Dynamic Flour Exporter
Jan. 19, 2012
by David McKee
Kazakhstan’s 2011 grain crop of around 30 million tonnes (bunker weight) is a record since the country gained independence 20 years ago. However, with this success comes the unprecedented problem of selling up to 25 million tonnes of net weight grain, of which 80% is wheat that will remain after drying and cleaning.
The country, with a population of just 15.3 million, consumes less than 8 million tonnes of grain, including animal feed. Its dynamic milling industry already has ranked as the world’s top wheat flour exporter for five years in a row, last year supplying 2.5 million tonnes of flour, almost all to Uzbekistan, Afghanistan and Tajikistan.
Traditional markets for the bulk of the country’s wheat exports, which have averaged 4 to 5 million tonnes in recent years, include the same Central Asian countries as well as Iran, Azerbaijan and Georgia.
To dispose of this year’s crop, Kazakhstan officials estimate that wheat exports will have to jump to 15 million tonnes. To reach this level, new markets are needed. Africa, the Middle East and Southeast Asia seem to hold the most potential.
But this means rail transport from the landlocked country thousands of kilometers across Russia to Baltic and Black Sea ports.
The problem is that Russia too has a bumper crop after last year’s drought and export ban, and will most likely have record grain exports this year as well. Grain railcars are in short supply and only smaller, shallower ports are available for the next few months to load Kazakhstan’s wheat in small vessels.
Thanks to its mineral and energy resources, Kazakhstan’s government can afford to help its grain farmers. The government grain corporation will buy up to 5 million tonnes at above market prices to add to the state reserves. There will be a $40-per-tonne rail transport subsidy provided for the export of 2.5 million tonnes of grain through Baltic and Black Sea ports.
In the following World Grain interview, Evgeny Gan, longtime president of the Kazakhstan League of Grain Processors and Bakers, an industry association, comments on the changes that the wheat milling industry has undergone in the last two decades, and the opportunities and challenges faced today by both wheat producers and wheat millers in Kazakhstan.
WG: What is the status of Kazakhstan’s wheat and wheat flour exports?
Gan: In 2010, Kazakhstan exported 8.75 million tonnes of wheat, including 5.47 million tonnes as grain and 2.23 million tonnes as flour. Wheat flour exports are principally to the countries of Central Asia. The main buyers were Uzbekistan with 45.8% of the total, Afghanistan with 34.4% and Tajikistan with 16%.
WG: What are the challenges Kazakhstan faces to increase its grain exports?
Gan: Kazakhstan’s distance from ocean ports is the main problem for development of foreign markets. The constant increase of transport costs is what is mainly holding back growth in grain exports. The greatest hope for Kazakhstan’s exports would be access to the Persian Gulf, considerably shortening the land transport distance for Kazakhstan grain to reach international markets.
Nevertheless, I think it is unrealistic to expect a sharp increase in Kazakhstan exports in the coming five years. In the next 10 years, the export potential of Kazakhstan will depend on the grain market situation in China and India.
WG: What is the prognosis for wheat flour exports?
Gan: In the next few years, we can expect to observe a decrease in demand in traditional markets for Kazakhstan wheat flour from 2.5 million tonnes to 1.8 to 1.9 million tonnes. We can expect further development of demand only in Afghanistan. The main factor affecting the opportunity to supply Kazakhstan flour to Afghanistan will be the wheat market situation in Pakistan.
The short-term perspective for increases in Kazakhstan wheat flour exports will be tied to the development of export markets for wheat flour in Southeast Asia. Given that milling enterprises have the capacity to process 10 million tonnes of wheat per year compared to domestic wheat flour requirement of just 1.8 million tonnes and current exports of 2.5 million tonnes, Kazakhstan already has the ability to supply no less than an additional 3 million tonnes of flour per year to external markets.
WG: To what extent does the Kazakhstan government support wheat production and exports?
Gan: Currently, about 43% of Kazakhstan’s population lives in rural areas. Therefore it is quite understandable that development of agriculture is given a lot of attention. There is an entire complex of measures in place for governmental support of wheat production.
The Food Contract Corporation of Kazakhstan is the main government operator active in grain markets. It buys wheat from producers with some of the purchases made in the spring to finance sowing of the crop. All told, the subsidies are not substantial, amounting to just about $4 per hectare of wheat.
However, purchases by Food Contract Corporation are a significant force for grain price stabilization, both during the harvest and afterward. This year, Food Contract Corporation bought 5 million tonnes of wheat amounting to about 20% of the harvest at a price (about $180) that was considerably higher than the actual market.
In order to support farmers, the government allocates a certain amount of subsidized diesel fuel every year for sowing and harvesting of the crop.
Supporting grain exports is one of the key tasks of the Ministry. In order to reduce the risks and costs associated with delivering wheat to ports, a grain terminal has been built at the port of Aktau on the Caspian Sea, a transshipment terminal has been built in Baku, Azerbaijan (also on the Caspian Sea), and an export terminal has been acquired in Ventspils, Latvia.
In addition, there are plans to increase wheat exports to China by rail and through China to ocean ports for transshipment.
In this manner, through the diversification of export corridors, Kazakhstan hopes to become more competitive in world grain markets.
In order to support exports in the current year, a decision has been taken to subsidize transport costs to Black Sea and Baltic Sea ports, as well as to and through China. The subsidy is $40 per tonne of wheat.
The League of Grain Processors and Bakers of Kazakhstan have proposed to the Ministry of Agriculture that a similar subsidy be put in place for wheat flour exports.
WG: Please describe the structure of Kazakhstan’s milling industry and its recent evolution.
Gan: In 1990, according to data from the central government archives, there were 31 milling enterprises in Kazakhstan, including one rye mill and two semolina mills.
Total daily capacity was 8,390 tonnes of wheat, equivalent to about 3 million tonnes per year. Of this, 390 tonnes was for semolina, 150 tonnes for rye, and 7,850 tonnes for bread wheat. Including those in agricultural enterprises, the total number of mills was 71, with sufficient capacity to supply the population with the three official grades of wheat flour. It should be noted that the mills constructed in the final years of the Soviet Union’s existence were large scale, up to 500 tonnes per day.
Beginning from the very moment that Kazakhstan obtained its independence, the milling industry began to develop rapidly. There were just 31 milling enterprises in 1991, but by 1998, according to government data, there were already 2,300 enterprises that reported their main activity to be “grain processing.”
After that, the number of milling enterprises started to fall. In 2009, according to figures of the League of Grain Processors and Bakers of Kazakhstan, there were 650 active mills, of which 500 actually operate.
But during the same timeframe, the production capacity had actually increased to over 9 million tonnes per year.
Unable to withstand the competition, most of the smaller mills with less than 50 tonnes daily capacity have been withdrawing from the market. At the same time there has been a massive addition of new production capacity, mostly consisting of mills in the 150- to 200-tonne-per-day size.
At present there are 383 milling enterprises, according to official statistics, but our association estimates the number is more like 450. Their total wheat grinding capacity is not less than 10 to 11 million tonnes per year. This means there is sufficient capacity to mill within Kazakhstan all the wheat that is shipped out of the country.
WG: Which are the largest milling enterprises in Kazakhstan?
Gan: According to Kazakhstan law, the actual capacity and production of industrial enterprises including wheat millers are treated as “commercial secrets.” Consequently, there is no official list of the largest milling enterprises based on production.
Without a doubt, the largest milling company based on capacity is Zernovaya Industriya, with a total of 1,400 tonnes capacity at plants located in three regional (oblast) capitals: Uralsk, Aktobe and Kostanai.
Other major producers include Tsesna Astyk in Astana, East Kazakhstan Milling and Feed Kombinat in Semey, Altyn Dan in Shimkent, and Romana in Kostanai.
The largest single milling plant has a capacity of 500 tonnes per day. The most typical mill size is 150 to 200-tonne-per-day plants supplied by Turkish manufacturers. As smaller mills leave the market, the average mill size has increased. There are almost no mills left operating in the 10- to 30-tonne-per-day capacity range. The ones that do are found within larger agricultural enterprises.
WG: What is the demand for wheat flour in Kazakhstan?
Gan: The domestic market volume is around 1.8 million tonnes of wheat flour. If you look at statistical data, you will notice that year to year it varies between 1.4 million and 1.8 million tonnes. In our opinion, this variation has more to do with imperfect statistical methods than with actual changes.
WG: How will the country manage to increase wheat exports given this year’s crop?
Gan: Kazakhstan harvested 30 million tonnes of grain in the just completed crop year. According to the Ministry of Agriculture, this is the largest in 60 years. It is planned to export 15 million tonnes of wheat. But if one analyzes historical grain exports from Kazakhstan, the quantity has never exceeded 10 million tonnes, even when wheat flour exports are converted into wheat equivalent.
In order to export around 15 million tonnes of grain, two things must exist – there must be buyers and there must be the technical capacity to deliver the grain to them.
As far as buyers are concerned, they seem to be there. Grain quality is good this year. There was favorable weather for practically the entire harvest period. The grain came in dry and the protein content is not less than 11% to 12%. Per-tonne costs are relatively low since yields were good.
But the problem is in delivery. In order to export up to 15 million tonnes, it is necessary to ship 1 million tonnes monthly of grain and another 350,000 tonnes of wheat flour. Practice has shown that even for rail transport, internally there is only enough capacity to ship 500,000 tonnes per month. Additional quantities can only be transported by counting on extra grain hopper cars brought in from other countries.
This year, Russia is in no position to help Kazakhstan as its export potential has been raised to 30 million tonnes, which would also be a record. So for the moment, Kazakhstan is acquiring grain railcars from other Central Asian countries and from Georgia. But even with these extra wagons, I don’t think we can ship more than 800,000 tonnes per month. For wheat flour as well a problem has come up, since some of the boxcars have been converted to grain carriers.
There was already a 30% shortage of boxcars in October. In November this figure will be even higher. The deficit could reach 50%.
By my estimate, total monthly export shipments under the most favorable circumstances will not reach more than 1 million tonnes including wheat flour, and more likely not more than 800,000 tonnes.
WG: Kazakhstan and Uzbekistan have the largest bilateral wheat flour trade of any two countries. Can you say a few words about it?
Gan: In my opinion, the development of wheat flour exports to Uzbekistan was facilitated by three factors. Uzbekistan population increases were accompanied by increases in food consumption, especially wheat flour. Income increases have resulted in demand from the Uzbek population for higher quality flour and baked goods.
There has been a growth in re-export of Kazakhstan flour from Uzbekistan to Afghanistan as well as increases in exports of Uzbek wheat flour to Afghanistan.
In 2010, the Uzbekistan government introduced a 10% excise tax on all wheat flour imported to the country. Beginning in the second quarter of 2011, this tax was increased to 15%. By this means, the Uzbekistan government hopes to stimulate more milling in their country. Confirming this trend is the establishment of a representative office of Bühler in the country.
We should keep in mind that Uzbekistan in recent years has increased its own production, permitting it to engage in exports.
Nevertheless, the quality of wheat grown under irrigation does not permit its use for a high quality “non” (traditional flat bread). Therefore they need Kazakhstan wheat and wheat flour to improve their own flour.
Introduction of excise duties contradicts the principles of free trade between our countries. The imposition of these duties has reduced the export of wheat flour to Uzbekistan in the first 10 months of this year by 10% compared to the previous year (799,600 tonnes versus 907,500 tonnes).
WG: Can you recommend some information sources for Kazakhstan grain markets?
Gan: Recently, sources of grain market data for Kazakhstan have been developing rapidly. There is a full range of internet sites that provide daily information on grain market activity.
minagri.kz – Kazakhstan Ministry of Agriculture site.
Kazakh-zerno.kz: Kazakh grain information agency site.
agrosektor.kz – Site of publication (Agrarian Sector)
agrozharshy.kz – Site of the newspaper (Agrozharshy).
Our association will be launching a new website soon: www.kaznan.kz. It will provide current news on grain and flour markets and monitor wheat and flour prices throughout the country. We expect it to be up by January 2012.
Most of the sites are in Russian, but I don’t believe that should be a problem these days. If some kind of concrete response is needed, you can contact us and we will respond with what information we have.