Category Archives: Asia

Profiling Pakistan’s milling industry

Pakistan is the largest country where wheat is the staple grain of nearly the entire population. With 6 to 7 times more people, China and India consume much more wheat, but in both nations rice surpasses wheat in importance.

Industrial roller mills in Pakistan have risen to the challenge of grinding up to half of the 24 to 25 million tonnes of wheat harvested in the country every year. They provide not only for Pakistan’s 180 million mouths, but also produce up to 700,000 tonnes of flour for export to Afghanistan in some years.

Despite the economic weight of the milling sector domestically, it has had a relatively low profile within the international grain industry. This may have to do with the degree to which it is self-contained. With the exception of some Karachi mills, the 1,200 commercial mills operating in the country process almost exclusively domestic wheat. Aside from Afghanistan, few other countries buy wheat flour from Pakistan. Very little milling equipment is imported as low cost local manufacturers supply complete plants. There is minimal foreign direct investment in Pakistan’s milling sector, the scale of the industry notwithstanding.

The complexity of the business environment for milling goes a long way toward explaining the lack of international investors. Erratic power supply means that mills can only operate without interruption for several hours a day in most places, depending on the season.

Though there is little more than 50% capacity utilization industry wide, new mills continue to be built, keeping profit margins razor thin. The government intervenes in the market by buying several million tonnes of wheat per year and subsidizing its allocation to mills on a quota system for part of the year, thus serving to keep weaker mills in business and distorting the market. At harvest time, inter-provincial and even inter-district bans are frequently placed on wheat movements to enable the provincial food departments to meet their procurement targets.

Finally, security issues related to escalating conflict in a number of regions complicate all types of business dealings.

Wheat and wheat flour trade

The largest concentration of wheat mills is in Punjab Province, which accounts for 56% of the population but three quarters of national cereals production.

David McKee, left, with Muhammad Anees Ashraf, executive director of Ashraf Flour and General Mills (Pvt) Ltd., Peshawar, Pakistan. Ashraf is the current chairman of the Khyber Pakhtunkwa Province Branch of the Pakistan Flour Mills Association.

David McKee, left, with Muhammad Anees Ashraf, executive director of Ashraf Flour and General Mills (Pvt) Ltd., Peshawar, Pakistan. Ashraf is the current chairman of the Khyber Pakhtunkwa Province Branch of the Pakistan Flour Mills Association.

One of the world’s largest canal irrigation systems crisscrosses the Indus River plain that extends most of the length of the country. Wheat has been cultivated there for millennia. Abundant water from the Himalayan snowmelt allows for reliable yields that have been steadily increasing thanks to the introduction of improved varieties.

Larger commercial farms capable of selling directly to millers are the rule in Punjab as compared to other parts of the country. As a result, the province is a large net supplier of both wheat and wheat flour to the rest of the country.

Millers in Sindh, Balochistan and Khyber Pakhtunkwa (KPK) Province (former Northwest Territories) as well as the federal capital Islamabad buy much of their wheat from Punjab and then compete with wheat flour produced by Punjab millers. Sindh Province, which is semi-arid over much of its area, cannot grow enough wheat to feed all its inhabitants including the 20 million in the megalopolis of Karachi.

Pakistan has been an irregular player in international wheat markets. In some years it is open for imports and in others it has exported surplus stocks. There have been years in which both have occurred. When wheat and wheat flour prices rise excessively and exceed international market prices, sometimes due to a high level of demand from Afghanistan, the government allows Karachi mills to import boatloads of wheat. Sea transport costs to the mills, some located directly at the port, can be lower than the cost of 1,000 km to 2,000 km of truck transport from Punjab.

Milling technology

The first roller mills built in Pakistan from the 1950s to 1970s relied on equipment imported from Europe. A number of mills with Miag equipment manufactured in Germany in the 1960s and 1970s are still operating.

Most mills built since the 1980s are based on a cookie-cutter, 5-story plant design using equipment referred to as “Russian mills,” though it is 100% produced in Pakistan. The technology is actually a 1970s Bühler design licensed to a manufacturer in Ukraine. It became the standard machinery for most new mills built in the former Soviet Union and particularly in the former Soviet Republics of Central Asia.

Some of this equipment was installed in Afghan mills before and following the Soviet invasion. Equipment from old dismantled mills in Turkmenistan and Uzbekistan acquired by Afghan traders ended up in Pakistani mills. Domestic manufacturers began making parts and eventually copied the entire equipment line. The only mill components still imported from Russia are the steel rolls, but the term “Russian mill” has stuck.

Leading international milling equipment suppliers have found Pakistan to be a difficult market to penetrate despite the industry’s size and the apparent need for more advanced technology.This has to do with low milling margins that make it difficult to get a payback on imported equipment.

A turnkey 8-roller body mill, the most common size, including plant building and warehouses, can be constructed for just $500,000 excluding land costs. Owners lease out entire mills to former competitors in Peshawar for just $2,500 monthly, such is the stock of excess capacity among the 60 mills clustered around the city.

These obstacles notwithstanding, larger milling companies in some urban areas, particularly in Islamabad and Karachi, have begun to replace the decades-old technology with the latest equipment from abroad.

A number of factors have combined to start to make the choice of imported equipment feasible. In recent years government has more than doubled industrial electricity rates as one solution to generate funds to pay back the investment cost of badly needed new generating capacity and to encourage reduced consumption. After the latest increase, electrical energy now constitutes up $11 per tonne or two-thirds of a mill’s variable grinding costs not including wheat.

Manual and semi-skilled labor rates have also doubled in the last five years. Some mill owners are keen to mechanize more of the handling of wheat and flour to reduce the number of men needed to unload bags of wheat from trucks and stack them before unstacking them again to feed wheat into the plant.

Cost savings aside, the key motivation for buying new equipment is to produce higher quality flour that is demanded by large industrial bakers and other food processors in urban centers.

Milling practices

Milling practices vary across Pakistan depending on type and quality of flour demanded in the local market. In Punjab Province, mills extract between 12% and 18% bran. In urban areas, extraction rates are higher, with 55% to 60% of the wheat kernel converted to atta flour for baking flat bread (nan) in traditional tandoor ovens or for chapatis on griddles. The remainder is divided between fine flour (maida) demanded by industrial bakers and semolina (sooji) for confectionary products. In more rural areas, extraction rates are lower at up to 88% with 70% to 75% processed into atta.

In Peshawar, the capital of the KPK Province, wheat mills cater to the tastes of the dominant Pashtun population whose staple is nan. Extraction rates are 88% converted  entirely to atta. There is some local production of maida and sooji, but much of it is imported from Punjab mills.

Up to half of Peshawar mill output is exported to Afghanistan, where the demand in Kabul and other cities is for higher quality, finer, whiter, 82% extraction flour for baking Afghan-style flat bread. In households and at neighborhood bakeries Pakistan flour may be blended with darker, lower extraction local flour. Or conversely it is mixed with 75% extraction flour coming from modern mills in Kazakhstan to make an even higher quality nan.

Pakistan still has a large informal milling sector made up of chakkis (stone mills), some water powered, mainly operating in villages. However, roller mill flour from industrial mills has replaced chakki atta in the diets of many villagers for much of the year. They may grind their own wheat as long as it lasts in local chakki mills, but choose to buy flour for at least part of the year thanks in part to its subsidized price.

Government's role

The government food departments in all of Pakistan’s provinces provide subsidized wheat to the privately owned mills, a practice dating back decades. There are no state-owned mills in the country. These schemes, which vary considerably from province to province under Pakistan’s highly devolved federal system of government, have two main goals: ensure farmers receive a minimum price that will serve to guarantee that the country remains self-sufficient in wheat production; and to enable government intervention to mitigate price rises in the lean months leading up to the next harvest.

The Punjab Food Department operates the largest scheme. It targets annual purchases during the harvest in April to June of about 4 million tonnes out of total government procurement of 6 million tonnes. This wheat is received and stored at 600 collection centers. The majority of them are open area facilities technically known as Cover and Plinth (CAP).

Distribution of the subsidized wheat takes place in Punjab beginning in mid-November and continuing to the start of the next year’s harvest in mid-April when wheat prices normally fall.

There is little doubt that the scheme helps to stabilize the prices paid by millers for wheat and the prices received by farmers. Government pays farmers, particularly smaller ones who could not afford to store their wheat long after harvest, a higher price than they would get selling to traders immediately.

Large farmers and traders who do speculate by holding on to wheat for several months after harvest are not able to raise their prices as much due to the government wheat allocations to millers beginning in November in Punjab and as early as September in KPK and Baluchistan provinces.

Quotas are assigned based on a mill’s daily capacity calculated per government norms as 20 tonnes per roller body, with no mill allowed quota for more than 8 roller bodies. In practice, because of load shedding (power outages) and the age of their equipment, few mills achieve production rates above 10 tonnes per day per roller body.

The importance of the wheat quotas varies from mill to mill according to the season. Because the number of mills has grown while the government has limited its total wheat procurement for budgetary reasons, the allocation to any mill is rarely enough for more than a few hours of daily production.

Financially weak mills may only operate when subsidized wheat is available. Strong, well-managed mills are able to stockpile sufficient good quality wheat after harvest when prices are lower so that they have little need to buy from the government poor quality wheat with high levels of impurities.

In good crop years the Punjab Food Department wheat price may be higher than that available in the market even four or five months after harvest. The official minimum support price paid to farmers has been fixed at 3,000 rupees ($306) per tonne for a number of years. The Punjab Food Department sells the wheat to mills at the same price, without adding the costs of bagging, storage, transport and storage.

Drawbacks

There are numerous drawbacks to longstanding public grain policy. Because wheat millers could always count on the government to store wheat and release it onto the market in the quantities needed, they have built relatively little warehouse and silo storage capacity.

In contrast to the highly modern feed milling sector that has much steel silo storage, the entire system of government wheat procurement and distribution is based on inefficient and corruptionprone bagged transport and storage.

The size of mills has been constrained by the government quota system that covers only up to 8 roller bodies per mill. Many uncompetitive and financially weak mills have been kept in business simply because they qualify for subsidized wheat part of the year. Indeed, there are many “ghost mills” that have not operated in years but whose owners, including members of parliament, illegally sell their wheat quota to other mills.

Pakistan’s roller milling industry is critical to food security in a country where wheat flour accounts for over 70% of average caloric intake. Whether heavy government involvement helps or hinders its performance of this key role remains subject to debate.

Government global grain reserves

Despite arguments of liberal market economists, many governments, especially in Asia and the Middle East, continue to buy and stockpile wheat and rice.

Government involvement in grain markets probably goes back to the beginnings of settled agriculture. Egyptian and Chinese records document the role of dynastic administrations in collecting and storing grain thousands of years ago.

Nowadays governments worldwide may buy 10% to 20% of all the rice and wheat produced in a given year, so up to 240 million tonnes out of about 1.2 billion tonnes for the combined crops of the two cereals, but the variation in procurement from country to country is huge. Not just domestic purchases figure into the tally. State wheat importers in Japan, the Middle East and North Africa, and elsewhere may account for around 35 million tonnes.

Global reserves of cereals in government hands at any given time could be in the range of 200 to 250 million tonnes. The International Grains Council (IGC) forecasts 2013-14 ending wheat stocks at 188 million tonnes and rice at 108 million tonnes. China and India traditionally account for the lion’s share, but Thailand stockpiled a peak of 18 million tonnes of rice over the last two years before selling at a loss. Governments of Middle Eastern and North African nations may hold 15 to 25 million tonnes of wheat at any time.

Problems of government grain

In every country the issues surrounding government grain procurement are economically complex and highly political. And, of course, they are fraught with potential problems of poor governance.

There is a standard set of arguments against strategic grain reserves. First of all they require large investments to build the storage facilities, and even more to fill them. Grain markets are volatile and risky but state agencies must constantly decide how much to buy and when, and how to rotate the stocks through sales or other distribution.

Case against strategic grain reserves

  • Expensive and risky to operate
  • Without profit motive,inefficient management practices and waste
  • Creates market distortions
  • Guesswork in estimating need and setting prices - Market does a better job
  • Requires transparency and good governance

Efficient management of public grain stocks is extremely difficult. Most government grain facilities have at least two or three times the personnel of similar private operations. Often they are vehicles for political patronage through jobs. Operational costs can be high. Storage losses from infestation, moisture and pilferage can be an even greater cost.

Let’s go on a quick world tour and see what goes on with governments when it comes to grain reserves. This will be a very high level view.

East Asia

East Asia is a region where governments are very involved in buying and storing grain from the poorest country (North Korea) to the richest (Japan).

China has the world’s largest production of both wheat at 122 million tonnes and rice at 142 million tonnes on a milled basis based on IGC forecasts for 2013-14. Maize production is 218 million tonnes and is mainly for feed use, but some is also held in the government grain reserve.

Data about public grain stocks are treated as a state secret in China, but IGC projects total ending stocks of wheat in China at 57 million tonnes and rice at 50 million tonnes for 2013-14. It is probably safe to say that 90% is held by state grain companies. Grain traders sell mainly to these state companies and large millers depend on them for supply.

In China, two main policy goals have been at play: self-sufficiency in the two staple cereals and higher incomes for farmers. In February 2014, China officially announced the target of domestic production of 95% of the country’s grain consumption would be abandoned.

It is likely that state grain agencies will still buy a significant portion of both wheat and rice - from one third to one half. The government sets prices significantly higher than the international market price to ensure production targets are met. The grain is auctioned off to private millers and traders through central government auctions.

The public grain stocks are not used for food safety nets or for retail market intervention. The idea is to pay prices high enough to help close the income gap between poor farmers and the average city dweller. This in turn promotes social stability by slowing the massive migration of rural poor to cities.

Elsewhere in East Asia, governments buy large parts of the rice crop to keep prices high enough to sustain farm households, even while per capita rice consumption has gone down substantially with economic prosperity. Japan’s Ministry of Agriculture, Forestry and Fisheries maintains a monopoly over wheat imports, and often doubles the price when reselling to domestic mills, thus generating funds to subsidize domestic wheat production.

South Asia

India ranks number two in the world in production of both wheat, at 93 million tonnes, and rice at 103 million tonnes, according to an IGC estimate. State governments buy much of the surplus and public grain stocks at times may be as large as China’s.

In 2013-14 government procurement of rice will be about 32 million tonnes. For wheat it was 25 million tonnes, down one third from 38 million tonnes the year before.

Government ending rice stocks are forecast to be 20 million tonnes for 2013-14. The target stock level is 11.8 million tonnes. Wheat stocks were estimated at 22 million tonnes, down 10% from a year ago but still much higher than the official target level. This is one hazard of intervention. Once started it is difficult to limit.

India’s government frequently experiences well-publicized problems with management of these excessive stocks including tremendous losses from insects, moisture and pilferage, much of which results from traditional bagged storage practices.

India’s grain policy goals are quite different from China’s. The main purpose of state grain purchases is for distribution of food rations to the poor. This is done through state level Pubic Distribution Systems that supply cereals to Fair Price shops in every village and city district. Poor households holding ration cards pay just a fraction of the market price for several kg of wheat and rice per month. The Food Corporation of India coordinates the movement of both rice and wheat from surplus to deficit states. This scheme is estimated to cost the Indian government $20 billion per year. Most economists would argue this money could be better spent on infrastructure.

Bangladesh (population — 160 million) and Pakistan (population — 200 million) are large countries whose governments buy only limited amounts of grain. Nevertheless, despite still high levels of poverty, both have attained a satisfactory degree of food security.

Why governments hold grain?

  1. Emergency reserves
    • Sudden onset disaster
    • Slow onset disaster
    • Food safety nets
    • Public distribution system - India
    • Subsidized bread – Egypt, Tunisia, Turkey
  2. Market intervention
    • Buying to support farm prices
    • Sales to dampen price spikes

Bangladesh’s government buys 1 to 1.5 million tonnes of the annual rice crop that is now close to 35 million tonnes. The country no longer needs to import rice. Rather it may soon have to start exporting large quantities. The government does buy from abroad up to 1 million tonnes of wheat per year, mostly from India. The private sector imports in an average year another 2 to 3 million tonnes of wheat. The government stocks are rotated via distribution to the poor through a myriad of programs and as well as through open market sales if prices rise.

Southeast Asia and Australia

In Thailand, Vietnam and Myanmar governments procure surplus rice that eventually gets exported. In most other Southeast Asian countries, government grain agencies import rice. In the case of Indonesia, rice importation is a monopoly of Bulog, but the country is now on the verge of self-sufficiency with imports at just 1 million tonnes equivalent to around 3% of consumption. In the Philippines, the National Food Agency (NFA) imports some rice and gives licenses to private companies to also buy.

The Thai government has a long history of buying some surplus rice from farmers that it has then sold for export. In 2011, an election year, the Shinawatra government greatly expanded rice purchases at prices 30% to 50% above international prices. Forty percent of Thai households grow rice and the government was re-elected, but controversy, scandal and massprotests have ensued. The Thai government has owned up to a record 18 million tonnes of rice due to its “rice pledging scheme.” Thailand produces about 21 million tonnes but consumes only 10 million tonnes. Peak exports were 12 million tonnes but fell to 6.7 million tonnes two years ago due to the misguided policy. Many observers expect the government to fall as a result of the scandal surrounding its rice buying.

Since Australian Wheat Board’s loss of its single desk status, direct local government intervention in the wheat sector is minimal, though Australian wheat is purchased by many state-trading enterprises.

Middle East and North Africa

The Middle East and North Africa is the world’s most important wheat importing region. It is also the region where governments are most dominant in procuring and holding food grains. These countries are the ones that have been the most aggressive in recent years in expanding their strategic grain reserves.

The region’s imports account for 48 million tonnes of the international wheat trade of 142 million tonnes. These imports are split evenly between the North African countries and those in the Middle East.

The bulk of imports are handled by state-owned grain import monopolies. The largest government wheat importers are Egypt, Iraq, Saudi Arabia and Algeria. Government agencies in each country are major owners and operators of grain storage facilities, though there is some reliance on the private sector, too, especially in Egypt. Smaller countries in the region whose governments operate wheat import monopolies are Tunisia, Kuwait and Qatar.

Western Hemisphere

The United States has no public grain procurement or government stocks. Grain reserves were halted in the U.S. in 1996. The Canadian government gave up its wheat buying monopoly through the Canadian Wheat Board in the western provinces just two years ago.

The U.S. government still subsidizes farmers through federal crop insurance programs and direct payments costing taxpayers several billion dollars per year. And it provides food assistance via debit cards to 45 million low-income people. But this is done without government grain buying.

The only Latin American countries where governments are heavily involved in grain purchasing are Cuba and Venezuela. In effect, the huge stocks of high quality grain always available in the U.S. from Gulf ports serve as a de-facto strategic reserve for these two countries and others in the region.

European Union and Turkey

The 28 countries of the European Union produced 143 million tonnes of wheat and 301 million tonnes of total cereals (IGC 2013-14 estimates). The net wheat surplus is 20 to 25 million tonnes in most years.

The E.U. protects its markets with import quotas and tariffs and still has a system of minimum support prices for certain cereals. This means governments may buy grain from farmers when market prices are below a fixed level, which is the officially set as the E.U. intervention price of €101.

Because of high international grain prices, there has been no basis for intervention purchases by the E.U. in recent years. Surpluses could be exported profitability outside the E.U. Therefore E.U. grain holdings have been at a minimum.

Each E.U. country has a so-called paying agency that is funded directly from the European Union budget when intervention is done. However, E.U. rules do not allow governments to own and operate their own grain storage facilities. All E.U. grain is kept in leased private storages.

Turkey has a well-organized grain market where the government through the Turkish Grain Board (TMO) plays an important role. TMO is a state enterprise whose role is to hold emergency reserves and to intervene in the market to stabilize prices. It buys from farmers when the crop is large and prices are low. It may import when the crop is small to replenish its reserves. TMO has about 4 million tonnes in storage capacity at its own facilities.

Turkey is a candidate for accession to the European Union. It therefore must take some steps to harmonize its grain market policies with those of the E.U. TMO will have to be split into a paying agency on the one hand and a grain storage operator on the other once it is granted E.U. membership.

Sub-Saharan Africa

Among the 50 or so countries of sub-Saharan Africa, there are just a handful where there is public ownership of grain stocks. Eritrea, a closed country with a centrally planned economy, is the only one where the government completely monopolizes procurement of surplus grain and imports.

Zambia’s Food Reserve Agency buys most of the surplus maize to support incomes of small farmers but at a huge cost to the national budget when the maize eventually must be exported at a loss. Annual purchases have been up to 1 million tonnes.

Ethiopia has limited holdings. The government has privatized all grain processing companies but maintains a wheat import monopoly and cooperates with international food aid donors to operate a grain reserve holding 400,000 tonnes in a country that consumes about 20 million tonnes of food grains per year. Sudan’s government holds reserves of millet and sorghum purchased from farmers through the Agricultural Bank.

South Africa’s government abandoned its wheat marketing board in the early 1990s. There are no more public grain stocks in the country. The country is the major exporter of white maize to other countries in Africa and even to Mexico in some years. Large carry-over stocks held by private traders in the country serve as a reserve for the region.

Conclusion

Despite the arguments of liberal market economists, many governments, especially in Asia and the Middle East, continue to buy and stockpile wheat and rice. With the exception of Japan, most rich countries avoid the practice, and few of the poorest countries of Africa can afford to hold reserves either. Some nations may cut their stocks, but others are just as likely to create a new reserve or expand their holdings. Thus state reserves will continue to be an important factor in global grain markets for the foreseeable future.

Central Asian Breadbasket

Central Asian nations have a combined annual wheat output ranging from 25-30 million tonnes from the Siberian steppes of Kazakhstan in the north to the mountain valleys of Afghanistan in the south, wheat is by far the most important cereal grown and consumed in Central Asia.

The six countries of the region have a combined output ranging from 30 to 35 million tonnes in most years. Kazakhstan may account for anywhere from one half to two-thirds of wheat produced in these countries, depending on the amount of rain received on its vast dryland farms.

Four of the other “stans” — Uzbekistan, Kyrgyzstan, Tajikistan and Afghanistan — all to a varying extent depend on Kazakhstan to provide wheat and wheat flour to cover part of their consumption. Only Turkmenistan, one of the world’s most closed societies, in recent years has achieved self-sufficiency in wheat.

Until 1990, when the Soviet Union broke up, all of their economies (except Afghanistan) had been unified under a central economic plan with all wheat production and processing under state control. Since then, each of the five for- mer Soviet republics has pursued separate economic models.

However, trade in wheat and wheat flour remains one of the major economic linkages among the nations of Central Asia.

Kazakhstan

Dryland wheat yields are low, averaging about one tonne per hectare, and can vary hugely from year to year according to rainfall and soil moisture. The harvest fell from a record 22.7 million tonnes in 2011 to just 9.8 million tonnes in the following drought year, per U.S. Department of Agriculture (USDA) data. The chairman of KazAgro Holding’s management board has predicted a recovery to about 15 million tonnes in 2013.

Domestic use runs around 5 million tonnes, so even when yields plummet there is still surplus wheat for export to other countries of the region.

Given the logistical difficulties of export over long distances by rail, Kazakhstan typically carries over to the next year over one-third of a bumper harvest. Following the record harvest of 2011, wheat stock levels reached an unprecedented 17 million tonnes. The government grain agency stepped in to buy several million tonnes from farmers that year.

Kazakhstan’s wheat can be delivered competitively to Black Sea and Baltic Sea ports, usually only when its crop is larger than average and world wheat prices are high due to shortfall in production among the traditional major exporters.

In 2011-12, when exports reached about 11.4 million tonnes, about half were to countries outside of the Central Asian region. The following year exports dropped to about half of that, and nearly all went to other Central Asia countries and to Azerbaijan on the opposite shore of Caspian Sea, as well as to Russia in difficult to monitor cross-border trade.

All told, other Central Asian countries including Afghanistan now buy the equivalent of about 5 million tonnes of Kazakhstan wheat and wheat flour annually.

Thanks to steady demand from nearby countries, but mainly Uzbekistan, Kazakhstan had been the world’s top wheat flour exporter for a number of years running, with exports reaching 3.65 million tonnes in wheat equivalent in 2011-12, according to the International Grains Council (IGC). Shipments dropped the following drought year to a level below Turkey but a recovery to 3 million tonnes is projected by the IGC in 2013-14, enough to regain the top position.

Proximity, an excellent railroad network, large efficient mills, low prices for high quality wheat, and supportive government polices are all factors in the ability of its milling industry to dominate wheat flour markets in the other countries of the region.

There are currently about 350 wheat milling enterprises in Kazakhstan according to Evgeny Gan, longtime president of the Kazakhstan League of Grain Processors and Bakers, an industry association. The trend has been toward investment in larger plants and closure of smaller mills to the point where about 200 of these are above 150 tonnes per day capacity and only 50 have a capacity of less than 50 tonnes per day.

Uzbekistan

Uzbekistan’s wheat production of 6.2 million tonnes depends 80% on irrigation from the rivers flowing westwards out of the Tianshan Mountains, which are nearly sucked dry before reaching the shrunken Aral Sea. Planted areas and yields are predictable from year to year thanks to adequate water and heavy state planning.

Paradoxically, though the country is nominally self-sufficient in wheat, its imports from Kazakhstan have steadily climbed to 1.4 million tonnes of wheat flour, the largest flow of this commodity between any two countries.

Among the reasons for the increase may be the increasing exports of lower quality Uzbek wheat and flour, as well as greater re-exports of imported Kazakh flour, mainly to Afghanistan.

Consumers in the nation’s capital, Tashkent, and other large cities demand “naan” bread made from the higher protein rain-fed wheat of Kazakhstan for reasons of taste and texture.

It is estimated that only 62% of the wheat grown in Uzbekistan is used domestically for food. The remainder goes for livestock feed or is exported at low prices to neighbouring countries.

Though it has been nearly a quarter century since achieving independence, Uzbekistan has retained the Soviet model of state ownership for large parts of its economy. Farmland is privately held, but government planners still dictate the amount of wheat (and cotton) to be sown, the prices of inputs and how much the state will pay for wheat at harvest.

The bulk of the wheat surplus is purchased by a single government grain storage, flour and feed milling entity called Uzdonmahsolut, which means “Uzbekistan Grain Products.”

It controls 40 to 50 feed and flour milling enterprises most of which incorporate monolithic concrete grain elevators dating from the Soviet era. Uzdonmahsolut’s annual planned wheat flour output is about 1.5 million tonnes.

All exports of surplus wheat and wheat flour are restricted to the government monopoly, but no data is published about prices, volumes and destinations of shipments outside Uzbekistan. Such grain trade data is officially treated as a state secret, one of few countries that is so lacking in transparency.

Despite heavy government controls in the sector, dozens of private milling companies have started up in the last several years as the share of wheat ground on a tolling basis in tiny village mills has declined, replaced by commercially produced flour.

Turkmenistan

This former Soviet Republic of just 10 million people has remained the truest to the model of state ownership of the economy since the collapse of the Soviet Union. Total wheat production, all from irrigated lands that formerly grew cotton, is expected to increase by one-third from 1.2 million tonnes in 2012 to 1.6 million tonnes this year, according to official government proclamations.

Abundant state revenues from exports of natural gas have permitted large-scale investment in the entire wheat value chain from modern tractors and combine harvesters to state-of-the-art milling and pasta plants.

The country reports exportation of 300,000 tonnes in 2012 of carryover wheat from the previous year. Most of it went across its southern border to either Iran or Afghanistan.

Afghanistan

In contrast to its neighbors to the north, Afghanistan has achieved a high level of wheat-based food security through unregulated agriculture, a large network of small, adroit traders who import flour and cash inflows from the outflow of illegal drugs.

Concrete grain elevator in Puli Khumri

Concrete grain elevator in Puli Khumri

Wheat consumption, which accounts for over 60% of total caloric intake, has reached about 6 million tonnes per year, with domestic production about 4.15 million tonnes last year and forecast by USDA to be down slightly for 2013-14.

Production is balanced between rainfed fields on the one hand and snowmelt irrigation on the other, and is also split between winter and spring-planted crops.

Kazakhstan’s aggressive milling industry has supplanted Pakistan in the last decade as the main supplier of wheat flour. Afghanistan’s wheat flour imports from Kazakhstan reached 1 million tonnes in 2011-12 before falling off to 700,000 tonnes the following year when the crop came up short and Pakistan regained some of its position as a wheat flour supplier. Uzbekistan’s low cost, low quality wheat flour accounted for another 250,000 tonnes per USDA data.

Other sources of wheat include official food aid donated by India and distributed by the United Nations World Food Program.

Most wheat flour shipments from Kazakhstan and Uzbekistan move efficiently by rail, crossing a bridge at the border at Termez, Uzbekistan to the rail terminus inside Afghanistan on the river bank and near the city of Mazar-e-Sharif. From there it is less than one day’s truck journey to the Afghan capital, Kabul and most other large cities in the country.

About 90% of Afghanistan’s domestically grown wheat is milled for farmers and others in small village mills, grinding just 1 to 4 tonnes per day on a pay-for-service basis.

There has been investment in about 12 commercial mills with capacity ranging from 80 to 500 tonnes per day. These are often shut down due to lack of wheat supply, electricity or other factors.

During the Soviet occupation of the 1980s, there were five large milling and baking complexes with concrete elevators built, averaging 50,000 tonnes storage capacity, similar to what exists throughout Russia and Central Asia.

Recently the Afghan government has taken steps to create a strategic grain reserve and has begun to reuse some of these complexes, though the milling and baking sections have remained unused except for the one in Kabul.

Tajikistan

The small amounts of arable land in the most mountainous of Central Asian nations allow for 800,000 to 1 million tonnes of annual wheat production.

Tajikistan is usually the second or third-largest market for Kazakhstan wheat flour, with imports having reached a peak of about 460,000 tonnes in 2007 and 2008 but dropping off since then to just 240,000 tonnes in 2012. The country’s millers that year used 720,000 tonnes of imported wheat as the trend has been for declining wheat flour imports and increasing wheat imports as the domestic milling industry expands.

Kyrgyzstan

Like Tajikistan, Kyrgyzstan is mostly mountainous. Its agriculture is focused on livestock production, mainly sheep and cattle. Potato tonnage exceeds wheat production that amounts to about 800,000 tonnes in most years.

Wheat is irrigated in the portions of the country’s southern region in the Fergana Valley that is shared with Uzbekistan.

The wheat value chain is entirely in private hands in line with the country’s free market economic policies.

Millers in the capital city of Bishkek rely partly on wheat deliveries from Kazakhstan, which are in the range of 450,000 tonnes per year for the country. The industry has been successful in getting its government to protect it via duties on wheat flour imports, though this usually results in large in-flows of contraband flour. Flour imports are only about 110,000 tonnes.

Summary

Though isolated from the rest of the global grain trade by thousands of kilometers to ocean ports, the economically and politically diverse, landlocked (Uzbekistan is double landlocked) nations of Central Asia comprise a dynamic wheat production, processing and trading community that continues to evolve with greater investment from governments and private enterprise.

Kazakhstan’s government is now pursuing policy measures to increase livestock production through reduced plantings of wheat in favor of feed grains. Nevertheless, the country will continue to supply its neighbors while holding large buffer stocks of wheat that can be released on world markets when prices spike.

Millers gather in Middle East

One of the world’s premier wheat milling industry events, the 2012 IAOM Mideast and Africa Conference and Expo, was held Dec. 5-8 in the cavernous, ultra-modern Abu Dhabi National Exhibition Center. The 23rd version of the highly anticipated trade show was a resounding success in the newly opened facility, with booth space and registration slots selling out well in advance.

Over the three days more than 600 participants from companies and organizations based in 45 countries visited the 100 exhibitors from 20 countries and sat through management and educational sessions featuring nearly 50 speakers on topics ranging from innovations in milling to the global economy and leadership skills.

Old friendships were renewed and new relationships initiated at the conference’s dinners, lunches and coffee breaks, generously sponsored by leading players in the international wheat industry.

On behalf of the joint hosts, H.H. Sheikh Mansoor bin Zayed Al Nahyan, chairman of the Abu Dhabi Food Control Authority, gave the welcoming address and Agthia Group’s CEO, Ilias Assimakopoulous, closed the proceedings.

Exhibition

Exhibitors covered all sectors from grain traders to manufacturers of packaging machinery but included a large core group of mill manufacturers. The strong presence of a dozen steel silo companies reflected the trend of several years running for private grain millers and government organizations in the world’s number one wheat importing region to enlarge their storage capacity in response to the increasing precariousness of supply and price volatility.

Similarly, rising dependence on wheat of variable quality from the Black Sea countries and more recently India and Pakistan has led to greater demand for flour additives which were offered by another 12 firms exhibiting this year. Many of these same companies also offer vitamin and mineral premixes since most Middle Eastern countries have embraced mandatory flour fortification as a public health measure.

Companies and organizations from six continents displayed products and services. As in the past, Turkish suppliers accounted for one quarter of all booth space. Twenty European firms, half of them German, were the second largest contingent. A new trend is the larger number of exhibitors from companies in the region besides Turkey. This year there were 11 including six from the United Arab Emirates, the host country.

Trading Session

The speakers at the trading session on the final day enjoyed an especially large audience as millers sought to understand the circumstances surrounding the sudden spike in wheat prices again this year and the relentless market volatility of the past five years.

Six speakers focused on six major grain exporting countries and regions, all of which supply wheat to the Middle East and Africa with Bill Tierney, chief economist of AgResources, as moderator. In his own presentation on the global market outlook, Tierney focused on the “historic decline in wheat production and historic decline in stocks.” He emphasized that “essentially there is no stocks cushion to stop prices from moving sharply higher.”

Countries are depleting their stocks through exports, said Tierney, citing USDA’s forecast that India will export 6 million tonnes of wheat this year. “If E.U. wheat exports do not slow down, the E.U. will have to import more corn to replace wheat for feed.”

Swithun Still, director and senior trader of Solaris Commodities, Switzerland, covered the Black Sea countries, which in the last decade have emerged as a vital supplier of wheat to Middle East and African countries, after being a net grain importer during most of the 1980s and much of the 1990s.

Bill Tierney of AgResources moderating the Trading Session at the IAOM Mideast and Africa Conference. Photo courtesy of David McKee.

Bill Tierney of AgResources moderating the Trading Session at the IAOM Mideast and Africa Conference. Photo courtesy of David McKee.

“Egypt is almost a captive market for Russia,” Still noted. “It is almost a symbiotic relationship. Russia needs Egypt’s market, and Egypt needs Russian wheat.”

After exporting 26 million tonnes in 2011-12, Russia exported only 9 million tonnes through the first 11 months of 2012, with a maximum of 2 million tonnes expected in the final month. “Russia’s domestic price is now more attractive than the export price,” Still said, adding that ice and cold weather hinder logistics in the Black Sea, so that exports could slow even further.

Neither Russia nor Ukraine will outright ban exports as happened in 2010, but Ukraine could take “unofficial measures” to slow the outflow, he predicted.

Joe Woodward, past president, IAOM presents a plaque of appreciation to Ilias Assimakopoulos, CEO,Agthia Group, the host company at the Gala dinner.

Joe Woodward, past president, IAOM presents a plaque of appreciation to Ilias Assimakopoulos, CEO,
Agthia Group, the host company at the Gala dinner.

Despite harvest shortfalls in two of the last three years, “it is expected and hoped that RKU (Russian, Kazakhstan and Ukraine) will be the world’s number one grain exporter during 2020-40,” Still said.

Nick Poutney, GrainCorp regional manager, presented the crop picture in his country. “Australia has done a lot of work in terms of making its export program more efficient in the last few years,” he said, noting that in 2011-12 wheat exports were a record 27 million tonnes out of a record 29 million-tonne crop. For 2012-13, his company’s crop estimate was for a more normal 20.3 million tonnes but with a higher share of milling quality.

Port grain terminal operators “will be allowed to sell up to 60% of port capacity up to three years in advance. Up to now it was only one year,” Poutney said. This will encourage investments in rail infrastructure, helping to relieve transportation bottlenecks, he said.

Returning to the theme of crop shortages, Jean-Benoit Gauthier of the Canadian Wheat Board (CWB) said that precipitation in Canada for the new crop is only 40% to 50% of normal, and Ontario is the only production area in the country that did not encounter major weather problems.

Though it has lost its monopoly on exports of wheat from the Canadian prairie provinces, CWB still operates 130 wheat purchasing stations and remains a key partner for many wheat growers, Gauthier told the audience.

Nebraska grain grower Dan Hughes, vice-chairman of U.S. Wheat Associates, touched upon the critical shortage of ground moisture, particularly due to lack of snow in much of the central Midwest and especially in his home state. However, he emphasized that “the U.S. wheat store is always open,” and he repeated the familiar U.S. Wheat refrain of “contract sanctity, market competition, transparent pricing and assured quality,” as reasons to buy American wheat.

Hughes encouraged the millers of the region to use higher priced but better quality wheat from the U.S. to blend with low-cost wheat from other origins to obtain the best possible price-to-quality mix, an argument developed in depth by Peter Lloyd, regional technical director of U.S. Wheat, during the educational session. Mark Samson, regional vice-president of U.S. Wheat, showed his country’s share of Middle East and Africa wheat imports at around 5% of a total of 37 million tonnes.

Moving on to Europe, there has been an increase of exports outside of the E.U. at the expense of intra-E.U. trade, noted Francois Gatel, director of France Export Cereales.

“Wheat is by far the largest crop in France with about 10 percent of all area, or roughly 5 million hectares,” he explained. French wheat yield was 7.4 tonnes per hectare in 2012 thanks to “high spring temperatures, a long growth period and an oceanic climate with a high spring temperature but not too hot summer.”

France ranks number five as a world wheat exporter with 11 million tonnes, half of which went to Algeria and Morocco in the most recent year.

Glencore trader Joost Viehoff introduced the South American crop situation which was very unclear at conference time. Every year a certain share of Argentina’s and Brazil’s wheat exports is delivered to ports in southern and east Africa and the Middle East. Brazil, at 7 million tonnes per year, is one of the world’s top wheat importers, but it nevertheless exported 500,000 tonnes to Iran in 2012.

Viehoff explained that exports are possible due to the different quality needed by mills at different times, adding that much of Brazil’s production is feed wheat quality.

The first day, Indrek Aigro of Copenhagen Merchants, Denmark, discussed how the Baltic region, including the former Soviet states of Estonia, Latvia and Ltihuania as well as Poland and northern Germany, had become a major wheat surplus zone.

IAOM MEA’s growing emphasis on management issues came out in the initial topics of the day. Hedging solutions were presented by Dr. Abedlatif Abada of Morgan Stanley, UAE. On this theme, Tierney suggested that millers cover some of their purchase risk with options contracts whose prices are unexplainably very low in relation to the current market volatility.

Former GAFTA President Wayne Bacon gave a talk entitled “The Hidden Contract,” focusing on the GAFTA 27 rules which form a part of every grain contract. They are “very seller biased, so buyers really have to understand what their risks are.”

The BBC’s Spencer Kelly offered an entertaining keynote speech that capped off the first day’s management session with highlights from his popular television show, “Click,” about technological innovations that are changing the lives of even the world’s poorest people. Session moderator Martin Schlauri, managing director of Bühler’s Grain Milling Business Unit, thanked him and commented, “The milling industry is high tech, too. Go to our booth.”

Participants were pleased by the continuously refined formula of the conference.

“I have attended since the second one in Yemen, where there were 200 people,” said Mustafa Mustafa, group head of milling for Dangote Flour Mills, Nigeria. “It has been very good for my professional development as it has kept me up to date year by year about innovations. I appreciate the addition of managerial issues to the program.”

In his closing remarks, Assimakopoulous of Agthia Group congratulated IAOM for the “diverse and valuable insights from some of the industry’s most esteemed and influential professionals.” He then handed over the IAOM MEA banner to the Kamel Belkhiria, president of La Rose Blanche Group, Tunisia, where the 24th annual conference will take place Nov. 5-8, 2013 in the Mediterranean city of Sousse.

Photo Galleria from the event