David McKee

With steady, although sometimes slow, recovery following the Asian economic crisis, grain processing industries in ASEAN nations are beginning to vertically integrate and see new growth.

Cross-border investment flows within the feed, flour and oilseed industries in Southeast Asia testify to the success of ASEAN economic integration. And the commitment to the region from companies like Cargill and other multinationals points to good prospects for continued development of a modern grain processing industry.

FLOUR MILLING

The production of wheat flour could be the most laissez-faire of all grain processing sectors in Southeast Asia. Import tariffs are minimal and there are few government subsidies for wheat-based products. In the Philippines and Indonesia, where rice production costs are relatively high, this policy has political significance, since wheat flour noodles provide a lower cost alternative to rice as a food staple. Ironically, prosperous Malaysia has subjected wheat flour prices to government controls for almost 30 years.

Despite, or in some cases because of, excess milling capacity in nearly every country, there is active trade in wheat flour in the region. Indonesia is the main importer of flour from within and outside ASEAN countries. An increasing level of shipments has led to the temporary imposition of 5% tariff on imported flour. This may only worsen the problem of smugglers, who are bringing in flour in small, hard-to-police water-bound shipments to the vast archipelago from underutilized mills in neighboring countries.

There are fewer and fewer countries where there is not an excess of flour milling capacity. ASEAN is no exception. In Indonesia it is estimated that the mills are operating at 50% to 70% of capacity. In the other major ASEAN economies, that figure is about the same. Vietnam is the one country where utilization rates may be higher, or at least where higher medium term demand is anticipated for wheat flour. This has made the country a focus of recent investment in the sector.

Singapore’s Interflour is building a first phase 300-tonne-per-day flour mill at the site of its new port grain handling facility in Vietnam’s Vung Tau Province. As the first Vietnamese flour mill located directly on a port, it is expected to have major competitive advantages. The landed costs of wheat arriving in vessels of up to 40,000 tonnes will be lower, and there will not be the expense of trucking wheat into congested Saigon where a number of mills are operating.

Vietnam is also host to other international milling ventures. Glowland Ltd. of Malaysia is the majority investor in a large mill in Vung Tau Province, with Australia’s AWB and the state-run Vietnam Food Industries as minority partners in the U.S.$25 million joint venture. Other components of Vietnam’s milling industry include a few state-run mills, and numerous small privately owned mills built in recent years, mostly using Chinese equipment.

Total milling capacity is only about 1 million tonnes per year, or just 12 kg of wheat per capita. If present trends in consumption and economic growth continue, it is quite likely the extra capacity will be used up and new mills will have to be built.

Thailand, where the demand for special flours used in cakes and pastries is most developed, has attracted Japan’s leading miller, Nisshin Seifun Group, to invest in the Nisshin-STC Flour Milling Co. Ltd.

In the Philippines, the regional brewing goliath San Miguel took a big step into the flour milling arena when it acquired Pure Foods Co. with more than 1,000 tonnes of daily capacity and separately bought Pacific Mills, whose capacity will be extended from 300 to 1,200 tonnes, according to reports. The new entrant will soon account for 20% to 25% of the Philippine milling capacity.

Founded in 1961 as of one of the first mills in Southeast Asia, Prima Mills in Singapore has sought expansion in flour milling by going outside the region. Its Trincomalee port complex in Sri Lanka has daily milling capacity of 3,400 tonnes of wheat. The company has also invested in two mills in Shandong province, China. There are a number of other ASEAN milling concerns with operations in more than one country.

FEED MILLING

The Thai group Charoen Pokphand is the region’s giant and a global player when it comes to feed milling. Ranked among the top feed companies in the world, the CP Group operates mills in seven ASEAN countries and is the number one or two player in five of them, including Indonesia where it has a 50% market share. Its biggest growth has come in China where the company built 104 feed mills in the last two decades.

Charoen Popkhand began humbly 80 years ago as a feed trader. While feed milling remains the core business activity, the CP Group has sought growth in downstream investment in poultry, pork and aquaculture production. It has diversified into many other activities including telecommunications, petrochemicals and industrial products. Today it is one of Thailand’s most

important business groups and the largest homegrown multinational.

Within ASEAN, Thailand ranks first in commercial feed production with 8 million tonnes compared to 5.8 million in Indonesia and 3.8 million in Malaysia. The Gold Coin Group has a history of more than 40 years of feed milling beginning in Malaysia. It has strong brand recognition among farmers, and has operations in five ASEAN countries and operates more than 30 plants, including Sri Lanka and southern China.

A number of other ASEAN based companies have operations in more than one country. This includes the Indonesian company Japfa Comfeed, which divides the market in Myanmar with the CP Group. The presence of Cargill, which has feed operations in all of the larger ASEAN economies, and of Ralston in the Philippines and Thailand, sets a high standard for the local players. In the Philippines, brewers’ spent grains provided a natural entry for San Miguel into the feed industry. San Miguel Foods Inc. has 34% of the animal nutrition market producing 1.3 million tonnes of feed annually.

As with flour milling, the slow recovery from the 1997-98 Asian economic crisis has prevented a return to rapid growth in feed milling. Countering the regional trend is Vietnam, the one country where there has been an uninterrupted expansion in feed production. According to Dr. Suresh Chandran of the U.S. Grains Council’s regional office in Kuala Lumpur, Malaysia, on average one new feed mill has been opening monthly. Much of this has to do with strong economic growth and increased meat consumption as living standards improve. It also has to do with an aggressive policy to pursue pork exports.

The French fertilizer company SCPA entered into a feed joint venture in 1991 with five Vietnamese enterprises and now has a capacity of 400,000 tonnes per year in Dong Nai, making it one of the largest producers.

Much of the intense development in Vietnam’s feed and livestock production is concentrated in the region adjacent to the new grain handling port built in Vung Tau Province. Hog and poultry production is close both to the increasingly wealthy Saigon market as well as to export ports.

Strong demand in the feed industry in recent years has been a big boost to investment in flour milling, as bran sales have generated nearly as much revenue for the mills as flour. Nationwide there are at least 130 commercial feed operations according to the Vietnam Animal Feed Association.

Vietnam is also prominent in the segment of the feed industry that has seen the most rapid growth throughout ASEAN — aquafeed. Again the Mekong Delta area with abundant water resources, has been the focal point for this development. The Vietnamese industry is successfully making the switch to larger scale feed-based farming operations. Catfish, shrimp and prawns are the three main export products that are primarily exported to the U.S., the E.U. and Japan. The rapid development of seafood exports has even stimulated demand for flour, used both as a binder in feeds, and for breading of finished products.

Industry exports estimate that aquafeed production accounts for 5% to 7% of total feed production in the region. This may be small, but it is still significant especially when one takes into account higher profit margins on the many specialized feed types required by the continually expanding range of fresh and salt water creatures being farmed.

All of the larger feed mill companies in the region operate special plants for aquafeed. Gold Coin has five such plants. Thailand, as the region’s number one seafood exporter, has the most aquafeed plants.

The opportunities for increased use of grain in aquaculture are good. While grain based feed costs may seem expensive to the small family operation accustomed to using trash fish, larger and better-managed aquaculture enterprises fully understand the benefits of using balanced feed due to its results of higher conversion rates, faster growth, and more consistent product quality.

OILSEED CRUSHING

ASEAN is the world leader in production of palm oil, and so it can easily meet its own vegetable oil needs, with plenty left over for exports. However, the steady development of feed milling has resulted in a large demand for soy meal that cannot be met by local soybean production.

The outcome of this dichotomy has been development of a relatively modest oilseed crushing industry that fills the needs for higher quality oils used in food processing which cannot be met by palm oil.

In Thailand there are four medium-sized plants of 800 to 1,000 tonnes per day. In the Philippines three crushers, one Taiwanese-owned, fill the demand. Malaysia has two crushing plants that process imported soybeans, sunseeds or rapeseed.

Vietnam’s government has announced plans to promote more vegetable oil production and consumption, and is soliciting foreign investment.

The country’s first modern soybean crushing plant is under construction. There is already more than 400,000 tonnes of extraction capacity in the country relying 85% on the importation of palm kernels from Malaysia for raw material. Singapore’s Kuok Group has teamed up with local partner Vocarimex to build Vietnam’s first rice bran oil extraction plant in Can Tho Province at a cost of $7.6 million.

WET CORN MILLING

The region’s largest and most integrated wet corn milling plant began operations in April of this year. The Indonesian company PT Suba Indah built the plant with an annual capacity of 400,000 tonnes. It will supply starch, gluten, high fructose corn syrup, fiber and corn cooking oil to the entire region, using both locally produced and imported maize.

President of the company, Teddy Tjokrosaputro, reports his company is working with several world class players to supply raw materials and to increase production capacity. He continued, “in the long term we have a vision to develop starch derivative

products such as fuel ethanol and even corn fabric for clothing.”

The plant is located at Cigading port in Banten province. It is the largest bulk port in Indonesia and can handle up to cape size vessels and several panamaxes simultaneously.

As economies of scale in grain industry operations have grown in significance, so have the sizes of the average grain storage bin. The larger storage bins have amplified the costs and hazards associated with the regularly scheduled bin clean outs that occur in every well-managed operation.

Sending valuable employees into a grain bin to setup, adjust, operate or trouble shoot faulty discharge equipment is a major safety nightmare for managers. Having these valued employees attack towering piles or broad thick carpets of grain with shovels is an equal horror from a personnel cost and morale standpoint.

A typical maize storage bin with a 70-foot (21.3-meter) diameter and three discharge outlets will have a residual pile of 38,000 bushels (965 tonnes) after gravity flow has stopped. A good manager will avoid sending employees into the enclosed bin to face a pile of grain that risks engulfing them.

Bin entry also poses health risks to employees. Dust levels in the bin can be very high, and the grain dust may contain relatively high concentrations of pesticides, herbicides and other toxins. Recent studies show higher and higher incidents of black lung disease due to exposure in large storage bins during clean out.

Recent advances in clean out systems now have made possible grain bin clean out without personnel entry. One technology leader has been Laidig Systems, Inc. which got its start in the commercial feed and grain industry by offering robust auger-type bottom unloaders that made possible the storage of soybean meal in large concrete or steel silos. The company then adapted its high-powered bottom reclaim technology to grain applications with its CleanSweep system, operating at several grain processing plants.

The Laidig unloaders are engineered to start at the push of a button under full load, and to advance the reclaim auger with continuous undercutting of the material. The pile is cut from underneath to create mass flow, eliminating the bridging problems that normally occur with such cohesive, tough-to-handle materials as soybean meal and other meal type products.

COST-BENEFIT ANALYSIS

A powerful industrial bin clean out system constitutes a major capital investment for a grain processing facility. Therefore the benefits must be carefully assessed. One benefit too large to quantify is the reduction in liability for health and safety risks.

It is much easier to put a value to grain storage losses. As much as 20% of the grain in a flat bottom bin remains after free flow has stopped. Depending on the aeration system and the moisture content at intake, this grain could become moldy within a couple of months. Payback can be quick when facilities can avoid wasting 10,000 to 40,000 bushels (250 to 1,000 tonnes) of grain.

Improved grain quality is the main benefit of more frequent bin clean out, according to the feed division director of a large poultry integrator in the northeastern U.S. He explained that the Laidig CleanSweep “allows us to keep our corn inventory much closer to first-in, first-out. We are now able to clean our bin every four to six weeks. In a typical operation, a bin gets cleaned out only three to four times per year. We can keep our feed inventory fresher.”

A high-capacity automated discharge system can eliminate much of the down time that normally occurs during routine clean outs. Another plant manager using CleanSweep reports that the bin is emptied now in six hours, whereas it had previously taken 60 hours with a combination of shovel conveying and hand clean out.

Convenience is as much a factor as safety, as the bin clean out system starts up while still buried in the grain. There is no need to remove grain covering the motor, drop power cords, get confined space entry permits or do other set up requiring personnel time and entry into the bin before turning it on.

With light duty equipment, the reclaim auger cuts up to the edge of the pile. But bridging may also occur, causing the auger arm to dig down under the pile and requiring the system to be backed out of the pile and restarted.

Alternatively, if the grain pile eventually collapses, lighter-weight bin sweeps can be immobilized, and require digging out by workers in the bin.

At one pet food facility that installed the CleanSweep in early 2002, the facility engineer said automated clean out takes the grain level down to only an inch on the bottom of the bin. “Now we don’t have to do any shoveling, and the clean out hazard to workers was eliminated,” he said. “CleanSweep compared to the old light duty set up is similar to the difference between a man with a shovel and one with an automated backhoe — it is night and day.”

The payback period to recover the cost of the CleanSweep was calculated at less than three years, the engineer said. This has all come from manpower savings at clean out time.

Technical parameters

The CleanSweep now comes in two models. The smaller Model CS210 is for bins up to 70 feet (21.3 meters) in diameter. It offers an auger delivery rate of up to 75 cubic feet per minute. The reclaim auger has a diameter of 14 inches and is powered by a hydraulic reclaim drive of 15hp.

The larger unit is the CS510 and is intended for bin diameters up to 110 feet. The reclaim auger has a diameter of 28 inches and can deliver up to 250 CFM. The hydraulic reclaim drive is 50hp.

Both models have an adjustable reclaim auger rotation of 10 to 80 rpm, and nominal sweep advances of 8 to 24 inches per hour.

The Russian Grain Union is an industry association established in 1996, with a membership consisting of more than 200 of Russia’s largest grain enterprises and associated companies.

Arkady Zlochevsky has been president of the RGU since October 2002, during which time the full time staff has been expanded from 10 to 17, and an ambitious program has been embarked upon. World Grain had the chance to meet with Zlochevsky at the end of January and discuss the issues facing the Russian grain industry.

WG: The European Union has established quotas for grain imports from Russia, as well as from its other trading partners. How do you feel about the quota given Russia?

AZ: On the one hand Europe talks all the time about free markets, and on the other hand they limit the access of fully competitive Russian goods to their territory. Of course the Russian Federation is not pleased by these limitations. The reason is very simple: we are not practicing dumping, and we do not subsidize the export of grain in Russia. If the situation arises that we are able to produce inexpensive grain in significant quantities and we have a surplus of this grain, then naturally Russia will look for a market to move it to. Europe proposed to the Russian Federation a separate country quota of 600,000 tonnes per year. Without a quota, Russia could ship 2.5 to 3.0 million tonnes in this time period.

WG: In January, Russia announced quotas on meat imports. To what extent are these in response to the disappointingly low EU quota for Russian wheat?

AZ: The need to protect the Russian meat market from massive subsidized imports long ago became apparent. And this is not a response to Europe’s limitation on Russian grain imports. This is really a separate issue. What is the significance of limiting the import of meat? Through this meat we are importing grain. We have nowhere to go with our grain surpluses, and we could be feeding it to livestock on our own territory. Instead we are importing huge quantities of meat products for our population. This is not very beneficial for the Russian economy. Limits are needed in order to establish parity, that is to say, equal competitive conditions between domestic manufacturers of meat products and foreign producers.

WG: What is being done to reduce the cost of transporting grain around Russia?

AZ: When we began to have a significant harvest and large carryover stocks, there arose the problem of moving these stocks around. The problem is connected to the huge territory of the Russian Federation and the high cost of transport. The RGU set out to resolve this issue and began a large-scale campaign to promote discounts for transport of grain. We were successful. In September 2002, tariffs for grain were set 20% below those for transport of other goods. This discount has been extended through the first quarter of 2003, and we are pushing to get it extended to the end of 2003. We also have the idea to push for more significant discounts for transport over distances longer than 2,000 to 3,000 km (1,240 to 1,860). These discounts should be up to 50%.

WG: Tell us about what you are doing to support construction of more port facilities for grain exports?

AZ: We have had a program to push the government to provide targeted stimulation of exports. We succeeded, and in the 2003 budget 130 million rubles (US$ 4.1 million) has been set aside to subsidize credits for the construction and expansion of port facilities. These 130 million rubles will go to pay two thirds of the annual interest on 5-year project finance loans. The 130 million rubles are only for the first year. In the second and third years, and beyond, 130 million rubles per year will also be provided. Such a program will facilitate annual investment of one billion rubles (US$31 million) in the expansion of port infrastructure.

WG: This year the Russian government very actively intervened in the grain market. What was the result?

AZ: Market intervention has been carried out two years in a row. The first year was more of a trial, and was perhaps not very successfully executed. Nevertheless much experience was gained. In the current season the intervention operations achieved the maximum effect. That is to say the price level that the government established for its purchases has now been reached by the market. On average the intervention raised the price by 300 rubles ($9.40) plus per tonne, which is about 15% at current price levels. This is a significant increase and represents a very substantial influence that the government was able to have on market prices.

WG: In just a couple of years, Russia has accumulated very large carryover stocks. How will these stocks be managed?

AZ: We estimated the carryover stocks as of July 1, 2002, the threshold between the old and new harvest, at 24 million tonnes. If we calculate in the order of 13 million tonnes of exports, and subtract the 3 million taken off the market through government intervention, then on July 1, 2003 we will have about 8 million tonnes of carryover stocks. This leftover will be a well-balanced amount considering the level of consumption.

WG: Do you have a prognosis for the coming grain crop?

AZ: I think that the coming crop will be lower — rather significantly lower — than the harvest of the past year. This is connected to a whole range of things resulting from the fall in prices. And prices have fallen in the domestic market severely in the last two years. One effect has been reduced sowing of winter wheat. And we have to figure in one other considerable factor, which is that Russia has been lucky with the weather two years in a row. It hardly seems possible that we could be lucky a third year in a row. So there will be a reduction in the crop, but not to a severely critical level. Rather it will still be in a good range of 65 to 75 million tonnes, which is about the level of consumption. Taking into account the carryover stocks, these quantities will allow for a good life in Russia and even afford a certain level of exports — not the record amounts of this year, but a good steady flow.

WG: What are some of the other tasks that the RGU has set for itself?

AZ: Lowering of tariffs on rail transport domestically and for export; shortening the time it takes for VAT (Value Added Tax) to be refunded to export companies; reduction of export handling costs and increasing handling capacity; participation in the distribution of subsidized loans for export terminals; development of a legal basis for a warehouse receipts system; lowering of customs duties for importation of corn and other feed components, especially protein components like soy meal and corn gluten; limiting the importation of certain grain products, in particular rice; setting up leasing of equipment for processing, storage and transport of grain, including rail hopper cars, and even small vessels for transport by river to the sea; organization of a commodity exchange for grain where quotations are given, prices are forecast, and risk can be hedged; estimation of the budget resources that would be needed to support a mechanism for crop insurance — this is poorly developed in Russia. We are advocating that government money should not be spent for imported grain, but only for domestic grain, and that this money be used for advance payments to agricultural producers, in effect as credits. We are also advocating direct subsidy of exports, in order that money can be earmarked in the budget for this purpose.

We are also pushing for a civilized way to resolve disputes, through reforms of the court system. And so that a civilized turnover of land can start taking place in the Russian Federation, it is necessary to divide up land in nature and not just grant shares in land. These are the programs that we are working on at this time.

WG: You have a full plate in front of you. We wish you success.

Immediately following the three-day AOM Middle East-East Africa District Conference, about 70 people took part in an all day “policy planning forum” to explore the launch of the joint public and private initiative of Universal Flour Fortification. The event’s key organizer, Glen Maberly, public health professor at Emory University, Atlanta, Georgia, U.S., said this forum was really the formal launch of the flour fortification movement and particularly its effort to enlist private industry’s support.

Through numerous speeches and presentations, specialists from the milling sector, the World Health Organization, United Nation’s Children’s Fund (UNICEF), and the U.S. Centers for Disease Control (CDC) pointed to the addition of iron, folic acid and vitamins to flour as one of the most cost effective ways to improve human health.

The goal of UFF is to ensure that each country has its own standard for vitamins and minerals to be added to flour.

The drive to reduce malnutrition on a global basis began in 1990 at the World Summit for Children. The aim to reduce iodine deficiency led to the Universal Salt Iodization (USI) movement, which has brought about a significant reduction in iodine deficiency, with sustainable elimination slated by 2005. In May 2002, more than 70 nations gathered under the U.N. and committed to reduce iron deficiency by one-third by 2010, while also accelerating progress to eliminate other micronutrient deficiencies. The flour fortification effort is just one front in this battle against malnutrition.

One of the first goals for these organizations is to gain support from private industry — millers themselves.

Joseph Judd, Director of UNICEF’s Programs Division, said that after USI, “we better understand the key roles producers play.” Judd added that the U.N. Secretary-General, Kofi Annan, is promoting these partnerships and that “the UFF is the kind of initiative that he will advocate with milling industry leaders.”

Even prior to salt iodization, William Dietz of the CDC pointed out, there is a precedent of fortifying food to eradicate disease; adding Vitamin D to milk in the 1950s, for instance, brought about the eradication of rickets in the U.S. North American milling industries have been fortifying flour voluntarily for several decades. In fact, 30 countries have already mandated some form of minimal enrichment to all flour. Venkatesh Mannar, president of the Ottawa, Canada-based Micronutrient Initiative organization, said additional programs are being launched in many other countries. Large flour mills everywhere, he encouraged, should adopt minimal flour fortification for “good milling practice” as the costs are low and benefits high for the “common good.”

Indonesia, which mandated flour fortification in February 2002, was recognized as a recent success. There, the program’s total annual cost is U.S.$4 million for a population of 210 million. A highly modern and consolidated flour milling sector was credited for adopting the new practice. In addition, millers from Les Moulins de la Concorde, Mauritius, and National Flour Mills, U.A.E., spoke of their facilities’ efforts to fortify flour with iron and folic acid.

Industry specialists provided technical information on flour fortification, estimating the cost of a minimal flour fortification program with folic acid and iron at about U.S.$0.50 per tonne of wheat, or as little as $0.07 per person per annum.

Based on the enthusiastic reception this year, Maberly said UFF will be represented at the next year’s AOM conference in Dubai, and another symposium could be included.

The precious things are not pearls and jade but the five grains,” runs an old Chinese saying. And in Asia, with nearly 90% of the world’s rice production and consumption, rice has always ranked first among grains. The movement toward more open markets in recent years has boosted global rice trade to record levels, as this elite grain has steadily gained favor among consumers in many regions of the world, despite losing “stomach share” in some countries of traditionally high consumption.

Production under Consumption

In 2002-03 (aggregate of local market years) for the third year in a row, worldwide production of rice at 380 million tonnes is projected to fall well short of worldwide consumption, according to the USDA. The shortfall will cause a precipitous drop of 27.5 millions tonnes in world rice stocks to 105 million tonnes by the end of 2002-03, the smallest since 1986-87. In 2002-03, ending stocks are projected to be just 26% of world rice consumption, the lowest level since 1983-84.

The reasons for the production deficit may have to do with adverse weather patterns in some places, but also to an underlying factor: a halt to the extraordinary increase in average per ha rice yields achieved in the last 3 decades. This yield growth, averaging 2.2% for the period 1967 to 1987, has slowed significantly since then, and has virtually halted since 1999.

The green revolution permitted rice production to keep up with population increases, especially in Asia, without greatly expanding the sown area. Indeed, in many Asian countries, rapid urbanization and cutbacks in government supports have resulted in a big reduction of the sown area. Japan, South Korea, and Taiwan have seen the land dedicated to rice reduced by 50%, 46% and 42% respectively since the 1960s.

There has also been a marked decline in per capita rice consumption in developed Asian countries, such as the three above, where prosperity has led to the substitution of meat and vegetables, and wheat-based products for rice. In South Korea, the average person consumed 120 kg of rice yearly in 1990 compared to 87 kg in 2002, a drop of 37%. The trend is taking hold in China, where close to one third of all rice is produced and consumed. Starting as early as 1995, USDA statistics show an identifiable drop in per capita rice consumption in China.

On the other hand, since 1998, the countries of the Middle East and Africa have increased rice consumption more than any other region, by close to 20% to a total of nearly 24 million tonnes. With the exception of Egypt, which is a sizeable exporter of rice, the regional harvest increase of 9% did not keep pace with consumption gains. Net shipments to the Middle East and Sub-Saharan Africa went up by 3.5 million tonnes from 1998 to 2002, accounting for the largest share of the increase in global rice shipments during the four-year period.

Record Global Trade

Rice shipments among countries are projected to remain robust in 2003 at 26.7 million tonnes (milled basis), fractionally below this year. The climb in global rice trade has been extraordinary, from a level of 7.5 million tonnes in 1974 to more than 27 million tonnes in 2002. Today’s trade level represents almost 7% of total world rice production compared with only about 3% of total production in 1974. Global rice trade was a record 27.6 million tonnes in 1998, with the spike in growth due to El Niño crop damage in Southeast Asia.

During the 1980s, global rice trade was nearly stagnant, at 11 to 12 million tonnes a year, stymied by protectionist policies in most major importing countries. However, since 1990-91, global trade has climbed from 12.3 million tonnes to today’s level.

What explains the rising trade in rice over the past 12-plus years? Senior USDA economist Nathan Childs said, “population growth, trade liberalization, and — for some countries — higher incomes are the driving forces.”

Childs points out that in the 1920s and ’30s, 8 to 10% of rice production was traded annually in international markets. “But World War II damaged much of Asia’s rice economy, especially the major exporters,” he said. “In the post-war years many importers strove for self-sufficiency in rice, primarily by controlling (or banning) imports and providing producers input subsidies.” These actions severely limited trade growth.

Robust trade growth in the Middle East and Africa in the 1970s and ’80s was largely due to higher incomes and larger populations. This trade expansion partially offset weaker imports by Asian countries during those decades.

Since the late 1980s, regional trade agreements followed by the creation of the World Trade Organization in 1995, have led many countries — especially in Asia and Latin America — to abandon efforts at total self-sufficiency and at least partially open their rice markets to imports. Indonesia, which briefly achieved self-sufficiency in the mid-1980s, was one of the first to back away from that policy. The Philippines, which was actually a small exporter during the late 1970s and early ’80s gave in to competition-enhancing imports soon after. Agreements under the WTO have partially opened rice markets in Japan, South Korea, and Taiwan.

In Latin America, many countries are producing less rice than they did 10 to 20 years ago, and are importing a significant share of consumption. This has been especially true for Brazil, Mexico, and Central America. More open markets and reduced producer support are behind the expanding imports in this region.

Export Countries

Six countries — Thailand, Vietnam, India, United States, China and Pakistan — accounted for 80 to 85% of the world rice exports in each of the past four years. Historically, Thailand, Vietnam, and Myanmar were all major rice exporters early in the 20th Century, exporting at least a million tonnes a year in the 1920s and ’30s.

Thailand has been the world’s largest exporter for more than two decades, with exports ranging from 6.5 to 7.5 million tonnes per year since 1999. However, smaller yield gains than other countries experienced from new hybrid varieties, and labor shortages in the countryside are now eroding its competitive advantage. Thailand’s 2003 exports are projected to bounce back to 7.8 million tonnes from 7 million in 2002.

India has in recent years steadily increased its share of world trade. It surpassed Vietnam for the second spot among rice exporting countries in 2002 — a result of substantial export subsidies. A decision by the grain monopoly, the Food Corporation of India, to reduce the country’s excessive strategic rice reserve is the reason for the country’s sudden rise in the export tables, even though recent crops have been short of domestic consumption. For 2003, exports will be cut back to 4 million tonnes, a result of reduced subsidies and much smaller supplies. Ending stocks are now only 13.8 million, down from 25.1 million a few years ago. A weak monsoon has cut India’s 2002-03 rice crop nearly 15%.

Vietnam returned as an export powerhouse as soon as economic reforms took hold in the country in the late 1980s, after more than three decades of war and political upheaval. Its outbound shipments peaked at 4.6 million tonnes in 1999 but have fallen since to 3.1 million in 2002. Exports are projected to rise to 4.3 million in 2003.

The United States will export a record of 3.4 million tonnes in 2003, nearly 50% of the total U.S. crop. In 1980, about 60% of the crop was exported, but in the past 20 years American consumption has grown sharply.

Consistent high quality has permitted U.S. producers for decades to enjoy a substantial price premium in world markets. However, as countries such as Thailand and Vietnam have modernized their milling industries, that quality premium has been harder to maintain. The need to move this year’s record U.S. crop at competitive prices has further narrowed it. In the last five years, high quality U.S. rice has enjoyed an average premium of $70 per tonne over similar grades of Thai rice, but the current market situation has reduced the premium to $20 to $25 per tonne.

China, as the world’s largest rice producer and consumer, can be a player on world rice markets through manipulation of its strategic reserve even when there is a production deficit. However the country’s exports and imports rarely exceed 2% of total domestic production. Since 2000, China has reduced its ending stocks from 98.5 million tones to 67.3 million by the end of 2002-03. Its exports fell below 2 million tonnes in 2001 and 2002 as stocks are lower and domestic production is 11.5 million tonnes short of consumption this year. Like Thailand and Vietnam, China has faced stiff competition from India. Rapid industrialization and urbanization, and government policy aimed at taking marginal land out of rice production, are already shrinking China’s sown area. These trends will diminish China’s role as an exporter, though major biotech investments may stimulate yields.

Myanmar has rejoined the top tier exporters, as this year’s exports will reach 1 million tonnes, up from only 57,000 tonnes in 1999. A smaller, second tier of export countries, including Egypt, Uruguay, Australia, and Argentina, all consistently sell 300,000 to 800,000 tonnes to other countries.

Import Countries

While rice exports mostly originate in a handful of countries, there are few countries in the world that do not import rice in one form or another. The leading U.S. exporter, Riceland Foods, alone sells to 75 countries. Even a major exporting country like the U.S. still imports nearly 400,000 tonnes, much of it of special varieties for sale to immigrant groups. The record U.S. crops notwithstanding, imported varieties have continued to increase their share of U.S. consumption.

Indonesia, with its population of 210 million, ranks third in rice production with 32.5 million tonnes of milled production. But it is by far the world’s biggest rice importer, taking more than 3 million tonnes in three of the last five years. No other country has imported as much in that time frame. Indonesia imported nearly 6 million tonnes of rice in 1998 due to El Niño related crop damage.

Iran, Nigeria, Saudi Arabia, Philippines, Bangladesh, and Iraq have all imported one million milled tonnes or more in at least one of the last five years. The third tier of importers, those who have bought between 500,000 and one million tonnes per year, speak to the prominent place of rice in the world diet, including the EU, averaging 800,000 tonnes; Russia; Cuba and Brazil in Latin America; South Africa, Senegal, and Ivory Coast in Africa; and Japan and Malaysia in Asia.

Bilateral Trade

Politics, geography and economics dictate some special two-way relationships in the world rice trade. Japan routinely takes half of its imports from the U.S.

Vietnam and Thailand supply most of Indonesia’s requirement, with inter-Asean governmental protocols dictating the relationship.

Intense lobbying from the U.S. rice industry contributed to the lifting of the U.S. trade embargo on Cuba for some food products, leading to last year’s resumption of U.S. rice exports to the nearby country. Shipments in 2002 exceeded 150,000 tonnes, and officials at the U.S.A. Rice Federation optimistically suggest the annual figure could reach 600,000 tonnes, nearly Cuba’s total requirement, replacing supplies from former socialist bloc allies Vietnam and China.

Before imposition of the embargo more than 40 years ago, Cuba was the number one importer of American rice. Since then politics has suddenly shut U.S. rice exporters out of their largest markets on two other occasions: Iran in 1979 and Iraq in 1991.

Traders

Rice is the most important grain crop in whose trade the major multinational grain companies do not play a dominant role. International trade remains vibrantly fragmented, with every major export country having a large contingent of companies engaged in rice exports, despite heavily regulated domestic markets.

In Thailand, the largest exporter, Capital Rice, accounted for a 20% share of the total exports in a recent period, but the next two had less than 10% each. Altogether, 38 companies are registered to export from Thailand. Vietnam has around the same number of mostly state-owned companies licensed by its Ministry of Trade. Pakistan boasts 16 active exporters, while India has many more companies targeting the diaspora of non-resident Indians with specialty products in addition to bidding on government tenders.

The plethora of rice exporters can be partly explained by the many varieties and forms of rice and also by numerous options for shipping rice. Much less goes in bulk in vessel holds in comparison to the big three of world grain trade: wheat, maize and soybeans. Official statistics are hard to come by, but perhaps less than 10% of the world rice trade is in bulk vessels — mostly rough rice from the U.S., Egypt, Argentina and Uruguay —compared to perhaps 90% for other grains. Most rice is shipped in bulk containers or in 20, 50 or 100 kg bags in containers or break bulk. Bagging is the traditional way of handling rice in Asia where most the world’s rice shipments originate. Small containerized shipments open up the trade to smaller players.

Forms of Rice

Perhaps 90% of the world’s trade is in milled rice, where the husk and part or all of the bran layer have been removed. Milling before export adds value and provides business to rice millers in the export country. For this reason, few of the Asian rice exporting countries allow the exportation of rough rice (paddy or unmilled).

On the other hand, more than a third of U.S. rice exports are now paddy, compared to less than 5% in the late 1980s. Most of the U.S. exports to Mexico and Latin America are paddy, where liberalized markets resulted in a decline in domestic rice growing, higher imports, and underutilized domestic milling capacity.

Carl Brothers, senior vice president of export sales for Riceland Foods, points out that the restrictions on milled rice imports by these Latin American countries combined with the Asian ban on rough exports make those countries a good market for U.S. producers. Argentina and Uruguay oblige with rough rice and provide some competition.

Brown rice is also increasing its share of the trade from a low base. One case in point is the U.K. where there has been big growth in rice consumption, thanks to the large Asian immigrant population. Many new rice mills have been built to process brown basmati coming from India and Pakistan. Lower EU import tariffs on brown rice than fully milled product, originally meant to protect Italian and Spanish rice millers, could explain this new investment. Another factor is that retention of part of the bran layer alleviates breakage during shipment, according to Shamik Patel of Satake UK, which has supplied much of the equipment to the new mills.

For well over a decade, the 13 countries of Central and Eastern Europe (CEE) encompassed in this regional review have been in a state of transition from socialist central planning to open market economies. Their progress along this arduous path has varied, but all have shared a common beginning as members of the former Soviet Bloc.

Seven of these nations are newly independent states resulting from the break-up of the Soviet Union itself in 1991: the small but strategically placed Baltic states of Lithuania, Latvia and Estonia; the geographically immense Slavic lands of Russia, Ukraine, and Belarus; and oft-overlooked Moldova. The FSU (former Soviet Union) countries, with the exception of the three Baltic lands, are members of the CIS (Commonwealth of Independent States).

The six contiguous countries to the west were classified as Eastern Europe during the Cold War, though these days Poland, Czech Republic, Slovakia and Hungary — with pending accession to the European Union — are thought of as Central European. The final two countries treated here, Romania and Bulgaria, are keys to an economically and politically stable southeastern Europe.

Without exception, grain production and grain processing in all of these countries has been subject to wrenching changes with privatization of farms, storage, flour milling, feed milling, and oilseed crushing on one hand, and liberalization of domestic and international trade on the other. Progress has been made, although interrupted by periodic — but severe — economic crises from country to country, such as the 1998 ruble devaluation in Russia, and the sharp 1996 recession in Czech Republic. Nevertheless, in all of the countries, privatization and trade liberalization in the grain industry have progressed.

Perhaps the most important change for the world grain industry is the potential for Russia and Ukraine to emerge as grain-exporting superpowers. In the other countries, grain production and consumption were, more or less, in balance during Soviet times and remain so today. Hungary is a moderate exporter, and Romania has potential to be a consistently moderate exporter of wheat. Poland, Czech Republic, Slovakia and Bulgaria primarily need to import soybean meal as poultry production expands. Aligning themselves with the EU’s common agricultural policy will probably result in a continuing status quo in grain production for all six countries. Of the FSU, only swampy Belarus imports a lot of grain.

In the grain processing industries, a key factor is the coming EU membership of up to nine of these countries: Poland, Czech Republic, Hungary and Estonia in the first wave; and later Latvia, Lithuania, Slovakia, Romania and Bulgaria. The need to meet EU standards could mean flour and feed industry consolidation with the closing of small inefficient plants, but it could also invite much needed investment from the West. Another highlight is surging investment in poultry production and oilseed crushing in several countries.

BELARUS
Capital: Minsk
Population: 10.3 million
Of the countries reviewed here, Belarus is the most unreformed both politically and economically. It is the largest net grain importer, now that Russia and Ukraine have turned around their agricultural sectors. The country’s low-priced but sturdy tractors could benefit from the investment boom in Russian and Ukrainian grain production.

BULGARIA
Capital: Sofia
Population: 7.7 million
Bulgaria is essentially self-sufficient in grain, with average production of 5 million tonnes. Of the average 3 million tonne wheat crop, 10% to 15% is surplus available for export. As an aspiring EU member, some consolidation in the flour milling sector is expected. Farm sizes are small, and privatization of agricultural land has been slow.

CZECH REPUBLIC
Capital: Prague
Population: 10.2 million
Though agriculture accounts for only 2% of its GDP, the Czech Republic is self-sufficient in wheat and most grains. In the last decade, rapeseed has become an important crop, and exports of malting barley and barley malt have surged to Russia’s and Ukraine’s booming breweries, which are importing over one million tonnes per year from Europe.

ESTONIA
Capital: Tallinn
Population: 1.4 million

Estonian ports could become an important outlet for Russian grain exports if international rail tariffs can be lowered. As traditional markets were lost after independence, livestock herds plummeted to half the level of the 1980s. The grain boom in Russia and Ukraine could stimulate exports of phosphate fertilizers from here and the other two Baltic countries.

HUNGARY
Capital: Budapest
Population: 10.1 million
Grain production averages about 14 million tonnes, of which wheat accounts for 5 million. About one-fifth of wheat production and one-third of wheat flour production is generally shipped to neighboring countries. High production costs and cutbacks of export subsidies with EU entry could lead to reduced wheat exports.

LATVIA
Capital: Riga
Population: 2.4 million
Farmland was returned to the pre-communist period owners very early in the transition period in Latvia, the first FSU country to enter the WTO. Food enterprises were also privatized early, resulting in a very competitive sector able to withstand imports. Some of the former focus on livestock is being switched to poultry production.

LITHUANIA
Capital: Vilnius
Population: 3.6 million
A wide variety of grains are grown and consumed; production of barley, rye, and millet together exceed wheat. Since 1998, production of rye, a traditional favorite for bread baking and porridge, has declined by 41% to 234,000 tonnes on 111,000 ha in 2001, while wheat has held steady at just over one million tonnes on 350,000 ha.

MOLDOVA
Capital: Chisinau
Population: 4.4 million
Moldova has an advantage in sunflower seed production, achieving the highest yields in the region, with 1.27 tonnes per hectare. About 40% of the labor force is in agriculture, and 53% of the small country’s land is arable. Privatization of government farms has resulted in 1.1 million citizens owning a total of 1.7 million ha of farmland.

POLAND
Capital: Warsaw
Population: 38 million

Poland’s ag sector remained in private hands while in the Soviet bloc, resulting in numerous individual farms averaging 6 to 10 ha in sizes. Although occupying over 20% of the population, farm production contributes only 3.8% of GDP. Protection from competition by import tariffs slowed farm modernization and restricted Poland’s affect on world grain markets — despite its large population and 2001 grain production of 23 million tonnes, 8 million of which was wheat.

ROMANIA
Capital: Bucharest
Population: 22.3 million
Romania has struggled in market reforms. Although state farms broke up into small inefficient units, 17 million tonnes was harvested in 2001, 5 million of which was wheat, and grain production remains potentially competitive. Export infrastructure is being built at Black Sea ports, and Romania is likely to become the number three net grain exporter in the region, surpassing Hungary.

RUSSIA
Capital: Moscow
Population: 145.4 million
Long a major net importer of grain, Russia is on the way to becoming a large net exporter. The 2001 harvest of 85 million tonnes left a large surplus to be carried over, due to poor export infrastructure. Agriculture is now one of the hottest sectors for investment. New laws passed in the Russian Parliament this summer permit the buying and selling of farm land for the first time since the Russian Revolution. Poultry production is set to take off, perhaps bringing soybean and soy meal imports back toward the levels of the 1980s.

SLOVAKIA
Capital: Bratislava
Population: 5.4 million
Grain production is on a bigger scale and more mechanized than in Poland and Hungary. One of ADM’s few joint ventures in CEE is a maize milling operation in Slovakia. ADM also has operations in Hungary, Romania and Bulgaria. EU accession could mean increased grain production. Only about 4% of GDP is from agriculture.

UKRAINE
Capital: Kiev
Population: 48.7 million
Ukraine has been lagged in market reforms; the state is only now withdrawing from flour milling ownership. Grain production is responding to the economic reforms, and the 2001 crop of 46 million tonnes severely tested the Ukraine’s long underutilized export infrastructure as 9 million tonnes left Black Sea ports. Grain exports could increase greatly in coming years. A dynamic poultry and livestock industry will help absorb some excess grain production.

The benefits to the average citizen of the last decade of economic reforms in the CEE countries are as evident in the food industry as anywhere. Central planners had permitted only a limited number of standard bread and pastry types, but now small entrepreneurs, foreign companies and re-energized former state enterprises have combined to offer an astounding diversity of baked goods.

Liberalization of processed food imports by Russia in the early 1990s made it one of the largest export markets for Western European food companies. This competition set a high standard for Russian producers, and also made inevitable investment by multinational food companies in local production.

The economic change has also brought hardships to consumers in the form of higher food prices, and in almost all CEE countries, meat consumption and livestock counts dropped sharply during the last decade.

FLOUR MILLING

There has been a dynamic restructuring and considerable new investment in the flour milling industries of Central and Eastern Europe in the last 10 or 12 years. The upgrading of old plants is not yet complete in much of the region, but several factors argue against further capacity expansion.

First of all, the countries of Central and Eastern Europe have some of the lowest rates of population growth anywhere. In all but two or three of the countries in this survey, the growth rate is negative. In Russia, plummeting birth rates, shorter life spans and outward migration have caused an average decline in population of over half a million per year. Even without stagnant or declining population numbers, actual milling capacity is far beyond what is needed in most countries.

Romania provides a somewhat extreme example. Doris Stoian, executive director of the Romanian National Association of Flour Milling and Baking Industries (ANAMOB), estimates that the milling capacity in Romania is twice what is required. Just the members of her association, which are mainly small or medium-sized private mills that started in the 1990s with 25 to 75 tonnes daily capacity, have a combined annual capacity of 6,130 tonnes. That figure alone matches Romania’s consumption. But the large former state-owned flour mills that have been privatized as joint stock companies are not members of ANAMOB and also offer as much capacity.

What happened in many, if not most, countries of the region was a mushrooming of new mills just a few years after private enterprises were allowed.

Stoian said that virtually every town or village in Romania now has a flour mill, many of which operate on a toll basis. A local farmer may bring in wheat and pay to have it ground into flour that he may partly use for himself, while selling or bartering the rest.

The large former state-owned milling enterprises in Romania were still centrally controlled and lacking in working capital when the small private mill phenomenon started. Now they have been reorganized as independent entities and can start to compete.

Inevitably, there will be consolidation, and many of the new, smaller mills have already been idled, Stoian said. Nevertheless, the association is contacted from time to time by newcomers who want to build small mills. Needless to say, they are discouraged.

However, steady upgrading of facilities in order to achieve production efficiencies in a highly competitive environment seems likely. This process could be sped along in countries entering the EU. In particular, all food processing enterprises will have to meet the EU’s strict hygienic standards, often by more actively enforcing existing regulations.

FEED MILLING

In feed milling, the picture is much different as the potential for growth and new investment is much larger. This results from a recently begun upward trend in meat consumption, associated with nascent prosperity in many CEE countries.

Despite this positive movement, feed production is only a fraction of what it was at the end of the Soviet era. There was huge contraction in livestock herds and feed production during the 1990s transition period. Only in the last few years have the numbers of domestic farm animals begun to stabilize in most countries.

Most of the new meat consumption has been poultry, with the trend expected to continue. The Czech Republic is one example. There, during the early and mid-transition period, consumption of pork, a traditional staple, held fairly steady while beef plummeted. Poultry is a relatively new item in the diet of the average Czech.

In Russia, the shift to poultry as a cheap source of protein has been particularly pronounced. Through 2001, the country has been the largest poultry importer in the world, with nearly 80% of the supply coming from the U.S. Exports to Russia had accounted for 8% of all U.S. production with the annual total exceeding 500,000 tonnes, and monthly shipments averaging US$50 million.

Now, rising incomes in Russia are expected to bring about a doubling of poultry consumption in just a few years. Much of this higher consumption could be met by increases in domestic production. Several large poultry projects have been announced, some by prominent business groups not previously involved in the food industry.

The highest profile project is being built by Mosselprom, Russia’s largest advertising agency. The new company, Agro-Industrial Complex Mosselprom, said its poultry operation will be the largest in Europe and fully integrated from incubation to packaged product. Heading the new company is Sergei Lisovsky, former chairman of the Russian Poultry Union and a supporter for Russian products against low-priced ‘Bush legs,’ as U.S. poultry is universally known in Russia.

Existing Russian poultry companies are also expanding. Elenar Broiler Farm, located south of Moscow, has a unique origin. Its funding was from the U.S. government to provide poultry technology transfer as a settlement in a mid-1990s dispute with Russia over veterinary standards for poultry products being shipped to Russia. With a team of American managers supplied by the U.S. Agricultural Export Council, the company has been expanding rapidly.

The most explosive growth in poultry production may be taking place in Ukraine. Andriy Yarmak of APK-Inform said poultry production is expected to double in 2002. However, there is expected to be ample supplies of feed grain due to the country’s bumper crop in 2001 and that projected in upcoming years (see companion article). To help absorb these large grain stocks, government officials have announced that Ukraine will become a major supplier of poultry and other meat to its immediate neighbors and even on world markets.

OILSEEDS

The CEE countries were important players in oilseed markets both as consumers of soy meal and producers of sunflower seeds in the socialist period of the 1980s. They continue to play that role today, but in different ways.

Increased domestic poultry production is driving increased demand for soy meal in several CEE countries. In addition, demand for edible oils is up in most countries as diets improve. The bulk of new European investment in oilseed crushing plants is taking place in the CEE countries.

In Russia, the consumption of edible oils in the form of margarine, mayonnaise and salad dressings has grown enormously and is likely to continue to increase. Average annual per capita vegetable oil consumption in Russia is 14 kg — up from previous years, but still far below the average level in the U.S. and most of Europe.

In recent months, there have been a spate of announcements of new soybean processing plants to be built in Russia and Ukraine. Agros, the newly created agribusiness arm of Russian business group Interros, has announced it will build a medium-capacity soybean extraction plant near St. Petersburg in conjunction with an unnamed international partner. Other announcements have been made for similar projects at both Russian and Ukrainian Black Sea ports. Other companies, including Dupont Technologies in the U.S., have made public plans to build plants to produce edible soy proteins and flour concentrates.

The industry in Ukraine has attracted some multinational investors. Cargill’s sunseed crushing plant in Donetsk, Ukraine is the world’s largest, with a daily capacity of 1,500 tonnes of seed. The French company Cereol owns a large plant in Dnipropetrovsk. At least a couple of other sunseed crushing plants have been built with participation of foreign investor groups in the last five years.

BREWING AND MALTING

There is hardly a country in the CEE where international brewing groups do not control a significant share of beer production.

In Russia and Ukraine, beer consumption has seen dynamic growth. Annual Russian and Ukrainian imports of barley malt and malting barley now exceed one million tonnes per year. There is a move to build modern malting capacity in Russia and the Ukraine. A malting plant in St. Petersburg was built jointly by Russia’s largest brewery, Baltika together with the French maltster Soufflet. Recently, the Belgian brewing group Interbrew announced a project to build a large malting plant in the Ukraine. Other malting projects by independent breweries and other groups are underway.

The new efficient domestic malting plants will stimulate the breeding and production of local barley varieties for brewing, eventually replacing imports and augmenting in another small way Russia’s and Ukraine’s position as net grain exporters.

One of the world’s great grain belts extends along the Ukrainian and southern Russian steppes, into the black earth zones of central Russia, up and down the Volga River, across the low lying Ural Mountains, and far into western Siberia and northern Kazakhstan. This vast expanse of arable land — covering 4,000 kilometers from east to west and, in places, 1,000 km from north to south — never had the chance to approach its potential during 70 years of centralized socialist agriculture.

Now, a foundation is being laid for the two largest former Soviet republics, Russia and Ukraine, to emerge as grain exporting powerhouses. Astonishingly, if trends continue, before the end of the decade the two countries taken together could challenge the United States’ long-held position as the world’s top wheat exporter.

In just a few years, they have transformed themselves from being large net importers into large net exporters of grain. Both Russia and Ukraine experienced bumper harvests in 2001 — the best in over a decade. The Russian crop was 85 million tonnes, consisting of wheat, barley, rye, oats and oilseeds, principally sunflowers. The Ukrainian crop came in at about 46.5 million tonnes, up from an average of only 25 million tonnes during much of the 1990s. The 2002 crop is expected to be somewhat smaller in both countries due to a severe drought this May, but the long-term trend is clearly upward.

Much needs to be done before the enormous breadbasket potential of Russia and Ukraine can be realized. While free market reforms are finally starting to create a productive agricultural sector, a great deal of export infrastructure, principally grain terminals and even new or expanded ports, still needs to be built.

Both countries will have to work hard to offer the quality and varieties demanded by world markets. Much of the wheat exported now from the two countries is feed wheat, but in the future there will be emphasis on milling wheat.

The two Slavic nations will also have to overcome the protectionist instincts of potentially their largest market, the EU, which absorbed a large amount of the recent surpluses before the flow was abruptly halted by the EU’s imposition of higher import duties on Russian and Ukrainian grain in the spring of this year.

There is a clear sense of urgency in the Russian grain industry. Alexander Ivlev, vice-president of the Russian Grain Union, an industry association based in Moscow, estimates the carryover from last year’s Russian crop at 15 million tonnes. Total grain export capacity of Russian ports is currently only 5.5 million tonnes, he said. Another 2 to 3 million tonnes of Russian grain could be exported through Baltic and Ukrainian ports except that Russian rail freight rates for international shipments are much higher than the already steep Russian domestic rates. Even if industry lobbying gets this issue resolved, the additional port capacity provided by the Ukraine and Baltics will not be nearly enough.

In recent months, several projects to build new grain export terminals at Russia’s Black Sea, Baltic Sea and even Pacific ports in the Russian Far East have been announced. The owners and operators of the facilities are intended to be private Russian grain enterprises. However, in some cases, the announcements were made jointly by private companies, the port authorities and the Russian Ministry of Agriculture, showing the importance that grain export development carries at a national level.

Transforming markets

It is only a matter of time before Russia’s newly dynamic market economy solves the grain export bottlenecks, and it can be said that optimism reigns today in the Russian and Ukrainian grain industry. This scenario is in stark contrast to this region’s previous history while under central planning.

Stalin’s brutal collectivization of agriculture in the 1930s exterminated the kulaks, the class of highly skilled and wealthy farmers, bringing declines in agricultural production, and even a couple of years of artificial famine. Steady underperformance was the rule after that. Throughout the 1980s, the Soviet Union was the world’s largest grain importer taking 10 to 20 million tonnes annually.

The collapse of the Soviet system brought new dislocations and decline once again as the former collectives were cut off from the central budget. No money was available for inputs or equipment. Andriy Yarmak, director of the Kiev branch of APK-Inform, points out that fertilizer was not spread in Ukrainian fields for most of the 1990s. Average wheat yields dropped from 3.5 tonnes to 1.9 tonnes per hectare. Ukrainian grain production hit a low of 24 millon tonnes in 1999, when the country even applied to receive milling wheat from the U.S. under USDA aid programs.

Grain trading was liberalized early on in the reform process. It became the domain of a huge network of small private traders which sprung up. Major companies, such as Cargill and Louis Dreyfus, who previously had only exported grain to Russia, became active players in the domestic grain trade as well.

The proliferation of the grain traders and fierce competition among them was partly due to a milling and baking industry that had been privatized and liberalized early on in Russia, though with much delay in the Ukraine. Suppliers competed on the basis of price, quality, service and financing. There has since been much consolidation among the private traders. Trading company Razguliay Ukrros now employs over 500 people at its Moscow headquarters, the same building where it started with just a handful of employees 10 years ago.

While privatization of the food processing industry happened fairly quickly, agricultural reforms took much longer. The former socialist collectives – the sovkhozes and kolkhozes – have now all been converted into joint stock companies with each member receiving shares. Also, a new class of private farmers has emerged in each country. The Russian Grain Union estimates their number has now stabilized at 260,000 farmers, though there is still a big turnover as some give up and others try their hand.

Increased investment and corporate farms

The key reason for anticipated bigger harvests is the increased level of investment in agriculture. Suddenly, private business groups spawned by the ‘Wild West’ capitalism of the FSU have discovered that there is money to be made not just in the city, but also on the farm. Many of these companies are based in the financial and industrial sector.

By buying up majority packets of shares in the former agricultural collectives, they gain long-term control over large tracts of land. They hire well-trained and motivated farm managers, make formal business plans to win credits from their banks, and buy equipment and inputs from major international companies.

In fact, the Russian grain sector has been attracting investment from some of the country’s best-known corporate names. Interros, with nickel mining and airplane engines in its portfolio of companies, is one of these Russian business groups. At the end of 2001, the company formed a subsidiary, Agros Holdings, which in the second quarter of 2002 acquired a majority share in the former state company Roskhleboprodukt. The latter had formerly acted as the grain products monopoly in the Ministry of Procurement.

The company’s grain elevators have room for 2 million tonnes; annual flour milling and feed milling capacities are 800,000 and 1.8 million tonnes, respectively. Following the trend among competing enterprises, Interros Agros has recently announced plans to acquire farmland. It will concentrate on the fertile region around Stavropol, Russia’s southernmost grain producing area, where very high protein wheat can be grown.

Bart Swankhuizen of Cargill’s Krasnodar trading office in the southern Russian grain zone, guesses there are 10 to 15 private Russian business groups with holdings between 50,000 ha and 150,000 ha. The trend is toward greater and greater accumulations. One company based in the metals industry has set up an agribusiness enterprise called Stoilenskaya Niva. According to Russian press reports, it has already gained control of one million ha in a single Russian oblast (state or province). The company purchased 150 combines in 2001 from Russia’s leading manufacturer.

Domestic and foreign grain companies now own all of the Soviet era grain elevators. The grain zone is punctuated with hundreds of these concrete behemoths, mostly silo structures, dating to the 1960s and 1970s, which — on paper at least — offer sufficient storage capacity for much larger crops. However logistical considerations, outdated handling systems, poor energy efficiency and maintaining grain quality in these crumbling structures are the questions that face all who own and operate them in the new competitive environment.

Nevertheless, asset values have been very low for these structures, often just a few dollars per tonne of storage capacity, and buying and upgrading them has usually been the most economical option. In fact only a handful of new modern grain storage facilities have been built in Russia and Ukraine since market reforms began.

Grain production influences

Grain growing must be profitable to attract big business groups, and indeed a well-managed corporate farm has every possibility to keep its production costs low in Russia and Ukraine.

Yarmak of APK-Inform, said Ukraine now ranks as one of the world’s lowest cost grain producers. He performed a study that showed quality Ukrainian wheat loaded on a vessel at a Black Sea port can cost US$70 to $75 per tonne, even with a generous profit for the trader included. He estimated the average farm cost at $45 per tonne.

Cargill’s Swankhuizen said there are certain areas in southern Russia where wheat farms are yielding 5 tonnes per ha with production costs of only $180 per ha, including transport to the port.

Low production costs have mainly to do with exceedingly fertile land leased or bought inexpensively. Other factors are low labor costs — a Ukrainian farmhand earns less than $100 per month — and cheap energy supplied from Russia’s vast petroleum and gas resources.

Even farm machinery can be a bargain. Thanks to the large devaluation of the ruble in 1998, combine harvesters produced in Rostov in southern Russia and basic tractors manufactured in neighboring Belarus are only a small fraction of the price of deluxe machines made by the major international companies.

In Russia, sown area is rapidly increasing after contracting for much of the 1990s. Expansion began less than two years ago, but already there has been an increase of 1.5 million to 2.0 million ha, according to Swankhuizen. In 2002, about 60 million ha were planted. Swankhuizen estimates that there are 15 million to 30 million ha of untilled land that could still be planted with grain.

There is also an underlying demographic factor adding to these grain surpluses. With negative population growth and lower living standards, Russia and Ukraine are consuming less grain than ten years ago. Current consumption is estimated by Russian Grain Union officials at around 70 million tonnes.

A 50% to 60% decline in livestock herds in Russia since 1991 has also reduced feed consumption. As of January, cattle numbers stood at 26.9 million compared to 57 million in 1991, and contraction has been even greater for pigs, sheep and goats.

Predictions for the level of future grain crops vary widely. Swankhuizen predicts Russian grain crops will range from a low of 80 million to a high of 130 million tonnes, depending on weather and market conditions. The median of this range is nearly 25 million tonnes larger than Russia’s bumper harvest last year, and 30 to 35 million tonnes above Russia’s annual consumption. Yarmak of APK-Inform is even more enthusiastic about Ukraine’s prospects. He believes that in several years, a low target for Ukrainian grain production will be 65 to 70 million tonnes, one and a half times as big as the 2001 bumper harvest.

Where will it all go?

What will be the outlet for this deluge of Ukrainian and Russian grain?

The traditional channels are for barley and feed wheat to be shipped to Saudia Arabia and other Gulf Countries, while milling wheat goes to the burgeoning North African market. There is even a steady market for Ukrainian feed wheat in South Korea. According to Yarmak, the Ukraine exports grain to about 30 countries. Ivlev of the Russian Grain Union said there are 25 members of the RGU doing some exporting, 10 of which are very active.

The key for now is not who exports or where the grain is sold, but simply how the increase in exports will be handled. In Ukraine, there was just enough Black Sea port capacity to handle the 9 million tonnes of grain shipped abroad from the 2001 crop. Two to three million tonnes additional capacity could be added in the next few years. The country benefits from having several deepwater ports.

Russia does not. Of the several new port projects that have been announced, none have even secured their sites, and it could be years before the new export terminals are operating. Russia’s only deepwater port on the Black Sea, Novorossiysk, has just a single berth for Panamex vessels. On the Baltic Sea, the St. Petersburg port of Ust-Luk could accommodate. New export grain terminals have also been announced for the Pacific Ocean port of Vladivostok, but some industry insiders are skeptical. Rail transport costs are high in Russia, and it is 4,000 km from the grain growing areas of western Siberia to Russia’s only ice-free Pacific ports.

It is easy to surmise that wheat prices to the producers in Russia and Ukraine will decline below world levels as long as both countries produce surpluses without the transportation capacity to move that extra grain to world markets. In fact, July 2002 farm prices for Russian wheat are running 15% to 20% below the level of a year ago at this stage of the harvest. Falling prices could dampen the general enthusiasm prevailing now, and slow the rapid pace of new investment in grain production in the short term.