Kazakh grain producers look to southern export markets
Business New Europe | March 12, 2009
Clare Nuttall in Almaty
As the Black Sea grain-belt countries increase their productivity, Kazakhstan is looking outside the CIS markets to Iran and Afghanistan. But to sell large volumes of grain to the fast-growing populations to its south, Kazakhstan needs to invest further in transport and storage infrastructure.
Kazakhstan is already among the world's top-eight grain producing countries, and the number-one exporter of flour. It exports to a total of 39 countries; the high gluten content in its wheat compensating for its relatively high transport expenses, which add to the cost of its products.
Substantial increases in productivity and land under cultivation have been made over the last decade, even though agriculture has not been a fashionable sector. Top graduates flocked to the cities to make their fortunes in banking and finance, eschewing the unglamorous countryside. But when grain prices started shooting up between 2006 and mid 2008, it suddenly came under the spotlight.
At the Almaty City International Grain Conference there was broad consensus that the immediate future for the agriculture sector - like other markets - is uncertain. "2009 is unique in that nobody can say what is going to happen next week," commented one speaker. However, while grain prices have fallen from their peak, they have not dropped as far as prices for certain other commodities, notably oil, and as long as people continue to eat and populations continue to grow, the demand for grain is certain.
"Demand for television sets and cars can fall, but demand for grain can't shrink because it's based on biological demand. The amount of grain consumed per person varies according to a country's culture and income levels. Very poor countries often increase consumption of wheat and flour products, and reduce consumption of meat and vegetables, because it is the most affordable staple product," said Nurlan Tlyeubayev, president of the Grain Alliance of Kazakhstan.
This being the case, Kazakhstan is in a good position, since it is one of the few countries with the ability to increase land under cultivation and considerably increase productivity. "The agro-industrial sector has good development potential, and offers a strong, real chance to overcome the crisis," said Arman Yevniyev, Kazakhstan's vice minister of agriculture.
Kazakhstan has already increased land under grain by 2m hectares in the last five years, and output was up by more than 3m tonnes to 15m tonnes in 2008. Investment in the agriculture sector is currently problematic due to the international financial crisis; last year's interest in buying up land or companies in this sector has melted away. To ensure this year's harvest, the government is making up the shortfall, allocating $1bn from the national fund to KazAgro Holding. KazAgroFinance - an arm of the holding company - is also holding tenders for investment projects that include building an agricultural machinery assembly plant, and constructing greenhouses, vegetable storage facilities and poultry farms.
An issue explored in detail at the conference was how to export grain from Kazakhstan to a wider range of customers. "Most exports are to CIS countries because they are closer and transport costs are lower," explained Berik Byeisengaliyev, deputy president of state agriculture holding company KazAgro. The largest recipients of Kazakh grain are Kyrgyzstan, Tajikistan and Uzbekistan. "However, Kazakhstan's quality of wheat gives it opportunities to export to the far abroad, for example the Gulf countries. We want to achieve a balance between the CIS and other countries."
Globally, the geography of grain markets is changing. On the other side of the world from Kazakhstan, increased consumption and recent droughts in Argentina and Brazil have cut back their exports, reducing South America's ability to be the breadbowl for the US. Other fast-growing emerging markets switched from exporting to importing as their populations increase. The arid Gulf states are buying up land abroad and striking international deals to secure their food supply. Things are also changing in Kazakhstan's backyard, where competition from Russian and Ukrainian producers is increasing, since both countries have increased productivity and exports in recent years.
"It is very important for Kazakhstan to secure its position in traditional markets, given the tougher competition from Russia and Ukraine," stressed Rachel Freeman, an agriculture expert at the International Finance Corporation (IFC). She was among several delegates pointing out the potential of Iran as a buyer of Kazakh grain. "We believe demand in Iran will increase sharply, making it one of the newest and most perspective markets for Kazakhstan," she said. Iraq could also become a market for Kazakh grain once the occupation ends.
The greatest enthusiasm was reserved for Afghanistan, where the population has grown by almost 50% in the last eight years. "Bread has been the main foodstuff in Afghanistan for thousands of years. Demand is growing as the population increases - from 23m people in 2000 to 32m in 2008," said Tlyeubayev.
"Pakistan used to be their main supplier of wheat, but it has now gone from being an exporter to an importer due to its own big population. From March 2008, the Pakistani government tried to close export channels to Afghanistan, resulting in a dramatic increase in demand from Afghanistan." At recent high-level talks between Kazakh and Afghani officials, Kabul sought to guarantee annual exports of 2.5m tonnes of grain and grain products.
Kazakhstan's location is its main drawback in exporting to world markets. Shipping grain via Russia or Ukraine adds to transport costs, making Kazakh grain less competitive than locally produced grain. Since 2006, the Kazakh government has been addressing the issue with several infrastructure investment projects. More are in the pipeline.
In 2007, the Aktau grain terminal was upgraded and a terminal in Baku was built. Kazakhstan is also building terminals at Amirabad in Iran and Poti in Georgia (with capacities of 350,000 tonnes and 500,000 tonnes, respectively), and is interested in buying a stake in a Ukrainian terminal.
Construction of the Kazakhstan-Turkmenistan-Iran railway, which will run from Uzen in west Kazakhstan to Gorgan in Iran, will allow Kazakhstan to boost its exports to Iran, Afghanistan and Turkmenistan. Work has also begun on the reconstruction of the Beynau grain terminal. These projects will give a much needed alternative to the current system - the Uzbekistan-Afghanistan route, where grain is transported on train cars then unloaded manually since there is no modern infrastructure in place.
Carrying out these projects is putting Kazakhstan in a much stronger position for when grain prices, as expected, rise again. By investing in this sector, the government is making a very safe bet. The food security scares that haunted 2008 may have receded, but long-term demand is assured.
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