An important risk to Iranian short-term consumption is playing out, as the government has recently announced that it is reducing subsidies in a bid to improve the country's fiscal account. The impacts should be relatively wide, as livestock and grain consumption is likely to be affected. With a large population and some economic growth, the country would appear to be a good place to invest in agricultural production. Indeed, with relatively low yields, large arable land space and the government's intention to eventually expand the sugar sector, the country on the surface appears an attractive place for production growth. However, with sanctions in place and potentially more on the way, Iran will struggle to meet even its most basic food needs over our forecast period. The poultry sector is likely to be the main outperformer due to consumption growth
- Wheat production growth to 2014/15: 3.9% to 14.0mn tonnes. Despite being an important crop, wheat yields in Iran are still fairly low by world standards. Average yields are comparable to the level seen in Turkey but some way below those of Pakistan to the east.
- Beef consumption growth to 2015: 12% to 738,000 tonnes. Rising disposable incomes should benefit the consumption of beef at the expense of poultry, as mainly higher-income consumers trade up to the more expensive meat over the long term.
- Sugar production growth to 2014/15: 21% to 1.3mn tonnes. Iran is widely believed to have given inadequate investment and public and private sector support to the sugar sector. Base effects are the main factor behind the long-term production increase.
- 2011 Real GDP Growth: 1.2% (same as 2010; predicted to average 2% from 2010 until 2015).
- Food Price Inflation: 25% y-o-y in March 2011 (down from 14% y-o-y in March 2010).
According to an Iran Daily report, the Sugar Cane Industry Development Company (SCIDC) is aiming to more than double production of cane sugar by the end of the decade. Production of cane sugar peaked in 2006/07 at 910,000 tonnes according to the USDA. By 2020, the state-run company is hoping to boost annual production to 2.06mn tonnes. This is to be achieved by a 94% increase in the area planted to sugar cane, as well as an ambitious increase in the yield from the already high current level of 87.67 tonnes per hectare to 110 tonne/ha. However, risks of further UN imposed sanctions as a result of Iran's nuclear development programme are a major deterrent to agricultural investors.
Iranian President Mahmoud Ahmadinejad's subsidy removal programme, which officially began on December 19, will dramatically increase political risks and reduce the country's growth prospects (particularly for domestic consumption) over the medium term. The head of state announced that, for the first 60 litres of gasoline purchased per month, prices would rise from IRR1,000 per litre (about USc9.6) to IRR4,000 per litre, and for all additional gasoline purchased, from IRR4,000 (USc38.4) per litre to IRR7,000 per litre. Diesel fuel and compressed natural gas prices also rose as part of the initial step in the programme, and Tehran stated its hope that all subsidies would be removed within five years.
The effect of subsidy cuts in Iran has finally begun to be reflected in official inflation data, and we maintain our view that the continuation of the subsidy reform programme, which began in December 2010, will result in sustained high inflation over the coming quarters. Consumer price inflation in January was slightly below our expectations, but we believe consumer price growth will accelerate. The consumer price index (CPI) for January showed that the 'food and beverage' and 'transport' components experienced the largest gains as a result of the subsidy reforms. Given the nature of the subsidy reform plan, which saw initial cuts aimed at food and fuel subsidies, the CPI components that saw the greatest increases in the January data were unsurprising, in our view.