Another bumper grain harvest in Russia

By Rhod Mackenzie

The harvest season in Russia is almost completed. As of the beginning of November, ICAR reports that approximately 142 million tonnes of cereal crops have been threshed, which is 9 million tonnes less than the previous year's record. The wheat harvest is predicted to yield about 93 million tonnes (down from 104 million tonnes last year), while barley production will amount to 21 million tonnes, slightly less than the previous year. Corn yields will total about 17.5 million tonnes, marking a historical record compared to last year's approximately 16 million tonnes. Another record has been broken with the production of grain legumes reaching 5.8 million tonnes, a 28% increase from last year's results.

The country requires around 77 million tonnes of grain for its own consumption, leaving almost an equal amount that must either be stored or exported. As the country doesn't need such reserves, exports will have a crucial role to play in the market. However, the grain export model has undergone significant changes in recent years. This sector is no longer market-driven and has almost entirely fallen under state control. It remains uncertain whether the new balance of power will simply create income opportunities for the government and select businesses, or if it will facilitate balanced growth of the agricultural market in the near future.

Production is heading north.
The decline in grain production this year, compared to the previous year, is linked to lower crop yields. On average, the yield fell to 31 quintals/hectare from 33.4 quintals/hectare last year, despite comparable sown areas. Nevertheless, some regions have surpassed these averages. Notably, the Central Federal District remains the leader both this year and the previous year. ICAR reported that the yield in the Central Federal District averaged 47.2 tonnes per hectare compared to 43.8 in the Southern Federal District. Furthermore, the foremost central regions took the lead. To illustrate, the yield in the Bryansk region was 60.3 tonnes per hectare, Belgorod region produced 58.8 tonnes per hectare, and the Kursk region produced 57.4 tonnes per hectare. These results were comparable to the leading agricultural region, the Krasnodar Territory, which yielded 57.3 tonnes per hectare. Previously productive regions, such as the Rostov region and the Stavropol Territory, exhibited inferior performance with yields of merely 44.4 and 37 centners per hectare, respectively, which is lower than the yield observed in the Lipetsk and Tambov regions, for instance. The Ural and Siberian federal districts recorded the lowest yields this year, with 18.3 and 16.2 centners per hectare, respectively.
Whilst the Central District remains inferior to the South in terms of total production volume, the latest dynamics are not in its favour. Production volume in the Central District increased by 700 thousand tons, from 34.5 to 35.2 million tons, whilst the volume in the Southern Federal District slightly decreased, from 40.25 to 40.18 million tons.

It is evident that unfavourable weather conditions had a significant impact on the yields this year as there were numerous natural disasters in the South of the country and Siberia. Furthermore, climate change and droughts have diminished agricultural opportunities. Recently, in several countries, specifically in Europe, agricultural production has shifted from the south to the north.  Moreover, the central areas feature not just fertile soils, a relatively warm climate, and significant moisture - they are also suitable for the growth of Russian livestock farming. This trend has also occurred within our region. Moreover, the central areas feature not just fertile soils, a relatively warm climate, and significant moisture - they are also suitable for the growth of Russian livestock farming. Livestock farms establish fully integrated production chains by growing feed crops for their own livestock. Recently, in response to competition from the prosperous South, which exports all of its grain, central regions have begun to focus on increasing the intensity of production, specifically by using more fertilisers.
The Ministry of Agriculture safeguards global pricing.
Despite facing numerous sanctions and restrictions, Russia exported a staggering quantity of grain last season - reaching an all-time high of 60 million tonnes. In the current season's initial months, from July to September, we have shattered our previous export records, with an extraordinary 5-6 million tonnes shipped per month, as opposed to the usual limit of 3-4 million tonnes. This boost was not arbitrary, and there are justifications for it. Firstly, there were large reserves of the previous harvest remaining, and they needed to be sold quickly. Secondly, the so-called recommended price has not yet come into effect - the minimum export price set by the Ministry of Agriculture, who made the decision to prevent world prices from collapsing (so that Russia could earn money) and avoid prices on the domestic market collapsing, as domestic prices have traditionally followed the export prices. During the summer, exporters continued to deliver grain based on previous contracts.

However, in October, the implementation of price restrictions caused a decline in Russian exports. The cost of Russian grain exceeded the market average, prompting buyers to switch to more competitive suppliers, particularly European ones. Grain market participants have reported a recent recommended price reduction from $191-$202 per metric tonne to $182-$187, while the current market price for Russian grain stands at $68 per metric tonne (wheat with 12.5% protein). "Experts from SovEcon predict that Russian wheat exports in November may range from 3.8 to 4.2 million tonnes, down from 4.3 million tonnes last year.  Monthly exports have been lagging behind last year's figures for two consecutive months.Additionally, wheat shipments from Russian ports have declined, with only 0.76 million tonnes shipped in the last week of October - the lowest figure since the beginning of the season." If exports continue to decline, and if exporters fail to show demand for grain, a significant drop in domestic prices can be anticipated. Farmers have harvest volumes that are too large to "sit out" the period of low prices as they usually do.

In anticipation of discontent among farmers, the Minister of Agriculture, Dmitry Patrushev, recently announced that the department would purchase 2 million tons of grain for the intervention fund before the end of the year. The highest rates for wheat stand at $15o per ton for wheat classified as 3rd class and $148 per ton for that of 4th class. Nevertheless, this amount barely makes a dent, as the rates remain low.
A new export model is emerging in the Russian grain market, which is now under state control. The railway infrastructure and the majority of port facilities are owned by state-run companies, granting priority to state-owned exporters for grain transportation and transshipment. This poses a significant challenge to private businesses. It is noteworthy that tariffs for grain rail delivery have surged sharply over the past few years.

Secondly, the government has been allocating quotas for exporting grain since 2020. Specifically, a quota for exporting 24 million tons during the period from February 15 to June 30, 2024 has recently been established - which is less than the same period in 2022. Overall, this is still a significant quota, taking into account that 24.5 million tons have already been exported from the start of the season until now. And experience has demonstrated that the allocation of quotas is not a democratic process. typically, access to quotas is tied to a company's export capacity and ability to utilize transshipment facilities.
Thirdly, there is an export duty on grain, which is determined by the sales price and the dollar exchange rate. The state sets the duty weekly. This levy decreases the buying rate of grain from farmers, which negatively impacts their income. The duty was introduced last year to prevent inflation in the domestic market.

Finally, the recent innovation - the suggested price, mentioned previously - has disrupted the market, exports, and tarnished the image of Russian firms as dependable suppliers in the global market. Grain market insiders reveal that attempting to export grain at prices below those set out by the Ministry of Agriculture results in the failure of Rosselkhoznadzor to issue a phytosanitary certificate for the product. It is noteworthy that buyers do not request this certificate. This 'punishment' is applied to exporters arbitrarily, and in a way that lacks transparency. The high rate of grain exports compared to previous seasons further validates this observation. If we sell our grain to our customers at a higher price than other producing countries, and if most buyers refuse to purchase Russian grain at our rates, why does Russian exportation continue to be so high? With the implementation of the suggested pricing, the market has been shrouded in ambiguity: sellers conceal details about their goods, their quantities, and the location of their sales, while middlemen arise in foreign territories (although procuring grain for them poses a challenge). As a result, there is duplication of documentation and other issues. Unfortunately, this is unlikely to have a positive impact on the development and business climate of the grain market.
Perhaps the state, represented by the Ministry of Agriculture, intends to sustain the export industry through government contracts and interstate agreements. For instance, the global grain market anticipates the purchase of 12 million tonnes of grain by China this season due to a poor harvest. Additionally, our government recently proclaimed a momentous agreement with China to provide a colossal amount of grain - 70 million tonnes over a decade. This is the ideal chance to commence implementing the agreement.

The combination of all these factors causes immense instability in the market, thereby significantly impacting the agricultural sector's profitability. Private enterprises largely rule our manufacturing industry (state-owned firms do not undertake any agriculture-related work) and have already borne the brunt of export levies. The government pledged to reimburse the confiscated funds through subsidies, yet this commitment remains outstanding. Amid impending export uncertainties, enterprises operating with low production expenses are best equipped to weather the volatility. This group comprises those who attained high harvest volumes this year: their expenses were steady, yet the grain yield surpassed prior seasons. Therefore, we can expect the ongoing trend in developing the agricultural Black Earth Region to continue next year.