Note #3 – March 2004
Wheat Crisis Monitoring: 2004 Q1
The situation at the Moldovan wheat, flour and bread markets still remains to be quite difficult in 2004 Q1. Despite the actions aimed to activize the wheat and flour import taken by the Parliament on the 25th of December, 2003 (Law #568-XV), their supply to Moldova's market was quite modest. According to the estimate of the Ministry of Agriculture and Food Industry there were imported 7.27 thou tons of wheat and 31.697 thou tons of flour in 2004 Q1 and Moldova will need another 115 thou tons to provide for its necessity in wheat till the new harvest, since only 131.27 thou tons (or 43.8%) out of the planned 300 thou tons were imported.
The attempts to alleviate the impact of the bread price rise through production of cheap bread by Franzelutsa SA affected negatively its financial indicators and, as a result, Franzelutsa SA, supported by the Ministry of Agriculture, worked out a draft programme to prevent the enterprise’s bankruptcy envisaging: first, the state is to restore at least a part of the lost floating assets (9 mil MDL according to some estimates) and introduce a compensation mechanism of the poorest population strata from the state reserve and, second, the compensation from the state reserve at prices should provide for at least zero profitability of bread supplies to state institutions (hospitals, etc.) where up to 25% of cheap bread is delivered.
The situation that has developed in the country’s bread supply (bread price rise first of all) and information gathered by the leaders of Franzelutsa SA was examined on February 28, 2004 at the session of Higher State Council for Security (HSCS). The Council decided to form a special parliamentary commission to assess the situation on the wheat and bread market. That same day the Government during its special session in pursuance of the HSCS’ decision dismissed A. Roibu, director of the Center for Fighting Economic Crimes and Corruption, G. Lungu, deputy director of the Agriculture Direction of the State Chancellery and reprimanded D. Todoroglo, Minister of Agriculture and Food Industry.
As a result of the parliamentary commission’s investigation of the situation at the wheat and bread market several criminal cases were opened (including cases against former executive officers of Franzelutsa SA).
Considering the fairly low import activity the Government formed at the beginning of March a working group within the Ministry of Agriculture led by the Minister of Agriculture and entrusted it with a task to provide the country with bread. It decided to buy 25 thou tons of food grain at the lowest possible price at the state budget expense. It was supposed that the delivery would be done during March. But this intention was not realized in short terms.
The corresponding amendments were made to the Law on the State Budget for 2004. The money has to be reimbursed to the budget immediately after the wheat is sold at the internal market.
It was only 18th of March, 2004, when the National Agency for State Purchases (NASP) carried out the first tender for purchase of 25 thou tons of food grain for the needs of the State Agency for Material Resources and Humanitarian Aid. Terms for companies – participants were as follows: payment upon arrival of wheat to the Ghindesti railway station, Floresti, gluten substance in wheat of the 2003 harvest no less than 25%, protein substance – 12.5%, humidity no more than 14.5%. Three companies applied to participate: “Product-Impex” SRL (25 thou tons of food grain from Canada at 148 USD per ton); “Trans Oil” LTD (12,5 thou tons of food grain from Kazakhstan at 222 USD per ton); “Кenja” SRL (25 thou tons of food grain from Kazakhstan at 175 USD per ton).
On the grounds of failure to comply with the tender terms the NASP declined all proposals: “Product-Impex” SRL (laid down a condition that delivery has to be paid immediately after shipment from Canada); “Trans Oil” LTD (delivery of only 12.5 thou tons instead of the declared 25 thou tons); “Кenja” SRL (presented incomplete set of papers).
The second tender was organized by the NASP on the 6th of April, 2004. There were four companies that participated: "Voest-Alpinie Intertraining" (25 thou tons of wheat at 233 USD per ton – delivery of goods to the Transnistrian border – and at 245 USD – delivery to the Ghindesti railway station, Floresti); "Trans Oil Ltd" (13 thou tons of food grain to the Ghindesti railway station at 2.72 thou MDL (226 USD) per ton); “Кenja” SRL (25 thou tons at 165 USD from Kazakhstan to the Ghindesti railway station), "Moldova Druc" (25 thou tons from Latin America or Canada at 164 USD per ton or 50 thou tons at 161 USD per ton to the port of Odessa, Ukraine). “Product-Impex” SRL renounced its participation in the second tender due to disagreement with the payment terms (delivery of wheat to the Ghindesti railway station). The results of the second tender organized by the NASP are still unknown (it was supposed that they would be announced in 15 days).
In the meantime, entrepreneurs prefer importing flour. At the present, at the Moldovan universal commodity exchange wheat flour (in any amount and of any quality) is offered at 4.8-5.2 thou MDL (375-406 USD or 220-250 euro) per ton.
It is not improbable that, if a company wins the tender for the wheat supply, the country will not get the wheat earlier than the second half of May, 2004. We should note that prices for wheat at the international market remain to be quite high (see the FAO forecast).
Considering that both Moldova and the region as a whole are into a good crop of cereals and the supply deadline of the “state wheat” has not been set yet, it must not be ruled out that the wheat supplied under the state purchase could turn out to be excessively expensive and the situation of 1997 will recur (see the Moldovan Wheat Market Research, FSP/CISR, 2003, p. 9).
It is symptomatic that the Government prepared in March, 2004, a draft law stipulating for repudiation of grain-purchase enterprises’ debts to the Ministry of Finance resulting from the difference between the purchasing prices for wheat bought for external credits rendered within the PL-480 Programme and the prices at the internal market at the time of its receipt.
Besides the state and market actions there is another channel of coming of foodstuffs to Moldova – humanitarian aid:
· 10 thou tons of food grain (Russia), 2003;
· 2.1 thou tons of food grain (China), 2003;
· two US organizations, IFE&CN and FFP, will supply 8.9 thou tons of flour for macaroni production within the Food Humanitarian Aid Programme for 2004 proposed by the international organization IPND (USA);
· the Swiss Agency for Development and Cooperation started a project for urgent humanitarian aid in 200 Moldovan villages. 7 thou persons will get one-time cash compensations of 850 MDL within the project. It is realized in collaboration with the Ministry of Labor and Social Protection.
The crop forecast for 2004 in Moldova gives hope. According to the data of the Ministry of Agriculture there were 264 thou ha sown with winter wheat in autumn of 2003 (50 thou ha more than in 2002); preparation for the spring field work is done ahead of the schedule. Economic units have been supplied with seed materials; they are now being provided with fuel, including through Moldresurse IS. The total wheat harvest is expected at circa 3 mil tons. Another action followed: on 8th of April, the Parliament presented an initiative to the Government to supplement the cereals list (rye, oats and maize) exempted from customs fees during import and prolong the deadline the cereals exemption from the customs fees payment ends – from the 1st of July to the 1st of September, 2004.
FAO forecast for 2004/2005 marketing year for world wheat production is 596 million tons, 6.6% more than in 2003. Compared with last year, output is expected to increase significantly in Europe and slightly in Asia, more than offsetting likely reductions in all other regions, the most noteworthy being in North America and in Oceania.
In Europe, a strong recovery in wheat production is expected in the EU after drought sharply reduced output last year. Aggregate output of the EU is forecast at 102.8 million tons. Among the major producing member states, output is forecast to increase by 23 percent in France, and about 11 percent in both Germany and the United Kingdom. By contrast, output may decrease slightly in Spain because of delayed planting reducing yield potential.
Among the central and eastern European countries (CEECs), prospects for the winter cereal crops are also generally favourable. In the three major producing CEECs - Hungary, Poland and Romania – aggregate wheat output is forecast to increase by about 6 million tons, to over 19 million tons, representing a 45 percent increase from last year’s poor crops.
In the European CIS sub-region, the area planted with winter wheat rose from the previous year’s poor level to an estimated 14.5 million hectares. Based on the condition of the winter crops, which account for about 50 percent of the aggregate (winter and spring) output, and assuming normal conditions for the spring crops, the aggregate wheat output in the region is forecast to more than double from the reduced 2003 level to some 61 million tons but would remain below the bumper crops recorded in 2001 and 2002. The Russian Federation and Ukraine account for the bulk of the total.
The FAO forecast for world trade in wheat (including wheat flour in grain equivalent) in the season ending 2003/04 (July/June) has been raised by 3 million tons since November to 99.5 million tons. The revision mainly reflects higher forecasts for wheat imports by China, the EU, Romania, and Ukraine.
Turning to exports, the fundamental picture is that of major exporters regaining their market share after two consecutive seasons of declining sales. All major wheat exporters, with exception of the EU, are likely to increase sharply their exports this season. Larger exports are expected from Argentina, Australia, Canada and the United States.
Nonetheless, the FAO forecast for trade in 2003/04 still points to a substantial decline of about 6.2 million tons from 2002/03.
World wheat stocks for crop years ending in 2004 are put at 139 million tons, down 48 million tons, or 25 percent, from the previous season. The biggest decline is expected once again in China. Significant draw-downs are also forecast for the Russian Federation and Ukraine as a result of exceptionally poor harvests in 2003.
International wheat prices rose during the first half of the 2003/04 marketing season, supported by reductions in exportable supplies in the EU and in a number of CEECs and the CIS. The price of US wheat No. 2 HRW surged to US$180 per ton during the fourth week in March, raising the average price for the month to US$168 per ton, up US$18 per ton from October and US$22 per ton, or 15 percent, more than in the corresponding month last year. By late March, the CBOT US Wheat futures price for July 2004 delivery was quoted at US$153 per ton, up US$49 per ton, or 47 percent, from the corresponding period last year. However, favourable planting conditions and forecasts for a rebound in world wheat production in 2004, coupled with generally weaker import demand prospects, are expected to restrain price increases in the coming months.