Bread Price Attests to Foul Deals
25 October, 2012
Bread Price Attests to Foul Deals

Bread price ups and downs speak of dirty deals and monopolies in this sector of Georgian economy. As soon as the election campaign fever passed away by October 1, 2012, Georgian consumer faced a 15-20% growth of bread prices – prices on all sorts of bread went up by 5-10 tetri. The price hike did not come as a surprise in fact as far as the prices for wheat and corn increased significantly during the summertime on international market and the

only reason bakeries held old prices, was the political pressure of the ruling National Movement party [which became an ex-power after the elections] to gain hearts of electorate during the election campaign. 

Inclement weather almost halved the crop harvest globe over, jacking prices up by 20% during summer and situation get worse by the end of the year.  In its October report, the US agricultursl department  reduced its monthly forecast for global wheat harvest by more than 5 million tons to 653.05 tons compared to September; the forecast for global wheat reserves dwindled by 3.71 million tons to 173 million tons. Both Russia and Ukraine [regional wheat suppliers to Georgia along with Kazakhstan] are thinking to address to export restriction remedies starting mid-November and expect price hike at internal markets. Ukrainian experts predict a 20% growth in price of bread. Prices increased in neighboring Azerbaijan that by major supply depend on its own wheat production as well as in Armenia facing around 30% growth on bread prices starting this year.

Generally Georgian entrepreneurs including bakeries eagerly react on the slightest price-ups at the international market. But this time Georgian bakeries maintained old prices until elections [reducing the weight bread to offset the losses] and gave a vent to feelings after elections.

According to Malkhaz Dolidze, the Chairman of the Association of Bread Producers as well as Director of Bakery#4, the reason to the October’s price-hike is high prices on flour that makes roughly 50% of the bread self-price. Flour prices crept from GEL 38-39 fixed per a 50 kilogram sack of flour in September to GEL 47 in October affecting the self-price of bread.

“When prices exceed GEL 40 per sack it makes the self-price of the bread expensive, but GEL 44 is a real critical level and after crossing this limit I have to work on an insignificant profit of 3%, while an entrepreneur needs at least 5% in profit to maintain and develop business,” Dolidze said in the interview with Georgian Journal.

He thinks the key reasons of high prices on bread in Georgia are the lack of strategic reserve of wheat [Georgia consumes around 800 thousand per year] and the monopoly at flour market.

“There is no competition at the market. You can get only locally produced flour that is more expensive than the imported flour. The state decided to boost local production and it encourages mills to grind the imported wheat rather than import flour. Ultimately we have no choice,” Dolidze said however shied to elaborate why bakeries cannot import the flour themselves.

Levan Silagava, Head of Association of Wheat Entrepreneurs incorporating mills and wheat traders, counters the reason for high prices on flour is the price hike on wheat at the international market increasing from USD 250-270 in January of 2012 to USD 350-370 in October.

Silagava assures it is the quality not the monopoly that hampers the flour import.

“Wheat can be kept for 5-6 years while flour is a fast-perishable product and can be stored for a maximum year, besides the due-quality-standard flour is very expensive to import. Cereal producers for example need flour of higher quality than bread-flour from technological point of view and they do import flour without restriction. Who baffles bakeries to import flour too?” Silagava elaborated with GJ.

According to him, the issue traces back to 2004 when the liberally inclined rose-government canceled quality certificates on flour and the under-quality cheap flour infested Georgian market. Countries exporting flour especially Russia and Turkey as well as Ukraine and Kazakhstan [major flour supplier to Georgia] have intricate legal schemes to enjoy profits of expired flour reserves that entered Georgia though damping prices. Turkey for example to boost its national export fixes 135% of customs tolls on the imported flour. On the other hand, the state covers 30-40% of the imported wheat price to those entrepreneurs who have already imported wheat, reprocessed it and exported the flour. Thanks to this preference Turkey is the second biggest wheat trader world over. Russia has mechanism to sell out the expired flour reserves by at least USD 3-4 cheaper.

“We are in a very aggressive environment, and to hurdle the low-quality flour import in 2009 the state restored the quality certificate demand on the imported flour. But permissions on the flour import requires good quality flour standards that are expensive to import and this is the reason bakeries do not import flour,” Silagava said.

Badri Ramishvili, an agriculture marketing analyst, believes the bakeries’ presumption on the market monopolization are not groundless as far as Georgian food market is largely monopolized. But he also doubts that bakeries themselves also enjoy deals since none of them reduced prices on bread after the flour price almost halved past summer.

Analysts believe flour makes less than 40% of bread price [although bakeries insist on 50-60%]  and if crop price reduces by 20% bread price is also supposed to have a 10%  drop. The price per sack of flour reduced roughly by 40% since February of 2011 to March of this year [from GEL 52 to GEL 30 per sack] but no price-slump ensued.  Dolidze explains bakeries had to reimburse losses they faced during the price hike in 2010-2011 but Ramishvili believes that halved flour prices  must be reflected on the product whatever the entrepreneurs excuses can be.

“But there is a psychological effect too; our entrepreneurs are eager to increase prices when the market trend allows but they react reluctantly on the price-slumps,” he said.

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