BEST WAY TO CURB PRICE FLUCTUATIONS

The global food crisis, now in its second year, has worsened significantly with the outbreak of the war in Ukraine and the anti-Russian sanctions. Russia's retaliatory measures, which have restricted the supply of fertilisers, grains, oilseeds and other raw materials, have further worsened the situation. Dependent on food wheat imports, Azerbaijan, like most of the regional countries, has also faced the negative factor of imported inflation. High prices of imported grain and flour caused another round of bread price hikes in the third decade of August. Azerbaijan intends to overcome this dependence by increasing the level of wheat import substitution to 80% by enlarging farms, introducing advanced agricultural technologies and economical irrigation systems, as well as developing arable lands in Garabagh.

Harvesting decline

In the second half of August the harvesting of spring crops was completed in Azerbaijan. According to the State Statistics Committee, together with the June harvest of winter crops, the final harvest in 2022 reached about 2.85m tons of grain, including almost 1.732m tons of wheat, which accounted for about 60.8% of total production. The Ministry of Agriculture will sum up the final data on the grain crop later, after the harvesting of leguminous crops and maize in some mountain and foothill regions. However, we should not expect significant differences in the statistical data, as by the second decade of August 98% of the 955,200 hectares of sown area had been harvested.

Rainy and cold weather in the spring and early summer delayed the winter harvest schedule by more than two weeks. In turn, the lack of irrigation water in a number of lowland areas also had a negative impact on average yields, dropping to 3.4 tonnes per hectare.

Nevertheless, a number of high-tech agriculture parks and specialised grain farms with a developed irrigation system have performed very well in the current year. Thus, the highest yields of 4-4.47 tonnes per hectare have been recorded in the districts of Hajigabul, Barda, Tovuz, Sabirabad, Tartar, Saatli, Aghjabedi, Aghdam and Samukh.

However, this year's yields were slightly behind to last year's figures. In 2021, average yields held steady at 3.18 tonnes per hectare and yielded about 3 million tonnes of cereals, including 1.9 million tonnes of wheat. Yet it was impossible to repeat the successes of 2018 and 2019, when the country had record cereal harvests.

Negative trends

The current situation in Azerbaijan is going on amid the global food crisis continuing for the second year in a row. Last year, the UN Food and Agriculture Organisation (FAO) forecasted the probability of decline in production of many types of cereals, including wheat, due to drought and other unfavourable climatic changes. Cereal prices have been rising since spring and summer 2021, due to a surplus of commodities and agricultural commodities caused by serious monetary policy mistakes in the US and the EU. The injection of over $2 trillion of unsecured funds to bring economies out of the pandemic crisis by the autumn of last year has boosted monetary inflation sharply. This was felt in all countries of the world, including our region, with the beginning of a marathon of rising consumer prices for food, particularly for wheat and cereal products.

Moreover, to regulate the domestic market and maintain stability of domestic wholesale and retail food prices, Russia, Kazakhstan, India, Argentina and a number of other countries introduced export quotas and additional customs duties on exports of grain, fodder, fodder supplements, oilseeds and various fertilisers from the country since late 2021. And with the start of the Russia-Ukraine war in February 2022, these trends only expanded. Almost all countries in the region imposed restrictions on exports of major agricultural raw materials and foodstuffs. The military conflict also resulted in restrictions on shipping in the Azov and Black Seas, which led to a blockade of Ukrainian ports and further exacerbated the global food crisis. Despite the so-called grain corridors initiated since late July thanks to Turkey's diplomatic efforts with UN support, the situation is still far from stable. While last summer the cost of transportation of one ton of wheat from the Black Sea to the Mediterranean ranged between $300, this figure is no lower than $400-410.

According to FAO, as a result of poor harvests in India, Northern European regions, as well as due to a shortage of water for irrigation in Syria, Iraq, Egypt and other countries of the Middle East and Africa, there is an increasing shortage of cereals. In turn, due to export quotas and higher customs rates on wheat exports from Russia and Kazakhstan, many developing countries are experiencing difficulties with grain imports and face the threat of famine.

Armenia, Georgia, Moldova, Kyrgyzstan and Tajikistan are also experiencing serious problems due to rising grain prices and shortages, where the level of domestic production is extremely low, so the lion's share of food wheat and fodder has to be imported, including from Russia.

Imported inflation

"As a result of the Russian-Ukrainian war, many countries are physically unable to provide their population with wheat, grain, because the main exporters of grain are Russia and Ukraine," President Ilham Aliyev said recently during a visit to Basgal village in Ismayilli district. He underlined that, as a result of the agreements reached with Russian partners, the necessary volumes of grain and fertilizers are exported to Azerbaijan, and there is no deficit in imports.

A deficit of grain on the domestic market has been avoided, but due to a significant increase in duties on Russian export grain, the final price of imported wheat and flour in Azerbaijan has increased noticeably. Our country has to import about 38% of hard bread wheat from abroad. Last year alone, Azerbaijan imported about 1.1 million tons of wheat, and Russian producers accounted for about 90% of all deliveries. Such dependence on the Russian market carries serious risks. That is why in 2022 the Azerbaijani government took a number of steps to change the geography of imports, having multiplied purchases in Kazakhstan. In particular, the export of Kazakh wheat to Azerbaijan in 1H2022 increased by 8 times - up to 182,700 tons. However, expensive Russian grain still accounts for the bulk of imports.

Since late last year, Azerbaijan has taken various steps to optimise the domestic grain market and prevent risks of imported inflation. These include the facilitation of the export of strategically important food wheat, the extension of the VAT exemption period, the maintenance of a zero duty for grain importers, subsidies to flour mills and the establishment of the State Reserve Agency. To maintain domestic market stability, a Cabinet of Ministers decree was adopted in March restricting exports of basic foodstuffs and raw materials from the country.

All these measures have helped to keep bread and flour prices within acceptable limits: the cost of traditional mill bread - a loaf (0.65 kg) of bread was on average fixed at ₼0.65 during the seven months of this year.

However, already by July the average price of a ton of imported food wheat in Azerbaijan reached $402.5, having increased by 67% compared to last year's July. Grain exporters' transportation and logistics costs have also risen markedly; a year earlier, tariffs for electricity, water, fuel were raised, all of which were included in the cost of production.

As a result, the wholesale market price of a 50-kilogram sack of flour rose from ₼35.9 (in January) to ₼40.7. By the second decade of August, Azerbaijani bread producers were forced to increase the retail price of mill bread by an average of ₼0.05 (to ₼0.70). Depending on the weight and variety, other types of bread also rose in price.

At the same time, due to the rise in the price of feed and fodder in Azerbaijan, there is also a trend for meat prices to rise by around 10%.

The best thing to do

It is clear that the key vectors for achieving sustainable food security in Azerbaijan should be the expansion of large-scale commercial grain production and a gradual reduction of external dependence.

Today Azerbaijan produces on average about 3 million tonnes of grain annually, which largely covers the demand for coarse grains. This includes approximately 62% of domestic consumption of baking wheat. In order to increase this volume, the President signed a decree on a number of measures to improve the level of self-sufficiency in food wheat. According to the decree, as a pilot project from 2023, subsidies will be granted for 5 years to grain-producing farms, which use modern irrigation systems and have concluded appropriate contracts for the delivery of grain to the State Reserves Agency and to milling companies. It is expected that the cost of about 40% of the irrigation systems purchased will be subsidised by the state, with the remainder to be provided through soft loans.

Considering that Azerbaijani farmers have suffered from a shortage of high-yield sowing seeds of wheat, barley and other crops, it is no less important to stimulate the increase in the domestic production of such seeds. Alas, for the time being, elite sowing seeds are mostly imported. In September, the State Seed Fund of Azerbaijan intends to import 1,200 tons of seeds of elite varieties of wheat from Krasnodar region of Russia.

Another equally challenging task is to address the issue of irrigation water shortages. In particular, it is important to prevent the huge water losses (over a third) in distribution irrigation canals. Most of them are earthen and need to be concreted or the introduction of modern technologies (e.g. Israeli, Turkish) using waterproof polymer coatings. It is also important to ensure gradual replacement of water supply to fields through ditches by introducing advanced water-saving technologies such as dripping, aerosol spraying, fine-dispersed sprinkling, and pivot systems everywhere. A number of large farms and agricultural parks in Azerbaijan are actively using economical irrigation systems, but these technologies are expensive and unaffordable for a significant proportion of smallholder farmers.

Specialists believe that with the upgrade of the irrigation network, as well as the introduction of other farming measures and subsidies for farmers, it is estimated that average yields can be increased from the current 3.1-3.2 to 4.5-5.0 tonnes per hectare.

It is also planned to involve the Azerbaijani lands liberated from the Armenian occupation: in total Garabagh and East-Zangezur economic regions host 1 million hectares of lands suitable for agricultural purposes, including 128,000 hectares of irrigated lands, the most suitable for grain production. Today, repair works are carried out there on Kondalanchai-1, Kondalanchai-2 and Ashaghy Kondalanchai reservoirs, included in the common system. Use of these water resources will make it possible to irrigate 6,200 hectares of sown area in Fuzuli district. In total nine water reservoirs are planned to be restored or built from scratch on the liberate territories. There are plans to reconstruct the Sol Sahil canal of the Terterchai River, and restore the water canals in the districts of Aghdam, Fuzuli, Jabrayil, Zangilan and Gubadli.

When will Azerbaijan be able to significantly reduce its dependence on grain imports? According to President Ilham Aliyev’s key medium-term objectives, "if we can raise the local food wheat production to 80% of the domestic demand in about 3-4 years that would be an excellent result".

Thus, Azerbaijan will be able to achieve another major economic victory, ensuring maximum food security independent of the situation or the decisions of other countries.