Igor Jadan. The mystery of Russian bread

The mystery of Russian bread
Igor Jadan

Publication date: February 4, 2004

X leb is a special product. This is so already because everyone knows that it is so. And when the president, at the ministerial meeting on February 2, starts talking about bread prices, one should think that this means not so much the beginning of the election campaign (which all the newspapers wrote about as if they did not understand that its outcome was already a foregone conclusion!), but another a sign of the “end of a beautiful era” of the authorities’ abdication of responsibility “for the market” - simply put, for the country being turned into a market and nothing more.

Bread, meanwhile, is a strategic product, almost like bombers and cruise missiles. A country with food problems can easily be brought “to its knees” - and “external conditions” will be dictated to it, regardless of what deterrent potential it has. That is why in the same USA there existed and continues to exist a system of strict and at the same time flexible state regulation of agricultural production, called the FARM Act (Farm Agricultural Recovery and Maintenance Act). This system is revised from time to time (but not constantly, like laws in some “developed bureaucracy” states), and experts recognize that its effectiveness is one of the main factors in stabilizing prices for agricultural products.

In Russia, despite the good harvest of 2003, bread prices not only cannot be called stable, but, on the contrary, they are growing at a faster pace than the cost of the price components of bread (grain, electricity, etc.). After they complained to Putin about the rapid rise in price of Russian bread last week, the president brought this issue into focus at a meeting with members of the government.

At this meeting, Deputy Prime Minister of the Russian Federation Alexei Gordeev noted that bread prices are extremely difficult to predict. According to his data , bread in St. Petersburg is 40% more expensive than in Moscow. And in Kemerovo, bread is 2.5 times cheaper than in St. Petersburg - despite the fact that little grain is produced in this region. “Analysis shows that it is difficult to grasp the economic trends in rising grain prices,” Gordeev tried to justify himself (Kommersant, February 3, 2004).

- For goodness sake, why is it “difficult to catch trends”?! The "economic trend" can be elusive. But the political one - oh, how obvious! Let me assume, based on the data presented, that the level of grain prices correlates with the determination of local authorities to solve other problems, that is, simply put, with its authority. Where speculators understand that they will “get it in the neck,” they do not initially try to “climb the ladder too high.” In this case, their constant desire to get into the buyer’s pocket in accordance with the postulate of “ expected utility maximization ” is limited only by the desire to minimize the harmfulness of such a business strategy.

So, it is almost obvious that the trader will expect a sharper reaction to price promotion from the governor of the Kemerovo region rather than from the administration of St. Petersburg. At least, the logic of domestic political life tells him exactly this version of the development of events. If this assumption of ours is correct, the situation with bread prices looks more favorable than one might think when listening to Gordeev. Indeed, in this case, the situation with bread prices is more manageable than if price increases were strictly tied to unchanging and eternal economic laws. The authoritative determination of power is still a more manageable thing than economic law.

It is also worth clarifying a little the conditions of competition in this very specific market - the bread market, since many people pinned their hopes on it as the main factor in containing price increases. Competition in the market for essential goods - and bread is one of them - occurs not so much in the form of a competition between producers of higher-quality and lower-quality products, but in the form of a race between the ambitions of sellers and intermediaries: who is bolder and able to set higher price tags without fear - he won. Imagine if air was on sale: would a choking person look for a lower price or would he still buy from a seller who is closer, although more expensive?

The rate of growth of grain prices is also affected by the country's general economic successes - a significant increase in well-being in the past year. For this reason, the average (not the poorest) buyer is now more willing to part with an extra ruble than three years ago if he has to walk an extra kilometer to save money. The consequences (in the form of higher prices) of this growing "laziness" of the middle class and its willingness to accept higher prices are primarily suffered by the poor.

It is also worth noting that the economic predictability of prices for agricultural products, according to some , is rather a property of small and so-called “ efficient ” markets, where each participant has approximately the same information about what is happening in the market. In Russia, depending on the region, a market participant may not only be informed differently, but also assess the possible consequences of the same information differently. As a result, the behavior of parts of the market is more reminiscent of a random walk or the “ drunken gait ” than the result of the “ law of one price ”.

As a result, the regional dispersion of bread prices is explained by the political heterogeneity of the state to a greater extent than by the heterogeneity of grain production. The situation with a large “dispersion” of prices is aggravated by the quality of the product itself: bread, unlike grain, is a perishable product, which violates the market mechanism for punishing trade speculators. It is not so easy to satisfy the demand for bread from a region with a high price by importing grain products from regions with a lower price and, thus, leveling out prices. Therefore, the relatively high mobility of the grain market does not in itself guarantee stable prices for bread. So on January 17, the decision taken by the government in December to limit the export of food grain - both wheat and rye - came into effect, after which exports to these groups of grain practically ceased. However, bread prices continue to rise.

As for the price of grain, in Russia it is only 20% of the price of bread. However, the movement of grain prices (to a lesser extent a real movement, and to a greater extent - an expected one) continues to influence the price of the final product - bread. In this sense, statements made by politicians regarding the grain harvest and containing assumptions about the price of bread may influence this price to a greater extent than the harvest itself.

Thus, during a similar Russian jump in bread prices in Ukraine at the beginning of last summer, despite the relative failure of the grain harvest, no noticeable movement in bread prices was noted until the moment when in several regions at once - perhaps in a coordinated manner - local government leaders made statements about the supposed inevitability of a future shortage of bread. As an example: the Kharkov mayor in his speech stated that the grain harvest was “virtually destroyed”, and there was not enough grain for sowing spring crops and that the region was facing a “terrible crop failure” and almost famine. At the same time, approximately the same voices began to be heard in a number of other regions of Ukraine. As a result, bread prices rose the next day by tens of percent, which forced the central Ukrainian government to limit the price of bread by order. Bakery factories were ordered to sell their products at voluntarily set prices, in some places below cost. At the highest level of Ukraine, people started talking about the fact that “some people are deliberately stirring up panic,” although this “some person” was the local leadership appointed from the center.

In this sense, the autumn conversations of the Minister of Agriculture of the Russian Federation that “ bread has become more expensive and will become more expensive ” are not just “frankness”. Such statements, as well as statements that it is allegedly useless to fight speculators and that one should focus on food assistance programs for the poorest, can also be classified as a kind of “market intervention.” In this same regard, the autumn proposal of the presidential economic adviser not to interfere in the grain market “at the height of demand and price” looks somewhat strange (Kommersant recalled it on February 3, 2004) - administrative intervention has already been made in the form of hints from the authorities, perceived by traders in no other way , as a “green light” for price increases. The observed “height of demand” may not have existed at all if government officials and economic advisers had not intervened from the very beginning , if they had simply “kept their mouths shut.”

In Ukraine, as you know, the price of the grain component of bread is a quarter higher than in Russia. Accordingly, the margin of retailers in the price of bread is less than in Russia. As a result, in the Ukrainian case, the limitation of price increases (30 percent) was done at the expense of the interests of bakeries, which were ordered to sell products at a fixed price, even if they were unprofitable, and not at the expense of traders (although they played an important role in stabilizing prices on the Ukrainian market and prompt supplies of grain from Russia). As in Ukraine, the Russian authorities will have to decide whose interests should be recognized as “inflated”, and by “bringing them to reality” to limit the rate of price growth. With retail bread markups of 30-40%, the answer to the question of whose interests should be considered “inflated ambitions” is almost obvious.