The latest news reports look like reports from a battlefield. Prices for flour, macaroni and buckwheat have doubled in some regions. In four days alone (June 20-23), they have grown by 30%. A ten-fold increase in demand for flour, sugar, cereals and other groceries has been recorded in Kyiv. And the government’s commands sound really war-like: track down, confiscate, jail…

Giddy From Success

The developments of the recent weeks are very dissonant with the previous triumphant reports about a record harvest of grain crops and about Ukraine listed among the world’s five biggest exporters of grain, with the government’s complaints about barriers imposed on Ukrainian exporters by the West.

Until recently, the agrarian sector has demonstrated impressive tendencies. Gross added value grew by 12.2% in 2002, by 10.2% in 2001, by 3.6% in 2002. 2001 witnessed a record-high harvest of grain - 39.7 million tons. A little (1 million tons) less was posted last year, but Ukraine managed to make a serious breakthrough to international markets: it exported almost 11 million tons of grain. This makes common people wonder: how come that with such rich harvests the country is going into a tailspin?

The mass media are increasingly urging the rank-and-file consumers to hunt for witches: those damned profiteers left you without bread, having sold it all abroad, and now they are trying to make money on your hard work. And they are doing this with your own help: you are playing into their hand by panicking and creating a boom…

These words are very familiar, although they belong to the epoch of primitive materialism.

Everything is okay, only the people don’t see it. Why don’t they stop buying, or better - eating? Then things would return to normal right away. Prices would fall, because there would be nobody to queue up for sugar or flour.

The weather “played up”, too: frosts without snow and spring droughts killed the last remaining optimism. Grain yields are expected to total 23 million - 27 million tons at best, which is about 12 million tons less than last year. Besides, the quality of grain is going to be a lot poorer. But we shouldn’t forget about the main thing: the booming demand has hit the stocks of last year’s rich harvest. And its causes lie not in the people’s mentality or bad weather. They lie in the agrarian policy. Rather, the absence of it.

Business The Ukrainian Way

It’s pointless to talk about any agrarian policy when the country lacks the basic value of its economic system - stable and predictable prices. And all responsibility for this rests with the government.

Agriculture is still not regarded as a commercial, profit-making economic sector. And the countryside is unable to cope with this problem single-handedly.

The way the government runs the agrarian sector resembles the joke about the way business is done in this country: “they stole a box of vodka, sold the vodka and squandered the money on drink”. It’s wrong to base the national agriculture on the household segment, because to those who run their family farms it’s not a business, but a means of subsistence. Commercial activity presupposes comparison of inputs and outputs and is oriented at profit.

It’s not my business to advise what to sow, when or how to reap. Any villager is head and shoulders above me in farming. But the key problem for the countryside is access to money. Farmers know how to spend it, but there is no way getting it. And with such a policy this problem is going to last forever.

Money could come either from private investors or as credits from commercial banks. Early signals of this approach appeared in 2000, when the government launched a very effective budgetary program of low-interest credits. The credits were reimbursed in full, and the government gained from it as well, because less resources were taken from the budget, and the agricultural sector obtained ten times more money. Some private businessmen risked to invest in agriculture. Many got their fingers burned. So did the farmers.

No one will invest his money without calculating the possibility of recouping it and receiving profits. Besides, the cycle of agricultural production is rather long. In 2000, the average selling price of grain was UAH 443.8 ($84) per ton, with wheat sold at UAH 487 ($92), rye - at UAH 468.8 ($88). In 2002 the figures were UAH 312.5 [$59] (down 30%), UAH 309.9 [$58.46] (down 36%), and UAH 227.7 [$43] (down 51%) respectively. The latter prices differed from the prices on which investors had built their initial calculations. Despite an impressive agricultural production growth in 2002, sales proceeds dropped almost by UAH 400 million [$75.45 million], with plant cultivation accounting for the lion’s share of the decrease (75%).

Small wonder that crediting, especially lax crediting, shrank drastically last year - by 21%. It’s not difficult to predict that no private investor will risk to invest if it’s impossible to calculate the result. As before, there is no stable reference point for prices in the agrarian sector.

Retail prices remained stable, more or less, but the reduction in procurement prices pumped out resources from the agriculture. The exhaustion was “facilitated” by the system of VAT reimbursement to exporters. In Ukraine, it turned into a tax on export, because it is simply never reimbursed. It’s clear that a substantial part of this tax was shifted on peasants’ shoulders.

The agrarian sector entered this year’s crop sowing campaign with a formidable shortage of money. Many experts maintain that the negative effects of adverse weather conditions could have been minimized by adequate land treatment. But farmers simply had no money for that.

The government should have been alarmed back in 2001, when prices for agricultural products began to fall. But the outcries from experts were taken as elements of political hubbub. The government didn’t lift a finger in 2002, when prices plummeted. Nor did it budge in spring. Instead of making correct decisions and giving correct signals to crop growers, it raised a hullabaloo around exporters and organized sweeping checkup raids on them.

To blame grain traders is the same as to complain about frosts. Traders act adequately to circumstances. It’s not their fault, but the government’s that that the country is left without reserves of grain.

Now it makes no difference to Ukrainian traders in what currency - hard or national - they get their receipts, owing to the current convertibility of the latter. And in some cases the hryvnya is even preferable on the domestic market than the dollar. But could the traders have acted otherwise if export prices in late May 2003 were $140 - $150 per ton of 3^{rd grade soft food wheat, $130 - $135 per ton of 4th grade wheat, $85 - $90 per ton of food rye, whereas in Ukraine wheat was priced at $80.5 and rye - at $54.4? So Ukrainian grain naturally flowed abroad in enormous quantities.}

But did it become clear only now? You reap what you’ve sown. The crisis showed today, but its foundation was laid earlier.

Only Fools Learn From Their Own Mistakes

There are grounds to expect this crisis to aggravate. (And there is a threat of a systemic economic crisis, judging by the government’s Olympian calm about similar problems that have accumulated in other branches).

The grounds are as follows:

1. The government still doesn’t understand the key role of stable, predictable prices of agricultural products for drawing money to agriculture. And even in today’s critical circumstances it makes no steps at all to form supportive resources.

2. There was hardly a better way to discourage people from working on the land than the widely advertised sweeping checkups of grain traders, most of whom were investors.

3. How can one trust the government who has declared a war on jobbers? Do our home-bred officials know the laws of simple reproduction? Do they know that it presupposes reproduction in kind? Prices began to climb six months ago, giving early signals of trouble, but the government wouldn’t respond. Thanks to the “paternal care” of our supervisory bodies, many private processing enterprises have closed down to the detriment of price stability. So who will trust the policy of those who call for investment in the Ukrainian economy?

The Measure Ruler Must Be Stable

The situation can not be corrected by tip-and-run assaults. It’s necessary to make adequate steps and give clear signals.

The agrarian policy should be based on stable, predictable prices.

Imagine a builder who is given a measure ruler every day, and every time it has a different number of centimeters. How is he supposed to work? So what are Ukrainian farmers supposed to do, if they are given one “ruler” to measure their expenses and another ruler to measure their profits? Moreover, they never know how many centimeters the latter may have tomorrow. Such terms leave no hope for a renaissance of the agricultural sector which has all prerequisites for leading positions in the national economy.

The solution is simple. The instrument of forming stable, predictable prices is well-known. It is corn exchanges (or whatever they may be called). According to last year’s statistics, there are dozens of agrarian exchanges in Ukraine, there is even an association of exchanges. But there are no auctions. In January-May 2003, not a single ton of wheat or rye was sold through exchanges. And even the grain that was sold through undeclared deals was sold 30% cheaper, the bulk of transactions remaining in the shade.

A prototype of an efficient agrarian exchange appeared in Ukraine in 1996. It was not only an indicator of prices (which were posted in TV news like currency exchange rates). It also supported an effective instrument of crediting crop growers - the purchase of a future harvest. But the newborn child was strangled very soon - someone wouldn’t reconcile with the imminent threat to shadow deals.

The restitution or establishment of a full-fledged agrarian exchange as a price indicator and a center of influence on pricing should be the top priority for the government. The instrument of such influence is not new - it is the government’s interventions. And there is no need borrowing experience from abroad. All it takes is to do what the National Bank does to maintain the hryvnya’s exchange rate. Offer and demand coincide very seldom, but the exchange rate is kept within reasonable limits. The National Bank simply either buys or sells a surplus of dollars.

It’s so simple. The upper and the lower price limits should be declared before each agrarian season. The gap should be agreed upon with producers and traders, taking into account forecasts for the future harvest both in Ukraine and abroad and the current pricing dynamics in the world. The latter factor is important for calculating the volumes of exports.

The stability of the national currency is regulated through the National Bank’s hard currency reserve. In the sector of agricultural products, this function could be performed by the State Commodity Reserve. But then its structure and subordination should be changed. The Agriculture Ministry can not conduct any agrarian policy without a reserve fund incorporated in it.

An optimization of the reserves (sale of redundant and unnecessary stocks) would enable the government to accumulate an “intervention fund” without additional injections from the budget. But even if it does have to resort to such expenses, they are justified. Besides, they are far smaller than the sums the government is spending now to put out the fire. Spending uselessly, without hope for positive returns in the future.

Information about the volumes of state reserves should be open to public. The fact that everybody knows the volume of the National Bank’s hard currency reserves - $6 billion - doesn’t undermine the national security.

It’s not necessary to sell all agricultural products through auctions. Primarily, it is grain that should be included in the exchange turnover. The auction prices would play the basic pricing role in the agrarian sector, similar to the role played by prices for energy resources in the national economy as a whole.

A viable agrarian exchange is not only an instrument of direct pricing, but also of indirect influence on prices for other agricultural products. However, its influence alone is not sufficient.

Prices Without Discrepancies

The term “price discrepancy” means a disparity between prices for agricultural products and prices for products of other branches consumed by agricultural producers. In the recent years, the dynamics of prices for foods and nonfoods has been positive: since 1998 the former have grown by 81.5% and the latter - by 22.9% (at a ratio of 1.48).

But this statistics is delusive as it is based on retail prices. And in 2001 and 2002 we witnessed a decrease in procurement prices while retail prices remained stable. It’s important how much money will find its way to the crop growers’ pockets, not to shops. And here figures are distressingly different, especially in the stock-breeding segment. Last year, Ukraine’s agriculture posted a 4.9% profit on the average (22.3% in plant growing), having lost UAH 0.198 on each hryvnya invested in stock-breeding.

The pricing trends in the stock-breeding are similar to what is happening on the grain market. Last year, prices for wool and eggs dropped by 21.5% and 20% respectively, for meat and dairy products - by 10.4%. Cattle and poultry was priced at UAH 3,200 per live ton in December 2002 versus UAH 4,500 in July (down 30%). The situation may aggravate in view of unfavorable forecasts for this year’s harvest. This may immediately result in cutting the livestock.

I have no doubts or illusions as to the government’s likely steps. The simplest way is to subsidize agricultural production. Partially, this instrument is already being used, through leaving the value added tax at the producers’ disposal instead of deducting it to the budget. Such a solution is ineffective for agricultural producers and immoral for low-income consumers.

The primary task of the national agrarian policy is to eliminate the disparity of prices, particularly through raising prices for agricultural and related products.

Unlike other, more effective instruments, subsidies do not augment the rural financial base. Disbursing UAH 2 billion to meat and dairy producers, the government shifts consumer demand to other sectors, thus subsidizing them indirectly.

It’s no secret that the basic consumers of meat are the better-off sections of the population. Price subsidies do not increase consumption (due to physical limits), but enable them to spend more on other products. Also, the immoral nature of this solution is obvious. The majority of Ukrainians never or very seldom eat meat. It is the poorer Ukrainians who the government should help first of all. But it turns out to be exactly the other way round: subsidies help those who have higher incomes and eat more, those who shouldn’t have the right to consume budget funds in this crisis situation.

This 2 billion in subsidies might as well find its way to the countryside, if it were disbursed directly to low-income citizens as direct material aid. Because, along with housing bills, foods dominate in the structure of their consumption and “eat up” the lion’s share of their incomes. Besides, the rural sector would receive an additional UAH 2 billion through non-subsidized prices.

Someone may allude to the European practice of subsidizing the agrarian sector. But Europe will inevitably abandon this practice vis-a-vis the aggravating global problem of food shortage. And subsidized European foods make it unprofitable to cultivate low-fertility soils. Of course, the international community is trying to do something about this problem. We have witnessed early steps in this direction in recent weeks: the EU has cut subsidies and liberalized the requirements to genetically modified foods.

It is extremely important to shift to direct social aid as a critical factor of support to the countryside and elimination of the price disparity (through increased consumer demand in a narrow segment of the market).

Another factor should be a political course toward increasing real incomes. Skeptics may argue that real incomes have been growing steadily over the past few years. But the problem is that for farmers prices have been changing unfavorably.

There is a simple explanation to this illogical phenomenon. Looking at price tags in shops or market places, one may say: why, with such high retail prices our countryside has every chance to prosper! But we see that retail and procurement prices in this country are different as night and day. The chain “purchase-processing-sale” works poorly. It’s very problematic to sell meat or milk even in big cities, let alone small towns, where farmers have to sell it for a song.

The central and local governments can and must look for solutions and serious impetuses, so that the chain can work in the interests of all. They can and must develop the network of procurement and processing of agricultural produce in small batches, i.e. eliminate the monopoly on purchasing and help those who are unable to sell what they have grown. The government should introduce a policy of subsidized (low-interest) credits to those who start procurement and processing businesses.

It is now, when drawing up next year’s budget, the executive government should declare its intentions: how much it is going to appropriate for specific purposes, in what amounts it is going to employ credits, how much it is going to spend on reducing interest rates on credits to the agrarian sector. Farmers must be told in plain language what credits they can count on.

It’s unclear even to me, a professional economist, what kind of price policy the government is going to conduct. This is inadmissible now, when clear signals are vital.

Stability Takes Trust

For several years, prices for many goods have remained stable, although no one keeps them fixed. Should anyone try to set a higher price, people don’t buy these goods. And if prices for some goods grow, there must be underlying reasons.

The food crisis which has plagued Ukraine is caused by mistrust. It’s not a situational, but a structural problem. It simply couldn’t be otherwise in the country where the agricultural business is an equation with many unknown quantities. Instead of giving clear signals, the government adds more unknown quantities to this equation, adding fuel to the fire of panic.

Instead of providing serious argumentations, the government only reassures that there are no reasons for the shopping rush as there are “sufficient reserves of grain”. But why doesn’t it say how much grain? Why doesn’t it let the people know what yield of grain is expected? Why does it keep still about the exact amount of food grain shortage? Why not calculate tentative amounts of import, amounts of its direct or indirect participation in the purchase of grain for the state reserve, or the volume of its intervention into the grain market? Why not make public forecasts for prices or plans of budgetary support to the cash-strapped agrarian sector?

There are more questions than answers. But there have to be answers, because the situation can be stable only if it is predictable.

P.S. At first I wanted to conclude this article by enumerating the steps the government should take. But I changed my mind and mentioned the most important aspects of the problem. And those who can’t read won’t bother to take any steps anyways.