ALACO DISPATCHES: Russia emerges as a wheat superpower

ALACO DISPATCHES: Russia emerges as a wheat superpower
Putin's Russia went from importer to leading global exporter in 15 years.
By Yigal Chazan of Alaco March 20, 2017

While Russia’s energy sector has faced tough times in recent years, another part of the economy has been growing from strength to strength. In 2016, Russia became the world’s leading exporter of wheat. Overseas sales, amounting to 25.2mn tonnes, have provided a welcome financial fillip as the country strives to claw its way out of recession. But just as grain farmers bask in their achievement, there are signs that they may be about to lose their crown.

The emergence of Russia as a wheat superpower is striking given that just 15 years ago it was a net importer of grains. The change of fortunes comes as the Russian farming sector experiences something of a renaissance, resulting from President Vladimir Putin’s bid to increase self-sufficiency and his ban on imports of Western food products in retaliation for US and EU sanctions over Crimea.

Domestic grain producers have been bolstered by bumper harvests, the fall in the value of the rouble against the dollar, as well as government subsidies and investment in infrastructure. Russia has also been able to keep production and transport costs relatively low, since the majority of wheat earmarked for export is grown in southern Russia, not far from the Black Sea ports. That has allowed farmers to sell competitively-priced consignments to North African and the Middle East – notably Egypt and Turkey, two of the largest wheat importing markets – and, increasingly, to Southeast Asia.

Some of Russia’s wheat-exporting rivals are worried by its growing position in the sector. Late last year, the Australian Export Grains Innovation Centre, an industry body, released a report suggesting that Russian grain exports will surge 60% by 2030, leading to greater competition in Australia’s key markets.

In addition to state backing, Russian agriculture has been benefiting from increasing foreign investment, with low land prices proving a particular attraction. In the early 2000s, European-based agribusinesses led the charge. But according to industry news site, Asian and Gulf investors have now entered the market, the interests of some extending beyond the purchase of farmland.

In November, it was reported that a consortium comprising the Mubadala Development Company – the Abu Dhabi state investment vehicle – the Russian Direct Investment Fund (RDIF) and other investors was considering multi-million co-investments in two Russian food companies: EFKO Group, a vegetable oil and fat products maker, and AFG National, a rice producer. In May, TH Group, a Vietnamese dairy operator, began building milk farms in the Moscow region as part of a 10-year project worth $2.7bn. The same month, RDIF signed a joint investment deal with Thailand’s CP Group and China’s Banner Infant Dairy Products for the construction of a $1bn dairy facility in central Russia.

The Russian farm sector has been on a roll with domestic investors getting involved too – AFK Sistema’s acquisition of the huge Yuzhny Agricultural Complex in 2015 catching the headlines. That year, the agricultural sector grew by about 3%, with food exports generating a record $20bn, exceeding revenue from arms sales. Production has been encouraged across a wide number of sectors, in large part to fill the gap left by the embargo on Western products. Russia imported around a third of its food in 2013, the year before Western sanctions and Moscow’s retaliatory ban. The proportion fell to just over a fifth in the second quarter of last year. Russia is reportedly becoming self-sufficient in a number of food groups, with pork and poultry producers doing particularly well. Now efforts are also being focused on fruit and vegetables. According to official figures, greenhouse vegetable production rose by around 30% in 2016 compared to the previous year.

With the downturn in oil revenues, agricultural exports have been seen as an increasingly important component of the economy, although some commentators say the efficiency of many farms needs to be improved. Bolstering trade with Asia has been regarded as a priority because of political tensions with the EU and the US. China has become the biggest purchaser of Russian non-wheat farm exports, but some Chinese markets have been difficult to prise open. Beijing maintains a ban on Russian meat due to African swine fever outbreaks in Russia, and also restricts Russian dairy products because of safety concerns. Moscow has had more success exporting frozen fish, soybeans and sunflower oil to China. So far wheat shipments remain limited.

Nevertheless, production and export of wheat appear key to Russia’s hopes of developing a more diversified economy. Yet while the sector has considerable revenue earning potential, it has weaknesses too. For instance, Siberia, another big wheat growing area, is far away from the Black Sea ports and parts of the region are said to be experiencing some storage capacity difficulties. Moreover, the rise of Russia as a leading wheat exporter has been associated with a drop in the overall quality of the grain.

But there is, perhaps, a more immediate concern. While Russia is set for a record wheat harvest this year, according to Bloomberg, a strengthening rouble and currency falls in Turkey and Egypt – the biggest purchasers of Russian grain – have increased the cost of imports. The agency reports that Russia is in danger of losing its top spot to America in the wheat exporting league. This will disappoint Russian producers, but that they are once again challenging for pole position underlines the considerable progress the country’s agriculture sector has made.

Yigal Chazan is an associate at Alaco. Alaco Dispatches is the business intelligence consultancy’s take on events and developments shaping the CEE/CIS region.