by Mario Sequeira

Today’s Russian agriculture sector bears little resemblance to the one before 1991, when the Soviet Union collapsed. In that year, a system lasting nearly three-quarters of a century
ended and a period of reform began that is continuing today.

From being a net importer of grains, Russia has transitioned to a net
exporter. Its livestock industries, particularly cattle, have shrunk considerably as subsidies were
withdrawn. Where once it produced enough meat for its population, today the country is a big importer of high-value beef, pork and Russia’s poultry meat. The United States supplies about 40% of poultry imports.

In 1991-1992, Russia imported 13.6 million tonnes of grain, mostly feed grain for the sizable cattle industry, and total grains exports were 555,000. In the 2003-2004 marketing year, the figures are estimated to be one million tonnes and 3.1 million tonnes respectively.

Russia became a net exporter of wheat in 2001-02, when exports totaled 4.4 million tonnes and imports 630,000 tonnes. The next year was a bumper crop year and exports hit a high of 12.6 million tonnes.

Wheat’s gain has been at the expense of the livestock industry, which received a lot of attention in the Soviet era. While the beef industry is still suffering, the pig and poultry industries have stabilized and are rebounding.

However, most commentators agree reform has not been as quick as in some of the other Soviet republics, which broke free from the Soviet Union and began changing to open economies.

They say the Russian leadership has been slow to set up the financial and market institutions necessary for an
open economy.

For example, farmers do not have access to timely credit or market information. There are neither adequate laws to enforce contracts nor a system of warehouse receipts. Also, there are no clearly transparent marketing channels.

The physical infrastructure too is
poor, with the road system seen as the main weakness. Much of the machinery on farms is old, posing another hurdle to improving productivity. According to a report presented last year at a grains conference, in 2003 the number of tractors and harvesters fell to 640,700 and 158,260 respectively from 1.365 million and 407,800 in 1990. Machinery production is not matching demand and will only meet two-thirds of demand in the next few years.

However, grain ports have received more attention. Expansion or improvement projects have been carried out at the ports ofYeysk on the Sea of Azov that connects to the Black Sea via the Kerch Strait, at Novorossiysk on the Black Sea and at Vladivostok, in the Far East. Two grain terminals were built near Astrakhan’s river and seaport on the Caspian Sea.

Among the most important reform legislations passed in Russia is the 2001 law that will help create an agricultural land market, covering ownership, purchase, sale, leasing and such issues. That same year, the government passed legislation simplifying the tax system and brought down the tax rates in subsequent years.

Another encouraging sign of change is the willingness of big business to invest in Russian agriculture. U.S.-based agribusiness Bunge announced last October it was buying the Rostov-na-Donu grain terminal north of the Black Sea.

Last August, the Russian agricultural holding company Agros Holding and Louis Dreyfus’ Russian subsidiary Sungrain Holding set up a joint venture to manage their elevator business.

Two years ago, Agros acquired Roskhleboprodukt, the descendant of the former state grain buying agency, which was made up of 82 companies, including grain elevators, mills and eight large poultry farms.

Overall, the Russian economy is not doing too badly. It has recovered from the 1998 financial crisis, when the ruble fell nearly 80%. Gross domestic product (GDP) since has grown an average of 4%. GDP growth in 2004 is estimated at about 7%.
*projected; Source: U.S. Department of Agriculture

The United States Department of Agriculture (USDA) forecast Russian GDP in the medium term at about 4%. That is expected to result in rising incomes and a continuing growth in food consumption, which will stimulate agriculture growth.
Quality is an issue every wheat season. There is never enough good quality milling wheat for the baking industry and in some years imports are required to meet needs.

This season, wheat production is estimated to be 43.8 million tonnes of which 71%, or about 31 million tonnes, is of food quality, the State Grain Inspection Service said in September. This is eight million tonnes more than last year.

However, the Russian Union of Flour and Groat Mills has recently said the availability of soft wheat is fast decreasing and it could be difficult finding the 18 million tonnes needed for bread production.

This could prompt bakeries to use poorer wheat for bread, resulting in poorer quality bread, as happened in 2003-2004.

To counter this situation, the government announced this month a new national standard for wheat flour that assesses flour quality more accurately than the old standard.

Russian wheat is classified by gluten content, with Class 3 representing the standard bread wheat. Classes 1 and 2 are the top quality wheat used for pasta and noodles, but they are generally in such short supply that bakeries have to import to meet their needs.

Class 4 is generally considered feed wheat but can be used to make bread if it is blended with better wheat. This year, the State Grain Inspection Service said there were significant quantities of Class 4 wheat that met food quality standards.

Last season’s short supply of bread wheat caused prices to jump although they dropped late last year. Class 3 wheat fell from a high of 6,390 rubles (U.S.$230) per tonne last March to 4,180 rubles (U.S.$150) in July. Class 4 wheat fell from 6,030 rubles (U.S.$217) to 3,770 rubles (U.S.$135).

The government has not yet bought any grain under its
price intervention program, which was introduced three years ago to protect producers from price volatility. It has set a minimum price for Class 3 wheat of 4,000 rubles (U.S.$144) a tonne.

However, a problem with the program is the government does not have sufficient funds to buy wheat, undermining its effect on the market.

Mill privatization and consolidation have been ongoing during the past decade. Small mills still predominate and capacity utilization varies widely.

Flour production has been steady during the past few years. In 2004, it was on track to reach and maybe surpass last year’s production. According to the latest figures available, millers produced 5.2 million tonnes of flour by June 30.
The full 2003 figure was 10.8 million tonnes, which was 2.5% up on 2002.
The livestock industry was the hardest hit agriculture sector when reforms began to kick in early in Russia’s post-Soviet period. Meat production, particularly beef, slumped, and Russia became a net importer of beef, pork and poultry.

Since then, the industry has stabilized a bit as producers seek to meet consumption demand, which is steadily increasing after falling amid the turmoil
of the immediate post-Soviet era.

While the cattle herds are still declining, pig and poultry numbers are rising. Part of the incentive for higher pig and poultry production is high prices. One of the reasons given for the price rise is the impending introduction during the next three years of tariff rate quotas (TRQs) for beef and pork imports of 420,000 tonnes and 450,000 tonnes respectively and a pure quota of 1.05 million tonnes for poultry.

The 2004 above average grain crop is expected to provide enough feed grain for the meat industry to continue to pursue growth. However, factors that could upset this situation are export feed grain demand, domestic retail prices and input costs.

The USDA has forecast stable Russian meat production in 2005 as a 3% growth in pork production compensates for a 4% drop in beef production. Poultry production was forecast to grow for an eighth straight year, with broiler production set to reach 705,000 tonnes.
Grain production in 2004 is estimated at nearly 76 million tonnes, of which the two biggest are wheat at 44.5 million tonnes and barley at 17.5 million tonnes.

The Ministry of Agriculture recently
forecast total 2004-2005 wheat and coarse grain exports to be 6 to 10 million tonnes. But observers think the figure will be lower because of high domestic prices and greater competition in foreign markets. The USDA projects Russian wheat exports of 6 million tonnes and barley exports of 1.7 million tonnes.

The latest official export figures put grain exports from July to September 2004 at 2.8 million tonnes, including almost 2.6 million tonnes of wheat and 235,000 tonnes of barley.

Wheat buyers included Egypt, Azerbaijan (126,000 tonnes) and Italy (about 100,000 tonnes). Barley was shipped mostly to the Middle East.

While grain exports are staying at levels at or slightly above recent years, observers believe there is potential to increase exports if the infrastructure is improved, notably at ports, grain terminals and the road and rail network.

This is already happening and several projects have been announced during the past two years involving ports and grain terminals. New businesses are bringing in money and expertise that could help raise the efficiency, productivity and throughput at points of export. WG

Key Facts

Capital: Moscow
Demography: Population 143.7 million, -0.45% growth rate (July 2004 estimates); Russian, language.
Geography: Climate varies from continental to Arctic; terrain ranges from plains, uplands, mountains and tundra. Government: Federation. Chief of State is President Vladimir Putin, head of government is Premier Mikhail Fradkov.
Official agricultural agencies: Ministry of Agriculture and Food, Minister Alex Gordeyev.
Economy: In its second decade of economic reform, Russia has made significant progress but many believe it is too slow. The agricultural landscape has changed considerably but remnants of the old Soviet system remain. The main barrier is seen as the general resistance to the change. However, change is occurring as Russia experiences the benefits of a market economy and more Russians adapt to the harsh changes. Oil and energy continue to be the biggest export earners and their strong prices has helped pushed GDP growth to 4% and higher since the 1998 financial crisis. This is likely to improve peoples’ incomes, increase consumption demand for food stuffs and stimulate agriculture. The agriculture sector in Russia accounts for 5% of GDP and employs 12.3% of the total labor force.
GDP per capita: U.S.$8,900 (purchasing power parity), 7.3% growth rate, 13.7% inflation, 8.5% unemployment (2004 estimates).

Currency: Russian ruble. Jan. 7, 2004 exchange rate: 27.76 rubles per U.S. dollar. Exports: U.S.$134.4 billion (2004), petroleum and products, natural gas, metals. Imports: U.S.$74.8 billion (2004), machinery and equipment, meat, grain, consumer goods. Major crops: Wheat, barley, maize, oilseeds, sugarbeets. Wheat: Production in the past five years averaged 42.4 million tonnes a year, ranging from a low of 34.4 million in 2000-2001 to a high of 50.5 million in 2002-2003. Imports averaged 1.1 million tonnes, exports averaged 5.4 million and consumption averaged 36.5 million. Coarse grains: Five-year production averaged 31.4 million tonnes, ranging from a low of 28.2 million in 2000-01 to a high of 35.2 million in 2001-02 . Total use averaged 29.5 million tonnes: imports averaged 715,000 and exports averaged 2.1 million. Feed use averaged 18.3 million tonnes, in a range of 15.9 million in 2000-01 to 21.5 million in 2003-04. Transportation: Highways, 952,000 km, 752,000 km paved; Railways: 149,000 km all 1.520-m narrow gauge; Murmansk, Novorossiysk, Saint Petersburg, Rostov, Vladivostok, Volgograd are major ports.