CIS Regional Review: Agriculture plagued by infrastructure challenges
August 01, 2008
by World Grain Staff
The huge potential of agriculture in the Commonwealth of Independent State (CIS) places massive demands on infrastructure. At every stage of the agricultural chain, there is a need to develop the facilities to make it happen. There are some things only governments can do, say the experts.
"The biggest problem or challenge is the problem of infrastructure, (such as) wagons, unloading and offloading capacity, railways, railway tariffs and general railway policies, roads, futures markets," Dr. Dimitri N. Rylko, general director of the Moscow, Russia-based Institute for Agricultural Market Studies (IKAR), told World Grain. "All types of service to productive agriculture need to be updated."
A start has been made with the futures market. On April 9, 2008, the Russian National Commodity (Mercantile) Exchange (NAMEX) began trading, and it is hoped that it will serve Russia, Ukraine and Kazakhstan. However, it’s not the first attempt to get a futures market up and running. The others failed.
"The futures are just starting," said Rylko. "We need to prove it. We need to test the delivery system. We need to test the guarantee system. We need it to go through storms to make sure it works."
There is also a need to make sure that everyone involved understands what a futures market is and how it works. "We need to train hundreds of people," he said.
Other problems exist such as the lack of agricultural and other machinery and facilities, but he sees them as less important. "In my view, this is rather a secondary issue which private industry could address," he said. "We have sufficient government support for private industry, at least in Russia and Kazakhstan, to solve these problems. Infrastructure is too big a business for private industry."
Farmers are trying to deal with the problem. According to Russian M inistry of Agriculture forecaasts quoted by the U.S. Department of Agriculture (USDA) attaché in Moscow, faarmers there will buy 23,000 tractors, 77,900 grain harvesters, and 3,000 forage harvesters in 2008. The capital of the state agrarian and leasing company Rosagroleasing will increase by 8 billion rubles.
There are $1.6 billion in subsidies to compensate for part of the interest on the purchase of agricultural machinery. "Within the next five years, producers plan to renovate or replace 40% of the tractors, 50% of the grain harvesters and 55% of the forage harvesters operated in the Russian Federation," the report said. "By mid-March, 78% of tractors were reported as operational, plows – 81%, cultivators – 82%, and seeders – 78%, which represents a 2% to 4% increase over 2007."
There has also been an increase in domestic production of machinery. "In 2007, Russia produced 36.3% more plows than in 2006, 38.6% more seeders, and almost three times the number of mineral fertilizer spreaders," it said. "However, farmers continue to purchase imported machinery, including tractors and harvesters, at an increased rate."
On the processing side, the marketing of all agricultural crops became a serious problem after the collapse of the former Soviet Union’s centralized ordering system, Ray Moule, a British agricultural consultant which has worked for many years in the CIS, told World Grain.
"Everybody had to sell what they produced," he said. "The mills were a bit cute and they grabbed control of some of the storage facilities. Anyone who’s got control of storage facilities was able to control the market."
The collective farms tended not to have much storage; just enough for saving seed. "Farmers were desperate to store grain," he said. "The elevators were able to put pressure on everybody. They were able to charge high rates to take grain in."
The flour mills struggled. "A number of large mills started to go bankrupt," he said. "You got the proliferation of mini mills (often of Turkish origin). In every town you got two or three of these mini mills producing flour. You got a proliferation of flour which was not something you were seeing there before."
The problem was that these mini mills did not have the economies of scale to make enough money to grow. "They tended to remain as mini mills until the late 1990s, when large investors came in and started to get investment in larger mills," he said.
OILSEEDS PROCESSING SECTOR
In the oilseeds sector, big crushing plants dominate the Russian market, according to the most recent annual attaché report on the sector. Between 4 and 5 million tonnes are crushed each year by large modern enterprises.
"Nearly 35% of crushing takes place in small industrial crushing plants," it said. Their average crushing capacity ranges from 40 to 140 tonnes of sunflower seed per day.
"However, the number and role of these crushing plants are diminishing," it said. "Approximately seven holding companies dominate Russia’s oilseeds crushing industry, among them Jug Rusi, Solnechnye Producty, Efko, Aston, NMZhK, WJ and Russkiye Masla."
Russia’s feed imports, especially soybean meal, are expected to rise sharply because of a 10% increase in poultry production as economic growth makes it possible for consumers to upgrade their diets, according to a report published by the USDA earlier this year. "Growing consumer incomes are also contributing to a rise in vegetable oil demand," it said. "With the shortfall in sunflower seed production in 2007, demand for alternative oils, like soybean oil, is especially strong."
"These two factors are already pushing soybean imports higher for the year," it said. "Imports are expected to approach 300,000 tonnes, an eight-fold rise from the previous year."
Ukraine also has a highly concentrated oilseeds sector, said Dmitriy Tarasov of vegetable oil producer and processor Kernel Ukraine. Kernel is involved at every stage, from farm to the bottling of oil. It is the largest producer and marketer of bottled oil in Ukraine with an estimated domestic market share of 35% under the brands Shchedryi DAR, Stozhar, Chumak Domashnya, Chumak Zolota and Lyubonka. It is also the country’s second largest crusher, processing about 15% of the sunflower crop, and the third largest bulk sunflower oil exporter.
"Mostly these are big companies," he said. "Kernel is one of the biggest. Bunge and Cargill are our main competitors." High prices are taking their toll on the smaller processors. "It is doubtful there will be any small companies left, because this year seeds are very expensive and few companies can buy them. Only big companies can buy them."
Flour production in Ukraine has been limited by the harvest and the government’s controls on bread prices. Compound feed production has risen steadily since 2001-02, probably due to the expansion of poultry production, according to the attaché there.
In its June Grain Market Report, the International Grains Councils (IGC) noted strong growth in the flour purchases of the CIS countries since 2001-02, with 2007-08 imports expected to rise to 2.1 million tonnes. "Wheat export measures in Ukraine and Russia led to sharp increases in their shipments of wheat flour, over two-thirds of which were purchased by CIS countries, including Georgia and Moldova," the IGC said. "However, imports by the region’s two biggest buyers, Uzbekistan and Tajikistan, mostly secured from Kazakhstan, are estimated to have fallen slightly in the past year."
It expected Kazakhstan’s wheat flour exports in 2007-08 to fall slightly to 1.9 million tonnes from 2 million the year before. "Due to a stronger-thananticipated pace of shipments in recent months, the forecast for Russia is lifted by 50,000 tonnes to a record 550,000 tonnes," it said. That compares with 322,000 the year before.
Kazakhstan also has infrastructure problems. In a report earlier this year, the USDA attaché called the country’s ambition to export more than 10 million tonnes of grain during 2007-08 "unrealistic," because of a lack of railroad cars. "According to the grain traders, at the end of December about 30 trains full of Kazakhstan’s wheat spent several weeks waiting to unload at Ukrainian ports due to insufficient storage," the report said. "Bad weather in the Russian ports on the Azov Sea also slowed the return of grain cars." Slow exports by Russia and Ukraine would help alleviate the situation by clearing port facilities for Kazakh grain, while the government had applied to Russia to rent-free grain cards.
Chris Lyddon is World Grain’s European editor. He may be contacted at: email@example.com.
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