provision of inputs. A variety of trading organisations has emerged on the domestic market, including large-scale private grain traders and smaller local operations, partly supplanting the parastatal procurement agencies. However, the benefits of a more competitive wholesale trade have yet to be realized in terms of transparent market signals at the farm-gate.. The reasons for continued weaknesses in the downstream sector are complex and vary from oblast to oblast. The most frequent constraints are as follows:

The lack of comprehensive price information, and non-existent futures market may also lead to under-bidding. Farm enterprises are often ill-informed of the prevailing farm-gate and elevator delivery prices. Although the Ministry of Agriculture and Food has a price information pilot project, the data (from around 30 oblasts) are not widely distributed.

It is unrealistic to expect efficient farm management under these circumstances and with soft but essentially rationed farm credit. Furthermore, the rapid transfer of farm ownership into joint stock companies was not accompanied by effective management shakeouts. With unclear ownership, incentives for efficient management are often lacking. Another frequently cited reason for the inefficiency is that managers are unfamiliar with the "laws of the market economy", particularly complex for grain producers.

Since there are significant economies of scale , the large-scale enterprise sector dominates cereal production, as well as sugar beet and oilseeds. Official estimates suggest that only 7 percent of 1997 cereal output came from private farms or household plots, the lowest proportion in all the CIS countries, although the share has increased considerable since 1991. In contrast, potato and vegetable crops are mainly cultivated on household plots and private farms. Production on such plots has been increasing in both relative and absolute terms in recent years. However, this year’s potato crop is anticipated to be some 6-7 percent lower than the 1993-1997 average. Dry soil conditions inhibited plantings and yields and late-season rains and blight also inflicted damage. The national aggregate masks considerable variation in production between oblasts. Vegetable production, also affected by low rainfall, is expected to drop from the good output last year to close to the five-year average. Household plots are often inter-cropped so total exposure to weather risk is lower than on large-scale farms.

2.2 Cereal Stocks

There is considerable debate over the level of cereal opening stocks for 1998/99. The available stock information is far from comprehensive. The bulk of the stock is held in regional level grain reserves, generally used for market intervention with a view to stabilising bread prices, or by agricultural enterprises. In the enterprises there is some incentive to under-report on stocks, to avoid taxes and state orders. Published data are not forthcoming on federal level stock holdings. These fall into two categories: working stock for "special users" (e.g. the military, prison inmates) and an emergency reserve held to provide humanitarian assistance in case of natural or man-made disaster. Informal estimates of these stocks range from 1 million to 1.6 million tonnes of food grains. Stocks held by commercial wholesalers and retailers are probably underreported.

The official estimates put July 1st 1998 cereals stocks in the region of 20 million tonnes (excluding new stock), a figure that has been disputed but is not implausible, given the unusually low grain prices throughout the marketing chain and for all grades early in the 1998/99 marketing year..

Although data are not available on the commodity and grade composition of carryover stocks, given the poor quality of 1997 winter and spring crops, it is likely to comprise mostly feed grain quality. Furthermore, the unexpected improvement in last year’s crop and high on-farm retention in uncovered storage or granaries (rather than in silos on delivery to elevators) is believed to have resulted in further losses from insect and fungal damage.

Both private and public sector analysts expect heavy-draw-down in 1998/99. Given the poor crop, critically low carryovers can be anticipated at the end of June 1999, unless there is a very significant increase in commercial imports over current expectations (see Section 4). On the current projections, 1998/99 closing stocks will cover roughly one months’ demand with little scope for maintenance of emergency reserves.


3. DOMESTIC DEMAND FOR CEREALS IN 1998/99



3.1 The Livestock Sector and Feed Demand

Cattle, pig and small stock inventories have been declining since 1991. Poultry numbers recorded a moderate increase in 1997 and in the first semester of 1998. There was a rise in domestic poultry meat sales in the immediate aftermath of the rouble crash. By September, however, the market was flooded, as suppliers had not anticipated the sharp decline in demand.

Some recovery in demand, especially for poultry, can be expected over the coming months. Russian livestock product demand tends to be seasonal, peaking in mid winter when demand for fats is highest. At the current exchange rates, and with US poultry exports stalled over repayment difficulties, domestic producers have become more competitive. In 1997 and 1998 there was considerable domestic and foreign direct investment in the domestic poultry production sector, and increases in plant capacity especially around Moscow.

It is, however, unlikely that improved incentives will stimulate a strong supply response in domestic poultry production. Second semester growth will be negligible. One critical constraint remains the difficulties in obtaining fuel for production plants. Further, a significant supply response will entail a major modification in feed formulae and a solution to low domestic availability of proteins for feed. The feed industry was exposed to the rouble devaluation and liquidity crisis as it was highly dependent on imported soya proteins. With imports of soya and compound feeds now negligible, restructuring is required. A relatively good 1998 sunflower crop points to increased availability of sunflower meal. This will probably not compensate for declines in soya availability. Sunflower exports have temporarily dropped as local authorities in the main producing areas have erected physical or legal movement barriers. These may collapse as a result of fiscal pressure on local authorities, prompting an increase in exports abroad. Further, the protein content of sunflower meal is lower than that of soya. At the prevailing exchange rates (around 17 roubles/US$), large-scale soya imports are set to remain unprofitable through 1998. Reduction of import tariffs for feed proteins is reportedly under discussion.

The feed processing sector is characterised by large-scale local production units a dominant local market share and uncompetitive cost mark-ups. Large plants are usually inefficient, operating at a small fraction of capacity. They currently face difficulties raising credit for raw materials purchases. Although there has been some recent investment, and plants close to Moscow and St. Petersburg are subsidised, the erratic supplies and inflated prices of processed feed have encouraged many farm enterprises to manufacture their own compound feed on farm.

The beef sector has been in a state of continuous decline since 1991, reflecting low and declining demand and major inefficiencies in production and processing units. Demand for meat is relatively income elastic , so declining real incomes have had a pronounced effect. Weight gains per unit of feed are much lower than those of the major foreign competitors and average feed-out periods are longer. Animal health tends to be poor as a consequence of inadequate veterinary facilities, the high cost of drugs and vaccines and the insufficient micro-nutrient content of feeds. Further, the genetic stock has deteriorated, although there are some recent initiatives to introduce higher yielding exotic beef varieties.

Dairy production has increasingly shifted away from large-scale production units and towards smallholders. As much as 50 percent of production now comes for household units and small private farms. Cow herds began to stabilise in 1997 and this year milk production could increase. There may also be an increase in small-scale dairy production, as imports of butter, cheese and dried milk become less competitive.

There are some positive indications of efficiency gains in the pork sector, including lower death rates and higher live-birth-rates for sows. In view of the bottlenecks in the feed sector, low effective demand and continuing decline in the meat processing sector, beef cattle and pig inventories are set to dwindle through 1998/99. This will have a marked impact on feed demand.

Table 3: Livestock Inventories: Beginning of Calendar Year in all Sectors
(‘000 head)


1991 1992 1993 1994 1995 1996 1997 1998 1999
Cattle 57 043 54 677 52 226 48 914 43 296 39 696 35 103 33 000 29 000
of which Cows 22 057 20 564 20 243 19 831 18 398 17 436 15 874 14 500 14 000
Pigs 38 134 35 384 31 519 28 557 24 859 22 631 19 115 17 300 16 500
Sheep & Goats 58 195 55 255 51 368 43 712 34 540 28 027 22 772 16 774 15 000
Poultry (millions) 660 652 568 567 520 423 368 380 400


Source: Official (GOSKOMSTAT) and FAO projections for 1999.

It is improbable that structural changes in the large scale-feed, poultry, pork and beef sectors will stimulate a healthy recovery in domestic production before the end of the 1998/99 marketing year. Reflecting the decline in pig and cattle inventories, feed demand utilisation of domestic grains is expected to drop by some 7 percent from 1997/98.

3.2 Aggregate Food Demand for Cereals

Official data on per caput food consumption of the main cereals suggest that it is relatively stable. It is not strongly income or price elastic, so even a surge in prices (should the regulated bread prices prove indefensible) would have only a moderate influence on demand. With the high proportion of milling quality in this year’s harvest, significant real milling grain price rises are improbable. Further, in "hard times" it is common for consumers to accept "conditional" feed wheat (which does not satisfy strict gluten and grain quality definition of food wheat grades 1 - 3). It is probable that per caput demand will remain close to the recent average.

The population is expected to decline through 1998. Low fertility rates and relatively short life expectancy explain the fall. In previous years the declining natural rate was partly offset by net migrant inflows, mainly from other CIS countries. These flows could be curtailed by the recent crisis. The last full population census was in 1989. With significant demographic movement since then, extrapolated estimates may be unreliable. There are no immediate plans for another census.

The rouble devaluation has led to a marked increase in the price of imported processed foods. Demand for pasta products, for instance, has plummeted. Some substitution into local bakery products is probable among the urban middle classes. The expected decline in average household income also points to substitution away from processed foods and into basic cereal and potato products.

On current estimates, average per capita consumption of cereals, pulses and potatoes will be more than sufficient to cover minimum caloric requirements. This does not preclude the possibility, discussed in section 5 below, that certain sectors of the population risk food insecurity this year.

3.3 Other Uses

With the certain prospect of a decline in winter grain area, and a high probability of lower spring plantings, seed demand will fall in 1998/99.

In the immediate post harvest period, loss rates have been lower that usual. This can be partly attributed to the relatively dry grain in the main producing areas, and also to the reduced volume of the crop, which has mitigated the need for open storage. Late rains caused localised but heavy losses in Siberia, but the general picture is of significantly low loss rates for all the major grains.


4. PROSPECTS FOR CEREAL TRADE IN 1998/99



4.1 Imports

Assuming that stocks are drawn down to minimum levels, at least 4 million tonnes of cereal imports will be required to meet projected consumption needs in the 1998/99 marketing year (July/June). According to FAO data, recorded imports in 1997/98 amounted to 3.5 million tonnes (including rice), although unrecorded flows may bias this figure on the low side.

The projection for 1998/99 is highly tentative. A number of factors have added uncertainty to an already volatile market. The most obvious source of uncertainty relates to the financing of imports and the exchange rate. The rouble/dollar exchange rate now appears to be fluctuating in a 10 percent band at under one half of its pre-crash level. Exchange rate uncertainty will evidently increase the risks of commercial imports and the main international grain traders are currently holding back. Most are chasing bad debt from previous transactions and are unwilling to risk major exposure to non-payment from local clients. In addition, the possibilities for hedging against foreign exchange fluctuations are limited.

While the outlook for food imports as a whole, particularly processed foods and chicken parts, is bleak, several factors suggest that wheat imports will pick up. First, world prices remain relatively low and the government has been reducing tariffs and internal transport charges. Second, the current domestic wheat prices are likely to come under heavy upward pressure, as the regulated prices, which have not been fully inflation indexed, are not sustainable. Third, the grain market can escape some of the pressing liquidity constraints, through barter deals, which had become relatively common, even before the financial crisis.

Barter deals have already been mooted within the CIS. A deal is expected with Ukraine involving food wheat imports in exchange for debt write-offs or oil. Ukraine’s cereal crop was also badly hit by drought, but a high proportion of food quality wheat and significant carryovers suggest that supplies of over 1 million tonnes should be forthcoming from this source. There are suggestions that grain barter deals have also been tabled with non-CIS countries but the details are not known.

In Kazakhstan, large carryover stocks are recorded, and, despite drought, exportable surpluses could, potentially, meet Russian import demand from that source. The official harvest estimate is probably biased on the low side. There are, however, considerable uncertainties over exports to the Russian Federation in 1998/99. Questions have been raised concerning the quality of supplies. Although most of the harvest is food quality, part of the carryover stock is old and has been downgraded to "conditional" and feed qualities. At present, food wheat imports from Kazakhstan are not profitable. The possibilities for barter deals are less obvious and there is a risk that alternative markets will be found. Import demand for Kazakhstan grain from other traditional buyers is expected to be only marginally lower than last year and new markets (such as the Islamic Republic of Iran) are reportedly being sought. On balance, even on the assumption of no further devaluation of the rouble and a significant increase in Russian domestic prices, imports from Kazakhstan will probably drop from last year’s level, of about 2.5 million tonnes.

Unsubsidised commercial imports from non-CIS countries will be strictly limited. Canadian and US imports are possible for the Russian Far East as well as continued imports of high quality durum and flour. The volume of non-CIS imports is very uncertain at present. Over much of the western part of Russia, current wheat prices at the mill gate barely cover US/Baltic shipping and transhipment costs. This will no doubt change if regulated bread prices are relaxed, but (at the current exchange rate and CIF price), Moscow and St. Petersburg milling wheat prices would have to triple for non-CIS imports to become profitable.

Negotiations are underway with the US and EC on concessional or grant-based imports. At the time of writing, the precise quantities and commodity composition of an aid package had not been revealed. In view of the uncertainties surrounding both domestic supplies and the import flows from other CIS countries, imports on concessional terms could play an important role in relieving the pressure on the domestic market and ensuring adequate levels of carry-overs into the 1999/2000 marketing year. As domestic, world price and exchange rate movements cannot be predicted for the remainder of the marketing year, it is unwise to suggest a precise quantity. The timing and quantity of subsidised imports must be extremely sensitive to market conditions to avoid crowding out of imports from other countries. Similarly, the location, scale and modality of market injections must bear in mind the risks of crowding out the domestic trade or unduly depressing farm-gate prices for local producers.

4.2 Exports

Although the spring barley crop was badly hit in the main producing areas, there are sizeable carryovers. Export sales in 1997/98 were lower than expected, as world prices were weak and logistics and contractual difficulties beset the trade. Barley feed demand is weak on Russia’s main export markets so no major increase in exports can be expected. The bottlenecks in the domestic feed market and favourable exchange rate will encourage further feed wheat exports in 1998/99 but at a reduced level. Tight domestic supplies are likely to raise domestic prices relative to export prices, limiting the incentives for trade. Total cereals feed exports (wheat and barley) for 1998/99 are forecast at 1.9 million tonnes, some 700 000 tonnes down on the 1997/98 level.

The failure to index consumer bread prices in the main consuming centres of Moscow and St. Petersburg, combined with relatively large wheat stocks on hand has meant that the mills have not been active on the markets in recent weeks. Since the rouble devaluation, there has been a surge in milling wheat exports, mainly from the winter wheat producing areas of Rostov. While the total volume is difficult to foresee, it is likely to be in the region of 150 000 tonnes. Incentives for milling wheat exports are set to collapse, as the regulated urban bread prices come under upward pressure from dwindling stocks. Some small-scale bakeries have already capitalised on the slow trade in the large scale-sector, selling bread at well above the regulated prices.

Milling wheat exports are also likely to be inhibited by regional level and oblast trade barriers. Although all export duties on agricultural products and foodstuffs were officially scrapped in April 1996, many local authorities have imposed roadblocks and/or increased the administrative regulations surrounding grain movements.

Table 4: Cereal Supply/Demand Balance for 1997/98 and 1998/99 in million tonnes


Wheat Total Cereals 1/

1997/98 1998/99 1997/98 1998/99
Supply 50.4 39. 6 96.7 73.3
Opening stocks 3.5 10.6 6.5 20.6
Production 44.2 26.0 86.6 49.0
Total domestic availability 47.7 36.6 93.1 69.6
Imports 2.7 3.0 3.5 3.7
- Of which: from Non-CIS (0.7) (0.7) (1.0) (1.1)
from CIS (2.0) (2.3) (2.5) (2.6)
Total Utilisation 50.4 39.6 96.7 73.3
Food use 14.3 14.4 19.8 19.8
Feed use 14.0 13.3 34.7 32.1
Other uses 10.5 8.2 19.0 13.3
Exports 1.0 0.7 2.7 2.1
Closing stocks 10.6 3 .0 20.6 6.0


1/ Includes rice in milled equivalent.
Totals calculated from un-rounded data.
Sources: Various.


5. FOOD SECURITY


The overall adequacy of basic food supplies masks major inequalities in income distribution and a strong possibility that specific population groups in the country will experience food price increases. There appears to be no systematic study on the at-risk populations by geographical area or social or demographic group. This section does not attempt to quantify the risks or enumerate populations at risk, but simply sets out the main sources of risk.

5.1 Market Risk

The Federal Government has prohibited the imposition of internal trade restrictions, but food stock and price regulation policy has been de-centralised. Fearing short supplies later in the year and difficulties in maintaining regulated retail bread prices, all but one of the surplus producing oblasts have imposed some restrictions on the grain trade. Restrictions vary in severity, effectiveness and method. Complete prevention of outflows (by sealing the regional border crossings for trucks carrying grain) is reported only in limited cases. Restricted issuance of trading licenses and lengthy bureaucratic processes are almost universal.

While all are agreed on the detrimental consequences of barriers, there is considerable debate among research institutes and the trade on whether the barriers are effective or will remain so. The current barriers are reportedly leaky and can, in some cases, be circumvented by manipulating the procedures or simply avoided by unmonitored border crossings. Indeed, the restrictions may simply aggravate the endemic problems of financial irregularity and parallel markets. As price differentials increase, the economic incentives for dropping barriers and authorising trade will become greater. Further, farm and trade groups as well as the federal Government, are taking measures to combat the tendency. On balance, the risk of effective and continuous maintenance of the barriers is low. However, if these impediments are maintained, there is a serious risk that prices will remain unduly depressed in surplus areas and will skyrocket elsewhere, especially in the remote deficit areas of the Northern, Eastern and Western Siberia and Far-Eastern Regions. Some remote areas import their winter provisions prior to the freeze as they then become inaccessible. This strategy has been hit by the rouble devaluation and financial crisis.

In urban areas the main market risks relate to price policy. Following intense consumer food purchases in September and queuing at retail outlets, the immediate risks of rationing have subsided. Later in the year, as wholesale prices increase, the possibility of untargeted and unsystematic rationing may reappear, if urban authorities fail to adjust regulated retail prices to reflect underlying inflation and market realities. Opinions vary as to the likelihood, location and extent of rationing in late 1998 and the first semester of 1999. This too will depend on the effectiveness and duration of internal trade barriers.

5.2 Income Risks and Safety Nets

The most vulnerable sections of the population are those who are dependent on state benefits and wages, the unemployed and the disabled. The real value of state pensions and wages has been eroded by inflation and the severe fiscal squeeze has resulted in late payments of both. The restructuring of foreign debt allowed the Government to clear some of its backlog. Inflation could have extremely deleterious social consequences unless wages and pensions are indexed.

The emphasis of the Soviet system on geographically concentrated and highly specialized manufacturing has left the populations of several of the old industrial centres exposed to destitution. Skilled industrial workers have tended to be less successful in adapting to the new economic realities than unskilled labourers and managerial classes. Rural populations tend to be more insulated from restructuring as they have reverted to own-production on subsidiary plots and have a relatively diversified income base. The dacha (kitchen gardens cultivated by urban households) has been a widespread and successful coping strategy, although it is difficult to assess the precise distribution of ownership. In several parts of the country, drought and blight have led to major declines in dacha potato production.

Social services for the disabled are negligible. The rather ineffective public health system and high costs of medicines mean that temporary or long-term illness carries the risk of destitution. For all economically inactive groups the main source of social welfare is the family. Orphans remain a particularly high-risk group.

In the past, the penetration of non-governmental organisations in the social sector was weak and there has not been a notable emergence since perestroika. The experiences of the early 1990s with food aid were mixed. Leakage was high, with rent seeking at all stages in the distribution process. The underlying problem is a lack of an effective and transparent monitoring and auditing system. Immediate steps are needed to enhance targeting, monitoring and distribution capacity, if targeted emergency programmes are to be considered.


6. PROSPECTS FOR 1998/99 CROPS


Ploughing and sowing of winter crops (for harvest in 1999) are behind last year’s. Dry soil conditions in the south have constrained plantings, impeded germination and emergence and necessitated some replanting. Fertiliser deliveries so far this year are well down on last year’s level, although machinery and fuel supplies are officially reported to be normal.

Land preparation for the 1999 spring grain sowing is more advanced than last year’s, reflecting the mild and relatively slow onset of winter and, possibly, expectations of improved grain prices next year. Nevertheless, uncertainty surrounding farm finance leaves a major question mark over the possibility of a recovery in 1999 spring production. Given the government’s difficult fiscal position, it is doubtful that soft farm credit (mainly from federal funds) will reach the levels of 1997 or 1998, although there have been strong calls in recent weeks for increased public funds for farm production. Private lending rates are high and private banks could, in any case, cover only a small fraction of demand. Despite the prospects of higher prices and even on the assumption of favourable winter and 1999 spring weather, a major recovery of cereal is unlikely in 1999. Current forecasts are of a particularly severe winter.

For potato and vegetable production, on the other hand, prospects are more positive. Increasing the intensity of production on household plots (or "dachas") is a standard response to economic uncertainty.

 

 

This report is prepared on the responsibility of the FAO Secretariat with information from official and unofficial sources. Since conditions may change rapidly, please contact Mr. Abdur Rashid, Chief, ESCG, FAO, (Telex 610181 FAO I; Fax: 0039-06-5705-4495, E-Mail (INTERNET): GIEWS1@FAO.ORG) for further information if required.

The Special Alerts/Reports can also be received automatically by E-mail as soon as these are published, subscribing to the GIEWS/Alerts report ListServ. To do so, please send an E-mail to the FAO-Mail-Server at the following address: mailserv@mailserv.fao.org, leaving the subject blank, with the following message:

subscribe GIEWSAlerts-L

To be deleted from the list, send the message:

unsubscribe GIEWSAlerts-L

 


TOC Return to menu