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June 2011

FSU AGRO-OUTPUT 2011: LOOKING GOOD, PERHAPS TOO GOOD

Source: The Times of Central Asia, Ch. Van Der Leeuw, 17.06.2011

The month of June is perhaps the most anxious time of the year for farmers in the former Soviet grain belt and the vastest grain-producing strip of land in the world. So far in Central Asia and to its west, weather conditions have been better than last year, but either too little rainfall which leads to drought or too much precipitation which leads to floods and soil erosion could easily spoil the scenario in upcoming weeks. Apart from that, major shifts in markets could hamper agro-activity in the region more than just incidentally.

Spring crop sowing campaigns have been completed early in some parts of the former Soviet Union, while elsewhere they are at an advanced stage. In Kazakhstan, which produces in the order of one-third of all spring wheat in the former Soviet Union, 21.3 million hectares of spring crops have been sown this year, including 16.5 million hectares of cereals, according to agriculture minister Akhyl-bek Kurishbayev as quoted by the Kiev-based specialised news agency Agrimarket. As for winter crops, in all three major ex-Soviet grain exporting countries more than 90 per cent is reported to be in either "good" or "satisfactory" state, which justifies expectations of recovery for this year's harvests close to the record-high numbers in 2009.

Depending on the weather

Production of cereals was down on most of the northern hemisphere last year throughout the former USSR's three net exporters of grain, meaning Russia, Ukraine and Kazakhstan. In some areas, the setback was due to floods as a result of heavy precipitation and in others due to drought for the lack of it. In Kazakhstan, production of cereals and leguminous crops dropped to 12.2 million tons in 2010 from 21 million in 2009. In Russia and Ukraine, grain output dropped from 97.1 million to 60.9 million tons and from 46 million to 39.3 million tons respectively.

This year, Kazakhstan pins its hopes on grain harvests amounting to 17 million tons under minimum conditions and 19 million tons at best. Russia has forecast its harvests in the range between 75 and 85 million tons, while Ukraine expects a yield between 43.4 million and 48.7 million tons, depending on the weather, Agrimarket reports. Weather conditions in most of the former Soviet southern grain belt have been good so far, with a crop-preserving "snow blanket" that lasted for four months on average, and enough rainfall in spring to make the plants grow. It is now during the month of June that everybody is due to hold his breath.

Hamstring strategy

Keeping grain in storage to face hard times has been the main tool for governments of ex-Soviet republics to keep domestic prices stable without curbing income on exports too much. In the Russian Federation, that policy failed last year, forcing the authorities to impose a straightforward export ban, which is expected to be lifted over the summer this year in case harvests satisfy domestic demand, put at 79 million tons - thereby offering a pretty good chance for the Russians to re-enter the cross-border market. In Kazakhstan, grain in store totaled 6.7 million tons as of May 1, including 6.16 million tons of wheat, 0.33 million tons of barley and minor quantities of other grains. As of July 1 this year, Ukraine is set to hold 5.48 million tons of cereals in reserve.

As a result of the hamstring strategy, export capacity of the ex-USSR grain troika for this year is expected to get back to stable from the two previous years' sharp oscillations. Thus, through the current marketing year ending on June 30, Kazakhstan is expected to have exported 7 million tons of wheat, down from 8.2 million in the previous year-period. Russia expects to rebuild its export capacity to a more modest 6 million tons. Ukraine, which has a far more diverse agro-output, is expected to top the list with 8 to 9 million tons of wheat, 5 to 6 million tons of barley, 4 million tons of maize along with lesser quantities of other produce expected to be available for export in the upcoming winter, Agrimarket reported on April 28 this year, quoting agro-ministry official Anatoly Rozgon. Through the current marketing year, Ukraine will have exported in the order of 13.5 million tons of cereals, the news report reads.

Serving overseas markets

In all, if harvest forecasts prove to be right, the ex-USSR "export troika" could well be able to make between 25 million tons of cereals under stable conditions and 40 million under highly favorable conditions on the international market - mostly wheat. With present benchmark prices oscillating around 100 pounds Sterling on Europe's LIFFE market, gross earnings on sales would be up to 4 billion pounds under the best possible conditions.

But the major change in the situation concerns less supplies than export destinations. First of all, Kazakhstan and Russia form part of the present Customs Union, in the process of being extended to a Single Economic Space during which Kyrgyzstan is expected to be integrated into the block. Trade between the four partners has the status of internal trade, with neither taxation nor quota within the domain being allowed.

The SES excludes Ukraine, even though in terms of grain trade a partial agreement between the latter and the SES is reported to be under negotiation, which would virtually include Ukraine in the SES regime as far as agricultural products are concerned. The reason is simple: both Russia and Kazakhstan lack sufficient logistics for serving overseas markets and need Ukraine's facilities for the purpose.

Position of an underdog

And even more changes in fundamentals are in the air. Within the SES, the two net importers of cereals Belarus and Kyrgyzstan are moving in the direction of self-sufficiency and could well join the export club in years to come. And the trend stretches further to countries such as Turkmenistan, Azerbaijan and Moldova - thereby leaving only Tajikistan, Uzbekistan, Georgia and Armenia as sales markets in the former Soviet domain.

It all leads to a rather ab-surd-looking situation. In order to catch up with agriculture's position of an underdog in national economic development within the future SES and adjacent countries, which in Russia and Kazakhstan represents 5 to 7 percent of their national income while up to a third of the working population depends on it for its income, boosting output means creating a bottleneck in the marketing process.

And even should that be overcome, a vanishing regional market means a glut entering markets further abroad, which is bound to have a negative impact on market prices and thereby on farmers' incomes. It is mainly therefore that, unfortunately, the socioeconomic picture of Central Asia's agro-sector can be expected to remain pretty much the same as it looks today - good weather or bad weather.