Voluntary Report - public distribution

**Date:** 6/22/2007

**GAIN Report Number:** BU7018

BU7018

**Bulgaria**

**Grain and Feed**

**Market Update**

**2007**

**Approved by:**

![](media/image1.wmf)Susan Reid

U.S. Embassy

**Prepared by:**

Mila Boshnakova

**Report Highlights:**

MY07/08 will be the first year for the Bulgarian grain industry to
operate on the common market. This challenge is complicated by lower
than expected wheat and barley crop due to severe spring drought.
However, local grain supply will meet the consumption needs and may
leave some quantities for exports. The GOB plans to pay full or partial
drought compensations to about 4,000 farmers. Grain prices skyrocketed
and trade is likely to be slow due to high price expectations of most
suppliers. Weather forecast for a hot and dry summer may make
post-harvest trade at the Danube ports more difficult and expensive.

Includes PSD Changes: No

Includes Trade Matrix: No

Unscheduled Report

Sofia \[BU1\]

\[BU\]

[Production 3](#production)

[Fall crops 3](#fall-crops)

[Table 1. Ag Sofia unofficial crop estimates, MY2007/2008
4](#table-1.-ag-sofia-unofficial-crop-estimates-my20072008)

[Adverse weather or weak management
4](#adverse-weather-or-weak-management)

[Spring crops 4](#spring-crops)

[Weather forecast for June-August 5](#weather-forecast-for-june-august)

[Trade 5](#trade)

[Prices 5](#prices)

[Demand 6](#demand)

[State Intervention 7](#state-intervention)

[Drought economic impact 7](#drought-economic-impact)

[Agricultural policy and domestic support
7](#agricultural-policy-and-domestic-support)

[Shall we support our farmers? 8](#shall-we-support-our-farmers)

# Production

## Fall crops

Severe drought conditions affected grain and oilseeds crops from
end-March until mid May this year. At the end of March, despite
unusually mild, warm and dry winter and early spring, fall crops were
developing well and experts forecasted a very good crop. April and May,
however, which are traditionally critical for the development of wheat
and barley reproduction parts, were extremely dry, hot and windy.
Reportedly, dryness in this period was comparable to the record dry year
of 1974. Rains which began in mid-May were late and could not reverse or
compensate the losses caused by the drought to fall crops. Moreover,
floods and hail storms at spotted locations caused additional losses and
lodging.

Pressured by farmers' protests, in mid-May, the MinAg established an
independent evaluation team of local researchers who made grain field
observations and a comprehensive crop evaluation report as of early
June. This report (www.mzgar.government.bg) had several key findings:

-   13,000 HA (1.2% of total planted areas- 1.045 MHA) of wheat and
    4,000 HA (2.3% of total planted areas -- 173,000 HA) of barley will
    not be harvested due to severe damage;

-   wheat: 23% of area is in good to very good condition (including 14%
    in excellent condition); 44% is in satisfactory condition; and 33%
    is evaluated as in bad condition (345,000 HA). The report authors
    estimate potential yield from the area in bad condition at
    about/below 1.0 MT/HA or total 330,000 MT.

-   barley: 22% of area is in good to very good condition (incl. 17% in
    excellent condition); 41% is in satisfactory condition; 35% of area
    is in bad condition (66,000 HA). The report estimates potential
    yield from the area in bad condition at about/below 1.0 MT/HA or
    total 61,000 MT.

-   overall, barley development is slightly better compared to wheat, a
    difference of 3%-4%, and in some areas barley can produce higher
    yields than wheat;

-   94% of wheat and 92% of barley are fertilized with nitrogenous
    fertilizers; 84% of wheat and 80% of barley was treated with
    herbicides;

-   pest infestation was rather high (affecting wheat, barley and
    sunflower) -- especially leave lice (Brachycandus helichrys);

-   Main area where wheat and barley are in good condition: Stara
    Zagora, Sliven;

-   Main area where wheat and barley are in mediocre/satisfactory
    condition: Varna, Dobrich, Vidin, Montana, Pleven, Plovdiv, Razgrad,
    Rousse, Yambol

-   Main area where wheat and barley are in bad condition: Bourgas,
    Vratza, Silistra, Turgovishte, Shoumen. Overall, Northern Bulgaria
    which is the main grain production region was the most seriously
    affected as the hardest hit were areas along the Danube river.
    Rainfall in this region in April and May were below 10% of the norm.

Drought related crop estimates produced in May/June varied considerably.
Some farmer groups estimated wheat (and barley and oats) crop at almost
3 times lower than in 2006 (yields from 1.0 MT/HA to 1.2-1.5 MT/HA) at a
total of 1.5 MMT. Others estimated wheat crop at only 15%-20% less than
in 2006. Most multinational grain traders believe that about 10% of both
wheat and barley will not be harvested, about 10% is in excellent
condition, and the rest 70%-80% will produce yields 30%-50% below
average. Their estimates are from 2.2 MMT to 2.9 MMT, mainly around 2.5
MMT. Government and industry associations are still afraid to produce
any estimates, mainly because of current financial and political
implications.

In mid-June, barley harvest has already began 10-15 days earlier than
the usual time, and similar early harvest is projected for wheat. Some
leading farmers reported high barley yields despite drought, at 5.1
MT/HA compared to 2.0 MT/HA or 30%-50% lower yields than in 2006 for the
majority of other farmers. To date, most reports about barley yields
vary from 1.3 to 2.7 MT/HA and for wheat, from 1.3 to 2.9 MT/HA.

AgSofia estimates are based on a more optimistic scenario. The wheat
estimate assumes 5% non harvested areas but this figure can easily
increase to 10% and thus, wheat production can drop to 2.5 MMT. The
volume of production will predetermine export potential in both
scenarios, from 300,000 MT to 500,000 MT (not counting price and other
market factors and behavior). For other crops, export potential is
estimated at 100,000 MT -- 150,000 MT of barley; 220,000 MT-245,000 MT
of corn; up to 350,000 MT of sunflower.

### Table 1. Ag Sofia unofficial crop estimates, MY2007/2008

  -------------- -------------- -------------- -------------- --------------
                 Wheat          Fall barley    Corn           Sunflower

  Planted area,  1,045,000      173,000        353,000        650,000
  HA                                                          

  Harvested      990,000        168,000        350,000        650,000
  Area, HA                                                    

  Average yield, 2.7            2.65           3.54           1.2
  MT/HA                                                       

  Production, MT 2,660,000      450,000        1,250,000      780,000

  Note: AgSofia                                               
  unofficial                                                  
  estimates.                                                  
  -------------- -------------- -------------- -------------- --------------

## 

## Adverse weather or weak management

Significant discrepancies in yields among various farmers shows that the
amount of farmers losses in 2007 is dependant more on the applied
technology than on the weather conditions. Many experts comment that
extreme weather conditions helped to more clearly identify weaknesses in
farm practices and agricultural technology. Late planting, use of not
certified seeds, and lack of modern equipment are among the most common
mistakes. Some large farmers try to expand their planting areas too
quickly which does not allow them to properly take care of all crops.

Farmers who make insurance against adverse weather conditions are rather
an exception. On the other hand, insurance companies in Bulgaria do not
offer any insurance against drought. Currently, 12 insurance companies
provide services to farmers but none of them makes drought insurance.
According to sources in this sector, only 15% of all cultivated
agricultural areas are insured in 2007. To date, the MinAg has not
initiated any risk management/diversification programs, however, voices
are raised that the Government should establish a special public-private
indemnity fund to provide drought insurances on a shared risk principle.

## 

## Spring crops

Unfavorable weather affected also corn and sunflower planting campaign.
Farmers reduced their corn area compared to their initial intentions and
substituted it with sunflower as a more dry resistant crop. Due to the
long dry period (a month and half), many expected that the country will
not have any corn and sunflower crop since seeds were not able to
germinate. Abundant rains which began in mid-May saved the spring crops,
however, they remained under stress. Rains were unevenly distributed and
the situation was very different from field to field. Currently,
sunflower development is visibly uneven -- unusually, there were fields
in flowering stage in early June. Some trade sources reported that up to
40% of late sowings were damaged; weeds and pests (propagation of gray
corn weevil and other pests) were also a problem at early stage
vegetation. Although detailed evaluation of spring crops is not done
yet, trade estimates that 2% of corn and sunflower are in bad condition;
about 90%-93% in satisfactory/average condition, and 3%-5% is in
excellent condition.

Crop estimates about spring crops are more consistent. Traders estimates
for sunflower area vary from 550,000 HA to 650,000 HA (650,000 HA is the
government published data), with forecast production of 700,000
MT-850,000 MT, and average yield of 1.2 MT/HA - 1.4 MT/HA. Corn
estimates are in the range of 250,000 HA to 420,000 HA (350,000 HA is
the official published data) and expected production of 1.2 MMT -1.3
MMT.

### Weather forecast for June-August

Current locally produced weather forecast (www.meteo.bg) is for a hot
summer with rainfall below the norm.

According to the Ministry of Environment of Waters report produced in
May, drought is threatening not only irrigation but even availability of
drinking water. As of May, drinking water dams were full at 72% of their
capacity which may be still sufficient to meet drinking water needs.
Irrigation dams were full at 47% of their capacity which is considered
low. The level of underground water was the lowest since 2000. It was
unusual and alarming that the river flow was fed by underground waters
and not visa versa. Average river flow was below the norm what was also
very untypical for May. The lowest was the river flow along the Black
Sea -- 37% of the norm.

According to recent statements of local transportation authorities, hot
summer weather is likely to lead to almost complete termination of
vessel transportation along the Danube river by August. At mid June, the
level of Danube waters was already more than 2 meters below the norm for
the season, and the projection is for a stagnation and further decline
in levels. If this forecast occurs, grain trade from/to Bulgaria and
Central and West Europe will be more difficult and expensive, especially
during post - harvest time.

# Trade

The MY07/08 is the first year when Bulgaria will trade its grains and
oilseeds on the common market. New market situation is further
complicated by drought and reduced crop. Many traders and farmers do not
know how to evaluate new market conditions and how to behave.
Reportedly, some had to cancel or modify their contracts and to bear not
well thought risks. In the new conditions, trade is likely to be
sluggish in the beginning of the marketing year.

Traders are not united in their expectations for MY07/08. Some expect
little exports of feed wheat to the EU market and imports of small
quantities of milling wheat; others think that the wheat crop will not
be so small and in general, Bulgaria will be able to be a net exporter
of 300,000 MT to 500,000 MT of wheat depending on the final harvest
data; third think that trade will be difficult, especially in
post-harvest time due to significant difference in price expectations of
suppliers and traders which may result in slow sales, accumulating of
extra stocks and uneven grain distribution.

## Prices

Grain prices reacted shortly after the grain industry voiced their
concerns about a low crop. A significant factor for quick price
development was the Ukrainian Government restriction on grain exports
from July 1. Bulgarian grain is traded as a part of the Black Sea
regional market where usually Ukraine has a leading position in price
setting. In mid-June, farmers began to offer new wheat crop at 230-300
leva (115-150 Euro/MT) which is 42% or about 50 Euro/MT more than the
price in the same time a year ago. Buyers are offering not more than
100-125 Euro/MT which is 54% more than in June 2006. Most millers are
ready to start buying the new wheat crop at not more than 110 Euro/MT.
Currently, new barley crop is already traded at 190-220 leva/MT (95-110
Euro) or higher due to good export demand to the Middle East.

Higher wheat prices are affecting other grain and oilseeds prices and
force producers to restrain from offers and insist on high quotations.
Sunflower is traded now at 420 leva/MT (210 Euro/MT) or 20 Euro/MT more
than a week ago, corn prices have increased by 20 Euro/MT for the past
week to 280 leva/MT (140 Euro/MT) - 330 leva/MT (165 Euro/MT). However,
supply is very limited.

# Demand

Expected poor grain crop, open common market and unclear future of
spring crops provoked local experts and traders to reconsider current
grain balance and make more detailed estimates about local consumption.

Traditionally, government and trade were considering local wheat food
use at well above 1.0 MMT. In early 1990s, food consumption was at
1,600,000 MT; in late 1990s it came down to 1,400,000 MT. The most
recent statistical data showed that bread consumption per capita in 1995
was 151 kilos while ten years later, in 2005, this consumption declined
23% to 117 kilos which translates into roughly 900,000 MT of bread.
Reasons for lower consumption are the improved diet, higher consumer
income and the fact that rural habitants stopped using bread to feed
backyard livestock. Thus, new updated wheat food consumption estimate
ranges from 1.0 MMT to 1.2 MMT.

Both government and trade are concerned about a sufficient supply and
quality of wheat and barely planting seeds for the fall planting.
Bulgaria uses only locally produced wheat seeds, about 230,000 MT to
300,000 MT, most of which produced at the Wheat and Sunflower Wheat
Institute, located in one of the most affected areas. Since prices of
planting seeds are forecast to stay high (about 300 Euro/MT), it is
likely that many small/medium farms will again prefer to use lower
quality not certified seeds.

Lower wheat and barley crop and record high prices may have a very
negative effect on feed consumption which is estimated to decline
10%-30%.

Due to poor quality of barley, breweries are forecast to buy less local
barley and import 10,000 MT -15,000 MT of malting barley, most likely
from France.

Regarding consumption of sunflower, one of the biggest crushers, Bunge,
has announced its decision to shut down its factory in Bulgaria
(estimated crush 70,000 MT -- 80,000 MT of sunflower seeds) but keeping
its trade branch and grain storage (100,000 MT). It is expected that
Bunge's market share will be captured by two local competitors working
in the same region (Papas Oil and Slunchevi Luchi/TIM) but overall
demand for crush will not drop. Thus, weaker crop will likely result is
lower than traditional exports.

Demand for corn will face two controversial trends: on one hand, demand
for processing into starch is expected to increase due to new installed
capacities; on the other hand, expensive corn may lead to lower feed
use.

# State Intervention

In May/June, public attention was focused on the biggest to date scandal
with the State Reserve Agency which involved a number of politicians and
top level government officials. Media was flooded with new data about
corruption deals among which the grain intervention deals played a
central role. According to various sources, the loss born by the state
budget due to questionable grain deals in the period 2000-2006 was
between 220 and 600 million leva (110-300 million Euro). More than 800
cases of suspicious trade deals were submitted to the Prosecution
Office.

However, despite the public light on nontransparent grain deals, the
State Reserve Agency continued to be managed in the same way. In the
period March -- May, total about 100,000 MT of wheat was sold on the
market under unclear terms. Moreover, these sales were executed during
the time when the Government and the grain industry raised their voices
about drought compensations and concerns over the low 2007 wheat crop.

# Drought economic impact

Bulgaria traditionally exports above 1.0 MMT of wheat. Due to poor crop,
wheat exports are under question. Experts estimate losses from reduced
exports at \$300 million. The budget may lose another \$100 million paid
as drought compensations to farmers. Since wheat is a major export
earner, the country may not have a positive ag trade balance in 2007,
and potential imports can deteriorate already considerable current
account deficit.

Milling, baking, brewing, vegetable oil crushing, biofuel, feed and
livestock industries will be all affected by reduced crop and record
high prices which inevitably will be paid by consumers of staple food
products. By tradition, bread is the number one staple product for
Bulgarians and large social groups are very sensitive about bread
prices. Therefore, potential increase in bread prices may easily cause
certain political implications.

# 

# Agricultural policy and domestic support

In May and June, there were a number of public, regional and nationwide,
farmers' protests against MinAg grain policy. Producers were blaming the
Government in lack of serious interest and support in solving their
problems.

As a result of this pressure, a special crisis management working group
was established at the MinAg. Every week, MinAg regional experts are
monitoring fields and make weekly reports. A complete monitoring and
evaluation report was done in early June and sent to the EC (see key
findings of the report above).

The MinAg offered the following drought compensation model to farmers:

-   farmers who will not be able to harvest their crop due to severe
    drought damage will be 100% compensated at 450 leva (225 Euro)/HA
    for wheat and 400 leva (200 Euro)/HA for barley, after detailed
    MinAg spot checks. The compensations will be paid in July/August so
    that farmers can purchase the necessary inputs for the fall
    planting.

-   farmers who have as minimum 30% lower yields compared to the average
    for the last 3 years, to be compensated at 170 leva (135 Euro)/HA
    for barley and 270 leva (135 Euro)/HA for wheat (80% of the full
    compensation as required by EC 1857/2006);

-   on-site spot check and individual drought evaluation reports should
    be prepared before the start of the harvest. The MinAg will prepare
    a special public register of compensated farmers.

-   funds for drought compensations will be allocated from the current
    account of State Fund Agriculture and Tobacco Fund.

-   Current loans borrowed by farmers from the State Funds Agriculture
    will be rescheduled for later payments; new soft term credit lines
    will be extended to grain farmers in the fall.

The MinAg has approached the EC with a request to use EC 1857/2006 to
provide drought compensations. According to the Ag Minister, drought
compensation plan/payment can be enforced only after an explicit
approval by EC expected in July.

Farmers' reaction to the MinAg proposal was not positive although the
pressure reduced. Farmers protested against the loss evaluation
methodology since they consider the European regulation (EC 1857/2006)
as not fully applicable for Bulgaria. Major reasons are lack of reliable
and long production history per a farm; vulnerability of local grains
prices and significant price fluctuations over the last 5 years.
Producers are dissatisfied with the size of compensations as well as
with the complicated application and approval procedure. They insist on
compensations at 200-250 leva (100-125 Euro)/HA higher than those
approved by the MinAg or total of 250 to 340 Euro/HA. The main concept
is that compensations should cover the full size of all planting and
growing expenses, especially for small/medium farmers who can easily go
bankruptcy (about 30% of all). Growers insist on having all
compensations earlier, in July/August and not in November when the fall
planting is over, which subsequently can jeopardize the amount of
planted area in MY08/09. Another claim is to increase the rate of free
of excise tax fuel from 72 liters/HA to 85 liters/HA.

As of June 15, about 3,700 farmers have applied for full drought
compensations, mainly from areas of Pleven (450), Rousse (185), and
Veliko Turnovo (212). Total losses are estimated by farmers at 200-250
million leva (100-125 million Euro) while the MinAg estimated drought
compensations at 100-150 million leva (50-75 million Euro). In fact, the
MinAg allocation for drought compensation is currently at only 20
million leva (10 million Euro): 15 million leva from State Funds
Agriculture and 5.0 million leva from the Tobacco Fund. The MinAg plans
to request more funds from the national budget later in the year
after/if they receive explicit EC approval for these payments.

# Shall we support our farmers?

Many grain traders and processors disagree with farmers' position and
are against significant state compensations. With the new record high
grain prices, traders think farmers will not be at loss despite their
low yields. In addition, spring crops production is forecast as stable
and in size meeting not only local needs but also sufficient for
exports, thus the overall farmers' income may not drastically suffer,
according to many experts.

Some larger farmers think that similar compensations discriminate them
against other farmers who suffered more losses not only due to drought
but because of worse technology and/or management.

The media gave floor to other public voices against farmers'
compensations. Questions like who pays; why all taxpayers should pay the
price of missing ag insurances; why farmers should be paid additional
compensations if they are already getting their first EU subsidies; why
other farmers such as fruit and vegetable growers are not compensated as
well (for example, cherry, apricot, peach and vegetable gardens were
severely damaged), etc. hinted that some Government decisions are taken
not because it follows a strict agrarian policy but because it is under
significant and mainly, visible pressure.