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Putin's Agricultural Policies

Despite a struggling economy, By 2016 Russian agriculture outpaced Canada and the United States in wheat exports, becoming the world’s largest supplier of the key ingredient for making bread. But Russia’s rise as a grain superpower was accompanied by a drop in the overall quality of wheat being produced. The quality of wheat was worse in 2016 than in 2015, and although the same volumes of good quality wheat were likely (due to the bigger crop), it would be more difficult to compose batches of good wheat; and the distances to deliver the good quality wheat to ports may be longer. Volumes of feed quality wheat were much greater than in 2015. Farmers would sell the feed quality wheat first, and wait for better prices for milling wheat, which has higher protein content. Within the category of quality factors, gluten quality or protein variability or quantity is the most important factor.

The US Government forecast Russia’s 2016 grain and pulses production at 101 million metric tons (MMT), assuming average weather conditions during the growing season. This would be 2 percent decrease from the crop in 2015 but still higher than the previous five-year average of 93 MMT. Overall the MY 2016/17 forecast, by crop, was: wheat - 58 MMT (3 MMT lower than last year but still higher than the 5-years average of 53 MMT); barley - 18 MMT (1 MMT more than in 2015); corn - 12.5 MMT (0.7 MMT less than in 2015); rye - 2.5 MMT; oats - 4.8 MMT; milled rice - 0.73 MMT (1.12 MMT in rough weight); and approximately 4 MMT of other grains and pulses. Grain exports for MY 2016/17 are forecast at 30 MMT, just 1.6 MMT less than the 2015/16 estimated exports of 31.6 MMT’s.

Due to the ruble depreciation and high inflation, the cost of spring work and the cost of inputs increased compared to 2015. Although spring 2015 saw high input costs, the US Government projected that input costs would increase again in 2016. This would continue to impact the ability of farmers to purchase and use certain technologies, such as fertilizer, agricultural chemicals, hybrid planting seeds, and spare parts for machinery.

After about ten years of decline in the 1990s, Russian agriculture began to show signs of modest improvement in the new century. The economic reform that began in Russia in the early 1990s spurred major changes in the structure and volume of the country's agricultural production and trade. The transition to a more market-oriented system introduced the element of fiscal responsibility, which resulted in increased efficiency as farmers tried to maintain productivity while struggling with resource constraints. Official data indicated a rebound in Russian grain yield in recent years, and although the bumper harvests of 2001, 2003, and 2004 are due in large part to favorable weather, most analysts agreed that the gradual improvement would continue. As of 2010 Russia was the world's fourth largest wheat exporter.

During the 2000s, Russian agricultural imports had grown considerably, from $7 billion in 2000 to $33 billion in 2008. This import growth has made Russia the second largest agricultural importer among emerging markets, after China. The main reasons for the import rise are macroeconomic-high growth in Russian gross domestic product, which increases consumer income and purchasing power, and real appreciation of the ruble, which makes imports less expensive vis-à-vis domestically produced goods.

During the late Soviet period of 1987-91, the USSR imported about 35 mmt (net) of grain per year, while in 2009, the former USSR countries exported nearly 55 mmt. This change involved a shift of about 90 mmt of additional grain available to the world market, a huge increase given that in 2009 total world exports of wheat, barley, and corn equaled about 245 mmt.

USDA projected in 2009 that wheat exports by Russia, Ukraine, and Kazakhstan will increase by about 50 percent to over 50 million metric tons (mmt) by 2019, and the region could lead the world in wheat exports by the end of the decade. By 2019, Russia could become the world's top wheat exporter, and Russian, Ukrainian, and Kazakhstan wheat exports collectively could more than double those of the United States. Growth in the former Soviet Union's grain production and exports may increase world food availability and, in the near term, help mitigate global food security concerns. The United States, the world's largest wheat exporter since World War II, could slip to second place. U.S. wheat production is projected to rise only slightly over the next decade.

Russia's agricultural potential, limited by climatic and soil factors to 32 percent of the country's land area, has been further depleted by policies such as overly intensive farming, overuse of chemicals, and inappropriate crop choice. In the post-Soviet era, failure to effectively convert inefficient collective farms to private ownership further hampered production. Limited sale of agricultural land was approved only in 2002 and, because of the political sensitivity of the issue, as of 2006 comprehensive land reform legislation still had not been passed.

In the 1990s, Russia's agricultural production fell sharply. After declines of more than 50 percent in every major crop, output began to increase somewhat in 1999. Between 2003 and 2005, the average annual increase was 3 percent. However, farm infrastructure has declined sharply, and farmers lack funds to purchase key inputs. Federal and subnational jurisdictions still subsidize agriculture heavily instead of developing incentives for independent entrepreneurship. In 2005 grain remained the largest crop, occupying more than 50 percent of cultivated land. Other key crops were sugar beets, sunflower seed, and vegetables. The main livestock outputs were cow's milk, beef and veal, eggs, and pork.

By 2005 one of the most dramatic changes in Russian agriculture was the emergence of externally owned and managed commercial farming operations that are exceptionally large, typically ranging between 10,000-250,000 hectares. The investment community had long considered Russian agriculture as the sector with the most risk, carrying a high potential for loss and a low return on investment. By 2005, however, investors from outside the agricultural sector had acquired control over farm assets and millions of hectares of farmland and had begun introducing organizational changes such as vertical integration, custom and contract farming, land leasing, and central machinery stations. Responding to real profit opportunities, these entrepreneurs brought with them the means to overcome market and institutional imperfections, as well as human and physical capital limitations.

This new phenomenon of non-agricultural new agricultural operators (NAO) participating in farm production and decision-making and engaging in "value through risk" investment ran contrary to the common expectation of how Russian agriculture would evolve in the post-Soviet era. Rather than a vibrant family-farming sector, what was emerging was a kind of Russian latifundia, owned not by the nobility [as under the Czars] or the State [as under the Soviets] but by corporations that in many cases are not directly related to food and fiber production.

The highest level of vertical integration exists in the domestic poultry industry, where the five leading companies control 24 former collectives and newly established farms, providing 35% of the national broiler output. In other subsectors of Russian agriculture the level of integration is much lower even though the overall presence of leading agribusiness companies in agriculture is high. For example, in the grain industry, six of the ten leading exporters have grain production operations.

The decision-making structure of the mother company is typically rooted in an industrial, trading, or financial culture that emphasizes economies of scale, standardization, and top-down approaches. This managerial orientation is not particularly well-suited for agriculture. Consequently the potentially hugebenefits of centralization and economies of scale are offset by the inability to make timely, local decisions. When the holding company tries to increase local decision-making authority, it often increases the risk of resource misuse and theft.

Yields improved mainly because of the rise of these "new operators" - large, vertically integrated enterprises that combine primary agriculture, processing, distribution, and sometimes retail sale. The most common types of farms in these countries are big corporate farms, most of which are the former State and collective farms of the Soviet period that remained largely unreformed even into the 2000s. The more dynamic new operators usually acquire a number of these corporate farms and improve them, as well as bring investment; superior technology, including the use of imported high-quality seed; and better management practices into the entire agro-food system. The new operators are especially interested in grain production because of the opportunities for profitable export.

One of the most critical problems facing Russian agriculture, and probably the most difficult to solve because of the high cost, is the shortage of agricultural machinery. Russia's fleet of machinery was in poor condition and machinery is deteriorating faster than it was being replaced. Most new machinery is obtained through leasing arrangements funded by the federal government and local (oblast) administrations. Since over half of Russia's farms were saddled with considerable debt and few farms were able to offer sufficient collateral to secure large, long-term loans, the purchase of agricultural machinery and grain-storage facilities is difficult.

The global financial crisis had a significant, negative impact on Russian agribusiness and agricultural production. Declining oil revenues and slumping confidence in the Russian economy have led to strong downward pressures on the ruble. In 2008 inflation was 13.8 percent and given the weakened ruble, inflation is likely to remain in double digits throughout the 2009. The global crisis spurred a liquidity crisis in the Russian financial markets as foreign investors left in mass and foreign banks dissolved Russian credit lines. With forty percent of investments in Russian agriculture dependant on credits and several banks denying financing for new agricultural projects, agriculture is among the most vulnerable sectors. Short term credits for working capital is scarce and experts opine that by spring 2009, 20 percent of Russian agricultural enterprises verged on bankruptcy; primarily small producers of crops and dairy products.

According to the Agriculture Minister Skrynnik, in 2009 Russian agriculture received 190 billion rubles ($6.3 billion) in federal funds. This included outlays for the Ministry of Agriculture, VPSS, and Fishery Service, and additional funds for anti-crisis measures in agriculture and related industries. Most of these funds were given to the government owned Savings Bank of Russia and Russian Agricultural Bank (Rosselkhozbank), and to the government owned machines and equipment leasing company Rosagroleasing.

According to the Russian Agricultural Minister Yelena Skrynnik, in 2010 the federal budget forthe Agriculture Development Program was 107.6 billion rubles ($3.6 billion); including 79.4 billionrubles ($2.6 billion) to the interest rate subsidies in the 2010 have increased 30 percent over 2009 as the Russian Government hopes to increase farmers' access to commercial capital.

Severe and persistent drought held southern Russia in its grip in June and July 2010. Low rainfall and hot temperatures damaged 32 percent of the country's grain crops, said Russian Agriculture Minister, Yelena Skrynnik on 23 July 2010. The drought affects more than Russian farmers. Russia is the world's fourth largest wheat exporter. If Russia isn't able to supply as much wheat, the world's overall wheat supply will drop. With less wheat on the market, wheat prices will go up. As of July 23, wheat futures (the current price for wheat that will be harvested and delivered in September) had risen for four consecutive weeks because of the expected drop in supply of Russian wheat.

The USDA forecast Russia wheat production for 2010/11 at 53.0 million tons, down 8.7 million or 14 percent from last year. Area is estimated at 26.8 million hectares, down 1.9 million from last year. The decline in area is primarily due to higher estimated winterkill and lower reported spring wheat area. The reduction in estimated yield is attributed chiefly to withering drought in the Volga, Ural, and Siberian Districts, which together produce most of Russia's spring wheat.

By August 2010 conditions caused the Ministry of Agriculture to slash their 2010 grain production forecast to 70-75 million tons, down from their previous estimates of 80-85 million metric tons. The projected 2010 grain harvest will be the lowest since 2003, when 67 million tons were produced. As a result of drought and wildfires, the Russian Ministry of Agriculture postponed the state commodity intervention program for grain markets. On 06 August 2010 the Russian Government imposed a temporary ban on exports of wheat, barley, rye, corn and wheat and rye flour beginning August 15 through December 31, 2010. Putin declared the ban in efforts to stymied fears regarding food and feed prices.

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Page last modified: 25-11-2016 12:03:43 ZULU