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Annex 1
Policies for Strategic Crop and Livestock Subsectors
I. Cotton - Overview
In general terms, the cotton sector is operating well, with strong production increases in
recent years, relatively attractive returns for producers and strong demand for cotton in
the domestic market. This demand is relatively well insulated from the general adverse
swings in the international textiles markets, as Turkish manufacturers have concentrated
on the production of high quality finished goods and have established strong off-take
contracts with quality fashion houses. This stability of the sector is in large part due to
the fact that the GOT has withdrawn from direct involvement in the sector and that
producers are learning to cope with being exposed to the international market.
Problems identified in the cotton sector are not fundamental (as exist in some other
sectors). Still, their resolution would lead to further growth and increased efficiency. It
will be important for producers to continue to strengthen their competitive position by
increasing their efficiency and rationalizing their production. The role of government
will lie in continuing to improve the business and production environment through the
provision of enabling legislation and a continuing reduction in intervention in the sector.
The long-term success of the cotton sector in Turkey will be tied heavily to the future of
the sector on the global markets (a factor largely outside of the control of producers or the
GOT).
Background - The production of cotton in Turkey has increased enormously (2,150
percent) since 1934, and the most marked increase has taken place since 1988. In the
past seven years, there has been a 15 percent increase in seed cotton production (current
production around 900,000 MT). Production is centered in 4 main areas: the Aegean
region (28 percent), Antalya (2 percent), Çukorova (19 percent), and the Southeast
Anatolia Project (GAP) area (51 percent). The fastest growing area for production of
cotton has been the GAP area (a 17 percent share in 1991 which increased to 51 percent
in 2002). The main reason for this dramatic increase in the GAP area is due to the
irrigation and cropping of previously unutilised lands, developed by a major government
infrastructure program.
Since 1963 domestic consumption of cotton has increased by 650 percent, to 1,250,000
MT per annum. The basis of this dramatic development has been driven by the creation
of a modern and efficient textile sector geared towards exports. The sector currently
represents about 10 percent of GDP and around 35 percent of total country exports of
US$ 39 billion. Given the slower rate of increase in domestic production of cotton lint,
the increase in demand has been filled by a dramatic increase in imports (224 percent in
the period 1996 – 2002) and a marked decrease in baled cotton exports in the same period
(57 percent). A contributing factor to this export decrease has been the increase in supply
of competing cotton from other origins, e.g. Central Asia, Greece etc. Whilst they may
not be of a similar quality to the Turkish cotton, they are relatively cheaper and have
therefore taken a large share of the blended yarn markets. The relative weakness of the
international markets and the severe drop in prices for American cotton, in comparison
with other growths, has also been an added spur for consuming markets to switch away
from Turkish cotton.
Policy Developments and Their General Impact - The GOT used to intervene heavily
in the cotton sector (mainly through the ASCUs), with payments of high premiums and
directions to Ziraat Bank to extend favorable credits to cotton producers. Since the
adoption of the new agricultural strategy in 2000, government involvement in this sector
has been reduced, as the ASCUs have become independent and the premium payments
have reduced from US$ 0.09/kg (2000) to US$ 0.05/kg (2003). The GOT has continued
to encourage the textile sector by not introducing a tariff on baled cotton, and this has
enabled the textile sector to remain competitive in the currently depressed global textile
markets. The effective rate of protection (ERP) for yarn is actually 27 percent, which
provides an incentive to textile manufacturers to import baled cotton and process it
domestically, as opposed to importing yarns from cheap markets such as China, Pakistan
or India.
The biggest impact on the cotton sector is currently coming from the GOT’s development
of the GAP area. The GAP project is providing irrigation to vast tracts of land in the east
of the country (total 1.7 million hectares at project end). Much of this new land is being
sown to cotton, and the GAP area is becoming the major supplier of cotton in Turkey.
The total cost of this investment by the state will be US$ 32 billion (of which US$ 17
billion has already been spent).
The continuation of the premium payment system at US$ 0.05/kg seed cotton represents
a premium of almost US$ 0.06/lb baled cotton. At current world market prices, this
represents a 10 percent payment to producers, which is a direct cost to the state. As
producers are already profitable, this payment is an unnecessary burden on the Treasury
and is causing various distortions (such as an inflated cost for land rental).
Supply Chain Issues
ASCU/ACC sustainability. The Agricultural Sales Cooperative Unions (ASCUs)
currently take delivery of producers’ seed cotton against a preliminary price, which they
increase if the market rises post delivery. However, if the market falls post delivery, then
the ASCUs do not reduce their payments to producers or seek to recover their market
loss. This means that the ASCUs are subject to 100 percent market exposure, a risk that
they are not able to hedge. This could mean that they will make substantial losses
(especially given the size of their open market positions) in an adverse market. Given
their relatively weak capital bases (especially Çukobirlik) and inability to make
speculative market gains, this places the ASCUs in an unsustainable position.
Both the ASCUs and the Agricultural Credit Cooperatives (ACCs) offer unsecured credit
to the producers in their areas. This risk is partially managed by ASCUs by the fact that
they are also off-takers of the product and that there are usually few competitors in the
immediate area. ACCs, however, do not take the product as a repayment vehicle and are
therefore reliant on producers selling to parties who will honor their payment obligations
and also that the producers will then pass on these funds to the ACCs. Both
organizations are therefore running substantial credit risks. This risk is further
heightened by the fact that neither producers, nor the organizations, are beneficiaries of
crop risk insurance and therefore are prone to the potential effects of a crop failure.
Whilst the above organizations are supposed to be producer organizations and to
therefore represent the interests of their members, there has to be a concern that their
senior management are often drawn from within their members. In order for these
organizations to be sustainable, there has to be a realization that they need to be run on
commercial lines and that therefore issues such as pricing and policy need to be based on
sound commercial principles, as opposed to being palliatives for the membership.
Commodity Exchange. Whilst this is operating well, there are various shortfalls in its
operations. Firstly, although there is a growing import of cotton, the prices of these
trades do not have to be registered at the exchange, which means that there is an apparent
disconnection between the domestic and import markets. More importantly, the
exchange only provides spot market prices and usually only for recorded trades outside of
the exchange. In order for the exchange to be able to develop into an actually traded
market, the law on collateralization and warehouse receipts will need to be adopted. This
will enable both buyers and producers to use the exchanges as a real forum for spot
trading. Equally, the lack of contract enforceability and weakness of the rule of law and
court judgment enforcement means that a futures market has not been able to develop, an
important risk management tool for producers, buyers, and the commercial banks.
Outlook - On the whole, it has to be noted that this sector is performing well and, with a
strong domestic textiles sector, the outlook for the immediate future is very positive.
This is enforced by the fact that the textiles sector in Turkey is largely based on higher
quality finished goods and off-take contracts with solid fashion houses. Although the
lower quality end of the international market is subject to excessive price squeezes
caused by swings in supply and demand, the sector in Turkey is shielded (to a certain
extent) by the nature of their production. However, what the producers are coming to
realize is that, with the reduction in their protection levels and a falling premium
payment, they are prone to swings in the international price of cotton. This competition
will be strengthened when some of the directly competing growths take the necessary
steps to improve the quality of their cotton. Ultimately, the future of this sector (as in
many other countries) will depend on the outcome of the WTO negotiations with regards
to the removal of subsidized production and export of cotton from the USA.
Recommendations - To ensure the medium- to long-term success of this sector, the
GOT must ensure that it encourages producers to become as efficient as possible. To this
end, it is recommended that the premium payment must be cut to a level that is
commensurate with the intentions of ensuring that the product is traded legally. At
current market levels, this would equate to a payment of roughly US$ 0.03/kg for baled
cotton, or US$ 0.01/kg for seed cotton. Any payments in excess of these amounts are a
direct cost to the Treasury and merely enable producers to continue with inefficient
practices such as tractor over usage or non-mechanized crop picking.
Linked with the above issues of efficiency, it will be imperative for the GOT to support
land consolidation with greater investment co-financing in cotton growing areas. A crop
such as cotton is dependent on the maximization of labor saving technology in countries
where there is a relatively high cost of labor. From a study of the cost of production
(COP), it is clear that the largest cost (after land rental) is harvesting and this is because
the crop is currently hand picked. However, it will not be possible for many producers to
switch to machine harvesting due to the small sizes of their fields. The problem of small
field sizes has been, in large part, caused by the past practice of land parcel division
between all the inheritors on a physical basis. Land consolidation investments and the
minimum plot size conditions that are attached to participants in state supported land
consolidation efforts can address this fragmentation substantially.
As we have seen above, the further development of both the commodities exchange and
the agricultural banking system is dependent on a producers’ or traders’ ability to
warehouse baled cotton. In this regard, it is recommended that the GOT expedite the
introduction of legal provisions enabling the issue of warehouse receipts. In conjunction
with this, the GOT needs to take steps to improve the areas of contract enforceability and
judicial process.
II. Maize – Overview From an initial overview, it could be argued that the sector is
operating well, with large domestic production and strong demand for maize in the
domestic market. The profitability of the processing sector of corn syrups and feed for
the poultry industry ensures that demand is relatively price inelastic at the moment.
Given the profitability of the trading operations of the TMO (State Grain Board), the
sector also represents a revenue source for the GOT.
However, the cumulative effect of import licensing, excessively high tariffs (80 percent),
TMO’s market interventions, and a very active secondary traded market (approximately
70 percent of domestic production) is having disastrous side-effects on a number of
agricultural sub-sectors and minimizing producer profitability. The situation created by
the foregoing is unsustainable, and Turkey faces the very real risk that insulation of the
maize sector will lead to a collapse in competitiveness of this and other related sectors,
unless the state changes the nature and focus of its policy in the maize sector.
Of particular concern are the serious adverse effects which the policies in this sector are
having on the development of the livestock sector. With demand for livestock feed
(cattle) being so price elastic, one of the major inhibitors to development of the livestock
sector (a priority sector for the GOT) is the high cost of feed caused by the state’s current
maize sector policies. Moreover, as the GOT protects the maize sector to the detriment
of other livestock feeds (e.g. soybeans), producers will be reticent to diversify/switch
their cropping.
Background - Domestic demand for maize has risen over the past seven years by 27
percent (3.6 million MT in 2002). This has been met by a 25 percent increase in
domestic production (to a level of 2.5 million MT) and a 31 percent increase in imports
(1.2 million MT in 2002). There was a 58 percent decrease in imports in 2001, largely
due to the devaluation of the TL. Imports recovered in the following year by 119 percent,
reaching almost the same level as prior to the 2001 crisis.
Demand for maize oil, largely driven by its adoption in preference to other oils for health
reasons, has increased in excess of the demand for maize itself – by 75 percent. This
increase has been met by a 24 percent increase in domestic production, a 42 percent
increase in imports and, most notably, by a 69 percent decrease in exports. This last
change indicates that processors are now achieving attractive domestic prices and
demand levels for their products. (It is also interesting to note that the inter-period
increase in imports coincided with decreases in the international prices of competing
oils.)
Production of maize feed cake has naturally increased, in line with the domestic supply of
maize, by 24 percent. There has been a dramatic increase in feed cake imports, and it is
likely that this demand has been driven by the continuing increase in poultry production.
Maize seed cake is a major ingredient in poultry food due to its high energy content.
Nevertheless, imports still represent only 5 percent of total domestic supply.
Another major factor affecting domestic demand for maize is its use in the production of
starch and corn syrups for the food processing industry. Although the Sugar Law
restricts the processing of natural starches to corn syrup to 10 percent of production, an
exception is made for syrups that are being produced for further processing of food stuffs
for export. On the basis of this exception, most processors are producing up to 90 percent
of their natural starches as corn syrups. The profitability of producing corn syrups is
high, and there is therefore a strong incentive for processors to maximize their syrup
production.
Policy Developments and Their General Impact - The main distortions in the maize
market are caused by the actions of TMO and secondly through import restrictions and
high tariffs. TMO is a major purchaser of maize in the internal market. In the 2003
season, TMO pushed a 47 percent increase in market price post harvest by declaring high
sales prices, which were followed by the rest of the market. The reason for such
interventions is not clear, as producers are not benefiting substantially from this price rise
and it simply leads to higher raw material costs for the processing sector. Notably,
processors or traders cannot freely import maize until TMO has disposed of all of its
stocks. Even after this time, processors have to obtain a state import license for each
specific shipment. Therefore, whilst TMO has only around a quarter of the market, these
other restrictions amplify its power to influence prices.
Turkey’s import policies have caused major distortions in the market for maize and its biproducts. There is an 80 percent import tariff on maize itself, which obviously enables
the secondary traded market to raise the price of domestic maize, as the available
alternative is much more expensive. This tariff also has a dramatically negative effect on
the effective rates of protections (ERPs) for maize by-products: corn oil has a 31 percent
import tariff, which only equates to a 4 percent ERP; feed cake has an import tariff of 13
percent, but an ERP of 25 percent. Applying heavy tariffs to the raw product is a
disincentive for the processing industry in the oil sector. The 135 percent tariff on syrup
produces has an ERP of 172 percent, which is giving a very high level of protection to
this sector and explains the high internal price for this commodity.
Whilst starch processors are able to absorb the extra costs that are created by these price
escalation measures, other agricultural sub-sectors are suffering. The area worst hit is the
cattle feed sector, where maize and its by-products are an important ingredient in
prepared meals, and the high prices for maize have a direct relation to the price of the
meal. Except in the poultry industry (where returns are high), livestock producers
demand for feed is extremely price elastic and the demand for feed is currently very low
because of the prices. This creates a vicious circle - as feed processors experience a 35
percent utilization of capacity, their unit production costs rise, further adding to the cost
of the feed. As discussed in the section on livestock, it is clear that better feed rations for
livestock would lead to both increased profitability and production levels.
Although maize producer’s returns are not very high, producers are aware that there is a
ready market for this crop and that they will be able to sell at harvest. Producers are
accustomed to a heavily protected agricultural sector, and their mind set is slow to
change. They see Turkey’s high maize tariffs as a clear message that maize is a priority
sector and that the state is prepared to protect producers from imported products. The net
effect is that producers are not prepared to switch to other crops where their profitability
might be higher, but where they see no state support or protection (e.g. soybean).
Supply Chain Issues
Secondary Traded Market. The large secondary market is caused by the pressure upon
producers to sell their crop at harvest and the lack of finance on behalf of the processors’
to buy and store the whole crop at that time. The excess supply is therefore purchased by
the TMO and traders. It should also be noted that maize has to be dried before it can be
stored and that producers do not own such drying facilities, which generally are in the
hands of the TMO and the traders. In 2002, approximately 700,000 MT (28 percent) was
purchased by the TMO and 1 million MT (40 percent) was purchased by traders.
Domestic production versus imports. The actual mechanics of the supply chain appear to
work well, with the large crop being taken into storage and producers paid in a short
period of time. The potentially problematic extra chain factor of maize importation from
other origins (32 percent of total domestic supply) is minimized by state control of
issuance of import licenses until such time as TMO has exhausted its stocks of
domestically produced maize. The problem with this intervention is that the internal
market is isolated from the international market and therefore prices can reach artificially
high levels.
Lack of Commodity Exchange Involvement. Lack of commodity exchange involvement
in the maize sector means that producers have to rely on information provided to them by
local traders and other information sources to be able to evaluate the prevailing market
prices at the time of sale. It also means that there is no publicly available information
enabling producers to be able to identify what prices are being paid by processors at
various stages in the year post harvest. The non-existence of this extra chain facility is
part of the reason for the existence of such a large secondary traded market.
Outlook - It is clear that producers are failing to maximize their returns and that the
majority of the profitability in this product is to be found in the secondary traded market
and processing stages. More concerning than the lack of producer profitability are the
distortions that current government policies are causing in other sectors of the economy.
Effectively, continuation of the situation in the maize sector is going to be at the cost of
the development of other agricultural products. Given that Turkey’s policies are not
currently benefiting producers in the maize sector, such policies are unsustainable and
detrimental to the long term viability of the agricultural sector.
Another problem with the current situation is that it is likely that the inflated costs for
corn syrups and livestock feed will make Turkish processors/producers uncompetitive in
international markets, leading to a decrease in exports and potentially to a net import
situation and the collapse of these domestic industries. There are already signs that the
poultry sector is beginning to suffer from price competitiveness issues in areas such as
the former Soviet Union (a major export market for Turkey). It should also be noted that
genetically modified (GM) maize crops are much cheaper and that many countries are
preparing to accept these crops, which will mean that their own producers/processors will
increase their competitiveness.
Recommendations - The most important recommendation in this sector is for Turkey to
significantly alter the form of its current involvement. First, the effect of the excessively
high import tariff and control of import licensing is causing serious distortions in the
market. Effectively, producers see maize as a major, stable cash crop, whereas cost of
production (COP) and the world market prices are very close to each other – a very risky
position (made worse by the fact that the maize price is currently at a six year high).
Second, the pricing strategy of the TMO is having a seriously adverse effect on
associated industries such as starch processing and, more importantly, the feed sector.
Whilst not wishing to encourage producers to increase their levels of maize planting, it is
important that they reduce their COP in order to be able to compete with foreign imports.
The introduction of mechanized picking, stripping, and sorting will reduce costs and steps
should be taken to encourage the creation of leasing/contracting companies for
agricultural equipment.
The market is currently not operating for the benefit of producers. At harvest, prices drop
substantially and then recover very quickly. To enable producers to avoid this market
squeeze (caused by seasonal oversupply), the GOT needs to push for the passage of the
Law on Warehouse Receipts and to support investments in maize drying capacity by
producers or associations thereof. The introduction of warehouse receipts will enable
banks to become involved in collateralized finance, and producers will be able to time
their sales in order to maximize their revenues. In connection with this, the sector should
also be covered by the operations of a commodity exchange. Although this will not alter
the value chain in the initial instance, it will increase market transparency and enable
producers to make more informed choices at the time of sale.
Given the belief that GM crops are being delivered to Turkey in breach of national
regulations, the GOT does need to procure and operate the correct laboratory testing
equipment. Apart from the potential health risks that GM crops may pose, the value of
these imports is markedly less than non GM crops. The effect of such imports is to
seriously depress the price for domestic maize.
III. Soybean - Overview
Effectively, there is no significant domestic production of soybeans. Over 91 percent of
demand was being met by imports in 2002, and this level was probably higher in 2003.
Although production did reach a level of 250,000 MT in 1986, the sector has been in
decline since then. There was an attempt to revive it in later years through government
incentives to the Çukobirlik Agricultural Sales Cooperative Union (ASCU) to enable it to
purchase soybeans. However, Çukobirlik’s restructuring and consequent narrowed focus
on the cotton sector meant that soybean producers in the once large production area of
Çukorova have been unable to sell their beans and reduced production.
The current structure of import tariffs (with high effective rates of protection on the
products processed from soybeans) means that there is a strong incentive to import
soybeans and process them domestically. This has led the processing sector to orient
itself totally to the import market and to build its facilities and supply chains around
access to sea ports and away from domestic producers. Equally, the import tariff regimes
for other oil seed crops and maize lead producers to be active in these crops and to have
no confidence in or incentive to move into the soybean sector.
In these circumstances, the limited interventions by the GOT (through premium payments
and introduction of new seed types) have been largely unsuccessful to date. Until the
GOT reduces the tariff distortions which negatively affect soybeans, a true domestic
supply chain for soybeans will not be created and domestic production of soybeans will
not increase despite the apparent comparative advantage which Turkey has. It is
important to note that such policy changes will have to include a reduction of incentives
for the production of other oil seed crops, which are distorting the current market.
Background - In the past seven years there has been a dramatic increase in the domestic
usage figures for soybean (240 percent) to a level of 680,000 MT in 2002. This has been
met by only a 20 percent increase in domestic production (60,000 MT in 2002) and a 310
percent increase in imports (620,000 MT). Of this total increase in imports, 63 percent
alone took place in 2002, during which soybean imports almost doubled. It is estimated
that total imports for 2003 reached 1 million MT (with 450,000 MT of registered imports
in the first 6 months of 2003). If imports did reach 1 million MT in 2003, then there has
been a 570 percent increase in imports since 1996. Information from MARA, the
Soybean Association of Turkey and Cukobirlik, indicate that domestic production levels
in 2003 dropped to 35,000 MT.
Whilst the above picture appears bleak for soybean production in Turkey, with domestic
production meeting only 9 percent of total demand, it should be noted that production of
soybean used to be relatively popular. Domestic production reached its peak in 1987, at a
level of 250,000 MT, but since then there has been a slow decline to current levels, with
no apparent signs of recovery in the sector. It should be noted that the current level of
imports is largely driven by the demand emanating from the poultry feed sector, where
much of the supply of soybeans is crushed directly to create full fat feed.
Policy Developments and Their General Impact - Government policies affecting other
oilseed and competing crops introduce a disincentive for producers to grow soybean in
Turkey. The high import protection on competing agricultural products (particularly
sunflower and maize) compared to soybeans (with no import tariff) reduces the
comparative returns for soybeans and is a principal cause of the current lack of
development of the sector. Although there is a soybean premium payment and an
additional incentive to use hybrid, registered seed, the premium payment system has been
historically problematic, with late payments and an unpredictability of premium levels.
Therefore, the premium system is not acting as an incentive to producers to grow soybean
nor does it attract into formal market channels the currently large proportion of soybeans
that are traded on the parallel market.
However, the effective rate of protection (ERP) for soybean oil of 85 percent is a major
incentive for the processing sector to establish crushing plants and refineries in Turkey
(explaining the high levels of soybean imports and domestic processing). Feed
processors, facing a 2 percent import duty and an ERP of only 5.4 percent also take the
opportunity of importing soybean meal to fulfill their requirements, avoiding unnecessary
storage and financing charges of domestically produced meal.
Supply Chain Issues
Sale of by-products. Previously, when there was fairly large domestic production, but
lack of producer storage, processors were forced to buy the crop all at once. This led to a
high seasonal supply of soybean meal, which the processors wanted to sell. The feed
processors, however, were unable to raise the finance to purchase the meal and the
storage and financing burden passed back to the soybean processors. This situation was
worsened by the fact that the bean processors were unable to export their meal, owing to
the government’s not issuing export licenses. Therefore, processors moved away from
purchasing domestic production and switched to imports, the timing of which they could
control.
Lack of buyers. As mentioned above, processors have switched to imported beans and
there are now few alternative buyers in the domestic market. The only real buyer is the
Çukobirlik ASCU, as Fiskobirlik (which own a processing plant in Ordu) have ceased
soybean operations. It is clear from interviews with Çukobirlik that they would be keen
to increase their purchasing but do not have the financial resources to enable them to do
so and to bridge the meal marketing gap. The net effect of this is that producers, whilst
they might recognize that soybeans are potentially a profitable crop, are averse to
growing it, as they fear that they will not have a ready market for their produce.
Lack of supply chain infrastructure. Processors have built their facilities near the ports in
the south of the country in order to minimize their internal transport costs. Effectively,
the internal supply chain is totally geared to imported soybean. Given the small volumes
of soybean grown in Turkey and the fact that production is spread among many regions
(with low density output and associated internal transport costs), the processors do not
actively try to source domestic soybeans. The effect is little or no supply chain for
domestic production and therefore producers are very reticent to start growing this crop.
Lack of market information. Although a producer has to sell his produce officially to
receive a premium payment and have the sale registered on the commodities exchange,
the amount traded through the exchanges is very small and therefore insufficient to create
a realistic market price. It should further be noted that import prices are not registered on
the exchange and therefore there is a weak effect of the imports on domestic traded prices
at the exchange level.
Outlook - Currently, there appears to be little chance for the increase of soybean
production given the situation in Turkey. There is little incentive for any of the parties in
the sector to either switch to domestic purchases or production. Equally, there appear to
be clear incentives for producers to maintain, or increase their production of other oilseed
and competing crops due to the existence of government policies to that effect.
In the light of the information received as to costs of production and the prevailing
international price levels for soybean, it is clear that Turkey has a competitive advantage
in this sector. Unfortunately, while the current situation persists, Turkey will not benefit
from this advantage and, moreover, will continue to suffer further losses from the
subsidization (direct or indirect) of other, less competitive oilseed crops.
On a separate note, it should be considered that soy has been acclaimed as a “miracle
crop” in the West. It is recognized for its high protein and oil content, accounting for
over 80 percent of edible fats and oil consumption in the US in 2002. It is widely held
that it was the development of soybean feed meal in the 1950’s that led to the rapid
expansion in US livestock and poultry production. Given the findings of the section on
livestock and the need to increase the production of affordable livestock feed for the
cattle sector, it is clear that the future development of soybean and livestock is
intrinsically linked.
Recommendations - The main problem in the soybean sector is lack of producer
confidence in soybeans as a cash crop. Although producers complain about the timely
payments of premiums in all crops, there is particular concern in the soybean sector. If
the GOT wishes to continue to provide for a premium in this sector, then it must ensure
that premium levels are set before the planting season and that they are paid on time. It
should also be noted that the continued payment of high premiums for alternative crops
will continue to be a disincentive to producers to switch to soybeans and therefore it is
recommended that the premium levels for these other crops be reduced to a uniform level
of 3 percent.
Naturally, producers refer to the fact that other crops are protected by high import tariffs,
but not soybean. They feel that this is a clear demonstration of the lack of government
support of the sector in favor of other crops such as sunflower and maize. It is
recommended that tariffs on these other crops should be reduced to a low uniform level
and applied to soybean imports as well. However, it must be ensured that this level is set
so as to encourage domestic production without being over protective and thus leading to
the encouragement of producer inefficiency.
As noted in the annex to this report, the Turkish soybean is not as attractive to processors
as imported beans, even though there are no major quality differences. The GOT has
introduced an incentive scheme for the use of new, hybrid seeds which is linked with the
premium payment system. However, owing to the lack of confidence in the soybean
premium, a large amount of domestic soybeans are traded on the parallel market.
Consequently, there has been little take up of the new seeds. Therefore, incentives for the
use of the new seed type should be separated from the premium system, and MARA
should be more active in promoting the use of the new seed by educating producers about
the advantages of the alternative soybean in the sales market.
IV. Sunflower - Overview
The production of sunflower is a major activity for many agricultural producers in
Turkey, especially in the Marmara region. However, a review of the sector indicates that
the current levels of production would be unsustainable were it not for various state
interventions in this sector, including high tariffs and premium payments. An analysis of
the costs of production (COPs) clearly shows that Turkey does not have a comparative
advantage in the production of sunflower in the international market. In addition to this,
Turkey is situated in a major sunflower producing area, with the main competitors being
Bulgaria and Ukraine. While there may be quality issues with production in these
neighboring countries, the volume and efficiency there are likely to increase.
Despite the high protection of Turkish sunflower, the uncertainty over timing and
granting of import licenses for sunflower seeds have led to negative moves in the
domestic price for sunflower. These have caused decreases in producer returns but
increased the profitability of the secondary traded market.
Background - There has been a 35 percent decrease in domestic usage of sunflower seed
over the past seven years, accounted for largely by a dramatic 80 percent decline in the
level of imports (from 640,000 MT to 130,000 MT), which now only account for 14
percent of total domestic usage. The vast majority of this decline was in the period 20002002. In contrast, domestic production has remained relatively flat over the period, with
only a 3 percent increase (from 780,000 MT to 800,000 MT).
In the same period, the domestic usage of seed cake has decreased by only 21 percent
since seed cake imports have soared by nearly 500 percent. It should be noted, however,
that imported seed cake still accounts for only 12 percent of total domestic usage. The
domestic usage figures for oil show only a 14 percent decrease over the period. This is
largely accounted for by the 46 percent decrease in oil exports (from 13 percent of
domestic production down to only 3 percent in 2002). There has also been a 60 percent
decrease in the level of oil imports, corresponding to 45 percent of total domestic usage
in 1997, while only 21 percent in 2002.
Policy Developments and Their General Impact - The sunflower sector is protected in
Turkey through the imposition of import tariffs, which escalate from seeds (20 percent) to
raw oil (36 percent) to refined oil (50 percent). It is these policies, as opposed to a
natural level of competitiveness with production from other countries, which explain the
relatively high level of domestic production and recent reduction in imports. There is a
severe disincentive to import refined oil, since domestic production of sunflower oil
receives an effective rate of protection of 85 percent.
However, since import licenses are imposed on sunflower seeds, and their timely
issuance is often uncertain, there have been times when large imports of very cheap seeds
have exerted strong downward pressure on domestic sunflower seed prices. By underinvoicing the true cost of the imported seed, traders can depress the domestic market
price for the period during which further import licenses are being processed. This has
the effect of partially off-setting the protection granted by the import tariff, which can be
particularly important if done (as it has been) at the time of the domestic harvest since
domestic seed producers often lack sufficient storage for their production. Producers
then sell into a market with falling prices, and this indirectly subsidizes the secondary
traded market in sunflower seeds.
Nevertheless, the high import tariffs imposed on seed are supplemented by a premium
payment to producers which (currently) equates to 20 percent of the sales value of
sunflower seeds. This is distorting producers’ perceptions of their profitability and is
therefore having a negative effect on interest in cultivating other crops such as soybean.
Given that premium payments are only supposed to incentivise producers to sell their
produce legally, the level of the premium does not need to exceed the level of 3 percent
(which is the tax on sales of commodities through commodity exchanges).
The policy of even higher import tariffs for wheat means that returns for producers from
wheat and sunflower production are basically the same currently. Without distortions
from tariffs and other differential protection, producers would make roughly twice as
much profit from sunflowers as compared to wheat. Thus, current policy affects
producers’ cropping choices and partially explains why there is still such a strong
preference for wheat cropping in Turkey. This “revenue competitiveness” is negatively
affecting producers’ willingness to increase their sunflower production (which would
necessitate dropping or decreasing wheat plantings).
This effect is accentuated by the on-going wheat purchases by the Turkish Grain Board
(TMO). Up until the 2002 season, TMO had a clear mandate to support domestic wheat
prices through an announced minimum purchasing price and substantial market
intervention. Since then, TMO has been instructed to purchase a much reduced amount
of wheat and do so at market prices. However, at times the TMO purchase price (e.g., TL
392,000/kg in August 2003) appears to be much higher than a competing imported price
(which in August 2003 would have been closer to TL284,000/kg, equal to US$ 140/MT
plus the 40 percent import duty, converted at TL 1.45 million/US$). Commodity
exchange prices (e.g. the Konya exchange price of TL 344,045/kg in the same month)
also appear to be above those of competing imports. Therefore, it appears that TMO is
still pursuing an (unofficial) price support strategy for wheat. This is possible due to the
control of wheat imports through import licensing.
Supply Chain Issues
Well developed domestic supply chain. Due to the established nature of sunflower
production in Turkey and the fact that imports of sunflower seeds account for only 10-15
percent of domestic usage, the supply chain in this area is well developed. Moreover,
production of sunflower seeds is concentrated in the Marmara region, where the
Trakyabirlik Agricultural Sales Cooperative Union (ASCU) takes a very active role in the
market. This ASCU purchases over 50 percent of production there and contributes to
market stability by granting prices to its members in the upper end of the price range
during any given period. Also, processors are increasing their direct purchases from
producers, reducing the effects of the secondary traded market.
Premium payments and the commodities exchanges. As producers need to register their
sales on the commodities exchange, the transparency in this market is relatively well
developed. However, it should be noted that the effect of cheap imports from Bulgaria
and Ukraine are having very negative effects on the internal market prices at times that
are crucial to producers. For example, there was an import license issued for extremely
cheap Bulgarian sunflower seeds just prior to the 2003 cropping season, which negatively
affected the internal price.
Lack of producer storage – price seasonality. As with many other crops, producers are
hampered by the lack of storage facilities and the necessity to sell their crops at harvest in
order to cover their COP. It appears that the high availability of sunflower seeds at the
time of harvest and limited number of purchasers (aside from Trakyabirlik) is having a
negative effect on the prices that producers are able to achieve. While this is a value
chain issue, it is caused by a supply chain problem of lack of producer warehousing and
the ability to collateralize stocks in warehouse.
Outlook - While sunflower cropping appears to producers to be an attractive option, this
situation is being maintained by the imposition of import tariffs and the payment of high
premiums. Since producers’ COP is relatively high, the competitivity and long-term
sustainability of production is in doubt. This is because Bulgaria and Ukraine will
continue to produce sunflowers and their efficiency and yields are improving with time.
As their production improves, the pressure on Turkish producers is going to increase.
Without the definition and introduction of a clear government policy to substitute
productivity enhancing investments for the current high protection of Turkish producers,
producers will not address their current inefficiencies and will continue to effectively
“farm themselves out of the market”.
Recommendations - Given that Turkey is in a region of high sunflower production
(Bulgaria/Ukraine), it is important that producers continually reduce their COP. One of
the major costs is the rental price for land. The effect of the premium payments and
tariffs in sunflower and competing crops is causing inflated levels of producer
profitability, which in turn causes land rental prices to be high. In connection with this,
the premium payment is approximately 20 percent of sales revenue. The current
premium payment is therefore an indirect subsidy that is causing profitability distortions
and should therefore be phased down.
The GOT should re-address its import licensing strategy, as it appears that lack of timely
issuance of licenses for imports has a negative effect on producer revenues and increases
profitability in the secondary traded market. This creates a vicious circle, whereby the
GOT is under pressure to pay inflated premium payments to satisfy the producer lobby.
Import licensing of wheat imports should also be re-evaluated since for this crop the
practice appears to boost domestic prices in excess of the protection afforded by wheat
import tariffs, thereby making sunflower even less attractive compared to wheat.
It is also vital that the GOT pass the currently proposed legislation on warehouse receipts.
This would enable producers to store their sunflower seeds, draw on collateralized
finance, and time their sales for when market prices are not depressed. Given that there
already is an operating commodities market in this sector, over time a futures market will
develop, allowing producers to enter into hedging strategies to minimize their price risk.
Producers operating within the system of the Trakyabirlik ASCU are currently shielded
from actual price risk. As with cotton ASCUs, the Trakyabirlik ASCU pays a minimum
price and then credits producers with subsequent increases in market price post delivery.
It does not deduct from the minimum advance price in the situation where there is a fall
in market prices. In order for the ASCU to carry on sustainable operations, it will have to
withdraw from this role of price risk taker. If it were operating in a speculating role, then
its market risk could be offset by potential profits but that is not currently the case since
when it does have profits it passes them entirely on to the ASCU members.
V. Policy Links with the Cattle and Sheep Sectors - Overview
Livestock producers of cattle and sheep are plagued by a number of problems which are
endemic to the dualistic nature of the sector (small mainly subsistence producers versus
larger commercially oriented producers) as well as those which have developed over the
past twenty years. Lack of resolution of these problems has had a particularly negative
impact on producers in eastern Anatolia, where the brunt of the long-term decline in
cattle and sheep herds has taken place. Generally speaking, the interventionist policies
initiated in the 1950s with the establishment of the EBK (the meat and fish parastatal)
greatly increased the role of the state in the cattle and sheep sectors. By the 1980s, the
specific output price, feed subsidy, and trade policies in these sectors were subject to
frequent change and proved unable, in a state-directed market environment, to engender
sustainable development of producers in eastern Anatolia.
When the low efficiency of these policies was recognized in the early 1990s and
tightened import policies replaced state market interventions as the main tool for boosting
returns in the sector, the market was left to direct decisions by producers. Eastern
Anatolian livestock production collapsed in this period as the private enterprises, which
replaced the state, contracted their activities. Produces in eastern Anatolia faced further
eroded returns either because informal imports from the east drove regional livestock
prices down, or because dislocation during the extended armed conflict in the region cut
producers off from their pastures, their main source of feed.
Thus, consideration of the impact of government policies in these sectors cannot be made
without taking into account the dualism of these sectors– both in terms of the sizes of
producers’ herds and regionally. Trade and support policies may be successful in
sustaining production in the larger, commercially oriented herds of (mainly) Western
Turkey since these markets have stronger supply chains and are more buffered (by
distance) from the negative impact of large illegal imports which typically plague the
small producers in eastern Anatolia. Because of lower returns, these smaller producers
suffer the impact of the following longer term problems of the sector to an even greater
degree and respond by slow but constant exit from the sector. These long-term factors
are summarized below and discussed in greater detail in the remainder of the Annex.
a)
b)
c)
d)
e)
Low level of knowledge and technical efficiency of small producers
High feed costs
Lack of access to finance
Highly underdeveloped supply chain serving small producers
Reduced domestic demand owing to shifting consumer preferences and high
relative retail prices for beef and mutton
In sum, the challenges for government policy are to recognize that eastern Anatolia will
likely not be a source of large supply response in the medium-term in the livestock sector
and to target development policies in this region on modest, achievable goals given the
very serious constraints the livestock sector faces there.
Background - Over the period 1975-2002, there has been a gradual annual decrease of
the domestic sheep stock, leading to a 33 percent cumulative fall. The most dramatic
decrease was in the 1990-1995 period – by 18 percent. Although Turkey had been a
major exporter of sheep (5 percent of stocks annually in 1990), sheep exports have fallen
88 percent since 1990, as the related export subsidy was removed and demand from
traditional export markets could not access Turkish supply owing to on-going military
activity in eastern Anatolia. A cessation of military conflict and the 2001 devaluation of
the Turkish Lira brought sheep exports back up to 1 percent of stocks annually.
Similarly, in the cattle sector, there was a 68 percent decrease in inventory from 1980 to
2002, with almost one-third of most of this decrease occurring in 1980-1985. Official
imports have largely ceased owing to an import ban imposed by the GOT, but an illegal
import of approximately 1 million cattle (in 2001) takes place which is not reflected in
official statistics. Exports of Turkish cattle remain almost non-existent, owing to their
high price in comparison with cattle in neighboring countries.
Policy Developments and Their General Impact - From 1950-1995 Turkish livestock
producers operated in a system of intensive government intervention, support and
subsidization. The “Et ve Balik Kurumu” (EBK, the meat and fish parastatal enterprise)
was created in 1952 as the state enterprise responsible for executing policies of price
support through market intervention, improvement in meat quality, regional livestock
development, and meat processing. From 1990 to late 1994, the GOT also introduced a
program of premium incentive payments to support producer prices for cattle and sheep
(as well broilers).
In 1995, EBK was reformed, with many of its slaughter houses being privatized.
Currently, its current operations only account for 5 percent of the sector’s output. The
GOT also subsidized feed purchases up until 1989 and operated a large number of state
owned feed mills (YEMSAN), but these were also privatized in 1995. From 1987 to
1999, various import subsidies were in place to encourage the import of breeding heifers.
Currently the only implied support is a zero rated import tariff for breeding cattle. Apart
from a continued involvement in the AI sector and provision of subsidies and incentives
for fodder production, the GOT had little direct involvement in the sector from 19952003.
Without the earlier support policies, producers were quickly exposed to large adjustments
in the market. These adjustments were amplified as demand fell with economic
downturns and switches in consumer preferences towards poultry consumption. Overall
input costs rose faster than output prices in the late 1990s, and this continued in the 2000
to 2002 period, as beef prices failed to increase in line with general inflation. Small
producer’s confidence in the cattle and sheep sectors fell markedly. Lack of confidence
led smaller producers to reduce the size of their livestock holdings, with most producers
now keeping livestock sufficient mainly for only their own requirements. When
producers have seen periodic increases in price, many of them slaughtered stocks heavily,
with a corresponding negative effect on their breeding stock and ability to increase their
holdings if prices continued to remain firm. This rather primitive approach to market
exemplifies lack of sufficient confidence in these sectors by the small livestock producers
and makes it to tackle the long-term production technology and supply chain issues
discussed below.
Supply Chain Issues
Low technical Efficiency. It is clear that producer profitability is being hampered by the
ration efficiency in the sector, i.e. the weight that animals gain as a ratio of the feed that
they consume. General weight gains in other markets are roughly 1.8 kg/day for cattle,
whereas in Turkey they are only 1 kg/day or less. It is likely that this inefficiency is
caused by a lack of producer knowledge in proper livestock rationing and also due to the
mixed local breeds that are prevalent in smallholder herds/flocks. In order to compete
and raise profitability, ration efficiency will need to be raised. It will also be necessary
for new breeds to be introduced that are either higher weight gaining dual purpose cattle
or specialized meat cattle breeds.
High Feed Costs. In terms of costs of production, producers face inflated costs for grains
and combined feeds caused by government intervention policies in other sectors. For
example, the TMO price of wheat in 2003 was US$ 280/MT, whereas the CIF cost of
imported wheat was US$ 140/MT. The price for barley was US$ 175/MT, compared to
imported feed barley at US$ 130/MT. Interestingly the cost of compound feed in the UK
in 2003 was US$ 215/MT, whereas the price in Turkey was US$ 250/MT. The cause of
this price distortion is mainly due to high import duties (80 percent in the maize sector).
Due to the low demand for feeds (a factor of their price and lack of livestock producers’
ability to evaluate their benefits), feed producers face very low production capacities and
therefore high unit costs (resulting in higher cost for feeds).
Lack of Credit. While producers may be aware that better feed rationing would lead to
higher weight gains, they do not have the financial resources available to be able to
purchase more grains or combined feed. Moreover, if they have no confidence in market
prices, they will be reluctant to invest in intensive feeding practices as a medium term
approach. The lack of access to credit also has an impact on producers’ ability or
willingness to invest in breeding animals, wintering premises and purchase of feed stocks
for winter feeding.
Underdeveloped Supply Chain. If small producers managed to reduce their unit costs of
production and were prepared to increase their production, a problem exists in that they
are now totally disconnected from the supply chain. Many of the old slaughter houses
were closed after privatization and further sale is controlled by the current slaughter
house operators and the retail sector. Producers also suffer from lack of economies of
scale, in that they are unable to economically enter the supply chain with the very small
numbers of livestock that they possess (e.g. insufficient animals to economically
transport to market). A compounding problem related to this is that the development of
any export business is very quality sensitive and small holders have no concept of what
quality meat is demanded for export markets. It is likely that only the feed lot operators
would be sophisticated enough to develop this business. It should also be noted that a
major potential development area for livestock, namely the eastern pastures, no longer
have a viable market/production infrastructure, nor does there appear to be any new
investment planned in these areas.
Outlook - In respect of the above, it must be remembered that development of nonpoultry livestock is a medium to long term investment (broilers mature in 40 – 50 days,
whereas sheep and cattle are a 2 to 3 year investment). Therefore, whilst we may see the
price increase in beef prices of 50 percent in the past year (US$ A FAS estimate 2003) as
a major incentive to producers, their ability to react to such market developments suffers
from a production time lag. An intensive feeding sector (feed lots) has begun to develop
in the past few years, with major commercial holdings such as Koc entering the market.
However, from interviews conducted during this study with such operators, it is clear that
they are finding it very difficult to source sufficient numbers and quality of calves. This
increase in demand may well explain the currently very high price for calves (US$
2.60/kg live weight, versus an equivalent price of US$ 1.80 in the UK).
Change in regional production is one factor that has led to the decrease in livestock
numbers (especially sheep) and hence young animals1. Eastern Anatolia was the
traditional production area for livestock and has been negatively affected by border issues
(both regarding internal security policies and illegal imports as noted above) to such a
degree that many producers in the East have switched from livestock production to
growing of arable crops. This is particularly the case in the South-Eastern part of the
country where the implementation of the GAP project has led to a dramatic increase in
arable land and a corresponding decrease in pasture.
Recommendations - In order to stabilize the market and provide for further growth (as
well as control of livestock disease), it is imperative for the GOT to ensure that the
practice of illegal importation and slaughter is fiercely controlled. Linked with this, the
GOT must ensure that it sufficiently supports and rigorously enforces a system of cattle
registration and traceability. This system must be followed through to the slaughter and
meat supply chains, as this will reduce the incidence of unofficially slaughtered meat and
the negative impact that this has on meat prices.
Although the GOT currently has an artificial insemination (AI) program in force for the
livestock sector, the impact of this needs to be maximized. Whilst there may be some
producer resistance to the use of AI (especially in the east of the country), it is possible
1
One thing to be considered in reviewing the current livestock situation is that the accurate estimation of livestock
production levels of small holders is difficult and it may be that the reported decreases since 2000 may well be less than
represented in the FAO data. As noted by US$ A FAS in August 2003, current official meat production figures
probably only account for 70% of actual production.
for them to increase the number (or encourage the use) of breeding bulls. Such a
program should be linked with a producer re-education drive and the introduction of new
breeds. Given the fact that many smallholder producers favor dual purpose cattle, the
GOT should consider the introduction of higher yielding dual purpose cattle, as well as
specific meat breeds. In conjunction with this, it is recommended that the GOT direct its
support in this area to the reduction of the actual cost of inseminations to producers, as
opposed to the current subsidy to private AI service providers.
Although the Pasture Law was passed in 1999, it does not appear that its provisions are
being very effective. The GOT needs to review this law and put in place any ancillary
provisions that will help its effectiveness. The state also needs to undertake an
investment program in the mountain pastures in the east of the country in order to provide
for increased access to drinking water for the potential sheep herds.
As the other sections of the report mention, the high cost of feed is directly linked to the
GOT’s policies in other sectors of the economy. Specifically, the high import tariffs on
maize and actions of the TMO are causing serious feed price inflation, with little benefit
to the producers in that sector. It should also be noted that these cumulative policies are
disincentivising producers from growing soybeans, a crop that has been shown to be
critical to the development of livestock sectors. The GOT should follow the specific
recommendations in these sectors in order to enable the price of livestock feed to fall. It
is not recommended that the GOT make any subsidies or incentives for the feed sector
itself, as this would only constitute an attempt to reduce the current symptoms, as
opposed to finding a cure for the actual problems.