Category Archives: Russia

Millers gather in Middle East

One of the world’s premier wheat milling industry events, the 2012 IAOM Mideast and Africa Conference and Expo, was held Dec. 5-8 in the cavernous, ultra-modern Abu Dhabi National Exhibition Center. The 23rd version of the highly anticipated trade show was a resounding success in the newly opened facility, with booth space and registration slots selling out well in advance.

Over the three days more than 600 participants from companies and organizations based in 45 countries visited the 100 exhibitors from 20 countries and sat through management and educational sessions featuring nearly 50 speakers on topics ranging from innovations in milling to the global economy and leadership skills.

Old friendships were renewed and new relationships initiated at the conference’s dinners, lunches and coffee breaks, generously sponsored by leading players in the international wheat industry.

On behalf of the joint hosts, H.H. Sheikh Mansoor bin Zayed Al Nahyan, chairman of the Abu Dhabi Food Control Authority, gave the welcoming address and Agthia Group’s CEO, Ilias Assimakopoulous, closed the proceedings.

Exhibition

Exhibitors covered all sectors from grain traders to manufacturers of packaging machinery but included a large core group of mill manufacturers. The strong presence of a dozen steel silo companies reflected the trend of several years running for private grain millers and government organizations in the world’s number one wheat importing region to enlarge their storage capacity in response to the increasing precariousness of supply and price volatility.

Similarly, rising dependence on wheat of variable quality from the Black Sea countries and more recently India and Pakistan has led to greater demand for flour additives which were offered by another 12 firms exhibiting this year. Many of these same companies also offer vitamin and mineral premixes since most Middle Eastern countries have embraced mandatory flour fortification as a public health measure.

Companies and organizations from six continents displayed products and services. As in the past, Turkish suppliers accounted for one quarter of all booth space. Twenty European firms, half of them German, were the second largest contingent. A new trend is the larger number of exhibitors from companies in the region besides Turkey. This year there were 11 including six from the United Arab Emirates, the host country.

Trading Session

The speakers at the trading session on the final day enjoyed an especially large audience as millers sought to understand the circumstances surrounding the sudden spike in wheat prices again this year and the relentless market volatility of the past five years.

Six speakers focused on six major grain exporting countries and regions, all of which supply wheat to the Middle East and Africa with Bill Tierney, chief economist of AgResources, as moderator. In his own presentation on the global market outlook, Tierney focused on the “historic decline in wheat production and historic decline in stocks.” He emphasized that “essentially there is no stocks cushion to stop prices from moving sharply higher.”

Countries are depleting their stocks through exports, said Tierney, citing USDA’s forecast that India will export 6 million tonnes of wheat this year. “If E.U. wheat exports do not slow down, the E.U. will have to import more corn to replace wheat for feed.”

Swithun Still, director and senior trader of Solaris Commodities, Switzerland, covered the Black Sea countries, which in the last decade have emerged as a vital supplier of wheat to Middle East and African countries, after being a net grain importer during most of the 1980s and much of the 1990s.

Bill Tierney of AgResources moderating the Trading Session at the IAOM Mideast and Africa Conference. Photo courtesy of David McKee.

Bill Tierney of AgResources moderating the Trading Session at the IAOM Mideast and Africa Conference. Photo courtesy of David McKee.

“Egypt is almost a captive market for Russia,” Still noted. “It is almost a symbiotic relationship. Russia needs Egypt’s market, and Egypt needs Russian wheat.”

After exporting 26 million tonnes in 2011-12, Russia exported only 9 million tonnes through the first 11 months of 2012, with a maximum of 2 million tonnes expected in the final month. “Russia’s domestic price is now more attractive than the export price,” Still said, adding that ice and cold weather hinder logistics in the Black Sea, so that exports could slow even further.

Neither Russia nor Ukraine will outright ban exports as happened in 2010, but Ukraine could take “unofficial measures” to slow the outflow, he predicted.

Joe Woodward, past president, IAOM presents a plaque of appreciation to Ilias Assimakopoulos, CEO,Agthia Group, the host company at the Gala dinner.

Joe Woodward, past president, IAOM presents a plaque of appreciation to Ilias Assimakopoulos, CEO,
Agthia Group, the host company at the Gala dinner.

Despite harvest shortfalls in two of the last three years, “it is expected and hoped that RKU (Russian, Kazakhstan and Ukraine) will be the world’s number one grain exporter during 2020-40,” Still said.

Nick Poutney, GrainCorp regional manager, presented the crop picture in his country. “Australia has done a lot of work in terms of making its export program more efficient in the last few years,” he said, noting that in 2011-12 wheat exports were a record 27 million tonnes out of a record 29 million-tonne crop. For 2012-13, his company’s crop estimate was for a more normal 20.3 million tonnes but with a higher share of milling quality.

Port grain terminal operators “will be allowed to sell up to 60% of port capacity up to three years in advance. Up to now it was only one year,” Poutney said. This will encourage investments in rail infrastructure, helping to relieve transportation bottlenecks, he said.

Returning to the theme of crop shortages, Jean-Benoit Gauthier of the Canadian Wheat Board (CWB) said that precipitation in Canada for the new crop is only 40% to 50% of normal, and Ontario is the only production area in the country that did not encounter major weather problems.

Though it has lost its monopoly on exports of wheat from the Canadian prairie provinces, CWB still operates 130 wheat purchasing stations and remains a key partner for many wheat growers, Gauthier told the audience.

Nebraska grain grower Dan Hughes, vice-chairman of U.S. Wheat Associates, touched upon the critical shortage of ground moisture, particularly due to lack of snow in much of the central Midwest and especially in his home state. However, he emphasized that “the U.S. wheat store is always open,” and he repeated the familiar U.S. Wheat refrain of “contract sanctity, market competition, transparent pricing and assured quality,” as reasons to buy American wheat.

Hughes encouraged the millers of the region to use higher priced but better quality wheat from the U.S. to blend with low-cost wheat from other origins to obtain the best possible price-to-quality mix, an argument developed in depth by Peter Lloyd, regional technical director of U.S. Wheat, during the educational session. Mark Samson, regional vice-president of U.S. Wheat, showed his country’s share of Middle East and Africa wheat imports at around 5% of a total of 37 million tonnes.

Moving on to Europe, there has been an increase of exports outside of the E.U. at the expense of intra-E.U. trade, noted Francois Gatel, director of France Export Cereales.

“Wheat is by far the largest crop in France with about 10 percent of all area, or roughly 5 million hectares,” he explained. French wheat yield was 7.4 tonnes per hectare in 2012 thanks to “high spring temperatures, a long growth period and an oceanic climate with a high spring temperature but not too hot summer.”

France ranks number five as a world wheat exporter with 11 million tonnes, half of which went to Algeria and Morocco in the most recent year.

Glencore trader Joost Viehoff introduced the South American crop situation which was very unclear at conference time. Every year a certain share of Argentina’s and Brazil’s wheat exports is delivered to ports in southern and east Africa and the Middle East. Brazil, at 7 million tonnes per year, is one of the world’s top wheat importers, but it nevertheless exported 500,000 tonnes to Iran in 2012.

Viehoff explained that exports are possible due to the different quality needed by mills at different times, adding that much of Brazil’s production is feed wheat quality.

The first day, Indrek Aigro of Copenhagen Merchants, Denmark, discussed how the Baltic region, including the former Soviet states of Estonia, Latvia and Ltihuania as well as Poland and northern Germany, had become a major wheat surplus zone.

IAOM MEA’s growing emphasis on management issues came out in the initial topics of the day. Hedging solutions were presented by Dr. Abedlatif Abada of Morgan Stanley, UAE. On this theme, Tierney suggested that millers cover some of their purchase risk with options contracts whose prices are unexplainably very low in relation to the current market volatility.

Former GAFTA President Wayne Bacon gave a talk entitled “The Hidden Contract,” focusing on the GAFTA 27 rules which form a part of every grain contract. They are “very seller biased, so buyers really have to understand what their risks are.”

The BBC’s Spencer Kelly offered an entertaining keynote speech that capped off the first day’s management session with highlights from his popular television show, “Click,” about technological innovations that are changing the lives of even the world’s poorest people. Session moderator Martin Schlauri, managing director of Bühler’s Grain Milling Business Unit, thanked him and commented, “The milling industry is high tech, too. Go to our booth.”

Participants were pleased by the continuously refined formula of the conference.

“I have attended since the second one in Yemen, where there were 200 people,” said Mustafa Mustafa, group head of milling for Dangote Flour Mills, Nigeria. “It has been very good for my professional development as it has kept me up to date year by year about innovations. I appreciate the addition of managerial issues to the program.”

In his closing remarks, Assimakopoulous of Agthia Group congratulated IAOM for the “diverse and valuable insights from some of the industry’s most esteemed and influential professionals.” He then handed over the IAOM MEA banner to the Kamel Belkhiria, president of La Rose Blanche Group, Tunisia, where the 24th annual conference will take place Nov. 5-8, 2013 in the Mediterranean city of Sousse.

Photo Galleria from the event

Strategic grain reserves

The world economic crisis at the end of 2008 led to a profound distrust of financial markets, particularly among the developed countries that were impacted the most. Similarly, the twin price spikes that like bookends preceded the collapse and now accompany the global recovery, have caused political leaders in many developing countries to lose faith in grain and other commodity markets.

Many developing countries choosing to increase the size of their grain holdings during recent period of price volatility.

In December of 2010, Chief Industries UK of Essex, England, finished installing six steel silos with total storage capacity of 73,800 tonnes (12,300 tonnes each) that are 28.3 meters in diameter with an overall height of 29.4 meters at a facility in the Port of Qasim. Photo courtesy of Chief Industries.

After at least two decades of gradual withdrawal as part of an overall move toward free markets and economic liberalization, food price riots in 2008 and the recent unrest in many countries — sparked in part by renewed inflation — have prompted many governments to vigorously intervene in grain markets.

Outright bans, quotas or other restrictions on exports by Russia, Ukraine, Argentina, India, China and others are just one aspect of this trend.

Another is the policy decisions of many countries to increase the size of their strategic grain reserves whether composed of domestic or imported origin. The effects on world markets of these larger reserves have yet to be seen, but could make volatile markets even thinner as governments seek to hold, or as critics would say, hoard more grain. There are numerous examples from many parts of the world.

Middle East

In the Middle East, a region heavily dependent on grain imports, wealthy governments have decided to invest some of their immense cash surpluses in strategic grain holdings. Industry sources report that Saudi Arabia intends to increase its stock on hand of imported wheat to 1.5 million tonnes, which represents a six-month supply based on an annual milling wheat requirement of 3 million tonnes. A number of large grain storage facilities are expected to be built, particularly at Red Sea ports, as the country has rapidly phased out domestic wheat production due to aquifer depletion after nearly 30 years of costly self-sufficiency.

The effects on world markets of these larger reserves have yet to be seen, but could make volatile markets even thinner as governments seek to hold, or as critics would say, hoard more grain.

On April 18, the head of the Iraqi Grain Trading Company stated that his agency would up its wheat purchases from abroad this year to 3.25 million tonnes, equivalent to one year’s import supply plus a 1-million-tonne strategic reserve. Last year the country imported 1.9 million tonnes. Iraq will also increase rice imports to 1.5 million tonnes in part for reserve purposes.

Oman recently announced plans to construct a total of 300,000 tonnes of steel silo storage for government wheat reserves at two ports. The country’s two domestic milling companies will draw from the reserve in order to rotate the wheat in storage.

In the UAE, there have been recent press reports of a plan to build a very large grain storage complex at the port of Fujairah on the Indian Ocean with financing from Abu Dhabi, the richest of the seven emirates. The location, which already houses a strategic petroleum reserve, would ensure access to imported grain in case the Strait of Hormuz was ever blocked. Saudi Arabia’s emphasis on Red Sea storage facilities may reflect the same geopolitical worries.

In line with this theme, industry sources report that Qatar’s government is considering building a huge underground grain storage bunker that would protect a wheat reserve from radioactive fallout in case of a nuclear catastrophe in nearby Iran.

In Jordan, where the state is the monopoly importer, the wheat reserve will rise by one third thanks to the addition of a 100,000-tonne-capacity concrete grain elevator at the Red Sea port of Aqaba. However, it could be argued that this increase merely keeps up with population growth.

In Egypt, with the government accounting for 5 out of 7 million tonnes of total wheat imports along with 2.5 million tonnes of domestic purchasing, there is little room to increase its activity except to push holdings up to six months stock, the upper end of the reported target level.

Iran, which has achieved near self-sufficiency in wheat production in the last decade, has gone against the regional tide of greater state involvement in the last couple of years by deregulating most of its wheat sector and allowing private milling companies to buy directly most of the over 15 million tonnes per annum of wheat produced in the country.

Sub-Saharan Africa

Despite its status as the earth’s least food secure region, governments in sub-Saharan Africa in recent decades have held only modest grain reserves, if at all. Above all, this has to do with financial constraints, since buying up domestic grain and rotating stocks can be a huge burden on national budgets, not to mention the cost of building proper storage facilities, the market risks of intervention, and problems of transparency and governance associated with such activity. Just as important, all but a few African governments have abandoned the socialist policies of the past, which often included state ownership of grain processing and storage facilities.

However, recently some countries, particularly cash-rich oil exporters, have begun laying the basis for greater intervention in grain markets. Nigeria has adopted a policy that 15% of the total annual grain harvest should be held in reserve. The National Food Reserve Agency (NFRA) will hold 5% as a core strategic grain reserve, and individual states are to hold another 10% as so-called “state buffer stocks.”

This policy initiative has already been backed by significant investment. In 2011, NFRA will complete the construction of steel silo storage capacity for over 1 million tonnes of grain, primarily maize, sorghum and millet, at 10 sites in key production areas. Existing NFRA storage capacity was 325,000 tonnes.

In Angola, the state also may divert some of its oil and gas export revenues to create a national grain reserve. The plan is for several hundred thousand tonnes of grain to be held in new government storage facilities under the Ministry of Agriculture. To date, just 45,000 tonnes capacity of steel silo storage has been built in five locations, thanks to development aid from the Spanish government. Despite 30 million hectares of unused arable land, Angola still imports much of its food. Guaranteed government purchases in order to build up a grain reserve could serve as an incentive to more investment in agriculture.

Kenya’s National Cereal and Produce Board has decided to double the reserves it stores from 4 million to 8 million sacks of 90 kg. The total of 720,000 tonnes will be almost entirely domestically purchased maize.

Zambia’s Food Reserve Agency, since about 2005, has become an active player in buying the maize surplus in the country, holding over 350,000 tonnes of maize, but in the process was subject to criticism for squeezing out private sector trade and contributing to overproduction and a 1-million-tonne surplus that could be neither adequately stored nor exported, resulting in a price collapse in 2010.

Sudan’s government, which operates a small reserve for domestic intervention in sorghum and millet, has largely stayed out of the wheat market since total deregulation of the sector in the late 1990s. However, recently it put out feelers for a tender purchase of 300,000 tonnes of wheat.

Ethiopia has operated an emergency grain reserve targeting a level of 400,000 tonnes for about 15 years. Thanks to economic reforms and outside investment, the country has experienced five years of GDP growth averaging 11%. Greater budget revenues should help the country realize a plan to increase the amount of grains held in reserve for both emergency relief and market stabilization.

South Asia

Bangladesh’s Food Department is increasing its public stocks of wheat and rice to 1.5 million tonnes from a previous target level of 700,000 tonnes. Up until the early 1990s, the country held 2.2 million tonnes and was praised by international economists for reducing this by two-thirds.

Pakistan and India could be viewed as going counter to the trend of increased food reserves. Thanks to bountiful harvests in recent years, Pakistan is in the process of exporting hundreds of thousands of tonnes of wheat from government stores in order to make room for the current harvest with planned government purchases of 4 million tonnes just in Punjab state.

India’s harvest of grain and pulses at 235 million tonnes is at record levels for the second year running. Despite this, the country has banned wheat and rice exports since international prices started rising in 2007. Now many high-placed people are calling for the country to export some of its surplus wheat from a carryover stock that exceeds 17 million tonnes held by the Food Corporation of India, plus another 7 million tonnes in private hands. FCI needs to make room for targeted procurement of 26 million tonnes from the new harvest. There are fears of poorly stored grain rotting. One paradox of large government grain holdings is that due to lack of investment in modern storage facilities, the goal of food security is subverted by storage losses that can exceed 20% in many cases, though this is rarely officially recognized. Most government grain reserve record-keeping shows one bag going out for every bag coming in.

Up to 75% of India’s food reserve wheat is still stored outdoors in jute bags piled on raised earthen platforms called plinths and covered with tarpaulins. Most of the rest is stored bagged in go-downs. Only about 650,000 tonnes of government wheat is stored in modern steel silo facilities built by private operator Adani Grain in the last decade. In Pakistan’s neighboring Punjab region, the storage practices are the same though a higher share of wheat purchased by the Punjab state government annually may be in go-downs.

Bangladesh is launching an ambitious project to build terminals for imported wheat and rice at a number of ports excluding Chittagong where grain terminals already exist. In other ports for lack of berths and ship unloaders, a couple of hundred laborers with shovels fill sacks in holds of vessels at anchor in the harbor for loading onto 1,500-tonne lighters and transport to mills up river. Handling and transport losses are thought to be significant.

East Asia and Southeast Asia

Though the total is a state secret, China’s government wheat holdings are estimated to reach 55 to 60 million tonnes following the harvest with an annual carryover of at least 20 million tonnes. Grain production and consumption represent 20% of the world total, but the impact on international markets is relatively benign due to a sacred policy of 95% self-sufficiency in grain, excepting about 57 million tonnes per year of soybean imports. Most other governments in the region hold large rice reserves. South Korea’s hit a record level of 1.5 million tonnes in the last year. In Indonesia, the food reserve agency Bulog has a monopoly on rice imports as does its counterpart in the Philippines.

Conclusion

In countries like Nigeria, increased grain reserves are mostly a domestic market phenomenon. But in the case of wheat, with some traditional exporters — particularly Russia and Ukraine — seeking to protect national stocks on the one hand while on the other hand governments in a number of importing
countries build infrastructure to increase their holdings, the implication could easily be less stable and less liquid markets over the medium term.

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What’s next for Russia?

On Aug. 15, 2010, Russian Prime Minister Vladimir Putin issued a decree halting all Russian wheat exports effective immediately. Export contracts for millions of tonnes of grain were suddenly canceled and world wheat prices quickly jumped by $100 per tonne as millers, traders and government importers all desperately strived to cover their shortfalls. There were widespread fears of a repeat of the food price spikes of 2008 which provoked demonstrations and riots in 61 countries.

Halting of wheat exports sparks a debate about whether the ban was necessary and what impact it will have on the country’s reputation as a global grain supplier.

To justify its actions, the Russian government called the devastation of the country’s grain crop by the worst drought in 130 years, and attendant wildfires, a force majeure situation threatening national food security. As it became apparent that the damage would extend to the coming year’s plantings, the ban was extended to July 1, 2011. Ukraine imposed similar restrictions. Given the continued tense grain balance, a further extension to the fall of 2011 was not out of the question as of late January.

This unexpected reversal in Russia’s position in the global cereals trade has sparked a debate nearly as heated as the flames that scorched the Russian steppes this past summer. Was the decree really necessary? Whose interests did it actually protect? To what extent were domestic political considerations at play? Was the ban simply a case of pandering to Russia’s increasingly powerful meat and feed industry? When will Russian wheat return to world markets? Does Russia still have the capacity to become the world’s number one wheat exporter within a decade, as had been widely predicted? How will the ban impact the structure of Russia’s domestic grain industry? Is the Russian government playing by WTO rules when it intervenes in grain markets with such a heavy hand? Given the ban and perception of heightened political risk, can Russia’s grain industry continue to attract the long-term private investment in wheat farms and storage, transportation and port infrastructure that is critical to realizing its wheat export potential?

The world needs Russian wheat

Most informed observers agree that Russia’s wheat exports will return to previous levels for one simple reason: The world needs Russian wheat. Global wheat consumption has increased by 50 million tonnes in the last decade. In developing and rapidly urbanizing countries, especially in Africa, consumption should continue increasing for decades to come. Russia is one of the few countries with enough arable
land to significantly increase wheat production. While the Russian harvest is notoriously subject to unpredictable weather extremes, its grain belt is so vast, stretching several thousand kilometers across five time zones from European Russia to the Altai region bordering China, that total crop failure is unlikely, notwithstanding the scale of last season’s drought.

Russia exports, which surged from just 2 million tonnes in 2002 to about 20 million tonnes in 2008, accounted for most of the rise in global wheat trade in that period. In the 2009-10 crop year, Russia’s share of global wheat exports peaked at 20%.

Russian grain production had climbed to over 100 million tonnes in 2008-09. Last summer’s inferno reduced the grain harvest by over 40% to just 62 million tonnes. Wheat production fell to 41.2 million tonnes, down from 61 million tonnes the previous year. Barley declined from 18.4 million to 8.4 million tonnes. The upcoming crop is forecast by USDA at just 60 million tonnes due to winter sowing reduced by 4 million hectares, another consequence of the drought, and despite a 7% increase in the harvested area to 35 million hectares.

On a much larger planted area, Russia was already producing 100 million tonnes of grain in 1992, shortly after the close of the Soviet era, but this was still based on an inefficient, centrally planned economy — yields were low and post-harvest losses high. Much wheat and barley already went at that time for livestock feed, but with conversion rates about half of that in modern economies.

It is not just arable land available for planting that makes the medium and long term-prognosis bright according to Gavin Snodgrass of ACG Trade SA, Geneva, which has an affiliated grain trading company and pig farm in southern Russia. “Even the area they already plant could use a higher rate of inputs. They could easily increase yields with more inputs and better seed. We have already seen yield increases since 2002.”

Snodgrass added, “Exports could go up to 30 million tonnes. Some people are even predicting 40 million tonnes, but investment is needed in infrastructure.”

Infrastructure gaps

Increased grain storage and better port facilities are obvious needs. But Snodgrass also emphasizes bottlenecks in rail transport of grain as an obstacle to export growth.

Building more quality port facilities, like the PJSC Novorossiysk Grain Terminal, is a goal of the United Grain Company. Photo courtesy of Neuero.

 

“There is a terrific shortage of rail cars, and there are fewer every year,” he said. “In 2009, Russia had officially 28,000 grain cars, but only 22,000 were usable. By 2015, 70 percent of them will go out of service. Their average age is 24 years and they last only 30 to 35 years.”

The biggest holder of grain hopper cars is state-owned Rusagrotans. Private operator Baltrans ranks second. Siberian grain traders have begun exploiting the surplus of shipping containers to move their grain by rail to ports.

When it comes to export terminals, Snodgrass said, “Novorossiysk port is at its max. Ships just get three-day slots. It can do 10 to 12 million tonnes per year. There is still a huge amount of truck traffic. During harvest there has been a 35-kilometer-long lineup of trucks to the port. There is a short window for shipments to take place. Tuapse is an alternative port, but there is only a single rail line. Right now cement and steel for Winter Olympics construction gets priority.”

“In 2009, Russia had officially 28,000 grain cars, but only 22,000
were usable. By 2015, 70 percent of them will go out of service.”
Gavin Snodgrass, ACG, Geneva

Shipping Russian grain via Ukraine is done, but Snodgrass said it is problematic. “Rusagrotrans doesn’t like to allow its rail-cars into Ukraine, because it is hard to get them back. It is difficult to use Ukrainian rail-cars to pick up grain in Russia. Now that there is a government friendlier to Russia in Ukraine, the situation might have changed.”

United grain company

One new player that is proposing to solve some of Russia’s infrastructure problems is United Grain Company (UGC), a state-owned national champion that was created by government decree in 2009. UGC took over the assets of 31 existing government-controlled operators in the grain sector. This included three export grain terminals including one at Novorossiysk.

At the International Grains Council meeting in June 2010, Sergei Levin, chief executive officer of UGC, estimated the need for grain infrastructure investment at $1.6 billion. He defined as critical the reduction of grain transport and port handling costs to levels closer to those in Europe and the United States. In an interview, Levin estimated, “It costs $75 to bring a tonne of Russian grain from farm to port for free-on-board delivery at an average, and may exceed $100 a tonne for grain from Siberia exported via Black Sea ports.”

For Russia to reach its potential as a global supplier, it is essential to reduce these costs, which are roughly three times the level in France.

UGC’s website contains a policy document dated June 2010 forecasting Russian grain production and exports to increase yearly by an average of 5 million and nearly 4 million tonnes, respectively, in a straight line projection that would have taken them in 2015-16 to 120 million and 37.8 million tonnes, respectively. The starting point was a forecast of 92 million tonnes and 19 million tonnes in 2010-11. A reset of these projections is in order.

Domestic industry

One of the original mandates of UGC was to give the Russian state a role in wheat exports which are dominated by global traders such as Glencore, Cargill and others.

Ironically, Russia’s export ban appears now to be strengthening the hand of the international companies in Russia’s grain market. Some major private Russian grain traders have been reported to have difficulties servicing their debts as a result of the sudden loss of export revenues. The result could be less availability of bank financing and even bank auctions of their physical assets like grain elevators. A sudden freeze up of credit had already harmed the sector’s development following the outbreak of the global economic crisis at the end of 2008

As a matter of national policy, UGC reportedly is taking over some of these facilities, but the international grain companies with their deep pockets will exploit the opportunity as well to expand their increasing presence in Russia’s domestic grain trade. These developments have helped accelerate the long-term trend of concentration and integration of the entire Russian grain industry. Small and medium-sized players are increasingly falling by the wayside.

State interventions

With exports cut off, UGC has taken on a different role than the one originally envisaged. It has now become the main vehicle for government grain market intervention. Industry insiders estimate that UGC may have purchased 8 to 10 million tonnes of grain in the last two years in line with a more assertive national policy with regard to grain markets.

Up until the price spike this summer, state purchases have served to provide a floor price to farmers to ensure that grain production is profitable. Since the imposition of the export ban, these reserves are being released back onto the domestic market in an attempt to keep grain prices from spiraling upward in a time of shortage. For the time being, the policy has been successful with average Russian domestic grain prices $100 to $150 below international levels.

This latter policy is closely aligned with one of the key grain market policy goals of the Russian government during the last decade: the regeneration of the country’s feed and meat production and return to national self-sufficiency.

Feed and meat industry

If Russia’s grain traders have been the biggest losers from the export ban, the meat and feed industry have clearly been the winners. A sharp escalation of feed costs has been avoided, and producers of poultry, pork, beef and dairy products should be able to continue to take market share from imported products, thanks in part also to a system of ever shrinking quotas for meat imports.

The growth of the meat and feed industry since its almost total collapse following free market reforms in the early 1990s is truly remarkable. Meat production in the latest year rose 6% to 10.6 million tonnes. Poultry production in 2000 was only a few hundred thousand tonnes, and imports were about 80% of consumption. Since the ruble devaluation of 1997, there has been steady and growing investment in modern integrated poultry plants near all major population centers. Investment in swine production and more recently dairy have followed.

In 2010, the share of imports in poultry, pork and beef consumption are now only 16%, 18% and 24%, respectively, and they are expected to keep dropping in 2011, thanks in part to a system of import quotas that has protected domestic producers.

The government has stimulated growth by waiving all import duties on feed and meat production equipment and heavily subsidizing the interest rate on credits for purchase of domestically manufactured equipment.

Total Russian compound feed production is now estimated at around 27 million tonnes, with 14.6 million tonnes by independent producers, according to 2009 government statistics, and another 12 million tonnes by integrated swine and poultry operations, as estimated by industry sources. The US Department of Agriculture estimates that 35 million tonnes of grain next year will go to feed use.

Given the lack of significant maize production, wheat is the main ingredient in Russian poultry rations. Insiders estimate the ban immediately made an additional 5 million tonnes of high-quality wheat available to Russia’s feed industry. In early 2011, poultry feed producers were paying just $260 per tonne for wheat versus a maize price of $343 per tonne.

Market friendly alternative

At an industry forum in Novosibirsk in December, Arkady Zlochevskiy, president of the Russian Grain Union, an industry association representing grain traders, presented an alternative plan friendlier to free markets than an outright ban. His analysis showed that southern Russia would have a carryover of 5.9 million tonnes of wheat at the end of the 2010-11 marketing year. Zlochevskiy proposed that exports of 3 million tonnes of high-quality wheat that normally would be too valuable for feed use should be allowed from this zone near the Black Sea. At the same time, northern and central Russia should be allowed to cover their deficit of 3 million tonnes with imports of lower-cost feed grains. So far this proposal appears to have fallen on deaf ears within Russia’s government. The only recent change to the embargo has been to allow the resumption of wheat flour exports. With wheat prices in Russia artificially low because of the ban, Russia’s millers should have no trouble competing in international markets.

Conclusion

In the near term, it is apparent that not just global export demand, but domestic feed demand will continue to drive expansion of Russian grain production. But with the country approaching self-sufficiency in meat, a new equilibrium seems likely, and the competition between the two sectors should subside, especially after grain production returns to the levels of 2008-09. Russia should then be able to resume its interrupted trajectory to global grain superpower status.

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