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. Last Updated: 07/27/2016

Picking The Price For a Peck Of Pepper

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Stock market traders are used to wild fluctuations. But spice market traders? For them price instability is nothing to sneeze at.

"Thank God pepper prices are no longer falling," said one pepper pusher this week — an exaltation more commonly heard from traders in oil, Russia's most valuable commodity.

The recent oversupply of black pepper on the international market has caused economic heartburn in the industry across the globe, with Moscow being no exception.

"Profit margins in the industry have dwindled," said Igor Ushakov, a contract trader with Kolvi Produkt, one of Moscow's two main pepper suppliers.

Vremya, the capital's other major dealer, has been forced to overhaul its business strategy in response to the surplus.

"Pepper traders had to switch to short-term contracts," said Vremya's marketing manager, Yelina Kondrushina. "They gave up the practice of signing long-term agreements."

Companies that had long-term deals with overseas suppliers were forced to either continue their purchases despite mounting losses, or forfeit their advance payments for future deliveries by breaking their contracts, which stopped being profitable due to the sharp decline in the spot market.

The bear trend was triggered by a sharp rise in exports from Indonesia and Vietnam, whose government is bent on cracking into the global market. Vietnam increased exports 25 percent last year to 37,000 tons, and plans to boost production to 42,000 tons in 2001.

Although India, the world's leading exporter, suffered a 30 percent drop in output last year, every other major player, including Brazil, Malaysia and Sri Lanka, increased output dramatically.

Before the recent price plunge, experts estimated Russia's annual pepper market to be worth as much as $90 million. But prices have fallen from a range of $5,100 to $5,800 for delivery at European ports last January to $2,700 to $3,600 at the start of 2001. Prices for pepper quoted in kilograms halved to about $2.50 over the same period, reversing a trend that lasted for almost a decade when prices barely budged.

As prices plummeted, local traders found their customers rushing to buy directly from abroad while they were forced to continue buying at old prices and dumping the pepper at rock-bottom prices — selling it at or, sometimes, below cost. Unable to compete in the low-price, low-cost environment, many firms were forced out of the market.

Perhaps not surprisingly, end consumers like restaurants have not benefitted.

"I'll have to look into the situation more closely," said Sergei Shumakov, head of logistics at the American Bar & Grill. "Our purchase prices have remained virtually unchanged over the last 2 years."

At the start of 1999, American Bar & Grill was paying 243 rubles ($11.80) for a kilogram of pepper, he said. Last month, it was paying 281 rubles ($10) per kilogram, so even though prices halved, the company was still paying a high premium to its suppliers.

"The one category of market participants that racked all the gains from recent market fluctuations were resellers, who buy pepper from us and deliver it to the consumers," said Kolvi Produkt's Ushakov. "But restaurants are somewhat a special case because they need top quality products, which are often purchased abroad," he said.

Unlike large European suppliers of ground pepper, local buyers of raw product were unable to cut a deal to prop up sagging prices. So restaurants, which buy foreign-made pepper in 1-kilo packages, are often gauged.

"Quality remains our main concern, so last year we had to switch to a new supplier," said a manager with the Yolki-Palki restaurant chain, who asked not to be named. The price Yolki-Palki paid for pepper was unchanged over the year, the manager said.

Many traders say that due to the nature of the product, some of their colleagues are able to sell their customers low-quality pepper at top-quality prices. In an effort to eradicate such practices and set quality standards for the whole industry, Kolvi Produkt has been trying to set up an association of packaged pepper manufacturers.

In December, a group of local pepper traders called a meeting to pursue common price policies in the market. The attempt failed, however, after some of the traders walked out, saying they would be better off on their own.

"Our primary concern is the quality," said Ushakov. "Coordinating a price policy is a second thought."