Overflowing Russian grain storage puts $3.4bn worth of grain at risk of rotting in silos

Overflowing Russian grain storage puts $3.4bn worth of grain at risk of rotting in silos
Russia's grain silos are full to busting following an all-time record harvest last year, but sanctions restrictions on shipping mean farmers can't export grain and don't know where to put the grain coming in from this season. / bne IntelliNews
By bne IntelliNews April 18, 2023

Full to overflowing, the lack of grain storage space and problems with export transportation due to sanctions have put grain worth $3.4bn at risk of rotting in the silos, a survey by Russia-based consulting firm Jacob & Partners found, reports World Grain on April 17.

Last year’s harvest of 153mn tonnes of grain smashed all records, including from the Soviet era, but coupled with the sanctions related restrictions on shipping Russian goods, farmers have been left with silos full to bursting and worry the millions of tonnes of grain will simply rot if they can export some 4mn tonnes of grain a month this year – high by even pre-war standards. (chart)

About 20% of those surveyed claimed that most likely the excess eventually would be lost due to a shortage of storage and transportation capacities.

“[At] the current prices, grain stocks worth RUB260bn ($3.4bn) are in peril, normally associated with (a lack of) long-term storage,” said Alexey Poroshkin, an analyst with Jacob & Partners. Grain prices in Russian provinces have fallen below the break-even point. For example, in the Saratov region, the wheat price dipped below RUB9,000 ($125) per tonne, while the sunflower seeds market saw a catastrophic slump in prices from RUB30,000 ($340) to RUB20,000 ($220) per tonne. In theory, soybeans may become the most profitable crop for Russian grain producers next season, but there are no guarantees.

In an optimistic scenario, Russia could export more than 60mn tonnes of grain this year, which is the official forecast; however, the floating export duty imposed by the government in July 2022 means farmers can’t compensate for the losses they suffer from selling grain on the domestic market.

“The whole marginality is being eaten up by duties,” the report said. “In fact, if there were no duties, the exporters’ marginality would be in a normal state, and everything would roll swiftly, as it was before.”

Russian grain farmers have already lost around RUB1 trillion ($15bn) due to the floating export duty, the report said. The losses the farmers suffer on the domestic market due to lower prices are much higher than that figure. Farmers are calling on the government to abandon the new duties to improve their profits, but the government, worried about food inflation, has been reluctant. Rising food prices has been one of the main contributors to high inflation in Russia, along with rising fuel prices.

The difficulties with exporting grain have been made tougher by the recent decision of the world’s leading grain traders to exit the Russian market. Viterra and Cargill reportedly will stop selling Russian grain at the beginning of the 2023-24 marketing season (July). State-owned companies are set to step into their shoes. Russian magazine Expert has speculated that the grain export business might be nationalised in a return to Soviet-era practices.

At the same time, farmers are facing serious challenges this season, due to a lack of Western technology, spare parts and seeds, logistics issues and a growing labour crisis, which could see profits from wheat sales tumble by as much as 60% year on year this year and a three-fold fall from 2020-21, Jacob & Partners found, formerly the Russian branch of international consultants McKinsey.

Russian farmers’ financial problems will also hit output in the 2023-24 marketing year, with wheat production potentially dropping by between 13% and 19%.

The largest problem in the industry, according to the poll of 96 Russian grain companies, is the large warehouse stocks, with almost half of respondents saying they have no idea what to do with the excess of grain in warehouses accumulated due to last year's huge harvest and export difficulties.

Grain exports came into focus after Russia blockaded Ukraine’s Black Sea exports, which prompted fears of a global food crisis. Between them Russia and Ukraine dominate the global grain trade, accounting for about 30% of total grain exports. Many countries in the Middle East and Africa are heavily dependent on imports of Russian and Ukrainian grain.

The UN and Turkey brokered a deal to restart Ukraine’s exports last July, which was recently renewed for another 120 days in March, but as part of the deal Russia has called for shipping restrictions on its own grain exports to be eased, which it claims has not happened. As a result the Kremlin has threatened to cancel the export deal after only 60 days.

Tensions in the grain export business continue to mount. Russia blocked ship inspections in the Bosphorus for the second time on April 17, as the Kremlin continues apply pressure to get shipping sanctions eased.

The Russian contingent in the Joint Coordination Centre in Istanbul unilaterally stopped registering vessels originating from Ukrainian ports to form an inspection plan since April 10, according to the Ministry of Infrastructure of Ukraine. Instead, the Russians created their own list, choosing ships from the queue at their discretion.

As a result, for the second time, an inspection plan has not been drawn up, and not a single vessel has been inspected, which threatens the work of the Grain Initiative.

"In this way the Russian Federation is trying to establish control over the number of ships in the loaded fleet and the directions of its work, which violates international norms and provisions of the Grain Initiative. This is another attempt to dictate its policy to the whole world, endanger food security and use food as a weapon," the department said in a statement.

Adding to Russian farmers' headaches is the growing labour shortage after the partial conscription of 300,000 men last September, coupled with the emigration of an estimated 1mn men following the start of hostilities in Ukraine, which together have drained Russia’s labour pool of workers.

At the same time, technical problems also plague the industry, with about one-third of the companies surveyed admitting problems with their tractor fleets and 25% experiencing difficulties in servicing their combine harvesters, which are heavily dependent on imports.

Sourcing seeds is also a challenge. For example, while Russia is self-sufficient in potato production, it imports almost all its seed potatoes from the West – imports that have now dried up. The lack of serviceable machinery is one of the critical challenges faced by 70% of the respondents to the survey.

About 19% of the survey participants warned about the shortage of these seeds, and one market player said it would be impossible to replace imports in the foreseeable future. The problems, to a degree, could be mitigated through the development of "alternative transport corridors," according to the Jacob & Partners study, as Russian firms have continued to successfully import sanctioned goods by routing them via “friendly” countries.

The one input Russian farmers have in abundance is fertilisers, as Russia is one of the biggest fertiliser producers in the world.

The Russian government's parallel import scheme, which allows Russian businesses to import a long list of sanctioned goods from countries deemed as unfriendly without the permission of the brand's owner, has been useful in some fields but is unlikely to help Russian grain farmers in 2023, Jacob & Partners found. Furthermore, Turkey, one of the main conduits for sanctioned goods, halted the transit of sanctioned goods by the European Union and the United States to Russia on March 1, which has further complicated matters.

As a result, Russian farmers must look for cost-saving solutions, such as cutting the use of plant protection agents, using cheaper seeds and finding other ways to save costs. However, this primarily concerns independent farmers, who manufacture most of the country's grain. In agricultural holdings, which have a large concentration of resources, the decline in technological effectiveness is not yet evident, but all agricultural holdings produce only 20% of the grain in Russia in total. This situation could worsen the outlook for the Russian grain industry in the coming years, as with the loss of technological effectiveness, the decline in output is gradual.

In recent years, after the state poured investment into the sector, Russia has become an agricultural powerhouse and grain exports are a top ten foreign exchange earner, whose list is otherwise dominated by raw materials, earning some $40bn a year.

Despite the record harvest last year Russia’s wheat exports plummeted by 21% in the 2021-22 marketing season to 23mn tonnes.

Between July 1, 2021, and January 20, 2022 Russia exported 23mn tonnes of wheat, down 21% year on year, according to the Russian Federal Service for Veterinary and Phytosanitary Surveillance data released January 24.

As of January 20, Turkey was the largest buyer of Russian wheat, purchasing 4.6mn tonnes, followed by Egypt at 3.6mn tonnes and Kazakhstan at 1.8mn tonnes. S&P Global Platts Analytics has estimated Russian 2021-22 wheat exports at 36.5mn tonnes.

Russia sold 38.5mn tonnes of wheat in 2020-21, according to data from the US Department of Agriculture. The country's marketing year 2021-22 wheat harvest was at 79.1mn tonnes as of December 30, 2021, lower than 88.1mn tonnes produced a year ago, according to the Agriculture Ministry.

Russia's wheat output is anticipated to fall in the 2021-22 marketing year due to adverse weather conditions, particularly dry and warm summers.