Economic instability has increased in recent months in many parts of the world due to the trade war between the world’s two superpowers — China and the United States — and lower investor confidence, according to global market research company Euromonitor International.

Turkey, the world’s leading flour exporter, has been affected by rising trade tensions and a stronger U.S. dollar.

“The Turkish lira and Argentine peso have led the decline in emerging market currencies against the U.S. dollar due in part to multiple rate hikes by the Fed, including three in 2018,” the CME Group said.

Due to weakness of the Turkish lira, the cost of imported Russian wheat, used in the production of export flour, exceeded Turkey’s domestic wheat price in August. To regulate the price spike, the Turkish Grain Board (TMO) opened its wheat stocks at a subsized cost in August and also received authorization to import 2.25 million tonnes of wheat, barley, corn and rice at zero customs duty.

Also, due to fluctuations in domestic flour prices, Turkey’s trade ministry introduced a regulation limiting exports of flour produced from grain grown domestically, outside of the “Inward Processing Regime” (DIR) duty exemption mechanism, to 1% of total exports.

“The move was designed to stabilize domestic flour prices, protect consumers and prevent speculation,” according to S&P Global, adding that the limit was being imposed on a temporary basis and would be removed when domestic price stability returned.

After this amendment, according to sector sources, flour millers who target export markets had to slow or stop their activities due to lack of imported wheat in their stocks during September, according to the USDA-FAS Turkey — Grain and Feed Update report published Oct. 15.

“Wheat product exporters are reportedly concerned about decreasing profits due to the economic environment as well as high competition in the sector, and there are concerns that the situation may lead to consolidations and acquisitions,” the report said.

According to the Turkish Statistical Institute, Turkey’s flour exports jumped from about 355,000 tonnes in 2000 to about 3.5 million tonnes in 2017 (see Table I, page 34) while the International Grains Council (IGC) estimates Turkey’s flour exports at 5,450,000 tonnes (wheat equivalent) followed by Kazakhstan (3,350,000 tonnes) and Argentina (1,140,000 tonnes) for 2017-18.

In 2017 and 2018, the main customers of Turkish flour were Iraq, Syria, Sudan, Angola and Somali (see Table II, page 35).

In its August report, the IGC reduced Turkey’s export forecast to 4.9 million tonnes for 2018-19 due to increased competition. In its recent Turkey — Grain and Feed Update report, USDA-FAS reported: “Turkey’s wheat flour exports during the first three months of MY 2018-19 (June, July and August) were just above last year’s exports of the same period, reaching 870,000 tonnes. Iraq continues to be the leading importer with 480,000 tonnes during this time, followed by Syria with 73,000 tonnes, despite the current logistical problems, especially in the Iraq and Syria border areas.”

Cautiously optimistic

This chain of events has raised the question: How might the economic difficulties and the weakness of the lira impact the Turkish flour milling industry as well as the grain and feed industries, and how this might impact flour being exported to neighboring countries that are desperately in need of it?

Eren Gunhan Ulusoy, chairman of the board of ULUSOY Flour Mills and chairman of the board of the Turkish Flour Industrialists’ Federation (TFIF), is cautiously optimistic about the future of the Turkish flour milling industry and its flour exporting prospects.

“Although there was not any problem with the quantity of the crop for this season, the climatic conditions and early harvest caused lower quality,” Ulusoy said. “During the second half of 2018, losing value of the Turkish lira against the U.S. dollar and economic fluctuations gave rise to an increase in wheat import prices. Because this reduction in value of the Turkish lira led to a decrease in prices of the wheat that is the raw material of flour in the domestic market, and export prices of wheat flour are in a fiercely competitive environment, the government decided to take some measures and suspend flour exports.”

Ulusoy stressed that it is quite normal to come across such problems in a sector in which the quality and quantity of the crop mainly depend on the climatic conditions.

“In the global wheat market in which we witnessed the new records of production in recent years, the last estimate pointed to a 5% to 6% decline in world total production,” he said. “Even though the problem in global wheat supply affects the Turkish flour industry, this situation didn’t cause such a big issue and 230,000 tonnes of wheat flour was imported in September.”

Regarding Turkey’s flour exports prospects, he said: “It is possible that this period may lead to a small regression in Turkey’s total wheat flour exports, but I think that it will not be such a long running period that it would cause Turkey to lose any market or its leadership among global flour exporters. I believe that with the supports of government to wheat production, the yearly required amount of raw material, which is approximately 25 million tonnes, will be supplied by local producers and wheat imports will be minimized in the forthcoming years.”

Erhan Ozmen, chairman of the board of Ozmen Flour Mills and chairman of the board of Association of Southeastern Flour Industrialists, said: “Although we say that the current economic situation in our country aggravates the working conditions, we think there will be some positive developments. Our flour industry has been intensely competitive in domestic and foreign markets as it is concentrated in medium-scale and quantity. Despite the fact that we are processing 18 million tonnes of wheat for domestic consumption and the foreign market, our idle capacity is still very high. Although the annual capacity of 40 million tonnes has decreased to 32 million tonnes with the windups, it seems that this capacity will decrease more rapidly with the current conditions.”

Addressing Turkey’s flour exports, Ozmen said: “With the decrease of intense competition, the Turkish flour industry, which is specialized in flour production and flour trade, will increase productivity, rise the scale and set a higher standard. Despite their political instability, we continue to trade with neighboring countries Iraq and Syria, which we have made the most exports by maintaining the communication.”

In its written statement on the current economic situation and Turkish flour exports, the Central Anatolian Exporters’ Union General Secretariat, which acts as the Turkish Flour Yeast and Ingredients Promotion Group’s secretariat, commented: “Thanks to Turkey’s broad production infrastructure, strong trade ties with Europe, the Middle East, Africa and Central Asia, and a highly developed tourism sector backed by Turkish Airlines, it is expected that the Turkish economy will start running a trade surplus by the end of this year. More specifically, Turkey, the wheat flour export champion in the world, will keep its strong position.”

Turkey’s renowned and developed milling equipment manufacturing industry has been an advantage for continuous capacity improvement and modernization of its flour mills. Zeki Demirtasoglu, general manager of Bastak Instruments and president of the Milling Machinery Manufacturers Association (MMMA) of Turkey, emphasized the role of the country’s milling equipment manufacturers in the country’s cereal processing industry.

“As Turkey milling machinery producers, our existing global leadership is continued this year as well,” he said. “In addition, Turkey is first in flour exports and second in pasta exports in the world’s exportation list. MMMA, representing the mill machinery sector in Turkey, and TFIF, representing the flour and pasta sector, are in constant communication.”

Feed industry impacted

In Turkey, most wheat is utilized for human consumption as flour and pasta while the rest of it is used as feed. Consequently, high wheat prices also have affected the Turkish feed industry.

“Turkey’s compound feed industry has been growing by 8% to 10% every year,” said M. Ulku Karakus, president of the Turkish Feed Manufacturers Association. “As of 2018, Turkish compound feed production reached 22.4 million tonnes. This quantity is calculated as 25 million tonnes by including home mixers’ production. Turkey recently rose to ninth in the world and second in Europe in terms of compound feed production.

“The fast growth of Turkish feed production, despite limited growth in Turkish crop production, brings many difficulties on the feed materials supply. Insufficient production of feed materials such as corn, soybeans, oilseeds and bran, which are currently required by the Turkish compound feed sector, increases the dependence of the Turkish feed sector on imported products.”

Regarding flour exports, Karakus said: “The prohibition of flour exports caused some problems such as decreasing the wheat bran supply in Turkey. This situation increases the wheat bran import demand for Turkey.”

He said the effect of rising exchange rates has been reflected in the feed material prices, particularly in imported products. As a result of these adverse events, the prices have increased by 35% for barley and corn, 23% for soybeans and 20% for wheat bran in the last two months, making it difficult to purchase these products from the domestic market. “In addition, raw material prices are expected to increase because of high demand from the feed industry and rising costs of other production inputs such as fuel oil, fertilizers, etc.,” Karakus said. “It is highly expected that this rapid raw material price increase will be reflected in feed prices.”

Ali Ekber Yildirim, agricultural journalist for the Dunya World newspaper published in Turkey, said the value of Turkish lira plummeting is negatively impacting the country’s wheat production.

“On average annually, Turkey imports 4.5 million tonnes of wheat and after processing, it’s exported as flour and pasta,” he said. “Of the exported 3.5 million tonnes of flour annually, 60% is to Iraq and Syria. The Turkish lira’s value plummeting in Turkey, which realizes 30% of global flour exports, has caused exported wheat to become much more expensive than local wheat for the first time. Turkish wheat has become below-average in cost compared to the rest of the market. Because of this, the Turkish government has stopped any exporting of Turkish wheat and flour made from local wheat. Flour exports dependent on imported wheat will most likely result in the loss of Turkey’s global flour export leadership and the markets lost by Turkey will be shared by Iran and Ukraine. The increase in price of agricultural inputs like fertilizer, fuel, seeds, pesticides is reaching 100% due to the economic crisis. This will result in reduction of the 2019 wheat crop sowings, which in turn will result in wheat imports at a higher cost and consequently less flour will be exported.”

The future of Turkey’s leadership position in global flour exports will not only be dependent on its current economic situation and lower wheat crop but also economic, trade and political conjuncture in neighboring countries and its markets.