Since July 2011, Russia has been conducting an aggressive strategy to reconquer grain markets, in order to regain the customers it lost during its embargo on exports during the summer of 20101. With a record harvest of more than 90 million tonnes of grain in 2011, Russia should, according to estimates by the International Grains Council (IGC), export 20 million tonnes of wheat for the 2011-2012 campaign. The country also has an alliance with Ukraine and Kazakhstan, the other two agricultural pillars of the region: according to the United States Department of Agriculture, the market share of these three countries now reaches nearly a quarter of world wheat exports. The rise of this major player on international trade has important implications for the structure of the world market and regulatory measures to restrict States’ opportunities in conducting unilateral policies that exacerbate market price volatility are paramount. We invite you to read about this subject in a note published last September by the Centre for Studies and Planning of the Ministry of Agriculture2, which details Russia’s strategy to reconquer the markets.
Momagri Editorial board
In August 2010, Moscow imposed an embargo on its exports even though its grain production had reached record volumes since the Soviet era, respectively 106 and 94 million tonnes (Mt) in 2008 and 2009 (data from the International Grains Council, IGC). With this freeze, Russian deliveries fell by 22 Mt reaching the lowest level since 2000 (4.3 Mt according to IGC), a year when Russian agriculture was still recovering from the period of strong decapitalization that accompanied the fall of the USSR.
Moving from importer status to that of major exporter as from 2001, delivery volumes had indeed quadrupled in a decade, lifting Russia to fourth position among the world's largest exporters of wheat in 2011 (same rank as the European Union after the United States, Australia and Canada) and to 6th position for grain. Russian wheat exports are expected to reach 16 Mt by end September 2011 (USDA), reaching pre-crisis levels (drought and embargo). Moscow expects a 90 million tonne grain harvest in 2011. Together with Ukraine and Kazakhstan, the market share of these three countries now reaches almost 25% of world wheat exports compared with 10% last year (USDA).
Strategy for reconquering the market: increased production
Russia emphasizes the region’s potential for production to reassure its trading partners. With the lifting of the embargo, it has announced aid of 50 000 t to North Korea, 1 000 t of wheat flour to Kenya and is offering farmland to investors from South-East Asia. It is multiplying diplomatic interventions, highlighting its energy revenues to support commercial activities and the comparative advantage of post-Soviet leading grain exporters. In 2009, the Russian Grain Union announced the prospect of creating a commercial union with Ukraine and Kazakhstan (and potential candidates: Hungary, Bulgaria, Romania, Turkey), to act together on the world market. For Moscow, the creation of such a pool would be a stabilizing factor in terms of volumes and therefore prices and an opportunity to reduce its logistical costs. Effectively, Black Sea countries enjoy a strategic location in that the countries on the southern shore of the Mediterranean (North Africa and Middle East) are major grain importers.
The Black Sea: a potential to be developed ... and followed
Russia, Ukraine and Kazakhstan have vast areas of cultivated agricultural land (130 Mha in 2011), with the highest global availability of uncultivated grain land (155 Mha in Russia). The size of the operating structures (up to several thousand hectares) would be very favourable to mechanization and economies of scale, with a high potential for improved yields (currently 2.13 t/ha according to the FAO). And yet, even though these countries are particularly responsive to market developments, their trading ambitions are hampered by climatic irregularities (impacting the volume and quality) and the zone’s socio-economic situation and its infrastructure (particularly in terms of storage and transport).
The development plan for Russian agriculture (2013-2020) to be adopted in late 2011 anticipates an investment of $230 billion with the objective of reaching a 125 Mt grain production in 2020 (IGC). In addition to transport subsidies, Kazakhstan, for its part, is investing in the Baltic Sea ports and railway infrastructures to overcome costs caused by its remote location. And if the Ukraine (more pro-NATO) showed reluctance towards the grain pool in 2009, talks with Moscow have resumed.
In this context, 2010, the year that saw the rise of one of the European Union’s major competitors, particularly on the Mediterranean market, was no accident. Thanks to their grain resources and as meat importers, Russia and Ukraine also seem to want to develop livestock production, which would not be without consequences on the European markets. These developments however could also provide opportunities because, beyond its political objectives, Moscow could turn to its European neighbours to acquire skills and modernize its agriculture.
1 See momagri article « Russia putting pressure on world wheat market » (29/08/2011): http://momagri.org/UK/a-look-at-the-news/Russia-putting-pressure-on-world-wheat-market_966.html
2 To read the full article on the website of the Ministry of Agriculture : http://agriculture.gouv.fr/Veille-no48-Septembre-2011-La