23 August 2017

Regional Review: CIS countries' grain exports soaring

In a series of articles, World Grain examines the Commonwealth of Independent States (CIS), led by Russia, Ukraine and Kazakhstan, is becoming a bigger player in global grain production and exports. This is the first of three articles in the September issue.

The rise of the countries of the former Soviet Union (the Commonwealth of Independent States) as grain exporters in recent years has been spectacular, with the region going from being an importer to being one of the most important sources of the world’s grain. The region’s three big grain producers — Russia, Ukraine and Kazakhstan — have some enormous advantages in terms of cost and the potential to achieve high quality, but they have also overcome some great difficulties, particularly in terms of logistics and building trust among the world’s grain buyers.

The region is one of the most important grain producing areas of the world. According to the International Grains Council (IGC), it will produce a total of 214.6 million tonnes of grain in 2017-18, down from 226.9 million the year before. The 2017-18 total is dominated by Russia, with 108.4 million tonnes, followed by Ukraine with 62.3 million and Kazakhstan with 17.5 million. Of the total, 120.5 million tonnes is wheat, with Russia producing 67 million of that, Ukraine 24.5 million and Kazakhstan 13.3 million. It also includes 48.2 million tonnes of maize, mostly produced in Russia, with a crop of 15.4 million tonnes, and Ukraine, which is expected to produce 28.5 million tonnes, and 31.6 million tonnes of barley, with Russia at 17.1 million tonnes and Ukraine at 7.8 million, the biggest producers.

Russia, Ukraine and Kazakhstan are big grain exporters. According to the IGC, Russia will export a total of 39 million tonnes in 2017-18. Ukraine will export 36.2 million tonnes, while Kazakhstan will export 7.8 million. Russia’s export total will include 29.5 million tonnes of wheat, Ukraine 13.5 million and Kazakhstan 7 million, according to the IGC.

“Russia will be again this year the largest wheat exporter in the world,” Swithun Still, director and senior trader at Solaris Commodities SA in Switzerland, told World Grain. He considered the reasons for the country’s success.

“Effectively it is low cost,” he said. “That is the key. Low land costs first and foremost compared to Western Europe and other competing origins. That is the crucial element.” There is also the availability of low-cost labor.

“Farm labor in Russia is very, very cheap compared to certainly Western Europe, North America, even South America, and it is even below some of the other countries in the Black Sea,” he said. “It is comparable with Ukraine, and may be slightly more than Romania.

“Those two factors are crucial because the input costs are low and therefore the profitability of the farming is higher. You are getting a good rate of return for investments in agriculture. Therefore, a lot of people in the last 10 years have gone into the agricultural sector in Russia in big style. They have bought up or leased land and made relatively large landholdings. I think there are about a hundred agri holdings now consisting of more than 100,000 hectares in Russia.”

That creates further cost efficiencies, he said. “If you have a big farm, several big farms, then you are buying the inputs cheaper, often from suppliers, whether it is seed or agricultural equipment, because you are bulk buying,” he said.

It also has helped that the world market has been through a period of being relatively well supported. “The ruble has been a huge factor in the profitability of Russian agriculture,” he said. “It has been relatively weak. It is stronger than it was last year. Last year we got down to 80 but this year it is hovering around 55 to 60 rubles to the dollar on the foreign exchanges. That helps the competitiveness of any exporter.”

Russia’s position in the market also is helped by wheat quality that Still called “exceptional.” “It is, I would maintain, the best quality-to-price ratio of any milling wheat anywhere in the world,” he said. “You are getting more bang for your buck. You have 12.5 protein on a dry basis, generally that is the standard, and you have strong gluten – 25 gluten ISO, and you have test weight that is generally minimum 78. You have a falling number that is at least 280 if 300.

“The only Achilles heel in Russian wheat is bug damage and that has been greatly improved from when I started trading Russian wheat. We were working on 2% maximum bug damage and that was a huge hurdle to climb over to get down to guaranteeing 1%. Now we are often getting, in the milling wheat that we are shipping, less than half a percent.

“We’re not getting down to the 0.1% that French wheat gets or effectively zero damage, so that will preclude Russian wheat from getting into the Algerian market. The OAIC has a maximum 0.1% bug damage specification, thanks to some very good lobbying by France Export Céréales, but we have broken into markets worldwide. We have eaten into the market share of hard red winter into Nigeria, even into Mexico, to Venezuela, partly on a government-to-government basis. Russian wheat has gone to Peru.”

Millers have been impressed with Russian wheat when compared to what they’d been buying before. “For example, Indonesian millers have almost exclusively been taking Canadian or Australian wheat, which is relatively strong, hard wheat,” he said. “They have generally no wheat themselves for six months of the year, so they take Black Sea wheat in the July to December period.”

The same thing happened in Jordan. “We were the first company to break into the Jordanian market, which had tenders that were ostensibly for hard red winter wheat, U.S. wheat, but in the small print of the tender it does actually say ‘or equivalent from other origins’ and people used to tender hard red winter wheat or German wheat or Australian wheat,” he explained. “We tried to ship them Russian wheat and the rest is history. Now you don’t really see other origins getting a look in. It is Russian or Romanian; that is it.”

Russia also has the advantage of having two of the largest markets for wheat right on its doorstep. “You have a great advantage into Turkey and Egypt,” he said. “Those two markets combined account for a large proportion of the Russian milling wheat exports, because they are so close, because they have constant demand and they have geared up their milling industries to use Russian wheat in their mills.”