Competitiveness of Russian wheat supply chain under stringent food safety policy
Nune Khachatryan1, Heinrich Schuele1, Armen Khachatryan1, Vitaliy Buzov2
1. University of Hohenheim, Eastern Europe Centre, Germany,
,
2. StavropolStateAgrarianUniversity, Faculty of Agronomy, RussianFederation
1Introduction
Being one of the major players at the wheat global market in the recent years, the Russian Federation can hardly compete with European Union in the “front”of food quality and safety standards. The high portion of confiscated shipments of wheat (because of mycotoxin contamination), constituting yearly20-30% of total wheat exports from Russia, makes the problem evident and urgent. Yet the food safety awareness within the Russian reality seems not to be mature enough at different segments of wheat chain to combat the problem fundamentally.
Research objective: The ongoing research, financed by the German Research Foundation, addresses the investigation of Russian food safety Sanitary and Phytosanitary (SPS) regulations, their institutional infrastructure as well as the national mechanisms of SPS monitoring and control along the wheat chain.Further objective is the estimation of theefficiency of wheat chain in the study area under the conditions of full enforcement of Russian national SPS standards.
Methodology:The research area (Southern Russian Regions, Stavropol region) represents one of the major wheat producing centers of Russian Federation, with its total production amounts constituting more then 40% of total wheat production of the country.
The value chain analysis approach, based on key expert surveys is applied to assess the extent of actual enforcement of SPS regulations in Stavropol region of Russian Federation focusing on mycotoxins standards along the wheat chain.
The comparative advantage analysis based on the Domestic Resource Cost approach (DRC) is applied to estimate the efficiency of wheat chain considering the local standards of mycotoxin, as well as scenarios for its different stringency levels.
2Russian national food safety and certification system on the example of wheat value chain
The detailed description of wheat value chain in Stavropol region, with special reference on food national standards, their enforcement, surveillance, monitoring and controlling and mechanisms in all segments of the chain has allowed to obtain major data necessary for the qualitative analysis of a chain.
The results of the analysis show, that the current situation of quality and safety issues of wheat represents an urgent problem in Russia and needs a close attention. At the moment the Russian economy is at transition stage. A large number of intermediaries act in the market of grain, the prices for flour and bakery products grow independent from the fluctuations of wheat prices. In such conditions the structure of food wheat chain cannot be characterised as stable, because the flour and bakery products producers are constantly looking for new consumers and markets.
The general consciousness of mycotoxin hazard is not equally matured in different segments of the wheat value chain. The reason is that mycotoxin presence in Russian wheat has a kind of hidden character.
Among internal segments of the value chain and in the domestic market, this is explained with the absolute absence of certification on phyto-sanitary norms and control of microbiological and safety characteristics at all the stages of the wheat supply chain. All the actors of the wheat value chain are interested merely on baking quality characteristics of wheat and on cheapness of any operation along its way from producer to consumer. No single segment along the chain is interested or even aware of the existence of food safety hazards.
More surprisingly the problem remains unsolved very often also during the external market relations, even though wheat flows designated for export pass through a double certification system and possess certificates of both quality (meaning backing characteristics) and safety. These certificates are granted from the national certified and accredited laboratories according to the request of the domestic exporters. But also the foreign country importers need certificates of quality and safety, which they request at internationally established laboratories, having branches allocated in Russia.
This is why the only registered contaminated cases of Russian wheat until now are those which are confiscated at the EU boarder. Apparently this is the only instance, where mycotoxin problem is addressed seriously.
The available best quality food wheat, having passed the certification and control, leaves the country to meet the food demand of foreign consumers. The consumers in Russia have no other choice, but to cover food demand by consuming the worst quality wheat. This fact even lessens the chances of local consumers to have access to good quality and safe wheat and wheat products.
The interpretation and analysis of the normative documentation, laws and decrees in the field of food quality and safety have revealed that there is a rather developed legislative basis in Russia. There are rather strict state norms which regulate allowable mycotoxin levels, and define the detection methods, even though they are not yet entirely internationally compliant. However, the actual enforcement level of the established legal basis is very low, the monitoring, surveillance and control mechanisms and institutions are not completely structured. The newly reformed quality control system lacks a clearly defined division of responsibilities among different control and monitoring agencies, resulting in confusion, contradictions and uncertainty in the wheat sector of the country.
3Domestic Resource Cost analysis of wheat chain in Stavropol region
Applied comparative advantage analysis seeks to answer the following question: for a given country which among the set of alternative production activities is relatively the most efficient (measured in terms of contribution to national income), ignoring the effects of distortions?
Relative efficiency in production depends on three factors: 1) technology (which determines production possibilities and influences rates of product transformation); 2) resource endowment (which determines the value of domestic resources), and 3) international prices (which determine the value of all other inputs and outputs), (MORRIS, 1990, p.6).
To estimate the comparative advantage of the Stavropol wheat “production-elevator” chain the study implements the method of DRC estimation described by MONKE and PEARSON (1989), as a ratio of opportunity costs of domestic factors of production per unit of value added in world prices. The social value of additional domestic output is thus the foreign exchange saved by reducing imports or, in our case, earned by expanding exports.
It indicates the efficiency of production in using domestic resources to earn (or save) one unit of foreign exchange. For outputs and inputs that are traded internationally the social valuations are given by world prices, and, for domestic factors, by their alternative uses.
The DRC is calculated using the formula, (MORRIS, 1990):
where:
FP - coefficients for domestic resources or non tradable intermediary inputs
Ti - coefficients for tradable inputs
FP - quantity produced of tradable output
WP - shadow price (opportunity cost) for domestic resource or nontradable input
Pj - border price for tradable input
PC - border price for tradable output
The DRC results conclude whether the production of a certain commodity has a comparative advantage for a certain country ,i.e. reveal the efficiency of the use of domestic resources to save (or earn) one unit of foreign exchange. The interpretation of DRC results is presented in Table 1.
Table 1. Interpretation of DRC Ratios
DRC Ratios / Interpretation / ConclusionDRC = 1 / The economy neither gains nor saves foreign exchange through domestic production / Economy on balance
0 < DRC < 1 / Value of domestic resources used in production is less than value of foreign exchange earned or saved / Comparative advantage
DRC > 1 / Value of domestic resources used in production is greater than value of foreign exchange earned or saved / No comparative
advantage
DRC < 1 / More foreign exchange is used in production of a commodity than the commodity is worth / No comparative advantage
Source: Author, based on MONKE, PEARSON, 1989, TSAKOK 1990, MORRIS 1990.
The data required for the DRC methodology come from primary and secondary sources. The direct interviews with the specialists from the wheat sector of Stavropol region were the most valuable primary sources of data, providing details on production technology, capital stock, labour force, capacity utilisation, etc. for building the production budget.
The primary data, obtained from interviews with farmers, included actual information on farm-level technical coefficients, such as quantities of agricultural production inputs and outputs, yield levels, prices paid and received by farmers, etc.
Secondary data (containing information for the previous 5 years) are obtained from annual financial reports of the agricultural ministry and meat industry. Accounting records of large wheat producing cooperatives provided quantities and values of opening and closing stocks, raw material inputs and other intermediate inputs, as well as production outputs.
The first step in the DRC analysis requires assembly of the production budget. The budget represents the observed costs and returns for one periodof the “production-elevator” segment of the wheat chain.
The second step in the DRC analysis requires classification of the inputs and outputs into tradable and non-tradable factors. Several non-tradable inputs (hired machinery, transport requirements, etc.) consist of tradable and non-tradable components and are further disaggregated, so that ultimately all component costs are classified as tradable inputs or domestic factors. Machinery, maintenance spares, fuel and depreciation are considered as tradable inputs. Maintenance labour, rent for machinery and capital costs are non tradable inputs.
After assembling the production budget using the actual market (private) prices of commodities and after classifying all the budget entries into tradable and domestic factors, the next step is to construct the social prices (also known in literature as shadow, efficiency, accounting, economic, opportunity cost prices or value of marginal physical product, Tsakok, 1990). The social prices are expressed in Euro using official exchange rates.
The social values for tradables, i.e. inputs (e.g. seeds), and output (wheat) that are traded internationally, are given by world prices – c.i.f. import prices for goods or services that are imported or f.o.b. export prices for exportable[1]. World market prices represent the opportunity cost to the country of producing various commodities (Tsakok, 1990). The social value of a traded commodity is determined by converting the long-run trend value of the commodity into the domestic currency equivalent using an appropriate foreign exchange rate and adjusting it for internal transportation and marketing margins. The resulting value is the border price[2], which represents the cost to the economy of producing a good and enables the analyst to determine if the country is an efficient producer of that commodity. It is the export or import price the economy would receive or incur for its exports or imports.
World prices illustrate the government’s choice to permit consumers and producers to import, export, or produce goods and services domestically; the social value of additional domestic output is thus the foreign exchange saved by reducing imports or earned by expanding exports.
The social price for wheat as well as for tradable inputs is the border price – the price at which foreign suppliers would deliver the commodity to the domestic market or the price that foreign consumers would pay domestic suppliers to deliver the commodity to their markets (Monke and Pearson 1989, p. 189).
Social values of domestic factors:The services provided by domestic factors of production – labour, capitalandland – do not have world prices because the markets for these services are considered to be domestic. The efficiency value of a non-tradable input is given by its contribution to output in the next best alternative use. The social value of each factor is found by estimation of the net income forgone because the factor is not employed in its best alternative use. This requires the commodity systems under analysis to be excluded from social factor price determination.
The social value of each of the non tradable factors is found by estimation of the net income forgone because the factor is not employed in its best alternative use.
Labour: There is a legislated minimum-wage law, but the labour market ignores it and the market is completely unregulated. Despite the rather high rate of urban unemployment and some differences in wage levels between regions and sectors there are no interregional labour movements in Russia, because of high costs of travelling and housing. The labour, therefore, is considered as fixed factor. The labour market is competitive; there is a surplus of labour relative to available opportunities. The opportunity cost of labour is approximately equal (or somewhat higher if taken the average wage in non agricultural fields) to the private wage.
Capital: The shadow price of capital (tractor services, rental of farm implements, and use of transportation) is estimated using the demand approach. There is a free, competitive market for capital use. The opportunity cost of tractor services, for example, is approximated by the rental fee, which in fact indicates the marginal product of these services. This is what the farmers assess the services will contribute to their production and what they are willing to pay.
Land: The only alternative to agricultural use of land is no use at all. The land market in Russia is in its formatting stage and the rental value is considered as economic value of land.
Sensitivity analysis
Due to one very convenient feature, the DRC framework lends itself readily to sensitivity analysis, which is a good tool for revealing the changes in comparative advantage rankings, when the individual parameters change. It is also used to assess the effects of possible errors in evaluation of technical coefficients of enterprise budgets or estimation of social values. Sensitivity analysis is carried out to examine the effects of the changes of parameters like world reference prices of wheat and wages. The DRC ratios have been calculated inducing plausible changes of the values of the basic model parameters to assess the impact of possible changes.
4Interpretation of results of DRC analysis
The DRC ratio of wheat production in Stavropol region including expenses for storage, marketing and transportation to the elevator is calculated considering the full enforcement of the existing SPS norms of mycotoxin. The analysis resulted in a DRC ratio of 0,37 in the base run.
Sensitivity analysis has been carried out to identify how the DRC ratios for wheat production in Stavropol react on various parameter changes (e.g., reference prices).
The results of calculations of DRC ratios for wheat involving 3 different scenarios, which reflect possible changes of model parameters, are presented in Table 2.
Table 2. DRC ratios for wheat
S C E N A R I O S / DRC RatiosB A S E R U N / 0,37
World price of wheat / 0,7*base / 0,79
1,3*base / 0.24
Labour / 3*base / 0,47
Our analysis of the dynamics ofthe prices of wheaton the world market during the last 10 years showed that they arevarying dramatically. For the reference year 2007 the world prices of wheat were changing with the amplitude of 30%. Therefore we considered two scenarios with 30% higher and lower prices of wheat correspondingly. The scenario with wheat prices higher than the reference price of the base run, increase the competitiveness of Stavropol wheat by 27% with a DRC ratio equalling 0,47. The scenario of lower wheat prices does not affect the social profitability of wheat production in the region, as far as the value of DRC (0,79) still does not cross the threshold of 1,0.
Analysing of the overall economic situation of the Russian Federationespecially the developments in the labour market we found it plausible to assume that the labour force in the agricultural sector has a potential to rise three times in the not far future. This scenario also delivers rather promising results of DRC ratio of 0,47.
Based on the results of the DRC ratios for wheat chain from producer to elevatorcalculated under different scenarios,we can conclude, that the wheat “production-elevator” chain under the policy of full enforcement of current Russian SPS norms on mycotoxin has a high competitive advantage in Stavropol Region. The DRC ratios illustrate that the value of domestic resources used is less than the foreign exchange earned or saved.
5Conclusions
Our investigations concluded that the contradictory problem of mycotoxin contamination has a hidden character in Russia, because of the combination of factors like the extremely low enforcement rate of the current national SPS regulations, the formal character of issued safety certificates, and particularly the inefficiency of the system of double-certification, the poor analytical-methodological laboratory infrastructure and obsolete equipment, the not equally mature public awareness and understanding of mycotoxin-hazard by different actors of the wheatchain, the high demand for Russian wheat in markets with very loose SPS norms.
The DRC analysis provides evidence on profitability of wheat chain in Stavropol region considering the full enforcement of the current national SPS regulations of mycotoxin allowable level.
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