16 August 2010

Kenya: How Country Will Be Affected by Russia Wheat Export Ban

Nairobi — Despite repeated assurances by analysts that the East African wheat industry is not likely to suffer from the ban on the grain's exports by Russia, there are fears that Kenya may not escape unscathed after all.

The latest development in the global market complicates matters further for the industry that is presently grappling with a decision on whether to lower import duty to be at par with its fellow partner states in the East African Community (EAC).

This could translate into drastic rises in the prices of wheat products in Kenya.

There have been price spikes in the global market over the past two weeks.

This does not help millers who have to pay a 35 per cent import duty that remains in place, as the government makes a decision on whether to lower it.

Like the rest of EAC, Kenya is a net importer of wheat, regarded as the second most important staple, producing only 30 per cent of its estimated one million tonnes annual requirement.

In 2007, an estimated $506.6 million worth of wheat was brought into the EAC from Russia, Argentina, Canada and Australia.

Official figures indicate that Kenya had the second highest wheat import bill after Tanzania, which received about 813,000 tonnes.

According to the chairman of the Cereal Millers Association Diamond Lalji, Kenyan millers are operating at a disadvantage compared with their colleagues in the region.

"The prices in the international market have spiked, while farmers are reluctant to sell their produce," explains Mr Lalji.

The high prices will inevitably be passed on to the consumers, who are likely to opt for the cheaper flour imported duty free under the Comesa protocol from Egypt and Mauritius.

Nonetheless, analysts insist the temporary ban on wheat exports by Russian Prime Minister Vladmir Putin will not snowball into a global crisis.

According to the director of Tegemeo Institute of Agricultural Policy and Development, Mary Mathenge, there is likely to be little effect in East Africa.

However, she adds, East African countries could be affected indirectly as a result of the lower supply of wheat in the international market, driving the prices up.

Russia produces about eight per cent of the global wheat supply.

The International Food Policy Research Institute (IFPRI) estimates the projected loss of crop at 1.6 per cent of the global wheat supply.

The Food and Agriculture Organisation on the other hand, has adjusted its earlier forecast for wheat production downwards by 25 million metric tonnes.

However, both organisations insist that the rise in wheat prices will not turn into a crisis in the short run, at least.

"It is tempting to think that a six to eight million metric tonne reduction in Russian exports will create supply shortages in regions such as the Middle East and North Africa [the main buyers of Russian wheat], but excess wheat supplies around the world could easily fill the gap," says an IFPRI briefing paper.

Besides the wheat export ban in Russia, anticipated lower output in Kazakhstan, Ukraine and Canada have contributed to the fresh worries over global availability of the crop.

Past studies on price transmission by IFPRI have indicated that unlike Asia and the rest of the world, Africa is less likely to feel the effects of such prices.

FAO says, "But after two consecutive years of record crops, world inventories have been replenished sufficiently to cover the current anticipated production shortfall. Even more importantly, stocks held by the traditional wheat exporters, the main buffer against unexpected events, remain ample".

Either way, the happenings in Russia have unsettled the favourable global outlook for wheat during 2010/ 2011 period where supply was projected to exceed demand.

In its forecast released last month, the Economic Intelligence Unit projected that the consumption of wheat would rise to 654 million tonnes and by a further 12 million tonnes in the next year.

Indication are that the ban might be the beginning of hard times for the industry.

FAO has warned that should the drought in Russia persist, this could spell danger for the situation in the 2011/ 2012 season.

This would translate into even more disastrous results for the local wheat industry that has refused to break from the mould of protecting its farmers.

Mr Lalji says over the past three decades, import tariffs in Kenya have remained higher than its neighbours, between 25 and 35 per cent, ostensibly to protect the local industry.

Among the factors blamed for the decline in wheat production from 312,000 tonnes in 2002 to 220,000 tonnes last year, is land sub-division.

"You cannot grow wheat on a five acre plot and still be competitive," he argues.

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