Clare Nuttall in Astana -

A severe drought will slash Kazakhstan's 2012 grain harvest to around half the record 26.9m tonnes gathered in 2011, slashing agricultural revenues at a time when the economy is already anticipating a hit from the global economic downturn. The news is especially worrying for the smaller Central Asian republics, which rely on Kazakh grain imports and have already seen an increase in food prices.

Kazakhstan expects to harvest just 12.8m tonnes of grain - well below the average of the last decade - this year after drought damaged crops in the northern grain belt. Worst affected is the northeastern Kostanai region, where just 18% of crops are in good condition, according to the Ministry of Agriculture, although the other main grain producing regions have also seen a high level of crop damage.

Kazakhstan does, however, expect to be able to maintain exports at around 12m tonnes in the 2012-13 marketing year, thanks to a surplus left over from the record 2011 harvest. "About 12m tonnes - this is our export potential for this marketing year," agriculture ministry official Yevgeny Aman told an online conference on August 16. This is slightly above the 10m-tonne forecast from Agriculture Minister Assylzhan Mamytbekov in July. Although Mamytbekov also announced on July 25 that Kazakhstan would scrap grain export subsidies from August 1, saying they were not "economically expedient," there are currently no plans to introduce a cap in exports.

The ability to maintain exports is important for Kazakhstan, which is starting to see a slowdown in growth due to worsening conditions in the global economy. Although the economy is in much better shape than when it entered the previous crisis in 2007, Kazakhstan has already experienced a four-month slowdown in industrial production because of a fall off in global demand. "Kazakhstan's Ministry of Agriculture expects the country's 2012 crop harvest to be well below the record-high 2011 number of 26m tonnes... For us, this indicates that the 7.5% GDP increase previously forecast by President Nursultan Nazarbaev for 2012 will be hard to achieve," says a research report from Renaissance Capital. "We... see potential for a GDP growth downgrade in the coming months, on the back of a low harvest [versus 2011] and declining [industrial production]."

As it became apparent that the 2012 harvest would be a poor one, President Nursultan Nazarbayev announced on June 23 that it would be "important to control grain prices on the domestic market." Kazakhstan's state grain trading company Food Contract Corporation is to sell 1.3m tonnes of stockpiled grain to local milling companies in an effort to keep bread prices at a reasonable level. This grain will be provided at a fixed price of KZT28,000 ($186) per tonne, the agriculture ministry says. Regional governors are also working with Food Contract and the KazAgro state holding company to maintain supplies and keep prices at an acceptable level.

Feast and famine

Droughts are not unusual in Kazakhstan, where the harsh weather conditions in the grain producing areas result in widely fluctuating yields from year to year. 2010 saw an even worse harvest than is expected in 2012, with just 12.2m tonnes of grain produced.

This year's problem is part of a wider drought that's affecting large swathes of the globe, such as Russia, the US and other countries in Central and Eastern Europe. In July, the International Grain Council cut its forecast for global wheat production in 2012-13 to 665m tonnes because of drought in major food producing countries. The Food and Agriculture Organisation (FAO) Food Price Index rose by 6% to an average of 215 points in July after three months of decline, though it is still well below the February 2011 peak of 238 points. According to the FAO, the increase was mainly driven by a surge in grain and sugar prices.

This is already resulting in food price inflation in Kyrgyzstan and Tajikistan, which depend on grain imports from Kazakhstan to make up their domestic shortfall. Anger over rising food prices could even lead to further unrest in the two volatile countries; Kyrgyzstan's government is on the brink of collapse, and Tajikistan is dealing with the aftermath of the July insurgency in Gorno Badakhshan.

Flour prices in north Kyrgyzstan, which borders Kazakhstan, increased by almost 43% in July, according to the Ministry of Economy and Antimonopoly Policy. Drought has affected Kyrgyzstan's own harvest, and traders have raised prices in anticipation of higher prices on world markets. Autumn in Kyrgyzstan is expected to be difficult due to the increase in grain prices on the world market, Economy and Antitrust Policy Minister Temir Sariyev told a government meeting on July 24.

In Tajikistan, food prices, and consequently inflation, have fallen steadily since an alarming peak in mid-2011. By May, wheat flour prices were 16% lower than a year before, and Tajikistan also expects to increase its grain harvest by around one-third in 2012 to 1.5m tonnes, after farmers switched from cotton to grain.

However, the World Food Programme (WFP) reports that wheat flour prices started to increase in July and notes that the Kazakh harvest may lead to price pressure in Tajikistan, which is an importer of Kazakh wheat. The "reduced harvest this year may well put upward pressure on prices of exported wheat and wheat products, including for Tajikistan, which imports 95% of its external wheat requirements from Kazakhstan," says a WFP report. Anticipating future shortages, on August 14 Tajik government officials visited Pakistan and secured a deal to import wheat, rice, sugar and other foodstuffs.