ON THE BRIGHT SIDE

Like most countries, Azerbaijan is also compelled to look for ways to solve the most serious problem of the present, food security. At the same time, the Central Bank of Azerbaijan (CBA) continues its efforts to ensure effective control over inflation. First steps in this direction are underway. The government outlined six basic principles of its strategy to ensure reliable provision of the country with food products.

Global anti-trend

Uncontrolled inflationary processes around the world were a trigger, which brought down the long-standing balance of supply and demand in the global agricultural market. This was the main cause of the current food security problems worldwide and in Azerbaijan in particular. The pandemic has disrupted the established logistical links and increased transport costs. Together with other systemic problems in the global agriculture, as well as negative climate change, this eventually led to a very dangerous process. For example, maritime container freight tariffs increased by more than 12 times in 2020-2021 compared to 2019 and this trend continues. The UN Conference on Trade and Development (UNCTAD) forecasts that global import prices could rise by 11% and consumer prices by 1.5% by 2023 should the current increase in container freight tariffs continues at the current pace.

In turn, attempts by the US and other major economies to overcome the coronavirus-induced economic recession by boosting liquidity were accompanied by gross monetary policy failures and led to growing global financial imbalances. The stock market turmoil in agricultural commodities and food since last year led to an unprecedented rise in imported inflation, which seriously hit not only to the food market of the developing world, but also that of the most developed countries. In the first 11 months of last year, annual inflation was 3.4 times higher in the US, 2.5 times higher in the Eurozone, 2.1 times higher in Russia, 2.1 times higher in Belarus, 4.2 times higher in Georgia and 4.3 times higher in Turkey, etc. Most of these countries are leading trade partners of Azerbaijan and it is not surprising that the whole negative of imported inflation in the listed regions has turned into an increase in consumer prices in our country.

Imported inflation

During a recent meeting of the Azerbaijani government on measures to prevent the rise of prices and ensure food security, officials mentioned imported inflation as the main reason of problems.

For example, average annual inflation in Azerbaijan was 6.7%, including food inflation of 8.1%, with food inflation accounting for about 60% of total consumer price growth. Yet the share of agricultural products and food in the total volume of Azerbaijani imports is only 18%, or about $2.1 billion. Naturally, the greatest increase in prices came from imported products, as well as food mainly produced using imported raw materials, components, packaging, etc.

The leading role of imported inflation in disrupting global food security has also been confirmed by the UN Food and Agriculture Organisation (FAO). According to FAO, global food prices in 2021 reached the highest level in ten years. FAO's Food Price Index averaged 125.7 points last year, which is a 28.1% increase over 2020. Cereals prices saw the highest increase on global markets rising by over 45% by the end of last year compared to the previous year. Since the spring of last year, the price of a tonne of imported wheat has increased from $253 to $340.

According to FAO experts, despite a slight decline in prices for a number of commodity groups, the overall trend of rising food prices will continue in 2022. Moreover, it appears that the global food market will not stabilise in the near future at all. In addition to pandemic-induced factors, agricultural business is threatened by climate change,  degradation of arable lands and the continued rise in fuel and fertilizer costs. All of these factors contribute to a continued imbalance between supply and demand, at least for the current year and possibly beyond.

Reduce dependency

What steps have already been taken and are planned in Azerbaijan in the near future to improve food security?

Alas, situation in the country is complicated by the fact that purchases mainly depend on the Russian market, which provides almost 90% of wheat and flour exports to Azerbaijan. After the introduction of export quotas in Russia last spring and increase of export duties on Russian wheat, as well as export restrictions and price growth, Kazakhstan implemented a number of measures to extend the VAT exemption period for grain importers. Similar fiscal relief measures as well as subsidies were granted to domestic flour mills and bread producers in the country. However, these measures hardly helped keeping prices down until the end of autumn, following which it became impossible. In a market economy, the use of administrative mechanisms to reduce prices is not as effective as one would wish. You have have to wait until a set of incentive measures be put in place to reduce costs and increase domestic production of basic food products.

In fact, many of the objectives have been achieved during the agrarian reforms of the last fifteen years. More than 150 large and medium-sized processing and canning enterprises, a network of enlarged crop farms and agriculture parks (including grain farms) have been developed, making it possible to achieve considerable success in poultry, livestock, milk, and meat production. “In fifteen years, the country's agricultural sector has achieved significant success in import substitution. Fruit and grape production has doubled, vegetable production has grown considerably, cotton production has multiplied. Azerbaijan is self-sufficient in the production of beef, mutton, poultry and dairy products by 90%, 100%, and 80%, respectively” President Ilham Aliyev said in his recent interview with local TV channels.

In general, final indicators on the industry are also quite good: the volume of agricultural production in Azerbaijan in 2021 reached ₼9.2b, which is 3.4% higher than in 2020. At the same time, livestock and crop productions increased by 2.8% and 4%, respectively.

Meanwhile, the country's self-sufficiency in grain products is a problem, while for food wheat the indicator does not exceed 60%. As President Ilham Aliyev said, the difference between consumption and production of wheat in Azerbaijan is 1.3 million tons. “We consume 3.3 million to 3.4 million tonnes of wheat per year. Azerbaijan, on the other hand, produces only 2 million tons of wheat. We import the rest of this volume. I cannot say we produce 100% of food wheat locally in the current situation,” Mr. Aliyev said.

To solve this problem, it is required to accelerate the process of developing enlarged grain farms with a well-developed irrigation system, which use the state-of-art modern technological solutions and support only elite high-yielding wheat varieties.

Also, it will be required to increase local production through higher yields. “Currently, the grain yield is 3.2 tonnes per hectare. It is possible to increase this indicator to 4-4.5 tonnes, as some large farms can produce 6-7 tonnes per hectare. Then we will be able to maximally provide ourselves with food wheat thanks to available areas under crops,” Mr. Aliyev said.

In addition, a breakthrough in grain self-sufficiency is possible after the liberated lands are used for sowing. Last year about 100,000 hectares of these lands were sown. In general, there are 1 million hectares of lands suitable for agricultural production in Garabagh, including 128,000 hectares of irrigated lands. However, it will be possible to develop these lands only after the completion of demining, restoration of water infrastructure, etc.

Decision points

In the meantime, Azerbaijan sees a way out of the situation by renting arable lands in neighbouring countries that have no problems with irrigation. Baku has chosen Ukraine as such a partner. Thus, during the recent working visit of President Ilham Aliyev to Kiev, the the countries signed a memorandum on cooperation in the agricultural sector, which will make it possible to attract Azerbaijani investments in grain production and its subsequent delivery to Azerbaijan. “Today we have also discussed food security. The objective is to improve our food security by establishing joint ventures in the food industry,” Mr. Aliyev said during his visit to Ukraine.

An updated food security strategy of Azerbaijan is also being drafted. Six basic principles for the provision of food products have already been identified. In particular, the strategic plan will include measures to reduce the cost of food produced in the country, as well as to improve the quality and volume of production. The goal of all these measures is to support domestic production rather than imports.

For example, as an option, it is considered to lease lands abroad for growing wheat to cover Azerbaijan’s domestic needs in this product.

Another option is the liberalisation of food prices. The plan of measures also includes combating artificial price increases and optimisation of entrepreneurial margins, strengthening the fight against unfair competition, increasing transparency of the system of subsidies while improving its targeting of producers.

In general, it is planned to strengthen the anti-monopoly control of the consumer market. Competition in retail chains will also be strengthened through the involvement of small-scale farmers in the food supply system and their access to logistics and warehousing facilities.

In order to mitigate the impact of external price fluctuations on the stability of the local food market, Azerbaijan has initiated the development of State Reserve Agency. The grain and food stocks accumulated in the state reserve system can be brought to the market in emergencies to compensate for sharp fluctuations in food prices.

In short, every cloud has a silver lining. Although the crisis and inflation are unpleasant phenomenons, they are like a painful shock to the body pointing out the problem and forcing us to solve them faster before the disease begins to threaten our life.