For many Canadian grain growers, this year’s weather concerns, disease pressure, high input costs, and low crop prices made it seem like we’ve already been facing the perfect storm. However, there is an even bigger threat on the horizon — Russia.
In the first week of October, while most Canadian growers were still busy with harvest, three reputable international organizations warned of the impact Russia will have on grain markets, not only this year but, because of the bumper Russian crop, for the long term too.
On October 6 the Agriculture and Horticulture Development Board, Cereals & Oilseeds Division, (a United Kingdom agency, funded by a statutory farm levy and independent of government and commercial industry) issued the statement: “Russian grain crop exceeds expectations.”
This board’s purpose is to increase the competitiveness and sustainability of U.K. farmers by providing factual, evidence-based advice, and it predicted this year’s harvest of 117.2MT would be the biggest in Russia since 1978.
Wheat will be the primary driver of the increase, and the board predicted Russia will harvest 70.8 MT this year. Given this scenario, Russia will be looking to export a record amount of grain, including an estimated 30.4 MT of wheat alone.
- Read more: Russia’s (grain) strengths… and weaknesses
The board warned Russia will be an aggressive seller of wheat throughout the year, and that it will be looking for new markets in countries like Algeria, Morocco, and throughout Southeast Asia.
On the same day, Bloomberg, the financial, media and business conglomerate, published an article entitled “Russia Becomes a Grain Superpower as Wheat Exports Explode.” Bloomberg News reporter Anatoly Medetsky has been following the rapid growth in Russian agriculture, and he wrote: “Last season, Russia topped the U.S. in wheat exports for the first time in decades and is expected to extend those gains to displace the EU from the top spot this year, according to the U.S. Department of Agriculture.”
In the article, Medetsky listed the reasons why Russia is now dominating world wheat trade, including its soaring wheat yields, productive soils, favourable climate, government support, privatization of land ownership, the 45 per cent drop in the ruble, and especially its very competitive cost-of-production and movement of grain to port.
Even at that, Medetsky said, Russion ag minister Alexander Tkachev was telling President Vladimir Putin he was expecting the crop to grow another 20 per cent within a decade.
“Investors from local farmers to billionaire tycoons are pumping money into the business,” Medetsky wrote.
Blockbuster AEGIC report
That same week, I received the Australian Export Grains Innovation Centre’s new study on Russia’s wheat industry. The findings in this comprehensive report endorse and expand on the above report.
The conclusions are also worrisome for Canadian farmers.
According to AEGIC, Russia has become the biggest grains producer in the Black Sea region, an area which has now captured 30 per cent of the global wheat trade.
In just 15 years, Russia has gone from being a net importer of grains to one of the world’s biggest exporters of wheat, barley and sunflower oil.
The first reason for this is that Russia is a low-cost producer. The report states: “The total cost of producing a tonne of grain, delivering it to port and loading the grain onto a ship is about AU$124 less in Russia than in Australia.”
“As at mid-2016, Russia’s supply chain costs for wheat are estimated to be AU$56/t, with pre-farm gate production costs of AU$121/t. This gives Russia, along with its similarly competitive Black Sea neighbours, a powerful competitive advantage against Australia and North America when targeting price-driven markets.”
Since late 2012 the export price for Russian wheat has trended downwards from above US$350/t to below US$200/t, the report said. At prices below US$200/t, the report adds, Russian farms are still profitable, mostly due to the devaluation of the ruble since late 2014.”
Land waiting to be farmed
Costs are lower throughout its production and export chain. First off, land is significantly less expensive in Russia. In fact, there is an abundance of arable land. “As of December 1, 2015, the unused arable land area was 19.7 m ha, of which 1.8 m ha had not been used for two years; 8.6 m ha had not been used for between two to 10 years; and 9.3 m ha had not been used for more than a decade,” the AEGIC report found.
Russia also has over 115 MT of grain storage, about 10 per cent more than the country’s average annual production. Storage is almost evenly split between on-farm and commercial capacity, and is continuing to expand with construction in the feed industry as well as at port terminals. “Since 2010, the construction of new storage has outpaced the retirement of obsolete storage by the ratio of 1.5:1,” the report states.
Most export grain production occurs in southern Russia with a relatively short haul to major Black Sea ports. Overall, 70 per cent of the transport of grain is by truck, and with more than 1,200 inland elevators in Russia, the costs of movement to export position is lower than in Australia or Canada.
Labour costs are also significantly lower in Russia.
The report also notes that Russia has become the price setter in international wheat markets because the Russian grain harvest usually starts earlier than in other major exporting countries, putting downward pressure on global wheat prices.
Location, location, location
Another factor enabling Russia to be the low-cost exporter is its proximity to Egypt and Turkey, two of the biggest wheat importers in the world. Russian Black Sea terminals give it easy access to all of the MENA (Middle East and North Africa) region with a distinct freight advantage over its competitors (including Canada).
Currently, Russia’s wheat exports to China are very limited due to the long distances wheat would have to be shipped by ocean. However, the report also suggests an interest in creating a Russian rail link into China/Southeast Asia. While this is unlikely in the short term, if such a link is developed it could have an impact on both prices and volumes of Canadian and Australian exports to China.
China would also like to see such a rail link developed to mitigate its own food security concerns. The country is already pursuing closer agricultural ties with Russia. China recently signed an agricultural free-trade zone agreement with Russia valued at US$2 billion. As well, in 2014 the Chinese state grain agency COFCO acquired a US$2.7 billion stake in Noble Group and Nidera, both of which trade Russian grains.
The AEGIC report also points to renewed interest by the Russian government in agriculture. “The collapse in energy prices has turned the Russian government’s attention to agriculture as a key element of a more diversified economy. In addition, regional geopolitics have intensified the focus on food security and self-sufficiency.”
The report highlights three specific programs the Russian government has implemented to promote agricultural growth, including long-term planning and funding, crop insurance, and biotechnology.
The report states: “During 2012, the government formulated a plan for the 2013-20 period, with food security as its underlying goal. The plan comprised several mini-goals of increasing (i) food production by 21 per cent, (ii) processed food production by 35 per cent and (iii) investment in agriculture by 42 per cent. The Russian government allocated 1.5 trillion rubles (US$23 billion) to this plan. Most support has been directed at livestock production.”
The report also predicts less government interference in grain marketing through the use of export bans and taxes as production rises and food security issues decrease. This will moderate the volatility of global grain prices that resulted from such actions.
As a result of Russia’s expansion, AEGIC paints a rather grim picture for wheat growers in Australia, saying that increased grain production and exports from Russia are likely to lead to increased competition in Australia’s key grain markets and, ultimately, lower farm gate prices for grain and a reduced incidence of Russian policy-induced price spikes.
“Unlike the situation in the 20th century, Australia now faces competitors with significantly lower cost bases than its own,” the AEGIC report states. “Moreover, in Australia, Europe and North America additional wheat production must principally come from yield growth or at the expense of an alternative crop, whereas Black Sea countries have similar opportunities plus swathes of arable land into which wheat production can expand. One of the Russian government’s aspirational targets is to grow its wheat production by as much as 25 million metric tonnes over the next decade.”
As it is, the USDA is already having to revise its Russian projections upward, and it looks like it will continue to do so.
Still, if there is a bright spot for Canadian wheat, it is that Russian wheat is primarily lower grade and medium protein. It is not as suitable for western-style bread or Asian noodles.
So to protect Canadian wheat markets we need to focus on growing high-quality wheats our customers want and providing superior service to those markets.
Grain companies invest in Russia
While the growing dominance of Russia in the world grain trade may be news for Canadian farmers, it isn’t to the global grain trade. Major grain companies have made large investments in Russia since the fall of the Soviet Union.
Archer Daniels Midland began trading grains in Russia in 1980.
Bunge established a subsidiary company in Russia in 2004. It acquired elevators and a grain terminal as well as building a sunflower seed refinery. It has already captured over 12 per cent of the Russian bottled vegetable oil market.
Cargill has been exporting grain from Russia since 1998. It has invested over US$1.1 billion in Russian infrastructure including elevators, terminals, sunflower crush plants, animal nutrition processing, and a chicken processing plant.
Louis Dreyfus in 2013 announced its intention to expand grain storage from 1.4 to four million tonnes of grains in Russia over four years. In 2015, that expansion started with the purchase of the Azov Grain Terminal.
Glencore has acquired farms and storage facilities in Russia since 2007.
Olam International Ltd. entered the Russian market in 2005 with its Outspan International Ltd.,and since then has become one of the biggest suppliers of raw and semi-finished products to the Russian food-processing sector. As well, it has invested in a port facility and in dairy farms in Russia. Its goal is to grow its Russian dairy operation to a milking herd of 50,000 head.