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MILLING POTENTIAL IN AFGHANISTAN

13/02/2018

Located between Central Asia, the Middle East, and South Asia, Afghanistan has a great geostrategic importance. It is the ancient crossing point of Asia. It has a population of 34 million which has traumatized by wars and conflicts for the last 40 years. Afghanistan is among the poorest countries in the world. 70-75 percent of the population is illiterate. 70 percent of the population lives in rural areas. More than 40 percent of the people are poor. While 80 percent of the population is employed in agriculture, the percentage of employees in the industry is 6 percent. Since the overthrown of the Taliban in 2001, the country’s economy has grown almost 10 percent annually. The Gross Domestic Product has reached $70 billion.

Afghanistan remains a very poor, agrarian economy with a small manufacturing base, few value-added industries. International financial and security support has been instrumental in developing the Afghan economy post-2001. However, as much as 80-90 percent of Afghanistan’s economy is in the informal sector. Government expenses will continue to exceed revenues, resulting in continued dependency on international donors for the foreseeable future.

The drawdown of international forces has hurt the economy significantly as demand for transport, construction, telecommunications and other services has fallen. Economic growth has slowed significantly after averaging 9.4 percent since 2003-12. The World Bank notes that a return to growth is conditioned on improvements in the security sector, strong reform momentum, and investments in key economic sectors (mining and agriculture). Much higher growth rates are required to counter a 2.5 percent population growth and roughly 400,000 new entrants into the labor market each year. However, the significant security problem in the country, where the Taliban can blatantly attack even Afghan ministries in Kabul, is the biggest obstacle to restructuring and investments. Other problems are corruption and patronage in the government administration.
Business opportunities are largely driven by Afghanistan’s need to renovate its infrastructure, which was weakened by years of war and neglect. Substantial opportunities for the firms have typically been linked to military organizations and donor and international finance institutions (IFIs), including the World Bank and Asian Development Bank, that fund reconstruction efforts. Companies are advised to monitor donor and IFI programs for current potential opportunities.

FOOD INSECURITY ON THE RISE
Overall food insecurity in the country is on the rise, with almost 1.6 million people (6 percent of the population) considered to be severely food insecure and 9.7 million people (34 percent of the population) being moderately food insecure. Continuing conflict, natural hazards and limited economic opportunities increase the vulnerability of the poorest households, including subsistence farmers. The total number of individuals displaced by the conflict in 2016 is estimated at about 640 thousand. A large share of displacements is located in the hard-to-access areas. Documented and undocumented Afghans have been returning to the country for a variety of reasons, including from the deteriorating protection space in Pakistan and the Islamic Republic of Iran. Most returnees need support to be socially and economically reintegrated.

Afghanistan is affected by some of the highest infant, child and maternal mortality rates in the world. As bread is the staple food for most families in Afghanistan, using flour that is fortified with essential vitamins and minerals is both a practical and feasible solution to address micronutrient deficiencies across the population. World Food Program (WFP) supports mills producing fortified flour and then buys the flour to provide to vulnerable people – such as in the food-assistance program for displaced families. WFP began supporting local flour fortification in 2006 in five mills across Afghanistan, and now provides equipment and the vitamin and mineral mix – known as premix – to 27 mills across the country.

NEW STORAGE FACILITIES TO BE BUILT
In June 2017, The World Bank announced a financing package for Afghanistan of more than $500 million to help the country through a difficult phase in its struggle to end poverty and to signal a long-term commitment to the country’s people. The package will help Afghanistan support communities with refugees, expand private-sector opportunities for the poor, boost the development of five cities, expand electrification, improve food security, and build rural roads. One of the projects is Afghanistan Strategic Grain Reserve Project. The $30 million-project will enable the Ministry of Agriculture, Irrigation and Livestock to establish a strategic wheat reserve to be available to Afghan households to meet their needs following any unforeseen emergencies and improve the efficiency of grain storage management. In order to achieve its objective, the project will upgrade two existing storage facilities, build four new large facilities, and establish the required institutional infrastructure to manage the reserve. It is estimated that by the end of this five-year project, the overall storage capacity will reach 200,000 metric tons, sufficient to supply two million Afghans for six months.

Another project for the wheat sector is Grain Research and Innovation (GRAIN). The five-year project that aims at bolstering Afghanistan’s wheat sector is funded by a $19.5 million grant from the United States Agency for International Development (USAID). Launched in the spring of 2017, the project will build the capacity of Afghan researchers to conduct and manage research on wheat and cereals, and sets the stage for the development of an in-country wheat research system that responds to the needs of farmers and the private sector.

80 PERCENT OF THE POPULATION WORKS IN AGRICULTURE
Agriculture remains Afghanistan’s most important source of employment: 60-80 percent of Afghanistan’s population works in this sector, although it accounts for just a third of GDP due to insufficient irrigation, uneven rainfall, lack of market access, and other structural impediments. Most Afghans farmers are primarily subsistence farmers. Agriculture is critical to Afghanistan’s food security and is a driver of economic growth. With 70 percent of cultivated land planted in wheat each year, an improvement in wheat production will advance the nation’s food security and generate local economic opportunities.

WHEAT PRODUCTION IS BELOW THE POTENTIAL
Wheat is the country’s major crop and staple food. Afghanistan’s wheat and milling sectors experienced substantial headwinds from the destructive effects of military conflict and instability. The Food and Agriculture Organization of the United Nations (FAO) forecasts the total wheat production in 2017 at 4.28 million tons, almost 16 percent below the five-year average. Afghanistan’s annual wheat production is low compared to neighboring countries. However, the studies point out that the country has a significant increase in production potential despite the mountainous land and semi-arid climate.

The bulk of farmers rely on their own farm-saved seeds. Households with low purchasing power in some areas are eligible for subsidies for improved seeds. For the 2017/18 cropping season, the Ministry of Agriculture, Irrigation and Livestock plans to distribute 10 thousand tons of certified wheat seeds to be distributed to 200 thousand farming households, sufficient to plant about 68 thousand hectares (out of 2.3 million hectares of wheat planted in 2016). The FAO and some NGOs provide some certified wheat seeds and other inputs, although the amounts are low compared to the total needs.

AFGHANS WORLD LEADER IN WHEAT CONSUMPTION
According to USAID, Afghanistan has the world’s highest annual per capita wheat consumption. Approximately 60 percent of the nation’s daily caloric intake comes from wheat. In 2015, 40 percent of the country’s wheat supply was imported. But based on Afghanistan’s projected population growth, wheat production must increase 20 to 28 percent in the next five years to meet consumption demands.

AMONG THE WORLD’S LARGEST FLOUR IMPORTERS
Afghanistan now ranks among the world’s largest importers of flour. According to the International Grain Council (IGC), Afghanistan will import 2.69 million tons of flour during the 2017/2018 season. In the post-2000 period, although flour production increased rapidly, demand grew even faster, spurred by a rapidly expanding population and a strong recovery in economic growth since 2002.

Cereal import requirements (mainly wheat) in the current 2017/18 marketing year (July/June) are forecast at 3 million tons, about the same as in the previous year and 25 percent above the five-year average. Even in the years with above average domestic production, the country imports significant quantities of wheat flour, reflecting the lack of adequate domestic milling capacity and problems of cost-effectiveness. The main suppliers of wheat flour are Kazakhstan and Pakistan. Imported wheat and wheat flour are often blended with domestic wheat to improve its protein content.

PROBLEMS OF THE AFGAN MILLERS
Flour milling is Afghanistan’s largest agro-industry. This is the best prospect industry sector for the country. There are more than 300 mills in the country. Main mills in the country have recently restarted the activity after the acute years of the conflict. Recently, the current milling capacity increased significantly reaching 1 MMT per year. The imported flour concorrential price does not allow the mills to reach its full capacity.

Most baking and wheat processing activities currently being carried out on a very small scale. Small-scale water, diesel, and electric mills, known as “asiabs” or “zirandas,” provide the vast majority of domestically produced flour in Afghanistan. The asiabs and zirandas each process 1-3 tons of wheat per day and account for approximately 90 percent of the country’s flour production (USDA, 2012).

However, large cities such as Kabul, Herat, Kunduz, Mazar-e-Sharif, and Kandahar, have medium-scale commercial wheat mills. The eight commercial mills in Kabul, Mazar, Jalalabad, and Herat, with milling capacities ranging from 80 to 500 tons per day, operate at less than full capacity, or in some instances not at all (USDA,2012). Afghanistan’s limited infrastructure and low farm yields also favor small-scale mills.

The milling sector has been slow to rebuild after years of war, in part because of competition from Pakistan, where the government provides price support for wheat producers and also supplies mills with low-cost wheat. In addition, unreliable supplies of electricity and limited marketed surpluses of Afghan wheat have discouraged the growth of commercial milling activity.

Most processing and packaging facilities currently in use for agricultural goods are technologically outdated. This sector represents attractive opportunities for investment. Another important need of the country is grain silos. Storage capacity respecting minimum quality and security standards is scarce in Afghanistan. In his analysis published in Miller Magazine in October 2016, President of Afghanistan Flour Mill Association (AFMA) Hashim Ghaznival listed the problems they have faced as follows: “Despite having over 300 functional flour mills (with over 30 equipped with large-scale production) we are able to utilize only a fraction of our estimated 40% production capacity. This is due to competition from neighboring countries providing low-quality flour at subsidized rates. It is also due to informal flour production across Afghanistan that continues to destabilize the market and cost the government millions in tax revenue. Without developing strong mitigation strategies to tackle these issues, the Afghan flour milling industry will continue to underperform and run at a loss.”

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