15 August 2020

Saturday, 02:22

CURRENCY

REGIONAL GRAIN CROPS HUB

Azerbaijan is an important link in the supply chain for the transportation of Russian and Kazakh grains to the Middle East

Author:

15.06.2020

Harvesting of winter crops started in Azerbaijan in early June. According to forecasts, favourable weather conditions contribute to the growth of grain production. Large-scale works have been carried out in Azerbaijan to enlarge the technical basis of grain-growing enterprises. This ensured a record level of grain crops harvested in the last two years. As a result, the level of import substitution for cereals has now increased to 74%. Although Azerbaijan still has to import wheat, in the near future it is planned to achieve sustainable level of self-sufficiency. The latter is extremely important, especially given the plans to establish an OPEC-like international body for grain crops to regulate market prices, as discussed in neighbouring exporting countries.

 

Waiting for a new record

At the beginning of June, President of Azerbaijan Ilham Aliyev visited one of the farms in the village of Hindarkh in the Agjabadi region and attended the ceremony of the start of harvesting season. President praised the farmers for the yield of 3.2 tons per hectare due to competent and timely agricultural practices, use of modern equipment and crop rotation, etc., despite dry weather in recent years. A similar picture is observed in other grain-growing regions of the country as in the previous two years. In 2018, 3.3 million tons of grain and leguminous crops were harvested, which is 13% higher than in 2017. And in 2019, record levels were achieved - 3.5 million tons, including wheat (2.2 million tons).

International experts believe that it is likely to achieve high yields this year too. They forecast production growth in the Caspian region due to heavy rains in spring. These forecasts are justified, since a sufficient amount of precipitation was observed in April and partly in May in the foothills of Azerbaijan. This contributed to the stable growth of cereals during the vegetative period. Although drought is observed in a number of low-lying regions, on average, we can expect an increase in the productivity of grain-sowing farms.

According to the Ministry of Agriculture, over 1 million hectares are sown with grain in the country, about 2/3 of which is wheat, and the rest is sown with barley, oats, corn and other crops.

The final outcome of the current grain harvest can be seen after the spring harvest in the second half of August. But experts believe that if favourable weather persists, the total yield, taking into account spring crops (wheat, oats, corn and legumes), can again reach a symbolic mark of 3.3-3.4 million tons.

Such positive forecasts are based on a number of factors, including the availability of the necessary amount of harvesting equipment for farmers, commissioning of several seed processing plants, creation of fifty large grain farms and specialised agricultural parks. So, the overall grain harvest is 1.5 times higher than the national average. According to international experience, the enlargement of grain farms is the most optimal way to increase volumes and reduce the cost of production. On large areas, the costs of maintaining and operating agricultural machinery, fertilising and pest control, irrigation and other agricultural activities are significantly reduced. “The yield in agricultural parks is 4-5 tons per hectare and exceeds the average indicators in grain production (3.2 tons per hectare). This is also very important, since the cultivated areas in Azerbaijan are somewhat limited, and therefore it is necessary to pay special attention to increasing yields,” President Ilham Aliyev said during the opening ceremony of the Agstafa Agricultural Park at the beginning of 2020.

This year, the Reserve Fund of the state budget will provide ₼5 million and farmers will receive lump sum payments of ₼60 per hectare for the purchase of seeds for re-sowing corn. According to the chairman of the Agency for Agricultural Lending and Development, Mirza Aliyev, after harvesting by the end of summer, hybrid corn seeds with a growing season of 80-90 days can be re-sown on about 100K hectares of land in low and foothill areas of the country. From each hectare of sown area, we can get 4-5 tons of products. This, of course, will positively affect the overall grain harvest in the country.

 

OPEC for grain crops

Admittedly, the trend of increasing grain production in Azerbaijan has become clearly visible in the past few years after two devaluations of the Azerbaijani manat in 2015 and a corresponding increase in prices for wheat imported from Kazakhstan and Russia. The government of Azerbaijan targets a phased reduction in the share of grain imports by increasing yields and lowering costs in local production. Success in this direction is quite obvious. Over the past five years, the level of import substitution for cereals has increased from 66% to 74%. Moreover, imports in the feed segment decreased tangibly and the share of local wheat, including hard-growing varieties with a high level of gluten, increases gradually.

The government considers it necessary to continue work to further strengthen import substitution in grain production. This is a right approach given the unstable situation in the global food market and, in particular, the recent events associated with the coronavirus pandemic. During this difficult period, a number of states imposed restrictions on food exports in order to protect domestic markets. So, Russia and Kazakhstan temporarily limited the supply of wheat, flour, buckwheat, oilseeds, etc. According to experts from the World Trade Organization (WTO) and the UN Food and Agriculture Organisation (FAO), this trend has pushed prices up in the global food market and has a very negative impact on developing countries' access to grains and other basic food products.

Therefore, the need to create an international structure that would unite the leading grain-growing countries and could regulate the prices of grain crops began to be actively discussed. Back in October 2019, during the food exhibition ANUGA-2019 in Cologne, Deputy Prime Minister of Russia, Alexei Gordeyev, suggested the idea of creating an international organisation similar to OPEC in order to ensure the stability of the grain market. In his opinion, the largest grain producers, including Russia, Kazakhstan, the EU countries, the US, Canada, Argentina, Australia, and joint efforts to coordinate grain pricing policy and solve the hunger problem on the planet could accelerate the establishment of the “grain OPEC”.

“Russia and Kazakhstan are among the ten world wheat exporters. Their share in world wheat exports is 3%. The establishment of such an international body may be an interesting initiative to ensure the stability of the grain market and coordinate prices. However, it is necessary to think about how much this complies with WTO standards and to what extent the interests of small players will be taken into account,” Kazakh President Kassym-Jomart Tokayev.

A number of experts consider the idea of creating a grain cartel unviable. So, according to the representative of the Kazakh Grain Union, Yevgeny Karabanov, grain producers have too different markets with different levels of prices and demand. “The main sales markets for Russia are North Africa and the Middle East, with Kazakhstan selling predominantly to Central Asia. It turns out that the cartel is created to prevent increased competition in certain markets and keep prices down,” the expert believes.

EU countries are more critical on this issue. According to European media outlets, the Russian proposal is generally regarded in Europe as Moscow’s attempt to take control of international food markets. Judging by the attitude of the UN, FAO and WTO towards this issue, the initiative to create a “grain OPEC” is unlikely to find support in the world.

 

Advantageous position of Azerbaijan

Azerbaijan has drawn the necessary conclusions from the instability in the global grain market observed during the pandemic and the protectionist policies of some states. The country is trying to ensure self-sufficiency in bread supply. It is planned to achieve this not only through the optimisation of the production base, but also through the integration of Azerbaijan into regional transportation routes for Russian and Kazakh wheat, and the establishment of the corresponding infrastructure in the country.

Many experts believe that the routes passing through Azerbaijan are optimal for safe and convenient grain logistics. “The role of Azerbaijan in the inter-regional grain logistics is exceptional: the country's unique geographical position provides for a wide transit potential, turning Azerbijan into an important player in the regional grain turnover," Alexander Korbut, Vice President of the Russian Grain Union, said.

There is no doubt in Azerbaijan’s position as a transit country, given the infrastructure potential created in recent years. Over 30 large granaries have been created in the country, including the Baku Grain Terminal (BGT) commissioned in April 2007. It is equipped with modern equipment that makes it possible to temporarily store up to 15,000 tons of grain crops with a throughput capacity of 1,500 tons per day.

In the second half of 2020, the construction of the Astara Grain Terminal, the largest grain terminal in the region, will be completed in Astara. “The throughput capacity of the terminal will be 500K tons of grain per year. By 2021, it is planned to increase this indicator to one million tons per year. The terminal’s capacity for one-time grain storage will be 60K tons,” Farid Hasanov, Operations Manager of Astara Grain Terminal, said.

The Astara terminal is planned to be involved in the transportation of Russian and Kazakh grain in to Iran and further to the Gulf region. Since Iran is one of the top three importers of Russian grain, the western branch of the North-South corridor should provide direct rail links through the Samur border with further access to Iran, to the cities of Rasht and Gazwin. An advantage for grain forwarders will be the provision of a 50% discount on transit to Iran through the North-South route.

In addition, after the signing of the trilateral memorandum in May 2019 in Ankara, Russia actually joined the Baku-Tbilisi-Kars project. Russian grain is already shipped through this route to importers in Turkey. For the same purpose, a joint Russian-Azerbaijani company has been established to transport grain and lumber, which is the only structure in the region that has an extensive wagon fleet for transporting grain.

Thus, the availability of an extensive transport and logistics infrastructure makes Azerbaijan the gates for transporting grain crops between the grain markets of the Black Sea region, Central Asia and the Middle East. As a transit country, Azerbaijan may eventually become a large regional grain hub, independently purchasing, storing and reselling wheat and flour. In other words, we can expect the establishment of a regional grain exchange hub in Azerbaijan in the near future. Operating on a large-scale grain market, the country will receive additional resources to ensure its own food security as well.



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