THE WHEAT PUZZLE OF TURKEY: WHAT NEXT?

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1 THE WHEAT PUZZLE OF TURKEY: WHAT NEXT? Client Prospectus: A Special Study by Informa Economics & SERES International August 2013 This multi-client study is a joint product of Seres International Agriculture Consulting (Seres) and Informa Economics, Inc. (Informa). In addition to this study that highlights the Turkish wheat complex, subsequent studies will focus on the Turkish cotton, pulses and the livestock & dairy sectors. Turkey is at the nexus of European, Black Sea, Asian and Middle Eastern trade. Moreover, as traders look beyond the BRIC countries for global growth and development, Turkey is always included in the list of countries under consideration as representative of the next wave of economic growth and development. But events surrounding the occupation of Istanbul s Gezi Park have surprised observers of the region, especially so as Turkey has been a bulwark of stability in a region that has been decidedly unstable in recent years. Against this backdrop, the question of where Turkey s agriculture sector is headed is of critical importance. How much will economic growth increase agricultural production? Will domestic agricultural production match domestic consumption? Will imports need to increase? Where does Turkey fit into the global agricultural trade picture? In this multi-client study, the focus will be on the Turkish wheat sector and these and many other questions will be addressed. Please join us in this unique study and gain insight into the Turkish wheat sector. INTRODUCTION The growth rate of the agriculture, hunting and forestry sector in Turkey has increased 3.5% (constant prices) in 2012 compared to the previous year. This was above the overall growth rate of Turkish economy which was 2.2%. The share of agriculture in GDP (by PPI) has been 8.9% and 9.1% in 2011 and 2012 respectively. Producer Price Indices (PPI) numbers for wheat are somewhat above overall PPI numbers of the agriculture sector for the same base year since the second half of 2012.

2 Exhibit 1 Source: Turkstat Under normal conditions, domestic wheat production in Turkey represents 14% (by value) of total crop production and 60% of cereals production. Despite being quantitatively self-sufficient, Turkey remains a traditional wheat importing country, mainly due to quality problems. Beyond domestic food consumption of wheat, the main drivers of demand are wheat flour exports, direct livestock feeding and the feed industry sector which has been revitalized in recent years. Wheat based biofuel production has a lesser effect on the demand side. As far as the supply side is concerned, wheat plantings are highly sensitive to input prices and can easily move to alternative crops which have higher market and intervention prices. National agricultural policy decisions, fueled by competing crop and industry sector interests, have a significant impact on the supply and demand patterns. The most recent issues and changes related to the supply and demand situation are meaningful to discuss with respect to the overall wheat situation. Revitalization of the livestock sector has significantly changed demand patterns for feed crops and feed industry and the livestock sector has been one of the major driving sectors of overall grain demand. However, the high feed prices prevailing in the last several months threaten sustainability of this sector with small and medium scale farms, in particular, very vulnerable. As far as forward linkages are concerned, the leading position of Turkey in global wheat flour exports has been negatively affected in the first months of 2013, mainly due to a temporary 20% import duty imposed by Indonesia and the political unrest in Syria. On the other hand, diet attitudes, both preferred by consumers and pumped by the government, have gradually changed the quality of wheat demanded by consumers. Even in 2

3 the current situation, regulations related to a quality based delivery and pricing system introduced in 2011 has helped to encourage the production of high quality wheat. From the structural viewpoint, regulatory measures to prevent land fragmentation by inheritance are on the agenda of law makers as well. It absolutely contributes to economies of scale which is currently one of the most important structural problems in agriculture. With respect to one of the recent policy arguments, the approved budget of the Mınistry of Food, Agriculture and Livestock (MFAL) proposes that agricultural subsidies would be fixed to billion TL in 2013, over 15% greater than Additionally, the announcement of a wheat intervention price from State Intervention Agency, Turkısh Grain Board (TMO) on June , is over the inflation rate. The base prices for Anatolian Hard Red Wheat and Durum Wheat will be 720 TL/MT and 765 TL/MT respectively. The announced prices would be changed according to the quality of wheat delivered. Milling wheat import data for the first four months of 2013 show an increasing trend compared to the same period of last year. Most likely, the directive published in the Official Journal dated September 2, 2012 led to this increase. This directive allocated an import tariff quota of 1.0 MT tons of wheat to TMO, which is valid until May 31, 2014 that is still in force. On the other hand TMO called for a bid of 240 thousand tons of wheat exports in May All of the above suggests that policy actions have and will continue to be critical in understanding the Turkish wheat situation. Although climate change models predict lower wheat yields for Turkey in the long run, as far as the current crop year output is concerned, Modis-Terra space images taken in the first quarter of 2013 and output modeling calculations show higher vegetation indices supporting higher production in most regions. In addition, the first estimate reported by Turkish Statistic Institute on May 23, shows production of 1.85 MMT, a 9.2% increase in overall wheat production compared to last year. The real long-term question is what are realistic long-term projections for Turkish wheat production and can Turkish production meet the quality and quantity expectations of the domestic market? 3

4 Exhibit 2 On the domestic supply sid, early harvesting has started in Southeastern Anatolia Region in early May and the crop seems promising for the time being. Warm winter conditions and rainfalls in April support a better crop year expectation. Nevertheless, future weather conditions will be particularly decisive, both on yield and quality, for the rest of the growing year. Stability of the Turkish economy has accelerated foreign investments in the last decade. However the question that comes to mind is whether the recent anti-government demonstrations starting in late May will create an uncertainty in the Turkish economy and agribusiness or not. Given the importance of government policy with respect to agricultural production, this is a critical question. Last but not least, the issue which has the potential to shape global trade flow and production patterns to some extent is The Transatlantic Trade and Investment Partnership (TTIP) Agreement negotiations to be held between the EU and the US. Will Turkey be part of this discussion and if so, how will TTIP impact Turkey s agriculture? The dynamic environment highlighted above will most likely impact the wheat situation in Turkey, but how? OBJECTIVE OF THE STUDY The main objective of the study is to help decision makers who already have trade relations with Turkey or are planning to enter the Turkish wheat market. Moreover, suppliers of agricultural and industrial inputs for the whole supply chain will also benefit from this study. Additionally, this study aims to provide a perspective of the Turkish wheat outlook for agricultural NGO s, Trading Houses, Agricultural Investment Banks and Exchanges trading agricultural commodities. 4

5 PRELIMINARY STUDY SCOPE The study gives quantitative and qualitative up-to-date information as well as forecasts and/or estimates mainly on milling, feed and durum wheat as well as wheat flour when needed. Information related to wheat consuming industries, data and information take place as an analysis of forward linkages. Results of statistical modeling studies for production and consumption projections of major product will be submitted by using one of the suitable models including time series, linear/nonlinear regression analysis, artificial neural networks or decision trees. PRELIMINARY OUTLINE I. Executive Summary (Key Findings, Conclusions and Points to Watch) II. Recent Macroeconomic Indicators of Turkey A. GDP Growth Rate B. Inflation Rate C. Income Per Capita Trends and Outlook D. Share of Agricultural Activities Within GDP E. Share of Industrial Activities Within GDP F. Agricultural and Industrial Production Indıces G. Gross Fıxed Investments H. Industrial Capacity Utilization Ratio I. Currency Movements Focused on Key Ag Trading Partners III. Recent Demographic Indicators of Turkey A. Population Growth and Projections by Age Groups B. Structure of Income Distribution by Groups IV. National Policy Overview A. Regulatory and Related Governmental Bodies B. Market Regulations C. Agricultural Subsidies D. Incentives for Investments E. Trade Regulations F. Taxes / Tax Incentives V. Flour Milling Sector A. Industry Structure B. Major Players C. Export v. Domestic Orientation D. Location of Mills E. Transportation/Storage Issues F. Government Policy Impacts VI. National Balance and Outlook to 2020 A. Supply Pattern, Drivers and Projections B. Demand pattern, drivers and projections C. Consumer Attitudes VII. Turkey s Relative Global Competitiveness Factor Calculations VIII. Production Costs of Wheat 5

6 IX. Turkey s Wheat Price Outlook A. Future Prices B. Spot Prices C. Comparison to World Prices (Black Sea, CBOT, Argentina,) D. Agricultural Input Prices X. Agricultural Investments in Pipeline XI. Turkey Within the Macro Environment A. Global Supply and Demand by Product B. Macro Drivers that Might Impact Turkey C. Long-Term Macro Outlook-Impacts on Turkey XII. Strategıc Considerations and Conclusions A. Import/Export Opportunities and Challenges B. Major Risks to the Outlook STUDY TEAM The leader of the team, Mr. Ali Fehmi Soygeniş who has Ph.D. degree in Agricultural Eng. has worked in public and private sector for over 30 years. He has worked for Syngenta Seeds as Crop Manager between Apart from Turkey, he was responsible for Azerbaijan, Kırghızıstan, Turkmenistan, Uzbekistan, Tajikistan and Syria. He will manage the study as an external expert. Mrs Aysın Türker Unal (Msc.), has a vast experience in agribusiness over 30 years. She was mainly responsible for agricultural investment managing due to her advanced project planning education which was held in UK. She participated in the screening bilateral meetings between the EU and Turkey in agricultural delegation. Mr. Tuğrul Atatüre who is an economist worked for Ministry of Custom and Trade over 30 years. He has been in the Department of Investigation and has been the Chairman of the Department and Undersecretary of the Ministry later on. Lastly he worked for a customs brokerage firm in İstanbul as a manager. He participates in the study as external consultant. Mr. Bulent Unal who is the Business Development Director of Seres Agri Consulting Ltd. will participate in the study team as a finance expert. Other professionals will provide their expertise on an as needed basis. INFORMA ECONOMICS TEAM Chris D. Ferris, Senior Grains Analyst, Canada, based in Informa Economics Winnipeg office, Mr. Ferris is responsible for core Canadian market analysis, reporting and project work within the Canadian grains, oilseeds and special crops sectors. Prior to joining Informa Economics, Mr. Ferris was the market analyst for Latin America and the Caribbean with the Canadian Wheat Board. Mr. Ferris has a diploma in Business Information Systems from Herzing Career College. He received both his bachelor's (honors) and master s degrees in economics from the University of Manitoba. 6

7 Rob B. Hatchett, Commodity Analyst, is in Informa Economics' Crops Group with primary emphasis on wheat and rice. Prior to joining Informa, he worked as a senior market risk analyst with the Gavilon Group, LLC., where he supported the company s speculative agricultural trading and physical grain and natural gas businesses. Mr. Hatchett received his bachelor's degree from the University of Arkansas in agribusiness and his master's degree from Oklahoma State University in agricultural economics. Don A. Riffe, Vice President, Director of Crops Economic Research oversees Informa Economics fundamental supply/demand and market research activities related to the major crops. Prior to working in this capacity, he was responsible for Informa s wheat and rice research from 2007 to 2012 and the manager of Informa s farm-level consulting business, Producer Services. Before joining Informa, Mr. Riffe was owner of Agri-Business Specialties, LLC, an agricultural consulting firm that published the Cottonseed Digest. Prior to that work, Mr. Riffe was a market analyst for Land O'Lakes, Fort Dodge, Iowa, for nine years, where he provided economic and agricultural market analyses and trading advice as well as managed hedging operations and developed and implemented futures and options risk management programs. Mr. Riffe also has held positions as senior agricultural economist for the agricultural chemicals group of W.R. Grace & Company, Memphis, as agricultural economist with the Farm Credit Banks of Omaha, and as economist for the Federal Reserve Bank of Dallas. He received his bachelor's and master's degrees in agricultural economics from Oklahoma State University. Joe F. Somers, Director of Washington Consulting is part of Informa's Project Consulting Group and is responsible for economic analyses and agricultural policy consultancy work in Informa's Washington, D.C., office. He brought to Informa more than 27 years' experience with USDA's Foreign Agricultural Service (FAS) as a Foreign Service officer and has been a member of Informa's staff since While at FAS, he served in Brazil and Argentina and traveled on official USDA fact-finding trips. In Washington, D.C., he supervised and conducted world supply/demand and trade policy analyses for a wide range of commodities and managed publication of several analytic circulars. He also was director of research and marketing for the GIC Group, Alexandria, Virginia, where he was responsible for business development and economic and market analyses. He received his bachelor's degree in political science from Northeastern University, Boston, and master's in agricultural economics from the University of Massachusetts, Amherst. PRELIMINARY PROJECT SCHEDULE A tentative schedule is given below and will be adjusted after the signups have been completed. August - Pre-Study Webinar and Kick-Off October - Study completed and final report sent to clients November Post Study Webinar to review findings STUDY FEES The study fees are US$ 4,850. These fees will be billed 50 percent upon the study s initiation and 50 percent upon delivery of the report. 7

8 ENROLLMENT FORM Yes, I want to participate in the multi-client study, The Wheat Puzzle of Turkey: What Next? The cost of the study is $4,850. One-half of the study fees will be billed upon initiation of the study, and the remaining half will be billed upon delivery of the final report. Please have someone contact me to provide further information. Name: Signature: Title: Company: Street Address: City, State, ZIP: Telephone: Fax: Address: Please Return This Form Via or Fax to: Tom Scott Jim Allwood President and COO Senior Vice President Informa Economics, Inc. Informa Economics, Inc. 775 Ridge Lake Blvd., # Ridge Lake Blvd., #400 Memphis, TN Memphis, TN tom.scott@informaecon.com jim.allwood@informaecon.com 8