Rebuilding Russia's Coarse Grains Industry
November 01, 1996
by Teresa Acklin
Grain handlers, traders and feed users strive to create a new marketing system.
This interview with B. Keith Long, who is the U.S. Feed Grains Council director for programs in Central Europe and the former Soviet Union, was conducted and written by Jennifer Morrill, the Council's manager of communications. Mr. Long is responsible for creating and implementing marketing programs aimed at expanding purchases of U.S. coarse grains.
By Jennifer Morrill with B. Keith Long
The Council has been working in Russia for about 15 years. What was the decline of the market like in real terms?
It was as if your source of market information was gone. Overnight.
Imagine contacting your local merchandiser — only to find the (marketplace) is closed. Outraged, you might call your local trade organization — to find they no longer exist. Does this sound like a tall tale? That is what it was like to wake up in the grain business in post-Communist Russia.
I think we all remember the heyday of grain sales to the former Soviet Union. The 1970s-1980s were a period of massive exports to the former Soviet Union. (Exporters) had one customer in Russia, the government — which had money and did not care much about price and transportation or whether grain was fed or wasted.
But the central planning system imploded. Those remaining had to pick up the pieces and create a new way of surviving.
How would you characterize Russia's economic progress today?
There is a great deal of construction and renovation going on — churches, residential and commercial construction. There are no lines leading to markets. Instead, there is a range of markets from small specialized shops to larger, westernized stores.
There are many imported products in all categories — beverages, meats, cheeses, etc. It is common to see billboards for ... Coke, Pepsi, Planters snack foods and other consumer products. Typically, 70% of the food marketed in Russia is imported. Russia is the number-one destination for imported broilers from the United States — reaching 650,000 tonnes in 1995 — and the growth hasn't slowed.
Recent estimates based on World Bank figures put annual per capita purchasing power at U.S.$9,288, as compared to China's U.S.$3,992. That is not to say, however, that there is equal access for everyone in Russia or that changing the structure of the country is easy.
What is it like in Russia today?
I asked a young Russian businessman this question. He said men of his age realize they are living through extremely tough times, yet there is only one direction — forward. Whether speaking to grain traders or livestock producers, there is a growing attitude of seriousness, persistence and a determination to better manage their businesses.
Most poor, inefficient managers and producers are already bankrupt, having been driven out of business by a system that rewarded dependency rather than profitability. Now the flood of imported, high quality goods is a wake-up call. If companies are to survive, they know it will be in the world market. Many realize that pointing to the low price of imported meat as compared to domestic production is not the reason for the current crisis and will not solve their problems.
What will reverse the current situation are new management tools which focus on greater efficiency and profitability for those able and willing to recognize the opportunity.
In a sense you are saying that there are categories of people — those existing under difficult circumstances, and those who are creating the new system.
I think that is a fair characterization — there is a solid group of entrepreneurs. There are Russians committed to moving forward.
Do the entrepreneurs see the economic changes differently?
I like to tell the story of a man who is the director of a large swine operation. He describes the market collapse: "As general manager under socialism, with no market, I was a stable consumer of compound feeds and I had no headaches about how to market my products. We didn't think about prices, we were told what they were. And then one day we found ourselves in a market where old mechanisms didn't work anymore, and new ones didn't exist."
This man used to feed U.S. coarse grains to raise his hogs. Now he doesn't have the necessary knowledge or resources to access imported coarse grains because his middleman — the government — left the table. But he is a survivor. He now markets his hogs directly and has even opened his own stores.
There is a common theme in the stories of the survivors and the young entrepreneurs, and that is that chaos can lead to opportunity for those who see it.
With booming consumerism in Russia and an insatiable appetite for imported products, why is Russia not importing coarse grains?
There is a simple lack of market infrastructure. The directors of the two largest swine farms in Russia have said their feeding programs in the past were based on up to 50% maize. For the past two years, they haven't fed maize because there is no mechanism in place to facilitate purchases.
Over the past year, local grain prices have approached equilibrium with world prices, yet large purchases of maize still require financing and participation by companies with the capability and knowledge to handle, store and transport large volumes.
The growth of private trading companies in Russia will soon be capable of bridging this gap between supply and demand.
What is the state of the private grain trade in Russia?
The number of private traders is growing and providing competition for monopoly players like Roskhleboproduct and ExportKhleb. However, significant imports and credit programs are still controlled by ExportKhleb.
Regional feed manufacturers and private traders are integrating forward and backwards to gain competitive advantage in storage, handling, procuring, processing and marketing grain. Another development the Council has seen over the last two years is that grain companies are beginning to establish departments for market analysis, which is a major step in disseminating regional price information.
What does the Council see as the central obstacle to exporting coarse grains to Russia?
The absence of market structures is the largest obstacle to exporting to Russia. For instance, many new importers are not familiar with the marketing system in the U.S. and elsewhere. And they are not sure about grain standards, sampling and inspection systems, or how they can specify contract terms that relate to current standards in Russia in order to avoid discrepancies.
In the case of the U.S., credit programs have not responded quickly to changing conditions, which means the U.S. is not competitive with other suppliers of coarse grains. End users have been unable to get the information they need, and they are unsure of how to value U.S. feed ingredients.
That is not to mention the inherent difficulties that exist in grain storage and handling and infrastructure.
What is the Council's solution?
A program with one overall goal: rebuilding the grain chain — from facilitating imports to increasing poultry and swine producers' demand for U.S. coarse grains.
Give us an idea of what is happening in the poultry and swine industries.
The participants in Council programs reported that 1995 was the worst year ever. The annual 5% to 10% rate of decline in animal numbers and the number of farm closures seem to have leveled-off. With rising input costs and competition from meat imports, some of the larger hog operations have been challenged.
But there is another phenomenon. Many private producers are taking over herds from state and collective farms. These private producers are raising hogs under less intensive methods. That means longer feeding times and greater reliance on low-cost or free feed ingredients. Pork quality is being sacrificed for price.
The poultry industry is in a similar state — the domestic industry is fighting against the sea of finished product imports. There has been an increase in the use of Western genetics, which will necessitate higher energy rations to maximize the potential of broilers, and the sector is more likely to use imported coarse grains because production is centered in large industrial operations.
How is the Council building demand in these sectors?
The Council operates the U.S.F.G.C.-Intenskorm Business Training Center in Samara, Russia. Here we offer seminars that cover business management and aspects of grain trading and technical programs in feed milling, animal nutrition and management.
The graduates of our programs come from all over Russia. Typically they are the notable exceptions — the movers and shakers in a sector which is seriously depressed.
What about rebuilding the grain chain?
Late in 1993, President Yeltsin initiated the liberalization of the Russian grain market by issuing a decree that allowed the distribution and sale of government-owned feed and flour mills and grain elevators to the private sector.
The Council saw the opportunity to influence the development of a free and open market, which could benefit U.S. grain exports, by organizing a committee to support and protect the interests of the growing private sector.
About six months later the committee decided to establish the Russian Grain Union, the first association of private grain trading companies in Russia.
Who can join the Russian Grain Union?
The R.G.U. began in 1994 with about 25 companies, mostly grain traders, brokers and organizations active in the market. Most of the original companies were Moscow-based.
Today, there are more than 85 companies, from all over Russia and multi-national companies, which have joined the R.G.U. Several regional offices have been established to meet the needs of members and to provide information on regional grain marketing. Annual membership dues are U.S.$1,000, for which members receive weekly and monthly market information and an annual directory.
The R.G.U. is working on arbitration policies that are consistent with Russian law. Seminars and other training programs are offered to members, too; the next one will address grain quality and the differences between U.S. and Russian grain standards.
What has the Russian Grain Union achieved?
The R.G.U. is eliminating constraints to free trade. For example, a large U.S. grain trading company (and member of the R.G.U.) was prohibited from moving grain from the region of origin to another site. This was illegal under Russian law, and it created an enormous obstacle for the exporter. The R.G.U. brought this to the attention of the Prime Minister of Agriculture and the Director of the Anti-Monopoly Committee of the Russian Federation; the trade restriction was reversed, and the grain was able to move.
President Yeltsin's Advisor on Economics has also recognized the importance of the R.G.U. He instructed the Federal Commission on Stocks and Bonds to use the R.G.U. to prepare a proposal for the development of a warehouse receipt program.
These are recent examples. Maybe small victories, but the R.G.U. is growing and progressing. It is now well on its way to becoming a self-sustaining entity with a growing presence in the market.
How do you see the U.S. export market in the near term? What's possible?
This summer, the Ministry of Agriculture forecast Russia's grain imports at 3.5 million tonnes, mostly maize, soybean meal and milling wheat. Then the number was raised to 4.5 million tonnes. It's interesting to look at the motivation for the forecasts — are they serious about returning to the market after such a long time, and are they looking West?
Although Russia's (1996) grain harvest was significantly better than in 1995, it will be the lowest harvest of the past 20 years. Carryover stocks are low, and they will have a difficult time importing significant quantities from neighboring countries in 1997. The Russian Far East and northern areas are importing coarse grains already to sustain animal production, which points to the growing demand for coarse grains.
We know that the Russian Ministry of Finance intends to assist in financing grain imports; to what extent isn't known. And then the role of the central government versus the involvement of the private trade will be debated. For the first time — through the R.G.U. — the private trade will be able to provide market information and lend its voice to that debate.
It is foolish to think Russia will ever return to the artificially high purchases of the past. But with a growing private trade and programs that are stabilizing the market structure, it is safe to say they will be significant customers again.
The U.S. Feed Grains Council is a non-profit organization that promotes the use of U.S. maize, barley, sorghum and related products worldwide. The Council receives support from coarse grains producers in 22 U.S. states and from leading agribusiness firms. In addition, the Council receives funding for its programs in Russia through the U.S. Agency for International Development/IREX Partnerships Project.
A range of consumer goods is available in Russian markets. These ready-to-eat cereals were produced in Russia, but about 70% of all food products are imported.
Russian grocery stores today are well stocked, in marked contrast with several years ago when shortages were common and queues were long.