Revised Version 03 March 2015 1

STRATEGIC GRAIN RESERVE

A PROPOSAL

Revised Version 03 March 2015 2

CONTENTS1) Annual Wheat Production2) Wheat Demand Projection3) Deficit in Wheat Demand4) Demand Gap5) Wheat and Flour Imports6) The Wheat Import & Milling Market7) Wheat Market Price 8) Cost of Wheat Production9) Conclusions10) Objectives of Establishing a Strategic Grain Reserve11) How SGR Works12) Where Do We Stand Now13) Recommendations14) Decision Points

Revised Version 03 March 2015 3

ANNUAL WHEAT PRODUCTION

Source: MAIL (2015)

Wheat Production (‘000 Metric Tons)

2005 2006 2007 2008 2009 2010 2011 2012 2013 20140

1000

2000

3000

4000

5000

6000

Rain fed WheatIrrigated Wheat

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WHEAT DEMAND PROJECTION

•Annual per capita demand of wheat: 170 kg

•Population: 28.1 Million (30 to 32 million WB)

•Wheat demand current year: 5.8 million MT

•Wheat demand for future years (as per 2.05 % population growth)

Year Wheat Demand2020 6.5 Million MT

2025 7.1 Million MT

2030 7.8 Million MT

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Annual Demand vs Domestic Production (‘000 MT)

2005 2006 2007 2008 2009 2010 2011 2012 2013 20142000

2500

3000

3500

4000

4500

5000

5500

6000

4266

3363

4484

2623

51154532

3388

50505169

5370

ProductionDemand

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DEMAND GAP• Average Wheat Demand: 5.1 Million MT• Average Annual Production: 4.3 Million MT• Average Annual Gap: 700,000 MT

OBSERVATION:• Every two or three year is a dry or a drought year• There is a permanent gap between production and demand annually

Average Production Average Demand1000

1500

2000

2500

3000

3500

4000

4500

5000

5500

778.38

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WHEAT AND FLOUR IMPORTS• Total wheat flour imports in 2014: 1.3 Million MT• Total wheat grain imports in 2014: 160,000 MT

2010 2011 2012 2013 2014 -

200,000

400,000

600,000

800,000

1,000,000

1,200,000

1,400,000

1,600,000

WheatFlour

Wheat and Flour imports (MT)

OSBSERVATIONS:• Majority of imports is flour• Lack of strategic grain reserves• Lack of interest in investing in storage and milling capacity

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WHEAT IMPORT & MILLING CAPACITYIMPORTERS• More than 200 importers of wheat• More than 200 importers of flour• Dominated by only about 20 big importers

MILLING CAPACITY• 25 commercial milling factories in 6 provinces• Milling capacity of 2,500 MT per day• Only 30% of their capacity is currently utilized

OBSERVATION: • Internal milling capacity being under utilized• There is a need to support full utilization of milling capacity

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WHEAT MARKET PRICEAverage Retail Price for Wheat in Afghanistan (Afs)

Jan Fab Mar Apr May Jun July Aug Sep Oct Nov Dec15

16

17

18

19

20

21

22

23

24

25

26

Aevrage 2014Average 2013Avrage 2012Average Trendline

OBSERVATION:Farmers sell most of their crops when prices are lowest, and donot receive adequate profitability

Harvest season

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COST OF WHEAT PRODUCTION

• Wheat production cost: Afs 15 to 17 per kg• Labor costs• Irrigation costs• Fertilizer costs are amongst the most expensive relative to

Pakistan and Kazakhstan

• Pakistan: Afs 14/kg• Kazakhstan: Afs 8.5/kg

• Government subsidies in Pakistan and Kazakhstan for inputs and government purchase of surplus wheat

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CONCLUSIONS• Permanent gap between production and consumption of wheat

at average 700 thousand MT annually • Every two to three year is a dry-spell or a drought • 90 percent of imports are flour which are not storable for long• In any given year wheat prices are not stable – low for farmers

at harvest and high for consumers in winter• At any given time lack of information on wheat quantity in the

country and therefore no preparation for crises• Lack of environment for private investment in storage and

milling capacities• Lack of support or incentive for wheat production domestically

All of the above and more provides a strong justification for the government to regulate the wheat market

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GOVERNMENT’S ROLE THROUGH STRATEGIC GRAIN RESERVE

• Government's role is to regulate, set standards and monitor quality

• Government uses SGR• Buffer shocks and emergencies to correct imbalances • Price adjustments through market support• Motivate farmers to grow wheat by purchasing surpluses • Releasing wheat in deficit periods

• Government will ensure market stability, availability to market, pricing stability and control emergency and crisis situations

• Ensure reliable supply to government clients – particularly Army and Police

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HOW SGR WORKS

Jan Fab Mar Apr May Jun July Aug Sep Oct Nov Dec 19.0

19.5

20.0

20.5

21.0

21.5

22.0

22.5

Strategic Grain Reserve Operations

Average Price, without SGR supportGovernment support for stabilizing prices

SGR operates by selling reserves, hence stabilizing the price

SGR operates by buying surplus, hence protect farm income

• Price stability pushes farmers sales price above breakeven, resulting in profitability • Certainty in pricing for farmers and consumers• SGR is commercially successful because it buys low and sells high, hence

profitable and self sustaining

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WHERE DO WE STAND NOW• Currently 170,000 MT of storage capacity in 5 big silo’s

(Kabul, Mazar, Hirat, Kandahar, Pul-Khumri)• Another 30,000 MT capacity in warehouses in different

provinces• Rehabilitation cost of current 5 silo’s and replacing the

equipment will cost: USD 30 Million (2011 Prices, WB)• Establishment of 50,000 MT new storage plus equipment

and testing laboratory will cost: USD 6 Million (approximate costing, FAO)

• With the sale of wheat currently in storages – Ministry of Agriculture will have almost $40m plus in revolving fund for SGR

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RECOMMENDATIONS• Establish a National Grain Reserve Board

• Members would include Ministers of MAIL, MoF, MRRD, MoCI, MoEcon (Led by MAIL Minister), that will:

• Set policies, supervise and advise the National Strategic Grain Reserve Authority• Set annual wheat price support mechanisms• Propose and revise tariffs and taxes to protect internal growers and millers• Encourage and support investment in milling capacity and reserves• The Grain Reserve will be technically supported by a restructured SGR Directorate in

MAIL, who will also assume the secretariat of the Board

• Establish a National Strategic Grain Reserve Authority

• Semi-autonomous body• The Board of Directors, appointed by the National Grain Reseve Board, will consist of up

to seven directors each appointed for their business, finance and industry experience and expertise

• The BoD will appoint a CEO and management team to:• Manage the strategic grain reserve• Set standards and monitor quality• Market support when needed• Support farmers with purchase of surplus wheat• Sale of wheat during shortage periods

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National Strategic Grain Reserve Authority

National Grain Reserve BoardChair: MAIL Minister

Members: MoF, MRRD, MoEcon, MoCI Ministers

Board of Directors7 Members appointed by the

National Grain Reserve Board

Chief Executive OfficerAppointed by the Board of

Directors

Management team, finance, operations, logistics, HR etc

MAIL SGR Directorate

Provision of technical support and act as

secretariat to National Grain Reserve Board

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DECISION POINTS• Establishment of a National Grain Reserve Board• Establishment of a National Strategic Grain Reserve

Authority• Terms of reference of which will be developed