On the flour market, everyone is in the red this season, both Kazakh grain processors and their main buyers in Central Asia. The reason is the falling wheat prices. That is, the mukomolys have in the fall Grains bought at 120 thousand tenge/ton and now have to Flour sell at 115-110 thousand tenge/ton. This is a disadvantage for them. The same goes for the buyers – they bought flour at a certain price, and then the price went down. That is, a month ago the price was $260 a ton, now it's $240 a ton. Now, during the heat wave, it is no longer possible to store the flour for long and the warehouses are forced to sell the goods at the current price - at a loss for themselves.
The crisis of the industry
The situation in the grain processing industry in Kazakhstan is critical. Especially in the Kostanay region, where most of the country's grain mills are located, 90 percent of the mill complexes are idle. The situation is similar in other regions. In June and July, statistics will show a massive drop in flour exports from Kazakhstan. This is bad for the country - less foreign exchange earnings and lost jobs. Additionally, uncollected grain is causing carry-over inventories to rise, which in turn is putting pressure on wheat prices.
There are several reasons for this situation. The main problem is the low purchase prices for Flour, offered by buyers in Afghanistan, the main market for Kazakh flour in recent years. Considering the raw material prices and the selling prices of the end product, the profitability of flour production has slipped into negative territory.
Russian wheat costs around 14.000 rubles per ton (excluding VAT) at the Kostanay plant,” explains Alikhan Talgatbek. – Domestic wheat costs around 90.000 tenge (including VAT). The export price for Flour inferior quality that accepts Afghanistan is $240 at the border (DAP Saryagash). In the best case, it is around 250 dollars. This price includes $45 for transportation from Kostanay to Saryagash railway station. Even if you take Russian wheat without VAT, the cost per ton of flour is now $270. And in order to make at least a small profit, the selling price in Saryagash should be at least $285.
Central Asian buyers are not willing or able to pay more. Everyone is overcrowded in their camps because of the huge flow from December to April,” he said. This has led to an oversupply in the market. In addition, a further decline in grain and flour prices is expected. This is forcing buyers to take a break and cancel contracts.
Russia's wheat surplus is also coming into play - the country is looking for new markets, including through increased flour production and sales.
Russian Flour is now being shipped to Afghanistan via the Caspian Sea,” said Alikhan Talgatbek. – It is unloaded in Turkmenistan and transported to Afghanistan by land. It's cheaper.
The VAT trap
The second most important problem is the state's failure to refund VAT to flour exporters. This immediately puts the entire grain processing economy in deficit by 12%. Considering that production is already at a low profit margin, this makes no sense and companies stop working.
The government's VAT debt to industry is now very high,” said Alikhan Talgatbek. – In total, the budget now owes grain processors more than 40 billion tenge. Some companies owe 1,5-2 billion tenge each. Most of them have accumulated by 2022. And as far as we know, nobody will settle them. As a result, the calculations without VAT refunds will go into deficit by 15-20%.
The reason for the non-payment is that the tax authorities have doubts that a partner of the mill company paid VAT in turn. This delays tax refunds by gigantic amounts.
The chain is as follows: The trading house exported the flour by buying it from the mill,” explains Alikhan Talgatbek. – That means it took over the VAT of the mill. The mill in turn bought the wheat z. B. from Prodkorporatsiya. “Prodkorporatsiya bought him from someone else, they bought him from someone else. Somewhere in this chain, the tax inspectors found some violations. As a result, the VAT is not returned to the exporter, the trading house. And it has not yet been conclusively clarified whether the violation related to the purchase of wheat or not. Maybe it was some kind of service. Or it was about selling other types of agricultural products. We don't know what the fifth or sixth tribe was all about. But the result is the same – the exporter gets no VAT refund.
Dangerous grain
The flour market will only slowly recover in autumn when the warehouses in Central Asia are empty. The question, however, is how this season's experiences will translate into next year's. More and more mucomologists are concluding that Kazakh wheat is becoming "toxic" (in economic terms), Talgatbek said. In other words, it is dangerous to work with him, as it is practically impossible to recover VAT. It is easier and more profitable for domestic processors to switch to Russian grain. Or generally relocating production to a neighboring country, Uzbekistan or Russia.
There are no VAT reclaim problems with Russian grain,” says Alikhan Talgatbek. – You buy it, pay import sales tax, and even then it costs the same as Kazakh wheat, if not less. You process it, export the flour - and get the VAT reimbursed without any problems. It is better not to work with Kazakh wheat, it is “poisonous” as all mills now know. If you take a ton of Kazakh wheat, you're going to have problems with it, and you won't even get a VAT refund on all your exports. Why do we need these problems? I repeat: it is now easier to import raw materials, process them and export the final product. And don't mess with Kazakh grain. This is a global mentality shift in processors and when that happens it will be very difficult to go back.
The expert also points out that foreign businessmen are among the owners of mills in Kostanay. They look at the terms and conditions in different countries and choose the best ones. If there are such problems for exporters in Kazakhstan, which are the fault of the government, then it is quite possible to transfer business to Uzbekistan or Russia, where there are no problems.
pressure on prices
The result is clear to all industry participants: since the mukomoles are the second largest buyer of Kazakh wheat (after traders), their refusal to buy Kazakh grain will lead to a sharp increase in the unclaimed supply on the market. This will put even more pressure on prices. And the price of Kazakh wheat will continue to fall until it reaches the price of Russian wheat. And prices on the Russian domestic market are currently around 10-11 thousand rubles/ton, converted at the current exchange rate - 55-60 thousand tenge. Kazakh wheat is currently offered at 81-82 thousand tenge/ton.
Of course, a lot will depend on what kind of harvest Kazakh and Russia will have this year. And in general about how the world market prices for wheat will develop. At the moment everyone is waiting and watching the weather. A drought is looming in Kazakhstan, and there are also heat waves in the border regions of Russia. However, it is still too early to make predictions and the situation will clear up in mid-July. Then we will see what prices the market for wheat and flour can expect in autumn.
Source: Ukragroconsult (Ukraine)