Khachapuri Index Follows Global Trends. Or Not Yet?

Khachapuri Index Follows Global Trends. Or Not Yet?

The FINANCIAL -- In September 2016, the average price of cooking one Imeretian khachapuri stood at 3.43 GEL. Compared to the previous month (August 2016) the Khachapuri Index gained 8.6%. The upward trend in Index at this time of the year is mostly related to the seasonal increase in the price of cheese (due to dwindling supply of fresh milk). 

While going up in monthly terms, the Index actually dropped 0.8% compared to the same time of last year (y/y). As shown in the chart, the main contributors to Khachapuri Index annualdeflation were eggs (-7%) andcheese (-3%). All other ingredients increased in price: milk (1%), flour (2%), yeast (9%), and butter (17%). Interestingly, prices fell y/y for locally produced goods (eggs and cheese); prices went up for goods that areimported (yeast and butter) or use imported intermediate inputs in their production (flour and milk).

This time we can’t blame the increase in the price of imported items on the exchange rate of the GEL. If anything, the GEL slightly appreciated relative to the USD: in September 2015, theGEL/USD exchange rate stood at 2.31, which is 0.1 points below its rate in September 2016. 

A possible explanation has to do with the general increase in prices of agricultural commodities compared to last year. Global food prices added 7% y/y, with increases in most food categories, except a few items, such as wheat. 

WHAT’S WRONG WITH GEORGIA’S FLOUR PRICES?

The story of wheat and flour prices is an interesting one. This year’s wheat productionin the United States, the European Union, and Russiareached record levels. As a result, wheat stocks went up, and prices went down by a whopping 24%. Now, the lion’s share of flour sold in the Georgian market is milled from imported wheat, and yet domestic flour prices remain some 2% above their last year’s level. What’s going on?

According to a recent APRC study,it takes up to 7 months for Georgian flour prices to fully adjust to changes in global wheat prices. Several factors appear to hinder “price transmission”: high transportation costs, market structure (monopolistic bottlenecks in some segment of the value chain), and available storage space (and stocks). 

The good news is that flour prices did decline in monthly terms (down 4% since August). If continued, this trend will allow Georgian consumers to more fully benefit from record wheat production levels and low prices.