Building a grain marketing infrastructure in Bulgaria
April 01, 1999
by Stormy Wylie
By Stormy WyliePilot program aimed at moving Bulgaria to market-oriented system with licensed grain storage facilities and warehouse receipts.
As NATO stepped up air strikes against Yugoslavia in early April, the International Monetary Fund warned emerging market economies elsewhere in the Balkan region specifically Bulgaria that the Kosovo crisis would inevitably have adverse effects.
“Investors might treat the region as uncertain,” said Juha Kaekoenen, I.M.F. mission chief for Bulgaria. “Bulgaria should stress sound economic policies to offset the impact.” Bulgaria was urged to step up privatization and reforms, especially its developing grain and export market, to offset the impact of the war.
Bulgarian authorities said the war in neighboring Yugoslavia has already had some economic impact on its economy, hitting transportation and exports the hardest. Bulgaria's road and rail links to Central and Western Europe run through Yugoslavia to the west. However, observers in Bulgaria said the war is so far not influencing grain exports, which go through eastern ports on the Black Sea.
A U.S.-backed effort to help Bulgaria develop a modern grain marketing infrastructure and establish a warehouse receipts program also is going forward without interruption.
“We are not personally threatened by the bombing,” said Madonna McGuire, country representative for ACDI/VOCA in Bulgaria. “The bombing is far enough away that we don't really notice it. There are small daily demonstrations but they have not gotten out of hand. We expect things will really calm down even more and we may not even be able to tell there is a war next door, except for the influx of refugees.”
ACDI/VOCA is a private, nonprofit international development organization that provides technical expertise to farmers, agribusinesses, cooperatives and private and government agencies around the world. Funding for its programs comes from the U.S. Agency for International Development, the U.S. Department of Agriculture, the World Bank, regional development banks and private donations.
“Because agriculture is the foundation of most developing economies, investments in agricultural development bolster farmer income, promote food security, advance political stability and support future trade,” says the group's literature.
ACDI/VOCA has projects ongoing in Africa, Asia, Latin America, the Middle East and in Europe and countries of the Former Soviet Union.
An ACDI/VOCA team has been in Bulgaria since 1991. Before joining the Bulgarian team, Ms. McGuire was the Muscatine County extension director for Iowa State University, Ames, Iowa, U.S., and the grants administrator for ACDI/VOCA in Washington, D.C. The other staff member is Krassi Kiriakov, a native Bulgarian who began working with the organization in 1993 after earning a master's degree in marketing.
Their job was to help the Bulgarian government set up a grain storage and marketing system. Initially, using a similar program in Poland as a guide, the ACDI/VOCA team's objectives included establishing a reliable marketing information system, forming a national grain and feed association and helping write a new grain marketing law to implement reforms and a warehouse receipt program.
“Our goal is to upgrade the Bulgarian grain marketing infrastructure to world standards,” Mr. Kiriakov said.
The ACDI/VOCA staff sought technical help in designing and implementing the grain storage and marketing system and enlisted the help of Si Matthies, a retired executive with General Mills, Inc., Minneapolis, Minnesota, U.S. As an ACDI/VOCA volunteer, Mr. Matthies has helped set up grain marketing infrastructures in Poland, Hungary and Bulgaria after the collapse of the former Soviet Union in 1990.
Mr. Matthies said the F.S.U. countries had difficulty moving from a command economy to a modern, market-oriented system. When their economies didn't improve as rapidly as was thought, the governments stepped in to protect their food and grain sector.
“Grain was terribly important in the Soviet Union,” Mr. Matthies said. “There was a stated or implied guarantee that there would always be bread on the table. It is so important to the welfare of a nation that the bread industry was considered a strategic industry. If you don't have bread, you have chaos and rebellion.”
That's nearly happened in Bulgaria in the mid-1990s.
One of the poorest countries of Central Europe, Bulgaria has had liberalized grain markets for some time, but government price controls undermined the workings of the free market. A food shortage in 1996, triggered by on-again, off-again grain export bans, licensing requirements and import tariffs, coincided with an economic crisis that saw inflation surpass 300%. Grain prices in Bulgaria fell and domestic wheat and coarse grains production plunged to 30-year lows.
The complete liberalization of the grain market started in January 1998 when imports and exports were opened and the minimum support price for wheat abolished.
“Bulgaria can be a factor in the bread and wheat market of the world,” said Mr. Matthies. “But they don't have credibility, and that has been a thorn in their side.”
Backed by financial help from the International Monetary Fund, the World Bank and private groups like ACDI/VOCA, the Bulgarian government was mandated to step up privatization of its food industry. By the end of 1998 all of Bulgaria's grain storage facilities and flour mills had been privatized. Bulgaria has about 5 million tonnes of grain storage capacity and its annual milled wheat capacity is estimated at about 1.2 mil-lion tonnes.
With wheat production exceeding consumption every year, and with newly implemented liberalized trade policies, Bulgaria should be a net exporter, Mr. Matthies said. But the country lacked a modern grain marketing infrastructure.
Last year, Mr. Matthies and staff from ACDI/VOCA and the U.S. Department of Agriculture helped the Bulgarian government write a grain marketing law, which calls for private grain warehouses to be licensed and authorized to issue receipts to producers who deposit grain. It is expected that the receipts can be traded on both commodity and stock exchanges and will be used as collateral to obtain bank credits.
The grain marketing system is being tested in a pilot program involving five Bulgarian banks, three privately owned grain storage warehouses and about a dozen farmers. Full implementation of the warehouse receipt system should be in place by the 1999 harvest.
Ms. McGuire said the key to the success of the program was to create a situation of trust between the parties. “Bulgarians are really proud people,” she said. “But they have been under the control of foreign governments for hundreds of years. It has been a difficult transition from a controlled economy to one that follows the market but this younger generation is better equipped, more computer saavy and highly educated. It is this generation that will make a difference in the future of Bulgaria.”
Hristo Iliev is the executive director of a grain and milling company in Kavarna, on the Black Sea coast. The Kavarna facility includes a 100,000-tonne grain elevator, two flour mills each with daily capacity of 200 tonnes, and a feed and byproduct mill.
Valentin Manolov is a banker. He manages the Dobrich branch of Expressbank, which is on the list of assets to be privatized by the Bulgarian government in 1999.
The advantage of the open grain marketing system, Mr. Iliev said, is that farmers can borrow the money they need to grow grain. Elevators make money from storing the additional grain. Bankers make money when farmers pay back their loans with interest.
“Everybody gains something from this system,” Mr. Manolov said.
On a recent trip to the U.S. with the ACDI/VOCA team, both men were impressed with not only the amount of information available to all aspects of the grain business, but also with the quick and accurate analysis of that information.
“Every farmer in the U.S. has a computer,” Mr. Iliev said. “Climate, weather, economic conditions, futures prices everything is available. That's why decision-making errors are less here (the U.S.) than in Bulgaria.” The U.S. futures market, Mr. Manolov said, is “ a good tool for managing risk for all participants.”
Bulgaria's wheat and corn production has nearly doubled in the past three years, exceeding domestic use. In 1998, Bulgaria's wheat production totaled 3.3 million tonnes, according to the U.S. Department of Agriculture. About 800,000 tonnes were exported, mainly to Turkey, Nigeria, Iran, Egypt, Yemen and other countries in the Middle East and North Africa. Given proper inputs and more normal economic conditions, exports could easily double, observers said.
“We are a small country and every year there is a surplus of wheat,” Mr. Iliev said. “There is more grain produced than demand. We are looking at how to expand our export market.” Bulgaria's wheat exports in recent years have been hampered by quality issues. But Mr. Iliev said the new grain marketing program could lead to improved grain quality and increased exports.
“Once the grain market starts moving, the farmers will start planting and we will be better off,” he said. “The more money there is for farmers to get loans, they will begin applying modern technology, which will lead to better quality and better yields and increase the production of grain.” This prosperity is sure to expand to other areas of the Bulgarian economy, said Mr. Manolov, the banker. “It will definitely be better for the overall economy,” he said.
The first loan was signed a few months ago, with two producers using their unsold grain as collateral for short-term credit of about 15 million lev (U.S.$10,000). The grain warehouses signed contracts guaranteeing both the quantity and quality of the grain, which satisfied the bank that their money was secure. With working capital, the producers were free to purchase new equipment, buy additional acreage or plant new crops based on market demand.
“So far, the program has been very successful,” said Mr. Kiriakov of the ACDI/VOCA staff.
Mr. Matthies agreed. “The Bulgarians already knew how to make money,” he said. “It didn't take them long to learn how to trade.”
The European Bank for Reconstruction and Development (E.B.R.D.) has given initial approval to pledge $10 million deutsch marks (U.S.$5.5 million) to local Bulgarian banks to lend for the warehouse receipts program. The key now is to have the support of the government and the Bulgarian grain industry to implement the new grain marketing law and the warehouse receipts program throughout the country.
A conference in January brought together the grain producers, warehousemen and bankers involved in the pilot project with the Bulgarian Minister and Deputy Minister of Agriculture, the chairperson of the agricultural committee in Parliament, the U.S. Ambassador to Bulgaria and representatives of the World Bank, the U.S.D.A. and the E.B.R.D. to discuss their experiences in the first year of the pilot program.
The grain producers said their greatest issue is the high collateral demanded by local banks before they will issue credits. The producers said they needed reliable marketing information, similar to what is available in the United States, and a uniform quality system.
The bankers said an indemnity fund and the use of insurance bonds was crucial to the success of the system.
The grain warehouse managers were unhappy with the high bank deposit that locked up their operating capital, and said they needed more modern laboratory equipment to address quality issues.
Despite these concerns, all three groups expressed their firm commitment to the program, said Ms. McGuire of the ACDI/VOCA staff.
She predicts that the grain marketing program will be implemented within the next two years in Bulgaria.
“Once people see that others are doing it and are successful, they'll come on board but they'll wait to see it with their own eyes,” Ms. McGuire said.