Category Archives: North Africa

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.

Egyptian government’s role in wheat

The Egyptian state has a long history of collecting and distributing grain. Beginning with the earliest dynasties 5,000 years ago, farmers paid one-fifth of their output as tax. The Bible recounts how Joseph, after a dream, advised the pharaoh to hold in reserve a part of seven bountiful harvests against the
seven lean years that would follow.

Today, Egypt’s government still plays a central role, especially when it comes to wheat, accounting for over half of the incoming volumes in the world’s number one wheat importing country. A large share of the domestic wheat crop is bought by public bodies as well.

State organizations account for more than half of the incoming volumes in the world’s number one wheat importing country

A generous subsidy on bread is the main reason for these purchases. Up to 8 million tonnes of wheat and half a million tonnes of corn are baked into loaves of traditional “baladi” bread from 82% extraction flour blended with corn flour. By some estimates 50 million Egyptians benefit from regular access to the traditional staple, selling for five piasters, or less than 1¢ per piece of 130 grams officially, but less in practice. The cost of this food subsidy to the national budget varies with international wheat prices, but could be around $3 billion in recent years.

State control spans only the middle ground of the wheat market. At the lower end is up to 3 million tonnes of consumption by rural farmers after village grinding. At the upper end is a buoyant and still expanding private milling sector that buys all of its own wheat from abroad, 4 to 5 million tonnes per year, and mills it mainly into 72% or 76% extraction flour for high quality flat bread, European-style breads or other baked goods.

General Authority for Supplies and Commodities

Grain traders these days describe GASC as the largest “single structure” buyer of wheat in the international market. Its purchases vary from year to year depending on the amount of wheat available internally but in recent years have been in the range of 5 million tonnes.

GASC buys wheat steadily and sometimes opportunistically throughout most of the year. It tenders on average every two to three weeks and may conclude contracts for one to several cargoes with each market entry or none at all.

Tenders go quickly. They are announced in the late evening Cairo time after Chicago Board of Trade trading ends. Most often GASC goes on the market when Chicago wheat prices have closed lower. Bid deadlines are 11 a.m. the next morning and a GASC committee decides its purchases that day.

Offers come from a core group of 10 to 15 mainly international grain traders who keep bid bonds permanently in place. In addition to the major trading houses like Cargill, Bunge, Toepfer and Glencore, specialized firms like Solaris Commodities focus on certain origins such as Russia. All get a regular chance as Egypt sources wheat from around 10 countries in most years. Besides the Black Sea countries, Australia, France, Canada and the U.S. are perennial suppliers. India and Pakistan are excluded on phytosanitary grounds due to the carnal wheat bunt.

Delivery is usually set for 30 to 60 days from the tender date. For example, a tender opened on Feb. 2 called for delivery from March 1-10.

The whole system depends on GASC’s ability to quickly open Letters of Credit following tenders. Declines in foreign currency reserves have made this difficult, particularly since the beginning of 2013 and state wheat purchases have fallen to half the level of a year before. Recently there have been reports of GASC considering other purchasing options that would rely more on stocks held by private importers in Egypt.

International tendering is put on hold by GASC for a two- to three-month period every year while the Egyptian wheat crop is harvested and delivered to government buyers from May to July.

To ease pressures on foreign currency reserves and to support farmers, Egyptian policy is to encourage higher domestic wheat production through a guaranteed support price. Well before sowing of the annual wheat crop in the winter, GASC is involved in fixing the price at which government will buy from farmers.

This year Egyptian farmers will receive a generous 2,500 Egyptian pounds (LE) per tonne for wheat deliveries, or approximately $371, even after taking into account recent sharp devaluations of the Egyptian pound.

Highlighting its direct line to the national budget, GASC is part of the Ministry of Supply and Domestic Trade whose Minister also holds the title of Chairman of GASC.

Though GASC is a food commodities procurement organization best known for wheat, it also buys through affiliates other heavily subsidized foodstuffs like vegetable oil, raw sugar, wheat flour, rice, pasta and corn, for distribution or to furnish to state-owned processors and to private processors.

GASC depends primarily on a number of other state enterprises to receive, store and transport imported and domestic wheat, and to mill it into the subsidized flour. It relies to some extent on private companies as well given capacity constraints in the former group.

General Company for Silos and Storage

The General Company for Silos and Storage (GCSS) owns and operates five grain terminals at Mediterranean, Suez Canal and Red Sea ports with total capacity of 350,000 tonnes. Inland silo facilities add another 320,000 tonnes.

GCSS handles the millions of tonnes of wheat imported by GASC annually. Its services include the onward transport of wheat from its terminals to the government mills.

In addition, depending on spare capacity, it may provide ship unloading and port storage to private sector wheat importers or to importers of maize and soybeans.

There are a number of private operators of major grain terminals at Mediterranean ports and several smaller ones. The National Stevedoring Company, a Cargill subsidiary, operates a grain discharging terminal in Alexandria’s Dekheila port zone on the Mediterranean. GCSS is a publicly listed company. While the government retains a controlling interest through FIHC, a minority of its shares are traded on the Cairo stock exchange, lending transparency to
its operations.

Food Industries Holding Corporation

Most of the wheat imported by GASC is supplied to the state milling sector, mainly for production of the high extraction (82%) flour for baking of subsidized baladi bread.

Workers at an Egyptian flour mill.

Workers at an Egyptian flour mill.

Food Industries Holding Corporation (FIHC) is an umbrella organization that encompasses most state-owned food processing companies including about nine regionally based wheat milling enterprises with names like North Cairo Flour Mills, East Delta Flour Mills and Upper Egypt Flour Mills. Most have around a dozen or more milling plants. Total grinding capacity approaches 7 million tonnes, nearly sufficient for all wheat used for baladi bread. The largest enterprises can process 1 million tonnes of wheat per year and the smaller ones just a quarter of that.

Under reforms carried out in the 1990s, these milling companies were all converted into publicly listed companies. Today, the Egyptian government through FIHC still retains a controlling share in each of them. Public banks and workers unions also hold shares and there are some cross share-holdings among them. Finally, a minority of shares are freely floated on the Cairo Stock Exchange for individual investors. These companies, with their volumes guaranteed from government orders, have been able to pay good dividends to shareholders.

They also produce 76% extraction flour for a second type of whiter subsidized traditional flat bread called “tabaki,” as well as 72% extraction for commercial sales. In this category they face much competition from dozens of new private millers that have sprung up since the sector was liberalized in the 1990s.

Indeed, private companies have accounted for almost all of the capacity expansion needed to keep up with population increases and to make up for the declining share of wheat ground by farmers at the village level as urbanization increases. Rising incomes in Egypt have meant greater demand for higher quality wheat flour at market prices, the lion’s share of which the private millers have captured.

Egyptian Holding Company for Silos and Storage

A relatively new organization for procurement and storage of the government’s share of Egypt’s domestic wheat production is the Egyptian Holding Company for Silos and Storage (EHCSS). Since its founding about eight years ago, EHCSS has built and now operates in various wheat production zones 25 steel silo storage facilities with 30,000 tonnes of storage capacity each.

EHCSS receives wheat from farmers and traders at collection points which it transports in bulk to its silo facilities. All movement from the storages to government mills is also in bulk.

EHCSS is only about halfway to its goal of building steel silo storage capacity for 1.5 million tonnes of wheat. It expects to tender again in 2013 for an additional eight sites. Another tender for the final seven sites is planned for mid-2014, according to a spokesman.

Two large government construction companies, Petrojet and Arab Contractors, have executed the turnkey contracts to build the 25 facilities to date, with the steel silos and handling equipment sourced from a number of manufacturers mainly in Europe.

Funding for the completed facilities has been provided through international development organizations like Danida (Denmark) the Saudi Development Fund, the Kuwait Fund and OPEC.

Principal Bank of Development and Agricultural Credit

Another major player in domestic wheat is the Principal Bank of Development and Agricultural Credit (PBDAC). As the country’s main agricultural bank and the largest provider of financial services to farmers, it also takes wheat from farmers in repayment of annual crop loans.

This wheat is mostly received on behalf of GASC for delivery to the government mills producing flour for baladi bread.

PBDAC took in 1.8 million tonnes of wheat in 2012 through its network of warehouses and outdoor storages, known as “shonas,” in 4,000 Egyptian villages.

PBDAC’s holding period for wheat used to be a maximum of just six months, but it has extended to as long as 14 months since mills favor the cleaner more homogenous wheat imported by GASC.

Because the government minimum support price for wheat is higher than the international price, PBDAC officials must be constantly vigilant against illegal delivery of imported wheat by unscrupulous traders to domestic wheat purchasing stations.

PBDAC’s practices are the least modern among government organizations. It relies on bagged storage in warehouses and in the open. Ministry of Supply specifications call for the use of 100-kg jute bags which are procured via tenders.

The Future

The need to reform the costly and fraud ridden system of subsidized baladi bread is a perennial subject of national policy debate. A plan to replace poorly targeted direct subsidized food distribution by regionally phasing in cash payments to the poor through national identity cards was announced in 2009 but seems to have fallen by the wayside in the tumult of the last two years.

Streamlining the system and reducing the total volumes has taken on renewed urgency due to the budgetary and foreign currency constraints faced by the
present government.

The case for reform seems clear based on anecdotal evidence that over one-third of baladi bread goes to feed domestic animals, creating distortions in the rational use of cereals across the entire food and feed industry.

But many, if not most ordinary Egyptians, view what amounts to free bread, even when generously shared with household ducks and chickens, as a sacrosanct entitlement to which they have become accustomed over generations. Previous attempts to reduce the subsidy, dating back to the 1970s, have resulted in mass demonstrations.

Today’s democratically elected government probably has little appetite to give citizens yet another cause to take to the streets. Thus, the dominant position of GASC and other state-owned entities in the supply of Egypt’s number one food staple is unlikely to be diminished anytime soon.

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

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.

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