Monopoly Profits in the Wheat Flour Market in Armenia

Executive Summary: Conservative estimates show that the companies involved in importing wheat and selling flour on the Armenian market charge approximately double what it costs them to import, transport, mill, and sell the wheat/wheat flour. In 2014 alone, the two companies in question pocketed nearly $110 million in pre-tax profits from wheat importing after subtracting all costs. The ability to extract these (monopoly) profits—which amount to nearly 10 percent of the budget of a person under extreme poverty—is likely to have contributed significantly to poverty in Armenia over the years.

A. Introduction

Bread and bakery products constitute more than one-third of the value of food basket of Armenian families (National Statistical Service of Armenia, 2012). Since almost two-thirds of wheat consumption is imported, bread prices in Armenia depend heavily on the structure of Armenian wheat import market.

The Armenian wheat market is highly centralized (State Commission for the Protection of Economic Competition of Republic of Armenia (SCPEC, 2011)). There are two major firms in the wheat flour market, Alex Grig and Manana Grain, which together control almost 88 percent of the market. Those firms not only control the import of the wheat, but also its milling and thus the wheat flour market. They have significant role in determining the prices of both wheat and wheat flour in Armenia.

It is interesting to note that, apart from wheat and wheat flour, Alex Grig is also a major player (with market share ranging from 33 to 100 percent) in the following markets: sugar, ethanol, butter, sunflower seed oil, rice, children’s juices, baby purees, baby food replacing breast milk.

B. Domestic vs. International Prices for Wheat and Flour

International wheat prices used in the analyses are based on the database provided by the FAO GIEWS and domestic wheat flour prices for Armenia are as reported by the NSSA. For Armenia the wheat flour prices are used instead of wheat prices since a large part of the imported wheat does not reach to the wholesale market—it gets milled by the same firms, which import the wheat, and enters to the market as wheat flour. So prices for wheat are irrelevant here. As benchmark international indexes the USA Gulf and the Black Sea export wheat prices are used.[1] Figure 1 shows the trends in Armenian and international wheat flour and bread prices for 2005-15.

Figure 1

In general the fluctuations in domestic prices correspond to the fluctuations in international prices. However, there are two important points to be made in this regard:

  • Price changes for wheat flour in Armenia are asymmetric and respond to international prices with a significant lag. As shown on Figure 1, there was significant increase in international world prices in July 2012 (driven by higher cereal prices due to adverse weather in the United States and Eastern Europe). That spike was reflected in the domestic prices in Armenia, where the wheat flour prices started to increase from August 2012. In December 2012, the increase in international prices has slowed down and gradually reversed. However, the domestic prices in Armenia did not follow the trend and instead kept increasing till October 2014, when the international prices has already managed to fall to their lowest level of past two years period. Meanwhile, when the international prices were in their lowest level, Armenia recorded its highest prices in the wheat flour market in that same month, October 2014. Between December 2012 and October 2014, international wheat prices declined by 20 percent, while the Armenian wheat flour prices increased by 10 percent. Staring from November 2014, the domestic prices in Armenia have finally started to fall following an even sharper decline in the international prices. Between October 2014 and August 2015, the international wheat prices have fallen by 25 percent, while the Armenian prices have fallen only by 15 percent.
  • The market power of Armenian importers has increased in recent years. The mark-up of Armenia’s prices relative to international prices have widened since summer 2012 and reached the highs observed during the 2008-09 crisis. Figure 2 depicts the percentage markup of the Armenian wheat flour prices relative to international wheat prices.

Figure 2

C. Wheat Flour and Bread Pricing in Armenia and other CIS countries

The data are drawn from national statistical agencies of CIS countries for 2005-15. Since data are not available for the same countries for each comparison category, different countries for each wheat flour and bread type are presented.

Figure 3 compares prices of wheat flour in Armenia, Russia, and Ukraine. Despite a sizable gap in consumer purchasing power between Armenia and Russia/Ukraine, retail prices in Armenia are higher than in latter countries (in case of Ukraine by almost 3 times).

Figure 3

Figure 4 compares the prices of bread in Armenia, Azerbaijan, and Tajikistan, all importers of wheat and wheat flour. It is shown clearly that bread prices in Armenia are higher than in Azerbaijan and Tajikistan by a large margin (almost two times relative to Azerbaijan). The results are consistent with a recent World Bank report that shows that price of bread in Armenia is by 36 percent higher than average in CIS countries (see World Bank, 2013).

Figure 4

D. The Percentage Markups and Profit Margins in the Armenian Flour Market

This section aims to estimate the monopoly mark-ups/profits extracted by the two importing companies. The following assumptions are made in the calculations:

  • As before, the Black Sea export prices are considered in the analysis as costs for wheat.
  • The railway transportation of one 40-ft container from (Georgian port of) Poti to Yerevan costs approximately $402.5 [2] and carries 21.6 ton of wheat[3], thus the transportation cost is $15/ton.
  • There is no custom duty on imported wheat (Article 102 of the Customs Code of the Republic of Armenia). However, there is VAT payment requirement of 20 percent levied on the importation of goods. The tax base is the customs value of goods, plus the amount of any import duties and excise tax levied at the time of importation (there is none in the case of wheat).
  • The milling costs are calculated based on the wheat flour costs breakdown indicated by International Association of Operative Millers and the calculations made in the FAO Agribusiness Handbook on wheat flour, whereby 1 ton wheat on average yields 0.55 ton of high grade flour and 0.41 ton of first grade flour; the rest is bran.
  • The breakdown of the cost of a final flour product is the following: the cost of grain accounts for approximately 81 percent of the total cost of flour, followed by electricity cost (6.5 percent), labor cost (4 percent), and expendable materials and other costs (8.5 percent). Thus, the milling costs constitute approximately a quarter of the cost of wheat.
  • Retail expenses are assumed to be equal to 5 percent of the retail value of wheat flour sold.

Table 1 below summarizes our findings on the average markup and profit margins made in the Armenian flour market.

Table 1. Calculations of Monopoly Markups for the Wheat and Wheat Flour Market

Price/Cost Items per ton Description/comments 2014
Price of wheat Avg. Annual Prices, Black Sea, export $265
Transportation costs $15/ton $15
Value Added Tax (VAT) 20 percent on custom value of the good $53
Milling costs 25 percent of the grain cost $66
Total cost of wheat flour production produced from one ton wheat $399
Retail expenses 5 percent of retail sales price $41
Market price of high grade wheat flour Annual National Average price (high grade), retail $1,008
Market price of first grade wheat flour Annual National Average price (first grade), retail $627
Total revenue from sale price of flour Yield from one ton of wheat (55 percent high grade and 41 percent first grade flour) $812
Markup Total revenue minus cost of import, taxes, milling, and retailing
        US$ per ton $372
        Percent 93
Wheat imports in 2014
       in million US$ $101
       in thousands of tons 332

The above results show that the companies involved in importing wheat and selling flour on the Armenian market charge a hefty 93 percent markup on their costs, that is, selling at nearly double what it costs them to import, transport, mill, and retail the wheat/wheat flour.

Depending on the project cycle (i.e., the time between paying for the wheat abroad and getting paid for retailing wheat flour in Armenia), this markup could turn into profit margins of several hundred percent per year, guaranteeing the importers super profits by any standards. In 2014 alone, our estimates suggest that the two monopolists pocketed nearly $110 million (or nearly AMD 50 billion) in pre-tax profits from wheat importing after subtracting all costs.[4]

This constitutes additional cost for Armenia’s consumers—ranging from AMD 2,000 to AMD 2,500 per person per month, depending on the estimates of actual population—and has contributed significantly to poverty in Armenia, where the extreme poverty line is estimated at AMD 23,384 per adult equivalent per month.[5]

The actual markups are likely to be much higher than the ones calculated above for the following reasons:

  • The monopolists are unlikely to pay the full amount of taxes due;
  • They are not likely to be sensitive to quality standards (and their enforcement) in Armenia and are likely to purchase inexpensive grain;[6]
  • Given the size and frequency of its cargo shipments, they are likely to receive a better-than-average deal on the cost of transportation.

Finally, the actual monopoly profits are likely to be higher than the ones calculated above because—in addition to reasons mentioned above—the importers are likely to under-invoice the volume of grain imported (i.e., actual imported volumes are likely to be higher) to avoid paying taxes.


Food and Agriculture Organization of the United Nations, 2009. “Agribusiness Handbook: Wheat Flour.” Available from FAO reports.

Food and Agriculture Organization of the United Nations, 2012. “Monthly Food Price Indices 01/01/2005 to 01/11/2015.” Available from FAO database.

Food and Agriculture Organization, Global Information and Early Warning System, 2013. “Prices on Wheat and Wheat Flour for Armenia, Black Sea and the US Gulf.” Available from GIEWS Data database.

National Statistical Service of Armenia, 2012. “National Food Balance of the Republic of Armenia.” Available from NSS database.

State Commission for the Protection of Economic Competition of Republic of Armenia, 2011. “Annual Program of Activities.” Available from SCPEC website.

World Bank, 2012. “Republic of Armenia: Accumulation, Competition, and Connectivity,” available here.


[1] Since Armenia imports wheat mostly from Russia and countries in the Black Sea region, the Black Sea export prices are more relevant for Armenia. However, the US Gulf and the Black Sea prices in general behave similarly.

[2] The South Caucasus railway charges $0.78 container/kilometer for 40-ft container with cargo in it. It is 516 km from Poti to Yerevan, thus the transportation of a 40-ft container costs $402.5.

[3] The average bulk density of wheat is 0.75 ton/m3. A 40-ft container (67.2 m3) can thus carry 50.4 ton wheat. However, since the maximum weight allowed for land transportation is 26.5 ton, this will be the actual amount of wheat carried in one container.

[4]  332 thousand tons at $372 each times the two companies’ market share of 88 percent.

[5] As reported by the World Bank based on the 2014 estimates by the NSS (see here).

[6] A recent media report on quality of flour sold through the “Yerevan City” supermarket chain can be found here (the flour purchased by a customer contained insects and worms).

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1 Response to Monopoly Profits in the Wheat Flour Market in Armenia

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