Why is Uzbekistan killing their successful greenhouse industry?

EastFruit often reports on Uzbekistan’s tremendous successes and significant potential in the development of new markets for fruits and vegetables and the greenhouse sector of the country is the most technologically advanced segment of horticulture, exporting tomatoes, cucumbers, peppers, eggplants, and other greenhouse produce. Greenhouse industry participants invest the most money per hectare of cultivation, but they also ensure highest revenues from each hectare, and provide jobs to a the largest number of people per hectare.

That is why it is difficult to understand the logic of the country’s officials currently putting enormous stress on the greenhouse industry of Uzbekistan. In this article, we will try to understand what is happening to their greenhouse industry, why the did the government create such unfavorable conditions for the industry, and how much Uzbekistan stands to lose if the situation does not improve. After all, competitors are alert and they will not miss any chance of winning more of their piece of the pie.

Greenhouse producers in Uzbekistan have repeatedly complained to EastFruit about the complicated bureaucratic and non-transparent procedure to connect (and re-connect annually) the gas supply necessary for heating their greenhouses. Even the lucky ones who manage to accomplish a gas connection are faced with an unstable supply of natural gas, which leads to disruptions in production processes. Therefore, greenhouse growers are then forced to spend huge sums to create additional infrastructure for the use of alternative sources of heat if their gas supply fails. To make matters worse, not everyone can afford to prepare for gas shortages. For example, East Fruit recently received information about another complete loss of harvest in greenhouses due to the gas supply being shutoff.

After forwarding these concerns to the appropriate authorities, the response from the Ministry of Energy of Uzbekistan is perplexing. It stated: “Greenhouses are seasonal consumers of natural gas, which is declared in their contracts with gas supply organisations. According to the documents, in the autumn-winter period, seasonal consumers must have a supply of an alternative type of fuel, in this case, it is a coal, to use for at least three months.”

The logic is confounding since greenhouses in Uzbekistan require gas in autumn and winter, not in summer. Therefore, it begs the question: what purpose does a gas supply contract serve if gas cannot be guaranteed when greenhouse producers need it most?

Why can’t Uzbekistan guarantee gas supplies to their consumers? Exports of natural gas are the most important source of budget revenues for Uzbekistan and the key sector for improving the country’s trade balance. In 2019, according to TradeMap data, Uzbekistan supplied 13.5 billion cubic meters of natural gas to foreign markets earning $2.6 billion.

Gas is a raw material and the government of Uzbekistan regularly declares the need to increase value to their exported products. Furthermore, fruit and vegetable production is officially considered one of the country’s priority sectors. Entire regions of Uzbekistan have shifted from growing cotton and grain up to 2013, to growing fruits, berries, grapes, nuts, and vegetables today.

When we look at the dynamics of Uzbekistan’s exports, gas exports tend to decrease while fruits and vegetables exports have nearly doubled over the past three years. Why, then, does the state fail to support the sector providing more jobs and better revenues while the demand for natural gas globally is falling?

Let’s calculate which is more profitable for Uzbekistan: exporting natural gas or exporting tomatoes and peppers grown in a greenhouse using natural gas?

To heat a hectare of greenhouses in Uzbekistan during the winter growing cycle, one needs an average of 220,000 cubic meters of natural gas. Domestic industrial consumers pay about $96 per 1,000 cubic meters of gas. Based on the TradeMap data, the average export price of gas last year was $193 per 1,000 cubic meters. We know that in 2020, global gas prices have dropped dramatically.

Thus, to heat 1 hectare of greenhouses, a grower needs to spend about $21,500 per season. With Uzbekistan’s growing technologies, it will be possible to harvest about 350 tons of tomatoes per hectare of such greenhouses. When exporting these products to Russia, a grower can receive on average at least $1,500 per ton of tomatoes or more than $500,000 per hectare.

Therefore, exporting gas required for heating 1 hectare of greenhouses, the country earns only slightly more than $42,000. If the same amount of gas were used to heat greenhouses instead, Uzbekistan’s earnings would exceed $500,000. Simply put, exports of greenhouse tomatoes for Uzbekistan are 10 times more profitable than the exports of natural gas! Supplying gas to the greenhouses means adding value to the exports of raw materials and increasing the country’s export earnings, which is what the country’s leaders are already striving for.

Additionally, the greenhouse industry is very knowledge intensive. It’s continually evolving and requires constant improvement, which means development of greenhouse technologies leads to an overall increase in the technological level of the country’s agricultural business. The benefits of this progress would be enormous, despite the difficulties to accurately assess it.

Why don’t greenhouses in Uzbekistan just switch to coal instead of gas when growing greenhouse vegetables? Why not just give up using gas altogether?

Complete transition to coal in greenhouses is possible. However, heating with coal will have the following negative consequences for Uzbek greenhouses:

1. Increase in heating costs by 12-17% resulting in lower producer’s income and products competitiveness;
2. Increase in the volume of capital investments per hectare since it would require purchases of more land, large warehouses for coal storage, equipment for coal logistics, and expensive filters to reduce emissions from coal combustion;
3. Higher costs for working capital since coal needs to be purchased for future use upfront – and this means frozen money and additional costs for servicing the loans;
4. Higher labour cost since coal usage requires hiring additional workforce;
5. More money spent on replacing the filters;
6. Decrease in productivity and product quality loss due to reduced transparency of glass or film on greenhouse surfaces caused by ash and soot buildup from burning coal. Using expensive filter systems (and their regular replacement) reduce this issue, but it can decrease selling prices and increase production costs affecting the competitiveness of greenhouse products from Uzbekistan.

“Both the regional and the global markets for greenhouse vegetables are very competitive. No one is guaranteed a share of this market. Moreover, the world trade in greenhouse vegetables has been stagnating for several years in a row. Thus, with the increasing production, international trade is not growing or is even declining,” says Andriy Yarmak, an economist at the Investment Centre of the Food and Agriculture Organization of the United Nations (FAO).

“Uzbekistan’s main target market for exporting greenhouse vegetables is Russia, even if produce gets there via neighbouring countries. In Russia, production of greenhouse vegetables is growing at a very high pace, so the demand for imported products, including those from Uzbekistan, is constantly decreasing. Besides, the neighbouring countries also stay alert. In Kazakhstan, the greenhouse business is actively developing and their producers have no problems with gas access, and the gas is 30-40% cheaper than gas in Uzbekistan. Even Russian greenhouses spend much less on gas than Uzbek ones. Turkmenistan provides gas to local greenhouses about 100 times cheaper than Uzbekistan and they also need less gas for heating! It is not surprising that Turkmenistan is increasing the export of greenhouse vegetables much faster than Uzbekistan does,” explains Andriy Yarmak.

Uzbekistan has the highest price of gas for greenhouses in the region. Even at this high price, it is still not easy to buy it and supplies are not guaranteed. If Uzbek producers switch to heating greenhouses with coal, then competitors will get even more advantages over Uzbekistan. This means that they will be able to offer better prices, pushing Uzbekistan out of the markets. Also, competitors will use the additional margin to accelerate the development of their technological level and will strengthen their positions in the market very quickly.

The Russian market is attracting a lot of competitiors in greenhouse vegetable supplies. After the ban on supplies in 2016, Turkey is starting to recover its leading position in Russia by rapidly increasing export volumes. Exports of greenhouse tomatoes and other greenhouse vegetables from Iran is growing very rapidly even if supplied via Azerbaijan. Turkmenistan is very rapidly increasing the volume of greenhouse vegetable exports to the Russian Federation. Thus, it is getting crowded there.

We are not experts in the oil and gas market, and we admit that other internal reasons may not allow Uzbekistan to allocate more gas for the local greenhouse business. Such reasons may include long-term export contracts with guaranteed volumes, depletion of gas deposits, or agreements with private companies that own gas wells.

However, from the point of view of the fruit and vegetable business and a common sense, Uzbekistan’s government should pay attention to this promising industry and try to lend it a hand. After all, market experts believe that more and more agricultural crops will gradually move into greenhouses. Today, many world countries started growing most of the berries and even cherries for the fresh market in greenhouses. Greenhouse production allows for extending the season, but also significantly improves quality, reduces losses, increases yields, and improves the purity and environmental friendliness of products thereby minimising the use of chemical plant protection.