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 KAZAKHSTAN International Business Magazine №4, 2013
 Agricultural Product Processing Calls for State Support
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Agricultural Product Processing Calls for State Support

Editorial

For a long time, the process of agricultural products has been treated as a stepdaughter with a part of stepmother being played by domestic agricultural industry. Thus, criticism of its lack of competitiveness, as a rule, was not accompanied by systemic support of the state. It’s only after the adoption of the State Program “Agribusiness-2020” the situation seems to be changing in a positive direction.

In contrast to the production of agricultural products their processing experiences pretty more challenges in its development both external and internal, as well as systemic and structural ones. One of these is caused by the desire of buyers to purchase raw materials on international markets, rather than the finished products. In this regard, many countries have been falling back upon a variety of protectionist measures to promote exports of products manufactured by home processing industries. Combining the above, plenty of barriers to food imports have been introduced to protect national producers.

As for the situation in Kazakhstan, for a long time the internal demand for the majority of types of food have been compensated by imports. Perhaps that’s why the state system of agricultural products processing management had a blurred structure and strategy. One can hardly speak of a serious approach in the situation where some of the issues are addressed to the Ministry of Agriculture, and the rest of them to the Ministry of Economy. In addition, there exists a dissonance in approaches to certain types of agricultural products in terms of stimulating the degree of processing, principle of subsidies allocation, and capacity utilization. 

Nevertheless, the situation with grains processing in particular is out of the picture. It would seem that we have clear quantitative benefits for its development since there’s no shortage of raw material (as opposed to meat and milk processing). Moreover, according to the Minister of Agriculture, Asylzhan Mamytbekov, we are facing the problem of grain overproduction. However, currently there isn’t a single operating high-level grain processing factory in Kazakhstan. And it’s despite the fact that the production of corn gluten, starches, feed yeast, and other high added value products would have not only satisfied the needs of domestic market and increase budget revenue in the form of additional tax deductions, but would have also increased the innovativeness of the Kazakh economy (the issue with which our government is so concerned at the moment). Converted into dozens of new products, grain doesn’t suffer from the volatility of world prices, doesn’t require grain carriers at all costs, has a variety of market outlets and doesn’t need transport subsidies.

Canned Stewed Meat’s Better than Sausage

The abundance of sausages on the market stalls of Kazakhstan delights historical memory. We have not yet forgotten kilometers-long lines we had to stay in the Soviet times to get at least some sausage. Today the whole range of sausages makes buyers dizzy but it’s just impossible to try each one of them. Nevertheless, in spite of the fact that this segment demonstrates a limit saturation of the market, the potential of domestic meat processing enterprises is only half-achieved, and if speaking about the production of sausages, we have unlocked only one third of its capacity. One of the reasons is the competition with imported products, the other one is a simple lack of raw material. Namely the lack of overseas block meat, which is cheaper and easier to recycle.

After the adoption of the decision to impose restrictions on imported frozen raw materials along the borders of Custom Union, the allocation of quotas for beef and poultry between processors and traders is getting tougher. Last year, large amounts of “blocks” were allocated to traders, who assured that they sold virtually all of “blocks” to small processors. In turn, the large and medium-sized producers of sausages and canned stewed meet doubt the verity of these statements suspecting intermediaries to have been selling the frozen meat through the stores, and even by means of re-export. So during the next quotas carve-up the decision of giving the processors a priority right for imported frozen meat is being refined. The fact that the meat-processing factories belong to the administer of the Ministry of Agriculture, and the distribution of quotas is in the powers of the Ministry of Economy and Budget Planning, makes the situation even more complicated.

Meanwhile, the increase in domestic production of meat, decrease of its costs and improving quality are quite achievable. But, providing the successful resolution of a number of problems. The first is to increase the herd breed, which is, in particular, the aim of the program of livestock export potential development currently implemented by the Ministry of Agriculture. The program’s main tools are subsidizing of the purchase of high-breed livestock, use of bulls to improve the nondescript herds, veterinary medicine system reform and subsidizing of feed crops growing.

Nonetheless, there remain many problems such as the high cost of feed or transportation difficulties when refrigerator carriers are needed to deliver meat, due to poor and/or long roads. The matters of sanitation and veterinary as well as of organized slaughter are also of delicate. Although these factors have different importance for different regions and sizes of agricultural producers.

Let’s consider a simple example. Today, the structure of beef production is dominated by private household plots (PHP), which share is accounted for about 79% of the total beef production. These are basically the households having an average of 2–5 heads of cattle. About 9% of beef (and this share is growing rather quickly) is produced by farms having 10–50 heads. Another 12% (with a tendency to decrease) are manufactured by large agricultural divisions with more than 100 heads of cattle.

Typically, large agricultural companies have their veterinarian, as well as own slaughterhouse. Their problems mainly consist in the intensification of the production, i.e. increasing the herd breeds, improving the diversity of feed, issues related to harvesting their own feed, grazing, grassland equipping. In addition, a large agribusiness in its majority is in dire need of financial recovery and support.

The small farmers do not have often enough money for the balanced feed, providing of normal conditions and high quality veterinarian availability. In PHPs the cattle usually is grown with the minimum necessary conditions. Therefore, this category is highly sensitive for the relevant accents of government policy. In particular, the PHPs need a complete system for the transfer of knowledge and technology of animal husbandry, assisting in the infrastructure development, creation of service-procurement centers and agricultural consumer cooperatives. At the same time it is necessary to raise the consumption culture by teaching the buyers to require the sellers to provide guarantee of the complete safety of meat products, as well as on the possibility of quick and easy examination.

One of the most charged issues that should be addressed urgently is the grassland management. The pastures around the settlements are exhausted. There is no water and power supply at the distant locations. Furthermore, the grassland areas are in the long-term lease by people, who graze a small number of cattle. That is, while some pastures are under capacity, other animals are kept on short rations.

The grassland problem sharply showed up at the implementation of cattle breeding development program, and, therefore, the government actively proceeded to its solution. Moreover, if the Ministry of Agriculture works on the program distant-pasture cattle breeding development, the Ministry of Regional Development, represented by the Committee on Land Resources, works over the grassland management program. By the way, the Ministry of Environment has also experience in working under the project of grassland sustainable development. It may happen that with good co-ordination by the common efforts these agencies would be able to achieve a breakthrough in the grassland issue...

While it is difficult to clear up everything even in such a matter, as, for example, the efficiency of the grants, issued by the Ministry of Agriculture for the construction of wells and power sources. How should they work with the uncertain legal status of the grassland areas or with the lack of updated data on the water supply?

Where are our cheeses?

The Kazakhstani cheeses stilly and imperceptibly disappeared from the counters of shops, there is less natural butter and powdered milk. From all milk produced in the country today only 2 million tons (or only 35%) are processed at domestic enterprises. And  this despite the fact that we have low total work load for our processing capacities, which makes 46.8% for liquid process milk, 30.6% for milk-powder, 38.2% for axle grease, 17.4% for cheeses. Such under load is caused by the industry no competitiveness; however, the agricultural production features and the degree of the state support for our main competitors, which are Russia, Belarus and Ukraine, are not taken into account.

For example, the system of public administration, form of ownership and advance mechanisms of agricultural products give clear advantages of the CES market in Belarus. Cheese, butter and milk-powder from Belarus are imported at the average prices lower by 35–40% than the prime cost of similar Russian and Kazakhstan products.

However, our agricultural producers are more concerned about permanently growing unfair competition from import dairy production, enriched with vegetable oil and other components, which considerably reduce its price. At a rough guess, adulteration covers over more than 30% of the market capacity of crude milk. Besides, whole-milk products cannot compete with the price of the milk-powder ones.

Additionally, the administrative factor impacts on the development of the dairy industry in Kazakhstan. Particularly cattle breeding and whole agribusiness industries in general were suffered much weaker destruction in Russia, Ukraine, and Belarus in the dashing 90th, than in Kazakhstan. There was no dividing of large agricultural enterprises, as well as no need to cut the cattle almost totally, including the pedigree stock.

The program and massive restoration of cattle breeding began in Kazakhstan only three years ago. Then the accent was put on the mid-size and large-size production of milk with the aim for fast solution of main problems in arboriculture improving and veterinary science. Today commercial dairy farms have priority state support.

Concerning household plots, the policy was limited to their promotion for merge in cooperatives or transfer to the mid-size farms. However it was difficult to overcome the persistence and conservatism of peasants. Therefore, an expectation that appeared processing plants become the powerful catalytic agent of intensification of country work, was false. These enterprises cannot pay as much as many household plots want for milk retail and in turn villagers do not want to improve milk quality.

As for commercial dairy farms, this business is troublesome and difficult, because cows (especially not regional) are required to themselves continuous attention and strict incarceration conditions. Having overcome a lot of problems in creation of commercial dairy farm, their owners are not absolutely interested to sell milk to someone's plant, and therefore they process milk by themselves. It could be just simple a cooking-out, unattractive package, small assortment, but it would be made by own hands. So today creation of a value added links is generally concentrated within one agricultural formation from cultivation of forages to processing.

Once again, the important role in price settlement, for example, for the production of cheeses, is played by the infrastructure. It means that there is a need of milk men from household plots, who shall provide more or less identical quality of milk for its further industrial processing. That is as minimum they should have a mini-laboratory, analyzer for check, cooler and tank refrigerator to deliver the product to the milk plant. 

If milk is suitable for cheese production, then after its processing and ferment it is necessary to spend a few months for cheese maturing. It means that the funds spent for the purchase of raw materials are frozen during all this period. Concessional lending for floating assets at the expense of state budget could solve the problem. However amount of expenses, which is necessary for financing of the agribusiness industry, always frightened financiers by its size and non-return risks.

From the next year the officials plan to allocate money “for subsidizing of expenses of the processing enterprises on raw materials purchase for production of milk-powder, butter and cheeses, fish, meat, vegetable products and canned goods”. Thereby the milk plants would be able to buy raw materials from farmers at the mutually beneficial prices and, perhaps, they would return to the production of cheeses.

Flour milling sufferings

The phrase already sounds as a mantra that Kazakhstan is a leader in the flour export. Meanwhile, there are clods over the Kazakhstani millers today. There are 245 milling enterprises in our country, including 9 large-size, 46 mid-size and 190 small ones. And though their potential mill capacities make about 9 million tons, only 37% of them are actually used. Grit production is loaded on 22%, bakery – on 43%, macaroni products – on 51%. 

The problem is that main buyers of the flour and grains from Kazakhstan are the countries of Central Asia which, having the opportunity to select, they prefer to import raw materials to involve its own economy. Uzbekistan, Tajikistan and Kyrgyzstan actively began developing their own flour-milling enterprises, processing on them the Kazakhstani grain and they do not scorn to introduce protectionist measures. Moreover, this situation acquires mass character according to the President of the Grain Processors Union of Kazakhstan, Evgeniy Gan. The more mill capacities appear in these countries, the more actively their governments work for the creation of priority conditions for the grain import, instead of the flour import. 

There is an excise duty for imported flour in the amount of 15% in Uzbekistan, while imported grain does not have it. Tajikistan applies increased VAT rates (18%) on imported flour and on the contrary VAT on grain is lowered (10%). Besides, these countries set high rates for our products delivery to the customers. Especially it concerns transportation across the territory of Uzbekistan, including flour transit further to the South. Very slow speed of trains over this country aggravates the situation.

Kyrgyzstan does not stand aside as well and it supposedly introduced allegedly for special import duty for a period of 4 months in the amount of 3 som (slightly less than 10 KZT) for 1 kg of flour at the beginning of July to protect the national vendor. The more so that similar practice was already implemented by Kyrgyzstan in 2009. However, the Kyrgyz flour is considerably inferior in quality if compared to the Kazakhstan flour, while the quality is more important for population than the price. Herewith all prohibitions provoke countermeasures like gray export and smuggling.

In this situation the Kazakhstani traders have other temptation, which is export of “social flour”. Our millers are convinced that the reduced price of flour, subsidized from the budget for its accessibility to poor social groups, flows away abroad. However, having considered a request of the Grain Processors Union on this problem, the Ministry of Agriculture has not found evidence of inappropriate use of “social flour”.

All these factors lead to fast stagnation because the Kazakhstani flour-grinding production does not cope with external and internal challenges. According to Evgeniy Gan, the domestic flour-grinding enterprises have started large-scale; some of them are closed fully or partly. As a result, it leads to the labor shedding or long-term holidays without payment for the enterprises’ employees. Flour export for the first half of the year 2013 was reduced by 45% in comparison with the similar period of last year. If such dynamics remains, closing of mill capacities would cause multiplicative effect and impact the situation in other branches related to this sector.

As it was mentioned earlier, the state also has a very close muffled relation to the deep processing of grain. It was possible to tell four years ago that Kazakhstan exported such products, as gluten and distiller’s dried grains. The country had big plans for extension this sphere. However, both innovation and promotion products were closed. At first BM LLP was closed in 2012, and then Biokhim. VITA-Soja LLP is the only enterprise in the Republic for soy production and it also has problems. As a result, the soy cheese, so loved by the dietetic food adherents, disappeared from the shops.

And still we hope that there is light at the end of the tunnel. At least, according to the Agrobusiness-2020 program text, the increase in grain processing products should be provided in the next years: “One of the key tasks is saving of leading positions for the flour export, which can be reduced because of the import countries’ orientation to the development of own capacities for flour production. The exportation of deep processed wheat products (starches, gluten, fibrin and others) shall amount 0.3–0.5 million tons if the projects on deep wheat processing, launched now, achieve their success”. 

The program also specified the processing of milk, meat, fruits and vegetables, and the production of sugar among other priority directions. The special master plan was elaborated for this sectors development, which provides such instruments of state support as the subsidizing of expenses of the processing enterprises in case of raw materials purchase (more than KZT 52 billion by 2020), investment subsidizing in case of construction of new and upgrades of existing productions (nearly KZT 11 billion), return of remuneration rates for credits and leasing (over KZT 47 billion), guarantees and insurance of loans (about KZT 20 billion) etc. 

We’d really appreciate if this year would become make-or-break for the situation, which has developed in the sphere of agricultural processing. We hope that the state will see at last “prophets in their fatherland” between the scientists, who have already developed tens of new food products, made of the Kazakhstani raw materials. Then at the end we would not regret about the missed opportunities for the creation of a really competitive agribusiness industry.   

Food and processing industry in figures

According to the Agency of Statistics, there are 1,372 enterprises in food and processing industry nowadays, including 55 large-size ones. They produced 5% of the republican industrial output and 16% of the general indexes of processing industry in last year. The actual volume index of industrial production in this sphere in 2012 amounted to 102.9%, and investments in fixed capital reacted KZT 29.6 billion (comparing with KZT 34 billion in 2011). If we speak about structure of food production, the main share in it is occupied by grain processing (19.4%) and dairy sectors (16%), production of bread and bakery production (15.5%), meat-processing (13.8%), fruit and vegetable (9.4%), oil and fat (9%) and other (16.8%) branches.


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