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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,
[email protected], [email protected]
2. Stavropol State Agrarian University, Faculty of Agronomy, Russian Federation
[email protected]
1 Introduction
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 yearly 20-30% 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 the
efficiency 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.
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Russian 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.
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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.
3 Domestic 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):
DRCC =
∑ WP FP
___________________________________
PC FP ―
(1)
∑ Pj Ti
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 non tradable input
Pj - border price for tradable input
PC - border price for tradable output
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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
DRC = 1
The economy neither gains nor saves foreign Economy on balance
exchange through domestic production
Value of domestic resources used in production is less Comparative advantage
than value of foreign exchange earned or saved
0 < DRC < 1
Conclusion
DRC > 1
Value of domestic resources used in production is No comparative
greater than value of foreign exchange earned or advantage
saved
DRC < 1
More foreign exchange is used in production of a No comparative
commodity than the commodity is worth
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 farmlevel 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 period of 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 exportable1. 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
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The f.o.b. (free on board) and c.i.f. (cost, insurance, and freight) prices for a given economy serve as reference
prices because they represent what the commodity can earn as an export or what it costs the economy as an
import.
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for internal transportation and marketing margins. The resulting value is the border price2,
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, capital and land – 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.
4 Interpretation 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.
Tsakok (1990) defines the border price as follows “When the international or world price is translated into
domestic currency at a given exchange rate, the resulting price is called the border price”.
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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
SCENARIOS
BASE RUN
World price 0,7*base
of wheat
1,3*base
DRC Ratios
0,37
0,79
Labour
0,47
3*base
0.24
Our analysis of the dynamics of the prices of wheat on the world market during the last 10
years showed that they are varying 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 Federation especially 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 elevator calculated
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.
5 Conclusions
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 wheat chain, 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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