TO SECURE THE GRAIN MARKET

The period of relatively cheap food is coming to an end, making the poorest countries, which depend on external supplies, suffer the most. Azerbaijan is not a poor country, but is also facing imported inflation, which led to a sharp rise in food prices in the local market. As the world history shows, an effective method of restraining sharp fluctuations of market prices and the threat of famine during wars, crop failures, and natural disasters is the use of state reserves, including stocks of food, as well as fuel, strategic raw materials, etc. The State Reserve Agency (SRA) established in Azerbaijan last October is designed to serve this purpose.

Key mission

World wars, revolutions, epidemics, and natural disasters, which resulted in catastrophic food shortage in the 19th and especially 20th centuries, compelled the leading countries of the world to develop a large-scale system of state reserves on a permanent basis. But only strong, economically wealthy states could accumulate and hold substantial reserves, which would become an additional factor ensuring the stability of these states.

In most developing countries, the system of strategic reserves is mainly based on the storage of food, primarily cereals, and only partly fuel. As a rule, leading countries form reserves in different ways, with food reserves not limited to grains and flour, meat and canned products, sugar, vegetable oil and butter, various cereals and concentrates, dairy products, etc. with long storage periods. They also keep huge stocks of raw materials such as petroleum products, including petrol, diesel fuel, aviation paraffin, non-ferrous metals, and various chemical components. In addition, there are medicines, vaccines, and anti-epizootics in case of outbreaks of dangerous diseases in humans and animals, radiation monitoring and protection equipment, disaster relief kits, tents, blankets, tools and building materials, mobile power generators, etc.

However, for most countries, the key objective is still to ensure food security and, accordingly, the structure of reserves and storage infrastructure, including grain elevators, refrigerated and conventional warehouses, underground storage facilities. Such anti-crisis stockpiles and an extensive system of storage are available in China, Russia, the US, Canada, in most leading European countries, as well as in India, Brazil, Indonesia, African states, etc. Experts of the UN Food and Agriculture Organisation (FAO) and international non-governmental organisations, including ActionAid and Oxfam, have once promoted an idea of forming a unified food storage system for the entire world population. But these steps were not supported by the leading states and today each country individually forms a national strategy for critical food, fuel, and raw material storage.

Multiplier effect of rising prices

Incoherent state reserve policies have seriously affected the supply-demand balance in the global market. In particular, the steps taken by China last year to replenish its food reserves have sharply increased grain prices. With a population of one and a half billion, China is the world's largest food consumer. Chinese State Administration of Grain (SAG), which employs 196,000 people, is probably the world's largest agency of this type. In the last decade, China's reserves have increased by 20%, holding 51% of wheat, 69% of corn, 60% of rice, and more than 30% of soybeans worldwide. In 2020, China purchased a record $98.1 billion worth of food, increasing imports by 22% over the year. This policy continued in 2021 as well.

Russia has been very active in reserving food stocks, with a Committee of Reserves set up back in 1931. Today the Russian government is making efforts to shield the domestic grain market with high export duties and quotas. The most extensive reserve food structures in the western hemisphere are in the US, which is considered the most protectionist government in the world. For example, in 1979 and 1986, the US adopted a bunch of bills on food security, which provided for the purchase of grain into the state reserve and set up a system of measures to support American farmers, including subsidies to maintain land fertility, etc.

As a result of climate change in recent years, as well as poor harvests in Russia, Kazakhstan, the US, Canada, Western Europe last year and declining grain production, FAO reduced its harvest forecasts for 2021 to 2.8 billion tonnes amid falling food reserves in most countries (excluding China and the US). The situation eventually boosts global inflation pushing prices up for wheat, flour and, as a multiplier effect, the dependent foodstuff. Thus, according to the FAO report published last year, the food price index reached record levels in the last ten years. This indicator, which tracks 95 major food commodities, rose by 27.3% annually.

This negative trend has been observed in almost all countries, including Azerbaijan. Since March 2021, wheat imports, the production and sale of wheat flour and bread products have been exempted from VAT, while flour mills enjoy subsidies. Authorities also took steps to secure the local grain market. Azerbaijan Railways is implementing a set of measures to reduce the transport and logistics costs of forwarding companies purchasing grain for the country.    

State reserves

However, fiscal incentives for importers and subsidies for producers are not a remedy for all problems in the food market. More effective tools of regulatory influence are also necessary. Such as the system of state reserves to be used in emergency situations and to protect people against price fluctuations. High-capacity reserves are also during the times of war, emergency response and humanitarian assistance to affected populations.

All these tasks will be fulfilled through the State Reserves Agency (SRA) of Azerbaijan founded by a relevant presidential decree on October 27, 2021. At the end of December another presidential decree appointed Sabuhi Sadigov as the SRA chairman of the board.

What will be the main mission of SRA—a new state body formed on the basis of other state-run institutions created previously? It will include the facilities of the State Agency for Material Resources of the Ministry of Emergency Situations, Azercontract Corp., as well as the State Grain Fund. The key objective of the agency, a legal entity of public law, is to create state and mobilisation reserves, implement the respective state policy in this area, ensure stable and sustainable supply of strategic goods to the country, suppress short-term price fluctuations for such products in the local market. SRA will be funded from the state budget as well as from other sources not prohibited by law.

SRA activities will primarily relate to ensuring food security, protection of and stability in the grain market. In this context, SRA inherited a powerful storage infrastructure of the State Grain Fund (SGF). Over the past years, a dozen of high-capacity elevators have been constructed in the Nakhchivan Autonomous Republic, Ganja, Garadagh, Baku, etc. Together with warehouses leased from private companies, the SGF infrastructure can conserve more than 750,000 tonnes of grain. There are over 30 large granaries (mostly private ones) in Azerbaijan, including the Baku Grain Terminal (BGT) commissioned in April 2007, with a daily throughput capacity of 1,500 tonnes. Among others, the largest terminal in the region has been built in Astara, with an annual throughput capacity of 500,000 tonnes. This facility is to be used mainly for transit cargo of Russian grain to Iran and further to the Persian Gulf. Therefore, the potential of private elevators and, most importantly, the storage capacity of SRA enables large-scale interventions in the local grain market to prevent price rises and attempts of violations in this area.

SRA will also address other food security objectives, including purchasing and stockpiling various types of meat, canned and other long-term stored products at appropriate levels of quality and food safety standards. These stocks will be periodically renewed, and sold to retailers at purchase prices during periods of market volatility, acting as an inflation buffer to compensate for rising food prices.

The agency's warehouses will store mobilisation stocks of fuel and lubricants, medical supplies and medicines, rescue supplies and other commodities needed in case of war, natural and man-made disasters, as well as for humanitarian aid both at home and abroad.

In short, Azerbaijan will have a new powerful structure that, if necessary, will be able to respond quickly to any emergencies, including the cases of drastic price rise.