EU accession to have little effect on food prices

  • 2002-04-25
  • Kairi Kurm

According to a survey carried out by professor Urmas Varblane of Tartu University, accession to the European Union would bring no rise in food prices, because the purchasing power of Estonians is low and the competition is tough. The only exception is sugar, the cost of which will more than double due to the elimination of export subsidies.

"Prices of groceries fall during a slump and rise during fast economic growth irrespective of whether Estonia accedes or doesn't to the EU," said Varblane. "Estonian consumers' purchasing power is the main force defining the possibility of a rise in the price of groceries."

Last year Estonia's GDP increased by 5.4 percent and food prices by 7.1 percent. By comparison, GDP dropped 0.7 percent in 1999 and food prices decreased by 2.2 percent.

At present, the average income of Estonians is 40 percent of the average income of EU residents, and Estonians spend one-third of their income on food. In the EU for example an average 19 percent and in the U.S.A. 13 percent is spent on food. The respective figure is 60 percent in Romania.

A factor leading to a rise in food prices is the gradual scrapping of export subsidies of the EU in the pre-accession period. Direct support, production quotas and investment needs also influence prices. The survey shows that the Estonian bakery and dairy industries have completed the necessary investments, but meat production requires at least 496 million kroons ($28 million) and the fish industry another 100 million kroons to meet EU requirements, all of which will reflect in the prices.

Application of the EU's common external customs after accession might have a small impact on prices as well since EU member and candidate countries have already become Estonia's main import partners. In the case of some products, imports from third countries will become more expensive on the application of external customs, but in most cases the more expensive imports will be balanced by increased domestic production.

"In terms of dairy and meat products, for example, more expensive imports will cause no hike in retail prices, as the volume of imports is small in comparison with domestic production, and the more expensive imported products will be replaced by domestic goods," said Varblane.

Demand for local margarine will increase as imported margarine becomes more expensive.

Sugar is the only product, the price of which will rise steeply on accession to the EU, because the union's export subsidy will disappear after accession and customs duties are imposed on sugar imported from outside the EU. As a result the price of sugar may increase from 4.3 kroons per kilogram to 10 kroons per kilogram.

"The price of sugar is the most serious problem where the Estonian government should consider different options of reaction," said Varblane.

According to him producers would have to take into account Estonian consumers' low demand in setting their prices.

Ants Promann, chairman of the board at the bakery Leibur, believes that EU accession would cause a rise in prices of bakery products and candy, but the influence would not be dramatic. The price hike in the Baltic countries in his words would rather be led by the development of the country's economy, inflation, salaries and market, and people's purchasing power.

"Competition precludes the inclusion of all cost growth in the price formation," said Promann. "We have to work more seriously on cutting the costs of production and improving our efficiency."

From 1994 to 2001 the prices of bakery products increased about threefold and will continue increasing until they reach the EU price level, he said.

"Currently our prices are very competitive compared to those in the EU and the sales of some of the products there would be quite realistic. But since freshness is the most important criterion for bakery products, their transport to far away countries is not possible."

According to Promann bakery products in Estonia are more expensive than in Latvia and Lithuania. Rye bread for example costs 16.7 kroons per kilogram in Estonia, while in Latvia it is 14.9 kroons a kilo and in Lithuania 12.8 kroons. White bread costs 20.1 kroons a kilo in Estonia, 16.3 kroons in Latvia and 13.14 kroons in Lithuania.