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№21 (108) 5 - 18 November 2003

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Main theme: Agricultural solitaire     Export is a good word
This year Kazakhstan got a possibility to rank among the 6 largest exporters of grains and flour. Despite this rosy scenario our country may face the internal crisis as the needs of domestic market are unlikely to be satisfied. The bread is a socially important product and its quantity defines the policy or this or that country.

Alexey Ikonnikov

The objective analysis.

There is nothing extraordinary from the economic point of view. Everything was rather predictable. Kazakhstan has yielded a heavy crop of grains while the harvest in neighboring countries and as well as in Europe and Asia was poor. The export prices are very high and they seem rather comforting in comparison with those on the internal market. As a result the internal supply has fallen and prices grew dramatically. Despite abundant harvest the republic may face serious social destabilization due to the surge in bread prices. Bread is really a basic product. One cat predict the public reaction to the declarations of officials about low inflation and economic recovery when the loaf of bread would cost twice above its today's price.

From the point of view of traders the situation on the market can be called unprecedented.In April the wholesale price was 19-29%per kg. In September the Bakeries bought the premium sort first rate white flour at an average price of 36.5% tenge per kg. Recently the price of the high quality flour(produced by the renowned firm "Cesna") has grown up to 40%. Experts think that prices are likely to increase as there is no supply growth .The demand for flour is brisk and stable. The coarse grinding flour is not even rested for 15 - 20 which are necessary in accordance with technological process(it is necessary as a bread made from such flour tastes better and look appetizing)The bakeries buy practically everything that is supplied. According to Erlan (one of the owners of bakeries in Almaty) after such a rich harvest( similar to that reaped this autumn) 10 or more suppliers competed to become the main one for his business. Today only "Cesna" and "Yumbul" and other 2-3 suppliers still work on the market

The situation is really strange. Bakery plants predicted the heavy crop of wheat and rye. Their prognosis became the reality. But there are problems with supplies. "The situation was practically the same four years ago- Erlan says- The price of flour reached 37 per kg. But it didn't last long. Many of my rivals believe that the problems with shipments won't be solved soon as supplies continue to tighten

The market situation is really difficult. The forecasts look even gloomier. The price of flour influences everything. It accounts for 60% of the bread price. The price for flour doubled but food producers raised the price per a loaf of bread only by 5-7% (from 20 tenge up to 22-23 tenge). The businessmen say that such a price can guarantee minimal profit that is enough to pay salaries and taxes. But this revenue will not allow to invest in the development of enterprise and capital renewals. The bakeries are forced to keep prices at the affordable level due to the tough rivalry in this segment of the market. The officials also help to stabilize prices as bread ranks first in the list of "socially important products". The government makes efforts to prevent the surge in the price of bread.

But there are always exceptions to the rule. For example in Ust -Kamenogorsk the prices changed three times. As a result of the first increase the prices grew 40%. The bread produced from the high quality flour cost 22 tenge. Then the price went up to 30tenge. On October the price fell by 1 tenge. Finally the price for a brick formed bread fixed at 25tenge and round formed one is sold today for 29 - 30 tenge. Mirzan Shakenov, the head of the Eastern Kazakhstan regional department of trade says that the cost of flour defines the final price and retailers increase it to gain a sufficient revenue. The Ust-Kamenogorsk bakery businesses tried to avert the public attention from the real factors that pushed the prices up. Among the main reasons that really determined price they listed the raise of tarrifs on water and electricity.

The Ust - Kamenogorsk precedent is likely to repeat in many regions of the country. The market situation concerning grains is practically the same. We have phoned to different Almaty suppliers and arrived to a conclusion that Kazakhstani flour is exported as the stocks are practically empty. The commercial enterprises evade the state control by all possible means. The trade regulation procedures are very "liberal". Take for example the high import duty in Uzbekistan which is levied on the goods delivered by the railroad. Thus the cargo is delivered by the railroad to a boarder then the sacks with wheat are loaded on the lorries. These cars cross the boarder one by one. Under the Uzbekh law the one lorry has certain privileges as it considered to be a commercial one(in the context of the small business development).

The cars are loaded on private elevators some suppliers conclude the bargains with farmers and grains are reaped from the fields and taken away. The forgery documents and bills are signed and cargo leaves the Republic. The domestic market can't guarantee such high prices as the external one. That is why wheat and rye are pumped out from Kazakhstan at alarming rate. Kirgizia, Uzbekistan and Tajikistan are the main importers and consumers of Kazakhstani wheat. There are really import dependent. Let's take Tadjikistan for example. Due to the decline in import from Kazkahstan the prices in the small mountain country surged 13%. Practically everywhere one can see long queues. Despite the poverty Tadjiks are ready to(buy bread at any price. They have no other alternative , as they reaped less than was targeted.

The supplies to the Southern neighbors reduced due to the fact that there are many other buyers of Kazakhstani grains, that are likely to pay more. Within the last 3-4 years Kazkah Turks were the main dealers that bought and resold wheat. It is there traditional business. Recently, representatives of German, French, Russian and Asian firms have entered the market. In the spring Kazakhstani suppliers signed numerous contracts with the Tadjikistan dealers but today many of the provisions are not fulfilled. The shipments of wheat and rye to Tajikistan and Kyrgyzia won't help to gain high profits. The cooperation with European importers is likely to bring more substantial revenue. It is even less lucrative to sell the bread on the internal market where the prices grow slower. but let's talk about it later.

The Kazakhstani farmers don't rush to sell grains. Their sluggishness looks quite in the context of latest stock market prognosis, because the grains market goes up.The growth is stable it is a real contango It influenced the internal market. Last year 70-80 USD per ton of grains looked very attractive. Today farmers sell wheat for 120$. The buyers are ready to acquire wheat not from the elevators but right from the fields. In August September the price hovered between 100-110$ per ton. The prices grow steadily and this growth is stable. The demand growth and increase in prices is quite an interesting phenomenon taking into account that stocks are piled up and there is a lot of bread. The farmer households can really capitalize on the opportunity. But some farmers tend to wait they sell grains but in small portions. They are encouraged by such a great number of European dealers that willingly pay 120$ or more per a ton of wheat. By waiting farmers are likely to gain more

Great export aspirations

Kazakhstan really saw the rich harvest of grains. It seems to be practically the sole country on the continent that was lucky to yield good crop. Ukrain and Russia that led in export of grains the previous year today can't be considered the serious rivals. Russia can produce enough to satisfy the internal needs. The grain production in Ukraine declined and today this country has even to import wheat. In August Ukraine officials has signed the import agreements with Russia and Kazakhstan. It will buy 2.2. m t of wheat from Russia and 1 m t from Kazakhstan. Russians that promised to supply Ukraine with million tons of grains and deliver the additional 200 thousand tons in form of aid (as the prices are below the market ones) can face the serious shortage of grains. One of the Russian officials made a dire forecast - by exporting 1 million ton of grains to Ukraine Russia will aggravate the situation on the internal market. Russia has to take into account practically each ton of grains . Ukraine is really in a parlous state. The prices for a third class wheat reached 170-190$ per ton and equaled the European ones. The bread price nearly doubled. The experts from the RBC daily (The Institute of the US Agriculture market reckon that such a situation on the world market exist not only due to the unfavorable weather conditions but due to the intensive export(the sowing wasn't done properly in many countries ) We have mentioned it the context of the Kazakhstani export boom.

The situation on the grains market is parlous not only in CIS countries but also in Europe. The activity of European dealers on the Kazakhstani market gives good evidence to a fact. On October 22 the renowned French company made a prognosis concerning the grains market. According to its forecast the projected yield of grains in Europe would be 11.8% smaller in comparison with the previous year. The import may increase up to 3.8mt.The Middle East countries and Northern Africa also saw the decline in output. On October, 22 the government of Egypt said that it would raise purchasing price of wheat by 30%. According to some prognoses by 2004 Egypt will pay 157$ per ton.

The world agricultural market trends play in hands of Kazakhstani producers of grains. They should gain certain benefits from the situation. It is crucial not only for farmers but also for government due to different reasons. This year Kazakhstan may rank among six largest exporters of grains. In July the Minister of Agriculture Akhmetzhan Esimov told about it. He put special emphasis to a fact that our country entered the export market with shipments of wheat to Middle east countries, Northern Africa, a bunch of European countries etc. Today The importers of Kazkahtsani grains totals 38. In 2001 only 22 countries bought Kazkahstani wheat. It is really difficult to become one of the leading world exporters of agricultural products. It is the high status and prestige of the state on the World International market. In addition the Kazakhstani wheat is a unique class of wheat that exhibits gluten strength and dough mixing characteristics.

By encouraging export the government can solve old problems in the agriculture. The regulation in this important economic sphere coincided with the program "three years of auls (Kazakh village)". This time the government succeeded to cope with difficulties and resolve certain matters quite naturally without additional credits and subsidies. The farmers can take a deep breath. Until recently they just tried to survive and price 120$ per ton of wheat is a blessing for them. In 2001 the buyers paid only 50-60$ per ton. Such a high price on the international market and bumper crop (this it even exceeded all the rosy prognosis of the government 12.5mt) will allow farmers to renew their assets buy new equipment and seeds etc. There are many advantages about the high prices. The same goes with oil industry. The main difference between agriculture and petroleum production is the following. Kazakhstan won't run out of oil in the nearest future.

The wheat exporters really managed to sell great amount of grains abroad. In 2002 Kazakhstan could export 4.4mt. This year for a period from January to June shipments reached 2.64mt. The export practically doubled in comparison with the previous year (there was 45% increase in sales). Kazakhstan sold the previous year surplus stocks and could built up larger ones this autumn. In July the ministry of Agriculture made a prognosis that Kazkahstan can sell about of grains on the international market. Today the sources say the export exceeded

The government pursued the export - oriented policy. It gave an incentive to the high activity of both - local farmers and foreign buyers. The authorities made statements that Kazkahstan had a great potential as one of the largest producers of grains. For Example Akilbek Kurashev(vice premier of Agriculture) said that Kazakhstan has great opportunities in the grain export sphere. De facto he referred to the ability of our country to gain a share on the Russian market. Today the shortage of grains there is about 10%.

It is really so. We should promote and look for new outlets. But Kazakhstan may face another problem - it should n't be done above the real capacity and due to great sacrifices. Is the government able to regulate the export and protect the internal market form the deficit? The shortage of bread would hit all people. The shortage of bread would mean the upward spiral of inflation. Can the government cope with such a difficult task and send down the inflation?

On August,15 during the round table meeting organized by the Kazakhstani Association of Graingrowers and bakeries this question was put on the agenda. Graingrowers said that the high price of grains would lead to the rise of prices per flour and bread. Evgeniy Kan, The chairman of the Association said that the situation on the internal market is difficult . The high price will allow the local farmers to earn more money and solve certain problems. But unfortunately the prices per flour and bread are likely to advance too. The Graingrowers proposed a program a complex of measures that may help to stabilize the situation on the internal market. According to their project a government had to provide additional subsidies in the agriculture and create a special grain fund that would play a role of buffer on the internal market and prevent the surge in grain prices. On October 21 it became clear that uncertainty about the future of grain market . Our government afraids that the Ukraine scenario will repeat in Kazakhstan. A Esimov said that our country exports too much due to the growing demand for grains on the world market(the major importers of Kazakhstani wheat are Ukraine and Russia. The experience of Ukraine demonstrated that intensive export may result in import

The government raised the purchasing price of grains. The Minister of agriculture admitted that attempts to stabilize the situation failed. Despite the new governmental program many farmer households rejected to ship the grains under the provisions of contracts concluded with the government this spring. Vice Premier explained the reluctance of farmers to cooperate with the authorities and deliver the grains to the internal market by the high price on the world market. The government is late with its programs. The farmers refuse to sell wheat on the domestic market . By the October,21 instead of projected and vital 256 thousand tons of grains only 100 thousands were loaded to built the strategic stocks. By using stringent measures the government will try to get the required quantity of grains. But according to different data the country's consumption requirement is approximately 5-6 million tons. It is really difficult to say if we manage to get this amount of wheat for the internal use, taking into the account the uncontrolled export.

"Anatomy" of price

What factors influences the price of bread. Who and how can define the price. The sources say that despite all the losses incurred due to the intensive export the internal market of grains hasn't collapsed. There is no threat to stability, there are no queues for bread and flour, and there is no necessity of the state shipment of grains to bakery plants. The number of flour suppliers reduced but they still provide stable shipments. The large enterprises- producers of flour still remain the major players that deliver this product to the bakeries.

The above mentioned "Cesna" corporation is the main supplier that operates on the Almaty market. In Akmolinsk region this company owns large grains areas, its own bakery plant. There are also other producers of flour in Kazakhstan. These companies virtually define the price of bread on the domestic market. One can suggest that it is classic case of oligopoly as competition in this segment is not intensive ,and demand exceeds supply. Several giants unlike numerous dwarves can easily agree on the future price. The companies like "Cesna" can get profit even working on the internal market as they can produce flour from their own grains. By establishing the monopoly price they don't lose anything on the contrary they can benefit from the stable demand on the internal market. Even if they are in short supply they can buy wheat from the farmers at the rate 120$ and they still remain the main players on the market. We have already mentioned that these large firms doubled the flour price. The situation is quite predictable. The government can easily ensure the stability because it is easier to control the large enterprise than small or middle one

According to the statistics there were 75 millers in 80s by 2002 two thousand of them operated on the domestic market. But new manufacturers didn't add to productivity.75 soviet millers managed to process 2 tons of grains. Today the milling armada(including all new enterprise) grind 4 million tons. There is no much use of these home brewed businesses. As one expert says we have an urgent need in Don Quixote with a sword to demolish them. According to the Kazakhstani Research Institute of Agriculture there are too many small milling businesses in the country. These constructions appeared practically in each town village and aul. Here we come to shadow business and turnover and uncontrolled export let alone the quality of flour produced this way.

Is it really possible to control such a great number of businesses and limit the export of flour? It is just predictable how one can answer it.The boundaries between Kazakhstan and Russia are transparent. The export control is a complete mess. It is really difficult to know where this or that individual transports the cargo. Abdiman Ospanov the head of Kazakhstani Research institute of Agriculture(grains) gave certain examples that help to illustrate the situation. In Semiplatinsk the flour production is 219 kg per capita. It exceeds the current demand twice. About 40% of flour leaves the region and 60% of grains for further processing are shipped from other oblasts. The flour for macaroni and pasta is produced only in Akmolinskaya oblast but there is no any plant or factory that puts out macaroni.. The expert says that such policy of plants and manufacturers work (one the supplier is located in one region and manufacturer in the other adds to uncontrolled export)

The lack of real leverages of the export control can lead to the disastrous consequences. Now the bread prices continue to grow.

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