FOOD INVESTMENT

Imported inflation continues to shake the world food market causing the greatest damage to the developing and poorest countries. The ongoing rise in food prices remains the number one problem also for most states in the region, includes Azerbaijan.

The threat of increased global hunger next year was again discussed during the ongoing 77th session of the UN General Assembly. This was also a key issue in all recent forecasts and reports published by the UN Food and Agriculture Organization (FAO).

Ensuring food security is also a key challenge for Azerbaijan: the draft state budget for 2023 increases spending on the agricultural sector and further develops the country’s food reserves.   

Unprecedented growth

"There is an international risk of a crisis of access to food availability and affordability in the coming months. Our agriculture food systems are fragile and supply chains are under pressure, the scale of the global food security crisis is frightening," FAO Director General Qiu Dongyu said.

FAO forecasts that cereal prices are still likely to rise further leading to higher prices for flour, baked goods, pasta and confectionery as well as forage, which will push prices for eggs, poultry, meat and dairy products up. "If we do not normalise the fertiliser markets, we will face problems in the food sector next year. The UN is fully committed to removing obstacles to exports of Russian food and fertilizers," UN Secretary-General António Guterres told a news conference on the occasion of the 77th session of the UN General Assembly.

Since the beginning of this year, there has been an unprecedented increase in the price of nitrogen, potash and phosphate fertilizers, which could reduce future agricultural yields and lead to higher food prices in 2023, according to a recent FAO report. The problem of agrochemical shortages is closely associated with reduced exports of fertilizers from Russia and Belarus due to the sanctions. In the past, European countries imported about 40% of fertilizers (and raw materials for their production) from Russia and Belarus.

In turn, the energy crisis and the shortage of cheap Russian natural gas, which used to be the main source of ammonia, reduced urea production in the EU. Fertilizer prices have been a problem since 2021, including as a result of increasing cargo rates and railway tariffs. However, the most acute shortages have been observed since late February 2022 following the outbreak of the war in Ukraine.

According to the World Bank (WB), global fertilizer prices increased by 10% in 1Q2022, by another third in 2Q20222, and are projected to increase by as much as 70% by the end of this year. In particular, the urea fertilizer prices have exceeded $660 per ton by the beginning of September - it is higher than after the 2008 crisis. Other segments are also experiencing a decline in production due to lower supplies of Belarusian and Russian potash, which increased in price by almost 80%, as well as sulphur, apatite and other phosphate fertilizer derivatives.

The UN World Food Programme (WFP) notes that in addition to fertilizer shortages the food market is facing very high risks of extreme weather conditions in Asian countries (heavy rains and floods in Pakistan, Indochina), unprecedented drought in a number of countries in the Middle East and Africa. This summer even agricultural land in traditionally water-sufficient Germany, France, Spain and other EU countries has been affected by drought. The situation is even worse in arid regions - Syria, Iraq, Iran, Egypt, Yemen and other countries of the Middle East and Africa, which faced a severe shortage of water for irrigation. "If the problem this year was the inability to buy food due to rising food prices, in 2023 the global community will face a food shortage that simply may not be enough to feed the entire global population," Corinne Fleischer, WFP Director for the Middle East and North Africa, said.

Dangerous imbalance

FAO and other relevant UN agencies estimate that the number of hungry people in the world has increased by 150 million to 828 million since pre-pandemic 2019. In 2021, some 2.3 billion people faced moderate to severe lack of access to safe and nutritious food; in 2022, the situation worsened further. Overall, due to food inflation resulting from the economic impact of the pandemic, rising ship charter prices and limited logistics, and military conflict in Ukraine, the number of people having difficulties with access to healthy food diets surpassed 3 billion.

Moreover, according to the ten-year OECD-FAO agricultural projection report published at the end of June 2022, annual global food consumption will grow by an average of 1.4% mainly due to population growth. At the same time, the growth of production in the agricultural sector will not exceed 1.1%, thus the gap between insufficient production and growing consumption will only grow. The UN predicts that the global population will reach 9 billion by 2050. In order to feed them, agricultural production must increase by at least 70%.

Today, there are no clear answers to the current challenges and future risks in food security. Certain measures taken in this area have so far been of a local nature. Thus, within the framework of the so-called grain deal reached at the end of July, the Joint Coordination Centre (JCC, Turkey) has authorised the shipment and departure from Ukrainian ports of 203 vessels carrying cereals and oilseeds and other agricultural raw materials for the Middle East, Asia, Europe and Africa - in total over 4.5 million tons of food cargo. On September 21, US President Joe Biden announced at the UN General Assembly that Washington would allocate $2.9b to tackle food insecurity in the world. In particular, the US will allocate about $2b of these funds to finance food aid programmes for countries hit hardest by the pandemic and supply chain disruption due to the war in Ukraine. Around $200m will be allocated by the US Department of Agriculture for programmes related to school meals for children in Africa and East Asian countries, and almost $200m will be used to promote agricultural projects as part of the UN climate agenda.

It is clear that the aid provided by the UN, the US and other donors is very small compared to the number of hungry and needy people on the planet. Nor can we expect food prices to fall anytime soon given the current situation. That is why as early as mid-year the UN called upon developing countries to make every effort to boost food production, convert waste land into farmland and use water and other resources prudently.

Goal: reduce dependency

Azerbaijan has been on this path for a number of years. Recently, the policy of import substitution and increase in agricultural production has received additional support from the government. According to the decree of President Ilham Aliyev dated July 19, 2022 on measures to increase the level of self-sufficiency in food wheat, the government plans a number of measures to increase local grain production through the use of advanced agricultural technologies, introduction of economical irrigation systems, increasing the number of specialised grain-sowing agriculture parks. At the first stage (3-4 years), it is planned to raise the average yield from the current 3.2 tonnes to 5.0 tonnes per hectare and higher. This will include the gradual development of arable land in Garabagh. As a result, self-sufficiency in food wheat could be increased to 80% and Azerbaijan's dependence on expensive imports could be sustainably reduced.

In the second decade of September, as part of his visit to the Aghsu district, Prime Minister Ali Asadov held a working meeting on problems and expanding grain production. Mr. Asadov noted that the state "will provide all possible support to producers of food wheat”. In this regard, he outlined the prospects of introduction of new subsidy mechanisms of state support to farmers, introduction of modern irrigation systems, increasing the area under crops, increasing the productivity of wheat production, improving its quality, the use of modern equipment and advanced agricultural technologies.

In order to implement the above presidential decree, funding for most of the planned activities to support grain producers and other strategically important areas of the agro-industrial complex (AIC) will be multiplied next year. Recently, during the meeting of the Cabinet of Ministers to discuss the draft State Budget of Azerbaijan for 2023 and other documents of the budget package it was decided to increase state spending on the development of agriculture in 2023 by 20.5%.  

Negative effects

It is clear that it will take several years before Azerbaijan feels the effects of the planned measures in the agricultural sector. In the meantime, the average annual inflation in the country accelerated to 13.2% at the end of August 2022. This increased the prices of food products by 20.8% since last August—largely due to the factor of imported inflation, when not only all foreign food products become more expensive but also imported agricultural raw materials and components used in local production, the cost of production automatically increased. It is impossible to overcome this negative factor today, but measures are taken to mitigate this impact on the domestic food market.

For example, Azerbaijan facilitated the export of strategically important food wheat as much as possible, extended the abolition of VAT from last year and maintained a zero duty for grain importers. In addition to subsidies to flour mills, authorities have taken other measures to secure the local market. These include the establishment of a State Reserve Agency, the development of the food reserve structure, and the reservation of some imported and locally produced food. Overall, through the efforts of private procurement companies, the State Reserves Agency and others, food imports increased by 20.8% between January and August 2022 (more than $1.4b). In terms of food imports, the situation is as follows: imported wheat around 540,000 tonnes (+12.1%), corn – 51,600 tons (2.6 times), rice – 40,700 tons (19.8%), as well as meat (1.9%) and butter (30.2%).

This year Azerbaijan has also made significant progress in the diversification of food wheat supplies: in 1H2022 the import from Kazakhstan increased eightfold reaching 182,700 tonnes. Recently, the State Reserves Agency decided to deliver 100,000 tons of food wheat from Moldova. In turn, Baku plans to provide Chisinau with carbamide fertilizers. Wheat from Moldova is expected to be supplied from October 2022 to February 2023 in batches of 20,000 tonnes per month.

A certain portion of grain and other food products is purchased to be reserved in the agency's warehouses. A certain portion of grain and other foodstuff is purchased from the agency's warehouses in case of force majeure (natural or man-made disasters, war) and in order to regulate prices in the domestic market in case of uncontrolled price rises.

In short, we will have to survive food inflation for the next two years, for better or for worse. The main thing is that before the issues of self-sufficiency in agricultural commodities are resolved, the government should take care of maintaining the volume of food available to the population.