In the 21st century, Russia has transformed itself from being a net wheat importer to ranking first in the world in wheat exports two of the past three marketing years. The Eastern European country, which has nearly 8% of the world’s arable land and plans to bring even more into production, has without question become a major force in the global grain market.
Since its inception 26 years ago, the Russian Grain Union (RGU) has played an instrumental role in Russia’s rise in prominence in the grain sector. Over 50% of the members of the RGU are grain producers and enterprises for the storage and processing of grain. Grain market operators, including infrastructure organizations, make up 25% of the total number of members of the organization. The members of the RGU, taking into account regional grain unions, provide about 20% of the production of Russian grain, more than half of the production of flour and animal feed, two-thirds of the market turnover of grain and over 90% of exports of grain and its processed products.
To date, the RGU has certified 112 enterprises in 27 regions of the Russian Federation. Total grain capacity of these enterprises is more than 10 million tonnes, including grain elevator capacity of 6.8 million tonnes.
World Grain recently interviewed Alexander Korbut, vice president of the RGU, to get his perspective on the current state of the Russian grain sector and its prospects for the future.
WG: How would you assess the results of 2020?
Korbut: From production point of view, this year was quite successful. We have seen a slight decline in corn production, but the overall harvest is still high at 131 million tonnes, including 83 million tonnes of wheat and 21.5 million tonnes of barley. These are outstanding results. This year we have also had comfortable prices. They were solid and sustainable. We have not had a slump in prices, as it often happens at the beginning of the harvesting campaign. These prices are encouraging production growth and investment inflow. We have already seen a result of this in the autumn sowing, although there are certain risks associated with drought, and they have already begun affecting the market.
WG: How has the COVID-19 pandemic impacted the Russian grain industry?
Korbut: Grain production is an inert industry. From my point of view, the pandemic has brought no direct impact on the grain industry. Some transport restrictions were put in place, and access to some markets was temporary limited, but unlike fruit or vegetable production, we have no need in the additional workforce, so we managed to handle this situation smoothly.
WG: How’s the Russian grain export picture looking?
Korbut: If we talk about this season, export supplies are robust. We have already exported 18.3 million tonnes of new-season grain, and I’m pretty sure we would be able to push this figure to 19 million tonnes, and possibly even beyond. Our export machine works properly, despite the drought and some production decline in the Russian south.
WG: How did the Russian government’s grain export quotation affect supplies?
Korbut: Just like the pandemic, the export quota introduction has affected the Russian grain industry positively. The unfavorable weather conditions in France, as well as in several other countries, have undermined the European ability to export wheat. All in all, in the first half of the season, Russia has remained the only one big grain supplier on the global market. Quite a few countries are concerned over new coronavirus-related restrictions and target to establish certain grain reserves. This factor drove the export prices up. We are delighted with the export prices because, on 80%, they are transferred to the domestic purchasing prices. The quotas played primarily a psychological role. Among other things, the authorities targeted to constrain the domestic prices with these quotas, but quite the opposite happened — there was a price hike.
WG: What do you think about the government’s plans to introduce new quotas in 2021?
Korbut: The new quotas we promised are acting in the same way — they stimulate customers to place orders for as long as there are no guarantees that the grain would be available in the future. The plans currently under discussion envisage the quota introduction already from Jan. 1, 2020. It is set at 20 million tonnes, which is basically a relatively comfortable level. If the overall export is limited to 50 million tonnes (in the entire 2020-21 season), this is not a problem for us. The government has promised to improve the quotas distribution scheme, so it would not be flawed in the future. Nevertheless, our stance is that the quotas bring little to no benefit — it is not a tool to regulate the domestic market, especially when we have such a good harvest.
WG: Why was the quotas distribution scheme flawed?
Korbut: First, everything was going well. Exporters were applying for quotas and getting them in a normal way. The number of exporters has significantly dropped, compared to the previous season, but export continued as usual. Then, the mayhem began — some companies refused from quotas, so they were picked up by others. These companies offered a helping hand to their partners who needed to execute their contracts. However, this involved supplies for hundreds of thousands of tonnes, which shows that the scheme was not working adequately. We raised concerns that some companies will get quotas to re-sell them. I’m confident this also took place. The problem was that the quotas distribution scheme was not entirely transparent. In the end, one could get the impression that only chosen companies got the quotas.
WG: Some Russian poultry and pork producers have complained about high grain prices on the domestic market. What are your thoughts on the matter?
Korbut: Now, we also have bakers (complaining over high grain prices). I’m not aware of any claims from pig farmers — they have a good margin. The prices indeed are on the rise, reaching $252 per tonne. Some market players even sell for $257. However, this is a temporary phenomenon. As I said, Russia is the only big grain exporter on the global market, from which you could purchase grain. Once Australia and Argentina bring their grain on the market, rest assured this would bring a price relief. It is yet to be seen what will happen with the global prices after the US presidential elections. Every scenario seems possible. They could skyrocket or slump to the lowest levels. The Russian ruble’s exchange rate dropped by nearly 20% (since the beginning of the pandemic). In Russia, grain is an export commodity, and 35% of all grain production is exported, which means the domestic prices are following export prices. The news about the new export quotas spills additional fuel to this situation.
WG: This season Russia collected its second largest grain harvest. Is there room for further growth in grain production in the country?
Korbut: The production would follow the demand. There are no other factors. The internal demand is poised to grow but at a slow pace. The demand on the food market remains flat, while on the feed market lags behind the country’s livestock industry’s growth. Our livestock companies are doing very well — they optimize their feeding rations, replacing grain with other components. In theory, deep processing could secure some additional growth in demand. I would say it could consume up to 7 million tonnes of grain per year. This is not much. This leaves us only with exports. The last few seasons showed us that Russian farmers follow the market trends, increasing production when the grain is in demand. The Russian grain industry becomes more effective. For instance, 15 or 20 years ago we used 15 kilograms of mineral fertilizers per hectare on grain fields; now its 60 kilograms. We have new approaches when it comes to seeds, digitalization, and automation. This paves the way for further growth. With favorable weather conditions in the Russian south, we would collect 140 million tonnes this year. In the coming years, we expect domestic production to grow slightly faster than the rise in global consumption, which is set to increase.
WG: Is the Russian grain industry experiencing any infrastructure issues?
Korbut: Infrastructure has always been an Achilles heel of the Russian grain industry. First, it was the port infrastructure. From the Soviet Union, Russia inherited only one deep-sea port with not the best location. However, our logistics industry has reacted very well to the growth in grain exports. New transhipment capacities have been established without state aid. Basically, the capacities we currently have meet our need in grains and oilseeds export. The other issue is that grain transportation tariffs in Russia are still relatively high. They have been gradually declining but still are higher than in Ukraine. I believe we will see new ports in 3 to 4 years, and they will pull the tariffs down. The past few years have shown that our ports can be flexible.
WG: Are there any other issues that are concerning?
Korbut: On Sept. 15, the major Russian grain suppliers inked a memorandum promising to avoid overweight during grain transportation. All major grain exporters signed this memorandum which took a toll on the transport capacities, impacting the small-scale carriers handling small supplies of 50 to 60 tonnes of grain in trucks. The transport tariffs jumped under different estimations from 15% to 30%. The Russian railway is also struggling for supplies, reducing tariffs. I would not say that this will become a significant obstacle for the Russian grain export. I’m sure we will find a compromise.
WG: To what degree is the Russian grain industry supported by state aid?
Korbut: There are no direct forms of state support for the Russian grain industry. Grain producers are not subjected to state subsidies. There are only soft loans with subsidized interest rates.
WG: How could the changing climate affect the Russian grain industry?
Korbut: Unfavorable weather conditions are a relative concept. God and ancestors gave us a vast territory, and the probability that some weather challenges, like droughts or floods, would emerge in this entire area is pretty low. This means that we have diversified risks, which is also a reason why Russia is a reliable grain supplier to the global market. Besides, the technologies mitigate risks — there are technologies for harvest protection we have not had in the past. However, the environment is indeed changing. We see some pests emerging in European Russia and in the north — in regions they have never been seen before. The current forecasts are somewhat controversial, but most of them are beneficial for Russia. The warming climate could increase the Russian grain harvest by 10% to 11%. We could possibly experience problems in southern Russia. On the other hand, we have immense opportunities in the Black Earth region. With the rising average temperatures, this area could become the world’s new breadbasket.
Vladislav Vortonikov is a correspondent from Voronezh, Russia. He may be reached at Vorotnikov.email@example.com.