Barriers to Kazakhstans Wheat Export Potential Are Crumbling
Limited production inputs, falling acreage, and poor grain transportation infrastructure have kept wheat exports in check since the fall of the Soviet Union. However, with these limiting factors being addressed, Kazakhstan could become an exporter of significant quantities of milling wheat to customers outside its traditional markets in the countries of the Former Soviet Union (FSU). Consequently this low-priced wheat will be very competitive and could result in some shift in trade patterns.
Kazakhstan was once a major wheat producing region of the Soviet Union, but production fell from more than 18 million tons in the early 1990's to less than 5 million in 1998. That plunge was due in large part to the sudden withdrawal of government subsidies in the production of wheat and livestock. With livestock production unlikely to rebound and domestic food use fairly level, exports are seen as a logical outlet for rising production.
Currently, the two main barriers limiting production are lack of investment in new equipment and in production inputs. The former is slowly being remedied by capital infusions from oil companies, government subsidies, and a better economic climate from the current oil boom. Meanwhile the use of fertilizers, which had been practically nonexistent, is on the rise with the government reportedly subsidizing 40% of its cost. The government is also considering partially subsidizing the cost of fuel, pesticides, and herbicides.
Improvements to the countrys transportation infrastructure could also greatly affect future export levels. Kazakhstan is an exporter with high transportation costs. One solution is using the Caspian Sea to move wheat to Iran, which in recent years has imported 6-7 million tons mostly from Canada, Australia, and the European Union. Other markets in the Middle East and North Africa can also be reached via the Caspian. The grain terminal at the port of Aktau, which was completed in May, has a capacity of 500,000 - 700,000 tons per year but is expected to handle only 250,000 tons this year. Most of this wheat is destined for Iran in the 6 months following harvest (Aug-Oct). However, the same company which constructed and owns the grain terminal is planning to build several silos in the northern producing areas. It is expected they would provide Aktau with a year-round source of grain, expanding its export flow to near capacity. In addition, the government has stated that, depending on the success of the terminal, it may soon begin construction of another port and storage elevator 30 miles south which would be capable of storing 5 times that of Aktau.
Nevertheless, one major obstacle to exporting wheat via the Caspian sea is the high cost of rail transport from the northeastern producing areas. Presently, it must be railed in a horseshoe-shaped pattern from the northern producing areas to the south and then over to the Caspian. However, the completion of a rail line in the next two years linking Kustanay with Aktyubinsk will cut the rail distance and freight costs considerably, making Kazak wheat more competitive on the world market.
With subsidized production inputs and the above-mentioned infrastructure improvements, exports will expand. In the last few years there have been small gains in exports to non-traditional markets, but these improvements create the potential for much larger sales beyond traditional FSU markets which have comprised about 90 percent of Kazak wheat exports. Iran has only taken small amounts in the past because of high transport costs and concerns over inconsistent quality. However, it could be a much larger market if the abundant wheat supplies could be cheaply delivered to the northern population areas, especially since Canadian, Australian, and EU wheat must be imported through the southern ports and expensively railed north.
Along with Canada and Australia, the United States would also be impacted by larger Kazak exports. With the United States two major competitors attempting to compensate for lost market share in Iran, they would likely push wheat to other Middle Eastern and North African markets. With the infrastructure improvements, particularly the rail connection, Kazak wheat could also compete directly with the United States in Italy, Egypt, and other Mediterranean markets as that wheat could be delivered for less to the Russian border and then railed to the Black sea.
However, several hurdles still constrain Kazakstans potential to become a major reliable exporter. These include unpredictable weather patterns, which in the absence of production inputs cause yields to fluctuate dramatically, inconsistent quality, lack of a reliable grain inspection system, competition from Russia, and questions regarding the governments long-term ability and dedication to subsidizing production inputs. Nevertheless, exporters doing business in the Middle East and North Africa should recognize Kazakhstans export potential.
For more information, contact Oliver Flake at (202) 690-4200 or firstname.lastname@example.org.
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