United States

Department

of Agriculture

www.ers.usda.gov

Electronic Outlook Report from the Economic Research Service

WRS04-05-02

October 2004

Black Sea Grain Exports

Will They Be Moderate or Large?

William Liefert, Olga Liefert, Ralph Seeley

and Ed Allen*

Abstract

Large grain exports by the Black Sea countries in 2001-03 raise the prospect

of these countries becoming major grain exporters in the long term. To do

so, they will have to (1) increase the productivity of input use, which would

allow them to sell at more competitive prices in world grain markets,

thereby improving their competitiveness; and (2) reduce the internal transport and transaction costs of shipping grain from farm to port. If growth in

productivity (output per unit of input) in the region is modest, in 10 years

the Black Sea region could be exporting a net 10 million metric tons a year.

With higher productivity growth, exports could rise to 30-40 million metric

tons. Such large grain exports would strongly affect the world grain market,

since over 2000-03 total annual world grain exports averaged 237 million

tons.

Keywords: transition economies, grain, agricultural trade, Russia, Ukraine.

Acknowledgments

The authors thank the following for their valuable review comments: Cheryl

Christensen, Nancy Cochrane, John Dunmore, and Joy Harwood of ERS,

William Tierney of the World Agricultural Outlook Board, Mark Lindeman

of the Foreign Agricultural Service, and Abdolreza Abbassian of the Food

and Agriculture Organization. We also thank Dale Simms for his careful

editing.

* Agricultural economists, Market and Trade Economics Division, Economic Research

Service, USDA. 
Introduction

When market-oriented reform began in the New Independent States (NIS) of

the former Soviet Union in the early 1990s, some Western forecasters

predicted that it could transform the region from a large grain importer (as

during the Soviet period) into a major grain exporter. Some predictions held

that the Balkan countries of Romania, Bulgaria, and Serbia could collectively become modest grain exporters as well. Yet, in each year during

1996-2000, both the NIS and Balkan regions had net grain imports or

exports of only a few million metric tons (mmt).

In marketing years 2001/02 (July-June) and 2002/03, however, the NIS and

Balkan countries that export grain through the Black Sea had total net grain

exports of 25 and 33 mmt (with the bulk of exports going to “non-Black Sea

countries,” especially those in the Middle East and North Africa such as

Saudi Arabia, Egypt, and Algeria, and to the EU). Of the 58 mmt of net

grain exports by the Black Sea region in 2001/02 and 2002/03 combined, 42

mmt were wheat and 16 mmt were coarse grain. The exportable surpluses

coincided with higher grain production in the NIS region and good harvests

in the Balkan region in those years (table 1). However, both grain production and exports in the Black Sea countries were down considerably in

2003/04, with net exports at only 8 mmt from July 2003 through June 2004.

So, are these countries becoming major long-term grain exporters, as

predicted, with the downturn in 2003/04 an anomaly? Or was the strong

performance in 2001-03 the aberration, the result of unusually good

weather? Answering this question requires assessing the potential of

NIS/Balkan countries to improve the cost competitiveness of their grain

production at the farm level. Can they reduce costly impediments to

moving surplus grain from the farm to the border? How might support and

trade policy changes, particularly those motivated by negotiations for accession to the World Trade Organization (as in the case of Russia and Ukraine),

affect future trade? What are the foreign markets for these countries' grain,

and are these markets limited?

This report focuses on the main NIS and Balkan grain producers. The

former include Russia, Ukraine, and Kazakstan, and the latter Romania,

Bulgaria, Serbia, Croatia, and Hungary (though Hungary borders, rather

than lies within, the Balkans). All eight countries export most, or a sizable

fraction, of their grain through the Black Sea, so we refer to them collectively as the “Black Sea grain exporters.”

How Grain Export Levels and

Competitiveness Could Change

Gauging the export potential of Black Sea countries requires identifying and

then examining the key factors that affect their production, cost competitiveness, and trade volumes of grain. These variables include:

2

Black Sea Grain Exports: Will They Be Moderate or Large?

Economic Research Service/USDA
• Weather,

• Real exchange rates,

• Costs of primary production,

• Consumer income,

• Infrastructure for internal movement of grain,

• Port capacity constraints,

• State policies,

• Domestic price adjustments, and

• Foreign market conditions.

Weather. The rise in grain output that enabled large exports by Russia,

Ukraine, and other Black Sea countries in 2001-03 could have been due

simply to favorable weather. In 1998, severe weather resulted in the NIS

region's lowest grain harvest in decades, such that the Black Sea countries'

combined grain harvest was only 122 mmt (USDAa). Unfavorable weather

also caused relatively poor harvests in 1999 and 2000; in 2000, the region

exported only 5 mmt of grain. However, very good weather years for grain

followed in 2001 and 2002. The Black Sea countries' grain harvests jumped

to 182 and 179 mmt, compared with average annual output over 1996-2000

3

Black Sea Grain Exports: Will They Be Moderate or Large?

Economic Research Service/USDA

Table 1—Grain production and net trade

Countries 1996-2000* 2001 2002 2003**

Million metric tons

Russia

Production 63 82.1 84.0 64.3

Trade -2.9 5.2 14.7 6.0

Ukraine

Production 26 38.4 37.7 19.2

Trade 2.6 8.8 9.2 -1.6

Kazakstan

Production 10.9 15.6 15.4 14.5

Trade 4.2 4.3 5.9 6.5

Romania

Production 15.7 15.2 12.7 8.9

Trade 0.6 0.7 -0.3 -2.7

Bulgaria

Production 4.7 4.8 5.5 3.1

Trade 0.2 0.9 1.3 -0.4

Hungary

Production 11.6 14.4 11.4 8.5

Trade 2.6 4.6 1.9 0.9

Serbia and Montenegro

Production 7.8 8.3 8.4 5.6

Trade -0.2 0.2 0.3 -0.2

Croatia

Production 3.0 3.1 3.6 2.6

Trade 0.002 0.05 0.3 -0.2

Total

Production 142.7 181.9 178.7 126.7

Trade 7.1 24.8 33.3 8.3

* Average annual for marketing years July-June.

** For production, estimated for July 2003-June 2004. For trade, actual trade from July 2003

through February 2004. Note: All years are marketing year, beginning in July of year given

through June of following year. For trade, positive values are net exports and negative values

net imports.

Source: USDAa.
of 143 mmt.1 Of the 360 mmt of grain produced by Black Sea countries in

2001 and 2002, 197 mmt was wheat and 163 mmt coarse grain. Among the

Black Sea countries, only Romania suffered bad weather in 2002 (drought),

which hurt its grain harvest.

In 2003, however, poor weather in the NIS and Balkan regions reduced the

grain harvest to just 127 mmt. Russian and Ukrainian grain production was

64 and 19 mmt, compared with average annual output in 2001-02 of 83 and

38 mmt. Severe winters in both countries resulted in substantial grain

winterkill. Romania and Serbia suffered drought in 2003. Still, although

weather can largely determine crop output in any given year, it is a

nonfactor in forecasting.

Real exchange rates. Russia's economic crisis of 1998—which affected not

only the entire NIS region but also the Balkan and other transition

countries—resulted in major depreciation of NIS currencies in both nominal

and real (inflated-adjusted) terms. For example, from the start of the crisis

in August 1998 through the end of 1999, the Russian ruble and Ukrainian

hryvnia depreciated in real terms by almost 50 percent. During this time,

Balkan country currencies also depreciated in both nominal and real terms

(though by less than in the NIS countries). Currency depreciation improved

the price competitiveness of NIS and Balkan grain on the world market, and

thereby helped these countries become major grain exporters in 2001/02 and

2002/03.2

In 2000, however, NIS and Balkan currencies began appreciating in real

terms (because the inflation rate exceeded the nominal rate of currency

depreciation). In the view of Western macroeconomic forecasters, NIS and

Balkan currencies are still undervalued relative to Western currencies. For

example, PlanEcon forecasts real appreciation for all these countries' currencies over the near to medium term, with the Bulgarian leva, Hungarian

forint, and Russian ruble appreciating in real terms from 2003 to 2007 by

25, 14, and 12 percent. This and the real appreciation already underway

since 2000 should diminish the grain exports of Black Sea countries.

Costs of primary production. Black Sea producers can best improve their

price competitiveness by increasing input productivity. By lowering the

amount of inputs needed to produce a unit of output, productivity growth

would reduce per unit costs of production. Agricultural productivity in the

Black Sea countries has been much lower than in the United States and

other Western countries. If its vast potential for productivity growth were

realized, say by moving to a superior technology or system of production,

the NIS region could become a major grain exporter. Western forecasters,

in fact, predicated their most optimistic predictions on the expectation that

NIS grain producers would increase agricultural productivity through technological and systemic change.

However, recent analysis finds that productivity growth in Russia, Ukraine,

and Kazakstan (the main Black Sea producers) has been poor. ERS estimates (Osborne and Trueblood, 2004) indicate that from 1993 to 1998,

productivity in Russian crop production fell by 8 percent overall. Another

study (Lerman et al., 2003) finds that total agricultural productivity in

4

Black Sea Grain Exports: Will They Be Moderate or Large?

Economic Research Service/USDA

2 The reason why the depreciation in countries' currencies in 1998-99 helped the price

competitiveness of their grain exports as late

as 2001-03 is that the magnitude of the depreciation in 1998-99 was so great that exchange

rates were still lower in 2001-03 than before

the depreciation of 1998-99. This was the

case despite the fact that countries' currencies

began to appreciate in real terms in 2000.

1 This report follows the USDA practice of

excluding buckwheat and pulses in grain output and trade figures.
Russia and Ukraine rose from 1992 to 1997 by just 7 and 2 percent, while

in Kazakstan it fell 5 percent. Much of the NIS' poor agricultural performance is due to the incomplete implementation of reform in Russia, Ukraine,

and most other NIS countries. Reforms are needed to improve farm-level

organization and management, and to develop the physical and institutional

infrastructure that supports agricultural production. 

However, private farming has not developed to any substantial degree, effective land and rural credit markets have not emerged, and a commercial legal

system is not yet in place to protect property and enforce contracts. Such

developments are necessary to improve the motivation and means of all

agri-food enterprises to reduce the costs of producing, transporting, and

processing agricultural output. For example, the absence of a well-developed commercial legal system substantially raises the transaction costs and

risk (such as not being paid on time, or at all, for deliveries) in forging and

managing commercial relationships.

Recent developments in Russia and Ukraine, however, could help spur

growth in agricultural productivity. Both countries recently passed legislation that sanctions agricultural land markets, allowing the relatively free

buying and selling of farmland (though in Russia's case the new law largely

codified a mass of earlier legislation on land affairs). In addition, large

vertically integrated producers are emerging in the agri-food sector of both

countries, with finance and management often coming from outside the

sector (though little of the investment is from foreign sources). These new

operators could stimulate productivity growth by improving both the technology of the country's production and its system of organization, management, and incentives, with greater concern for reducing waste and costs and

for rewarding initiative and superior job performance.

If effectively implemented, the new land legislation and new types of

production should boost productivity, output, and exports. Yet, during the

transition period these countries have tended to pass legislation and make

“official” systemic changes that leave dysfunctional conditions largely

unchanged. Also, even if the new producers outperform the existing former

state and collective farms, they might simply represent the best possible

management and production practices within the economy's current technological and administrative systems. 

Most future productivity gains are likely to come from strengthening

vertical ties for production and distribution of output, rather than from real

technological or systemic improvement. Strengthening the links in the

chain of supply and distribution can reduce waste and improve efficiency.

Yet, there is little evidence so far to indicate that the move toward greater

vertical integration will result in a more fundamental switch to more

advanced technologies of production. Thus, productivity growth in the

major NIS grain producers during the next decade is anticipated to be

moderate.

In the Balkan countries, farm-level changes during the transition have also

not been conducive to major productivity growth. Both Romania and

Bulgaria have broken up the large collective farms that dominated agricultural production during the Soviet era. Romania now has about four million

5

Black Sea Grain Exports: Will They Be Moderate or Large?

Economic Research Service/USDA
private farms, most of them quite small (average farm size is about 0.5

hectare). Bulgaria's grain production is more mixed, with some large,

private farms. The many small private farms in both Romania and Bulgaria

suffer from diseconomies of scale. The main grain producers in Serbia are

large vertically integrated kombinats, which are undergoing a complicated

and confusing privatization. Because these countries have not yet established systems of farm structure and management with proven records of

productivity growth, their grain producing operations over the next decade

are anticipated to show only moderate growth. Thus, in both the NIS and

Balkan regions, the effect of productivity growth on grain exports is

expected to be only mildly positive.

The price competitiveness of Black Sea grain production is also sensitive to

changes in input prices, especially for energy. As during the Soviet period,

energy use in Russia, Ukraine, and Kazakstan continues to be subsidized,

not only in agriculture but throughout the economy. The most important

type of energy used in grain production is fuel for machinery (used mainly

for planting and harvesting). Subsidization of energy use can be defined as

either setting user prices below production costs, or even if domestic user

prices equal production costs, charging domestic users prices below world

trade prices. Although the first definition holds in Russia and perhaps a few

other countries for only a few energy products, the second definition holds

in Russia and Ukraine for many such products. For example, in 1999

Russian farms paid about $13 per 1,000 cubic meters of natural gas, while

the average export price of Russian natural gas was $57 per 1,000 cubic

meters.

In Russia's WTO accession negotiations, WTO members argue that Russia's

policy of charging domestic energy users prices below the prices it receives

when exporting the energy is a subsidy, which gives its producers (in all

sectors of the economy) a cost advantage over foreign competition. These

countries are therefore arguing that Russia end this subsidy as a condition

for WTO accession. Therefore, in the near to medium term, energy prices

faced by Russian grain producers will likely rise closer to world prices. By

raising production costs, this development will hurt Black Sea grain's

competitiveness and thereby dampen exports.

Consumer income and revival of the livestock sector. Soviet-era imports of

grain have disappeared in the NIS region mostly due to the massive contraction of the livestock sector, which has reduced the need for feed grain.

Macroeconomic forecasters project GDP in most Black Sea countries to

grow during the next decade by 4-5 percent a year. Given that demand for

livestock products is fairly sensitive to changes in consumer income, GDP

growth should help revive demand for meat and other livestock products,

and consequently for feed grain as well. The growing domestic demand for

feed could cut into domestic grain surpluses available for export.

If agricultural and food markets in the Black Sea countries are functioning

well internally and are well integrated with world agricultural markets, any

rise in consumer demand for meat would have little or no effect on grain

exports. When domestic and world markets are integrated, domestic

producer prices are determined predominantly by world trade prices. Thus,

an increase in domestic demand for a foodstuff, such as meat, would only

6

Black Sea Grain Exports: Will They Be Moderate or Large?

Economic Research Service/USDA
slightly affect domestic producer prices, and therefore only slightly affect

domestic meat production. Most of the rise in domestic demand for meat

would be met by additional imports (or by reduced exports, if the country is

a net meat exporter), not by a change in meat output. There would be little

or no secondary effect on domestic grain markets. If markets in the Black

Sea region are not functioning well, however, the projected GDP growth

could significantly raise producer prices and domestic production of meat.

How well integrated are Black Sea countries' agricultural and food markets

with world markets? Osborne and Liefert (2004) find that the transmission

of changes in world trade prices, and in the exchange rate, to changes in

Russian domestic prices for meat products is fairly weak. This weak integration is due to undeveloped physical and institutional infrastructure (such

as weak systems of transportation, commercial law, and market information), which segments regional markets and cuts off regional markets from

the world market. Other Black Sea countries have made no more progress

than Russia in improving their infrastructure for agriculture. Also “separating” regional markets from the world market—to the benefit of regional

producers that must compete with imports—are differences in quality and

taste between locally produced and imported goods, such that consumers

prefer their local products.

Over the next decade, Black Sea countries are likely to improve their infrastructure and integration with world markets. Increased Western investment

and the technological/managerial know-how that typically accompanies it

(which the Russians identify as a major motive for joining the WTO) could

play a key role in developing agricultural infrastructure and linkages. NIS

grain producers might also improve their skills at marketing their output to

foreign buyers. Nonetheless, infrastructural development is usually slow.

With lingering segmentation of regional markets, the anticipated growth in

consumer income is likely to spur livestock production, thereby dampening

grain exports.

Infrastructure for internal movement of grain. Black Sea grain exporters

must compete on the world market with respect not only to the costs of

primary (farm) production, but also to the costs of moving grain from the

farm to the border/port. The quality of countries' physical and institutional

infrastructure therefore affects the Black Sea countries' grain export potential not only indirectly through the livestock/feed relationship (as just

discussed), but also more directly by affecting the total cost of making grain

available for export.

Except for Hungary, all the Black Sea countries suffer from deficient

domestic physical infrastructure for moving grain and other agricultural

products (mainly the poor road, rail, and storage systems), which raises

internal transport costs. The weak institutional and commercial infrastructure of the agricultural and food economy also raises transaction costs

(though Hungary again is an exception, with a stronger commitment to and

better implementation of reform). Producers in particular need better

systems of market information (where can one sell and at what price?) and

commercial laws that protect property and enforce contracts. The payments

that must be made throughout the food economy because of extortion and

bribery, a consequence largely of the dysfunctional legal system, are an

7

Black Sea Grain Exports: Will They Be Moderate or Large?

Economic Research Service/USDA
additional commercial cost and impediment. Both Romania and Bulgaria

have many small private farms. Physical and institutional infrastructure is

particularly crucial for such vulnerable farms, without which they are cut off

from both foreign and domestic markets, and can function only as subsistence producers.

Because of deficient infrastructure, Ukrainian grain farmers in the late

1990s received prices equal to only about 45 percent of the Ukrainian export

price, while German farmers received prices equal to 75 percent of the

German grain export price (Striewe, 1998). (Post harvest losses are taken

into account in determining the real prices received.) By cutting into the

share of the full export price that farms can receive, high internal transport

and transaction costs discourage production for export.

The problems that Russia and Ukraine have faced recently in moving large

grain surpluses to export have reinforced the importance of infrastructure to

all the Black Sea grain exporters. In 2002, Russia passed national legislation that could strengthen commercial law economywide. Yet, improving

physical infrastructure takes time and considerable expense (whether

publicly or privately funded), while improving institutional infrastructure

requires not only passing legislation but also transforming the attitudes and

behaviors that underpin effective institutions (such as respect for the rule of

law). Improving physical and institutional infrastructure in these countries'

agri-food economies will benefit grain exporters, but progress will be slow.

Port capacity constraints. The Black Sea countries have port capacity

constraints for exporting grain, the main limitation being port-side elevators.

The bulk of Ukraine's and Russia's grain exports move through Black Sea

ports, such as Odessa (Ukraine) and Novorossysk (Russia). The Balkan

countries also face constraints, either in port capacity (such as Costanza in

Romania) or in shipping down the Danube (Hungary and Serbia).

The Black Sea countries are committed to increasing their shipping and port

capacity for exporting grain. Also, port capacity constraints appear to have

been exaggerated, at least for Russia and Ukraine. In 2001-02, sources

commonly reported that the Black Sea ports of Russia and Ukraine each had

a total annual grain export capacity of only 5 mmt (Interfax). Yet, in

September, October, and November 2002, Russian grain exports equaled

1.7, 1.8, and 2.0 mmt per month. One reason for the higher-than-anticipated

movement of grain through ports was the use of shortcut methods like direct

loading. In this procedure, grain from rail cars is dumped directly into

ships’ holds without first passing through an elevator. The procedure

decreases loading time, but increases the amount of broken grain kernels

and reduces traders’ ability to control quality (because grain from various

sources is mixed). Nonetheless, Russia and Ukraine have been strenuously

expanding grain port capacity, which should boost exports.

State policies. An important factor that will affect these countries' policies

concerning grain production and trade is WTO membership (or accession

negotiations). Of the Black Sea countries, Hungary, Bulgaria, Romania, and

Croatia are already members of the WTO, while Russia, Ukraine, Kazakstan, and Serbia have begun accession negotiations.3 The accession negotiations for agriculture center around the three “pillars” of the Uruguay Round

8

Black Sea Grain Exports: Will They Be Moderate or Large?

Economic Research Service/USDA

3 An issue that will also strongly shape agricultural policies for Hungary is EU membership, while for Romania, Bulgaria, and Croatia

the desire to join the EU (Romania and

Bulgaria being slated for membership in 2007)

will surely influence policy development. The

effect of EU enlargement for the acceding

countries and for world agricultural markets is

examined in the previous report in this series

EU Enlargement: Implications for New

Member Countries, the United States, and

World Trade.
Agreement on Agriculture—market access, export subsidies, and domestic

support. Since a country's market access policies affect its imports rather

than exports, the negotiations that will most impact the acceding countries'

status as grain exporters are those on domestic support and export subsidies.

WTO membership requires that countries keep their level of trade- and

production-distorting domestic state support to agriculture below a negotiated limit. Acceding countries are expected to ground their bound level of

support at levels that existed during a “base period,” usually the last 3 years

of available data. WTO members are arguing that the base period for determining Russia's and Ukraine's bound support should be some time in the

late 1990s, say 1997-99. Over this period, total budgetary transfers to agriculture in Russia (from federal and regional governments combined, as

WTO rules require) averaged $3.1 billion per year (Russian Federation State

Committee for Statistics, 2001). The transfers equaled 14 percent of agricultural GDP, and about 1 percent of total GDP. Member countries argue

that the appropriate level of bound annual support for Ukraine—based on

the period 1997-99—would be about $60 million, less than 1 percent of

agricultural GDP.

Both Russia and Ukraine argue that it is unfair to require them to base their

bound support on recent support levels. During the Soviet period, agricultural support was high, in the form of both administered pricing and budget

allocations. In 1990, Soviet budgetary transfers to agriculture equaled about

3.3 percent of GDP. Support to agriculture in Russia, Ukraine, and Kazakstan has fallen steadily throughout the transition period, mainly because of

diminishing state finances rather than the desire from a policy perspective to

shrink subsidies. Russia is therefore asking to base its bound support level

on the period 1991-93, while Ukraine is asking for 1994-96. 

In 2001, Russia proposed an initial bound annual support of $16.2 billion, to

fall over a 6-year implementation period to $12.9 billion. In 2002, Russia

lowered its proposed annual bound support level to $9 billion, still well

above the $3.1 billion annual budgetary support figure for Russia over 1997-

99. Ukraine is negotiating for bound annual support of $1.38 billion, far

above the $60 million proposed by member countries. WTO members

argue that basing support on the early 1990s is illegitimate, given that these

countries' economies at that time were still as much state-controlled as

market-driven.

Russia is also arguing that it be allowed export subsidies, which would be

used most likely for grain given the country's aspiration of becoming a

major grain exporter. Russia is proposing that its bound export subsidies be

based on levels over the period 1990-92, which covers the last 2 years of the

Soviet regime (1990-91). It is asking for bound annual subsidies of $726

million, which would then drop over 6 years to $464.7 million a year.

Ukraine, on the other hand, has not used any export subsidies during the

transition period, and is not negotiating for their use.

An acceding country can negotiate the right to use export subsidies as a

WTO member only if such subsidies existed during the “base period” used

in its accession negotiations, again typically the 3 most recent years of

available data. One would therefore think that the absence of export subsi9

Black Sea Grain Exports: Will They Be Moderate or Large?

Economic Research Service/USDA
dies over the entire 12-year course of Russia's transition would wholly

prevent it from negotiating export subsidies as part of its accession package.

In addition, the United States and many other countries are seeking in the

new Doha Round of trade negotiations to end agricultural export subsidies

for all WTO members.

Yet, even if Russia and Ukraine were to negotiate the right to bind support

in excess of current levels, and Russia were also allowed export subsidies,

government budgetary limitations could preclude any rise in subsidies or

support. On the other hand, projected annual GDP growth of 4 percent over

the decade could increase government revenues sufficiently to raise support

to agriculture. The effect of policy changes on grain production and exports

is therefore likely to be positive rather than negative, though perhaps only

mildly so.

WTO accession is also likely to promote grain exports by reducing (if not

wholly eliminating) the ability of regional governments in Russia and

Ukraine to restrict grain outflows. There are two possible reasons for the

restrictions. First, regions want to ensure that local food needs are met.

Second, some local officials deliberately create price differences between

regions, and then control grain outflows in order to profit by selling to

regions where prices are higher. The federal governments of the NIS countries oppose these controls, and their opposition could grow given that the

restrictions might also create monitoring and enforcement problems for

WTO membership.

A countervailing policy development in Russia, however, will reduce rather

than promote grain exports. In spring 2003, the government created tariffrate quotas (TRQs) for imports of beef and pork, and a pure quota for

poultry. (A TRQ allows a fixed amount of imports at a lower tariff rate and

unlimited imports at a higher rate, while a pure quota absolutely sets the

maximum volume of imports allowed, at a single tariff rate.) The low-tariff

quota volume for beef and pork, and pure quota volume for poultry, equaled

about two-thirds of the country's import volume of these meats in 2001.

The protection afforded by the TRQs/pure quota have raised meat producer

prices. From January 2003 to July 2004, wholesale prices for beef and pork

in the most meat-expensive regions in Russia rose 33 and 42 percent

(Interfax). The price increases should stimulate output, which in turn would

raise domestic demand for feed grain. This would cut into the grain

surpluses available for export.

Domestic price adjustments. Even if the Black Sea countries are able to

increase grain output for export at the farm level, regional restrictions on

grain outflows, deficient infrastructure for the domestic movement of grain,

and some lingering port capacity constraints could all limit the amount of

grain actually exported. If exportable surpluses remain within the country

(or even more so within regions), domestic producer prices could fall,

perhaps substantially. This has already happened to some degree in both

Russia and Ukraine. For example, the price of soft wheat as reported in

Moscow's main commodity exchange fell from 3,400 rubles a ton in August

2000 to 2,980 rubles in August 2001, and then to 2,350 rubles in August

2002 (Interfax).

10

Black Sea Grain Exports: Will They Be Moderate or Large?

Economic Research Service/USDA
Given that the demand for grain is relatively fixed and therefore not overly

responsive to price changes, grain surpluses could require that domestic

prices fall by a lot in order for market supply and demand to balance. The

consequence, well-known to farmers in the United States and other Western

countries, is that successive years of bumper harvests could drive prices

down so far that farmers' total revenue is lower than in years when output is

less and prices are higher.

Grain producers in the Black Sea countries could respond to falling prices

and income by cutting back growing area. In fact, grain area in Russia and

Ukraine in 2003 dropped by 11 and 23 percent from the previous year

(USDAa). Such a reaction can act as a partial “built-in stabilizer” to the

growth in grain production and exports, at least in the short to medium term

while impediments to exports persist. 

Foreign market conditions. In the last few years, the Black Sea countries

have exported grain to many different regions of the world, including the

Middle East, North Africa, European Union (especially Italy and Greece),

South America (including Brazil and Argentina), East Asia (such as China

and South Korea), and even Canada. The bulk of Black Sea grain, however,

goes to the Middle East and North Africa (MENA), especially Egypt,

Algeria, Saudi Arabia, and Morocco. In 2002, MENA countries accounted

for 47 percent of Black Sea grain exports. (Black Sea grain exports to EU

countries in 2002 were almost as large as those to the MENA countries, but

this was because of abnormally high EU demand. EU grain import quotas

imposed in 2003 will preclude such high imports of Black Sea grain in the

future.)

One reason that the MENA countries are the main destination for Black Sea

grain is simple geography. MENA countries are fairly close to the Black

Sea, so the cost of shipping is relatively low. Another likely reason is

complementarity with respect to product quality. Much of Black Sea grain

is of relatively low quality, compared at least to Australian, Canadian, and

U.S. grain. Although some Black Sea grain is high quality, much of it has

low protein content and suffers from sprout damage (which occurs because

of rain during harvesting) and other problems such as poor cleaning. A

commonly consumed type of bread in the MENA countries is flat bread,

which does not require high-quality milling wheat. Several MENA countries, such as Saudi Arabia, import much feed barley for sheep and camels.

Other countries, such as Israel, import wheat to be used as feed. Thus,

MENA countries are willing to accept low-quality Black Sea grain versus

more costly grain from OECD countries.

Because of the complementarity between Black Sea grain and MENA

demand, any constraints on the growth in MENA demand could constrict

the growth in Black Sea grain exports. However, MENA grain demand

during the next 10 years should rise by a fair degree. Demand for food

grain depends mainly on population growth, and projected annual population growth rates for MENA countries (around 2.0 percent) are well above

projected annual world population growth (1.3 percent). Also, as per capita

incomes in the MENA countries increase, food demand should switch from

staples such as bread and rice to higher value livestock products. The

resulting growth in MENA countries' livestock sectors should stimulate

11

Black Sea Grain Exports: Will They Be Moderate or Large?

Economic Research Service/USDA
demand for imported feed grain and feed-quality wheat. The stability and

growth of the MENA countries as a market for Black Sea grain is demonstrated by USDA's 2004 baseline forecast to 2013 (USDAb). MENA grain

imports are predicted to rise at about the same rate as total world grain

imports (and even higher than aggregate world grain imports if the large

influence of China on the growth in world grain trade is excluded).

Although the EU was a major destination for Russian and Ukrainian grain

(especially wheat) in 2002, the EU's potential as a growth market for NIS

grain will be constrained by recently imposed EU import controls. In

January 2003, the EU imposed a tariff-rate quota on NIS wheat imports of

2.6 mmt at a fixed tariff of 12 euros per metric ton, with above-quota

imports at a fixed tariff of 95 euros per ton. The tariff-rate quota does not

apply to the Balkan countries, such as Romania and Bulgaria, which have

special trade agreements with the EU. Hungary's accession to the EU in

2004 removed any export constraints for that country.

Black Sea Region Likely To Be a

Medium-Sized Grain Exporter

The most important factor affecting the volume of Black Sea countries'

production and trade of grain is probably productivity growth. Productivity

growth would improve countries' cost competitiveness in grain production,

thereby moving countries toward a comparative advantage in producing the

commodity. Such productivity growth is likely, though at a moderate rather

than substantial pace. It therefore appears that those developments having a

positive effect on Black Sea exports should dominate those having a negative effect (table 2). As a result, the Black Sea region is most likely to

become a medium-sized grain exporter over the next decade.

Empirical support for this conclusion comes from model-generated projections for Russian and Ukrainian grain production and trade to the year 2013.

The projections are from an ERS model of the world agricultural economy,

the Country-Link System, which generates forecasts for agricultural production, consumption, and trade. The Country-Link System consists of 46 individual country or regional models, all of which are partial equilibrium and

dynamic in nature, covering 22 commodities. Results are presented for

Russia and Ukraine (table 3), which accounted for about two-thirds of the

Black Sea countries' grain production during 2001-03.

The projections model includes assumptions for Russia and Ukraine, which

reflect the analysis in this report about the following variables:

• real exchange rate;

• productivity growth;

• consumer income;

• price and exchange rate transmission elasticities, which represent the 

degree of countries' integration into world agricultural markets; and

• import controls and budget subsidies to agriculture.

Because of the importance of productivity growth as a forecast assumption,

results are presented for two scenarios based on differing assumptions about

12

Black Sea Grain Exports: Will They Be Moderate or Large?

Economic Research Service/USDA
productivity growth—a low-growth scenario and a high-growth scenario.

For both Russia and Ukraine, grain yields have fallen since reform began in

the early 1990s, especially for Ukraine. For Russia, the low-growth

scenario assumes that by 2013, yields rise to the pre-reform level. The

high-growth scenario assumes that by 2013 yields both recover to prereform levels and increase by an additional average annual rate of 1.5

percent. For Ukraine, the low-growth scenario assumes that by 2013, yields

rise halfway to the pre-reform level, while the high-growth scenario

assumes that yields recover fully to the pre-reform level.

The projections are compared to average annual levels of production and

trade in a base period. The base period used for Russia is 1999-2001 and

for Ukraine 1997-2002. The main factor in choosing base periods was

finding a recent period of time over which weather conditions were on

average “normal” with regard to grain production.

In the low-growth scenario, total grain production for the two countries by

2013 is 114 million metric tons (mmt), 19 percent above base period output.

This results in a doubling of net annual grain exports from 4.2 to 8.6 mmt.

Since low rather than high productivity (yield) growth seems more likely,

the projections support the conclusion that the Black Sea region (led by

13

Black Sea Grain Exports: Will They Be Moderate or Large?

Economic Research Service/USDA

Table 2—Expected effects of changes in key variables

on agricultural trade

Variable Expected direction Expected effect 

of change on grain exports

Real exchange rate Appreciation ↓

Input adjustments 

Energy prices Increase ↓

Labor employed Decrease ↓

Productivity Increase ↑

Consumer income and 

revival of livestock sector Increase ↓

Infrastructure (including

port capacity) Improvement ↑

Policy

Import controls Increase ↓*

Subsidies Increase ↑

Regional outflow controls Decrease ↑

Grain prices (if export 

constraints continue) Decrease ↓

Foreign demand Increase ↑**

* The “expected” increase in import controls are the meat import TRQs (and for poultry the pure

quota) created in spring 2003. The TRQs should raise domestic demand for feed grain, and

thereby reduce grain surpluses available for export.

** Although in the short run an EU wheat import quota might reduce grain exports,

in the long run growing demand in North Africa and the Middle East would raise exports.
Russia and Ukraine) could become a medium-sized grain exporting region

of around 10 mmt a year.

The high-growth scenario, however, results in grain production for Russia

and Ukraine of 132 mmt by 2013, which pushes the countries' combined net

grain exports up to 32 mmt. From these results, we can extrapolate that

high productivity growth throughout the Black Sea region could result in

30-40 mmt of grain exports a year. Such large exports would strongly affect

the world grain market, since over 2000-03 total annual world grain exports

averaged 237 mmt.

The projections are based on the assumption that the tariff-rate quotas that

Russia created in 2003 for imports of beef and pork, and the pure quota for

imports of poultry, remain in effect throughout the projection period. These

trade protection measures should stimulate domestic meat production and

correspondingly demand for feed. Their effect is to reduce the 2013 projection for Russia's annual grain exports in both the low- and high-growth

scenarios by 3-4 mmt. This explains why in the low-productivity scenario,

the rise in grain output does not result in Russia becoming a net grain

exporter (table 3). If Russia were to eliminate its recently imposed meat

14

Black Sea Grain Exports: Will They Be Moderate or Large?

Economic Research Service/USDA

Table 3—Projections for grain production and net trade to 2013:

Russia and Ukraine

Country/

commodity Production Trade*

Million metric tons

Base period

Total grain 96 4.2

Russia 66 -1.2

Ukraine 30 5.4

Product:

Wheat 54 2.3

Coarse grain 42 1.9

Low productivity growth

Total grain 114 8.6

Russia 74 -0.6

Ukraine 40 9.2

Product:

Wheat 62 6.1

Coarse grain 52 2.5

High productivity growth

Total grain 132 31.8

Russia 87 15.5

Ukraine 45 16.3

Product:

Wheat 73 19.4

Coarse grain 59 12.4

* Positive (negative) values are net exports (imports).

Note: Base period values for Russia are average annual values for marketing years (July to

June) over 1999-2001, while base values for Ukraine are average annual values for marketing

years over 1997-2002.

Source: USDAa and authors' calculations.
import restrictions, the Black Sea region would become an even bigger

grain exporter. 

References

Cochrane, Nancy, and Ralph Seeley, EU Enlargement: Implications for New

Member Countries, the United States, and World Trade, U.S. Dept. of

Agriculture, Econ. Res. Serv., WRS04-05-01, April 2004.

Interfax. Food and Agriculture Report. Moscow, weekly.

Lerman, Zvi, Yoav Kislev, Alon Kriss, and David Biton. “Agricultural

Output and Productivity in the Former Soviet Republics.” Economic

Development and Cultural Change 51 (2003):999-1018.

Osborne, Stefan, and William Liefert. “Price and Exchange Rate

Transmission in Russian Meat Markets.” Comparative Economic Studies

46, 2:221-244 (June 2004).

Osborne, Stefan, and Michael Trueblood. “An Examination of Economic

Efficiency of Russian Crop Production in the Reform Period.” Economic

Research Service, U.S. Dept. of Agriculture, 2004 (unpublished paper).

PlanEcon. Review and Outlook for the Former Soviet Republics.

Washington, DC, biannual.

Russian Federation State Committee for Statistics. Rossiiskii Statisticheskii

Ezhegodnik (Russian Statistical Yearbook) 2001. Moscow, 2001.

Striewe, Ludwig. “Grain and Oilseed Marketing in Ukraine.” Joint Working

Paper of the Germany Advisory Group on Economic Reform and the

Ukrainian Center for Privatization and Economic Reform, Kiev, 1998.

U.S. Dept. of Agriculture (USDAa). Production, Supply, and Distribution

Database (PS&D). www.fas.usda.gov/PSD .

U.S. Dept. of Agriculture (USDAb). USDA Agricultural Baseline

Projections to 2013. Office of the Chief Economist, Staff Report WAOB2004-1, February 2004.

15

Black Sea Grain Exports: Will They Be Moderate or Large?

Economic Research Service/USDA