Seed of doubt: How will fluctuations in the wheat market affect Azerbaijan? Analysis by Caliber.Az

The Russian government recently imposed a ban on the export of durum wheat until 31 May 2024: the decision is aimed at ensuring food security and supporting price stability in the Russian domestic market. This means that the Russian Federation will continue the policy of introducing export quotas and additional tariffs already initiated at the end of 2021. Global wheat prices continued to rise in December, even though the UN Food and Agriculture Organization (FAO) has forecast a good 2023/2024 grain harvest and mitigated the risk of a food crisis. Even though 81 per cent of Azerbaijan's imports come from the Russian Federation, Baku made its main purchases before the restrictions were imposed. Moreover, the country's grain production is increasing.

The FAO report, published in September, underestimated the threat of famine and other risks to the global food market, based on forecasts of a good grain harvest this year.

"Global cereal production could reach 2.810 billion tonnes in 2023, slightly higher than last year. However, this growth is based on feed grain production in China and much of West Africa: in particular, China harvested 695.41 million tonnes of grain at the end of this year, 1.3 per cent more than last year. However, the FAO's final forecast for food wheat has been reduced by 2.2 million tonnes to 781.1 million tonnes. This adjustment is due to a deterioration in the outlook for wheat harvests in the world's leading grain-producing countries. In particular, due to drought in the EU and Canada and rainfall in several countries in the Asian region, wheat crop estimates have been reduced by 2.6 per cent," the FAO said in a survey published in early November.

The collapse of the "grain deal" and the suspension of sea shipments of Ukrainian wheat and other food products have also contributed to this reduction in forecasts. The situation has also been exacerbated by the ongoing tensions between Ukraine and several Eastern European countries, which have been blocking land shipments of cheap Ukrainian grain since the spring, despite the European Commission's tough stance on the issue. At the same time, global consumption of both wheat and coarse grains is forecast to exceed the level of the previous crop year, 2022-2023, according to the UN's specialised agency.

This situation has already had an impact on the world market and, with relative stability in the feed segment, the food wheat market, after a period of cheapening in October-November, recovered towards growth in December. In particular, according to market reports on Monday, export prices for Russian wheat for December-January delivery rose by $3 to $240/t (FOB) during the week. French wheat also gained $3 to $250 per tonne, while US wheat was up $33 to $273. The rise in prices reflects a marked increase in buying by importers, including China, which imports some of its food wheat from the US. In the most recent period, Algeria, Lebanon, Bangladesh and South Korea have all made significant purchases of breadmaking raw materials.

Meanwhile, the Russian government's decision on December 11 to ban durum wheat exports until May 31, 2024, could put some pressure on the food wheat market, especially in the former Soviet Union. The decree, signed by Prime Minister Mikhail Mishustin, is aimed at ensuring food security and will help maintain a stable price situation for durum wheat products on the Russian domestic market. The document provides for many exceptions, including the export of durum wheat for international humanitarian aid and under international intergovernmental agreements.

Durum wheat may be exported to the countries of the Eurasian Economic Union (EAEU) within the quotas established by government decree, subject to permits issued by the Ministry of Agriculture of the Russian Federation. The proposal to restrict durum wheat exports was made by the Ministry of Agriculture and the customs authorities of the Russian Federation: the main argument is the decline in the world durum wheat harvest this season in the vast majority of producing countries, to a 20-year low.

According to the Russian Grain Union, from July 1 to November 10 this year, annual shipments of durum wheat increased by almost 13 times to 657,000 tonnes, significantly depleting the Russian domestic market.

It is worth recalling here that from October 11 this year, the customs duty rate on wheat exports from Russia has also increased from 4.564 thousand roubles to 5.224 thousand roubles per tonne, while the rate on corn supplies has also increased. Russia has also set a tariff quota for exports of the main cereal crops - soft wheat, barley, corn, rye - at 24 million tonnes, which is also a cause for concern: the quota is expected to be in effect from February 15 to June 30, 2024. For comparison, the previous quota was 25.5 million tonnes.

The Russian government took similar steps in anticipation of the food crisis in late 2021, moreover, with the beginning of the Russian-Ukrainian war in Russia, Kazakhstan, India and several other countries also began to tighten export quotas, introduce additional customs duties, duties on the export of grain, forage, feed additives, oilseeds, various fertilisers from the country. The fact is that producers of comparatively cheaper wheat in the Russian and Kazakh markets do not want to sell grain to local flour mills, and on the contrary, they strive to export it to richer countries, with a higher level of exchange prices, and as a consequence, the domestic food market is "exposed", where a new round of inflation starts due to a decrease in supply.

Grain importers in the post-Soviet region suffered indirectly from all these steps; misunderstandings with quotas arose even at the level of the EAEU member states; in the previous two years, Azerbaijan also faced the problem of rising prices of imported wheat. Our country independently provides only a little more than 60 per cent of domestic consumption of durum wheat, the rest of the raw materials and flour are imported from Russia and Kazakhstan (supplies from Ukraine since the beginning of the war are practically non-existent).

In particular, in January-September 2023, Russia accounted for 81 per cent of all wheat imports to Azerbaijan, while Kazakhstan provided 19 per cent of supplies. The relatively small share of Kazakhstan is explained by insufficient yields and rising prices in this country: thus, according to data as of December, 16.6 million tonnes of grain and leguminous crops were harvested in this republic, while in 2022 this figure reached 22 million tonnes. Accordingly, in the first three quarters of 2023, wheat imports from Kazakhstan totalled 149,955,000 tonnes, down 6.4 per cent, while imports from Russia increased by 10 per cent to 639,281,000 tonnes.

Taking into account the negative experience of previous years, Azerbaijani importers purchased and imported the main volume of food wheat mainly by mid-autumn, ahead of a series of restrictions and growth of customs duties on Russian bread imports. Thus, according to the data of the State Customs Committee, for ten months of this year, a total of 949,278 tonnes of wheat worth $247.343 million was imported to Azerbaijan: at the same time, in value terms, wheat imports fell by 25 per cent, and the average price of 1 tonne of wheat fell from $345 to $261. The fact that wheat reserves were purchased in necessary volumes and at an acceptable price is also evidenced by the fact that in October and early November in all leading trade networks of Azerbaijan, there was a decrease in wholesale prices for flour (the cost of 50 kg bag of flour fell to a minimum of $15), as well as for several types of wheat bread. In particular, the price of 650-gram bread fell from $0.35 to $0.32 and taking into account the March slump (at the beginning of the year bread cost $0.4), the annual decline in retail prices reached 21.4 per cent.

However, it would be extremely dangerous to indulge in complacency, as taking into account the fluctuations of the world and regional wheat markets, it is difficult to make forecasts about the cost of flour and bread next year. According to the State Statistics Committee, as of November 1, 2023, the country produced 3.173 million tonnes of grain crops (including corn), and there was even a slight - 1.8 per cent growth concerning the figures for 2022. But this success cannot be called a breakthrough, especially since our country is still heavily dependent on imports in the food wheat segment. Therefore, the key task today is to maximise import substitution and increase productivity in grain farming, increasing yields even taking into account unfavourable climatic conditions. A set of measures in this sphere is being implemented within the framework of President Ilham Aliyev's decree of July 19, 2022 "On a series of measures to increase the level of self-sufficiency in food wheat". In particular, grain-growing farms are provided with a food subsidy of $59 for each tonne of wheat. It is expected that the cost of about 40 per cent of the irrigation systems to be purchased will be subsidised by the state, and the remaining funds will be provided through soft loans.

At the end of November, the head of state signed another decree in connection with state support of the agro-industrial complex sector: the Agrarian Credit and Development Agency (AKIA) received the right to provide state guarantees for loans, subsidise interest on loans for the purchase of modern irrigation systems for wheat production. The maximum loan amount for such projects cannot exceed $1.7 million, the loan interest rate is not higher than 15 per cent, and the loan repayment period is up to 5 years, with a favourable annual period.

All the above measures envisage subsidising food wheat producers, and expanding the number of agro-parks and specialised grain farms and these works are being carried out in the Karabakh region etc.