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Grain Storage trends in India

By David McKee and Munishwar Vasudeva

Indian government agencies at the state and federal level are expected to hold an unprecedented stock of 90 million tonnes of rice and wheat when the annual wheat procurement drive ends in June, up from 78 million tonnes a year before.

Over 99% of this government grain is still stored in 50-kg bags in state-owned warehouses or in the open  air. Such has been the practice for decades despite storage losses of 10% or more, according to some official estimates.

Now a movement is gaining momentum in India that will revolutionize both the modalities and technology  of government grain storage. Many initiatives among states and at the center’s Food Corporation of India (FCI) are propelling this drive for reform.

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These schemes include Public Private Partnerships (PPPs) for construction of dozens of steel silo storage  facilities, long-term contracts with builders of traditional go-downs under a scheme called Private Entrepreneur Guarantee (PEG), and the large-scale introduction by companies of storage services using hermetically sealed silo bags to hold cereals procured by the state.

Current Situation

At present, FCI operates a network of warehouse facilities throughout India in both grain surplus and deficit states with storage capacity of 27 million tonnes of bagged wheat and rice. State agencies hold stock on behalf of FCI in warehouses totalling another 16 million tonnes, bringing the total government covered storage capacity to 43 million tonnes.

Privately owned warehouses already built in the last several years for guaranteed 10-year lease to government agencies under PEG hold another 7 million tonnes of grains.

FCI and state agencies dispose of an additional 18 million tonnes of capacity in facilities called Covered Area Plinths (CAP), consisting of an earthen platform of standard dimensions holding stacks of jute bags covered by tarpaulins. Such technology, introduced during British colonial rule, is officially considered to be “scientific storage” but has high rates of grain losses due to moisture exposure, rodents, lack of aeration and delayed liquidation of stocks.

Only wheat can be stored outdoors in this manner on CAPs. With the exception of a couple of states, government agen-cies do not hold paddy but purchase or collect as levy payments sacks of milled
rice which must be kept in warehouses. Space shortages often mean that bagged wheat is moved outside when the rice crop is harvested and processed in the fall in India’s dual cereal crop breadbasket states of Punjab and Haryana.

Due to successive record wheat and rice crops and the state’s obligation to purchase these cereals at a minimum support price that is often higher than the market price, the national storage gap, estimated for last year at about 10 million, continues to widen.

Furthermore, labor rates in India have been on the rise, increasing the costs associated with manual unloading from trucks, stacking and de-stacking in go-downs, and loading of 50-kg bags back onto trucks. Organized labor demanding higher pay or a change from contractual to departmental status has been able to effectively close down major government warehouse facilities for months at a time.

Driven by top-down guidance from FCI, as a policy decision most Indian government agencies have decided to no longer construct their own storage facilities but will rely on the private sector instead. Furthermore, these agencies are now requiring that all new storage be bulk automated facilities in order to
reduce labor strife, operating costs and quality deterioration.

Federal PPPS

At the federal level, PPPs for silo storages have been officially endorsed. In India’s 13th Five Year Plan for the years 2015 to 2020, the National Planning Commission has committed the country to realize 18 million tonnes of silo capacity for government’s grain in storages to be provided by the private sector on a Build, Own and Operate (BOO) basis.

In the shorter term, FCI is completing the planning work and government approval to launch tenders this year for grain storage facilities to hold 2 million tonnes of wheat.

This targeted amount of storage capacity has been allocated by FCI as the nodal agency to 42 storage facilities in 10 different states, including 38 locations of 50,000 tonnes and four of 25,000 tonnes. About 1.6 million tonnes is to be located in production zones in five surplus states: Punjab, Haryana, Madhya
Pradesh, Uttar Pradesh and Bihar. The remainder will be for consumption in grain deficit areas in five states: Assam in the northeast, West Bengal in the east, Maharashtra and Gujarat in the west and Kerala in the far southwest.

Bin size will be standardized at 12,500 tonnes. All facilities will be required to have rail sidings, which could be 30% of overall project costs. Potential contractors must have land or an agreement in place for the purchase of suitable land in order to participate to bid to build steel silo storages for lease to the  government.

Tendering will be handled by FCI. Bid documents are under preparation and will be approved through a num
ber of agencies including the Ministry of Food, Planning Commission, and various departments of the Ministry of Finance. The tender is expected to be announced by mid-year 2013. FCI hopes to award the 20-year storage contracts by the end of 2013.

Companies will bid based on annual storage rates per tonne. The storage facilities will have to be built to FCI specifications, though they will not be owned by the agency.

Under the proposed structure, any newly built silo storage will be declared a “mandi” (grain market square). But unlike in traditional mandis, farmers will have the right to deliver the grain for sale directly to the government without having to go through commission agents known as “ardhiyas,” who exact legally fixed middleman charges of 2.5%.

So far this ambitious program applies only to wheat, which makes up about two-thirds of all government cereals stocks, and for which the storage periods can be as long as four years due to the strategic reserve nature of some FCI holdings. Rice, which has a higher turnover rate, will continue to be stored in go-downs.

FCI is proceeding from several years of experience with a very successful “pilot” PPP program undertaken with Indian corporate logistics giant Adani Group as the tender winner. Seven steel silo storage facilities totaling 550,000 tonnes of capacity were built in production and consumption zones and linked by bulk rail transport. The seven facilities operate with a total of only 80 staff members.

State PPPS

While the FCI continues the federal planning and approval process, individual state governments have already pushed ahead with their own PPP projects. Punjab, the state with the largest wheat surplus, last year put into use a 50,000-tonne steel silo facility built by a private sector group under a tendering process.

Madhya Pradesh, which has transformed itself from a wheat deficit to the number three wheat surplus state in the last several years, has launched its own tender for PPP storage. It calls for 500,000 tonnes of steel silo storage at 10 sites of 50,000 tonnes each. In MP, the government is providing the land for the new storage sites.

The basis is Build Operate and Transfer (BOT) with bid winners to operate for 10 years with an option for 10 more years before ownership takeover by the government. The federal FCI model, on the other hand, is BOO so ownership is never transferred to the state. The federal Planning Commission will provide a 20% subsidy on the project costs.

The MP government has fixed the guaranteed service charge at 62.5 rupees (U.S.$1.20) per tonne per month based on total capacity. This is the same as paid for warehouse storage of bags. To compensate for this low rate, MP government will provide a subsidy on the estimated project costs of up to 20% beyond the federal subsidy. However, bidding will be based on the amount of subsidy required by the private contractors, so that a winning bid could result in a subsidy well below 20%.

RFQ (Request for Qualifications) has been completed and offers should arrive in May.

Silo Bags

In 2011, the Government of India started test trials of silo bags under the Ministry of Food, Consumer Affairs and Public Distribution. These were carried out at FCI go-down sites in Nerela, Delhi State and in Sanewal, Punjab State. After six months of trials, test results were published and states were encouraged by the center to use the new technology for government grain.

Madhya Pradesh has taken the lead in the introduction of silo bags to India. After conducting field trials for 25,000 tonnes near Bhopal, where wheat was filled in the cocoon like bags in May 2012 and emptied out in mid-March of 2013, it has now placed orders for about 1.3 million tonnes of storage capacity with three Indian companies which are the agents for separate manufacturers in Argentina, where up to now this hori-
zontal bulk method has enjoyed the greatest success.

Under the MP model, private operators bid competitively to provide a storage service based on a per tonne, per cycle fee. Contracts are signed yearly with companies that already have the storage bags and handling equipment in the country or under delivery.

One acre can store only 2,200 tonnes of grain in silo bags, so land requirements could be an obstacle. However, the MP government owns large tracts which are leased to farmers but must be allowed to rest every few years. This fallow land will be utilized for storage sites. Land preparation consists only of some levelling.

Each bag is about 200 feet long, 9 feet in diameter (60 meters x 3 meters) and can store around 200 tonnes. The bags are made from three-layer HDPE (high density polyethylene) 220 microns thick. Grain is protected from rain, UV rays and other atmospheric conditions.

The bags are hermetically sealed so that within three weeks 16% carbon dioxide is generated, sufficient to kill any insects in the grain. Holes from pecking by birds can be patched easily with tape.

The bags are unrolled like a sock while being filled by a silo bag loader tractor which is fed by a screw conveyer that lifts grain from the ground into a grain cart. The 200-foot long plastic sack is coiled on one end with a heat seal at the other end. The process of filling the bag pushes the tractor forward. One bag can be stuffed full of wheat in an hour.

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The operator provides a complete package of services including receiving, weighing, filling silo bags, and
emptying them to fill 50-kg bags when government requires. MP is now paying these service providers about 500 rupees per tonne ($10) per grain cycle from receiving to delivery of bags of 50 kg. Conventional warehousing costs the government about 700 rupees per tonne.

Rajasthan, another new wheat surplus state with an underdeveloped mandi system, is likely to adopt the MP silo bag approach at least as a temporary solution before silo facilities can be built for longer term storage.

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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Strategic grain reserves

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

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

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

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

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

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

Middle East

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

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

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

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

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

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

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

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

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

Sub-Saharan Africa

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

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

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

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

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

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

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

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

South Asia

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

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

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

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

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

East Asia and Southeast Asia

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

Conclusion

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

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