April 15, 2016 FPI | Are Georgian Wheat Flour Prices Reflecting Global Trends?
15 April 2016

Retail food prices decreased by 1.3% y/y and 0.2% m/m. Compared to the end of March, the biggest drops in prices happened in the vegetable category: eggplants are down by 11.8%; cucumbers by 11.2%; and cabbage by 5.3%.

The biggest increases were recorded for wheat flour (added 9.3%), garlic (9.0%), and tea (7.7%.).

Of note is the rapid convergence in prices among competing retail chains. The most expensive and the cheapest chains are no longer as far apart from each other as they used to be just a few months ago. The gap between the max and min values of the Food Prices Index has shrunk from 13 index points on January 15, 2016, to only 6.5 index points on April 15, 2016. The good news is that prices converge downwards. In other words, the more expensive chains face tough competition and are forced to cut prices.

Separating Wheat from Chaff, and From Georgian Wheat Flour Prices

Since Georgia imports around 60% of its foods, international prices have a significant effect on Georgian market prices. According to FAO, food prices have been steadily declining since 2011. Hence, we are particularly interested in knowing to what extent this positive (for consumers) dynamic is translating into lower food prices in Georgia’s domestic market.

The global wheat market is an excellent case in point since Georgia is very far from self-sufficiency in wheat production. In 2014, we have imported more than 650,000 ton of wheat (92% of total consumption); at 151.7mln USD/year, the share of wheat in Georgia’s total food imports exceeded 11%.

Most of the imported wheat is milled locally into flour, hence the question is this: do Georgian wheat flour prices follow the international trend in wheat?

As has been shown by an APRC study, from 2004 till 2014, Georgia’s wheat flour prices did follow the so-called Black Sea wheat price (calculated as the weighted average of Russia, Ukraine, and … Kazakhstan prices). We estimate that a one percent increase in Black Sea wheat price leads to 0.72 percent increase in the Georgian wheat flour price. We also find that a full price adjustment happens with a lag of about 7 months, which is only slightly more than the international norm in “price transmission”.

Yet, when looking at the more recent data (see chart), this link appears to be much weaker.

For once, retail flour prices are much more volatile than the underlying Black Sea wheat. When translated into USD, flour prices did decline in early 2015 (lari prices during this period remained more or less stable despite a sharp devaluation of the GEL/USD exchange rate). Yet they started picking up way faster than the dollar from June till December 2015, resulting in flour prices increasing from 755 to 927 USD/ton in a matter of 7 months. Without a clear reason, prices started adjusting downwards in early 2016, until the most recent price hike recorded in March 2016.

So much volatility (and in particular the upward movement in flour prices in the second half of 2015), is difficult to explain given that Black Sea wheat had been slowly but steadily declining during the entire 2015 and early 2016. The explanation for this disconnect may have to do with the market structure and competition along with the various links in the wheat flour value chain: from the wheat imports to strategic storage, to milling, to flour distribution and retail.

Perhaps, something for the Georgian Competition Agency to explore.