Deteriorated expectations as to this year grain harvest have emerged due to unfavorable weather conditions. Together with decreased supply on the world grain markets from certain countries and uphold in price level, this spurred the food security concerns and called for preventive policy measures.
According to the latest forecast announced by the Ministry of Agriculture, this year grain harvest is expected at 38.6 million tons, including nearly 16 m tons of wheat (and 9 million tons of wheat for food use). If aggregated, it means 15% reduction of domestic supply. Could this number raise any concerns about the lack of grain supply?
The Draft Cabinet of Ministers Decree published in October[1] extended the lists of products subject to quota to include corn and buckwheat. Moreover, the quota volumes have been substantially reduced^ for wheat and mixtures of wheat and rye from 1.5 million tons to 500 thd tons, for barley from 1 million tons to 200 thd tons, and established quota volume for buckwheat and rye (1 thd tons for each commodity) effectively imply the ban for export for the respective period. Given actual export volumes for October-December 2009 (nearly 3.25 million tons of wheat and 1.5 million tons tons of barley[2]) and expected reduction of 15% in domestic supply, such export quotas would be binding and entail losses for the exporters, farmers, who will not be able to benefit from favorable world prices, and the whole economy.
The consequences of export restrictions valid between 2006 and 2008 show the negative overall impact of grain quotas and licensing for the economy[3]. Wheat export grain quotas in 2006 alone with the quota volume of 400 thd tons (compared to 500 thd tons now) harmed Ukrainian economy by nearly 8 million USD[4].
Furthermore, the surplus of consumers of grain-based products appeared to be limited. In fact, quotas benefited only processing companies, but not the final consumers. In 2006-2008, despite the quotas in place, domestic bread prices remained stable showing that costs of the feedstock is only one factor affecting the final market price. Since price of wheat constitutes only a fraction of total production costs of bread, and bread and flour cover not more than 5% in the consumer basket, potential losses from export restrictions for the producers would by far exceed the potential gains for the consumers resulted from price decrease.
Introduction of any export restriction undermine investors’ and international trade partners’ that is necessary precondition for productivity growth through the whole food supply chain. High vulnerability of quotas to distribution mechanism (where some firms may exert efforts to get privileged access by rent seeking) and dependency of the level of accuracy of information about grain supply and demand balance for proper calculation of quota volumes and duration are also among main disadvantages of the quota system.
Address assistance is an alternative tool in times of sharp price increase. Such systems imply support of families when the food expenditures, including spending for bread, flour and groats, exceed certain share of the household’s income[5]. Defining the need of such support and actual transfers would entail much less costs compared to those emerging from any restrictions for external trade and allow the government to protect families in need.
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[1] http://me.kmu.gov.ua/control/uk/publish/article?art_id=151846&cat_id=32862
[2] UkrAgrocunsult data
[3] See. Stephan fon Cramon and Martin Raiser “”The Quotas on Grain Exports in Ukraine: ineffective, inefficient, and non-transparent”, policy paper AgPP10, Institute for economic research and policy consulting, November 26, 2006..
[4] For details, see Kuznetsova G. The welfare effect of export restrictions: the case of Ukrainian market for wheat. LAMBERT Academic Publishing, 2010 (ISBN: 978-3-8433-5444-8).
[5] Such system requires definition of the share of expenditures for eligibility for support programs but does not require detailed analysis of the reason behind the price jump (unexpectedly high shortage of domestic supply, inability to freely import from abroad, sharp increase in costs of production inputs)
