AGI Ukraine
COFCO's port terminal in Mykolayiv region of Ukraine.
Photo courtesy of AGI.
In a series of articles, 
World Grain examines the Commonwealth of Independent States (CIS), led by Russia, Ukraine and Kazakhstan, is becoming a bigger player in global grain production and exports. This is the second of three articles in the September issue. To read the first article, click here. To read the second article, click here

The future prospects of the grain sectors in the former Soviet countries depend on their ability to develop new production areas while opening new markets for extra production. New markets depend on infrastructure, which means the readiness of agribusiness to invest will be vital, as some of the greatest potential for producing more grain is in some of the most remote regions.

“It all depends on their investments in areas that are currently underutilized,” Swithun Still, director and senior trader at Solaris Commodities SA in Switzerland, told World Grain. “There are ways of growing wheat in large chunks of Siberia that don’t really get used for farming at the moment. It is relatively barren steppe and it is difficult but not impossible, like they have in Canada. There is potential.

“The idea has been floated for a long time to expand the grain export capacity of Russian wheat and other grains as well, but notably Russian wheat into Asia by expanding the port capabilities and infrastructure in Vladivostok and other ports in the Far East, but mostly Vladivostok. That is where the center of attention has been.”

Soyuz Summa, which owns two of the three silos in Novorossiysk, has made investments in Vladivostok and around 2011 it talked about Russian wheat being pumped into Asia out of Vladivostok, he said.

“But now, unless there are serious subsidies given to exporters to incentivize them to freight grain all the way across Siberia by rail, it will never work because the rail freight in Russia is just far, far too expensive,” he said. “It cannot compete with ocean freight. It is always going to be more competitive to ship grain in Panamaxes into Asia from the Black Sea than across land.

“It just doesn’t work. On paper, yes, and in theory, yes, but practice shows that unless railway rates are subsidized it just doesn’t work.”

He said there also has been some talk about Russia finally signing some phytosanitary agreements with China but those are quite limited in their scope because they can only be for certain border areas that are next door to China.

“It doesn’t open the door like the Ukrainians have done to sending corn or wheat into China by Panamaxes,” he said. “But that could come.”

In an article on the growth of Russia’s farm exports published earlier this year, the Financial Times newspaper looked at the potential.

“The most exciting opportunity lies in Asia, where Russia has a band of fertile land along its border with China,” the newspaper noted. “There, the soil and climate — on a similar latitude to the big grain-growing areas of the U.S. — is good for soybean cultivation. However, it will be a slow change. With food exports to China still in their infancy, developing that sector could take years, or even decades. Even without it, however, Russia’s agriculture boom shows that, despite sanctions and the poor state of east-west relations, there are pockets of value and opportunity to be found in the Russian market.”

||| Next page: Record high stocks in Russia |||


Record high stocks in Russia

Andrey Sizov, president of SovEcon in Russia, said Russia would remain the world’s leading wheat exporter in a presentation June 6 at the International Grains Council Conference in London.

“Colossal changes have taken place in Russia and Russian agriculture,” he said. “The sowing of autumn crops was quite successful and the area increased by about a million hectares. Winter losses were insignificant. Russia is expecting a good crop.”

He predicted the total grain harvest in 2017 will reach 107 million tonnes.

“We’re expecting a decline in wheat of about 9 million tonnes,” he said, adding that would bring it to around 64 million compared with the USDA estimate he gave of 67 million.

“Russia is entering the new season with record high stocks,” he said.

He did identify quality concerns with what Russia has to export.

“Delay in harvest affected quality,” he said. “The quality of stocks is not quite high.”

In addition, domestic prices were down because of pressure from the high level of stocks.

“Millers were looking for the right quality,” he said. “This created difficulties for exporters.”

Export prices, however, remained steady.

“These prices are supported by the ruble,” he said.

However, it has appreciated.

“It means that the competitive advantage of Russian exports is much less,” he said. “Our forecast for export to wheat is 27.3 million tonnes in the outgoing season. Barley was quite a failure. Exports of corn will be a record high, which is over 5 million tonnes.”

“I’d like to draw your attention to a great growth of domestic consumption,” he said, pointing out that consumption of grains had risen by 5 million tonnes in 2016-17. “We think that this is because of cattle breeding and also because of poultry and pig breeding.”

The ruble rate will influence Russian exports, he said.

“Some of our leading experts think the ruble will weaken,” Sizov said.

He expected 2017-18 wheat exports to be around 27 million tonnes, but that depended on the ruble and on quality.

Russia has an intervention stock problem.

“State intervention stocks are around 4 million tonnes,” he said. “That’s a lot. Currently the state cannot fund the storage of that grain.”

It’s done by paying independent elevators.

“Something has to be done with these 4 million tonnes of stocks,” he said. “One proposal is to export them. The 2016 harvest was bought at a very high price, so that grain cannot be sold. What could be sold is grain brought in 2013-14.”

No decision has been made and the grain is in the Urals and Siberia, which would mean a cost of about $50 a tonne for rail transport, even before the fobbing cost. That means that about 500,000 tonnes of it probably wouldn’t be exported but would go for domestic sales.

“Russia will be in the group of major exporters of wheat,” he said.

||| Next page: Ukraine strengthens ties to E.U. |||

EU Ukraine trade

Ukraine strengthens ties to E.U.

Ukraine’s future looks increasingly tied to the countries to its west.

“Ukraine continues developing closer economic ties with the European Union,” an attaché report said. “This translates into growth of exports both for grains and products of the milling industry, which have been supported by Tariff Rate Quotas offered to Ukraine under the Deep and Comprehensive Free Trade Area (DCFTA). This trend is expected to continue in the years
to come.”

In a review of investment policies in agriculture in Ukraine, published at the end of 2015, the OECD said, “Ukraine offers an enormous agricultural potential, particularly due to its vast and fertile arable land, part of which is currently idle, and its comparative advantage in grain production owing to low production costs and a strategic location. As the global demand for food increases, driven by growing populations, higher incomes, and changing diets, Ukraine’s agricultural potential attracts a rising number of investors, both foreign and domestic. Indeed, private investment has increased over the last decade and Ukraine has now some of the largest farms on earth. Large multinational agri-food companies are planning to invest heavily in the sector in the coming years.”

Its policy recommendations included simplifying administrative procedures and enhancing the predictability of investment policy. It proposed lifting a moratorium on the sales of agricultural land once the necessary legal and institutional conditions are in place. It suggested that Ukraine should continue removing regulatory and administrative barriers to trade, shift away from distortive policies and further encourage the participation of the private sector in infrastructure development.

It also identified a need to improve access to finance, particularly for small and medium enterprises in agriculture and ensure that the education and research system responds to the needs of agricultural enterprises. OECD also proposed strengthening environmental protection.

Kazakhstan shipping to China

Kazakhstan is looking to its east.

“Kazakhstan and China agreed on sanitary requirements for export of wheat bran and the parties discussed lifting restrictions and giving Kazakhstani agricultural products access to the Chinese market, agreeing to speed up the procedures for coordinating draft protocols of veterinary and sanitary requirements for 34 export items from Kazakhstan to China,” the attaché’s most recent annual report on the grains sector said. “Moreover, industry sources note that China has created a special economic zone on the border where imports are not subject to a quota as long as the imports are further processed within the zone. On Feb. 5, 2017, a shipment of 720 tonnes of wheat arrived by rail to the Chinese logistics center Lyanguan, in the Tsyansu province of eastern China. This shipment will be further transshipped to Vietnam by boat. This shipment is marking the official opening of the transit corridor though China for Kazakhstani agricultural products.

“The transit route from Kazakhstan via China to Southeast Asia takes about 20 days, while wheat shipments from Australia to Southeast Asia take, on average, 30 days. At the same time, the Kazakhstani price for wheat is more competitive than the Australian price.”