Iran Agribusiness Report Q3 2012

BMI View: With no agreement reached at the May summit in Baghdad over Iran's compliance with the nuclear non-proliferation treaty, attention now turns to a proposed meeting in Moscow in June. If these further negotiations, which include the G5+1 countries of China, the US, France, the UK, Germany and Russia, fail, Iran will be hit by EU sanctions targeting the oil industry. These sanctions are likely to have serious effects on the country's economic development - including on its agriculture sector. Consumption growth of more expensive commodities such as beef and rice are likely to be affected first, especially as Iran depends on imports for these products. Moreover, the longer sanctions persist, the more severe will be their effect on Iran's capacity to make much-needed investments in the agricultural sector. Iran already faces stringent US restrictions on financial transactions, and these measures have severely hit importers who are unable to finance their deals with overseas sellers, forcing the government to intervene to avert a food crisis. Government cuts to subsidies have further complicated the situation.

Key Forecasts

Wheat consumption growth to 2015/16: up 1.2% to 16.4mn tonnes. The removal of subsidies, combined with the effects of sanctions, are expected to lead to higher prices and depressed demand.

Beef consumption growth to 2015/16: 9.8% to 664,300 tonnes. We have revised down our forecast on the back of an expected slump in demand brought about by sanctions exerting a squeeze on availability and incomes.

Sugar consumption growth to 2015/16: 4.1% to 2.6mn tonnes. The removal of subsidies and the difficulty of obtaining supplies on the back of sanctions will lead to lower growth than previously forecast.

2012 real GDP growth: -1.6% (compared with growth of 0.9% in 2011; predicted to average 2.2% from 2011-2016).

Consumer price inflation: 26.0% year-on-year (y-o-y) in 2012 (up from 24.5% y-o-y in 2011; predicted to average 20.4% from 2011-2016).

Industry Developments The most significant development so far in 2012 has been the major intervention by the Iranian authorities - via the Government Trading Corporation - in acquiring vital agricultural commodities. Iran imported around 3mn tonnes of bread wheat in March alone and is negotiating further supplies from India. The South Asian country has a large trade deficit with Iran due to its oil imports and has begun to pay up to 40% in rupees to circumvent US and EU financial sanctions. Iran in turn is using these revenues to make deals for Indian rice, sugar and soybean. Uruguay is also offering to continue rice exports to Iran in exchange for oil in a similar effort. Reuters reported in May that Iran is also attempting to secure feed grains for the livestock sector. Private traders have been unable to finance the imports themselves because the US has enforced a boycott of financial transactions with Iranian banks. This government intervention has gone some way towards preventing shortages in the short term, but it remains to be seen how long this activity can be maintained if sanctions continue.

The government has also continued its efforts to cut subsidies across a range of basic foods, including milk and sugar. In an attempt to insulate the poor from price rises, the government has made substantial monthly payouts of around $37 to the poorest households. However, the Financial Times has reported that Iran's parliament has sought to block these payments, as they are contributing to spiralling inflation of around 50% on many foodstuffs. Further objections have been made, with opponents noting that the subsidy cuts were originally intended to contribute to investment in domestic producers, but this has apparently not been carried out. If parliament were to succeed in reducing or cancelling these handouts, this would cause a short-term drop in demand as the poor face a further squeeze on incomes.