The fall and rise of Russian wheat – World Grain

the-fall-and-rise-of-russian-wheat-–-world-grain

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KANSAS CITY, MISSOURI, US —Wheat is not only sown into Russia’s rich, black soil, but also woven into the cultural fabric of the agricultural powerhouse that straddles Eastern Europe and Western Asia. The image of wheat stocks can be found on Russian and Soviet Union-era flags, monuments, and artwork, reflecting the food grain’s importance as a national symbol of abundance and prosperity. Recognized throughout history as a leading wheat producer, it wasn’t until recently that Russia began flooding the international market with significant volumes of the grain. In fact, throughout the latter part of the 20th century, Russia depended heavily on wheat imports to feed its people and its burgeoning livestock industry.How did Russia go from being largely self-sufficient in wheat during the first 70 years of the 20th century to being among the world leaders in imports the century’s last three decades, only to dramatically reverse course and become the world’s leading wheat exporter during the last five years?The fall and rise of the Russian wheat industry is a complicated story, influenced by international politics, domestic political and economic ideology, the country’s notorious volatile weather, and the ups and downs of the domestic livestock industry.William Liefert, formerly of the US Department of Agriculture’s Economic Research Service where he specialized in Russian and Former Soviet Union agriculture, describes the “black soil region” in southern Russia as being among the best agricultural land in the world.“That land during the times in modern history when there has been sufficient peace has naturally been a surplus grain-producing region and exporter, as it is now,” said Liefert, noting that the 19th century Russian empire was a major grain exporter.In the following century, the czarist regime’s collapse in 1917 led to the Bolsheviks’ rise to power in Russia and the formation of the Soviet Union. After consolidating authority in the late 1920s, Josef Stalin pushed for mass industrialization, which included agricultural collectivism, as part of the new Soviet Communist vision.“There was suddenly complete state control of the economy,” Liefert told World Grain. “This led to mayhem in agriculture. About half of all livestock in the country was destroyed because the peasants decided they weren’t just going to hand it over to the government. It led to a horrible famine that centered on Ukraine, which was largely a man-made policy event. It did not have to happen. It’s a subject of historical debate that anywhere from 4 million to 10 million people died in that famine.”Eventually, the Soviet Union became largely self-sufficient in grain, particularly after World War II through the 1960s. Although yields were below average compared to other leading wheat-producing nations, the Soviet Union was able to remain self-sufficient due to the enormous amount of land that was dedicated to grain production.But in a Soviet agricultural system described as having “no strength, only weaknesses” by current Russian Grain Union President Arkadiy Zlochevskiy, farmers were “demotivated to improve production assets and make technological improvements” during that era.“With the lack of motivation and in the context of the (planned) economy, even the program of virgin land development, which was called to the save the country’s food safety, didn’t help,” Zlochevskiy told World Grain.Dimitry Rylko, general director of the Moscow, Russia-based Institute for Agricultural Market Studies (IKAR), said the strategic shift toward increasing imports became necessary.“The Soviet system could not afford any longer the food shortages in normal, peaceful times,” Rylko told World Grain. “On the other hand, they could not keep up with growing consumer demand against the background of fixed wholesale and consumer prices and, basically, state-owned agriculture. The only way of solving this fundamental contradiction was to enter the import market.”The Great Grain RobberyWith domestic grain production trending downward and severe drought conditions in the early 1970s hindering output even further, the Soviet Union quietly changed course from its self-sufficiency strategy by brokering a secret deal to import grain from its arch-political enemy, the United States.In July 1973, the Soviet Union purchased 10 million tonnes of mainly wheat and corn from the United States at subsidized prices, which caused global grain prices to soar. Soviet negotiators worked out a deal to buy the grain on credit but quickly exceeded their credit limit. American negotiators did not realize that both the Soviets and the world grain market had suffered shortfalls, and thus subsidized the purchase, leading it to be dubbed the “Great Grain Robbery.” The strategy backfired and intensified the crisis as global food prices rose at least 30% and global grain stockpiles were decimated.“The farmers were happy, but the rest of the world was wondering what the heck was going on,” Liefert said. “What people may not know is the Great Grain Robbery coincided with a change in Russian policy regarding the expansion of the livestock sector.”Liefert said the motivation for the sudden influx of imported grain wasn’t only to ensure low food prices and food security for the Russian people.“Beginning in 1970, the Soviet regime decided to expand the livestock sector,” Liefert said. “They saw increasing meat and dairy production as the most direct way to increase the standard of living. It was actually kind of a benevolent policy. They began offering huge subsidies to the agricultural economy, mostly to the livestock sector. They succeeded in increasing the amount of meat and dairy products, but it came at a huge cost. Huge resources were thrown at that sector.”From 1970 to 1990, the Soviet Union was a large importer of not only grain but soybeans and soybean meal as it attempted to bolster its livestock industry. However, when the Soviet Union dissolved in 1991, and Russia returned to being a singular country transitioning from a planned to more of a market-oriented economy, the government could no longer afford the subsidies, so they were eliminated.“Without those subsidies, input prices rose significantly relative to output prices,” Liefert recalled. “Farmers could no longer afford all those inputs, and with the decline in inputs, outputs also fell considerably.”He noted that Russia’s annual grain production fell from 95 million tonnes to 63 million tonnes during that 10-year period. But it wasn’t just the unfavorable grain prices versus high input costs that led to the slump in grain output. The Russian livestock sector contracted by about half in the 1990s, with annual meat production falling from 7.2 million tonnes in 1991 to 3.6 million tonnes per year in the final four years of the 20th century, Liefert said.“The contraction of the livestock sector meant they didn’t have to import all that feed grain or produce so much domestically,” he said.A golden era of Russian agricultureAfter a difficult decade of transitioning to a more market-oriented economy, Russian agriculture began to reap the benefits of the new system and the shift from grain importer to exporter began.“The main factor, which had a number of spinoffs, was privatization of the Russian economy and the shift to free market prices,” said Rylko, who also noted that land privatization, significant investment in port infrastructure, and the emergence of agro-holdings, or large-scale farming operations, helped Russia become a major grain exporter.And once again, Russia’s decision in the early 2000s to strive for self-sufficiency in meat production benefited the grain industry as demand for feed grains increased sharply.“The main goal of the Russian agricultural policy ever since the 1990s has been to revive the livestock sector and make the country as self-sufficient as possible in agriculture,” Liefert said. “A lot of that has been achieved. At one point Russia was importing over 3 million tonnes of meat per year. It is now importing about one-tenth of that.”To supply the growing livestock sector, feed its 144 million people and earn the designation as the world’s top wheat exporter, Russia had to dramatically increase wheat output, which at the turn of the century was around 30 million tonnes per year. Mainly through increased yields, Russia saw its wheat production double to 60 million tonnes in 2010 and to a record 85 million tonnes in 2020.“When you look at the last two decades, Russia has shown such impressive growth,” Stefan Vogel, global sector strategist for grain and oilseeds at Rabobank, told World Grain. “You look at the acreage changes; they’ve gone up 30% to 50% for many of the grain crops such as wheat and sunflower seed. Production has grown three times more than it was. Wheat production nowadays is 150% above where it was 20 years ago. It’s been impressive to see how much this country was able to scale up production.”But bolstering production was just part of the equation to becoming a leading wheat exporter. Equally important was investing heavily in infrastructure improvements at the Port of Novorossyisk and other Russian port terminals.“As soon as they started exporting wheat in large volumes, they realized they had great potential in this area but there were bottlenecks at the ports,” Liefert said. “Before they were importing grain, now they’re exporting it, and to export you need a lot more storage capacity at the ports.”Mostly private investors have poured millions of dollars into port infrastructure improvements, including installing newer, larger grain storage bins, and dredging the sea floor to enable bigger ships to enter the port for loading.The port expansions, which began in the early 2000s, have accelerated in recent years. In June, United Grain Co., Demetra-Holding and Federal State Unitary Enterprise Rosmorport reached agreement to develop a new pier at the Port of Novorossyisk to enhance the transshipment of grain cargo. It will double the total transshipment capacity at the site to about 25 million tonnes from 13.6 million tonnes, while increasing capacity of one-time storage to 870,000 tonnes from 370,000 tonnes.The first year of the 21st century, Russia exported a modest 696,000 tonnes of wheat. Ten years later, having made tremendous inroads into Asian, Middle East and African markets, Russia increased that total to 18.5 million tonnes. By 2018, Russia more than doubled that total when it exported a jaw-dropping 41.4 million tonnes of wheat, which still stands as a record. Since then, the country has exported around 35 million tonnes per year.To a certain degree, Russia’s push to become the world’s leading wheat exporter may have been precipitated by a lengthy price decline of oil and natural gas, which for many years have been Russia’s most lucrative export commodities. Despite the current spike in oil prices, many countries are vowing to switch to green alternatives, putting the long-term future of fossil fuels in doubt.Perhaps that is part of what inspired Russia’s push for more revenue from agricultural exports. In 2012, Russian President Vladimir Putin boldly stated that Russia would double its grain exports by 2020.With that goal met, the question is where will Russia’s grain industry go from here? Will it remain a powerhouse wheat exporter? Will it become a bigger producer and exporter of other grains? Will some unforeseen issue such as climate change or geopolitical tensions negatively impact its role as wheat supplier to the world market?Opportunities and challenges aheadWhen looking to the future, one must always consider that while Russia has become a more market-oriented economy, it still operates under more government control than its wheat-exporting competitors such as the United States, Canada and Australia.Since June 2021, Russia has placed a floating tax on wheat exports, reportedly to tame food inflation, which has gripped the country, as well as most of the world, in recent months. Historically, Russia has been quick to impose export quotas or even bans during times of drought or domestic food inflation. In 2010, after drought devastated the country’s wheat crop, it imposed an outright export ban, a move that caused global wheat futures to spike and may have indirectly contributed to the Arab Spring uprisings in the Middle East.“I believe it is best to let the free market decide and then the producers and supply chain can work it out,” Vogel said. “But given how tied wheat prices are to bread prices, I think what Russia is doing right now is a better way than banning exports completely.”Zlochevskiy said the Russian government’s interference with grain trade does a disservice to its farmers.“The government doesn’t understand that we struggle for the sales market, and they constantly hamper farmers’ motivation,” he said. “We saw this back in 2014 when we had begun supplying durum wheat to the European Union. And at that moment, the government introduced a floating export duty, which primarily hurt the most expensive product items. All products with a price above ($180) were subjected to a 50% duty. This decision killed our exports of durum wheat. There is no incentive for farmers to grow it as long as no sales markets are available, so farmers stopped investing in this segment.”If not durum wheat, is there potential for Russian farmers to become larger producers of other high-value grains and oilseeds? Opinions are divided on the subject.“By all means this is going to happen,” Zlochevskiy said. “Motivation to grow wheat is going down, while to grow soybeans, to the contrary, is rising. The demand for corn is stable, primarily because livestock producers are yet to realize its potential as a feedstuff. However, the time will come when the demand for corn on the domestic market will rise.”While Vogel doesn’t foresee a significant increase in Russian soybean production, he does see potential for greater production of another oilseed.“I think the crop to watch besides wheat is rapeseed,” he said. “There is potential to see that rising, particularly in times when you have Canada facing a drought, prices for canola being high, and Europeans still scrambling for imports. I assume the Russian farmer will look at that opportunity and invest more on the rapeseed side.”While Russia has succeeded in modernizing its grain infrastructure at port terminals, the country still lags well behind its biggest grain export competitors with mostly outdated inland grain infrastructure.  Vogel said Russian rail and waterway grain transportation systems are in need of a significant upgrade.“Given that rail is still largely state-owned, there may be issues with getting enough rail cars and getting a competitive freight rate,” Vogel said. “When you compare the big grain companies in other parts of the world – ADM, Bunge, and Cargill in the US, for instance, have developed a nice supply chain from the inland elevator all the way though rail transport and river transport. It’s the same more or less in Brazil. I don’t see that happening in Russia where the international companies haven’t developed as much strength as in other exporting regions.”In terms of increasing wheat production, there are two paths to consider: Expand the amount of planted area or improve the yields on the land that is already in production.The problem with expanding wheat acreage is that most of the land that could be brought into production is marginal at best, Rylko said.“We have truly vast land reserves, but it wouldn’t make much economic sense in involving this land in grain production,” Rylko said. “We need first to improve effeciency of already existing operations, in particular, to boost already ongoing digitalization of our farming. We should not stand on the path of virgin land development. This is expensive and promises poor returns.”He is more optimistic regarding the potential for crop yield improvement.“We still have big reserves regarding fertilizer and pesticide application,” Rylko said. “Moreover, one can see quite big intra-regional differences as the best farmsteads in Russia are using more inputs and achieving higher (yields) than average farms.”The country’s farmers also have been slow to adopt no-tillage farming techniques that reduce soil erosion, increase soil biological activity and increase soil organic matter, all of which can lead to economic gains for farmers over time.“Such a big shift requires a combination of big investments, big patience and big knowledge,” Rylko said. “So, despite the tremendous success, there is still a lot to do on the already utilized lands.”Wheat quality is another area with room for improvement, although Rylko noted that progress was being made.“I remember just a few years ago, in the middle 2010s, that Russian exporters dreamed of shifting from the 11.5% to 12.5% protein category,” he said.“For at least the last four seasons in a row this dream is the reality: 12.5% has become a predominant export quality. Amazingly, this season we haven’t seen any vessel shipped by the Black Sea terminals with protein below 12.5%.”As Sosland Publishing Company, publisher of WORLD GRAIN, gears up to celebrate 100 years of providing food industry professionals timely information, news and commentary, we will be publishing a series of articles across all our titles to celebrate the past, present and future of the people and industry that feeds the world.
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