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. Last Updated: 07/27/2016

Grain Trade Moves to the Market

The next few months will tell whether this year, for the first time since Stalin executed all the grain traders in the 1930s, Russia will make the transition from state grain distribution to a free market.

For the economy, it will end one of the worst legacies of Soviet inefficiency. It means that Russia, potentially one of the richest agricultural countries in the world, can stop spending billions of dollars every year importing grain.

Turning grain consumption and supply from a political question to a purely financial one has been one of the bitterest battles of the last year.

On the eve of last year's harvest, the deputy prime minister for agriculture, Alexander Zaveryukha, promised the farmers an exorbitant price for their grain. Zaveryukha's goal was maximizing the harvest, whatever the cost.

The collective farmers were tricked into delivering their grain to the state grain elevators but monetarist Finance Minister Boris Fyodorov refused to issue the money to pay for it.

This amounted to an act of political suicide for Fyodorov. Farmers were only paid in full after Zaveryukha and the agrarian lobby had driven Fyodorov out of the government.

But Fyodorov's hara-kiri served its purpose. Farmers no longer unquestioningly ship their grain to Roskhlebprodukt, the state grain distributor. They want to make sure they will be paid.

Over the past month, Zaveryukha has repeated his promises of an extravagant purchase price for grain. He is recommending a price for grain of 220,000 rubles ($102) a ton, well above the Russian market price of 120,000 rubles. Who is likely to listen?

The federal branch of Ros-khlebprodukt may be told to purchase grain at this price, but at the moment it does not have the money. It has been allocated 1.8 trillion rubles of cheap loans but these are yet to be released.

The regions will soon receive another 2.8 trillion rubles in soft loans to buy their grain needs but they are likely to look for grain at the cheapest price regardless of Zaveryukha's promises.

As a result, the political stage is now set for a boom in private grain trading.

Moreover, private grain traders have had a year to prepare for this harvest. Since October last year, all restrictions on profits in grain trading have been lifted. Traders have used the time to form contacts with farmers, distribution points and consumers, including regional grain reserves, flour mills and livestock producers.

Hopefully, supply and demand will also start to determine import levels.

On this issue, both the monetarists and the agricultural lobby are in agreement. The godfather of the agricultural lobby, Zaveryukha announced categorically that the state will cease grain imports this year. All imports will be carried out by private traders.

Zaveryukha trumpeted this policy as a major achievement of his agricultural brethren, pretending that Russian agriculture has miraculously become self-sufficient.

In fact, it is just a sign of the efficiency that supply and demand will bring.

Russia's harvest this year is predicted at 90 to 95 million tons, well down on last year's year 99 million tons. Yet last year, Russia imported 11 million tons of grain and this year the state will import none. Why did Russia need 110 million tons of grain last year and only 95 million this year? Part of the reason is that demand for grain in Russia, especially feed grain, has shrunk. But the deeper reason is that state grain imports were always based on idiotic inflated guesstimates by bureaucrats in Moscow. Much of the grain imported in the past was been left to rot or dumped on the market for nothing. It was common to use bread to feed pigs.

In fact, Russia will have to import some grain this year but it will not be on the basis of market demand. For example, with rail freight charges now near world levels, it may not make sense to freight grain from the Kuban in southern Russia to St. Petersburg or Vladivostok which can buy U.S. grain by sea.

Private grain traders will import some grain for these special demands. Hopefully, in the not too distant future, this should not be a matter of national shame but of economics.

Geoff Winestock is a Moscow-based correspondent for the Journal of Commerce. John Lloyd, who usually contributes The Big Picture, is on vacation.