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The COVID-2019 pandemic and the ensuing economic crisis, severe drought and declining bioethanol production have reshaped the global grains market reducing supply in a number of areas. The UN Food and Agriculture Organization (FAO) has lowered its August forecast for world grains production by 25 million tons in comparison with July 2020 mainly due to a drop in feed grain crops. Experts predict continued volatility in the grains market both due to protectionist measures in a number of countries and for objective reasons related to natural, demographic and social factors.

Pandemic is to blame

The established ratio of supply and demand in the global grains market began to change back in February 2020, when the global prices began to decline due to the disruption of transport and logistics chains and reduced demand as a result of the COVID-19 pandemic. The March fall in world oil prices also contributed to this process.

Remarkably, similar processes were observed after the 2008 financial (2008) and energy (2014) crises, when a sharp decline in oil prices made it commercially unprofitable to process cereals and oilseeds into bioethanol and biodiesel. According to the UN, such sharp market fluctuations in the past led to a global reduction in the supply of grains and a number of other agricultural crops and, as a result, to higher prices for basic food increasing hunger in the most undeveloped countries of the world.

However, in addition to the fuel crisis, a number of other factors have also contributed to the grains market this year, which changed the global grains balance. In spring, the International Grains Council (IGC) predicted that corn production in 2020 will reach a record high (almost 1.17 billion tons) while wheat - 766 million tons. Positive forecast of the IGC experts was based on the perspective higher corn yield, as well as an increase in the consumption of feed grains by livestock and poultry enterprises. However, the recession caused by the pandemic sharply reduced the demand for compound feed, food sector and the processing industry.

Grain producers in a number of countries have responded by reducing the sowing of spring crops, in particular fodder crops. According to recent FAO data, in August, the world production of feed grains was 1.5 billion tons or 23.5 million tons less than in July primarily because the US farmers reduced corn acreage compared to the spring forecast. As a result, the country lost 26.3 million tons of this forage crop. In turn, the FAO lowered its forecasts for grain production, including forage in the EU and Ukraine, where drought during vegetative growth and unfavorable weather conditions during grain harvest caused the deterioration of crop species. Indonesia also had poor indicators this year, where the estimated production indicators and the forecast for cereals for 2020 were adjusted downward.

However, according to FAO estimates, the decline in forage production in the United States, Europe and several other countries is largely offset by higher forecasts for corn production in Argentina and Brazil, where record high harvests are expected.

As for milling wheat, there was also a decrease in harvest mainly in Argentina, the EU and the USA - by 6.4 million tons compared to July. Accordingly, the global FAO forecast in August fell to 760.1 million tons, which is slightly lower from a fairly high level in 2019.

During the coronavirus pandemic, another negative factor affecting the global grains market has intensified. In this difficult period, Russia, Kazakhstan and a number of other states, in order to protect domestic markets, introduced restrictions on food exports, including temporarily limiting the supply of wheat, flour, buckwheat, oilseeds, etc. According to experts from the World Trade Organization (WTO) and FAO, a similar trend pushed prices up for bread, flour and other basic food products in the production chain. Apparently, the trend will continue. The Russian Ministry of Agriculture has recently announced that they plan to make the grain export quota mechanism permanent and the parameters of the quota for the next year can be determined after the harvest. “Russian grains are in high demand globally, and the absence of export control measures could potentially lead to a shortage of grain products on the domestic market,” Russian Minisetr of Agriculture Dmitry Patrushev said.

Despite the drought, the drop in feed grain production, export quotas and other negative factors caused by the pandemic, global forecasts for 2020 are generally good. So, according to the FAO report published recently, it is expected that given the harvest in the countries of the Southern Hemisphere, the overall volume of grain products will reach 2.8 billion tons, which is 58 million tons more than the corresponding indicator of 2019.

Azerbaijan: problems with irrigation

Unfortunately, Azerbaijan could not repeat the accomplishments of 2018 (3.3 million tons) and 2019 (3.4 million tons) this year. The main reason for the production decline was a severe drought, which decrease the water level in the Kura and Araz rivers, as well as in many water reservoirs, which caused a shortage of irrigation water in a number of grain-growing regions of the country. The balance in the country's grain market is achieved through the imports from Russia and Kazakhstan.

By the beginning of July, the harvesting of winter cereals was completed on more than 860,000 hectares with more than 2.7 million tons of crops harvested. According to the Minister of Agriculture of Azerbaijan Inam Kerimov, due to the lack of irrigation water, some low-lying areas have suffered, and there have been certain losses of grain crops on an area of about 100,000 hectares. Drought also contributed negatively to the production of spring crops (wheat, oats, corn and legumes) mainly harvested in August. Accordingly, the preliminary results for the grain harvest (winter and spring) in mid-August are estimated at about 2.9 million tons with the average yield of 3.07 tons per hectare, which is slightly less than last year's results. According to the State Statistics Committee, grain has already been harvested from 944,400 hectares, which is 97.6% of the total sown area. The final data on the harvest will become available a little later, but the re-sowing of fodder corn in 41 regions of the country and the harvesting of legumes in individual farms in the foothill regions, which is completed in September, will have almost no effect on the figures announced in August.

Thus, this year has again confirmed that the low efficiency of irrigation is still the most urgent problem that prevents Azerbaijani grain growers from gathering consistently high yields every year. The dynamics of the reduction of fresh water reserves in the last five years, recently cited by Deputy Prime Minister Shahin Mustafayev, is alarming. “At present, water reserves in the main reservoirs are 11.1 billion cubic meters, while their capacity is 20.5 billion cubic meters. For comparison, last year the water reserves were 12.9 billion cubic meters, and in 2016 they even reached 16.5 billion cubic meters,” Mr. Mustafayev said.

In general, erosion due to water shortage affect 41.8% of Azerbaijan's land fund. The potential threats to the country's agricultural sector due to drought have been repeatedly mentioned in FAO reports. Ten years ago, experts from the Organization for Economic Cooperation and Development (OECD) presented detailed studies of the consequences of desertification in Azerbaijan. According to the document prepared by the OECD, if the government fails to create a modern irrigation and reclamation system in the republic, then by 2030 due to a decrease in the level of soil moisture, primarily due to a decrease in groundwater, the long-term damage to Azerbaijan's agriculture will exceed $36.3 billion.

Despite the efforts of the recent years, including the construction of the Samur-Absheron canal, the Takhtakorpu and Shamkirchai reservoirs and associated irrigation canals in the north-eastern and north-western Azerbaijan, the upgrade of the main Mil-Mugan collector, there are still many problems in the field of irrigation.

Moreover, this negative factor is not a product of global factors (climate changes, desertification, etc) only. As President Ilham Aliyev noted recently, the problem of water shortage is caused by huge (about 40-50%) losses in distribution supply networks and irrigation canals, ineffective control over the use of water resources, lack of water balance plan, careless spending of state investments, as well as weak coordination of the activities of the organizations responsible for this area: Azersu OJSC and Melioration and Water Management JSC.

In April 2020, President Ilham Aliyev initiated the establishment of a special interdepartmental commission, which develops the State Program for the Development of Irrigation. The projects of two state programs are ready for implementation - Development of Melioration and Water Management JSC for 2020-2030 and Primary Measures to Combat Water Losses and Efficient Use of Irrigation Waters. The programs are designed for medium-term (until 2025) and long-term (until 2030). They provide for the construction of small reservoirs on mountain rivers, the expansion of the use of alternative water sources, including for settlements located in the Kura-Araz Lowland, the use of water-saving irrigation technologies, the development of a new mechanism for the preferential use of irrigation water, etc. Among other things, it is planned to quickly introduce methods of intensive irrigation, which not only saves water, but also protects the fertile soil layer.

New strategy: Enlargement of farming households

An equally important goal for increasing the profitability of domestic grain production is the enlargement of agricultural farms together with increasing the share of grain production in agricultural parks and specialized grain-growing farms. Indeed, on large areas, the costs of maintaining and operating agricultural machinery, fertilizing and pest control, irrigation and other agrotechnical measures are significantly less.

This year, for example, despite a severe drought, record yield indicators were observed in a number of regions of the country: 4.0-4.41 tons per hectare. In several pilot farms with the most modern technologies the yield was 6.0 tons per hectare, which is one of the best indicators globally. In the last couple of years, the grain harvest in pilot farms and agricultural parks was 1.5 times or more higher than the national average.

The Ministry of Agriculture believes that the commissioning of several dozen specialized grain agricultural complexes will make it possible to increase the annual grain production up to 3.6 million tons, reaching the level of internal annual consumption. According to government estimates, the enlargement of farms and the solution of irrigation problems will make it possible to harvest 3.7 million tons of grain and legumes in 2022.

Moreover, along with the growth in production, it is planned to change the structure of crops by increasing the share of durum wheat. This should reduce Azerbaijan's dependence on food wheat imports from Russia and Kazakhstan. So, in 2019-2020, Azerbaijan imported mainly 1.4 million tons of grain from Russia. Although in the first half of 2020, grain imports from the countries of the Eurasian Economic Union dropped significantly, they are still at a high level.

The share of imports still accounts for just over a third of the annual demand for milling wheat. Azerbaijan spends about $200 million annually for this purpose. These expenses are inevitable today, since the local bakery, confectionery and pasta industries are highly dependent on foreign purchases, since a significant part of the wheat produced in Azerbaijan is soft-bone and is intended mainly for fodder. In March 2020, the parliament of Azerbaijan exempted the import and sale of grain, as well as the production and sale of flour and bread from value added tax (VAT) for another two years. It is possible that fiscal and customs preferences will have to be extended in the next two years.

According to experts, the dependence on import of grain products in the long term is highly undesirable for Azerbaijan, as it is expected that prices on the world's grain exchanges may be volatile in the medium term. In particular, the growth in wheat prices currently observed in Russia and Kazakhstan will continue to grow due to the introduction of export quotas, and possibly duties. UN experts believe that in the longer term, climate change and the depletion of the potential of fertile lands, as well as the growth of the world's population will inevitably lead to a shortage of grain and a steady rise in prices. Therefore, due to the lack of reserves for increasing arable areas, Azerbaijan needs to ensure the introduction of methods of intensive farming in order to guarantee food and grain security in the future.