Reforms change grain sector
August 01, 2007
by Meyer Sosland
Traditionally, the Middle East’s grain sector has been dominated by state trading enterprises and interference from governments who believed that managing the market was the only way to ensure a steady supply of bread at prices acceptable to the populations of their countries. But today, the Middle East is experiencing a period of liberalization in the grains sector. Reforms are working well, but not everybody wins.
One country where the government has loosened its control on the grain market is Iran. "The big change here is that after 27 years of government subsidies the private sector is able to import and export wheat," Merzad Jamshidi, chief executive officer of KFF Mills in Tehran, Iran, told World Grain.
But the changes, which were implemented in November 2006, are not universally popular. "It’s created a situation
some millers don’t like," he said. "It’s created competition."
The effect on the industry has been mixed. "Some of the mills are shutting down, some of them are running at 15 to 20 percent capacity, and some of them are running at full capacity," Jamshidi said. "Before, you had all of them running at around 50 percent capacity."
Jamshidi believes that the changes have had the effect the government wanted. "Ultimately it has been good for consumers," he said. "It has affected flour quality."
PROGRESSIVE CHANGE IN SYRIA Syria has also reformed its grain sector. The history of Union Mills, based in Aleppo, Syria, has been one of adapting to progressive change, Nizar Kayali, the company’s operations manager, told World Grain. "We’ve been in business for 10 or 11 years," he said. "We first started because there was a shortage of milling facilities for government wheat." At the time, Syria was importing about 1 million tonnes of flour a year, mostly from France. "Farmers are not allowed to sell into the free market," he said. "They sold to the government."
The wheat was then milled at government facilities at an 80% extraction rate. It was baked into pita bread in facilities that were also owned by the government. "There was a shortage of mills, so the government allowed the private sector to come in," said Kayali. "In effect, they were outsourcing it."
The government provided the millers with wheat and a milling specification, which included the 80% extraction rate. Millers were paid a rate per tonne for the milling operation.
"We did that for about six or seven years," he said. "The private sector started to grow." Further change came as the government allowed private bakeries to open. "They allowed firstly farmers to sell on the free market and allowed us to produce 70 percent extraction wheat," Kayali said. "All the private bakeries produced this type of flour and sold it to local bakeries and biscuit manufacturers."
An increasing number of private bakers started to buy their flour direct from the millers. As the government was paying millers $10 a tonne to produce flour, the free market was more profitable, but not every miller made the change. "Some of them did stay with the government, because it was more secure," he said. "With the government, you got your raw materials guaranteed."
"We did that for awhile. It was a very small market," Kayali said. "The private sector was only about 20 percent of the wheat market. "
Then, last year, the Syrian government’s General Establishment for Cereal Processing and Trade (HOBOOB) found that it was holding high stocks. "The government consumed about 2.5 million tonnes of wheat a year for producing flour for bread," he explained. "Everything beyond that is excess and is stored." Last year’s harvest was around 4 million tonnes, and the harvest the year before that was about 3.5 million. "So there was an excess amount of wheat," Kayali said. "By last year, they got to a point where government storage facilities were full."
"So they decided to start selling wheat to the local market and exporting it, which was a first," he said. Before that, Syria’s exports were limited to about 500,000 tonnes a year to Jordan and to exchanges of wheat for rice with Egypt.
"They started to sell to us at world market prices, which was also a first," he said. A freer market did mean some supply problems. "Some traders hold stock, but we faced a shortage every February. So they allowed us to import. We did two years ago."
The imports, which came from Russia, Kazakhstan and Ukraine, were allowed from September through May. "In May to September it was not allowed, as it was the harvesting period," he said.
"There was good demand for flour, mainly from Iraq which is a big market for us," Kayali said. "We could compete." The major competitor was Turkey, but when the Turkish government stopped subsidizing its exports, Syrian millers found they could compete.
However, this year’s drought has changed the situation. "There is a shortage of wheat production," he said. "Wheat has gone up dramatically." He put the price of wheat at harvest at around $220 per tonne.
However, the government retains control of wheat exports. "I cannot export wheat," Kayali said. "I can export flour."
The market has helped the government out. "The government purchases soft wheat at $220," he said. "That has been the case for 10 years. It’s to subsidize the production and farming of wheat."
"When the world market was at $120, we were buying at $220 so export was out of the question," he said. "Now we can buy from the local market for export. This is the first time we have been competitive."
"A lot of the market is controlled by the government," Kayali said. "Now it’s opening up. It is changing."
According to a report published by the U.S. Department of Agriculture (USDA) in June, HOBOOB’s target is to hold a year’s worth of stock, so as to avoid imports in a bad crop year. However, stocks were set to end below that level in 2006-07 because of high exports and fall again in 2007-08 because of low production.
REFORM IN OTHER COUNTRIES Jordan has seen some reform, but the government is still the sole importer of wheat and barley, according to the most recent USDA attaché report on the country’s grain and feed market. The government sets the price for the wheat it sells to millers and fixes millers’ flour prices to bakers. It also fixes the retail price for what is known as unified, or baladi bread, which accounts for 90% of Jordan’s wheat consumption.
Egypt, which also subsidizes baladi bread, has a central wheat buying authority (GASC). The government views wheat as a strategic commodity and is expected to retain control of most of the milling industry, according to the writer of a report produced by the USDA earlier this year.
The government has sold shares in the 126 public sector mills, but it retains control. The Ministry of Supply and Domestic Trade tries to maintain five months supply of stocks, but storage capacity stops it from reaching that target, so the stock level has been redefined to include purchases in the pipeline.
While several governments have loosened their controls, the landscape of the grains sector in the Middle East is still dominated by government bodies, like Egypt’s GASC or Turkey’s Grain Board TMO. Saudi Arabia has its Grain Silos and Flour Mills Organization, which controls the wheat market, despite pressure for reform.
Chris Lyddon is World Grain’s European editor. He may be contacted at email@example.com.