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Archive 2005

  • 21.12.2005

    An Ex-Ante Analysis of a Minimum Price System for Ukraine

    (Code:31)

    Ukrainian agricultural markets have been characterised by occasional instability throughout the last decade, which has further reinforced the widespread conviction that market mechanisms do not lead to satisfactory results in the agro-food sector. Such mistrust against the 'invisible hand' has led to repeated attempts to stabilise prices and support farm incomes through various market interventions, most of which, however, remained ineffective after all. In the aftermath of the severe winterkill in 2003, which reduced the wheat harvest to one third of its average volume, a comprising effort was started to get domestic agricultural prices under public control. The major policy tool to achieve this goal is the introduction of minimum prices coupled with extensive intervention purchases for the most important agricultural commodities.

    In this paper we investigate possible consequences of the introduction of such floor prices in agriculture and the food sector of Ukraine on production, producer incomes, domestic market prices, trade, and overall welfare. The quantitative part of the analysis is carried out with the Regional Agricultural Sector Model of Ukraine (RASMU). This model aims at analysing the consequences of different policy actions in the field of agriculture and the processing industry. Our simulation results clearly show that the use of minimum prices is incompatible with Ukraine's position as a net exporter of agricultural commodities and its aspirations to join the WTO, and that such an intervention system would inflict a considerable burden on consumers and the state budget.

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