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 KAZAKHSTAN International Business Magazine №1, 2008
 Food Market. Not by Bread Alone…
Food Market. Not by Bread Alone…
The continuing growth in food prices that started in summer 2007 has shown that Kazakhstan cannot guarantee enough food for itself. The prices of bread, vegetable oil, meat, dairy products and sugar that make up the basis of a standard food basket of Kazakhs went up all over the country. The government had to take administrative measures to stabilise food prices and saturate the domestic food market.
The government was fully preoccupied with the stabilisation of domestic prices of petroleum products and foodstuffs and set up two working groups for this. The first group - for petroleum products - was headed by Energy and Mineral Resources Minister Sauat Mynbayev, while the other group - for foodstuffs - by Agriculture Minister Akhmetzhan Yesimov.
Deputy Prime Minister Umirzak Shukeyev said at the time: “We have accumulated experience in regulating the domestic fuel and lubricants market through creating stocks of petroleum products in all regions.” He added that the authorities intended to use all market and administrative resources to fill this market and prevent a hike in prices.
The government continued to purchase grain through the Grain Union to saturate the food market. Memorandums signed between this association and regional governors “will be extended until the next harvest”, Mr Shukeyev said.
The government also decided to control two other items – vegetable oil and sugar. “In order to avoid imported inflation with goods, we are setting up stocks of these products and are buying these products abroad rather than in the country,” Shukeyev specified. He also said that the main method of government regulation would be the liberalisation of imports and the abolition of customs duties on foodstuffs, as well as preparing stocks for timely food interventions. The deputy prime minister assured that regional governors had already been acquainted with the rules for doing this.
Already Not Safe
Experts believe that decisions taken by official Astana are correct in theory. Another issue is as how they will be fulfilled in practice. For example, a senior economist at USAID in Kazakhstan Michael Boyd believes that while drafting mechanisms the government should bear in mind that there are two prices of foodstuffs – international and domestic. “Astana cannot influence the growth in world prices, and this is a fact. If this global growth affects local prices the government can only, for example, buy goods abroad and sell them to the population at reduced prices,” Mr Boyd said. However, he stressed that this sort of subsidy should be paid from the budget. “At initial stages these measures will alleviate social tension and will indeed make it possible to reduce prices of the main products. However, on the other hand, it is important that the government’s policy to ensure food security in no way should contradict the interests of producers,” the economist warned. He thinks that the government has to clearly realise that if private business is now forced to sell products at unattractive prices, it will reduce productivity and profits. That is why government policy should take into accounts the interests of both the population and producers.
Another approach has to be adopted for wholesale traders. “The situation with food prices emerged in the past six months needs to be thoroughly studied by antimonopoly bodies. It only seems that the hike in prices is linked to world trends, but actually on many products there is no competition which leads to an uncontrolled increase in prices of goods,” Mr Boyd concluded.
The sharp, uncontrollable growth in prices raises the very question of Kazakhstan’s food security. This term means the government’s ability, which is not limited in time, to ensure the population’s access to foodstuffs in amount and quality that are enough for the healthy physical and social development of each individual in normal conditions and also the minimum amount and quality necessary to maintain health and the ability to work in emergency food situations.
According to Food and Agricultural Organisation standards, a country is “self-sufficient” in food products if food imports do not exceed 15% of the total needs. By these criteria, Kazakhstan does not have food security. In the country, 40 to 60% of the demand for most products in the food basket is covered by imports and some of them are 100% imported. Only in terms of bread and bread products do we provide enough for ourselves, as well as supplying neighbouring countries.
The chairman of the council of the Kazakh Association of Customs Brokers, Gennadiy Shestakov, estimates that Kazakhstan now imports up to 20% of beef and pork consumed in the country, 60% of fish, up to 30% of dairy products, 80% of cheese, 50% of sunflower oil, up to 50% of fruit and vegetables and 40% of potatoes. According to customs statistics, the country imported 1.604million tonnes of foodstuffs worth $1,117m in the first 10 months of 2007, while exported 6.882 million tonnes worth $1,319m, 99% of which were grain and flour.
Ademi Yerasylova, researcher at the economic research department of the Kazakh Institute for Strategic Research under the Kazakh president, believes that Kazakhstan imports about 25% of foodstuffs it consumes. The country is self-sufficient only in terms of the basic needs of the population. She also said that imported goods were cheaper and of better quality than local products.
One of the main reasons for this situation in the Kazakh agricultural market is a disparity in a growth in prices of industrial and agricultural products. During the reforms in the 1990s, prices of industrial products grew four or five times faster than those of agricultural products. The contraction can also be seen from the contribution of agriculture to GDP: it fell from 26% in 1991 to 5.5% in 2006.
Meanwhile, the deputy chairman of the Atameken Union, Viktor Ivanov, believes that measures proposed by the government are not new. “These initiatives have been produced in Astana for more than a decade now and each time they approach to them as if it is the first time,” he said. In the sphere of petroleum products, the government should have solved the problems a long time ago, drafting a systematic approach which would have set rules for everyone for once and for good. “In the government they know which measures to take and for whom in order to prevent oil companies and refineries and traders and consumers of fuel and lubricants from facing the same problems every year,” Mr Ivanov thinks. It is possible that the government should set quotas for exporters of oil and petroleum products, forcing them to sell, for example, 20% of oil refined on the local market.
Mr Ivanov believes that Astana should have adopted developed countries’ experience in the food industry a long time ago and created conditions for local producers to enable them to sell their products at prices matching local incomes. “If producers cannot sell products at reduced prices, the government should subsidise them or pay compensation. However, this should apply only to the essential goods that make up a food basket,” Mr Ivanov said.
When Tomorrow Comes
Gani Kaliyev, the chairman of the Auyl social democratic party, believes that agriculture is not a market sphere. In many countries it is under the government’s protection because ensuring food security is a crucial issue. The output of food products is currently lagging behind the natural growth of the population. About 40% of the planet’s population is undernourished and this trend will only be worsening. As a result, people have to learn to produce agricultural produce not only in favourable but also in harsh climatic conditions. Mr Kaliyev said that the biological potential of soil in the USA, Latin America, Europe, the Middle East and the Asia-Pacific is up to three times higher than that of soil in Kazakhstan. This means that our country reaps two-three times less harvest from one hectare of farmland. “When we join the WTO, Kazakhstan will face open competition which our farmers will not be able to withstand because even now they cannot cover their costs,” Mr Kaliyev said.
Political analyst Dosym Satpayev agreed with him: “Our agriculture in terms of prospects is not in the best state. When we join the WTO and our competitiveness will fall, our agricultural producers will be destroyed. We will drown in imports.” He said that the country’s food security was threatened by its unpreparedness to join the WTO. “We will not be able to agree on subsidies and preferences for agriculture, so Kazakhstan will be fully dependent on the world food market,” the analyst believes.
Mr Kaliyev thinks that the country’s authorities are not providing sufficient support to the agricultural sector. “In all countries, even those with favourable climatic conditions, 20-80% of the total value of farming produce of the agricultural sector is subsidised, while our country only subsidises 1.5-2%. No-strings attached subsidies for a hectare of ploughed land total $300 in the USA, $400 in the EU and only $5 in our country,” he said. This distortion should be eliminated because the country is already facing a sharp growth in good prices now. When the government started to establish reasons, it turned out that many goods became expensive on the world market. Kazakhstan turned out to be very vulnerable in this situation. “That is why our country should increase subsidies for the agricultural sector to at least 40-50%. In addition, the domestic production of foodstuffs should be developed, mainly the essential items such as bread, meat, milk, vegetables and fruit so we will be self-sufficient. Only then will the country not depend on imports,” Mr Kaliyev said. Moreover, subsidies should be offered to all spheres of agricultural production. Not only will this policy ensure food security but will also create new jobs and help the rational settlement of people in the country, increasing the competitiveness of local farming produce.
No Need to Reinvent the Wheel
In order to improve the situation the government should stimulate local production, including through putting obstacles to imports. This was the idea Prime Minister Karim Masimov announced at a recent government meeting: “The trend of the past two or tree months is that ‘hot money’ was channelled into the food market. Sharks arrived in this market, which is why we should take proper measures. I do not rule out any protectionist measures or subsidies.” The prime minister also said that “food inflation was imported to Kazakhstan in the short-term”.
However, in the near future the only measures to protect the market and encourage domestic production will be customs regulation and government subsidies for agricultural producers.
UN experts estimate that the level of the Kazakh domestic market’s accessibility to imports is very high. For example, this level is two to four times higher than in developed countries which rigorously protect their markets and encourage the advancement of their goods abroad. The country is currently applies five customs rates to agricultural produce: 0%, 5%, 15%, 20% and 30%, and these rates cover 2,239 items of imports. The average-weighted customs rate is 12.2% for agricultural products. This is one of the world’s lowest indicators. In comparison, it stands at 35% in Bulgaria, 34% in Latvia and 15% in China.
Ms Yerasylova said that at the initial stages it would be reasonable to increase customs duties on food imports by 15-25% for various groups of products so the average-weighted rate reaches 18-20%. In the future, the government should set up a system of state monitoring of the economy in terms of food security and a system of encouraging and subsidising food production bearing in mind regional specialisation. The expert said that all these programmes had already been drafted and launched but they were inefficient because they had the wrong objectives.

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