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Page added on August 30, 2007

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Grain will not become oil

Russian Minister of Agriculture Alexei Gordeyev will discuss a possibility of creating an OPEC-like grain cartel with his colleagues from Australia in September.

He said the United States is reviewing the idea, and somewhat earlier Ukraine and Kazakhstan accepted it as a rational suggestion. But agricultural experts are not too optimistic about the idea to control the production and trade in grain.
But let’s assume that the permanent rivals come to terms. How will they control the scale of grain production and influence pricing? The OPEC countries each have a state monopoly on oil production and exports, and any government can easily ‘close the tap’ to push up oil prices. At the same time, the state monopoly keeps oil prices low at home.

Grain is quite different. Its production and export are in the hands of private companies, which will not change their prices at the first call of their government. The Russian government has two effective instruments for price regulation – tariff policies and grain interventions. Thus, it can raise grain prices by buying part of the harvest, or it can cause a drop in prices at home by raising export duties and thus limiting grain exports. But these are extreme measures. Restrictive tariffs may deal a heavy blow to grain producers and deprive them of an incentive to produce more grain. The knock on effect is a shortage of grain the following year, and consequently bread and live stock products would become more expensive.

But why do we need a grain OPEC at all? World grain prices are going up and are not likely to fall down in the next two or three years. The high demand rests on two factors. The world’s population is growing by about 80 million people a year, predominantly in grain-short Asia and Africa; and demand for bio-fuels, which require grain, is also on the increase.

RIA Novosti

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