written by Alezandra Tsay

translated by Peretz Partensky

Part 1 here.

Perfect storm

FCC had to renege on the original purchase price of $165 US because that turned out to be the market price on the Black Sea ports. Given transport costs, this cost of grain would make it uncompetitive.

FCC was facing the prospect of buying three million tons of grain it couldn’t possibly sell. The company has already endured a net loss of $1.5 billion tenge in the first half of this year. Funds for the procurement are borrowed from the National Fund, and it is quite possible that the FCC is worried about defaulting on its obligations. Even at a reduced purchase price offer around $123 US per tone will not make Kazakh wheat competitive in foreign markets.

The critics point out that the FCC should have foreseen these market conditions before giving false hope to the farmers through reneged promises.

“The conjunction of forces acting on world grain price has left Kazakh grain as a whole in poor shape. This applies to increased competition in the west in the Baltic and Black Sea ports. Very good yields were also obtained in Europe, Argentina, and Russia. As production indicators from these countries began to top expectations, world prices fell. Now the price at the ports is 170-180 dollars, and that’s not good for Kazakhstan’s grain. In order for our grain to be competitive at the ports, the domestic purchase price must not exceed a hundred dollars,” said Mr. Smagulov. His company decided to give up on exports this year, and focus on methods for processing of grain and pasta production.

Grain yield in Russia was about 63 million tons and 20 millions tons in Ukraine. The export potential of these two countries will be 19 and 12 million tons respectively. That already fills the capacity of the Black Sea ports.

“Saudi Arabia has recently purchased 500 thousand tons from Canada. We hoped they would buy from Germany, giving us a niche in Europe, which fell through. Now, 500 thousand tons of German grain staying put in Europe, and no one is going to be buying any of our grain for the next two to three months,” says an anonymous source from a large trading company.

The traditional buyers of Kazakhstan’s exports to the south (Uzbekistan, Kyrgyzstan, Afghanistan, Iran, Tajikistan, Turkmenistan, I) also got good crops, halving their grain import needs to 8 million tons from 16. Kazakhstan is anticipating exporting up to six million tons of wheat there.

However, because of the abundance of their own stores of grain, they will only be able to take delivery of Kazakh grain at the end of November. Meanwhile exports to this area are further complicated by administrative barriers. “The Sary-Agash customs checkpoint, through which the grain goes to the south, was closed from the sixth to the 20th of October in connection with the accumulation of cars. An administrative transport ban may last through the beginning of November. Consider the south closed. There is practically no export,” said Ivan Malygin, commercial director of a trading company AltynBiday 2000. Almost 10 million tons of Kazakhstan’s export potential has yet to find a right buyer.

Ironically the south is currently the only potential market for Kazakhstan’s wheat. “As in past years, the FCC plans to export wheat in the south (the countries of Central Asia and Caspian region), which accounts for about 90% of the total wheat export,” Daulet Uvashev, the commercial director of FCC, told “EK Agro”.

Solving the underlying structural problem will require finding new potential markets. This has been initiated by Prime Minister Karim Masimov, who said in October that China is ready to buy as much grain as Kazakhstan offer. He gave orders for the necessary work to develop this market. “Negotiations are presently underway with the corresponding Chinese government-owned corporation on import and export of grain and oil products for delivery to the Chinese market from 2010 to 1 million tons of food wheat. In July 2009 the Corporation has shipped a trial consignment to a flour mill ShenKan in Xinjiang,” said Mr. Uvashev.

The experience of market participants suggests that entry to the Chinese market will be very difficult obtain, and nearly impossible in the near term. Yet it is necessary. “It’s not that simple - China wants it, and the grain goes. It is necessary to forge legal agreements and sign a contract with the Chinese side identifying receiving centers. That is a lot of technical work that may be stretch out a year or two, considering the peculiarities of Chinese trade. But if we do get access to China, we can breathe freely, because less will depend on the Black Sea where access has gotten, to put it mildly, problematic,” said a trader who asked to remain anonymous. So this is how it now stands. After a plentiful harvest, the farmers are reaping only financial loss.