Focus on Kazakhstan
February 01, 2007
World Grain Staff
For centuries, Kazakh herdsmen grazed their animals in the summer on the sub-Siberian grasslands of northern central Asia and wintered them far to the south and east in the more temperate shadow of the Tianshan Mountains. This traditional lifestyle explains the vastness of Kazakhstan: it covers an area of 2.7 million square kilometers — about the size of Western Europe — but has a population of less than 15 million.
These days it is not migratory horsemen and their livestock, but railcars laden with grain and wheat flour that cross the nation’s immense desserts and steppes. Much of it is en route to export markets.
In 2006, Kazakhstan’s Ministry of Agriculture reported a total wheat and barley harvest of 18 million tonnes gross weight — a record for the period since independence — and forecasts that the 2007 harvest will equal that level. The excellent crop enabled the country to double its grain and flour exports over the previous year to 6.2 million tonnes.
The share of wheat flour in total grain exports has increased rapidly as Kazakhstan milling companies have aggressively sought markets in countries to the south like Uzbekistan, Kyrgyzstan, Tajikistan and Afghanistan. Indeed, the country now ranks as one of the world’s top four wheat flour exporters and is countering a worldwide trend of diminishing trade in the product.
Kazakhstan’s grain production and processing industries have undergone great changes since independence accompanied the disintegration of the Soviet Union in 1991. Kazakhstan was one of the first of the former Soviet republics to abandon central planning and state ownership. It pushed hard for liberalization and privatization of agriculture and grain processing in the 1990s, which led to a sharp reduction in the total area planted, as marginal land was left fallow.
Under Stalin’s Virgin Lands policy in the 1950s, wheat production on a massive scale was introduced to northern Kazakh- stan for the first time. During this time, Soviet central planning called for the sowing of as much as 25 million hectares (ha) with wheat and barley. Today grain markets permit a sown area of about 15.5 million ha, a big increase from a few years ago.
Average yields may be low, but the enterprises that operate the farms benefit from enormous economies of scale. About 70% of Kazakhstan’s grain is produced by a limited number of domestic companies that combine ownership of farmlands, grain elevators, flour and feed mills, and even export terminals. Some of these private companies own up to 400,000 ha of grain land and 500,000 to 1 million tonnes of grain elevator capacity. The large farm size is a legacy of the Soviet era, when state farms in Kazakhstan averaged 100,000 ha compared to 10,000 to 20,000 ha in Russia and Ukraine. A typical Soviet-era grain elevator has a capacity of 100,000 tonnes.
GOVERNMENT ROLE The state still plays a limited but active role by subsidizing inputs to wheat production and intervening in the market. A state enterprise, Food Corporation of Kazakhstan, manages a strategic grain reserve of 550,000 tonnes, nearly all of which is wheat. The grain in this reserve is turned over every year, with Food Corporation contracting with large grain companies and independent farmers for the full reserve amount and selling the previous year’s reserve, usually for export, and often in government-to-government agreements.
Budget funds of more than U.S.$120 million per year subsidize diesel fuel and agricultural chemicals for grain production. The government also underwrites a program for banks to provide leases of agricultural equipment at interest rates of 4.5%. The Kazakhstan government also uses portions of its oil and gas revenues to promote diversification of agriculture. Soybean production could be one beneficiary through programs to develop culitvars with shorter growing seasons. Vita, a Kazakhstanbased company, built the country’s first soybean crushing plant in Almaty, thus creating a demand for local production.
EXPORTS Kazakhstan wheat has high protein and gluten content and is sought by millers in many countries. The main constraint on the country’s wheat production is the high transport cost to international markets. Transport to ocean ports, for instance, can cost as much as the farmgate value of the wheat itself.
Kazakhstan is a landlocked country, and its grain zone is thousands of kilometers from both the Baltic and Black Sea ports. To reach those ports, Kazakhstan wheat must be transported by rail through Russia and sometimes Ukraine, nations whose wheat competes directly against Kazakhstan’s in international markets. Railway tariffs for commodities in transit can sometimes become a trade weapon. Nevertheless, one major Kazakhstan grain company has acquired a grain terminal in Ventspils, Latvia.
Kazakhstan does have a coastline on one large body of water, the Caspian Sea, which is also landlocked. Grain export companies have invested in export terminals at three ports in the relatively shallow northern half for shipments during the ice-free, non-winter months in 3,000-to-5,000-tonne vessels to Iran in the south.
When these projects were conceived, Iran was a steady buyer of about 1 million tonnes per year of Kazakhstan wheat in government-to-government agreements. Since completion of the terminals, Iran has become mostly selfsufficient in wheat. Now there is a project by Kazakhstan companies to build a grain receiving terminal at the Azerbaijan capital of Baku on the western Caspian to supply that country as well as Georgia and Armenia.
Kazakhstan’s main competitors, Russia and Ukraine, are in some crop years its best wheat export customers. Ukraine, for example, may export lower quality feed wheat while buying higher protein Kazakhstan grain for its own millers. Alternately, it may make sense for Moscow, St. Petersburg and Siberian cities to receive Kazakh wheat, while Russian wheat grown in the southern steppe region near the Black Sea is exported. In some years, notoriously unreliable weather patterns in both Ukraine and Russia can result in a crop failure, enabling Kazakhstan to drawdown its normally large carryover stocks, which usually exceed 4 million tonnes.
FLOUR MILLING The combination of abundant highquality wheat, deregulated markets and export demand has resulted in tremendous dynamism in the flour milling industry.
Kazakhstan’s millers may be more reliant on exports than those of any other major grain producing country. Out of a total grind of 2.8 million tonnes of wheat, about 1.8 million tonnes are for export.
The general rule is that the larger the mill or milling company, the greater the share of its flour will be shipped to other countries. By providing quality and value, and extending credit to their export customers, these companies get better prices than on the local market where competition comes from scores of smaller mills with low cost structures, but average quality and no ability to sell internationally.
An example of the aggressive export orientation of the industry is the cluster of about 10 mills in Shymkent, the southernmost large city in the country. Most of these report selling 70% to 80% of their output directly to importers in Uzbekistan, Tajikistan and Afghanistan. Much of the rest is sold to local traders who deliver to the border to supply the so-called shadow market made possible by Uzbekistan’s import duties of 25% on wheat flour. Indeed, the three former Soviet Republics to the south — including Kyrgyz Republic — count on Kazakh product for one-quarter to one-third of their wheat flour consumption. Uzbekistan’s state milling company is exporting increasing quantities of low-quality, low-gluten wheat flour to Afghanistan, Kyrgyz Republic and elsewhere, even as Uzbek city dwellers consume more and more Kazakh flour.
In Soviet times, a couple of dozen mills joined to mammoth grain elevator complexes met domestic demand for flour. Deregulation in the 1990s resulted in small private mills popping up like mushrooms. The number of mills in Kazakhstan is said to have peaked at around 1,500 in the late 1990s, though there is no exact figure. Since then their number has been declining rapidly. Industry insiders say that few mills with less than 50 tonnes of daily capacity are likely to survive, whereas there were hundreds of mills of 5 tonnes or less just 10 years ago.
David McKee is a grain industry consultant providing market research and other services to companies seeking to initiate business in new markets. He can be reached by e-mail at email@example.com.