HOPE FOR THE BEST

Harvesting of winter grain crops is practically over in Azerbaijan, with an average yield of 3.23 tonnes per hectare. Given the good forecasts for August, we can expect results that are significantly higher than last year. Today, given the ongoing instability in the global food market, it is extremely important for Azerbaijan to ensure reliable import substitution of agricultural products. Despite a slight decline in commodity prices in June, the Consumption Price Index (CPI) is still almost 34% higher than in 2020, according to the latest data from the UN Food and Agriculture Organization (FAO).

Rising prices

Recession triggered by the pandemic and the efforts of central banks to overcome it by pumping billions of unsecured money into the US and EU economies have imbalanced stock markets and increased food and agricultural commodity prices in many regions of the world. This process was also exacerbated by last year's crop failure and a tangible decline in global grain reserves in early 2021. Plus, Russia and some other states have introduced export quotas and increased customs duties on wheat exported to foreign markets. High volatility of prices in the grain and other segments of the food market triggered inflationary processes that covered all regions of the world.

The situation slightly stabilised only by the end of June 2020. FAO recorded the first decline in world food prices in the last 12 months. In particular, the average value of CPI in June was 124.6 points, which is 2.5% lower than in May, but still 33.9% higher than a year earlier. Taking into account the favourable global production outlook, the overall index for cereals was down 2.6% from its May level, while 5% down for corn and only 0.8% down for wheat.

Also in June, the price index for vegetable oils decreased by 9.8% - primarily for palm, soybean and sunflower oils. Butter also became cheaper, which is explained by a sharp decline in global import demand and a slight increase in stocks, especially in Europe. However, CPI for dairy products fell by only 1%. The decrease in prices for other food product groups was insignificant, while growth was recorded in a number of segments. In particular, CPI for sugar continued to climb for the third month in a row, reaching 0.9% and a new multi-year high due to projected crop failures in Brazil. The meat price index also rose 2.1% in June for the ninth month in a row.

FAO experts believe that the slight decrease in food prices observed in early July is due to seasonal factors, as well as an increase in supply and a decrease in import demand. At the same time, some global traders argue that prices for agricultural products will rise for several years. Experts from Cargill, Cofco, Viterra and Scoular believe that prices will rise for corn, soybeans and wheat markets in the next two to four years. This is due to the demand for feed in the 2021-2022 season, the growth in consumption and the accumulation of food supplies in China, as well as a sharp increase in transportation costs (by almost 20%), which increases the costs of food importers.

However, it ix expected that the growth in oil prices observed since spring will put the greatest pressure on the grain and oilseeds market. The rise in energy prices almost always increases the demand for agricultural crops that are used to produce biofuels. In Brazil and a number of other South American states, as well as in Southeast Asia, the processing of cereals and oilseeds into bioethanol and biodiesel has already increased. And, apparently, this trend will continue in the coming year as well. According to the UN, a decade ago, a surge in biofuel production led to a decrease in the supply of a number of crops, which led to higher prices for basic foodstuffs, increasing famine in the world's most underdeveloped countries.

Nothing to lose!

Similar risks exist today. In order to avoid negative consequences from imported inflation, Azerbaijan has taken a number of preventive measures to regulate the country's grain market. In particular, the period for exemption from VAT on grain imports has been extended. The government also launched a new mechanism for the development of food wheat stocks, reforms in irrigation systems and the transfer of farms to economical methods of water use. Equipping farmers with new-generation combines and other equipment has also been improved.

Timely measures, as well as favourable weather conditions ensured a good result - winter crops were harvested on time and without loss. As of July 4, 81.3% of the country's fields were harvested, with about 2.6 million tons of crops harvested from more than 805,000 hectares of arable lands. About 60% of this figure was wheat, while the remaining 40% was barley. “The average yield in the country is 3.23 tonnes per hectare, but in a number of regions it reaches 4 tonnes per hectare. In general, grain harvesting is carried out ten days ahead of schedule,” Azerbaijani Minister of Agriculture Inam Kerimov said.

Currently, the wheat harvesting period reached its final stage, harvesting is nearing completion in the foothill and mountainous regions of the country. In total, 1,500 combine harvesters were involved in harvesting, including specialized harvesters designed to work in mountainous areas, and on sloping land plots. New generation combine harvesters purchased last year by Agroservice OJSC solved the problem of harvesting in the mountains and foothills, which will increase the area allocated for cereal crops by many tens of thousands of hectares. “The harvesting has already been completed with new combines in the mountainous areas of Yardimli, Lerik, Jalilabad regions, in the highlands of Shamkir, Shamakhi and Gobustan. We managed to achieve the main goal - to carry out the harvest in an orderly manner and without losses,” Inam Kerimov said.

We will see the final indicators of the grain harvest of 2021 at the end of August, when the harvest of spring crops is over. Today it is difficult to say whether it will be possible to repeat the successes of 2018 and 2019, when a record grain harvest was collected in the country - 3.3 and 3.4 million tonnes, respectively. However, the experts of the Ministry of Agriculture believe that the current harvest will exceed the indicators of 2020, i.e. 2.7 million tons. The main reason for the decrease in production last year was associated with a severe drought, which decreased the level of water in the Kura and Araz rivers. Dropping water level in most reservoirs caused a shortage of irrigation water in a number of grain-growing regions of the country. This year turned out to be more generous in precipitation. In addition, an improvement in the water balance, optimisation of water consumption in the irrigation system and the introduction of economical irrigation technologies in a number of large farms - drip, aerosol, fine-dispersed sprinkling - had a beneficial effect on the situation.

Goal: self-sufficiency

Nevertheless, today Azerbaijan is still unable to fully provide itself with grain crops. While the country maintains a balance for feed grains, the share of food wheat imports is still relatively high. So, in January-May 2021, 392.2 thousand tonnes of wheat (more than $99.8 million) were imported to Azerbaijan mainly from Russia. Moreover, the cost of imported wheat increased by 33.7%, which is associated with a global increase in prices for grain, as well as export duties introduced in Russia since the beginning of the year.

In order to ensure food security and reduce costs during import operations, the government of Azerbaijan adopted amendments to the Tax Code in March 2021. According to these amendments, wheat imports, production and sale of wheat flour and bread are exempt from VAT until 2024. The production and sale of bran is also exempt from VAT for five years. The payment of subsidies to flour mills (₼35 for each ton of flour sold) during February 1 - May 1, 2021 has been organised. In addition, Food Safety Agency and Azerbaijan Railways CJSC agreed to form an effective mechanism for creating sustainable stocks of food wheat, as well as optimising the core activities of the transport and logistics sector.

However, experts believe that to ensure the long-term security of Azerbaijani grain products, it is necessary to increase domestic production. Ministry of Agriculture believes that the operation of multiple specialised grain agricultural facilities using intensive technologies will increase the annual production of grain and legumes up to 3.7 million tonnes and, in general, achieve the level of domestic annual consumption. Along with the growth in production, it is planned to change the structure of crops, increasing the share of durum wheat, which is the basis for the production of bakery flour. This will reduce Azerbaijan's dependence on grain imports from Russia and Kazakhstan.

De-occupation of tens of thousands of hectares of arable land in Garabagh will also play a positive role in this context. Specialists have already began the works in the areas of the Aghdam district cleared from mines, where grain crops used to be sown in the spring.