Russian Agriculture Russia Macro Statistics
Moving from a neglected to a priority industry 2015E 2016E
GDP, US$ bln
$1,260 $1,280
Population, mln
143
143
GDP/Capita, PPP, US$ *
$23,290 $23,100
Growth, real % YoY
‐3.5%
0.5%
Consolidated bdgt., % GDP
‐2.5% ‐1.5%
CPI ‐ year‐end, % YoY
12.0%
7.0%
GFI, real % YoY
Industrial output, % YoY
Agricultural output, % YoY
Retail sales, % YoY
Unemployment, % EOP
‐10.0%
1.0%
3.0%
‐6.0%
6.5%
Curr. account, % of GDP
Trade balance, US$ bln
CB reserves, US$ bln
CB Key Rate
3.0%
2.3%
$120.0 $150.0
$360.0 $380.0
10.0%
7.5%
“Agriculture not only gives riches to a nation, but the only riches she can call her own” Samuel Johnson, English writer and philosopher (1709‐1784) ‐2.0%
2.5%
3.3%
0.0%
6.0%
RUB/US$, year‐end
70.00 68.00
RUB/EUR, year‐end
78.00 75.00
Urals, average, US$ p/bbl
$55
$60
Source: State Stats, Macro‐Advisory estimate ƒ
The world’s biggest country. Russia has one of the globe’s largest areas of arable land (120 mln hectares/296 mln acres). Agriculture accounts for 4% of GDP (vs. 1.3% in the US and 10% in China). ƒ
Per capita consumer spending. Food and non‐alcoholic drinks constitute a sizeable 31% of total per capita consumer expenditure, almost three times higher than in the EU or among OECD countries. ƒ
Agriculture is one of the few growth sectors. We forecast Russia’s economy to decline by 3.5% YoY in 2015. However, the agricultural sector is on track for 2‐3% growth, largely driven by a weak ruble and the food import ban imposed by the government in August 2014. ƒ
Food imports slump. As a result of the ban on certain food imports, encompassing products worth about US$9 bln, overall food imports have declined over 30% in the past year. Russia was one of the world’s biggest food importers – up to US$40 bln annually, which accounted for over 30% of its total food consumption. ƒ
Legacy and neglect took their toll. The agriculture sector still suffers from the Soviet legacy (the gross inefficiencies of centralized planning and collectivization) and the lack of meaningful investment until the early 2000s. There is a significant technology gap with the West. ƒ
Government finally taking action. A strategic agricultural development plan is making progress and is ahead of schedule. Meat and dairy production industries are being prioritized. ƒ
Mixed industry structure. The crop segment is slightly bigger than meat production and increasingly industrialized, as large agro‐
holdings begin to dominate. Poultry and pork production are rapidly industrializing, but overall the meat sector remains fragmented. ƒ
Pushing for localization. Foreign equipment imports to Russia continue, but the government is increasingly emphasizing the need for production localization, as part of its import substitution strategy. ƒ
Ruble weakness hit equipment imports. Sales of most types of Western equipment, inputs and technology are down significantly since the ruble started to depreciate. ƒ
Significant opportunities for foreign investors. Western expertise has successfully transformed many production facilities and there are still significant opportunities. Large swathes of land abandoned in the nineties could be brought back under cultivation. ƒ
Western involvement. Several Western food producers and equipment manufacturers have a presence in Russia. Western equipment is preferred in food production, whenever affordable. ƒ
Transport & logistics. Apart from direct agricultural investment, there will also be considerable opportunities in transport, handling, storage and port facilities. Russia currently lacks spare handling or export capacity to boost grain exports. Agriculture Sector
Share of GDP
Share of workforce
Share of exports (by value)
Trade imbalance (net imports), $ bln
4.0%
7.5%
2.2%
$20
Source: State Stats, Macro‐Advisory estimate Taxation in Russia
Corporation tax rate
20.0%
Personal tax rate
13.0%
Sales tax rate
18.0%
Social security tax rate
30.0%
Source: Finance Ministry of Russian Federation Russian Meat Market *
Pork, as a % of total market
Poultry, as a % of total market
Beef, as a % of total market
Meat producing capacity *
Volume of meat imports *
33%
46%
19%
9 mt
1.7 mt
Source: Miratorg * 2013 data
Chris Weafer
+7 916 349 2039
cjw@macro‐advisory.com
http://macro‐advisory.com/
Michael Winn
+7 985 760 8194
mkw@macro‐advisory.com http://macro‐advisory.com/
October 2015
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Summary Russia has the world’s third‐largest area of arable land. The largest country in the world, Russia has the third‐
largest area of arable land (120 million hectares/296 million acres) after the US and India but ahead of China. The agricultural sector accounts for 4% of GDP (versus 1.3% in the US and 10% in China). Lower on a per capita basis. The country is ranked in sixth position on a per capita basis for arable land. Top Ten Countries by Arable Land per Capita Source: World Bank
Growth in agriculture despite faltering economy. In the wake of falling oil prices, the Economy Ministry expects the economy to contract by 3.8% YoY in 2015. However, the agriculture sector is on track for 2‐3% growth in production this year, largely as a result of the food import ban imposed by the government in August 2014 and the fact that ruble depreciation is making imports more expensive, thus encouraging local production. But growth in food production is expected to slow next year. However, after this initial stimulus, growth in food production is expected to slow in 2016 – to around 1.5% – as the overall economic difficulties in Russia persist and consumer demand stagnates. Detrimental effects of Soviet planning and perestroika. The entire agriculture sector still suffers from the legacy of the Soviet period (the gross inefficiencies created by central planning and collectivization) and the dramatic changes brought about by perestroika in the early nineties. The shock of perestroika led to the abandonment of previously cultivated land equivalent in size to the entire area under cultivation in France, Germany and Spain. 2 Russian Agriculture
People leaving the land. The agricultural labor force has declined from 8 million in 1998 (11% of total workforce) to 5.5 million in 2013 (7.5% of the total workforce, versus less than 2% in the US). Land Abandonment in Russia
Source: RosStat (2014)
* Sowing area (mln ha). Percentage and real change on the right axis. Other crops: potatoes
and vegetables; fodder crops: annual and perennial grasses and root vegetables; technical
cultures: sunflower, sugar beet, soybean, and rapeseed; other grains: barley, rye, and oats. Patchy picture. While certain aspects of the agricultural sector, particularly grain production in southern regions of the country near export ports operate to international standards of efficiency and quality, the overall situation is characterized by: ƒ
Poor infrastructure and transportation, leading to massive wastage in some areas. ƒ
Low overall yields by world standards. ƒ
Lack of investment, particularly in the last two decades. ƒ
Inadequate production technology and techniques and frequent mishandling of equipment. ƒ
Lack of adequate access to finance, and high interest rates. ƒ
Low direct subsidies by international standards. ƒ
Until recently, an absence of a clear strategy and poor government support. Government taking action. Following the neglect of the Yeltsin era, for the past fifteen years the Russian government has been paying increasing attention to agriculture. A strategic development plan was approved in 2012 and some targets (e.g. sunflower seed production) have been reached ahead of schedule, while others are well on track. Under the strategy, the meat and dairy production industries are being prioritized. 3 Russian Agriculture
Agriculture Minister spearheads new measures. The Government is also using the current political crisis over Ukraine to try to revitalize the sector by re‐targeting its subsidy programs, imposing bans on certain imported foods and establishing an ‘import substitution’ program, with financial assistance. The priority sectors are meat and dairy production. The new Agriculture Minister, Alexander Tkachev, is proving to be a more effective lobbyist than his predecessor and is spearheading these measures. International influences. The international political situation is having an effect on key sectors of Russian agriculture. Russia’s membership of the WTO has impacted agriculture, although the situation has been considerably confused by the Ukraine crisis. Membership of the Eurasian Economic Union is also having an influence, creating a larger market for Russian goods. The structure of agriculture varies from segment to segment. Overall, by value, the crops segment is slightly bigger than meat production. Grain production is increasingly industrialized, with large agro‐holdings beginning to dominate, particularly in the regions near export ports, where, under the stimulus of receiving world prices for exports, grain yields can reach global standards (6‐8 tonnes per hectare). But major parts of the meat sector, particularly beef production, remain fragmented. Distribution of Arable Land in Russia
Source: State Statistics Service of Russia
Pork and poultry production have made rapid progress. In contrast to beef and dairy production, the pork and poultry sectors have industrialized rapidly and are now dominated by extensive industrial‐scale production facilities. Russia is nearly self‐sufficient in poultry meat production – a dramatic change from the recent past – and will soon have enough pork output to meet domestic demand. Significant pork exports from Russia are a real possibility in the next few years. Import‐export patterns have changed dramatically due to recent political actions. Although food imports are down, the trade imbalance in food remains substantial, at about US$20 bln, even after the effect of the ban on food imports. However, food exports are increasing. In the 2014‐15 season (1 July 2014‐30 June 2015), Russia exported a record 31.7 million tonnes of grain, flour and pulses. 4 Russian Agriculture
Domestic food producers benefit from weak ruble but the picture is mixed. While the weaker ruble should ordinarily help domestic food producers by reducing competition from imports and encouraging exports, government policy may hamper exports in some segments (e.g. by imposing taxes on wheat exports to promote lower domestic prices). Ruble‐US Dollar Exchange Rate – Past Two Years
Source: ExchangeRates
Sales of Western farm equipment shrinking. Foreign equipment dominates in some areas of the market (e.g. dairy production), but the Russian government is increasingly emphasizing the need for production localization to replace imports. Russian and CIS manufacturers still struggle to provide quality equipment to the market, where there is still a preference for Western machinery. However, the weakening ruble is changing the picture and sales of most types of Western equipment are down significantly. Foreign equipment suppliers respond to localization pressure. Several international companies have already established production bases in Russia and many others are known to be considering establishing a presence. However, there are reported difficulties in obtaining quality components from Russian sources, meaning that, even with the best will in the world, complete product localization is immensely difficult. Agricultural inputs have risen steeply in price over the past year. Seeds, fertilizers and pesticides have been showing price growth in the region of 30‐50% over the past year. However, international seed suppliers report that exports into Russia are down less than expected, as farmers recognize the yield advantages of using quality seeds. There is a growing appreciation of the positive effects of high‐quality equipment and input imports, despite the extra expense. The agriculture sector offers many opportunities to foreign investors, despite the political backdrop. Despite the political difficulties, in view of the relative underdevelopment of the sector there are significant opportunities for international companies and investors in Russia’s agricultural sector. Several Western equipment manufacturers have established assembly facilities in Russia. Most Russian grain is shipped by internationally‐owned trading companies. The biggest milk producer in Russia is now a German company. There is large‐scale availability of previously cultivated land which was abandoned after perestroika. Western expertise has successfully transformed many production facilities and there are still significant opportunities for further involvement. 5 Russian Agriculture
Recent trends ƒ
Ruble weakness, the economic crisis and the import ban are all having a very adverse effect on the sector. ƒ
On the other hand, due to ruble weakness, food exports are increasing. In 2014‐15 (1 July 2014‐30 June 2015), Russia exported a record 31.7 million tonnes of grain, flour and pulses. ƒ
As a policy instrument, the food import ban is being imposed effectively but domestic producers are proving to be ill‐equipped for large‐scale import substitution and will take time to adjust. ƒ
Dairy production has declined slightly and quality beef production is about 2% down on 2014 (although there are several large projects in the pipeline). ƒ
Nevertheless, year‐to‐date agricultural production is up 8% in pork, 9% in poultry. ƒ
The Agriculture Minister, Alexander Tkachev, appointed in April 2015, is a more effective lobbyist for the sector. ƒ
There has been a steep rise in the cost of agricultural inputs, averaging around 30‐40% over the past year. ƒ
Bank lending and equipment leasing activity in the sector remains expensive and is down dramatically. ƒ
Investment from foreign companies has been allowed to proceed unhindered, and is even encouraged, with the production ‘localization’ policy. Several regional development agencies have been set up to promote investment. ƒ
Several Western equipment manufacturers have established assembly facilities in Russia. The biggest milk producer in Russia is now a German company. Most Russian wheat is shipped by international companies. 6 Russian Agriculture
Soviet legacy and perestroika Legacy Collectivization still haunts Russian agriculture. The Russian agriculture sector is still hampered by the legacy of Soviet agricultural policy, which was driven by centralized bureaucratic commands and not by market forces. Stalin ordered the ‘forced collectivization’ of agriculture and the creation of industrial‐scale collective and state farms. The consequences of the wholesale misallocation of resources during the Soviet period haunt Russia to this day. Agriculture in the Russian Republic of the USSR suffered underdevelopment, in the name of ‘international socialism’. Part of the issue was that, under the banner of ‘international socialism’ and under the principle of the division of labor, the Russian part of the USSR was content to import large volumes of food products from Eastern Europe and other parts of the Soviet Union. This led to a lack of infrastructural development in many key sectors of agriculture in Russia. Now, of course, these traditional suppliers are foreign states. Agriculture was a burden on the Soviet budget. The agro‐industrial complex contributed about 12% of the traditional revenues of the Soviet state budget – but it absorbed about 25%, according to V. Semenov, Deputy Minister of Finance of the USSR, who was a noted expert on agricultural finance. Perestroika exacerbated problems in the sector. The shock of Perestroika further exacerbated the problems of the sector, since the large‐scale state and collective farms were disbanded and the whole pattern of relationships in the sector was torn apart – productivity slumped and approximately half the livestock herd was slaughtered. Moreover, there was massive land abandonment – according to official figures, the total area of cultivated land declined by 35% between 1980 and 2011. ’Motherland, Receive our Abundant Harvest’ (1952)
Source: Yandex Images
7 Russian Agriculture
Problems Some of the key problems of the agricultural landscape are: ƒ
There is a shortage of storage facilities for agricultural products, and other infrastructure, especially transportation, is weak. In particular, the under‐provision of refrigerated storage and transportation causes a huge amount of wastage. ƒ
There is a ‘technology’ gap with the West, in that those segments which use Western techniques, equipment and inputs are demonstrably more productive, efficient and profitable than those in the purely ‘Russian’ sector. ƒ
The slowness and inefficiencies of the harvesting process leads to around 15 million tonnes of grain per year going to waste. In some regions, the snow arrives before the harvest is completed. ƒ
The combination of the above factors has led some experts to comment that up to one third of agricultural production is wasted. ƒ
Some sectors – such as beef and dairy – were particular ravaged by the changes of perestroika, as fodder disappeared, large tracts of land were abandoned and the stock of cattle fell by over 50%. ƒ
Climatic conditions make agriculture a risky business in large parts of the country. This leads farmers to under‐invest, so as to reduce potential losses. ƒ
Although meat consumption was high in Soviet times, there was no quality meat industry in the Soviet Union. As recently as 2008, the portion of quality beef stock in cattle herds, as whole, was as low as 2%. ƒ
In the past, particularly in the Soviet period, over‐intensification of farming and a failure to rotate crops adequately led to soil exhaustion in many parts of the country. ƒ
The sector is vulnerable to external shocks, such as ruble depreciation, which in large part results from the Russian economy’s dependence on the oil price. ƒ
Interest rates are high and there is an inadequate provision of loan financing in the sector. Many farmers rely exclusively on credits (banks and suppliers) and leasing to finance their business. ƒ
Although the food import ban provides huge opportunities for domestic production, it will take time for the industry to adapt. ƒ
In the grain sector, only an estimated 8% of the seeds used are from commercial sources (versus 45% in Germany). This means that 92% of the seeds used in farms are taken from their own production and are not the modern, productive seeds available from seed producing companies. ƒ
Although the government is now firmly behind the strategic development of agriculture, short‐term policies – such as export duties – can have a detrimental effect. ƒ
There continues to be a ‘brain and labor’ drain from the countryside, where wages are very low, (currently averaging around US$150/month) to towns and cities. ƒ
Agricultural equipment is frequently abused and mishandled, leading to drops in efficiency and output. 8 Russian Agriculture
Government policies Government policies impacting on agriculture fall into two main categories: ƒ
Measures aimed to encourage agriculture specifically – the 2013‐20 strategic plan, subsidy programs, import bans and quotas. ƒ
Other measures, which, while not targeted at agriculture, may support the development of the domestic industry, such as the recent policy of a weaker ruble. Reform opportunities. Policy makers believe that the combination of these factors represents a real opportunity to reform Russian agriculture, although there may be a lot of pain in the short and medium term. Strategy program for Russian agriculture. In July 2012, the Russian Government adopted the State Program for Development of Agriculture and Regulation of Agricultural Commodities Markets in 2013‐20. The program is the successor to an earlier version, which ran from 2008 (and which was regarded as being the first real attempt to develop a strategy for Russian agriculture). Newly‐appointed Agriculture Minister has the right credentials. In April 2015, a new Agriculture Minister, Alexander Tkachev, was appointed to lead the re‐launched policies. Significantly, Tkachev’s previous job was as the Governor of the Krasnodar Region, in southern Russia, a very important agricultural area, producing an estimated 10% of the grain harvest and containing some of the most advanced and productive farms in the country. The appointment was greeted positively by many in the sector, who note Tkachev’s declared commitment to strong action (a commitment possibly strengthened by the fact that his father owns a large agro company). Russia GDP from Agriculture, RUB bln
Source: Trading Economics, State Statistics Service of Russia 9 Russian Agriculture
Subsidies Development of the livestock and dairy industries remain top priority. The 2013‐20 Program plans to allocate RUB2.28 tln (currently US$36 bln) for the development of agriculture and the food production markets during the period, split roughly two‐thirds from the Federal Government and one‐third from provincial budgets. The development of the dairy and livestock industries will remain the top priority for the government during this period. Support to switch from subsidized interest rates to direct income assistance. One notable change recently in the State Program is the method of support to agriculture which will shift from subsidized interest rates towards direct income support for farmers. This represents a major revision, considering the view of one commentator that “… it would not be exaggeration to say that the entire investment activity of the domestic agricultural sector was based on federal subsidies of bank interest rates”. Experts claim the subsidy program is inadequate. Some agricultural experts have criticized the subsidy program as being inadequate – indeed, the amount allocated is only about half of what the Agriculture Ministry requested – noting that the average subsidy across all food groups is 6.7%, compared with 25% in the EU and more than 35% in the US. These experts doubt that the government’s import substitution policy can succeed without a significant rise in the level of subsidies over the next few years. Prime Minister Medvedev Shows Support for Domestic Producers
Source: Kommersant Import substitution Reciprocal sanctions targeted food imports from the West. In response to the sanctions imposed by the West over the Ukrainian crisis, in August 2014 Russia banned the import of certain specified food products for one year from a group of Western countries. When the West renewed sanctions against Russia in June of this year, President Putin responded on 24 June by extending the food import ban for one year. Import substitution evident on shop shelves. The ban has been effective, with the banned Western foods disappearing from Russian shops. The locally made products which have partly replaced Western goods are noticeably inferior in quality (if cheaper), and it will require considerable time and investment to raise quality levels. 10 Russian Agriculture
Percentage of imported food to be reduced to 10%. In the past few years the proportion of imported foods sold in the Russian retail sector has been averaging 33‐36%, with Russia being the second largest food importer (after China) in the Emerging Markets category. The Agriculture Minister, Tkachev, has stated that he believes this proportion can be reduced to 10% within three years, a view which has been echoed by other ministers and which would be a colossal shift in the import pattern. US$6.5 bln of investment required to achieve import substitution targets. The Agriculture Ministry estimates that to achieve the government’s import substitution goals in full, investments totaling US$6.5 bln will be required in the food production sector. Imported foodstuffs to fall significantly by 2020. As part of its planning process, the Ministry has calculated that the volumes of imported foodstuffs up until 2020 will fall significantly, by 54% for meat, 30% for milk and 65‐75% for vegetables. These figures can only be guidelines, as the direction of economic and trade policy during and after the current tensions are unpredictable. Food ban takes toll on Germany and other traditional food suppliers. There is mounting evidence that the food ban is having a serious impact on traditional food suppliers. German exports to Russia fell 34% YoY in the first five months of 2015 to EUR4.4 bln (US$4.8 bln), according to a lobby group representing German industry in Eastern Europe. Currency and Sanctions Have Pushed Food Prices Higher
Source: State Statistics Service of Russia Ministry control Agriculture Ministry is taking measures to reduce abuses and improve efficiency. The Agriculture Ministry – despite its constrained resources – is stepping up efforts to exercise greater control over farming practices, in order to reduce abuses and improve efficiency. The Ministry is tightening regulations so that correct crop rotation is observed. Farmers are also obliged to report on their activities, what crops they are planting and even what equipment and inputs they are using. Regional governments also offer support. In a number of Russian regions, local programs support investors in large agro‐industrial projects. Under these programs, investors may be provided with direct subsidies and preferential loans. Local administrations may also assume an obligation to provide new agricultural enterprises with infrastructure. The regional administrations in Voronezh, Kaluga, Rostov and Krasnodar are reported as being particularly helpful in this regard. 11 Russian Agriculture
Financing Small‐ and medium‐sized farms particularly susceptible to financing difficulties. The financing of inputs and equipment is widely referred to as being the biggest problem facing farmers, particularly small‐ and medium‐
sized farms. Overwhelmingly, farmers rely on bank credits or leasing arrangements to support their input purchases. The financing sector is dominated by two banks, Rosselkhozbank (Russian Agricultural bank) and Sberbank, both of which reported earlier this year that lending levels to agriculture are sharply down, mainly because of the increase in interest rates and the stricter lending policies and criteria imposed on them by the crisis. State‐provided interest rate subsidies. Agriculture finance is closely associated with the interest rate subsidies provided by the government. Sberbank and Rosselkhozbank are also pre‐eminent in this form of finance, having about 85‐90% cumulative market share. Other banks, such as VEB, VTB, Alfa‐Bank, Gazprombank, have rather modest lending volumes. 12 Russian Agriculture
International organizations WTO WTO conditions limit subsidies to agriculture ... Russia has been a member of the World Trade Organization since 2012. As a condition for joining, Russia had to agree to limit the level of subsides in the agricultural sector. It was agreed that the total trade distorting agricultural support would not exceed US$9 bln in 2012 and would be gradually reduced to US$4.4 bln by 2018. … but that has been rendered largely academic by the conflict over Ukraine. However, a discussion of the observance of such limits has now been rendered largely academic by the conflict between Russia and the West over Ukraine. Russia accused Western countries of violating WTO rules in imposing sanctions and then argued that the food ban against Western imports was retaliatory action. Eurasian Economic Union Economic union uniting Armenia, Belarus, Kazakhstan, Kyrgyzstan and Russia. The Eurasian Economic Union came into being on 1 January 2015, uniting Armenia, Belarus, Kazakhstan and Russia into an economic union. Kyrgyzstan, despite some late domestic concerns, formally joined on 9 May. After 20 years of talks to bring these former Soviet states into a single economic space, there is finally a treaty that actually implements all the promises that have been made. PPP on a par with Germany and Japan. The EEU comprises an aggregate economy valued at US$2.4 tln based on the current dollar rate and US$4.2 tln based on Purchasing Power Parity (PPP). That places it between Japan and Germany on the same PPP basis. The total population base of the EEU is almost 180 million people. Russian economy dominates the EEU. Russia’s economy dominates the EEU to the extent that this year’s recession and ruble weakness have had a direct negative impact on economies across the CIS and Eurasia region. All countries have either already had to, or are expected to soon, devalue their currencies to mitigate the loss of competitiveness. OECD Membership on hold until Ukraine conflict is resolved. Russia officially applied to join the OECD in 1996, and in 2007 a ‘roadmap to accession’ was approved by the OECD Council. However, in March 2014 the OECD postponed activities related the accession process for the Russian Federation at the request of its 34 member‐
countries. Clearly, the OECD does not propose any further negotiations with Russia until the Ukraine situation is resolved. 13 Russian Agriculture
Major agricultural segments Grain Increasingly industrialized. Grain production is becoming increasingly industrialized, with the emergence of large‐scale farms, many of which are well‐equipped (especially those with access to export markets), although overall yields are still low by world standards. Estimated grain production for 2015 is 100 million tonnes (versus 428 million tonnes for the US and 311 million tonnes for the EU). That compares with 102 million tonnes of grain production in Russia in 2014. Benefits of good climate and access to ports. Although the average grain yield for Russia is little more than 2 tonnes per hectare, in the milder southern regions of the country, for farms with easy access to ports, yields can reach 6‐7 tonnes per hectare, due to the stimulus of exporting. Many farms in these regions have been able to invest in modern equipment and techniques and will also benefit from the weaker ruble. Storage continues to be a concern. Theoretically the country has excess grain storage capacity, with an estimated national total of 118 million tonnes. However, most of this figure is accounted for by barns and warehouses and only 34 million tonnes can be placed in elevators – and over half these grain elevators are thought to be in a dilapidated condition, making storage very difficult. Wheat is the mainstay of the grain harvest. The main constituent of the harvest is wheat (production for 2015 is estimated at 54‐56 million tonnes), followed by barley, (estimated production of 19.5 million tonnes) then maize (11‐12 million tonnes). Wheat production will probably be down some 5‐10% in 2015, due mainly to poor weather conditions. Barley output boosted by brewing industry growth in post‐Soviet Russia. Annual barley production is around 19 million tonnes. The sector was given a stimulus in post–Soviet times by the rise of the beer brewing industry in Russia. Grain production targets achievable. Under the 2013‐20 Program, grain production is projected to increase by 35% from a base of 85.2 million tonnes (the 2006‐10 average) to 115 million tonnes by 2020. As for improvement in grain logistics, the Program envisages grain storing capacity being increased by 17.1 million tonnes by 2020. In crop production, the increase is expected to be due to improved use of agricultural lands and the development of a seed breeding industry. Despite fluctuations due to weather variations, given the rate of progress in the industry and the ongoing stimulus for exports, this seems to be an eminently achievable target. Russian Cereal Production, 000' tonnes
2010‐14 average
2014
2015E
% Chg, YoY Wheat
Barely
maize
Others
49,450
15,444
8,248
9,698
59,711
20,444
11,332
10,977
54,000
19,000
11,400
10,387
‐10%
‐7%
1%
‐5%
Total
82,841
102,464
94,787
‐7%
Source: FAO/GIEWS Country Cereal Balance Sheets
Note: Percentage change is calculated from unrounded data
14 Russian Agriculture
Case study – Western investment: Black Earth Farming International investment. Black Earth Farming is a UK company that acquires and manages arable land in the Central European part of Russia. Since it started operations in 2006 it has acquired some 271,000 hectares (670,000 acres) of land under management, most of which it owns itself. The company is unique in giving Western investors access to the agricultural potential of Russia’s Black Earth region. In 2014, the company produced a total of about 530,000 tonnes of grain. Investor access. Black Earth Farming was founded by Mikhail Orlov, a British businessman of Russian descent. In 2008 it raised funding from two Swedish companies, Vostok Nafta and Kinnevik, and listed its shares on the Stockholm Stock Exchange. A rights issue was held in 2012 to fund investment for a major potato contract with PepsiCo. Financial difficulties. So far, the company has not been so successful financially, partly because its debt financed investment model was hard hit by the crisis of 2008, just after its initial listing. The stock price fell from US$10.75 at its initial listing in March 2008 to US$1.90 in January 2009. Although it recovered to US$4.70 in January 2011, it has since suffered from the macroeconomic and political problems affecting the overall Russian market, as well as the 2010 drought in Russia, and the weakness in the global grain market. Investing for the future. A comprehensive investment program has allowed the company to boost blended grain yields from 2.2 tons per hectare in 2011 to 3.5 tons per hectare in 2013, although the weak market led to revenues per hectare falling. A dry summer in 2014 cut yields to 2.9 tons per hectare. The company continues to invest and rationalize, although it remains subject to the vagaries of the weather and the international grain markets, which is likely to act as a restraint on the share price. Western Machinery Greatly Improves Efficiency and Harvest Yields
Source: Wikimedia
15 Russian Agriculture
Case study – Western investment: Rheinland Farm, Oryol Support and infrastructure are available. Eckhart Hohmann, a German businessman from a farming background, saw an opportunity in 2003 to invest in Russian grain production. His idea was not to be a passive investor but to develop a farm from scratch, using his experience of Western farming techniques. He had a very firm idea of the prerequisites for his investment – e.g. a supportive regional government, locally available infrastructure (particularly storage), good soil and acceptable climate conditions – and, after a dozen or so site visits to various parts of Russia, he found what he needed near the city of Oryol. Legal preparations relatively straightforward. The land he earmarked comprised 2,000 hectares (4,900 acres) owned by 1,500 individuals from nearby villages, each of whom had received a plot of land under the privatization program. Surprisingly, it was relatively straightforward to reach a deal with the villagers (a local lawyer did all the detailed work) and, after a period of land preparation, Hohmann began to sow in the spring of 2004, initially harvesting exclusively wheat. Investment attracted. He organized a company, which he named Rheinland, and managed to attract investors from both Russia and Britain. Western technology overcame local climatic problems. The main problem Rheinland faced was that while the Oryol region has rich soil – it is located in the famous ‘black earth’ area – and experiences poor precipitation. Accordingly, the only realistic way to improve yields was to use non‐tillage (moisture retention) techniques, which were virtually unknown in the region. Another key factor was the purchase of top quality Western equipment, such as a Claas tractor and Western sowing and cultivating equipment. His use of pesticides and fertilizers was also innovative in the region. Yields double the regional average. With the efficient use of his inputs and equipment, Hohmann managed to raise the yields on his farm to over 4 tonnes per hectare, compared with the regional average of around 2 tonnes. Over the time Rheinland has been in operation, Hohmann has gradually moved to incorporate other crops in the sowing mix, thus mirroring government policy, which is to encourage diversification. Use of modern techniques yields dividends. Through the use of modern techniques and management, close controls and discipline, Rheinland has become a model farm and a symbol of what can be achieved in the Russian grain sector. Hofmann is currently harvesting the 2015 crop and is anticipating a wheat‐barley yield of 5 tonnes per hectare, with rapeseed and soya at 2 tonnes per hectare each and maize at 8 tonnes per hectare. 16 Russian Agriculture
Caveat. However, things do not always turn out well … Case study – Ivolga World’s second‐largest landholding. The Ivolga agro‐holding is reportedly the second‐largest agricultural landowner in the world after China’s Beidahuang Group (5.4 million hectares); however, the group now faces bankruptcy. Diversified holding. Ivolga was founded in 1992, in Kazakhstan, by Vasily Rozinov. The original business was dedicated to trading grain but, like many companies which grew from trading beginnings in the 1990s, the company soon moved upstream, in this case by purchasing elevators. Then, faced with supply instability, the company decided to grow its own grain. Having its own fodder production, led to a move into livestock and meat production, and the company grew strongly over the years to its present size. A wide array of business interests. According to publicly available information, in addition to crop and livestock production, Ivolga is engaged in the processing of raw materials and the production of food products. The company also supplies agrochemicals and agricultural machinery, which it produces itself, and it manufactures plastic windows and construction materials. In addition, it has a network of storage depots, gas stations, branded stores, as well as its own airline, a newspaper ‘Kostanay News’ and the TV channel ‘TV Alau.’ Ivolga’s Kazakh operations sow about 700,000 hectares in the Kostanay region. Over‐diversification and mismanagement take a toll. The company seems to have lost its way through a combination of mismanagement, bribery, under‐management (an analyst at Aton investment bank said there were not enough skilled managers in the country to run such a large and complicated group), over‐
diversification and, quite simply, changing economic conditions. As things now stand, a number of creditors are taking legal action to recover debts, including Royal Bank of Scotland, which is owed some US$260 mln. Meat Production up in 1H15. Russian producers have significantly increased meat output in the first half of 2015. The production of meat and offal from slaughtered animals grew by 13.2% compared with the same period in 2014 and reached one million tonnes. The sector continues to be a priority for the government. Production and consumption rising. Average meat consumption per head is expected to be 74 kg (162 lbs) in 2015, compared with 98 kg (212 lbs.) in the US and a world average of 41 kg (90 lbs). During the Soviet period, the meat industry, although badly organized and inefficiently operated, was heavily subsidized, leading to developed world levels of meat consumption. The upheaval caused by perestroika put an abrupt ending to subsidies, and a rapid move to a market economy, which saw meat production and consumption plummet to near Third World levels. Recovery began in the early 2000s and continues. 17 Russian Agriculture
There is Still a Long Way To Go
Source: World Bank
Controversial plans for small livestock farmers. The government is proposing to cap the number of poultry, sheep, pigs and cattle Russians can own without registering as farmers. This is provoking an outcry as, despite the rise of industrialized agricultural production, smallholdings supply about 10 percent of the country's poultry and milk, up to 30 percent of its pork and about 50 percent of its beef. The measures are being described as designed to improve the tax take, but many smallholders view the proposals as being initiated by the agro‐holding industry, in order to reduce competition. Beef Production flat but beef imports have been falling. Domestic beef production is forecast to remain flat in 2015 at 1.37 million tonnes, but beef imports are forecast to fall by nearly 30% to 750,000 tonnes. Between July 2014 and July 2015, the price of beef rose 20%, in ruble terms, at a time of declining consumer spending. The current squeeze means consumers are turning towards cheaper meats, such as pork and poultry. But local production still cannot meet demand. Even at a time when cheaper meats are increasingly preferred, it is likely that imports of beef will rise slightly in 2016. USDA observers in Moscow estimate that domestic production can currently meet only 60% of demand. Quality improving. However, the proportion of high‐quality beef produced domestically is steadily rising, largely due to the efforts of the three biggest producers, Miratorg, Zarechnoye and Albif. 18 Russian Agriculture
Increasing focus on pedigree beef stock. A key driver in the beef sector is the initiatives to reduce the amount of beef from dairy cattle and to switch to rearing quality beef from pedigree stock. The Russian Union of Beef producers estimates that 88% of beef production is still from dairy herds, with only 12% coming from cattle specifically reared for meat production; however, this is a significant improvement on the estimated 2% of beef from pedigree stocks which was produced in the Soviet era and through the nineties – in fact, this low figure persisted until 2008. Substantial progress in quality beef production. The Russian Institute for Agricultural Market Studies forecasts that the production of pedigree beef cattle and crossbreds will increase by 10‐12% to over 420,000 tonnes in live weight this year; as recently as 2012, the total was only 280,000 tonnes, indicating a 50% increase in three years. Trend to continue. Observers see this trend towards quality continuing, given the incentives offered by the government and the clear demand for quality beef in the economy. Rapid development – now that a firm base has been established – would also reflect the experience of other countries, when moving to high‐quality production and decreasing the amount of beef taken from dairy cattle. Quality improves while overall herd declines in number. While the structure of the beef market, in terms of quality, is changing, Russian cattle herd is expected to continue to decline in 2015, following a pattern of more than 25 years. The reason for this expected decline is a smaller calf crop (due to fewer cows) in 2014, coupled with the steady level of slaughter necessary to meet consumer demand for beef. Unlike pig and poultry, where the lion’s share of the herds are at large‐scale agricultural establishments (77% and 80%, respectively), for cattle producers it remains small at only 45%, and the head count at these establishments actually fell in 2013. Live imports to fall short of estimates. Cattle imports in 2015 are anticipated to be lower (i.e., 70,000 head) than previous estimates after import volumes fell 25% in 2014. Breeding and genetics a priority for the government. Improving beef quality has become a priority for the government, which plans to spend RUB69 bln (US$1.1 bln) by 2020, to support the development of breeding and genetic centers and to increase the production of high‐quality breeding stock. Beef herd small by international standards. Industry sources report there were approximately 350,000 purebred beef cattle in Russia in early 2014; the most common breeds being Kalmyk, followed by Hereford, Kazakh Whitehead and Angus. Even so, the total number of beef cattle in Russia is only 1‐2% of the 30 million head of beef stock in the US. 19 Russian Agriculture
Case study – Inward investment, beef: Stevenson Sputnik Rancher comes to Voronezh. Darrell Stevenson, a cattle rancher from Montana, formed Stevenson Sputnik, with two Russian partners, in 2010, on 6,000 hectares (14,800 acres) of land near Voronezh, a town some 550 kilometers south of Moscow, in a region which is noted for its support of agricultural projects. Pedigree herd established. The company brought in by air and sea over 1,500 pedigree cattle, Angus and Hereford, from Montana, to establish a herd of pedigrees for the production of prime beef. The climate in Voronezh is similar to that of Montana, so the cattle had little difficulty settling in. The group has invested over US$18 mln into the operation, most of which was provided in the form of a subsidized loan from Sberbank. The size of the herd has now grown to 6,000‐8,000 and the company has begun a small amount of slaughtering, as demand in the market is so great. [Ideally, the herd would be allowed to grow further to obtain better economies of scale.] Modern techniques and best practice the key to success. Of vital importance to the success of the operation is the link Stevenson provides, not just to pedigree stock but also to best practice and the latest technology in rearing beef cattle. These factors have been instrumental in the farm’s success. Techniques such as artificial insemination and embryo transplant have contributed to the successful development of the herd and a particularly important factor is the fact that Western experts are brought in to supervise the accurate usage of these techniques. Case study, Domestic beef production: Miratorg, Bryansk Russia’s leading farm producer. Miratorg is one of the leading agricultural companies in Russia. Founded in 1995, the company initially concentrated on grain production and pork. By 2010, it had become the leading pork producer in Russia. Miratorg increased sales of all products by 28% in the first half of 2015, compared with 1H14, and has become the largest agro‐holding by sales in Russia. Substantial enterprise. Miratorg now employs 20,000 people and has four meat processing plants with a total capacity of 560,000 tonnes. Major investment in cattle farms and pedigree beef herds. Beef production presents a different, more substantial challenge than pork, in view of the long‐lead time to establish the industry. The company’s founder stated that it was only when the government took action to regulate the import of quality beef by imposing quotas that the industry obtained breathing space for development. Rapid growth, using imported cattle and expertise. In 2010, the company began to invest in cattle farms in the Bryansk region of Russia, where they built an integrated operation, planting fodder crops for winter feed. The company imported pedigree cattle from the US and Australia and recruited experienced cattle hands, mostly from the US. They herd has grown to over 110,000 pedigree cattle, with an intensive feedlot capable of handling 45,000 head. The company claims it now has the largest beef production facility in Europe. Investment starts to bear fruit. To date, the estimated total investment is nearly US$600 million (August 2015 exchange rate). The company is now beginning to see the fruits of its efforts, with beef production reaching a forecast 40,000 tonnes in 2015 and with plans to double output to 80,000 tonnes in 2016, of which 20‐30% is earmarked for exports. In 2015, the company announced plans to begin exports to the Middle East. 20 Russian Agriculture
Pork Production swings sharply from small‐scale producers towards industrial‐scale enterprises. Trends towards the development of an agribusiness industry in Russia are clearly seen in the pork sector. The National Union of Pork Producers estimates that by 2020, small‐scale producers will account for less than 20% of Russian pork production, down from more than 70% in 2005. Pig inventories fell more than 10% at private households in 2012. This trend continued in 2013 and 2014 with inventories falling another 12% on these farms. The largest players are expanding rapidly. The top three Russian pork producing companies Miratorg, Cherkizovo, and Agro‐Belgorye are all rapidly expanding production. Miratorg increased its production by nearly 50% in 2013. Cherkizovo, Russia’s largest meat producer (including poultry) increased its annual production by nearly 40% in 2014. State support to modernize the industry and boost output. Production levels at pork farms should be even higher in 2015 with the influx of an additional RUB75 bln (slightly more than US$2 bln) in government support payments from the state program, Pork Production Development in 2013‐15. Approaching self‐sufficiency. The rapid pace of development in the pork sector has reduced Russia’s imports of the meat from 33% of the market in 2010 to 13% in 2014. The expectation is that the market share of imported pork will fall to below 10% in 2015. The Agriculture Minister said recently that he expects pork production to ‘hit the ceiling’ within the next two to three years, paving the way for exports. But costs still high. Although many pork producers are excited at the prospects of an export market developing, Russian production costs remain high by world standards, even allowing for the recent ruble depreciation and the economies of scale in mass production. An estimated production cost of US$2.4 per kilo must compete with costs of US$1.8 in Europe and US$1.7 in the US. Poultry Substantial import market unlikely to ever re‐emerge. In view of the short lead times and relatively quick return on investment, the Russian poultry sector has moved quickly to industrial‐scale production. Russia is approaching self‐sufficiency in poultry meat production, with imports accounting for l5% of the market in 2014 and it is unlikely that a substantial import market will ever re‐emerge. Production up 8.6% YoY in 1H15. Production for the first half of 2015 across all categories of Russian poultry farms was 2.85 million tonnes. This is 8.6% higher (226 thousand tonnes more) than the same period last year. Food import ban accelerates self‐sufficiency. Imports totaled 450,000 tonnes in 2014, down from 520,000 tonnes in 2013. In 2005, the country imported 1.3 million tonnes, a fact which indicates the rapidity of the move towards self‐sufficiency. Currently, the food import ban is accelerating the decline in poultry meat imports, with a 70% drop for the first four months of 2015. Egg production. The production of eggs remains stable at around 40 billion units per year. Dairy Milk production stagnating. Russia produced about 31 million tonnes of milk in 2014, about the same output as 2013. The country has an estimated 80% self‐sufficiency in dairy products, although the sector used to be characterized by significant imports of butter and cheese. Under the influence of the food import ban, butter production is up 14% in the past year and cheese production is up 12%. 21 Russian Agriculture
Another sector disrupted by Perestroika. In 1990, the average level of per capita milk and dairy product consumption in Russia was 380 kg per annum, but this had declined to 250 kg by 2014. Capital intensive industry. Several segments of the dairy industry in Russia are heavily penetrated by foreign products. Before the current food ban, an estimated 37% of butter and 35% of dried milk was imported, with a high proportion of these goods coming from countries now subject to the ban. This should, in theory, make the sector a beneficiary of the import substitution program. However, the dairy sector is notoriously capital intensive and the waiting time for returns on investment are long. And given the high interest rates prevalent in the economy and the difficulties in raising loan finance, the sector is not in a position to respond quickly to the new opportunities. Dairy is underdeveloped by Western standards. Russia has about 8.5 million dairy cows, which produced 31 million liters of milk in 2014. The US has slightly more dairy cows (9.2 million), but produced nearly three‐
times as much milk (93 million liters) in 2014, indicating the underdeveloped state of the Russian dairy industry. But government paying attention. The Russian government intends to double the amount of subsidies going into the dairy industry over the next five years. Additionally, a new form of support is being introduced – compensation of direct spending on the construction of dairy complexes. Some EUR342 mln has been stipulated for this purpose between 2015 and 2017 and grants of up to 30% of the costs of constructing dairy facilities are on offer. Imports from Belarus continue. Belarus is a traditional supplier of dairy products to Russia, stretching back to Soviet times. The proportion of all imports in the dairy sector coming from Belarus ranges from 30 to 70%, depending on the product group. The heavily‐subsidized Belarus dairy industry now benefits from both the current food ban in place in Russia and its EEU customs union membership. Notable switch towards value‐added products. The milk import ban, coupled with the established inefficiencies in the sector, has created a shortage of dairy products, and countries such as New Zealand, Serbia, Argentina and Uruguay have moved to fill the gap left by Finland and other EU countries. A notable trend in dairy has been the switch to value‐added products, as the shortage of raw milk supplies continues. Thus, according to preliminary estimates, as of end‐2014 all types of cheeses recorded growth of 12%, oils, fats and dairy spreads increased by 14% and all kinds of milk powder rose by 30%. Large‐scale investment required to meet targets. The industry requires RUB600 bln (US$16.7 bln) in investment through 2020 in order to expand production and meet government aims of satisfying 90% of the population's dairy needs, according to the Association of Dairy Producers. It is planned to raise milk production by 20 % to 38 million tonnes, meeting 90% of Russia’s domestic needs in dairy products. Dairy Production Requires Large‐scale Investment
Source: Wikimedia 22 Russian Agriculture
Case study – Dairy: Russkoe Moloko Russkoe Moloko. Russkoe Moloko (Russian Milk) is a sizeable dairy operation, owning 23,000 hectares of land and producing 60 tonnes of milk per day. The company has over 9,000 head of cattle. Sales rising quickly. Since the introduction of sanctions against milk and milk products from certain countries, Russkoe Moloko has increased its production and sales by 15‐20%. The company uses state‐of‐the‐art equipment, imported from abroad, so the ruble depreciation has increased equipment and spare‐part costs considerably. However, the company intends to continue with its policy of using Western equipment, stating that the Russian variants are hopelessly inefficient or simply do not exist. Virtually the only Russian‐made items on the farm are large milk tanks. Profitable operations. The company claims to be one of the few operating profitably in the dairy sector and attributes its success to promoting organic products – which carry higher margins – and the vertically integrated nature of its operations, owning its own land, crop production, feed making units, herds, milking plant and transportation fleet. Resurrecting old production assets. Another interesting aspect of the company’s operations is that its expansion plans include the rehabilitation of old dairy units and pasture land, which were abandoned during perestroika. Russkoe Moloko views this path as a relatively straightforward way to increase production. Case study – Investment in milk products: EcoNiva Russia’s leading milk producer. EcoNiva, a German company, has now become the leading producer of milk in Russia. Having started from scratch, the company has built seven milk processing unit in seven years. EcoNiva boosted its output in 2014, as it raised production by 28% to 153,700 tonnes of milk, taking advantage of the vacuum created when some foreign competitors were forced out of the market by Russia’s ban on dairy imports. Prior to the ban, nearly half of Russia’s milk was imported and there is still strong competition from the Belarus dairy sector. State subsidies important to the sector. The head of the company’s Russian operations stresses the important and supporting role of the state subsidy program and the regional authorities in Voronezh. As a recent example of EcoNiva’s development, funding for the construction of a milk processing unit for 2,800 head of stock was raised through a loan of RUB1.25 bln (about US$20 million) drawn from Rosselkhozbank (Russian Agricultural bank) for a period of 15 years at 11.5% per year, a subsidized rate. 23 Russian Agriculture
Seed production and edible oils Sunflower seeds dominate but rapeseed and soya beans increasing in importance. Russia is a major producer of three types of crops used mainly in the production of edible oil: sunflower seeds, soya beans and rapeseeds. The 2015 harvest of these three crops is expected to be a record 13.9 million tonnes, with sunflower seeds accounting for 71% of the total, soya 20% and rape seed 9%. Crops into oil. Russia produces about 2.6% of the world’s total volume of vegetable oil. Production in 2014 reached five million tonnes. Traditionally, the market has been dominated by sunflower oil – until about 10 years ago, sunflower oil comprised an estimated 95% of domestic production. Since 2006, there has been an increase in the proportion of other oils produced, notably rapeseed and soya bean oil. By 2014, the share of sunflower oil in domestic production had fallen to around 80‐85%. Exports to stimulate growth. 2015‐16 should see further growth in edible oil production, although domestic demand is not expected to increase significantly, in view of the difficult economic conditions in Russia. However, the export stimulus, due to the weak ruble, should ensure that production levels remain high. Increased investment in crushing. In the past year or so, a lot of investment has been made in crushing plants, and oil producers are competing to ensure supplies, thereby bidding up prices. In early August 2015, sunflower‐seed prices of RUB22, 000 (US$343) per tonne were being quoted in the market, compared with RUB13,000 a year earlier (although at the then prevailing exchange rate that was about US$390). 24 Russian Agriculture
Case study – Solnechnye Produkte One of Russia’s largest producers with plans to ramp up output a further 50% in 2014‐15. Solnechnye Produkte is one of the top three producers of sunflower oil in Russia. In line with the rapid expansion of the market, the company plans to increase production in the 2014‐15 season by 50%, by bringing on line its new processing plant in Balakovo (Saratov Region). Solnechnye is working in partnership with Volga Terminals and the new plant has the capacity to process 590,000 tonnes per year. Shortage of raw materials hikes up prices, as some farmers hoard. A company spokesman said that the current shortage of raw material has pushed prices up in the market. Also, he believes that many farmers have been holding back on supplies, believing that even higher prices will be available going forward. This has led to processing plants operating below capacity, leading to the inefficient use of assets and a rise in fixed costs. 25 Russian Agriculture
Soya Cultivation area increased 30% in 2014 to meet demands of import substitution. Soya production is growing rapidly in Russia. In 2014, a record crop of 2.5 million tonnes was harvested, as the area under cultivation increased by 30% to 2 million hectares. The soya sector is developing into a model case for the government’s import substitution policy, as imports for the first three months of 2015 were 160,000 tonnes, compared with 280,000 for the same period in 2014. Concurrently, the weak ruble is making exports of Russian soya to China attractive, with some analysts believing that 150,000 tonnes could be exported to China this season. More scope for growth. Despite the production increase, the domestic price for soya has risen over 40% in the past year, indicating that there is increasing demand and still scope for further production increases. Rapeseed Gaining in popularity as a profitable crop. Rapeseed has been gaining in popularity and reputation as a profitable crop. As with sunflower oil, processors have been investing in crushing capacity and believe that local farmers will see the benefits of cultivating the crop. The 2015 harvest, however, at 1.2 million tonnes, is likely to be some 20% lower than that of 2014, due to several factors connected with the weather – an autumn drought and harvesting delayed by rain. 26 Russian Agriculture
Fruit and vegetables Potatoes Leading global producer. Russia is one of the leading global potato producers. Annual production figures for the past ten years have been stable at around 30 million tonnes (8.2% of world production). Russia imports only about 500,000 tonnes of potatoes per annum, the largest supplier being Egypt, with about 120,000 tonnes comes from countries impacted by the food import ban. At 111 kilos per head, annual consumption is high by world standards – twice that of France for example. Small‐scale farms and private plots dominate the sector. Production is mostly concentrated in small‐scale farms and private plots. Indeed, the share of potato production from large farms has been declining in recent years and is now estimated to be below 20%. Since Soviet times, potatoes have been a ‘family’ crop and many Russians who live in cities cultivate potatoes on their country plots (which is a huge resource: in Moscow, for example, about half the population are believed to have access to country houses (dachas), most of which are of modest size.) Staple Food. Potatoes dominate in the fruit and vegetable sector of food consumption, amounting to two‐
thirds of the volume of all other vegetables combined. In recent times, potato consumption has been declining as increasing disposable incomes contributed to diversification in the local diet. However, in the face of the current economic difficulties and increasing price sensitivity, the demand for potatoes as well as other staple vegetables is expected to rebound at the expense of meat, fish and other more expensive foodstuffs. Receives little state subsidies, mostly due to the structure of the industry. Given the structure of the industry, potato production receives little specific subsidies from the government – according to some reports, less than 1% of agricultural subsidies went into the potato sector in 2013. Although important to the population, the crop is clearly not seen by the government as being strategic, in the same way as grains or meat. Typical Cluster of Dachas
Source: Wikipedia
27 Russian Agriculture
Other fruit and veg Private production dominates. As with potatoes, a huge proportion (up to 70%) of fruit and vegetables consumed in Russia are grown on private lots. Most of the personal production is destined to be stored in a cellar or another cool place, or pickled, preserved and canned for winter consumption. Important market. The fruit and vegetable market was estimated to be worth US$400 million in 2013, ahead of dairy but behind meat. Import dependence. Approximately two thirds of all fruit and one third of vegetables consumed in Russia are imported. Long winters, a generally unfavorable climate over large parts of the country, the small share of land suitable for more extensive agricultural activity as well as transportation and storage constraints hinder significant expansion of fresh produce production. Turkey, China and Poland are the most important mport partners, while Moldova, Uzbekistan and Azerbaijan are also significant. Severe impact of food ban. The consequences of the food import ban are being strongly felt in this sector. Overall, fruit and vegetable imports were down 14% to eight million tonnes in 2014, when the food import ban had only been in place for four months. However, other countries are quickly taking up the slack; fruit and vegetable imports from Turkey rose 25% in the last four months of 2014. Trend towards market garden produce. Apples, bananas and citrus fruits dominate fruit consumption. Tomato, cucumber and capsicum consumption grew the fastest among vegetables in recent years, and this segment is expected to continue growing as Russians get more accustomed to greenhouse vegetables and increase their consumption during the off‐season. Tightening belts. In view of the expected increase in fruit prices and the drop in disposable incomes, Russians are expected to limit their non‐essential fruit spending to the most common fruits such as apples, bananas, oranges and mandarins. High supply chain fragmentation. Given both Russia’s size and the fragmented grocery retail market, distributors play a vital role in the fresh produce supply chain. A lack of adequate infrastructure both for off‐
season storage and for wholesale distribution are the major supply chain challenges. Poor infrastructure and transportation. Russian fresh‐produce farms and companies also lack adequate infrastructure for the sorting, storage and processing of harvests, with the result that some trade experts estimate that up to half of all harvests perish before reaching the consumer. Most of the storage and processing infrastructure remains from Soviet times. Household plots and small farmers are too small to gain the resources to invest in modern facilities. Dominance of retail. Modern retail dominates the sale of fruit and vegetables in cities. Elsewhere, open markets prevail. Outside major cities distribution is much more complicated and fragmented, modern retail is underdeveloped and open markets dominate fresh produce retail. As a result, customers are more price‐
sensitive and strongly prefer local produce. Different suppliers in different regions. Imports consumed in the European part of Russia come from Europe and the Middle East, whereas a large share of produce sold in Siberia and the Russian Fareast is imported from China. Flowers – almost all imports. Imported flowers rule the market and are sourced from a variety of countries, which account for up to 90% of the fresh‐cut flower market. Russia is the sixth‐largest fresh‐cut flower importer in the world behind the US, Germany, the Netherlands, the UK, and France. The Netherlands and Ecuador. Colombia, Kenya and Israel are the biggest suppliers to Russia, supplying 95% of imports. 28 Russian Agriculture
Leading agricultural companies According to recently published figures, in 2014, the largest agro‐holdings in Russia were the following companies: (US$ conversions at the 2014 rate) 1 Miratorg (pork, beef, grain) RUB74 bln US$ 2.4 bln 2 Cherkizovo (poultry, pork) RUB69 bln US$ 2.2 bln 3 Efko (seed oils) RUB61 bln US$ 1.9 bln 4 RusAgro (sugar, seed oils) RUB59 bln US$ 1.9 bln 5 Agro‐Belogore (pork) RUB58 bln US$ 1.8 bln It is interesting to note the prominence of pork production, a sector which has undergone rapid industrialization in recent years. Beef and seed oils are also gaining ground – rapidly in the case of oils and more slowly in the case of beef. Case Study – Mixed agriculture: RusAgro, Belgorod and Tambov Developed from a sugar trader to a vegetable oil producer. This primarily Russian‐owned company started in 1993 as a sugar importer. In a fairly common pattern in Russia, it recycled its trading profits to acquire domestic production assets in this sector, including factories and land, in the Belgorod and Tambov regions. From this base, it expanded into vegetable oils, as part of a process of using the crop rotation of its arable assets. Founded in 2003. The group of companies was established in 2003. It sold its oil and fat assets in 2006‐07 and invested in a modern pig breeding complex in Belgorod, where its arable assets were located. It listed ADRs in London in 2011. Founded by Belgorod politician. The company’s founder and main owner is Vadim Moshkovich – he represents the Belgorod region in the Federation Council, Russia’s upper house of parliament. Beneficiary of weak ruble and import substitution. RusAgro is a major beneficiary of ruble devaluation and import substitution, posting EBITDA of RUB18 bln (US$580 mln) on RUB59 bln (US$1.9 bln) of sales in 2014. It has 43% of the Russian cube sugar market, 6% of the pork market, 9% of the mayonnaise market and 49% of the margarine market. It has a land bank of nearly 0.5 million hectares, mostly in Tambov and Belgorod. Expansion plans. The company has expanded further in 2015 taking advantage of the weaker ruble for import substitution. It plans to invest US$735 mln in a large pig farm in the Far East of Russia. This will not only supply the domestic market, but will also provide exports to Asian countries. Planned capacity is around 79,000 tonnes of pork per year. The company is looking for other investment projects with a total potential budget of US$1.5 bln. 29 Russian Agriculture
Food import‐export market Major shift in import‐export trend can be expected. A substantial break from the ‘high import, low export’ trend can be expected following the imposition of the food import ban in August 2014, which is already showing through in radically reduced food import volumes. For example, EU agri‐food exports to Russia between August 2014 and July 2015 decreased 43% to EUR6.3 bln. However, Russia exports more agricultural products that is commonly thought. In 2014, Russia exported more than US$19 bln of food products, which is more than the figure for defence equipment exports (US$15 bln). The industry accounted for 3.8% of Russia’s total exports last year. The principal product groups for export are grain, fish and vegetable oils. While the gap remains large there is a steadily growing trend in exports. The proportion of food products in the overall export mix has risen from 1.6% in 2000 to 3.8% in 2014. However, the gap between food exports and imports remains huge, with Russia importing food products worth US$40 bln in 2014 (8% less than in 2013). Imports The EU remains by far the main source of food imports. Around 40% of Russia’s food imports last year came from the EU. A wide range of products are imported, mostly higher‐value processed foods, which helps to explain the large trade gap, as Russia exports mainly lower‐priced commodity foods. In 2013, only US$1.3 bln of Russia’s food imports came from the US, the leading product being poultry at around US$300 mln – but, for reasons discussed in this report, that figure is likely to drop sharply. The next product groups from the US were tree nuts, soybeans and live animals. German companies particularly hard hit by the food import ban. The current ban on imported foods is having a huge effect on the statistics for food imports into Russia. The annual value of banned goods from the impacted countries is estimated to be US$8.3 bln. German companies are particularly hit by the ban, with the Head of the German farmer’s union stating that German farmers have already lost EUR600‐800 mln because of the ban, representing a drop of 50%, a percentage which will undoubtedly rise if the ban persists. Exports The ultimate government goal goes beyond import substitution to becoming an exporter. The government is keen to go beyond the import substitution program and wants to see Russia become an exporter, not only of the basic commodities, such as grains, but also of more added‐value products – meats, dairy products (eventually) and other finished goods. There is even a certain excitement in official circles at this prospect, which relies upon an overshooting of domestic demand to provide goods for export. Leading industry figure calls for strong grain export push. Igor Babayev, the Chairman of Cherkizovo Group, believes that grain production in Russia could rise to 300 million tonnes per year, if modern production methods were adopted throughout the industry. He points out that the country could eventually export over 200 million tonnes per annum – assuming the removal of infrastructure blockages – which, at today’s prices, would produce revenues of around US$40 bln. 30 Russian Agriculture
Grain Exports Agriculture is only a Small Component of Exports
Source: State Statistics Service of Russia Grain surplus. Estimates suggest that 20‐25 million tonnes of the 2015 grain harvest will be exported. Some grain traders believe that exports could potentially reach 34 million tonnes, but point out that government policy will likely curb that potential. A complicated formula for calculating export duties on wheat was introduced on 1 July 2015, the overriding concern being to prevent excessive price inflation in the domestic marketplace. Russia’s regulation of grain exports depends on the availability of grain in the domestic market. As with domestic production, wheat dominates exports. After the disasters of the nineties, Russia is now firmly on track to maintain its new position as a major wheat exporter. World wheat exports 2014: 1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
US: Canada: France: Australia: Russia: Germany: Ukraine: Romania: India: Kazakhstan: US$7.8 bln US$7.2 bln US$5.4 bln US$5.3 bln US$5.3 bln US$3.1 bln US$2.3 bln US$1.3 bln US$1.1 bln US$0.96 bln (16.3% of global wheat exports) (15.1%) (11.4%) (11.2%) (11.2%) (6.4%) (4.8%) (2.7%) (2.3%) (2%) Source: International Grains Council The top two producers hold 25% of the wheat market. Russia’s biggest wheat exporters are International Grain Company (which is a subsidiary of Glencore) and RIF, both of which exported 2.5 million tonnes of wheat in the 2014‐15 season (July to June). Each company has about 12.5% of the wheat export market, with IGC having been the traditional market leader for several years, while RIF has come to prominence only in the past couple of years. 31 Russian Agriculture
Middle East and North Africa are key markets. The major importers of Russian wheat are Egypt and Turkey. Russian wheat sales are also making rapid progress in other markets, such as Mexico, Nigeria and even Peru. Wheat from the Black Sea area, which includes Ukraine, has taken 12% of the Mexican market this year, up from virtually zero two years ago. Large supplies of barley are delivered to Saudi Arabia, Libya and Iran. The geographical proximity of these countries to Russia contributes to the competitive advantage of Russian exporters, which also benefit from relatively low transportation costs. US traders feel the pressure. As exporters from Russia and Ukraine become better organized and the two countries’ currencies depreciate, the traditional leader in the grain export market, the US, is under considerable pressure. The US has seen its share of world grain exports drop from 50% in 1970 to under 20% today. Ruble weakness supportive. The average price of exported Russian wheat reached US$254 per tonne in 2014. When converted into rubles to cover domestic costs, this makes for an extremely attractive business. Edible oils Vibrant market. Although exports of vegetable oils from Russia have fluctuated significantly over recent years, the overall trend is undeniable exports expanded from only 50,000 tonnes in 2002 to 1.65 million tonnes in the 2013‐14 season. This latter figure was nearly twice that of the 2012‐13 season. Export volumes were also up considerably in the first nine months of 2014, even before the ruble depreciation made Russian oils even more competitive. Weak ruble encourages exports. This export trend will be supported by the weakening of the ruble, which is encouraging production aimed at exports. For example, in 2014 the average export price for Russian vegetable oil fell by 16.5%, making Russian oil more competitive on global markets. Aston becomes Russia’s leading producer by focusing on bulk sales. Aston is Russia’s leading exporter of edible oil, with an 18% share, followed by Yug Rusi with 15%. Aston was able to take the leading position from Yug Rusi – a much bigger company – by concentrating on developing markets for bulk sales, rather than selling packs of individual bottles of oil. Main markets. The leading markets for Russian edible oils are China, the Middle East (especially Egypt) and Turkey, which has become an important trade partner for Russia, trading its fruit and vegetables in return for Russia’s wheat, sunflower oil and barley. 32 Russian Agriculture
Equipment The fleet of farm equipment declined substantially YoY in 2014. According to the Agriculture Ministry, as of February 2015, there were 384,000 tractors in Russia, 171,000 seeding machines and 147,500 cultivators. The tractor fleet has declined by 18% since 2013, the number of seeders has declined 21% and cultivators are down 17%. This is a continuation of a long‐term trend, which has been in evidence since the early nineties (when there were over one million tractors operating in Russia). Modern Russian‐built Tractor
Source: Yandex Small tractor fleet by world standards. Available figures are somewhat dated (2009), but they indicate that Russian had one‐tenth of the number of tractors per square kilometer as the US – 27 units vs 271 (China has 81 tractors per square kilometer). Imports of equipment decline sharply. Equipment imports are also down sharply, with Western suppliers quoting the political difficulties and the ruble depreciation against the dollar and euro as the main issues. They also point out that even those companies which have embraced localization – by setting up assembly plants in Russia (which gives access to the subsidy system) – are suffering from similar problems, as such companies still have to import spare parts and other inputs for their machinery. The overall decline in sales of imports over the past year varies from manufacturer to manufacturer but is reported to be around 10‐15% on average. Purchases are down due to recession and difficulties accessing finance. Other factors impacting the decline in purchases of farm equipment are the economic recession, and the difficulty of accessing and servicing debt. Almost all new equipment purchases by Russian farmers are financed by bank loans or leasing. In addition to the need to pay high financing charges, the sector is also impacted by the performance of the farms themselves, so that in times of drought or delayed harvests, farmers are unable to service loans or pay leasing charges. This results in their equipment being confiscated by the financiers, who then try to recover what they can by onward sales. The farmers, of course, are not compensated for the money they have already laid out, which further compounds the problem. 33 Russian Agriculture
Definition of what constitutes an import is often clouded. The statistics are clouded by definitional problems e.g. exactly what constitutes an import, when foreign brands, although assembled in Russia, contain many parts that are directly imported. There are many factors which are persuading foreign manufactures to invest in Russian production, one of the key points being access government to subsidies under Decree 1432 of 2012, which sets out in detail the requirements to qualify for subsidies. Even established manufacturers are facing difficulties. Even companies with many years of experience of manufacture and assembly in Russia point to uncertainties in the market that are hampering further expansion. Financing problems encourage manufacturers to improvise. The financing problems are causing some manufactures to propose to their customers that the delivery of equipment will be paid for out of the proceeds of the harvest. This is a high‐risk strategy and equipment producers will be prepared to use the instrument only very selectively – but it is a pointer to the seriousness of the situation that these plans are being developed. Russian equipment accounts for only 28% of that used in agriculture. According to Rosagpromash, one of the country’s biggest equipment manufacturers, only 28% of the equipment used in agriculture is Russian‐made. There is an ongoing debate in the sector about the possible extension of subsidies to foreign manufactures, with the Russian equipment lobby arguing that many of these companies already receive subsidies in their own country and that if they were to be included in the Russian subsidy program, the competition would be grossly unfair. Imports vary between 30% for seeders to 100% for sprayers. The market share for imported equipment varies between 30% for seeding machinery and 100% for sprayers. Most of the imports come from Germany, France, Italy, the US and Canada as well as from Ukraine and Belarus. Equipment is frequently mishandled. Rosselmash, one of the biggest Russian producers of farming equipment, estimates that about 70% of farm workers misuse their equipment – often not even bothering to read the instructions – which results in significant losses at the cultivation level. China becoming an increasingly more significant player in Russia’s farm equipment imports. China was the third‐largest supplier after Germany and the US in 2014, increasing its exports to Russia by 18%, contrary to the general trend. Within the space of only five years, their machinery shipments to the Russian Federation have doubled to EUR140 mln. Around half of the import volumes from China are for soil working machinery and (smaller) tractors. 34 Russian Agriculture
Tractors Only 83% of the fleet is in working order. Of the 384,000 tractor fleet, only 83% are reckoned to be in working condition, so the effective tractor fleet in agricultural enterprises is 318,000 and the vast majority of these vehicles are well past their official working life. According to the Agriculture Ministry, 14,000 tractors were purchased in 2014, which was 7.5% fewer than in 2013. Imports from Belarus down sharply. In 2014, imports of new tractors from Belarus – traditionally the strongest supplier – decreased by more than one quarter, from 23,200 units to only 17,000 units. Plows – situation confused. The market for plows in Russia is influenced by a number of changing elements. For example, the debate between plowing and no‐till (or low till) operations is moving in favor of a return to tilling, as subsides for fertilizer and pesticides – both essential for no‐till operations – are reduced or withdrawn. This is despite the obvious success of enterprises such as Rheinland (see the case study on page 16). An Agriculture Ministry inventory taken at the beginning of 2015 showed that the number of serviceable plows in the country had dropped by 17% i.e. by nearly 23,000 units ‐ but reports from sales operations indicate that there has recently been an increase in the rate at which plows are selling. Tractor fleet is inadequate.. Whatever the number of plows operating in Russia, there is a clear imbalance with the number of operational tractors, with only an estimated 30% of the tractor fleet being able to operate a plow. There is a similar situation with other drag‐behind equipment, such as cultivators. Combine harvesters Source of controversy. Despite the obvious needs for improved efficiency in the harvesting sector and the entry of Russia into the WTO (which should lower import duties and quotas), the Russian government continues to take a protectionist stance with regards to imports of combine harvesters. Overall sales were around 6,000 units in 2014, but the government imposed a restriction on imports at some 424 machines, and administrative measures made sure that not even that quota was filled. Domestic brands grabbed market share last year. Increased domestic sales. Domestic brands strengthened their position from 53% to 59%, with Belarus considered to be an overseas country despite EEU membership, having a significant market share. Belarus brands increased market share. The retail sales of Belarus brands produced in Russia increased by 29% to reach 1,102 units, while their market share increased from 15% to 19%. At the same time, the sales of foreign‐brand combine harvesters assembled in Russia dropped by 18% to 730 units. The new Rosselmash Combine PCM‐161
Source: Rosselmash
35 Russian Agriculture
Note on US equipment exports to Russia Ukraine conflict dampens demand for US equipment. For most of the last decade, Russia and Ukraine have been leading dynamic growth markets. Annual growth for US agricultural equipment exports to both countries was well into double‐digits from 2004 through 2013 – 30.5% for Ukraine and 17.0% for Russia. As recently as 2012, Ukraine was the United States’ seventh‐largest export market, worth US$381.6 mln, ahead of ninth‐ranked Russia, at US$335.7 mln. Since the outbreak of the conflict between the two countries last year, however, US agricultural equipment exports have fallen precipitously — to Ukraine by more than 50% and to Russia by almost 25%. Given the character of the conflict and the damage it is inflicting on the two countries’ economies, it will be some time before these markets recover their previous vigor. Source: US International Trade Administration Agricultural inputs Some inputs still (relatively) inexpensive. Gasoline and diesel prices within Russia are low by world standards, so fuel inputs for farming are cheaper than in the West. However, many farmers complain that the cost of diesel fuel has doubled in the past few years. Modern seeds little used. There is a shortage of modern seed processing factories in Russia. The latest plant was built in the nineties and, for the most part, the industry uses Soviet technology. Moreover, an estimated 92% of the seeds used in the grain sector are taken from the farms’ own crops, with only 8% of seeds sown coming from modern, technologically advanced sources. Crops such as wheat, oats, peas and millet are dominated by domestic seed breeders, with consequent shortfalls in quality. In other segments, such as malting barley, corn, sugar beet, sunflower seeds and almost all commercial vegetables and potatoes, as well as horticultural products, etc. foreign seed varieties and hybrids are well established. Market responding. Recent reports suggest that new seed production capacity is being commissioned, with some twenty potential projects in the pipeline, with an estimated capacity of 250,000 tonnes per year. Paradox of fertilizer. Russia is one of the largest producers of mineral fertilizers in the world, yet Russian farms are amongst the lowest users of fertilizer. According to World Bank/FAO figures, Russia uses only 16kg of fertilizer per hectare (14lbs per acre) per year, compared with 131kg for the US, 198 kg for Germany and 647kg for China. Fertilizer manufacturers prefer to export … The low use of fertilizer in Russia can be traced back to the collapse in the agricultural sector in the nineties, which forced fertilizer manufactures to develop markets overseas. As a result, internal prices rose, leading to a spiral, which dissuaded farmers from using fertilizer. Currently 70‐90%, depending on type, of Russian produced fertilizer is exported, with the depreciating ruble offering further incentives to export. Fertilizer exports were worth US$9 bln in 2014. … but the government is putting pressure on producers. The Russian government is actively monitoring the fertilizer sector and has induced manufactures to offer discounts to farmers. Such discounts can range from 15‐20% to 30% in areas designated as challenging. 36 Russian Agriculture
Opportunities in the Russian agri‐business sector Market research Agriculture Ministry establishes a database for the sector. As part of overall government policy to increase food production, the Agriculture Ministry has established and continues to develop a database of activity in the agricultural sector. Farms have to report to the ministry on a wide range of topics – their activities, what crops they are planting and likely harvest figures, usage of materials, such as pesticides and fertilizers, equipment purchases and origins, rotation policies etc. The database which is being developed is still not fully comprehensive, but offers excellent insights into the whole of the agricultural sector. Our understanding is that the database is available for purchase from the Agriculture Ministry. Investment in production Food import ban creates opportunities in Russian agriculture. The effectiveness of the food import ban in Russia is creating real opportunities for local production. However, the agricultural sector as a whole is ill‐
equipped to take full advantage of these opportunities in the short to medium term, for reasons discussed earlier in this report (inadequate infrastructure, high financing costs, lack of modern equipment and techniques). Despite the political difficulties, the Russian administration has to face the reality that, if import substitution is to succeed as a policy, dramatic moves are necessary to improve the agricultural infrastructure in the country and to upgrade the technological base. This points to a huge opportunity for Western suppliers of machinery and equipment and other inputs. Promising opportunities for those investors willing to do their homework. Additionally, for investors willing to do the necessary research and preparation, there are some promising opportunities to enter the food production chain. There are many examples of how Western know‐how, management and technology can transform agricultural production in Russia (the Rheinland case study; 2,000 hectares of land now producing 10,000 tonnes of wheat and barley). Additionally, the rise in exports – once again largely due to the falling ruble rate – creates and increases hard currency revenues for crop producing companies. Abandoned land offers opportunities. Official government figures show that there was a total sowing area of 77 million hectares in Russia in 2011. This was down from 118 million hectares in 1990, a decline of 35% or 40 million hectares, which is equivalent to the entire sowing area of France, Germany and Spain. Much of this land is capable of being quickly brought back into productive use. Ruble depreciation encourages exports. Government policy has shifted in favor of a weak ruble, which is stimulating local production and exports. Russian wheat traders are even moving into markets where the US had been traditionally dominant – countries in South America for instance – and the likely continuation of cheap resources (land, labor, fuel) for grain production inside Russia should create favorable conditions for investors to receive hard currency profits from exports over the coming years. Packaging may offer unique potential. One possible easily‐overlooked opportunity is in the packaging industry. The stimulus here is Russia’s ambitions to export food products, which is attracting a lot of attention from officials. However, to export successfully, food products must have Western‐standard packaging and an attractive design, with clear labeling and quality wrapping. Packaging standards in the Russian market are often inadequate, and although consumers are demanding better quality all the time, if a major export push does come about, this will accelerate the move towards quality. 37 Russian Agriculture
Overseas partnerships offer another area of opportunity. Other opportunities will surely arise, if Russia does become an exporter of finished and semi‐finished food goods. Cherkizovo, for example, is looking for overseas partners, even though they admit that prices on the domestic market are currently more favorable. Nevertheless, their wish to form overseas links shows a growing confidence in an industry which has traditionally had no overseas outlets. Equipment supply Western equipment and technology comes at a substantial premium. As mentioned earlier, the vast majority of the Russian fleet of agricultural equipment is obsolete or obsolescent and Western manufacturers have a good reputation for quality, service and spare parts availability. However, they are much more expensive than their CIS competitors and the gap is not just the difference in equipment costs but in the whole ‘bundle’ of equipment, technology and technique, all of which goes to make Western equipment much more efficient. Refrigerated transportation and storage is an Achilles’s heel. The government’s drive for import substitution will have little impact if the issue of adequate refrigerated storage and transportation is not addressed. This sector represents a major opportunity for equipment suppliers. Localization to stay. The current emphasis on equipment production within Russia is unlikely to change quickly and could offer substantial opportunities to companies willing to follow the route already established by manufacturers from North America and Europe. The Russian government and (some) regional authorities are taking significant steps to attract inward investment and the message seems to be that, whatever the political difficulties, Russia wants to continue with its integration into the world economy. Financing is proving difficult, but where there is a will there is a way. A key point here is the availability of finance, as the stresses in the Russian system at present are making it difficult for farmers to take out loans for equipment purchases. One interesting scheme involves cooperation between a Western provider of seeds and crop protection and a major Western commodity trader. The trader pays for the seed company to provide high‐quality inputs and crop protection, but waits for his own payment from the farmer until the crop is harvested. With creative input from banks and other credit organizations, these models could be developed further. Seeds and other inputs Modern seed technology in short supply. Russia lags behind in seed technology and in the widespread use of modern seeds, which are able to resist disease. Analysts estimate that yields could be improved by 30‐40% through the effective use of modern seeds and crop protection measures. The equipment and technology used in Russia is obsolete, producing inadequate seeds, which result in lower production. There is an urgent need for modern seed production techniques to be brought on line (and, indeed, recent reports indicate that as many as twenty seed producing facilities have recently been built or are under construction). Expertise and know‐how Consultancy services are needed. This is possibly a controversial area, in view of the current political situation but there is a huge opportunity for the provision of advice, consultancy, know‐how and expertise to the Russian agricultural sector. As the sector moves increasingly towards large‐scale production, techniques developed in Western countries will be more and more sought after and the companies themselves will be in a better position to afford foreign expertise. Again, the example of Miratorg’s beef production operations Bryansk is a useful reference, as is the widespread use of Western equipment and processes in the pork, poultry and dairy industries. 38 Russian Agriculture
Appendix 1: WTO impact on agriculture Russia was admitted as a member of the WTO on 22 August 2012. Many of the agreed provisions and tariff changes affected the agriculture sector. Main tariff changes: ƒ
The average import tariff on food items will fall from 13.2% to 10.8% over an implementation period of up to eight years. ƒ
Dairy import tariffs will fall from 19.8% to 14.9%. ƒ
Grain import tariffs will fall from 15.1% to 10.0% over three years. ƒ
Imports on poultry have a concession period of eight years. ƒ
Wine imports will see the tariff cut from 20% to 12.5% within four years. Changes to the tariff structure and the way the state subsidizes the agricultural sector have been among the more contentious issues in the negotiations. The government has agreed to replace the current subsidy scheme with a new support program, starting from 2013. The main thrust of the changes is to move away from a broadly‐based subsidy scheme to a scheme more targeted at areas for growth. For example: ƒ
An end to the discounted sale of fuel to farmers, who have benefitted from a 30% discount on fuel costs, which saved the industry approximately RUB24 bln (US$740 mln) in 2011. ƒ
An end to the fertilizer discount, which totaled US$117 mln in 2011. ƒ
Milk subsidies will be raised from RUB10 bln (US$300 mln) to RUB12.5 bln (US$380 mln) as part of the program to raise standards in the dairy industry. Currently, only 20% of milk output and 50% of butter production complies with EU standards, according to the Agriculture ministry. Scope to raise subsidies. Russia is allowed to subsidize the industry by up to US$9 bln in 2013, although it will have this cut in half by 2018 to US$4.4 bln. Of course at the peak, Russia only ever spent just under US$6.5 bln (in 2008) on subsidies, so in actual fact the government has scope to raise spending for several years initially. The new subsidy scheme is forecast to cost RUB1.5 tln (US$46 bln) from the federal Budget and RUB770 bln US$24 bln from regional budgets, according to Finance Ministry data. The Agriculture Ministry had requested RUB3 tln (US$92 bln). Some subsidies are allowed. Subsidies also breakdown into two categories: ƒ
Amber Box – which are trade distorting ƒ
Green Box – which are not trade distorting. The limit on subsidies applies to the Amber Box category only. This is the category to which US$9 bln can be applied in year one, and which must drop to US$4.4 bln annually by 2018. Green Box subsidies are unlimited and include public spending on infrastructure, R&D, training, pest control, inspection services, marketing and promotion, and some targeted support for low income earners, etc. Basically, anything that is not directly price distorting. The trend worldwide is for governments to shift more and more to these Green Box subsidy schemes. 39 Russian Agriculture
Agriculture and food are high investment priorities for Russia Acceptance of US DAFS certification will ease the export of US meat to Russia. The other significant area of compromise is in the area of sanitary and phyto‐sanitary control. This has been a hugely contentious area of dispute between Russia and the US over the past two decades. Russia has now agreed to accept US DAFS certification for poultry and pork and to joint inspection for beef production facilities. This will greatly ease the export of US meat to Russia, raising competition for domestic producers. It will also be cheaper and, in theory, easier to import agricultural machinery into Russia. The average tariff for imported machinery will fall to 5.2% upon entry. Some items of big machinery currently have an import tariff of 15%. This will eventually fall to 5%. In practice, the import procedures will remain subject to difficult bureaucracy so many international manufacturers will still follow the lead of companies which manufacture machinery (e.g. tractors) in the US and then send the dissembled product to Russia where it is re‐assembled. In future, we are more likely to JVs between international manufacturers and local producers similar to those seen in the auto sector. Short‐term impact The short term impact on Russia’s agriculture will be negative. Direct fertilizer and fuel subsidies will be cut and replaced with targeted subsidies in specific areas. It will be positive for dairy producers, which will benefit from the shift to specific industry subsidies, but it will hurt other producers as direct costs and competition increase. Several Russian producers have already said that they will delay investment plans until they can better assess the impact of WTO membership. Long‐term impact Huge scope for improvement. The efficiency of Russia’s agriculture industry is only 50% that of the EU average and huge tracks of arable land remain idle. The ambition of the newly directed subsidy scheme is to raise agricultural output by 20% over the next seven years. The aim of the program is to boost domestic output across crops, grains, livestock and poultry and dairy and to make the product match the quality of imported goods. If successful, then Russia will cut its food import bill significantly and agriculture‐food production will rise as a percentage of GDP. It should also mean cheaper and better quality food products in Russian stores for the consumer. We should see more international partnerships. Building up the infrastructure to support the sector will mean irrigation and access roads. Manufacturers of farm machinery will not get the same broad protection as auto sector manufacturers, but we should see more JVs between domestic producers and established international brand manufacturers. 40 Russian Agriculture
Appendix 2 Summary Macro Trends: Russia – Base Case Forecasts 2000 2004
Key Indicators GDP, nominal, US$ bln
$251 $591
Growth, real, % YoY
10.0%
7.1%
Industrial production, real, % YoY
11.1%
6.4%
Private consumption, real, % YoY
Gross fixed investment, real, % YoY 17.7% 11.7%
Retail sales, % YoY
9.0% 13.3%
Budget balance, % of GDP
CPI ‐ year‐end, % YoY
CPI ‐ average, % YoY
PPI ‐ year‐end, % YoY
PPI ‐ average, % YoY
2009
2010
2011
2012
2013
2014
2015E
2016E
2017E
$1,299
8.5%
6.8%
14.3%
21.0%
16.0%
$1,660
5.2%
0.6%
10.6%
10.6%
13.5%
$1,219
‐7.8%
‐9.3%
‐4.8%
‐14.4%
‐5.5%
$1,478
4.5%
8.2%
5.1%
5.8%
4.4%
$1,950
4.3%
4.7%
6.4%
10.2%
7.2%
$2,010
3.4%
2.6%
7.9%
6.0%
5.9%
$2,000
1.3%
0.3%
4.7%
‐0.3%
3.9%
$1,850
0.6%
1.7%
1.0%
‐2.5%
2.5%
$1,328
‐3.5%
2.0%
1.0%
‐10.0%
‐6.0%
$1,314
0.5%
2.5%
1.5%
‐2.0%
0.0%
$1,390
1.5%
4.0%
3.0%
2.5%
2.5%
4.3%
5.4%
4.1%
‐5.9%
‐4.0%
0.8%
0.0%
‐0.5%
‐0.5%
‐2.5%
‐1.5%
‐1.0%
20.2%
11.7%
11.9%
9.1%
21.0%
15.7%
13.4%
14.1%
‐7.0%
21.7%
8.8%
11.7%
13.9%
‐7.2%
8.8%
6.9%
16.7%
14.9%
6.1%
8.6%
12.0%
17.3%
6.6%
5.1%
5.1%
6.8%
6.5%
6.5%
3.7%
3.5%
11.4%
10.0%
5.9%
5.5%
12.0%
13.5%
5.5%
6.0%
7.0%
9.0%
6.0%
5.5%
6.0%
7.0%
5.5%
5.8%
10.0%
5.5%
12.2%
5.7%
15.3%
8.6%
10.8%
6.0%
8.5%
4.4%
9.1%
5.5%
10.0%
5.0%
11.0%
5.2%
10.0%
10.0%
7.5%
7.0%
7.0%
6.0%
Social Indicators
Real disposable income, % YoY
Real wage growth, % YoY
Nominal monthly wages (RUB p/m)
Unemployment, % EOP
GDP Per Capita, US$'000*
$1,725 $4,118
Debt & Reserves
Foreign public debt, US$ bln
Foreign private debt, US$ bln
Foreign public debt, % of GDP
Total foreign debt, % of GDP
Forex reserves (ex gold), US$ bln
2008
1.4%
Commercial Bank Rates
Lending, average, %
Deposit, average, %
Trade & flow indicators
Trade balance, US$ bln
Current account, US$ bln
Current A/C % of GDP
FDI, gross US$ bln
Capital inflow/outflow, US$ bln
2007
11.9%
1.9%
1.9%
4.3%
0.4%
4.2%
3.3%
‐1.0%
‐6.0%
0.0%
0.5%
15.8%
11.0%
‐2.7%
4.4%
4.1%
8.6%
5.5%
1.3%
‐4.0%
‐1.0%
2.5%
13,600р. 17,100р. 18,800р. 21,100р. 23,500р. 26,700р. 30,000р. 32,600р. 36,000р. 39,000р. 41,000р.
6.5%
6.2%
8.4%
7.5%
6.6%
5.7%
5.6%
5.3%
6.5%
6.2%
5.8%
$9,206 $11,773 $8,639 $10,475 $13,830 $14,205 $14,035 $12,890 $9,210 $11,290 $13,400
$46.3 $60.0
18.4% 10.2%
$4.4
$9.4
$128.7
$76.6
5.9%
$55.1
$81.7
$179.7
$102.3
6.2%
$75.0
‐$132.8
$111.6
$48.6
4.0%
$36.5
‐$56.9
$151.7
$70.3
4.8%
$43.5
‐$33.6
$198.2
$98.8
5.1%
$52.9
‐$80.5
$193.3
$74.5
3.7%
$55.0
‐$56.8
$177.0
$33.0
1.7%
$78.0
‐$62.7
$186.0
$57.0
3.1%
$40.0
‐$154.1
$120.0
$40.0
3.0%
$25.0
‐$90.0
$150.0
$30.0
2.3%
$40.0
‐$75.0
$155.0
$40.0
2.9%
$50.0
‐$60.0
$46.4
$419.0
3.6%
35.8%
$465
$32.7
$452.0
2.0%
29.2%
$413
$44.3
$425.4
3.6%
38.5%
$417
$46.6
$442.1
3.2%
33.1%
$444
$49.3
$492.6
2.5%
27.8%
$454
$70.0
$567.8
3.5%
31.7%
$487
$76.0
$655.0
3.8%
36.6%
$475
$52.0
$545.0
2.8%
32.3%
$340
$50.0
$485.0
3.8%
40.3%
$320
$55.0
$500.0
4.2%
42.2%
$340
$65.0
$560.0
4.7%
45.0%
$360
$144.0
$98.0
57.4%
16.6%
$28
$125
RUB/US$, average
RUB/US$, year‐end
RUB/EUR, average
RUB/EUR, year‐end
28.1
28.8
25.6
24.6
35.0
35.8
24.9
28.2
36.4
38.0
31.8
30.0
44.2
43.8
30.4
30.9
40.3
40.8
29.4
31.4
40.9
41.5
31.1
30.8
39.9
40.3
31.9
32.9
42.3
45.3
38.6
61.4
51.5
72.0
62.0
70.0
68.0
78.0
67.0
68.0
74.0
75.0
66.0
65.0
73.0
72.0
Average Urals, US$ p/bbl
$29
$38
$69
$95
$61
$78
$109
$110
$108
$100
$55
$60
$70
Source: Federal Statistics Service, Central Bank of Russia, Macro‐Advisory estimates * Excludes the Crimean population and GDP contribution
41 Russian Agriculture
Recent research publications * Russia Macro Monthly: An economy badly in need of a fix (September 2015) Are we there yet? – Mid‐year economic and political review (August 2015) Exactly what is the New Norm? (July 2015) #realeconomik (June 2015) After a positive first quarter, what’s next? (April/May 2015) Revisiting the scenarios for the economy (March 2015) Will public opinion influence Kremlin policy? (February 2015) Russia special: Ruble is stuck between weak oil and a hard Fed (August 2015) St Petersburg Forum (June 2015) Capital markets update: Partying like its 1999 or 2009 … (April 2015) Deteriorating labor demographics (January 2015) Russia and geo‐politics: A different kind of war (December 2014) Ukraine: Dangerous conflicts (July 2015) Commodities: Oil market outlook & impact on Russia (January 2015) CIS Countries: Kazakhstan: A difficult balancing act (October 2015) Georgia: What to do when reality intrudes? (June 2015) Armenia: Country profile & macro update (May 2015) Turkmenistan: At a crossroads or, in a cul‐de‐sac? (April 2015) Kazakhstan: Country profile & macro update (March 2015) Azerbaijan: Country profile & macro update (February 2015) Eurasian Union: Initiation report (May 2015) Caspian Corridor: Inaugural Caspian Corridor report (October 2015) Sector Focus: Pharmaceuticals: The long road to localization (July 2015) Upcoming publications Country Reports: Iran Country profile initiation report (TBP October 2015) Mongolia Country Profile initiation report (TBP in October 2015) * Clients may request copies of any published reports via: jpn@macro‐advisory.com 42 Russian Agriculture
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