Bread Price Journal
19 September, 2013
Bread Price Journal
Price on the imported flour plunged by 20% since August and reduced the bread price by around 5-10 tetri. However, bakeries seem reluctant to likewise lower the prices on their products in the near future because they believe prices are already low in Georgia compared to neighboring countries. Nevertheless they do not rule it out if the low prices on wheat remain stable at the international market.
Thanks to brimming crop worldwide this year, commodity prices on wheat went down
from USD 370 per ton (the price that prevailed in the period from November 2012 to March 2013), to USD 260-270 in August 2013. Actually, wheat prices reached their peak of USD 370-380 by the end of 2012 due to harvest losses. Then they started downwards from March this year, as the 2013-2014 year harvest forecast was optimistic, and reached the bottom USD 270 by past June. As a result, prices for flour dropped from GEL 44 [fixed in January of 2013] to 37 per 50 kilo sack at mills in Georgia in August. This is over 20% price drop which implies at least 10% drop on bread prices, economic analysts explain. However, Georgian bakeries did not took off a single tetri from old prices ranging from 60 to 80 tetri per 600-700 gram loaf. Generally, Georgian entrepreneurs including bakeries eagerly react to the slightest price-ups at the international market but shy with the price-drops. Past fall when prices went up on bread due to the price hike for flour, Malkhaz Dolidze, Chairman of the Association of Bread Producers as well as Director of Bakery #4, said, GEL 44 was a critical margin after which bakeries could not maintain old prices. However, now when flour price were reduced from the critical GEL 44 to 37, he does not set the bottom margin after which bakeries are supposed to cut bread prices down.
“Bread price is a matter of competition; you can find a loaf for 40-50 tetri too but it weighs less of course. Yet, it creates competition,” Dolidze said in the interview to Georgian Journal. “Besides, flour is not a decisive factor. There are other significant expenses in bread manufacturing such as prices on water and electricity which are higher for entrepreneurs than households, plus distribution and so called shelf-price that supermarkets and marketplaces add to the price fixed by bakeries. Besides, bakeries have outstanding liabilities to mills that hinder bread plants from reducing prices on their products.” High energy and water prices have not changed for many years and they make up similar expenses on a year-to-year basis. However, bakeries used to increase prices on bread simultaneously as flour became expensive, explaining that flour made around 50% of the bread manufacturing cost. The sector experts say there is a psychological factor in play here: “our entrepreneurs are eager to increase prices when the market trend allows but react reluctantly to price slumps because they do not expect stability.” More than that, the trade outlets are unlikely to reduce prices if bakers do it. The former will enjoy the bigger profit margin leaving consumers to count losses. Therefore, bakeries prefer to enjoy higher profit themselves and keep old prices. Levan Silagava, Head of the Association of Wheat Entrepreneurs, assures that prices reached their bottom this year thanks to lavish crops and will not change at least till February when the southern hemisphere will come forward with its harvest. Dolidze does not rule out lower prices if international market keep stable but declined to specify expected length of the stability period. He believes the best remedy to maintain lower bread prices is cutting the value added tax on agricultural products from 18% to 10%.
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