Our Analytics 5 january — 18:42

Azerbaijan could turn into grain distributor! (How to get out of grain crisis)

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BY ECONOMY SECTION

The increase in the cost of bread in Azerbaijan is in fact the first hint of the new reality of the 2020s, where the role will no longer be played by the question of price, but by the real shortage of food.

Perhaps the only way to overcome this challenge is to channel state investments into the development of a system for long-term storage of grain and other agricultural products. Large storage facilities can act as a damper during exchange and tariff surges and serve as a critical reserve in the event of drought and adverse situations caused by climate change.

The increase in the cost of bread is the first hint

Climate, politics, tariffs

By and large, it does not matter what stage of changes is coming - global warming or cooling, but there is a fact of a deep imbalance in the climate and an increase in various natural excesses, destroying the forecasts of farmers.

Moreover, if we take individual players, then the situation does not look critical, but only unstable. Let's say that about 42.4 million tonnes of grain were harvested in Germany, which is 2% less than last year's volume (4.7% less than the average for 2015-2020). You cannot call it a poor harvest, but if you put the German result in the European and global context, then a clear trend emerges: this year there will be less wheat on the market. In France, the harvest will be higher than last year, but below the average of the past ten years.

But such instability in one parameter of the weather, coupled with other factors, gives rise to systemic crises.

There are also political reasons. For example, Kazakhstan supplies the bulk of wheat and flour to Afghanistan, where the political situation is now quite tense, and therefore part of the wheat that was intended for the Afghan market was sent to other markets. As a result, according to the results of nine months of 2021, 4.02 million tonnes of Kazakh wheat were exported, which is 18.1% more than last year.

However, varieties of Kazakh wheat are inferior in quality to Ukrainian ones. Therefore, Ukraine sells its higher quality grain on the foreign market at a higher price than Russian grain. Hence the problem of purchases for such small markets of the Black Sea-Caspian region as the Georgian one. Georgia's annual consumption of about 650 thousand tonnes of wheat is compensated by its own production by only 15%. The bulk (about 500 thousand tonnes) is purchased from Russia, despite the military conflict with Moscow.

There is no alternative to Russian wheat supplies to the South Caucasus

There are practically no alternatives to Russian wheat supplies, especially when it comes to the South Caucasus. And not only because of the proximity of the huge export market, but because of its global influence. The Russians do not fall below the second place in terms of the share of the world wheat market (18% of world trade). This is, of course, good macroeconomics with a touch of geopolitics, but it has two ends: negatively affecting prices within the country. Therefore, in January 2021, the Russian government put forward the introduction of export duties for discussion.

And the export duty on wheat in the Russian Federation from January 12, 2022 will increase to $98.2 (from $94.9 per tonne). The new duty rates will remain in effect until January 18 and may increase even more. The fees are calculated based on the forecasts of exchange prices. For wheat, the price was $340.4 per tonne ($335.6 a week earlier), for barley -- $308.2 ($304.4), for corn -- $281.8 ($283.6) per tonne.

What should Azerbaijan do?

One of the ways to stabilise and manage the market is to create grain hubs to accumulate reserves and reduce dependence on imports. Azerbaijan purchases annually in the range of 1 to 1.3 million tonnes of wheat. Therefore, it makes sense to count on the system of reserve storages for half of this volume (about 600-700 thousand tonnes of long-term storage), with an extensive system of rail and sea export. Here, in passing, we note that the expansion and modernisation of all directions -- meridian and latitudinal -- for the Azerbaijani transport hub will directly affect such a project of a network of hubs.

In subsequent years, the price surges that occur after the grain purchase season can be smoothed out for domestic consumers, restraining the rise in prices, and export the surplus to Turkey and Iran, if the material base of the storage facilities is expanded at the second stage. Having stocks of various types of grain, Azerbaijani agro-processors could launch workshops for producing vegetable oil. There is no need to look far for an example -- the very same Turkey skilfully resells Russian grain further to Africa and the Middle East.

But Azerbaijan could become the largest transport and grain hub

Transport and grain hub: parameters

Let's start with the fact that Azerbaijan is actually in the centre of the intersection of flows: last year Iran received 5 million 660 thousand tonnes of Russian grain, Turkey received 4 million 560 thousand tonnes. In terms of volumes, these are the first and second consumers of Russian wheat. So far, most of it is shipped from the Russian Black Sea ports, but already last year the growth in the trans-shipment of the Caspian and river ports of Russia was directly dependent on grain contracts with Iran. Saratov, Volgograd, Rostov regions are the leading exporters of grain in the Volga-Don system. In November, the navigation is coming to an end and the main role is played by rail deliveries to both the Caspian and the Azov Sea. In addition, almost all large exporters are trying to avoid economically inefficient transportation of grain by trucks. That is, the North-South international railway route towards Iran will gain more and more importance for grain.

The same can be said about the Baku-Tbilisi-Kars railway. If Azerbaijani Railways (ADY), in partnership with Russian Railways and the Turkish Railways, manages to modernise the connection in Kars and resolve other technical issues, then an increasing share of Russian grain in the direction of Turkey can be attracted to the Azerbaijani railway. According to Rusagrotrans analysts, Russian Railways transported 5.84 million tonnes (28% of exports) in the direction of the main export corridors. This is the third result in the last seven years after the record-breaking 2017 fruitful year (then the railway's share was 29%).

Hence, it is clear that this flow can potentially work for filling (purchasing and storing) grain hubs in Azerbaijan.

Industry analysts at ADY recognised this moment long ago. Under the contract with Uralvagonzavod in 2015, Azerbaijan purchased from Russia 2,255 new freight cars, including 204 grain carriers (the carrying capacity of the carriage is 76 tonnes). Thus, the largest regional operator was formed.

In 2015, Azerbaijan purchased 204 grain carriers from Russia

Studying the topic of the grain hub, it makes sense to work out the issues of interaction not only at the interdepartmental level, but also directly with grain traders of the Russian Federation, regional administrations of the Volga-Don region, to assess the demands of foreign markets. That is, in a complex, calculate the scale of investments in new warehouse-elevators, the availability of access roads and trans-shipment systems on the main highways, the availability of transport infrastructure for trans-regional transportation and the organisation of long-distance foreign supplies. The average cost of building a grain hub for 80 thousand tonnes with access railways, an unloading and loading system, warehouses and storage systems can reach one million dollars. At the first stage, several such points of up to one hundred thousand tonnes of storage in Azerbaijan can be built, with a total capacity of 400-500 thousand tonnes, located at the main hub communications.

Thus, Azerbaijan will turn from a grain consumer into a distributor and custodian of regional reserves, gaining the opportunity to influence pricing policy.

A similar system, but on a large scale, can be used in the storage of vegetables and fruits. Such warehouse hubs can become the basis for the creation of exchange platforms, where the market value of large contracts will be determined. This will already be a new stage in the regulation of export prices for fruit and vegetable products using all types of transport for global delivery.

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