“Many countries are choosing to invest in their own milling industry and to reduce their flour imports. Therefore, both the decrease in wheat consumption per capita and the decrease in Turkey’s flour exports in the coming years will further increase the internal capacity pressure. As a result, many flour mills will have to cease operations.”

In Turkey, which has been the world flour export champion for the last 7 years, wheat yield is expected to decline due to high temperatures and drought. In its latest report, the US Department of Agriculture (USDA) predicted Turkey's wheat production this season as 16.5 million tons. USDA's import estimation is about 11.5 million tons. This figure means a new record for Turkey. The decrease in the forecasts for the wheat production and global stocks of Russia, the world's largest wheat exporter, also increased the wheat prices in the global stock markets.

These developments challenge the Turkish flour industrialists, who do not want to lose their export markets, in terms of raw materials. Stakeholders of the sector are discussing the effects of drought and the risks to flour export. We interviewed with Mr. Avşin Kaşıkcı, CEO and General Manager of Kavukçu Group, a successful name of Turkish flour industry, about the dangers waiting for the sector, possible steps towards a solution, and the future of world flour trade.

Mr. Kaşıkçı thinks that both Turkey's flour export and world flour trade will decrease in the coming years. He bases this prediction on both the decrease in flour consumption per capita and the investment of most countries in their own milling industry.

Answering our questions about the Turkish milling industry and the future of world flour trade, Avşin Kaşıkçı's comments are as follows: Mr. Kaşıkçı, you are successfully managing the Kavukçu Group, one of Turkey's leading wheat flour and pasta producers. Kavukçu has been supplying flour since 1920. Could you give us brief information about this deep-rooted past of the group? The Kavukçu family has been engaged in flour production since the 1920s. We are currently continuing our production in our three facilities. Two of our mills are in Çorum and one is in Lüleburgaz. We also have a pasta factory in Çorum. Our total daily crushing capacity has reached 2,300 tons with the last capacity increase completed last year. From Doğubeyazıt to İzmir and from Alanya to Sinop, we bring our products together with our customers in almost every part of our country. Likewise, we are one of the leading flour exporters of our country and we export to more than 50 countries.

Mr. Kaşıkçı, you are closely following both Turkey and the world markets. The coronavirus epidemic has led to multifaceted changes in economies. So, how was the international sales of the world export champion Turkish flour industrialist affected in this process? The pandemic brought with it the biggest demand shock the world economy has seen since World War II. According to the World Bank, the world economy shrank by 3.6% in 2020. The tourism, transportation and retail sectors were severely affected. However, if we exclude the HORECA (hotel, restaurant, cafe) segment, there has not been a significant decrease in wheat flour demand in the world and in Turkey, as it is a staple food. In fact, in the early stages of the pandemic, we encountered a very intense demand for flour both from within the country and from abroad. I believe that our industry, which is often unfairly scapegoated during this period, has passed this test successfully. Many flour industrialists, especially Kavukçu, made a commitment not to increase prices for a certain period of time and took a responsible stance. I think this is the best proof that our industry neither has a reflex to raise money unless there are unbearable increases in basic input costs, nor does it have the opportunity due to intense competition in the industry.

CONTAINER CRISIS AFFECTS FLOUR EXPORTS

The panic demand experienced at the beginning of the pandemic returned to normal in the following months. As I mentioned above, I think that there may have been a 10% - 15% decrease in the general flour consumption of our country in 2020 due to the shrinkage in HORECA.

We did not encounter a serious decrease in demand in our export markets during the pandemic. However, the biggest problem for the exports was the container crisis, which started in the last quarter of 2020 and continues today by getting worse. There were unprecedented and sudden increases in container freights. In addition to the price increases, the supply of containers was also a big problem. Lines started not accepting freight independent of price and shutting down service. Unfortunately, this troubling situation I mentioned still continues and our 2021 wheat flour export may therefore be completed at a lower level than the previous year.

If we want Turkey to reach its export target of 500 billion USD, one of the strategic steps we need to take is to keep the container transport sector of our state under close watch and to implement a national line that will break the oligopolistic structure in the sector as soon as possible.

IDLE CAPACITY PROBLEM

A few years ago, flour production was carried out in over 700 plants in Turkey. But a consolidation process has begun. Today that number has dropped below 500. But still the installed capacity is twice the need. Almost half of the production capacity is idle. How can we get out of this impasse? We can count many factors in the increase in the number of flour factories in our country. Some of these are the incentives given to flour factory investments in the 1980s and 1990s, the increase in the urban population, the increase in flour exports in the 2000s, the fact that flour mill machinery is produced in our country and it is possible to establish a factory with relatively low investment costs. However, there is one factor that is much more important than all these factors, and that is that our business people do not make a detailed analysis and feasibility while making an investment decision, and they often act by saying "He did it, I'll do it too". You can see this in every sector with relatively easy investment and government incentives in Turkey. Unfortunately, there is a similar situation in the pasta industry and licensed warehousing.

MANY FLOUR FACTORIES WILL BE CLOSED

We think that the amount of milled wheat in our country will decrease in the coming years. This decrease will be due to the decrease in both domestic consumption and exports. Changes in eating habits cause a decrease in bread consumption per capita. This decrease is not unique to us. Wheat consumption per capita is decreasing in the Western world every year. According to OECD figures, food wheat consumption per capita in the European Union was 109kg between 2005-14, while it was 211kg in our country in the same period. With the increase in national income per capita in our country, our per capita wheat consumption will approach the EU averages. Although the increase in the population of the country will compensate for the decrease in general wheat consumption, it is understood that the domestic market will shrink.

Similarly, there are problems in export markets. Many countries are choosing to invest in their own milling industry and to reduce their flour imports. Therefore, both the decrease in wheat consumption per capita and the decrease in our flour exports in the coming years will further increase the internal capacity pressure. As a result, many flour mills will have to cease operations.

We see that food nationalism is on the rise with the pandemic. Grain-exporting countries imposed prohibitions, restrictions and additional taxes. Russia, where Turkey imports more than 60 percent of its wheat imports, comes first. During the pandemic, we realized that even if you have money, wheat cannot be bought. Turkey need to increase grain production. So what can be done at this point? What kind of cooperation can be made between the industrialist who processes the wheat and the farmer who produces it? Can agricultural production contracts be the solution at this point? Turkey has been experiencing serious problems in wheat production in recent years. We have been importing for the last three years in order to meet our own domestic consumption in addition to our imports for the export of finished goods. However, in 2005, we had a surplus of 4 million tons of wheat in TMO stocks. Turkey was both self-sufficient and our industrialists could purchase the wheat required for flour export from TMO within the scope of inward processing regime. We were witnessing that TMO exported its surplus wheat through international tenders in those years. Unfortunately, we are a long way from that point right now.

THE GOVERNMENT SHOULD PROMOTE WHEAT PRODUCTION

If we point to the droughts as the only reason we got to this point, it would be wrong. Of course, the drought we have experienced this year has dealt a serious blow to our wheat and barley production. However, even if there was no drought, we would probably still have a deficit of 1-2 million tons. There are a number of things that need to be done for Turkey to become a country with a surplus in wheat again. The foremost of these is to ensure that wheat farming is a profitable business. In the short term, this can be achieved by keeping TMO intervention prices high, increasing direct subsidies, or subsidizing production inputs significantly. In this context, I think the 36% increase in the purchase price of wheat announced by our government this year is correct. Although the depreciation of the Turkish lira has eroded this significant price increase, I think the entire industry should support the change in our state's approach to the issue.

The second issue that I see as important is irrigation. There is no agriculture without water. According to official figures, we are still within 54% of the Southeastern Anatolia Project (GAP) irrigation target. Anatolia will become even drier with the effect of global warming, so irrigation will be of vital importance. Our state should give priority to large irrigation projects that will make the Anatolian steppe green.

Thirdly, we need to reduce the grain demand of the feed industry. The ratio of ready-made feed in animal feed should decrease, the share of pastures should increase. This will ensure that some of the wheat used by the feed industry will remain in the food industry.

Fourthly, I think that our state should be encouraging by creating a legal, economic and social environment that will enable farming to be done efficiently with high technology. On the other hand, I think that the contract farming practice will be beneficial for some products that are low in production and not preferred by the farmer, or for specific wheat varieties. It is said about the post-epidemic that, “Nothing will be the same as before. The epidemic will be a milestone.” We are already experiencing the effects of this in many areas of life. So, what kind of process do we have in front of us in the milling industry? What innovations, changes or standards will this epidemic bring to the industry? Deglobalization, which was on the rise even before the pandemic, seems to have gained a little more power with the pandemic. Countries will take steps to reduce their dependence on foreign sources, especially in basic foodstuffs. Agricultural production and food processing industries will gain even more importance. Likewise, they will diversify their food suppliers, and they will not want to be tied to a single supplier country.

WORLD FLOUR TRADE TO DECREASE

Turkey’s Black Sea neighbors such as Russia and Ukraine, which increase grain production, especially wheat, are renewing their milling infrastructures. The Russian government encourages the sale of high value-added products instead of raw materials. Are these developments a risk for Turkish flour producers? What steps should be taken to prevent the market share from shrinking? First of all, we need to focus on the world flour trade in order to analyze the risks we face. We divide the world flour trade into three categories in our internal analysis. The first category is exports made in the form of border trade. Here, on one side of the border, there is a competitive flour producer, on the other side there is another country that needs flour. For example, Turkey's exports to Syria and Iraq, exports from Kazakhstan to Afghanistan or from Argentina to Bolivia. Border trade has advantages such as the fact that buyers and sellers mostly know each other, payment in local currency, credit mechanism, transit time is very short compared to overseas imports, and the product is fresh on delivery. It is often not possible for the flour of a non-bordering third country to enter this trade. Our studies show that the share of this type of border trade in world flour trade is around 47% with 6.5 million tons.

The second category of flour exports is exports within a trading bloc. Here, thanks to customs union agreements between states, countries can export flour to each other without paying import tax. The European Union, ECOWAS, COMESA, MERCOSUR and ASEAN are the most important trading blocks. In this way, Vietnam, which is an ASEAN country, can export to another ASEAN country, Thailand. Likewise, Egypt, a member of COMESA, can export to Madagascar, a member of COMESA, or Guinea, a member of ECOWAS, can export to Siera Leon, another member of ECOWAS, without paying the import duties for the countries outside the bloc. Exporting flour from a country outside the trade bloc to countries with very high import duties is still not possible due to tax disadvantages. The ratio of exports made within the trade bloc to total world exports is at the level of 33%.

The third flour export category is overseas export. In this category, a competitive country exports to a neighboring country or to another distant country where it is not in the same trade bloc. The best example of this is, of course, Turkey. The share of overseas flour exports in total world exports is 20% with 2.7 million tons, and Turkey carries out 60% of overseas flour export alone.

Turkey exports flour in the form of border trade and overseas flour trade. The two countries with which we do border trade, Iraq and Syria, account for 52% of our total exports. We know that large milling investments have been made in Northern Iraq recently. When these investments are completed, we will experience a serious loss in our Iraqi exports.

The trend we observe in overseas export markets is that these countries are establishing their own mills. For example, 10 years ago, Indonesia was a market where we exported close to 500 thousand tons. Unfortunately, this figure has now fallen to an insignificant level of 30 thousand tons per year. The reason for this decrease was neither the increase in import duties nor the anti-dumping or safeguard measures. Indonesia has increased the number of mills and the market has become an efficient market. This eliminated the need for flour imports.

The same development took place in the Philippines. Our exports decreased from 170 thousand tons to 20 thousand tons. New flour factories are being established very quickly in Africa, one of our important markets. African governments, which have adopted the industrialization model with import substitution, unlike the Far East, either prohibit flour imports or impose a preventive import tax as soon as their wheat crushing capacity reaches the point where they can feed the country. Therefore, it is inevitable that we will experience a contraction in our overseas export markets.

I am not one of those who think that Russia has a strategy to export flour instead of wheat, or that it is wise if there is one. Because, as I explained above, when we examine the 13.5 million-ton world flour trade in detail, we see that the market is not as big as it is thought for a country that wishes to become a global flour exporter. I don't think that a country like Russia that exports 40 million tons of wheat will target a market of 2.7 million tons, which is shrinking every day, and especially that it will impose a raw material export tax for this. If Russia is targeting wheat importing countries rather than flour importing countries and it is thought that those countries will import flour instead of wheat, this would not be a logical approach again. Because flour import can never be an alternative to importing wheat and crushing it in your own country in the context of food safety. The shelf life of flour is so short that it cannot be compared with wheat. Storage of flour is much more difficult than wheat. Wheat supply can be done in high tonnages and it is a market ten times deeper than global flour export. In quality problems, quality correction can be achieved by mixing with other wheats. Therefore, no country wants to close its mills and make the country dependent on flour imports. Flour imports can only make up for the shortage of local production.

THE NEW TREND IS TO IMPORT WHEAT AND CRUSH IT AT THE DESTINATION

I think that the world flour trade will decrease in the coming period. Now the new trend is to import wheat and crush it at the destination. For the reasons I explained above, when the country that used to be a flour importer established its own mills and no longer allowed wheat flour import, it will not mean anything if you are producing in Turkey, Russia or Ukraine.

Of course, wheat flour trade in the world will never be zero. A food crisis, a political or economic crisis or drought in some part of the world will necessitate flour import. When a need arises, the answer to the question “Where to buy flour?” should continue to be Turkey as it is now. For this, Turkey should re-establish the Flour Promotion Group, which was closed with an erroneous decision in 2017.

And also our flour industrialists should focus on quality and efficient production. Companies outside the sector, which has become very widespread these days, should not be allowed to collect and export the flours of unknown origin. We must keep our container logistics strong. And perhaps most importantly, we should return to the years when we had a surplus in wheat, as in the 2000s. In this way, we both realize a more value-added flour export and we do not face the export restrictions of wheat exporting countries.

Mr. Kaşıkçı, is there anything else you would like to share with our readers? Thank you for giving this opportunity to me.