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Kazakhstan’s Wheat Dilemma
Last Monday, Akhmetzhan Yesimov, Kazakhstan’s Minister of Agriculture, announced that the government planned to limit wheat exports as it battled rising domestic inflation. This announcement led to record prices on global commodity markets as investors worried that supplies of the grain may not be enough to meet demand.
As one of the world’s top producers with 22 million tons collected in 2007, Kazakhstan should easily be able to meet domestic demand projected at 3.5 million tons. However, gross mismanagement by the government agricultural agencies, along with an opaque trade environment fraught with potential conflict of interest, has left the Kazakh population fearful of rising bread prices and bread shortages.
Kazakhstan is the sixth-largest grain producer in the world, most of its output being wheat. Its production declined dramatically following the demise of the Soviet Union, as the country and the agricultural sector were in disarray and short of funds. Since the late 1990s this trend has reversed and Kazakhstan’s agricultural output has been steadily increasing.
While the agricultural output has finally regained - or in some cases even surpassed - pre-independence peaks, the sector still faces major challenges in improving efficiency and upgrading quality. The yield of Kazakhstan’s fields is about half of that in the United States, and the farming sector almost exclusively focuses on primary products, having to import staples like butter and meat.
The reform of the sector conducted through privatization in the 1990s and the Land Code passed in 2003 have brought some improvements, especially compared to early 1990s. Most private farmers, however, are struggling and the sector is dominated by large enterprises affiliated with regional administrators.
The farming sector is still plagued by outdated processing and storage facilities, an inefficient transportation system, difficult access to export markets, and depends heavily on government assistance. However, despite grand rhetorics by government officials and periodic grand schemes launched by Presindet Nursultan Nazarbayev, there appears to be no sincere will to tackle these fundamental shortcomings that plague the sector. Government assistance, when rendered, has frequently been distributed based on connections rather than merit, and small farmers are often left with little hope.
In 1995, a government-owned enterprise called the Food Contract Corporation (FCC) was established to maintain state grain reserves and protect Kazakh farmers from price fluctuations resulting from droughts. Since its inception, the FCC has greatly expanded its role, and aside from its main objective of ensuring food security for the country, it became responsible for regulating the national grain market, investment activities in the agricultural sector, and grain exports.
This collection of tasks, however, has raised serious questions about its mandate. As Oraz Zhandosov, a prominent Kazakh economist and opposition leader, told the business weekly Business & Power, the FCC “suddenly started to conduct commercial purchasing. How that helps the local farmers, nobody can explain.” At the same time, Zhandosov claims that the enterprise makes enormous profits. “It uses its position as a national company to buy wheat from local farmers at local prices. Later, it exports this wheat at world prices, and pockets the difference.” The farmers, far away from international markets and with little financial resources to export their harvest on their own, have often no choice but to sell their grain at little or no profit to the FCC.
However, as the bread price inflation last November showed, the FCC has failed even in its fundamental task to ensure that Kazakhstan has enough grain to secure its own needs. “As the grain reserves ran out last fall and the prices of bread suddenly shot up, it turned out that the national reserve which was to be maintained by the Corporation, was empty”, Gani Kaliev, the chairman of the opposition party Auyl, told Business & Power.
Of course, the cause of the November bread price hikes and the current export restrictions is not a shortage of wheat. Last year, Kazakhstan enjoyed a record harvest collecting 22 million tons. Increased demand caused by growing consumption in Asia and diminished supply due to droughts in Australia and Ukraine and summer rains in northern Europe have pushed up global wheat prices nearly fourfold to a level at which Kazakh producers were able to profitably export their harvest. Naturally, most of them were more than eager to circumvent the FCC which has been purchasing domestic wheat for significantly less than overseas buyers.
Domestic wheat prices have not reached global levels, but they have grown significantly in recent months. Moreover, as large wheat traders anticipate seasonal price increases before new crop is sown, wheat is becoming more and more difficult to obtain on domestic markets. “There is enough grain but it is held by large traders in grain elevators as they wait for spring increases in the price of wheat”, claims Vitaliy Lagoda, Vice President of the League of Grain Processors and Bakers.
It is for situations like this that the FCC was established — to ensure that the country had adequate wheat supplies to meet the demand of the population. However, as the FCC busied itself profiting from the high world price of wheat, speculative forces on the domestic market have taken over. At this point, the FCC - and the government - do not have the credibility or actual wheat reserves to restrain the pressure on domestic prices.
In response to this situation, Kazakhstan’s Minister of Agriculture Akhmetzhan Yesimov announced that the government would limit exports and ask producers to sell a share of their harvest to the FCC at a predetermined price. These short-term remedies, however, are unlikely to affect the fundamental misbalances in grain trade which will ultimately be exploited by agricultural traders and speculators, with or without government’s blessing. The actions seem to serve mainly as a smoke screen to hide domestic problems of food supply such as inconsistent agricultural reform, ineffective land use and inadequate state support for farmers, along with state favoritism of the largest market players at the expense of small farmers and the general population.
The fact that the government of Kazakhstan is unable to provide the population with sufficient and affordable supply of staple food like bread even at a time of a record harvest speaks for itself. This will not change until Kazakhstan begins to pursue effective agricultural policies based on long-term business and economic principles rather than favoritism and populist short-term remedies. Moreover, the FCC needs to remain true to its original mandate to aid developing the farming sector and ensure sufficient and reliable grain supply. The current hybrid of a for-profit enterprise and a public institution presents an inherent conflict of interest that is bound to only undermine the sector and any advances it has made so far.
Tags: agricultural reform, agriculture, export ban, food corporation, ministry of agriculture, wheat Related articles
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