The surge in grain prices caused another proposal to limit the export of agricultural raw materials from the Republic of Kazakhstan. If in the summer, against the backdrop of a drought in Mangistau, the government of the Republic of Kazakhstan was preparing a ban on the export of feed, now representatives of the flour-grinding industry are proposing to introduce export duties on wheat.
According to preliminary estimates, this will lead to direct losses for exporters at the level of $307 million, distortion of incentives for producers and traders, and does not solve the problems of state policy. A more efficient solution would be to use the reserves of the Food Corporation.
Millers for the ban
The main thesis of representatives of the flour milling industry is the rapid rise in grain prices, which forces millers to raise prices for their product. According to Dos-Mukasan Taukebayev, director of the Mutlu flour milling company, as reported by ElDala.kz, the producers' warehouses are running out of grain volumes purchased at 105-110 thousand tenge per ton, and new supplies of raw materials are more expensive - from 120 thousand tenge, and from - due to a poor harvest-2021, the price may reach 150 thousand tenge (+ 36–43%). According to Taukebaev, this will lead to an increase in the price of a ton of flour from 160,000 to 215,000 tenge (+34%) and will cause an increase in the fair price of social bread to 215 tenge, while the current cost is 90 tenge.
Millers see a solution in the introduction of an export duty on wheat of all classes in the amount of 50 euros per ton.
“With a further rise in the price of raw materials, in conditions of unequal competition with Uzbek flour millers, most of the mills in Kazakhstan will be forced to close. To provide flour to Kazakhstan itself with its population of 18 million people, 18 mills are enough - that’s how many will be able to survive until next year,” Taukebaev believes, pointing out that this is not only his personal opinion, but also one and a half hundred flour mills operating in the Republic of Kazakhstan.
“Currently, we have 170 flour mills, and it is quite clear that we have not conducted a survey of all these enterprises. But those flour mills that we have in the chat and which actively correspond and express their civic position, they are in favor of introducing an export duty on grain, - Evgeny Gan, president of the Union of Grain Processors of Kazakhstan, confirms the position of the industry. – I would focus not on the value of the duty, but on what millers say about expediency. The final decision belongs to the state authorities, not to us.”
Proponents of an embargo on wheat exports point to the experience of Russia, where export duties on grain (wheat, barley, corn) were introduced from June 2, 2021 and are calculated weekly depending on the prices of export contracts on the Moscow Exchange. For example, since October 6, the duty on wheat has been $57.8, while the exchange price is $283 per ton.
Prices are rising, but not critical
The fundamental factor behind the rise in wheat prices in Kazakhstan is the rise in world grain prices. The FAO sub-index, which reflects the level of grain prices (FAO Cereal Price Index), reached 129.8 points in August, having increased by 4.4 percentage points over the month. due to worsening forecasts for the wheat harvest for this year. World wheat prices rose by 8.8% over the month. According to the International Grain Council, in August this year, wheat prices in annual terms increased by 39.6%. Moreover, the rise in prices is also observed for other grains (for example, barley), as well as for corn, soybeans.
The dynamics of wheat prices in the Republic of Kazakhstan (producer prices, according to the BNS ASPR of the RK) in the last two years showed high growth, which began to slow down only by the middle of this year: if in January the dynamics of wheat prices was at the level of 20%, then by June it approached to 12%.
Export prices for wheat as of January-July 2021 were at a comparable level with the domestic level - 9.3%, while in the same period last year - 24.7%. This means that wheat prices both domestically and exported continue to grow dynamically, but this dynamics is slowing down.
Domestic and export prices for flour are at the same level and change in line with wheat prices.
A local negative factor affecting the rise in the price of wheat in the Republic of Kazakhstan is a weak harvest in 2021. According to the Ministry of Agriculture of the Republic of Kazakhstan, as of September 28, 2021, 98% of the area of cereals and legumes (15.5 million hectares) was harvested, 15.0 million tons of grain were harvested, including 11.7 million tons of wheat, which is 25 and 18% correspondingly less than in 2020. And although the harvesting campaign has not yet been completed, it is already clear that farmers will face a significant drawdown this year.
The description of the situation given by the millers is objective, but the approaches to its solution raise a lot of questions.
Will we lose exports?
The introduction of duties on grain exports is a measure that not only distorts prices within the country and discourages investors in this type of economic activity, but also worsens the export prospects of national business, and also creates a field for action outside the legal field.
The first consequence of the introduction of restrictions will be a reduction in the revenue of farmers. According to a study by the Russian Institute for Agricultural Market Studies, the lost revenue of Russian farmers in the 2021/2022 agricultural year due to the introduction of a floating duty on grain will amount to $2.0 billion, including $1.9 billion from the loss of wheat exporters.
If the government of the Republic of Kazakhstan accepts the offer of flour millers to introduce a duty of 50 euros per ton, the total loss of Kazakh wheat exporters could amount to $307 million (with export volumes at the level of 2020). These losses are comparable to those that the business would suffer if a grain damper similar to the Russian one was introduced.
The second result of the introduction of export duties is the possible loss of part of the markets. In the Russian Federation, industry experts believe that the use of the damper resulted in the loss of certain export markets, primarily the Egyptian market, where the Russian Federation annually sent about 20% of all grain exports (both in value and in physical volume of supplies). For Kazakh exporters, Uzbekistan is among the priority markets, where the Republic of Kazakhstan sends from 1.7 to 2.9 million tons of wheat per year. However, seeing the high uncertainty in Kazakhstan's trade policy, the Uzbek side is looking for opportunities to obtain raw materials that are not related to Kazakhstan, including the lease of land in the Russian Federation for agricultural crops for their own needs.
The third negative consequence that may occur in the event of a radical scenario - the introduction of prohibitive duties on the export of wheat - is an increase in gray exports and smuggling to border countries importing Kazakh grain. Last year, about 2.9 million tons of grain went to Uzbekistan (55.7% of exports), to the Russian Federation - 156 thousand tons, but in some years the physical volume of exports reached
500 thousand tons. As a result of the introduction of restrictions, this need will remain at the same level, but the place of legal traders will be taken by shadow companies.
Enter reserves
A win-win solution for all parties would be to introduce state resources to the market in the person of the Food Corporation, which annually resorts to purchases (including direct and forward) of grain and oilseeds, thereby supporting farmers and performing the tasks of maintaining grain reserves and regulatory function.
Last September, the Food Corporation updated the purchase prices for wheat of the 3rd, 4th and 5th grades, raising prices on average by 24% compared to last year.
In June, the Food Corporation reported that it had contracted 760 thousand tons of grain only as part of forward purchases, which is more than one and a half times more than in 2020.
Even taking into account the need to maintain a reserve stock, these volumes are enough to increase the volume of interventions in the domestic market. In 2020, with the volume of grain purchases by the Food Corporation of 483 thousand tons, 137 thousand tons were sold on the domestic market (86 thousand tons, or 63% of this volume, to millers), 54 thousand tons were exported.
In addition, the Food Corporation has 500,000 tons of reserve stock of grain. According to the Law of the Republic of Kazakhstan “On Grain”, a reserve stock is a stock of food grain used to guarantee the provision of the country with food grain in the event of natural, man-made and social emergencies, the introduction of a state of emergency, and also, if necessary, for the purpose of regulating the impact on the domestic market.
A sharp rise in grain prices is exactly the case in which a major state player can enter the market with interventions to smooth out price fluctuations. The result of the situation would be a general gain: grain growers would fulfill their obligations to counterparties in other countries and not lose sales markets and revenues, flour millers would receive raw materials at an affordable price, and the government would fulfill its regulatory function without distorting the players' incentives.
Grain growers offer their own way out of the situation. The official representative of the Grain Union of Kazakhstan, Yevgeny Karabanov, sees a way out in the introduction of the principle of "export tithe". He proceeds from the fact that for the production of the entire volume of bakery and pasta consumed domestically, about 700 thousand tons of wheat are needed. With an export potential of 6.0–6.5 million tons, this is slightly more than 10%. The state can make it a condition for the exporter to sell 10% of the grain at a fixed price to the Food Corporation, the remaining 90% of the grain can be sold at the price they consider acceptable.
“Firstly, this will definitely help stabilize prices, because the Food Corporation will sell such grain at fixed prices to flour and pasta producers. The second point is that we regulate only the export market, and not the whole. Agree, is it unfair if you want to regulate the market of 10 million tons for the sake of, by and large, these 700 thousand tons?” Karabanov said.
Ad hoc duties create negative incentives for all participants in the value chain and investors in the industry. However, if the situation with food supply and prices in the domestic market really seems so threatening that the government will have to apply restrictive measures, then it is logical to apply them to the entire supply chain, and not just one part of it - grain.
Importers can reorient themselves to the product of the next processing stage - flour, and the national market will again face problems with providing food at affordable prices. In this case, it is advisable to consider the possibility of introducing export duties on both grain and flour. At the end of 2020, flour millers exported 56% of their manufactured products worth about $500 million.
“If a duty is introduced and grain becomes cheaper, then flour prices will remain the same, because they are tied to export prices. That is, flour and bread will not become cheaper for our citizens,” Karabanov states.