Author Archives: dmckee

Bangladesh – road to self-sufficiency

Once heavily dependent on international assistance, Bangladesh is now in position to help other countries with rice exports.

At a traditional husking mill parboiled paddy rice is pushed into piles and covered with cones in the drying yard in the evening before being spread under the sun again the next morning. Scores of village woman perform these tasks at each mill. The smokestacks of the boilers of other husking mills are in the background.

When Bangladesh won its independence from Pakistan in 1971, its prospects for development were viewed dimly by many in the global community. A severe famine in 1974 reinforced its unfortunate image as a destitute country. A long period of socialist policies that began to be reversed only in 1988 did little to lower poverty rates.

Thanks in part to gradual market-based reforms and heavy doses of international assistance, but mainly owing to the initiative of the Bangladeshi people, the country can now boast of many accomplishments on the road to economic self-sufficiency.

  • At $20 billion per year, it is the world’s number two garment exporter after China.
  • Numerous other export sectors from pharmaceuticals to plastics to ship building are on the verge of taking off.
  • About 8 million overseas workers send home over $1 billion per month in remittances.
  • Population growth is well under control as fertility rates have dropped from 6.9 children in the 1970s to less than three per woman.
  • Micro-lending, a phenomenon that was first successful on a large scale in Bangladesh, has improved countless livelihoods in rural society.

Food security successes

The above notwithstanding, advancement in food security is one of the biggest feathers in the nation’s collective cap, particularly given population density, the highest of any large country (160 million people in an area the size of Iowa or Greece), lack of natural resources and vulnerability to more and more frequent climate change-related natural disasters like drought, cyclones and flooding.

Workers gather up and fill jute bags with parboiled paddy (rough) rice after drying for milling at a husking mill. New automatic mills now accounting for over 20% of production eliminate these labor intensive steps.

With 33.5 million tonnes of milled rice production from three annual crops, Bangladesh has maintained self-sufficiency in rice production. Twenty years ago production levels were less than half this amount. Population has increased by 40% to 50% in the same period such that per capita food availability and intake has increased significantly.

Like other countries in the region, ranging from India to Myanmar to Thailand to Vietnam, today policy makers in Bangladesh fret more about the risks inherent in surplus rice production and the need to help farmers make ends meet. Wholesale prices of milled rice have declined by 30% since October 2011. Retail prices have fallen more slowly but are now about 25¢ to 30¢ per kg for the most common varieties.

If farmers begin major plantings of other crops in place of rice, reduced area and sudden drought could bring a crop shortfall and domestic price spikes. Some Bangladeshi politicians have even suggested allowing large-scale exports of common varieties for the first time to raise domestic prices closer to international levels and boost incomes of rice growers.

Bangladesh ranks fourth in rice production and consumption after China, India and Indonesia, so any radical policy moves could impact world markets.

Limited government role

In the past, the government has imported rice to make up for perceived shortfalls in domestic supply. In the 2010-11 marketing year (May-June), a record 1.3 million tonnes of imported rice filled Food Department warehouses, with the inward flow slowing to 445,000 tonnes the following year. This constituted a sudden policy shift, as the next largest year for government rice imports was 477,000 tonnes in 1996-97.

Successive bumper crops occurred in the last two years as the import contracts were executed reducing the government’s ability to make domestic purchases and boost the slumping rice market.

These activities aside, the direct role played by the government in the rice sector is relatively small compared to other rice dependent countries. Procurement for public food distribution schemes in most years ranges from 1 million to 1.5 million tonnes. This amounts to just 3% to 5% of total production.

By comparison, Indian federal and state government agencies procure about one-third of all rice production, and Thailand’s government is seeking approval to buy 19 million tonnes, or nearly two-thirds of annual rice production next year to support farmer incomes. Bangladesh government rice stocks are about 1.5 million tonnes versus 12 to 13 million tonnes in Thailand as of September 2012 and 25 million tonnes in India.

Farm investment

It can be argued that public sector withdrawal from the rice market is largely what triggered the surge of investment in production and milling capacity. Up until the early 1990s, the government exercised monopoly powers over the rice market as the sole buyer of surplus from commercial mills in an attempt to control both producer and consumer prices. Such a policy was a disincentive for private sector risk-taking to invest in production and processing of the key food staple accounting for over 60% of caloric intake.

Since the late 1990s there has been a huge shift in the zone of surplus rice production from southern areas during the wet monsoon Aman season to the northeastern districts during the dry winter months of the Boro crop. Investment by farmers in over 200,000 electrically driven irrigation pumps and tube wells is at the base of this transition.

For the sake of greater food security, the pumps run without interruption in the hot dry months of April and May, even while Dhaka’s residents suffer repeated daily power cuts, euphemistically known as “load-shedding,” due to the country’s chronic under-supply of electricity.

The Boro crop now accounts for 60% of annual production, diminishing the Aman season share to 30%. Increased imports, production and distribution of subsidized mineral fertilizers by a government monopoly also have boosted output.

Milling investment

As production has expanded, the efficiency of the rice milling sector has gained through the construction of
hundreds of automatic rice mills in the last 15 years. Ninety percent of rice is parboiled in Bangladesh. There are just a few small, peripheral, hilly regions where raw white rice is preferred.

“Auto mills” soak, steam and dry the paddy in a continuous automated process before milling, polishing and color sorting.

Traditional “husking mills” in Bangladesh soak the paddy in open outdoor vats before a few minutes of steaming or boiling followed by labor-intensive spreading and turning of the wet grain in a concrete yard to dry under the sun. Such mills still number from 10,000 to 20,000. Capacity of most is just 1 or 2 tph.

Industry insiders estimate that already over 20% of all rice in Bangladesh is processed by “auto mills.” The largest numbers are found in clusters in the surplus zones of the north Bengal region. For example, around Dinajpur there may be 100 such auto mills built just in the last five years. Capacity ranges from 2 to 14
tph.

Most milling and parboiling equipment is imported from neighboring India. However, many of the major mills ranging from 8 to 14 tph, are now being built with state-of-the-art equipment from the most well-known international manufacturers.

These mills compete to sell their brands to urban consumers throughout the country but primarily in greater Dhaka, a rapidly expanding urban conglomeration of 15 million where purchasing power is highest. Color sorters are a key piece of equipment for the new generation of mills in Bangladesh as middle-class buyers happily pay a premium for the product with fewest impurities.

Fine rice and Miniket

While the food security policy emphasis has been on getting increased yields of common varieties of rice, there has been a pronounced shift in market demand to fine varieties, many of them similar to the aromatic jasmine and basmati varieties of Thailand and India. These varieties now make up about 15% of production but command a much higher price due to lower yields and high demand.

Responding to the market, innovative owners of auto mills have come up with their own fabricated version of fine rice, locally known as “miniket”. Low price coarse varieties are ground down in a final step in the milling process to make the kernels thinner and appear longer, giving them the visual appeal of fine rice. From 5% to 10% of the milled kernel is removed as flour in the process, which is sold for extrusion of rice noodles or for chicken feed.

One 2011 study estimates the miniket sales at an annual 5.4 million tonnes, nearly 20% of total domestic consumption, and still gaining market share. Miniket commands a price about onethird higher than the coarse varieties from which it is ground, so the incentives for millers are clear. True fine varieties on the other hand sell for about three times the retail price of coarse rice and twice the price of miniket. Miniket
allows aspiring housewives to serve up rice having the appearance of expensive fine rice but with the flavor Bangladesh is are accustomed to from childhood.

Further investment

Entrepreneurial rice millers are beginning to explore opportunities in production of rice bran oil. One major miller with such plans estimates that 150 truckloads of rice bran are taken daily to India, even though Bangladesh imports up to 1 million tonnes of vegetable oil per year. Reportedly, four rice bran oil plants have been started up in recent years and many more are likely to follow.

Today, farmers dry paddy themselves in order to store it on farm and to sell to millers at 14% moisture content. As farm economics change due to higher labor rates, it will be attractive for farmers to sell wet paddy to large millers with big, efficient dryers. Already a few are exploring investment in large paddy drying centers auto fueled by rice husk furnaces consuming only a fraction of the husks from milling.

Wheat rising

Per capita rice consumption may have already peaked as rising incomes allow for dietary diversification to wheat-based products, particularly for the burgeoning urban population. Large food groups with highly-efficient procurement, logistics and processing operations now account for two-thirds to three-quarters of wheat imports. Bushandhara Group has recently completed one of South Asia’s largest wheat mills at 1,200 tonnes per day and 60,000 tonnes of steel silo storage. It awaits only an electrical hook up from the government to start up. At the same time, truckloads of wheat arriving from India in cross-border trade assure adequate wheat supply to dozens of smaller wheat millers spread throughout the country.

Because of its lower cost compared to rice, the government usually favors wheat imports for distribution to the poor under a myriad of food welfare schemes.

Domestic wheat production has decreased from a peak of almost 2 million tonnes to 1 million as farmers plant maize instead to supply feed production for an increasingly industrialized poultry sector and growth in aquaculture. More protein intake in the form of chicken and fish has contributed to major reductions in the rate of childhood stunting.

Conclusion

With rice consumption soon peaking but rice yields still rising by over 3% annually, Bangladesh has the potential to add millions of tonnes to the international market within a five-year period if the export gate is opened and farm prices are allowed to climb.

Ironically in the process, once chronically food insecure Bangladesh would thereby help stabilize world rice prices and contribute to the food security of sub-Saharan African countries for which low-price imported rice can be a safety valve.

Full PDF Version

Turkish Grain Board restructuring

Cereal crops have been sown in Turkey longer than possibly anywhere else. Recent archaeological discoveries in the country’s central Anatolian plateau have pushed back the existence of the first permanent agricultural settlements to 13,000 years ago.

The grain sector, and particularly wheat, still play a key role in Turkey’s economy. There is 33 million tonnes of cereals production including over 20 million tonnes of wheat. About 23 million tonnes of this  output now enters commercial channels, with the rest kept for local consumption. Wheat is ground by 715 milling companies. There are high levels of per capita bread and pasta consumption and major exports of
wheat-based products.

Since its founding in 1938, the Turkish Grain Board, or TMO, as it is commonly known after its Turkish name Toprak Mahsulleri Ofisi, has been the main organization providing stability to grain markets while promoting modernization of the sector. Today it operates as a semi-autonomous state enterprise under the Ministry of Agriculture and Rural Affairs with a staff of nearly 3,500, including almost 600 at its headquarters in Ankara.

TMO is now undergoing a period of change as its restructures to harmonize its policies to those of the European Union as well as to the free market principles that have driven Turkey’s rapid economic growth over the past decade and longer.

TMO’s main role is to intervene in the market, buying grains from farmers when market prices fall below a predetermined floor level based on production costs. Its purchases vary widely from year to year, depending on market fluctuations. In 2007 and 2008, while prices were moving upward, it bought only 122,000 tonnes and 40,000 tonnes, respectively.

However, after prices collapsed during the global financial crisis, TMO stepped in to buy 3.77 million tonnes of wheat from registered farmers in 2009.

Wheat imports and exports

In 2008, TMO accounted for about 710,000 tonnes or 19% of Turkey’s 3.71 million tonnes of wheat imports. To prevent prices from going too high when the harvest is poor due to drought, TMO imports to supply mills and to build its reserves. About 80% of these purchases originate from the Black Sea region.

When its stocks are in excess, TMO sells them off to the international grain trade for export. In 2010, TMO sales accounted for about 200,000 tonnes of Turkey’s total wheat exports of 1.16 million tonnes.

Just as important to removing surplus wheat stocks from the market are flour exports to scores of countries by dozens of Turkish milling companies, many of which may have obtained wheat at favorable prices from TMO. In 2010, Turkey exported 1.85 million tonnes of wheat flour, mostly to Iraq, Indonesia, Libya and sub-Saharan African countries. The country’s 22 pasta producers also sold nearly 300,000 tonnes of their products abroad.

Turkey is known for its brightly painted grain elevators such as this one outside of Istanbul. Photo by Morton Sosland.

In wheat equivalent, total exports of wheat products totaled 3.4 million tonnes in 2010. Coupled with raw wheat exports, the total wheat equivalent exports exceeded 4.5 million tonnes. Despite the size of its bureaucracy, TMO was able to react quickly to the ban on Russian wheat exports in August 2010 and subsequent price spikes. TMO Deputy General Director Kayhan Unal stated in a recent meeting that TMO
took 35 separate measures that contributed to limiting the increase in Turkey’s wheat prices to just 20%. These measures included rapidly permitting wheat milling companies to increase their direct wheat imports.

To accommodate its import and export operations, TMO possesses 528,000 tonnes of port silo and warehouse storage capacity together with ship unloading and loading facilities at a number of ports on the Black Sea, Sea of Marmara and the Mediterranean.

Purchasing and storage operations

TMO’s network of 28 regional offices operates a range of grain storage facilities at sites throughout the country with total capacity of about 4 million tonnes, including ports. The core storages are 1.3 million tonnes capacity of concrete elevators and steel silos, some built as early as the late 1950s when the transition away from bags to bulk storage and handling was already mostly complete.

There are also mechanized flat warehouse bulk storages. For overflow situations, TMO could put into use
645,000 tonnes of “modern open bulk storage units.”

Turkey’s wheat harvest runs from May to early August. During this period and until November, TMO takes in grain only from its 2.6 million registered farmers, 1.6 million of whom grow wheat, at over 203 of its own purchasing centers including temporary seasonal facilities as well as permanent storage sites.

TMO sets its price for sales to the market in November or December. Usually this price allows a sufficient margin over the minimum purchase price to cover all operating costs of the organization. Market sales can begin as early as September, however.

Since 2009, TMO has begun buying from traders from November onward at its permanent facilities to meet supply needs unmet by farmer purchases. Such a practice and timing is in line with the European Union’s Common Agricultural Policy.

TMO uses European Union grain quality standards for all its purchasing and trading activities.

As a strategic reserve for emergency use and in case of war, TMO maintains a minimum level of grain in storage. This may be around 2 million tonnes, though the figure is not published.

Licensed warehousing

In years when procurement activity is low due to high market prices, existing storage capacity can exceed TMO’s actual requirements.

In these times, TMO’s main activity may be to provide storage services to farmers, millers and traders. Since 1993, the organization has been the sole operator of licensed storage facilities in Turkey authorized to issue warehouse receipts which are negotiable instruments against which commercial banks will provide up to 80% financing.

Market volatility in 2011 was a factor in a record level of over 712,000 tonnes of wheat and 175,000 tonnes of barley taken in for licensed storage, as farmers and traders delayed selling and relied on bank financing in the expectation of higher prices.

In Polatli, about 70 kilometers to the west of Ankara, the commodity exchange recently officially inaugurated a state-of-the-art 40,000-tonne steel silo storage facility to receive and store wheat and barley specifically for issuance of licensed warehouse receipts, with the received grain either already purchased or eventually to be sold on the exchange. The 16 bins of 1,250 tonnes capacity each allow for segregation of four types of wheat into different quality grades, with eight bins of 2,500 tonnes each holding two grades of feed barley.

This facility is not intended for TMO intervention purchases but rather to facilitate sales by farmers to the market, and in particular to enable farmers to obtain financing to hold their grain longer after the harvest until prices rise.

Commodity exchanges

TMO holds a 48% ownership in a network of about 100 grain commodity exchanges around the country that account for a significant share of farm-gate sales. Twenty of these exchange are large scale and modern with high trading volumes.

For example, the exchange in Polatli has 330 trader members with access to the trading floor. Average daily volumes after harvest are 8,000 to 9,000 tonnes, much of it in lots of 20 tonnes or less. Annual volume is about 1 million tonnes.

Farmers bring their wheat to the exchange in trailers and trucks where it is weighed while a probe automatically sends a sample in a pneumatic tube to the laboratory for immediate analysis. The quality data and weight of each lot appear on a large screen on the trading floor where traders place their bids. The
farmer seated in the gallery watches as his yearly harvest is sold in a completely transparent fashion.

TMO does not operate these commodity exchanges, but it does place an employee at each one. If trading prices fall below a certain unannounced target level determined by TMO as necessary to keep markets stable, the TMO representative will declare the intervention procurement price and begin purchasing from producers. To stay in the market, traders must buy at this price as well.

Restructuring

Since 2009, TMO has been in negotiations with the European Union about reforming its organization and policies to comply with the Common Agricultural Policy. In the E.U., each country has one or more paying agencies that use E.U. funds to procure major cereals from farmers when prices drop below a certain level. With Turkey’s accession to the E.U., TMO would assume the role of a regulatory and paying agency. At  the same time, it would have to have spin off its storage and licensed warehousing operations into a separate company.

TMO also controls all purchasing of poppy capsules from farmers and their processing into raw materials for the pharmaceuticals industry. This activity would have to be taken over by a separate state enterprise as well.

The future

Turkey’s long-awaited accession to the E.U., if and when it happens, would first require some major changes for government regulation of Turkey’s grain industry.

The average wheat farm in Turkey is only six hectares, half the E.U. average, and production costs are  still significantly higher due to wheat yields that are also half the E.U. average.

Some of the resistance to Turkey’s entry to the E.U., from countries such as France, could be due to fears of the burden Turkey’s large number of farmers might impose on the budget of the CAP from which French farmers benefit the most. The average wheat farm in Turkey is only six hectares, half the E.U. average, and production costs are still significantly higher due to wheat yields that are also half the E.U. average.

Thanks to better roads and larger trucks, TMO has steadily downsized by converting a large portion of its permanent storages to seasonal ones or shutting them down entirely. Employment now is only about one-third of the peak level of more than 10,000 in the mid-1980s.

One can argue that increased reliance over a long period on the private sector for storage and trading of grains has already prepared Turkey for the challenge of E.U. entry. Milling companies and traders have been installing new storage at a rapid rate and account for 12 million tonnes of the 16 million tonnes of storage now installed. Another 6 million to 7 million tonnes is needed, according to TMO officials, and the private sector is likely to continue building at a rapid rate to be able to increase their direct purchases from farmers at harvest. At the same time, TMO has a project to add 300,000 tonnes of incremental but state-of-the-art storage at 10 sites.

There is little question that TMO has played a key role in bringing change and modernization to the world’s oldest grain industry, contributing to the growing competitiveness of Turkey in the global cereals trade.

Full Pdf Version

Strategic grain reserves

The world economic crisis at the end of 2008 led to a profound distrust of financial markets, particularly among the developed countries that were impacted the most. Similarly, the twin price spikes that like bookends preceded the collapse and now accompany the global recovery, have caused political leaders in many developing countries to lose faith in grain and other commodity markets.

Many developing countries choosing to increase the size of their grain holdings during recent period of price volatility.

In December of 2010, Chief Industries UK of Essex, England, finished installing six steel silos with total storage capacity of 73,800 tonnes (12,300 tonnes each) that are 28.3 meters in diameter with an overall height of 29.4 meters at a facility in the Port of Qasim. Photo courtesy of Chief Industries.

After at least two decades of gradual withdrawal as part of an overall move toward free markets and economic liberalization, food price riots in 2008 and the recent unrest in many countries — sparked in part by renewed inflation — have prompted many governments to vigorously intervene in grain markets.

Outright bans, quotas or other restrictions on exports by Russia, Ukraine, Argentina, India, China and others are just one aspect of this trend.

Another is the policy decisions of many countries to increase the size of their strategic grain reserves whether composed of domestic or imported origin. The effects on world markets of these larger reserves have yet to be seen, but could make volatile markets even thinner as governments seek to hold, or as critics would say, hoard more grain. There are numerous examples from many parts of the world.

Middle East

In the Middle East, a region heavily dependent on grain imports, wealthy governments have decided to invest some of their immense cash surpluses in strategic grain holdings. Industry sources report that Saudi Arabia intends to increase its stock on hand of imported wheat to 1.5 million tonnes, which represents a six-month supply based on an annual milling wheat requirement of 3 million tonnes. A number of large grain storage facilities are expected to be built, particularly at Red Sea ports, as the country has rapidly phased out domestic wheat production due to aquifer depletion after nearly 30 years of costly self-sufficiency.

The effects on world markets of these larger reserves have yet to be seen, but could make volatile markets even thinner as governments seek to hold, or as critics would say, hoard more grain.

On April 18, the head of the Iraqi Grain Trading Company stated that his agency would up its wheat purchases from abroad this year to 3.25 million tonnes, equivalent to one year’s import supply plus a 1-million-tonne strategic reserve. Last year the country imported 1.9 million tonnes. Iraq will also increase rice imports to 1.5 million tonnes in part for reserve purposes.

Oman recently announced plans to construct a total of 300,000 tonnes of steel silo storage for government wheat reserves at two ports. The country’s two domestic milling companies will draw from the reserve in order to rotate the wheat in storage.

In the UAE, there have been recent press reports of a plan to build a very large grain storage complex at the port of Fujairah on the Indian Ocean with financing from Abu Dhabi, the richest of the seven emirates. The location, which already houses a strategic petroleum reserve, would ensure access to imported grain in case the Strait of Hormuz was ever blocked. Saudi Arabia’s emphasis on Red Sea storage facilities may reflect the same geopolitical worries.

In line with this theme, industry sources report that Qatar’s government is considering building a huge underground grain storage bunker that would protect a wheat reserve from radioactive fallout in case of a nuclear catastrophe in nearby Iran.

In Jordan, where the state is the monopoly importer, the wheat reserve will rise by one third thanks to the addition of a 100,000-tonne-capacity concrete grain elevator at the Red Sea port of Aqaba. However, it could be argued that this increase merely keeps up with population growth.

In Egypt, with the government accounting for 5 out of 7 million tonnes of total wheat imports along with 2.5 million tonnes of domestic purchasing, there is little room to increase its activity except to push holdings up to six months stock, the upper end of the reported target level.

Iran, which has achieved near self-sufficiency in wheat production in the last decade, has gone against the regional tide of greater state involvement in the last couple of years by deregulating most of its wheat sector and allowing private milling companies to buy directly most of the over 15 million tonnes per annum of wheat produced in the country.

Sub-Saharan Africa

Despite its status as the earth’s least food secure region, governments in sub-Saharan Africa in recent decades have held only modest grain reserves, if at all. Above all, this has to do with financial constraints, since buying up domestic grain and rotating stocks can be a huge burden on national budgets, not to mention the cost of building proper storage facilities, the market risks of intervention, and problems of transparency and governance associated with such activity. Just as important, all but a few African governments have abandoned the socialist policies of the past, which often included state ownership of grain processing and storage facilities.

However, recently some countries, particularly cash-rich oil exporters, have begun laying the basis for greater intervention in grain markets. Nigeria has adopted a policy that 15% of the total annual grain harvest should be held in reserve. The National Food Reserve Agency (NFRA) will hold 5% as a core strategic grain reserve, and individual states are to hold another 10% as so-called “state buffer stocks.”

This policy initiative has already been backed by significant investment. In 2011, NFRA will complete the construction of steel silo storage capacity for over 1 million tonnes of grain, primarily maize, sorghum and millet, at 10 sites in key production areas. Existing NFRA storage capacity was 325,000 tonnes.

In Angola, the state also may divert some of its oil and gas export revenues to create a national grain reserve. The plan is for several hundred thousand tonnes of grain to be held in new government storage facilities under the Ministry of Agriculture. To date, just 45,000 tonnes capacity of steel silo storage has been built in five locations, thanks to development aid from the Spanish government. Despite 30 million hectares of unused arable land, Angola still imports much of its food. Guaranteed government purchases in order to build up a grain reserve could serve as an incentive to more investment in agriculture.

Kenya’s National Cereal and Produce Board has decided to double the reserves it stores from 4 million to 8 million sacks of 90 kg. The total of 720,000 tonnes will be almost entirely domestically purchased maize.

Zambia’s Food Reserve Agency, since about 2005, has become an active player in buying the maize surplus in the country, holding over 350,000 tonnes of maize, but in the process was subject to criticism for squeezing out private sector trade and contributing to overproduction and a 1-million-tonne surplus that could be neither adequately stored nor exported, resulting in a price collapse in 2010.

Sudan’s government, which operates a small reserve for domestic intervention in sorghum and millet, has largely stayed out of the wheat market since total deregulation of the sector in the late 1990s. However, recently it put out feelers for a tender purchase of 300,000 tonnes of wheat.

Ethiopia has operated an emergency grain reserve targeting a level of 400,000 tonnes for about 15 years. Thanks to economic reforms and outside investment, the country has experienced five years of GDP growth averaging 11%. Greater budget revenues should help the country realize a plan to increase the amount of grains held in reserve for both emergency relief and market stabilization.

South Asia

Bangladesh’s Food Department is increasing its public stocks of wheat and rice to 1.5 million tonnes from a previous target level of 700,000 tonnes. Up until the early 1990s, the country held 2.2 million tonnes and was praised by international economists for reducing this by two-thirds.

Pakistan and India could be viewed as going counter to the trend of increased food reserves. Thanks to bountiful harvests in recent years, Pakistan is in the process of exporting hundreds of thousands of tonnes of wheat from government stores in order to make room for the current harvest with planned government purchases of 4 million tonnes just in Punjab state.

India’s harvest of grain and pulses at 235 million tonnes is at record levels for the second year running. Despite this, the country has banned wheat and rice exports since international prices started rising in 2007. Now many high-placed people are calling for the country to export some of its surplus wheat from a carryover stock that exceeds 17 million tonnes held by the Food Corporation of India, plus another 7 million tonnes in private hands. FCI needs to make room for targeted procurement of 26 million tonnes from the new harvest. There are fears of poorly stored grain rotting. One paradox of large government grain holdings is that due to lack of investment in modern storage facilities, the goal of food security is subverted by storage losses that can exceed 20% in many cases, though this is rarely officially recognized. Most government grain reserve record-keeping shows one bag going out for every bag coming in.

Up to 75% of India’s food reserve wheat is still stored outdoors in jute bags piled on raised earthen platforms called plinths and covered with tarpaulins. Most of the rest is stored bagged in go-downs. Only about 650,000 tonnes of government wheat is stored in modern steel silo facilities built by private operator Adani Grain in the last decade. In Pakistan’s neighboring Punjab region, the storage practices are the same though a higher share of wheat purchased by the Punjab state government annually may be in go-downs.

Bangladesh is launching an ambitious project to build terminals for imported wheat and rice at a number of ports excluding Chittagong where grain terminals already exist. In other ports for lack of berths and ship unloaders, a couple of hundred laborers with shovels fill sacks in holds of vessels at anchor in the harbor for loading onto 1,500-tonne lighters and transport to mills up river. Handling and transport losses are thought to be significant.

East Asia and Southeast Asia

Though the total is a state secret, China’s government wheat holdings are estimated to reach 55 to 60 million tonnes following the harvest with an annual carryover of at least 20 million tonnes. Grain production and consumption represent 20% of the world total, but the impact on international markets is relatively benign due to a sacred policy of 95% self-sufficiency in grain, excepting about 57 million tonnes per year of soybean imports. Most other governments in the region hold large rice reserves. South Korea’s hit a record level of 1.5 million tonnes in the last year. In Indonesia, the food reserve agency Bulog has a monopoly on rice imports as does its counterpart in the Philippines.

Conclusion

In countries like Nigeria, increased grain reserves are mostly a domestic market phenomenon. But in the case of wheat, with some traditional exporters — particularly Russia and Ukraine — seeking to protect national stocks on the one hand while on the other hand governments in a number of importing
countries build infrastructure to increase their holdings, the implication could easily be less stable and less liquid markets over the medium term.

Full PDF version

What’s next for Russia?

On Aug. 15, 2010, Russian Prime Minister Vladimir Putin issued a decree halting all Russian wheat exports effective immediately. Export contracts for millions of tonnes of grain were suddenly canceled and world wheat prices quickly jumped by $100 per tonne as millers, traders and government importers all desperately strived to cover their shortfalls. There were widespread fears of a repeat of the food price spikes of 2008 which provoked demonstrations and riots in 61 countries.

Halting of wheat exports sparks a debate about whether the ban was necessary and what impact it will have on the country’s reputation as a global grain supplier.

To justify its actions, the Russian government called the devastation of the country’s grain crop by the worst drought in 130 years, and attendant wildfires, a force majeure situation threatening national food security. As it became apparent that the damage would extend to the coming year’s plantings, the ban was extended to July 1, 2011. Ukraine imposed similar restrictions. Given the continued tense grain balance, a further extension to the fall of 2011 was not out of the question as of late January.

This unexpected reversal in Russia’s position in the global cereals trade has sparked a debate nearly as heated as the flames that scorched the Russian steppes this past summer. Was the decree really necessary? Whose interests did it actually protect? To what extent were domestic political considerations at play? Was the ban simply a case of pandering to Russia’s increasingly powerful meat and feed industry? When will Russian wheat return to world markets? Does Russia still have the capacity to become the world’s number one wheat exporter within a decade, as had been widely predicted? How will the ban impact the structure of Russia’s domestic grain industry? Is the Russian government playing by WTO rules when it intervenes in grain markets with such a heavy hand? Given the ban and perception of heightened political risk, can Russia’s grain industry continue to attract the long-term private investment in wheat farms and storage, transportation and port infrastructure that is critical to realizing its wheat export potential?

The world needs Russian wheat

Most informed observers agree that Russia’s wheat exports will return to previous levels for one simple reason: The world needs Russian wheat. Global wheat consumption has increased by 50 million tonnes in the last decade. In developing and rapidly urbanizing countries, especially in Africa, consumption should continue increasing for decades to come. Russia is one of the few countries with enough arable
land to significantly increase wheat production. While the Russian harvest is notoriously subject to unpredictable weather extremes, its grain belt is so vast, stretching several thousand kilometers across five time zones from European Russia to the Altai region bordering China, that total crop failure is unlikely, notwithstanding the scale of last season’s drought.

Russia exports, which surged from just 2 million tonnes in 2002 to about 20 million tonnes in 2008, accounted for most of the rise in global wheat trade in that period. In the 2009-10 crop year, Russia’s share of global wheat exports peaked at 20%.

Russian grain production had climbed to over 100 million tonnes in 2008-09. Last summer’s inferno reduced the grain harvest by over 40% to just 62 million tonnes. Wheat production fell to 41.2 million tonnes, down from 61 million tonnes the previous year. Barley declined from 18.4 million to 8.4 million tonnes. The upcoming crop is forecast by USDA at just 60 million tonnes due to winter sowing reduced by 4 million hectares, another consequence of the drought, and despite a 7% increase in the harvested area to 35 million hectares.

On a much larger planted area, Russia was already producing 100 million tonnes of grain in 1992, shortly after the close of the Soviet era, but this was still based on an inefficient, centrally planned economy — yields were low and post-harvest losses high. Much wheat and barley already went at that time for livestock feed, but with conversion rates about half of that in modern economies.

It is not just arable land available for planting that makes the medium and long term-prognosis bright according to Gavin Snodgrass of ACG Trade SA, Geneva, which has an affiliated grain trading company and pig farm in southern Russia. “Even the area they already plant could use a higher rate of inputs. They could easily increase yields with more inputs and better seed. We have already seen yield increases since 2002.”

Snodgrass added, “Exports could go up to 30 million tonnes. Some people are even predicting 40 million tonnes, but investment is needed in infrastructure.”

Infrastructure gaps

Increased grain storage and better port facilities are obvious needs. But Snodgrass also emphasizes bottlenecks in rail transport of grain as an obstacle to export growth.

Building more quality port facilities, like the PJSC Novorossiysk Grain Terminal, is a goal of the United Grain Company. Photo courtesy of Neuero.

 

“There is a terrific shortage of rail cars, and there are fewer every year,” he said. “In 2009, Russia had officially 28,000 grain cars, but only 22,000 were usable. By 2015, 70 percent of them will go out of service. Their average age is 24 years and they last only 30 to 35 years.”

The biggest holder of grain hopper cars is state-owned Rusagrotans. Private operator Baltrans ranks second. Siberian grain traders have begun exploiting the surplus of shipping containers to move their grain by rail to ports.

When it comes to export terminals, Snodgrass said, “Novorossiysk port is at its max. Ships just get three-day slots. It can do 10 to 12 million tonnes per year. There is still a huge amount of truck traffic. During harvest there has been a 35-kilometer-long lineup of trucks to the port. There is a short window for shipments to take place. Tuapse is an alternative port, but there is only a single rail line. Right now cement and steel for Winter Olympics construction gets priority.”

“In 2009, Russia had officially 28,000 grain cars, but only 22,000
were usable. By 2015, 70 percent of them will go out of service.”
Gavin Snodgrass, ACG, Geneva

Shipping Russian grain via Ukraine is done, but Snodgrass said it is problematic. “Rusagrotrans doesn’t like to allow its rail-cars into Ukraine, because it is hard to get them back. It is difficult to use Ukrainian rail-cars to pick up grain in Russia. Now that there is a government friendlier to Russia in Ukraine, the situation might have changed.”

United grain company

One new player that is proposing to solve some of Russia’s infrastructure problems is United Grain Company (UGC), a state-owned national champion that was created by government decree in 2009. UGC took over the assets of 31 existing government-controlled operators in the grain sector. This included three export grain terminals including one at Novorossiysk.

At the International Grains Council meeting in June 2010, Sergei Levin, chief executive officer of UGC, estimated the need for grain infrastructure investment at $1.6 billion. He defined as critical the reduction of grain transport and port handling costs to levels closer to those in Europe and the United States. In an interview, Levin estimated, “It costs $75 to bring a tonne of Russian grain from farm to port for free-on-board delivery at an average, and may exceed $100 a tonne for grain from Siberia exported via Black Sea ports.”

For Russia to reach its potential as a global supplier, it is essential to reduce these costs, which are roughly three times the level in France.

UGC’s website contains a policy document dated June 2010 forecasting Russian grain production and exports to increase yearly by an average of 5 million and nearly 4 million tonnes, respectively, in a straight line projection that would have taken them in 2015-16 to 120 million and 37.8 million tonnes, respectively. The starting point was a forecast of 92 million tonnes and 19 million tonnes in 2010-11. A reset of these projections is in order.

Domestic industry

One of the original mandates of UGC was to give the Russian state a role in wheat exports which are dominated by global traders such as Glencore, Cargill and others.

Ironically, Russia’s export ban appears now to be strengthening the hand of the international companies in Russia’s grain market. Some major private Russian grain traders have been reported to have difficulties servicing their debts as a result of the sudden loss of export revenues. The result could be less availability of bank financing and even bank auctions of their physical assets like grain elevators. A sudden freeze up of credit had already harmed the sector’s development following the outbreak of the global economic crisis at the end of 2008

As a matter of national policy, UGC reportedly is taking over some of these facilities, but the international grain companies with their deep pockets will exploit the opportunity as well to expand their increasing presence in Russia’s domestic grain trade. These developments have helped accelerate the long-term trend of concentration and integration of the entire Russian grain industry. Small and medium-sized players are increasingly falling by the wayside.

State interventions

With exports cut off, UGC has taken on a different role than the one originally envisaged. It has now become the main vehicle for government grain market intervention. Industry insiders estimate that UGC may have purchased 8 to 10 million tonnes of grain in the last two years in line with a more assertive national policy with regard to grain markets.

Up until the price spike this summer, state purchases have served to provide a floor price to farmers to ensure that grain production is profitable. Since the imposition of the export ban, these reserves are being released back onto the domestic market in an attempt to keep grain prices from spiraling upward in a time of shortage. For the time being, the policy has been successful with average Russian domestic grain prices $100 to $150 below international levels.

This latter policy is closely aligned with one of the key grain market policy goals of the Russian government during the last decade: the regeneration of the country’s feed and meat production and return to national self-sufficiency.

Feed and meat industry

If Russia’s grain traders have been the biggest losers from the export ban, the meat and feed industry have clearly been the winners. A sharp escalation of feed costs has been avoided, and producers of poultry, pork, beef and dairy products should be able to continue to take market share from imported products, thanks in part also to a system of ever shrinking quotas for meat imports.

The growth of the meat and feed industry since its almost total collapse following free market reforms in the early 1990s is truly remarkable. Meat production in the latest year rose 6% to 10.6 million tonnes. Poultry production in 2000 was only a few hundred thousand tonnes, and imports were about 80% of consumption. Since the ruble devaluation of 1997, there has been steady and growing investment in modern integrated poultry plants near all major population centers. Investment in swine production and more recently dairy have followed.

In 2010, the share of imports in poultry, pork and beef consumption are now only 16%, 18% and 24%, respectively, and they are expected to keep dropping in 2011, thanks in part to a system of import quotas that has protected domestic producers.

The government has stimulated growth by waiving all import duties on feed and meat production equipment and heavily subsidizing the interest rate on credits for purchase of domestically manufactured equipment.

Total Russian compound feed production is now estimated at around 27 million tonnes, with 14.6 million tonnes by independent producers, according to 2009 government statistics, and another 12 million tonnes by integrated swine and poultry operations, as estimated by industry sources. The US Department of Agriculture estimates that 35 million tonnes of grain next year will go to feed use.

Given the lack of significant maize production, wheat is the main ingredient in Russian poultry rations. Insiders estimate the ban immediately made an additional 5 million tonnes of high-quality wheat available to Russia’s feed industry. In early 2011, poultry feed producers were paying just $260 per tonne for wheat versus a maize price of $343 per tonne.

Market friendly alternative

At an industry forum in Novosibirsk in December, Arkady Zlochevskiy, president of the Russian Grain Union, an industry association representing grain traders, presented an alternative plan friendlier to free markets than an outright ban. His analysis showed that southern Russia would have a carryover of 5.9 million tonnes of wheat at the end of the 2010-11 marketing year. Zlochevskiy proposed that exports of 3 million tonnes of high-quality wheat that normally would be too valuable for feed use should be allowed from this zone near the Black Sea. At the same time, northern and central Russia should be allowed to cover their deficit of 3 million tonnes with imports of lower-cost feed grains. So far this proposal appears to have fallen on deaf ears within Russia’s government. The only recent change to the embargo has been to allow the resumption of wheat flour exports. With wheat prices in Russia artificially low because of the ban, Russia’s millers should have no trouble competing in international markets.

Conclusion

In the near term, it is apparent that not just global export demand, but domestic feed demand will continue to drive expansion of Russian grain production. But with the country approaching self-sufficiency in meat, a new equilibrium seems likely, and the competition between the two sectors should subside, especially after grain production returns to the levels of 2008-09. Russia should then be able to resume its interrupted trajectory to global grain superpower status.

Full PDF verion