BMI View: We have extended our supply and demand forecasts for Iran’s agribusiness industries to the end of 2016. With the exception of milk, for which negative production and consumption is forecast, positive growth trends are envisaged for all of Iran’s main agricultural commodities. One development expected to have a wide impact on the production and consumption of agricultural produce over our forecast period is the government’s commitment to reducing food subsidies. On the demand side, the removal of subsidies means higher prices for basic food items such as bread; this will trigger slumps in domestic demand. On the supply side, food producers such as milk farmers will find it harder to sustain levels of production as the government stops purchasing their products at above market prices. We maintain our view that Iran’s agribusiness sector offers investment opportunities, due to its relatively low yields, large arable land space and the government’s commitment to supporting sectors such as sugar. However, we anticipate multiple challenges for the country’s sector in the coming years. Indeed, with sanctions in place and potentially more on the way, Iran will struggle to meet even its most basic food needs over our forecast period.
Iran Agribusiness Market Report Q1 2012
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.. Rice production growth to 2015/16: 16% to 1.74mn tonnes. Demand growth and forecast short-term increases in global prices will encourage some domestic rice farmers to try to compete with imports. The government has been making some attempts to restrict imports through tariffs, but political wrangling appears to be scuttling any significant progress.
.. Corn consumption growth to 2016: 22.5% to 6.92mn tonnes. This will come mainly from the growth of the livestock sector and of domestic meat consumption, as the percentage of corn production used for human consumption is very low.
.. Poultry production growth to 2015/16: 20% to 1.93mn tonnes. Poultry production will grow as feed prices moderate in coming years and domestic demand for meat, especially chicken, increases.
.. 2012 real GDP growth: 2.2% (compared to 2.1% in 2011; predicted to average 2.3% from 2011 until 2016).
.. Consumer price inflation: 25.0% y-o-y in 2012 (up from 12.3% y-o-y in 2011).
Iran has emerged as the largest market for Brazilian beef exports for the first time on record. Brazil’s beef exports to Iran have increased more than 300-fold over the past decade, as a rapidly expanding population has fuelled greater demand for the commodity. Although Brazil also exports vast quantities of sugar and soybeans to Iran, beef is the principal export, making up around 37% of the value of total shipments to the country in H111. Iran is seen as being a particularly good market for Brazil because it buys the more expensive cuts and has a reputation for timely payments.
Sugar from Pakistan is being smuggled into neighbouring states owing to the low retail price for sugar in the country (at PKR75/kg) compared with Iran (PKR110/kg) and Afghanistan (PKR105/kg). While the smuggling of sugar into Iran increases supply on the country’s domestic market, thus reducing the need for imports, it also discourages Iran’s farmers from boosting domestic sugar production. The price difference for sugar in the three countries is due to higher food price inflation in Iran, as the government gave up on food price subsidies for products such as bread and sugar.
Dairy producers have launched protests against the government’s subsidy reform plan in front of the Iranian Ministry of Commerce. The Iranian government used to pay a subsidy to milk producers, purchasing 2mn litres of their products at a higher price than the market. However, the government unilaterally stopped paying this subsidy at the beginning of 2011, leaving milk producers short. This, combined with severe droughts in the country, has resulted in milk production falling by almost 30% since the start of 2010/11, according to industry sources. Our revised forecast for milk envisages a 1.5% fall in production in 2010/11.
Rice farmers in Iran mainly use traditional methods of cultivation in the absence of larger-scale mechanised methods of production. The government has been active in the local rice market, exercising control over production and imports so as to control prices. However, the government’s involvement is not viewed as sufficient to incentivise producers; consequently, the country’s import dependency continues to grow. Import tariffs are used to prevent cheaper rice inflows from completely flooding the local market and wiping out the domestic production industry. Yet with Iran reliant on imports and with rice an important staple, the government must balance these tariffs with the need to keep rice affordable without having to dramatically increase subsidy spending.