In August 2007, there was a discussion in Bulgaria about the possibility of opening the State Reserve and supplying the market with wheat at a lower price than the market price. The realisation of this measure was deferred, for now, because it would need to be approved by the European Commission first.
The so-called Intervention Agency, part of the Common Agricultural Policy of the European Union (EU), aims to “correct” prices of agricultural products during periods of low prices, because of excessive supply, or vice versa and it operates during the period November 1 to March 31. Of course, there is not, there just cannot be, a theoretical justification of what is “too low” or “too high” a price in a market economy with free competition. But a centralised government body decides what the price should be and attempts to govern the market.
The were other options for dealing with this year’s low crop yield and providing enough grain for the processing industry and for animal feed. They were: 1) to import grain, duty-free, from non-EU member states or 2) to purchase grain from the reserves of Intervention Agencies in other member states. However, during the scarcity of a good, it is free trade – without quotas, 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 was due to speculation. However, what does speculation mean? That is taking more risk and expecting a higher return in exchange. Thus, agricultural producers acted as all other entrepreneurs and businessmen and followed the market signs. They could only increase the prices to a level that the market would stand.
Prices are sensitive to changes in supply and demand, not to someone’s idea of fair price. On one hand this summer there was greater demand due to the growth of the economy and the development of the animal breeding sector, a widening of the market and there was free access to the Common European market – custom duties within the EU were abolished. On the other, there was less supply due to the poor yield and petrol and labour prices had increased as well. Interventions can only lead to distortions, the creation of a culture of dependency, rent-seeking behaviour and making economically wrong decisions on the market as a result.
When questioned whether he could do something to stop the increase in the price of wheat in Romania, Prime Minister Calin Popescu said, “We are in a market economy. What do you want me to do? Romania will not return to controlled prices. We have only recently liberalised all products, following a long process. We do not want to introduce measures for administrated prices. I think Europe would laugh at such measures...The Prime Minister decided the ‘fair’ price of bread only before the ‘90s”. At the same time, the Prime Minister of Bulgaria, Sergei Stanishev was calling for a supervising commission for the control of prices.
History repeats
Now we will look back over several years and follow what happened on the grain market right after the wheat harvest season – from July to October.
2003: The wheat yield was poor due to bad climate conditions. Producers asked for 153 euro for a ton of wheat on the Commodity Stock Exchange but real deals were made at 133 euro a ton during the summer months. At the same time, farmers insisted on compensation from the state for the poor yields, while livestock farmers and bread producers requested that the state intervened on the market to push the prices down. In September, there was a ban on the export of wheat and flour that aimed at “protecting the domestic consumption”. About 200 000 tons of wheat was released from the State Reserve. Despite this, the price of the wheat reached 177 euro a ton in December.
2004: The yield was good and supply increased, which pushed prices down. The average bid price for the season was 81 euro a ton or 50 per cent less than the previous year’s price. The state intervened in order to increase the price and purchased, through the State Reserve, 170 000 tons of wheat at a higher price than the average market price.
2005: Floods and heavy rains during the summer caused damage to part of the crops and farmers, that were negatively affected, wanted compensation from the government. Supply was still high and in September the price of the wheat was 71 euro a ton. The State Reserve purchased 122 000 tons of wheat at a higher price than the market price in order to “activate” the market and increase prices. At the end of the agricultural year, prices reached 98 euro a ton.
2006: The yield was good. The price of the wheat in August was 81 euro a ton. Agricultural producers protested and threaten to block roads due to the low market price. They wanted the government to increase subsidies and the State Reserve to purchase over 100 000 tons wheat at a price of at least 100 euro a ton.
2007: The yield was bad again due to dry weather, very little snow in the winter and droughts in the summer months. The asking price on the Commodity Stock Exchange reached 200 euro a ton. The farmers will receive additional grants from the government because of the low yields. Bread producers and livestock farmers insisted the government to take action to decrease the price of 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 thing that is certain – the interested parties will again plead for interventions on the market.
The European Commission not only allows, but actually promotes the idea of intervention in the market in the agriculture and food industry sectors, through the mechanisms of the Common Agricultural Policy – production quotas, subsidies, interventions, export subsidies and grants. Therefore, we should not be surprised that farmers, year after year, place different requests on the government. This, however, has not proven to be a successful strategy because the sector is lagging behind the other sectors of the economy and agricultural producers have got used to receiving protection from the state and have become dependent on someone else to rule their lives.
