Russia has been experiencing an unprecedented drought, the most serious one in 130 years of weather observations. The Volga Region and Central Russia have been the hardest hit. The main grain producing areas in the south and in Siberia have been mostly spared by the drought, although the harvest there is lower than in the previous year.
The area of grain producing land decreased by nine percent compared to last year. Crops were seriously affected on 10 million hectares – more than one fifth of the total cultivated area. After record harvests of 108.1 million tons in 2008 and 97 million tons in the dry past year, the Ministry of Agriculture expected 80-85 million tons this year; however, in early August experts warned that Russia may not be able to take in 70 million tons. Several days later Prime Minister Vladimir Putin reported that the harvest may be as low as 60 million tons.
Large grain reserves – about 24 million tons – allow Russia to easily meet its domestic requirements (75 million tons in 2009). But if the harvest is low, it will not be able to keep the reserves high enough (according to UN Food and Agriculture Organization criteria, these reserves must amount to 17% of annual consumption) even if it completely discontinues grain exports. And it is not clear how much of the reserved grain has rotted because of poor storage conditions, and perhaps it only fully exists on paper.
In this context, Putin's decision to fully stop all grain exports is absolutely justified. No matter how frustrating it is after record exports of 23.5 million tons in 2008 and 21.5 million tons in 2009 (compared with US exports of about 30 million tons), this is the only way to reliably meet the country's demand this year. If there is a surplus, it could then be exported later at higher global prices, which increased, among other things, owing to this decision.
The main threat is not in the lack of grain but in its effective use. Poor natural conditions are not as harmful as ineffective government management.
The reduction of resources creates opportunities not only for swindling the government but also for all kinds of profiteering. In July, prices on milling wheat increased by more than a quarter. Prices on flour for industrial consumers soared by more than 40% and are still rising. Agricultural producers are holding back grain, which creates the threat of local shortages in the hope to sell it later for more. And no efforts are being made to counter the outrageous conduct of monopolies.
The government's right to restrict price increases on socially significant commodities if the increase is over 30% per month does not help. What can the government do if these prices rise by 29.5%?
According to expert estimates, global food prices will increase by 10%-15% by the end of the year. Such growth is likely, and global profiteers may return to the food market and push the prices up to the highs of 2007-2008.
But even if global prices become only slightly higher, Russian monopolies will act as our oil companies act, and use this increase to justify the boosting of prices at home.
It has already become clear that the funds allocated to the countryside are not enough. Winter wheat is a major crop in central Russia and it is impossible to sow seeds in the ground that the drought has reduced to dust.
Direct support of the federal budget will be limited to those companies that completely lost their crops. Assistance to others will be rendered through complex quasi-market methods that may fail without a dedicated effort.
It seems that the government still underestimates the gravity of the situation. The measures planned are similar to the promises to reduce mortgage costs that are addressed to the 85% of the population that cannot afford it. Experts from the Levada Centre explain that these people do not even have the money to buy home appliances.
Fodder is a bigger problem than grain. The massive loss of fodder crops will deal a heavy blow to the cattle breeding that only just started to recover, and the increase in grain prices will only exacerbate the problem.
In some regions, private farm owners used to pay for the fodder for the cattle only after selling the meat.
Higher grain prices will make this impossible and private farm owners (as well as economically weak agricultural companies) will have to slaughter their cattle on a massive scale, therefore further reducing their livestock. In the meantime, private farm owners keep about half of the pigs in the country.
The massive slaughter of cattle will decrease purchase prices on meat, and the retail monopolists will not lower prices in shops. It will become unprofitable to raise cattle, and domestic livestock breeding that is only in the process of attempting to recover will receive the second strongest blow after the liberal reforms of the early 1990s.
The shortage of meat will become more serious with the depletion of reserves. It will be replenished by relatively cheap (for the retailer rather than for the customers) imports that are blocking the development of livestock breeding.
This will create a favourable environment for the massive abuse of the monopoly position (especially in retail): the unrestrained growth of prices, artificial shortages and an even higher "corruption tax" that is backbreaking as it is. If the monopolising attitudes and corruption are not countered effectively, prices on bread, cereal, pasta, milk, meat and many other products may grow not by the currently predicted 10%-20% but even double. If official statistics cover up this increase it will become even more destructive.
It is possible to avoid this. There is still time for taking measures, but time is being wasted. The trouble is that to minimise the consequences of the drought, we have to accomplish something that seems incredible for the past quarter century – drastically reducing corruption and abuse of power of monopolies, at least in agribusiness and retail. The technical measures needed to reach this goal are well known, but less and less time remains for resolving to use them.
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Fodder is a bigger problem than grain. The massive loss of fodder crops will deal a heavy blow to the cattle breeding that only just started to recover, and the increase in grain prices will only exacerbate the problem.
The views expressed in these articles are the author's and do not necessarily represent those of the editorial board.
Mikhail Delyagin