Kazakhstan’s Agricultural Sector. Grain Ties
The year 2007 was unfavourable for a number of the world’s major grain producers because of droughts in the USA, Canada and Australia and floods in central Europe. According to the International Grain Council, 1,568 million tonnes of grain was harvested in the 2007 agricultural season against 1,602 million tonnes in 2006, which reduced world reserves from 315 million tonnes to 259 million tonnes.
The situation was the reverse in Kazakhstan: the country reaped a record harvest of 20.1 million tonnes of grain at an average yield of 1,470 kg per ha. Inspired by such an achievement, Prime Minister Karim Masimov even said that “agriculture, and in particular grain production, is becoming a new locomotive of Kazakhstan’s development”. It seems that this “grain locomotive” should replace housing construction which was also accorded this high status in the past but is now stagnating. Moreover, the government believes, this should not only ensure a breakthrough in the country’s economic development but also enable it to join the group of the world’s top five grain exporters, which now includes Argentina, Australia, the EU, Canada and the USA, by 2010.
The Agriculture Ministry forecasts that in the medium-term Kazakhstan’s grain export potential can be increased by 50-60%. For example, the use of new grain production technologies alone may increase wheat production from 13 million tonnes to 19 million tonnes, while the average annual grain output to 26 million tonnes. As a result, the country will be able to export at least 12 million tonnes of wheat in the near future.
However, in reality the achievement of such an ambitious task raises great doubts. The large-scale intensification of grain production demands significant investment and will hardly be possible over the next few years. Moreover, world experience indicates that after a sharp increase in the price of grain a fall is very likely and that after a bumper harvest there may be a drought.
A Rather Difficult Job
In support of the ambitious task of joining the world’s top five grain exporters, officials cite the fact that Kazakhstan produced 1,078 kg of wheat per capita, which has enabled it to occupy first place in the world by this standard, ousting Australia. However, this criterion does not make it possible to judge the level of the development of agricultural technologies in the country. For example, according to a US Department of Agriculture report in February 2007, Russia and the EU produced a similar amount of grain per capita – 532 kg. However, at almost equal areas of cropland, the EU has a population of 500 million people and the average yield of 5,000 kg per ha, while Russia has a third of the EU population and 2.5 times smaller yield.
Kazakhstan can become a leader thanks to only two factors: poor harvests in the main grain-producing countries and favourable conditions at home. The government, having been dealt these two trump cards last year, assumed that it would now have only trump cards. However, even amateur card players know that having a pair (a queen and a king of the same suit) in one’s hand does not ensure victory in that round. So a bumper harvest and great interest by purchasers do not guarantee the same favourable situation in the future.
Of course, in the current season, which is unfavourable for the leading grain exporters, it is possible to try to seize “someone else’s” segments of the world market. However, it will hardly be possible to hold on to them: Western farmers enjoy sizeable state support in the form of subsidies and guaranteed state purchases, as well as protectionist measures that do not allow foreign producers into the domestic market. It is somewhat naive to assume that the Canadians and Australians will continue to suffer from droughts and the Europeans from floods. Moreover, analysts from Teopfer International (a German company that specialises in trading raw materials) forecast that the EU’s grain output will grow from 252 million tonnes in 2007 to 277-282 million tonnes in 2008. The fact of the matter is that record high prices of wheat and barley will lead to an increase in cropland through the abolition of the 10% reserve of farmland in the EU.
Of course, the climatic factor will have a defining impact on the harvest. In Kazakhstan, where 90% of cropland is in the category of risk farming, even an insignificant delay in the start date of spring sowing may reduce yield (given that 95% of wheat is sown in the country in spring). For example, spring droughts reduced yield by 24% in 2004 compared with 2003.
This factor may change the situation on the grain market radically. For example, droughts in Australia’s New South Wales, Victoria and Queensland in 1994-1995, cut the wheat harvest by 9 million tonnes, but it grew by over 150% to 23.7 million tonnes already in 1996-1997. As a result of droughts, Australia again lost half of its harvest last year. Nevertheless, Australia, which exports more than 17 million tonnes of wheat in good years, intends to export as much wheat as Kazakhstan will in this grain season, given that the countries have equal – 13 million ha – cropland!
A growth in gross grain harvest cannot be regarded as sustainable in Kazakhstan. An analysis shows that over the past 12 years grain yield fluctuations (the ratio of the maximum yield to the minimum) have a very substantial amplitude – 2.05 – in our country. For comparison, this indicator stands at 1.51 in Russia, 1.09 in Germany, 1.18 in Canada and 1.24 in Australia. For example, after growths in 2001 and 2002 when the per capita grain production reached 1,072 and 1,076 kg respectively in Kazakhstan, a sharp fall followed – 824 kg in 2004. In addition, high-quality wheat that is in strong demand on the market can be grown only in fallow fields in Kazakhstan. This means that when cropland lies fallow, moisture should be saved and land should be cleaned of pests, but this pushes up the production costs.
No-one is insured against unfavourable weather conditions, whereas Kazakhstan is also lagging behind grain-exporting leaders in terms of technology and material and technical provision in the agricultural sector. For example, the country has reduced the output of mineral fertilisers by 16 times since 1990. As a result, fields are receiving six to eight times less fertiliser than they should (over 19 kg of fertilisers were used per hectare in 1990), so the average yield is only 1,200 kg per ha.
The state of the domestic fleet of agricultural vehicles is appalling. In early 2007, the country had 134,800 tractors, 44,600 grain-harvesting combines and 15,600 harvesters, 47,500 lorries, 90,400 seeding machines and 348,900 tillage tools. However, 80% of them are obsolete, which is double the designated term of exploitation. Kostanay Region has managed to renew only 20% of its fleet of agricultural vehicles over the past five years, whereas 16% of the fleet of combines and 7% of the fleet of tractors have been renewed nationwide.
The need for active development of domestic agricultural vehicle building is obvious. The Pavlodar Tractor Plant, which used to produce more than 50,000 vehicles a year, is now bankrupt. Although the Avtospetsmash-Pavlodar company opened a line to assemble Belarus tractors last year, Kazakhstan also needs other types of agricultural vehicles. However, everything necessary to produce them is currently subject to VAT and, as a result, they are also sold with VAT. At the same time, importers of agricultural vehicles are exempt from this tax. Thus, from the outset, domestic producers are not competitive. Moreover, the general director of a research and production centre for mechanising agricultural production, Vladimir Astafyev, has said that 50% of foreign agricultural vehicles do not meet Kazakhstan’s legislation requirements, for example the law On Technical Regulation.
We should also bear transport costs in mind, because in order to bring a sowing facility from Canada the cost is about $20,000. This money is enough to buy a Belarusian-made tractor. The main problem is that it is a rare farmer who can now afford to buy a foreign combine or seeding machine to work on his 500 ha of land. Shortages of agricultural vehicles result in poor cultivation of soil (given that it has naturally low productivity in our country).
On top of problems with vehicles, our farmers also have problems with fuel and lubricants, whose prices are constantly increasing. Meanwhile, fuel contributes 30% to the total production costs of grain because twice as much fuel is used per one hectare of land in Kazakhstan as in Canada. Problems with vehicles, fuel and lubricants, funding, seeds and fertilisers increase the proportion of weed-infested farmland. Kazakhstan has now lost 25 million ha of tilled land.
A growth in the production costs of wheat will reduce its competitiveness and complicate its marketing, while the increasingly expensive fuel will force many farms to cut spring operations. However, the situation regarding wheat exports is similar to that of the oil sector, where exporting the raw material is more profitable than supplying it to the domestic market. That is why farmers will sell grain abroad even when they reap a poor harvest, leading to shortages and a growth in the price of bread in Kazakhstan.
Weak Legs of State Support
Over the past five years, the country’s agricultural sector received 205 billion tenge of budget funds and 800 billion tenge of private investment. Various programmes to develop the domestic agricultural market have been adopted. However, an analysis shows that state support stands at $83 per hectare of cropland in Canada, $107 in the USA, $500 in Finland and $855 in the EU, whereas it was only $16 in Kazakhstan.
As for state programmes, the quality of their implementation leaves a lot to be desired. For example, a three-year agricultural and food programme adopted by a presidential decree on 5 June 2002 was completed in 2005. We can say now that it produced no breakthrough in the development of the country’s agricultural sector. A majority of farmers did not receive subsidies envisaged under the programme because of non-transparent schemes of allocating funds, while the fleet of agricultural vehicles remained in critical condition, even though the farmers themselves did not make profits despite the current high world prices. At best, they are only managing to cover their costs, while only the owners of elevators and farmers with hundreds of thousands of farmland have made profits. The modern financial policy in the agricultural sector was and still remains a policy of “patching up the holes”. Numerous programmes to support the sector ignore the main problem – constant deterioration of the quality of farmland.
As a result, in order to create a hi-tech agricultural production not only is it necessary to adopt a proper programme to develop it but also to increase sizes and types of subsidies, reconsider insurance mechanisms in crop faming and achieve absolute transparency in allocating budget funds in the agricultural sector.
Self-sacrifice?
An important issue in developing the grain market is not growth in exports but an increase in domestic consumption, for example, through an increase in the numbers of livestock and poultry. However, in the current structure of cropland in which grains account for 85% of the total cropland (wheat 75%), tilled land can be expanded only at the expense of forage cultures which even now cannot ensure the fully-fledged development of animal farming. Amid the constant reduction in farmland sown by forage cultures, which fell by 3.2 times between 1996 and 2004, imports of meat are growing. In 2006 alone, Kazakhstan increased poultry imports by 40% and beef imports by 130%.
A question arises: what to feed the local average cow if the country meets only 30% of its demand for succulent fodder, while it does not produce quality hay or fodder beet at all? Moreover, the government has allocated 2.5 billion tenge for reducing the price of compound feed for producing beef, pork and poultry.
There is also another threat – in a situation of rising grain prices, regions that specialise in producing livestock may change their specialisation. A blueprint to develop the agricultural sector envisages that over 851,000 tonnes of meat will be produced in the country in 2010. As a result, without a balanced development of both parts of the agricultural sector, the fully-fledged development of it as a whole is impossible. It is precisely livestock husbandry that should play a stabilising role, smoothing out the consequences of poor harvests in plant farming.
In the medium term, growth in domestic demand for grain may increase not only thanks to growth in domestic consumption for fodder purposes, but also the production of bio-ethanol. Kazakhstan intends to set up enterprises to produce up to 1 billion litres of bio-ethanol by 2010. Moreover, it intends to double this figure and become one of the world’s leading exporters of it in the future.
Despite the fact that the government expects that only low-quality wheat used as livestock fodder (1 million tonnes) and free leftover grain (1.9 million tonnes) will be needed to produce bio-ethanol, the construction of even a few such plants will significantly change the regional grain balances.
Some local specialists believe that the country does not have the potential to considerably increase grain exports now and will not even have it in the future. The director of the Northwestern Agricultural Research and Production Centre, Valentin Dvurechenskiy, told the Kazakh Grain Union 2006 conference that in order to ensure that the nutrition of Kazakhstan’s population is fully balanced, that the country maintains strategic grain reserves and manages to export 5-6 million tonnes of high-quality grain annually, the country needs to produce 26.5 million tonnes of grain a year. Some agriculturalists believe that complicated soil and climatic conditions and the existing production potential make it impossible for Kazakhstan to grow more than 20 million tonnes of quality grain a year.
Paths We Choose
Logistics costs which account for up to 50% of the final price of grain also reduce the competitiveness of Kazakh wheat. Naturally, this has a negative impact on the economic feasibility of grain exports, which is affected by the remoteness from open-sea ports, a shortage of train cars, transit and export tariffs and additional charges for transiting through neighbouring countries. This issue has been repeatedly raised at meetings of the CIS and the Eurasian Economic Community but without any progress at all so far. Both Ukraine and Russia provide their producers with support when they reap a bumper harvest, often to the detriment of the interests of Kazakhstan, which is regarded as a competitor on the world grain market.
Several dozen countries now import Kazakh grain: these are mainly CIS, Middle Eastern and EU countries. The grain markets of China, Iran and Afghanistan are becoming increasingly promising for Kazakhstan. However, large-scale entrance to these markets requires the improvement of transport links. In particular, the cost of transporting grain from the main grain-growing regions to the country’s only sea port of Aktau on the Caspian Sea makes this grain very expensive.
Moreover, the transport infrastructure’s limited capacity has meant that the autumn shortages of train cars to transport grain resulted in lost profits for many Kazakh exporters and reduced consumers’ trust in them. Local traders seem unable to manage this problem without the government’s support.
Many countries provide support to grain exports in the form of subsidies, reduced transport tariffs and special tax breaks. This is often the factor that enables them to dominate the world market. For example, Canada and Australia subsidise the shipment of grain to export sea terminals. As a result, we will not be able to manage without a comprehensive state programme to encourage grain exports.
Another issue that needs attention is the need for integration processes. A hike in the price of food grain is causing increasing concern at present among the main grain producers and exporters. In this connection, it is feasible for Russia (which exports about 12 million tonnes of grain a year), Ukraine (about 10 million tonnes) and Kazakhstan to coordinate their efforts on the grain market and create an OPEC-style cartel. This grain union will enable exporters to regulate export volumes and, as a result, influence the world prices, and make it possible for Kazakh grain to obtain an easy access to the European market.
The Cost of the Candle
We can conclude that the government’s ambitious aim to secure a place for Kazakhstan among the world’s top five grain exporters will have serious negative consequences for the country’s economy as a whole. Firstly, the Soviet planning principle of proceeding from what has been “achieved” is very dangerous: “existing preconditions set development goals and guarantee their achievement.” Secondly, if the main grain-producing countries increase subsidies for their farmers, the market will collapse. In this case, Kazakh traders will end up in a situation when they will be able to sell their grain only when they reduce export prices to the level of local prices or below. Thirdly, aiming to export grain poses threats of grain shortages on the domestic market, a hike in the price of bread (as happened last autumn) and a further reduction in the fodder basis for livestock and poultry (which will damage animal husbandry and poultry farming). This may produce quite negative results both in the economic and social spheres.
Вy Sergey Smirnov
Table of contents
Extractive Sector: Time for Action Editorial Review
Oil Chronicles. Wind of Change Editorial
Kazakhstan’s Agricultural Sector. Grain Ties Sergey Smirnov
Food Market. Not by Bread Alone… Editorial
Kazakhstan's Ratings: Post-mortem Editorial
Stock Market: RFCAsums up Results Chingiz Kanapyanov
The Mergers and Acquisitions Market: M&A Kazakh Style Sergey Frangulidi
Stock Indices: Fighting All Winds Tatyana Kudryavtseva
