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Russia Agribusiness Report Q3 2009Published by: Business Monitor International Published: Jun. 19, 2009 - 63 Pages Table of Contents
AbstractDespite having 7% of the world's arable land while accounting for only just over 2% of the world'spopulation, Russia is a net food importer. In BMI 's new Russia Agribusiness Report for Q309, weexamine why this is the case and what challenges Russian agriculture will face as the country attempts toreassert itself as an agricultural power. The global recession is creating particular problems and the reportexamines the government's role in trying to bolster and protect domestic agricultural production at thisdifficult time. However, we also consider the successes. Grain production has been making great stridesand while the recession may lead to short-term crop reductions we forecast that by 2013 Russia will beone of the world's top wheat exporters.Though the Soviet Union was self-sufficient in food production until well into the 1980s, the danger signsof the coming collapse were clear to see. Yields were a fraction of those in the US as the majority offarming was done on woefully inefficient state and collective farms. A small amount of private householdfarms were permitted, and, in the 1980s, despite accounting for only 3% of agricultural land, theyproduced around 25% of the total agricultural output. With the fall of the Soviet Union in 1991, the system of subsidies for farmers and guaranteed prices andmarkets for their produce began to collapse. Thrust into vagaries of the market system, many farmerswere unable to stay afloat and output dropped precipitously, turning Russia into a large net food importer. Since the end of the 1990s, however, things have begun to turn around. As unprofitable operators havebeen forced out of business, those that have survived have become more efficient, and large corporatefarms have emerged. Russia's Federal State Statistics Service show that the percentage of agriculturaloutput in value terms produced by larger concerns (agricultural organisations) rose from 41.2% in 2005 to43.4% in 2007 and the percentage for household farms fell from 53.2% in 2005 to 49.6% in 2007. We expect grain production to expand rapidly thanks largely to support by the government which hasbeen implementing plans to increase the use of higher yielding seeds, allow the greater use of fertiliserand encourage investment in machinery. An estimated RUB12bn (US$468mn) was poured into theindustry between 2005 and 2007 improving crop yields and attracting the attention of foreign investment. The Moscow Times, quoting Reuters, reported in March 2009 that Russian grain processor Pava islooking for potential foreign investors to help triple the amount of farmland under its control. A companydirector was quoted as saying that the firm hopes for a tenfold increase in grain production by restoringfallow land in Siberia. Agricultural expansion could substantially benefit from Putin's latest land reform legislation which meansthat for the first time since 1917 Russia will permit the trading of national farmlands. This could go a longway towards attracting the types of investment that can help Russia fulfil its vision of being a majorglobal agricultural player. The land reform could lead to over 400mn hectares of crop acreage being sold.Foreign investment would help reduce Russia's comparatively expensive food imports. The government is hoping that the establishment of the United Grain Company will help boost grainproduction and exports further. According to a United States Department of Agriculture (USDA) report,in March 2009 President Medvedev signed a decree establishing the company, the main priorities ofwhich will be to increase the purchasing and selling of grain on the domestic market, increase grainexports and modernise and construct new elevators and port terminals. The report states that thegovernment has nine months in which to develop the company's trading strategy for 2009-2012 and 2013-2015 and find some private funding. The division between state and private ownership, as well as detailson strategy and the Company's role in the grain market are not yet clear. There are of course fears thatgreater government involvement could politicise grain exports, as has happened with energy in recentyears. A number of trade protection measures have been recently introduced. A USDA attaché report notes forexample that in January 2009 a resolution was passed imposing a temporary 5% import duty on soybeanmeal (previously duty free). Also according to USDA, in February the government introduced anadditional seasonal import tariff on rice and rice products from mid February 2009 to mid May 2009,amounting to EUR0.16/kg which is 2.2 times higher than the previous rate. USDA adds that the duty isspecific and the tariff will mainly affect imports of cheaper Asian rice. Oats, rye, sunflower seeds and potatoes are not covered in depth by this report but Russia is a major worldproducer of all four. A range of fruit is also commercially grown including apples, pears and peaches.According to USDA the production of plums and apricots has fallen in recent years. Another success story is the poultry industry. USDA notes that the poultry sector is the only one that hasmanaged to triple production in the last decade due to the introduction of new breeds, improved feedtechnology and better management, largely possible through greater industry consolidation. USDA addsthat recent increases are also down to investment credit subsidies and the imposition of import restrictingpolicies. Cheaper feed is also helping. The government is keen to develop the struggling livestock and dairy sectors and has introduced anumber of measures. According to the USDA the 'State Program for Development of Agriculture andRegulation of Food and Agricultural Markets 2008-2012', is aiming to turn around falling cattle numbers,including measures to stimulate domestic production and protect local producers. Also the Moscow Timesreported in March 2009 that the government may allocate RUB72bn (US$2.1bn) to enable theconstruction of new, and the restoration of older, dairies and meat processing plants. First Deputy PrimeMinister Viktor Zubkov is quoted as saying: 'We must come out of this year with a greater volume ofdomestically produced milk and meat'. There is now considerable interest in Russia's livestock and dairy sector. In February 2008, Wimm-Bill-Dann invested more than US$12mn in the opening of a large-scale dairy farm outside of St Petersburg,which it claims will have yields on a par with those seen in US dairy farms. However, despite the advances, investment and government schemes there are a number of challengesthat must be met if Russia is to reach its potential to be one of the world's leading food producers. Thelegacies of complex land ownership rights from decades of collective farming remain. Though these havebeen cleared up considerably in recent years, establishing large corporate farms is no easy matter. Infrastructure in many parts of Russia is already creaking, with little investment since Soviet times. In2008 there were insufficient grain storage facilities and transporting the grain harvest was severelydelayed due to a lack of functioning railway cars. Another daunting challenge for the Russian authorities is population demographics. As Russia'spopulation has been falling, rural areas have been hit particularly hard. Unless the government can stemthe flow of young people leaving the land for the cities, it is hard to see how their agricultural dreams canbe realised. Importantly, the global recession is taking its toll. According to a December 2008 article in the MoscowTimes the recession, low grain prices and export woes (mostly related to competition from other bigharvest regions) are making it difficult for many farmers to pay off last year's debts and refinance theirbusinesses. An agriculture analyst is quoted as saying that no one is loaning to farmers any more. Heexpects smaller farmers to sell to bigger concerns to cover debt. (Although larger farms would benefitproduction in the long run.) We reported in November 2008 that Razgulay, one of Russia's largest agricultural traders, despite nearlydoubling its year-on-year net profit for H108 to US$26.8mn, had pulled out of various investmentprojects because of dire conditions witnessed in global credit markets. The total investment needed tofund all projects was RUB5bn (US$182mn) of which Razgulay was to pay on credit with an interest rateof 14%. This was later revised to 18% which the group deemed too high and the investments wereforfeited. Global and domestic slowdown is putting a break on consumer spending, which could negatively impactfood purchases in general, but specifically more expensive items such as expensive cuts of meat. Get Full Details About This Report >> |
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