Russian Wheat: Red Breadbasket Rising?

15.08.2016

In describing wheat’s strategic importance to policymakers, American President Herbert Hoover reportedly summed it up this way: “The first word in war is spoken by the guns—but the last word has always been spoken by bread.” Russia knows only too well the reality of those words from first-hand experience—Napoleon’s invasion of Russia in 1812 was undermined, in part, by dwindling grain supplies. The country’s ban on wheat exports in 2010 and the uprising in Egypt, the world’s largest importer of wheat, during the following spring are also forceful reminders of how lives and political outcomes can still hang in the balance because of Russian wheat. Still, the strategic importance of wheat to Russian producers and global importers can easily be overlooked in an environment where the USDA is projecting that global wheat ending stocks will reach a record high this year.

In a country that saw its bread basket suffer 27 droughts during the 20th century, every Russian farmer instinctively knows that, although the cord between Russian wheat and the world has occasionally frayed, it has never been completely torn asunder. Poor weather can quickly erase the current surplus, resulting in export bans and price spikes. What’s more, developing countries are struggling to achieve food security, and turf wars among the world’s top wheat producers to capture export markets are surfacing. With Russia regaining the title as the world’s largest wheat exporter in the 2015-16 marketing year, importers and exporters should seriously evaluate whether the country’s success is ephemeral or evidence that the country is once again tapping into its latent production potential. One thing is certain: Russia’s past, present, and future are intertwined with wheat.

A short-term fix had long-term consequences

While cereal farming has always had cultural significance for Russians, the shock of Stalin’s collectivization-induced famines made wheat production integral to Soviet policy as it acted as a strong proxy for gauging the success of communism at large. Khrushchev's emphasis on agriculture spurred his rise to power and the development of the Virgin Lands Campaign (Освоение целины) in 1953. By 1960, the USSR increased cropland by 55 million hectares, ensuring that Russia remained a dominant figure in global wheat production during the Soviet Era. On the other hand, the strategic decision to grow cropland as opposed to adopting structural agricultural reforms did little to bridge Russia’s long-term productivity gap with its Western peers. The problem became acute during the Great Grain Robbery of 1972 when unexpected crop failures caused Russia to import grain from the United States, its ideological enemy, for the first time since 1917.

With the dissolution of the Soviet Union came economic hardship leading to diminished consumer purchasing power and a drastic reduction in government subsidies for Russia’s agricultural producers. The transition to free markets from collectivism proved extremely painful for the country’s farmers.

Investment in the Russian agricultural sector declined from $39 billion in 1990 to $2 billion in 2000, removing many of the prior support mechanisms, including price supports and crop input subsidies, for the country’s grain and livestock producers.

To make matters worse, per capita beef consumption in Russia halved during the 1990s in conjunction with falling income levels, changing consumer behavior, and reduced domestic livestock supplies. With fewer economic incentives for farmers to maintain prior production, Russia’s cereal production collapsed, as cropland in Russia shrunk by 41 million hectares between 1990 and 2011.

Despite loss of subsidies and cropland, Russia emerged as a net exporter of wheat in the 2001-02 marketing year. In fact, supportive weather conditions during 2016 are expected to push Russia into the vaunted position of being the world’s top wheat exporter for the second marketing year running. However, high production during amenable weather conditions should not be confused with a reformed agricultural sector. The opposite may just as easily have occurred, as it did in 2010, when heat waves produced droughts and wildfires throughout European Russia that wiped out a quarter of the country's grain harvest and led to an economic loss of $15 billion.

The reality is that the country’s wheat production still falls short of its potential, which is largely driven by past underinvestment in capital equipment and inconsistent agronomic practices. Crumbling infrastructure, including Soviet-era irrigation projects, has also exacerbated the fact that two-thirds of arable land in Russia has an insufficient water source and that southern growing regions face erratic weather patterns. What’s more, Russian farmers in 2014 applied half the amount of nitrogen fertilizers during cereal production than they did in 1990. As a result, insufficient fertilizer and water supplies have led some scholars to estimate yield gaps of 44 and 62 percent, respectively, for winter and spring wheat. Even after a 25 percent jump in the country’s wheat yields in the past decade, Russia wheat yields in 2015 were 39 percent lower than the EU’s and 36 percent lower Ukraine’s.

In the midst of this saga of lost potential, some academics and commodity consultants see reason to be optimistic about the country’s potential to close its wheat yield gap. Recent research shows that increased crop intensification methods and selective recultivation of abandoned cropland could expand Russia’s wheat production by nine to 32 million tonnes under favorable rainfed weather conditions and a stable economic background. Even greater production gains could, in theory, be achieved if irrigation is added to the equation and environmental concerns are minimized. However, irrigation investment is unlikely without significant government subsidies, and unpredictable weather patterns in many abandoned cropland areas make reclamation untenable in the absence of new crop insurance schemes. Last, some point to the fact that Russia’s spring wheat areas will continue to be negatively impacted by climate change, creating uncertain financial returns for irrigation projections in the region and, in turn, resulting in a continued drag on the country’s overall wheat yield potential.

Small changes can go a long way for Russia

Realistically, Russia could increase baseline wheat production (59 million tonnes) by 9 to 15 tonnes by 2025, albeit impacted year over year by climate and farmer economics. Recent academic research suggests that growers can potentially reach 60 to 80 percent of potential yield in European Russia by normalizing nitrogen fertilizer use, planting better wheat cultivars, and adopting the latest agronomic practices. An increase in global wheat demand and domestic policy measures encouraging livestock production—increasing feed demand—are also the essential linchpins to holding together the economic case for farmers.

To this end, Russia is implementing a $76-billion plan to boost agricultural productivity, which includes discretionary subsidies for farmers and continued support for the livestock sector. But the immediate outlook for government support looks less promising. A recent USDA Foreign Agricultural Service attaché report questioned whether government spending on agriculture can be maintained at past levels in 2016-17, owing to economic challenges in the Russian Federation. Gro Intelligence checked in with Sergey Feofilov, head of UkrAgroConsult, who had this to say: “While government spending on agriculture can’t be counted on to spur agricultural productivity in Russia, there is evidence that rising profitability at the farm level over the past two years is resulting in increased fertilizer application levels, higher imports of high-yielding wheat cultivars, and a greater number of grain combine purchases this past spring.”

Russia’s aspirations could impact global trade flows

If Russia’s farmers continue down the path of improved agronomic practices, the country could capture a greater percentage of global wheat exports than currently anticipated. Even if Russia is able to close the wheat yield gap, it is unlikely to happen within a few seasons or in a linear fashion. Nevertheless, a basic scenario analysis is helpful in illustrating the impact that Russia’s untapped production potential could have on global wheat trade flows. Assuming that roughly half of Russia’s incremental production gains are directed to the export markets—derived by extrapolating Russia’s export trends during the past three marketing years, Russia could capture 20 to 24 percent of projected global wheat exports in 2025. This figure is up from 14 percent in the 2014-15 marketing year and ahead of the USDA’s estimate of 15 percent in 2024-25.

Conclusion

Even as Russia is expected to hold the world’s title for top wheat exporter this season, a considerable gap remains between the country’s wheat yields and those of its regional rivals. There is a strong historical precedent dating back to the Soviet Era for the country’s lagging agricultural productivity; yet recent research and input from regional commodity consultants offers hope that the country can gain ground, albeit in step-function fashion, in the coming years. If Russia can sustain recently launched agricultural support programs and farmers remain economically driven to improve agronomic practices, it is conceivable that baseline wheat production can expand by 17 to 25 percent by 2025 to reach 68 to 74 million tonnes. With the Ministry of Agriculture reporting that sales of fertilizers were up 20 percent year-over-year in the first three months of 2016, there is some evidence that farmers are, at least in this season, starting to close the nutrient application gap. Still, the country’s farmers remain heavily indebted, domestic lending rates remain high, and producer profits aren’t expected to remain as high next season, so skeptics will still point out that one season does not a clear trend make.

Even so, there are global implications for global producers and consumers alike if Russian wheat growers can keep a steady hand on the plow. With roughly 40 percent of global wheat import growth expected to be driven by Africa over the same time period, growing wheat exports from Russia could offer a supply buffer for consumers in these developing countries. On the downside, Russia’s position as a low-cost shipper to Africa could become a hindrance for African countries that are trying to stimulate their own domestic production. Depending on global market conditions, the shorter distance for Black Sea producers to many wheat import markets in relation to the US and Canada could also heighten export competition.

Within the global value chain, a sustained expansion in grain shipments from the Black Sea region will also likely require increased investment in logistics and storage capacity. As of 2011, a combination of government and privately funded operators were planning to spend over $500 million to develop and expand port and logistics operations on the country’s rivers and at locations on the Baltic, Azov, and Black Seas. A resurgent Russian agricultural sector would also be a boon to fertilizer, seed, and equipment manufactures. While climate patterns, financial pressures on farmers, and exogenous events could ultimately derail Russia’s export recovery, grain handlers, livestock producers, milling operators, and traders should still stay alert to Russia’s unrealized potential and the potential implications for global trade.


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