Interventions On the Grain Market – Will They Last Forever?

In august 2007 there was a discussion in Bulgaria for the possibility of opening of the State Reserve and supplying the market with wheat at a lower than the market price. Realization of this measure was deterred for now because it should be approved by the European Commission at first. The so-called Intervention Agency, that is a part of the Common Agricultural Policy of EU,  aims to „correct“ prices of agricultural products during periods of low prices (due to excessive supply) or vice versa and it operates in the period  November 1st – March 31st. Of course, there is not (just there can't be) a theoretical justification what is “too low” or “too high” price in a market economy with free competition. But a centralized government body decides what the price should be and begins the attempts to govern the market. 

The other options for dealing with this year bad crop yield and supplying enough grain for the processing industry and for feeding the animals are: 1) duty-free import from third countries and, 2) purchase of grain from Reserves’ of Intervention Agencies in other member states. During scarcity of a good, it is free trade (without quotes, duties and other limitations) that is the most effective pill against sharp increase of prices.

Are agricultural producers speculators?

The “Federation of Consumers” in Bulgaria made a statement that the recent increase of wheat and flour prices in the country is due to speculation. However, what does speculation mean? That is taking more risk and expecting higher return in exchange. Thus, agricultural producers act as all other entrepreneurs and businessmen and follow the market signals. They can only increase the prices to a level that the market can take.

Prices are sensitive to changes in supply and demand, not to someone's idea of fair price. From one side, this summer there is greater demand due to the growth of the economy and development of animal-breeding sector, widening of the market, free access to the Common European market (custom duties within the EU were abolished), and on the other side – there is less supply due to the bad yield, petrol prices grow up, labor prices – as well. The interventions can only lead to distortions, creation of culture of dependency, rent-seeking behavior and taking economically wrong decisions on the market as a result.

Here it is what the Prime Minister of Romania Calin Popescu replied to the question whether he could do something to stop the increase in the price of wheat in Romania: „We are in a market economy. What do you want me to do? Romania will not return to controlled prices. Hardly had we liberalized all products, further to long efforts. We do not introduce measures of administrated prices. I think Europe would laugh at such measure…Prime Minister told the “fair” price of bread only before ‘90s.“ At the same time, the Prime Minister of Bulgaria, Sergei Stanishev, summons up a supervising commission for control of prices.

History repeats

We will look back several years and will follow what happened on the grain market right after the harvesting season of wheat – from July to October.

2003 – the wheat yield is poor due to bad climate conditions. Producers ask 153 Euro for a ton of wheat on the Commodity Stock Exchange, but real deals are made at 133 Euro per ton during the summer months. At the same time, farmers insist for compensations from the state for the bad yields, while animal-breeding farmers and bread producers request the state to intervene on the market to push down the prices. In September there is a ban for export of wheat and flour aiming to „protect the domestic consumption“. About 200 thousand tons of wheat is released from the State Reserve. Despite this, the price of the wheat reached 177 Euro per ton in December.

2004 – the yield is good, the supply increases, which pushes the prices down. The average bid price for the season is 81 Euro per ton or 50% less than last year price. The state intervenes in order to increase the price and purchases through the State Reserve 170 thousand tons of wheat at a higher price than the average market price.

2005 – floods and heavy rains during the summer cause damage to some part of the crops and farmers, that are negatively affected, want compensations from the government. The supply is still high and in September the price of the wheat is 71 Euro per ton. The State Reserve purchases 122 thousand tons of wheat at a higher than the market price in order to „activate“ the market and increase prices. At the end of the agricultural year, prices reach 98 Euro per ton.

2006 – the yield is good. The price of the wheat in August is 81 Euro per ton. The agricultural producers protest and threaten to block the highways due to the low market price. They want from the government to increase the subsidies and the State Reserve to purchase over 100 thousand tons wheat at a price of at least 100 Euro per ton.

2007 – the yield is bad again due to dry weather, snowless winter and draughts in the summer months. The ask price on the Commodity stock market reached 200 Euro per ton. The farmers will receive additional grants from the government because of the low yields. Bread producers and animal-breeding farmers insist the government to take action to drop the price of the grain.

2008 – there are two scenarios. The price will be either too low or too high according to the agricultural producers However, there is one certain thing – the interested parties again will plead for interventions on the market.

The European Commission not only allows, but actually conducts the ideas of intervention in the market in the sector of agriculture and food industry through the mechanisms of the Common Agricultural Policy – production quotes, subsidies, interventions, export subsidies, grants. Therefore, we should not take it as surprise that farmers year after year have different requests to the government. This, however, does not prove to be a successful strategy, because the sector is lagging behind the other sectors of the economy and agricultural producers get used to receive protection from the state and become dependent on someone else to rule their lives.