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What’s next for Russia?

Posted by on June 3, 2011 No comments

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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Sudan – Booming market for wheat

Posted by on November 11, 2010 1 comment

Sub-Saharan Africa accounts for just 14% of the world wheat trade and a small fraction of all consumption. But in coming decades, demand from the region will result in the lion’s share of increases in global wheat production and trade.

sudan-wheat-silos

Sudan wheat silos.

This is because nearly all net global population growth up to 2050 will be in the 45-plus countries of the region. Rapid urbanization will mean greater per capita consumption of bread and other wheat-based foods at the same time as average consumption goes down or remains stable in developed countries as well as in the Middle East, China and India.

Sudan is one country that has been leading the regional trend. Sorghum and millet are the traditional cereals grown and consumed throughout the country, but in recent years imports of wheat have totaled 1.7 million tonnes per year. In the sub-Saharan region, only Nigeria at 3.5 million tonnes imports more.

As late as the 1980s, bread for most people in Khartoum (the nation’s capital) was a luxury purchased only when guests came. Annually only 100,000 tonnes of wheat was ground in modern mills. Today, three powerful milling companies are producing 1.5 to 2 million tonnes of wheat flour per year. In Khartoum, where the population has burgeoned to 10 million, the average person now consumes over 200 grams of wheat flour daily, equivalent to four or five typical loaves.

More than 20 years of civil wars in the west, south and east of the country have caused millions of displaced people to relocate to the capital. Millers report that 90% of these migrants within a few years have switched from sorghum to bread as their main food. The traditional flat bread from sorghum flour, kisra, is now baked in urban households just one day per week or only on holidays. Many women in cities have never learned to bake kisra.

About half of the country’s production of 70,000 to 80,000 50-kg bags per day is consumed in Khartoum, which represents about one-third of the 30 million population of the northern part of the country.

Similar changes in eating habits are occurring in most of the country’s urban areas thanks to an efficient network for distribution of wheat flour, which often costs less than local grain.

Few villages these days are without a bread baker. Many farm families now sell part of their sorghum harvest for animal feed use in order to have money to buy bread. Even in Darfur, internally displaced people living in the huge refugee camps frequently sell a portion of their sorghum ration in order to buy bread.

The big Three

One of Africa’s most modern wheat milling industries has developed as both a contributor to and beneficiary of the trend toward greater bread consumption. The three mill operators in Sudan are the basis for the major food groups and indeed some of the largest private business groups in the country.

Sayga Flour Mills, which is part of Dal Group, is the biggest miller in terms of installed capacity mill. Today it has nearly 4,000 tonnes of milling capacity at three sites: four production lines with 2,250 tonnes of capacity in Khartoum, 1,200 tonnes at a leased mill in Port Sudan, and 500 tonnes at Atbara, located between Khartoum and Port Sudan.

Sayga has built a pasta plant next to one of its mills in Khartoum, where capacity was expanded in the last twoyears to 300 tonnes per day. Vermicelli, suitable for making a traditional Sudanese sugary desert, accounts for 80% of the plant’s output.

Sayga’s parent company, Dal Group, is in the process of investing $60 million in a major dairy operation that will have 10,000 cows fed by Sayga’s bran production.

Wheata Flour Mills, which started up in 2001, was the second company to become a major wheat flour producer in Sudan. Currently,  it has three production lines with 1,750 tonnes of daily capacity at its single milling plant in Khartoum. Wheata is part of Araak Group whose other food interests include fruit juices.

The most aggressive player in the sector in recent years has been Seen Flour Mills, which took over the former government mill in Khartoum, the original wheat mill in the country, and then acquired a couple of failed mills in Khartoum as well.

Relying on special access to the domestic wheat crop of 300,000 to 400,000 tonnes combined with Black Sea wheat, the company has used a low-price strategy to rapidly win market share, particularly in the low-income districts of greater Khartoum. Seen Flour Mills is planning the construction of a new 1,000-tonne-per-day mill in north Khartoum near its main mill, as well as an industrial bakery with five tunnel ovens.

Impact of deregulation

Deregulation of the industry in 1998 has been an important factor in its dynamic growth since then. Formerly the government held a monopoly on wheat imports, which were supplied to about 20 small millers on a quota system at subsidized prices in order to keep bread prices down. Once the government gave up its control due to chronic supply shortages, most of the smaller millers, lacking the financial strength to buy boatloads of wheat, were forced to close or operate only intermittently.

Sayga developed a strong supply relationship with the Australian Wheat Board and Wheata with the Canadian Wheat Board. Thus the two companies were able to dominate a market that could not be satisfied by local wheat production.

It could be argued that investment by the three largest milling groups - not just in milling, but also in storage and transport – has done a lot to improve food security in Sudan. There is now 240,000 tonnes of steel silo storage capacity for wheat at Port Sudan. Pending projects could add another 100,000 tonnes. The eight milling sites have another 140,000 tonnes of storage. In total, this is nearly 400,000 tonnes of wheat storage that has been built in the past 15 years.

By comparison, the government strategic grain reserve, which is mainly sorghum and millet, operates two concrete  grain elevators built in the 1960s by the Soviet Union: one 50,000-tonne port facility at Port Sudan and a 100,000-tonne elevator in the main sorghum producing area around Gadarif, where there is also a new 100,000-tonne concrete silo built by a Chinese contractor.

The importance of food security in Sudan should not be understated. From 1995 to 2010, Sudan’s population doubled from 20 million to 40 million. Add to this civil wars and periodic droughts that reduced the sorghum and millet harvest, and it is not surprising that the country has hosted one of the largest food aid distribution operations of the World Food Program. The United Nations agency as recently as a few years ago imported and distributed up to 800,000 tonnes of food commodities to distribute to 6 million beneficiaries, the great majority being people in Darfur displaced to camps that have now become permanent settlements.

Red sorghum donated from the United States has traditionally amounted to about two-thirds of the WFP food basket. Now with more political stability and the scaling down of food distribution, some of this donated sorghum will inevitably be replaced by wheat imported commercially.

Recent improvements in grain transport infrastructure have also served to keep wheat prices down and improve food security. This has resulted from a combination of public and private investment. Port Sudan’s harbor has beendredged to accommodate vessels with 40,000 tonnes of grain versus only 25,000 tonnes five years ago. A new highway has shortened the road distance from Port Sudan to Khartoum from 1,200 to 800 kilometers and truck transit time from over 20 hours to less than 12. At least 5,000 tonnes of wheat must be transported daily over this distance to satisfy the capital’s milling demand.

Sub-Saharan Africa wheat imports (in million tonnes) 2010. Includes wheat flour in wheat equivalent. Source: International Grains Council and author’s estimates for 2009-10

Sayga has invested in a fleet of Australian-designed grain hopper cars as well as locomotives made in China in order to operate its own grain trains on the government tracks. Wheat a operates a fleet of 220 trucks with cylinder tanks for bulk transport of its wheat.

hopper-wagons

Sayga Flour Mills has its own fleet of Australian designed grain hopper wagons and locomotives to transport wheat on 1,200 km of government tracks from Port Sudan to Khartoum.

Sudan has a long history of wheat production. But in the deregulated environment since 1998, local wheat has not always been competitive with imports. Varying quality of small lots from numerous individual farmers makes local wheat less desirable to the big milling companies.

However new investment is taking place, much of it from Saudi Arabia, where large agricultural companies have stopped production due to reversal of the 30-year policy of self-sufficiency in wheat. One major Saudi investor has transferred from Saudi Arabia center pivot irrigation equipment, combines, tractors and even technicians to establish over 32,000 hectares of wheat farms between Port Sudan and Khartoum. With yields of five tonnes per hectare, an extra 160,000 tonnes of local wheat is anticipated.

Two of the millers have also turned their focus to sorghum flour in 1-kg retail packaging. Sayga was the first to launch such a product, but Seen Flour Mills has announced its purchase of two 100-tonneper-day sorghum mills. Nevertheless sorghum remains the domain of chakki-style stone mills found in villages as well as urban markets.

Corporate social responsibility programs are important to all three milling companies. Since 2005, Wheata has fortified all of its production with iron and folic acid. In the last year it became the first company in Sudan to gain ISO 9000 food safety management certification. Sayga has financed the conversion of many bakers from wood- and charcoal-fired ovens to gas and electric. The company has even trained female prison inmates to become bakers. Seen Flour Mills is best known for its commitment to purchase local wheat from small holder farmers.

Can a handful of private wheat millers help solve the food security, public health, environmental, economic and social problems of an African country? In Sudan, they are certainly doing their part.

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