Russia: Wheat Output to Drop 33 Percent

Analysts from the USDA Foreign Agricultural Service traveled to Moscow and southern Russia in April to assess 2003/04 grain production prospects. The team met with farmers, local and federal agricultural officials, grain traders, and independent agricultural specialists. The information gathered from these sources, combined with analysis of recent weather and satellite imagery data, indicate that Russian grain production for 2003/04 will drop significantly from last year due to a reduction in sown winter grain area, higher than usual winterkill, unfavorable spring weather – which reduced winter grain yield potential and hampered spring grain sowing, and continued sub-optimal use of fertilizers and plant-protection chemicals. The USDA estimates total Russian grain production at 65.2 million tons, down 25 percent from last year’s bumper crop of 86.6 million. Wheat production is estimated at 34.0 million tons, down 33 percent from last year’s 50.6 million (Russia’s highest wheat harvest since 1978/79), and barley at 15.5 million, down from 18.7 million last year.

Roughly 14.4 million hectares of winter grains were sown for 2003/04 (including roughly 65 percent wheat, 30 percent rye, and 5 percent barley), against 16.3 million in 2002/03 and 14.6 million in 2001/02. Some analysts attribute the year-to-year reduction in sown area to low grain prices during planting season last fall, and maintain that grain prices are regularly the major factor driving winter grain area. Other analysts suggest that weather is the leading determinant. Analysts from this camp note that forty days of persistent wet weather last fall in most of the Southern District (Russia’s prime winter wheat region) prevented completion of winter grain sowing, and that sown winter grain did increase in Rostov oblast, where the weather was considerably drier and sowing conditions favorable.

Inclement winter weather and an unseasonably cold spring resulted in above-average winterkill in European Russia. A mid-March report from Russia’s Federal Weather Center cited that crops needed to be replanted on 12 to 14 percent of sown area, slightly more than last year but not remarkably high. Damage estimates increased over the next two months, for two reasons: additional damage occurred during March and April, and persistent snow cover in the northern Central District and Volga Valley prevented officials from thoroughly examining the condition of winter grains until late April. The final assessment indicated severe overall damage: according to June data from the State Statistical Committee, nearly 27 percent of Russia's sown winter grain area failed to survive the winter and early spring, compared to a near-average 10 percent last year. (Russia's winterkill problem, while worse than usual, did not approach the extent of damage in Ukraine, where December frosts, February ice crusting, and unfavorable spring weather combined to destroy a staggering 60 percent of sown winter grains.  See Ukraine trip report.) The extent of winterkill varied widely from region to region, even among the four main grain-producing oblasts of the Southern District. According to estimates from SovEcon, an independent Moscow-based agricultural research institute, 8 to 10 percent of winter grains in Stavropol and Krasnodar perished (only slightly higher than last year), compared to over 25 percent in Rostov (4 percent last year) and over 60 in Volgograd oblast (2 percent last year).

Unusually low temperatures during March and April delayed the resumption of vegetative growth of winter grains, and crops were unable to compensate for late fall establishment and winter damage. Winter grain yield potential was further reduced by persistent dryness, beginning in early April, and excessive heat in May. Agricultural officials in Krasnodar, one of Russia’s top agricultural regions, reported in early June that 300,000 hectares of crops perished following two months of hot, dry weather, and that Krasnodar grain output could drop by 40 percent from last year’s record 9-million-ton harvest. Reports from Rostov, another key agricultural territory, are even worse: according to a senior agricultural official, 450,000 hectares of winter crops – roughly 25 percent of the sown area – have perished this spring. While officials emphasize that it is still too early to estimate total damage, spring weather has already had a significant negative effect on crops in the Southern District. Satellite imagery clearly illustrates the combined effect of lower sown area, higher winterkill, and unfavorable spring weather in Volgograd, Rostov, Krasnodar, and Stavropol territories.

Wheat, barley, and oats are Russia’s chief spring grains. Spring wheat typically comprises two-thirds of Russia’s total wheat area (but less than half of wheat output due to winter wheat’s higher yield potential), and spring barley comprises roughly 95 percent of total barley area. Planting progress was impeded by cool spring weather, which reduced the number of available planting days and placed a heavy burden on the country’s aged fleet of planting equipment. The sowing pace accelerated as the season progressed, but some analysts maintain that farmers in the Central and Volga districts missed the prime sowing window, thereby decreasing spring grain yield potential. Most of the country’s spring wheat is grown in the Siberian, Volga, and Ural districts, and the pace of spring sowing in these regions was considerably behind last year’s planting rate. Although the authoritative State Statistical Committee has not yet reported final area numbers, June data from the committee indicates that spring grain area is down about 6 percent from last year.

Price and availability of fuel was not a significant problem during this year’s spring sowing campaign, farmers’ standard complaints notwithstanding. Fuel prices are high but not prohibitively high, and the effect of increased fuel prices will be reflected in marginally higher grain production costs (five percent, according to one analyst). Fuel prices reportedly had little or no effect on sown area.

Because of the weather-related planting delays, some farmers elected to replant destroyed winter grain fields with crops other than spring barley, traditionally the main crop used for reseeding purposes. This is consistent with the efforts of agricultural officials in Rostov oblast to encourage farmers to increase production of "economic crops" for the domestic market (such as sugar beets, sunflowers, vegetables, mustard, rapeseed, corn, buckwheat, and millet) at the expense of wheat production. Officials are eager to expand local food-processing industries and increase the output of value-added products, and trust that the higher profitability of some of these crops, particularly sugar beets, sunflowers, and vegetables, will entice farmers to boost production. Despite administrators’ efforts to sway farmers’ planting decisions in favor of these alternative crops, however, the area planted to wheat actually increased this year in Rostov oblast. Officials explain that winter wheat is the region’s traditional crop. It is easy to sow, resilient under a variety of weather conditions, and it requires less manual labor than other, potentially more profitable crops like sugar beets.

One of the obstacles to a steady and significant increase in Russian grain yield is that only 10 to 15 percent of the country’s arable land receives the recommended amounts of fertilizers and plant-protection chemicals due to a chronic lack of funds in the agricultural sector. Fertilizer and chemical use is expected to remain stable from last year, but current average fertilizer application rates are only ten percent of specialists’ recommendations. Furthermore, the quality of planting seed remains a major problem. Many farmers sow the cheapest seed they can: according to the U.S. agricultural attaché in Moscow, over 90 percent of planting seed is saved ("common") seed. Seed quality is arguably the major impediment to significantly increasing both yield and quality of grain. In order to maximize the beneficial effects of increased pesticide and fertilizer use, farms must first expand the use of certified seed. A substantial increase in fertilizer application rates without the accompanying use of certified seed could actually be detrimental, resulting in excessive vegetative growth with no increase in grain yield, or increased lodging due to weak stems.

The utilization of new technology, such as reduced-tillage practices, may help increase efficiency, but, as with input use, technological improvements must be implemented in a coordinated fashion. One agricultural enterprise in southern Russia, for example, purchased new "no-till" seeders, which also necessitated the purchase of more powerful tractors capable of pulling the seeders. The benefits, however, were significant and justified the investment: fuel use dropped by 75 pct, damage to the soil was reduced, and planting time decreased.

There has been improvement in the agricultural credit situation in Russia over the past five years – for some farms, at least – due largely to subsidies from the federal government. The State offers in-kind credits, whereby seed, fertilizer, and other inputs are provided in exchange for grain harvested at the end of the season, though the use of in-kind credit is reportedly decreasing. The government also provides subsidies for the purchase of plant-protection chemicals and fertilizers, and subsidizes two-thirds of the interest rate on loans from commercial banks, which provide the majority of farm credit. Banks remain cautious and insist on certain farm management practices and minimum levels of input use before granting loans (a policy which, according to some observers, has had a significant positive effect on overall efficiency in the agricultural sector), but banks’ confidence is boosted by increasingly reliable guarantees from regional administrations who see stability of food production as a high priority. Banks recognize the inherent risk in agricultural financing, but also see agriculture as less risky than other industries and are generally willing to lend money to solvent, well-managed farms.

Over fifty percent of Russia’s farms, however, are already saddled with considerable debt, due in part to the disparity between grain prices and production costs, and few farms are able to offer sufficient collateral to secure a loan. As a result, many farms are forced to rely on outside investors to guarantee loans. These investors, frequently referred to as holding companies, typically are large, cash-rich, traditionally non-agricultural companies that became involved in agriculture over the past five years. Some viewed crop production as a potentially highly profitable venture, and others were working to guarantee raw materials for vertically-integrated food-processing operations. Holding companies possess assets that satisfy banks’ demand for collateral, and a farm that receives a commercial loan with the help of a holding company is still eligible for the federal interest subsidy. Many holding companies, particularly those who were attracted to agriculture by the high grain prices during 2000, have lost interest in crop production following two years of low prices and are bailing out. Investments in crop production don’t pay off quickly, in contrast to investments in trade. Although some holding companies remain comfortable with the variable profitability of agriculture and will continue to work with farms, several prominent commodity analysts feel that the overall involvement of big companies in agriculture is declining.

This means that current prospects for significant, long-term investment in agriculture – particularly the purchase of agricultural machinery and grain-storage facilities – are somewhat dim. Land reform has been evolving in Russia since the basic right to own farmland was established in 1993, but "landowners" are still unable to use land as collateral in securing a loan. The situation, however, is not one that can be resolved quickly or easily through legislation alone. There is no mechanism currently in place to enable banks to evaluate the value of land based on its productivity before issuing loans, and banks likely would be reluctant to use land as collateral regardless of legislation. Furthermore, there are restrictions against non-agricultural use of land that is currently used for agriculture: if land is used for other purposes, the owner loses the title to the land. This imposes a limit on the land’s "re-sellability," and, in turn, its value. Most observers believe that the use of land as collateral is years away.

Many farmers are compelled to sell grain shortly after harvest when prices typically are lowest. One of the main reasons is a shortage of on-farm storage capacity, especially following a good harvest. According to the director of a large grain trading firm in southern Russia, only about ten percent of farms have adequate paved, covered storage. This is a relic of the Soviet system, which was designed for immediate post-harvest shipment of grain to regional elevators. The need to repay short-term debts or to satisfy "payment-in-kind" arrangements is the second chief factor contributing to the untimely sale of grain (i.e., untimely from the farmer’s perspective). Roughly half of the output is contracted prior to harvest in exchange for fuel, fertilizers, or chemicals. At harvest time the region is flooded with traders offering cash for grain. Banks do not accept grain as payment, and for a farm director struggling with a heavy debt burden the lure of immediate cash is difficult to resist. Farms also need cash for fall sowing operations, which begin as early as August in northern regions.

One of the most critical problems facing Russian agriculture, and probably the most difficult to solve because of the high cost, is the shortage of agricultural machinery. Recent years have seen some positive changes, due mostly to the increase in federal and regional leasing programs, but Russia’s fleet of machinery remains in poor condition. Machinery is deteriorating faster than it is being replaced. Although federal interest subsidies are available for the purchase of domestically-produced machinery, low grain prices are preventing many farmers from purchasing new equipment. Leasing arrangements are the only way for most farmers to get good, new machinery, but funding for the federal leasing program reportedly did not increase significantly from the 2.7 billion-rubles ($90 million) allocated last year, despite a planned increase to 5 billion rubles ($165 million). Regional leasing programs are better than the federal program, but still inadequate. One observer suggested that the federal machinery leasing program primarily benefits domestic machinery producers: leasing-program administrators purchase Russian-made equipment rather than the foreign machinery that most farmers prefer. Complaints about the federal leasing program were common, but analysts point out that the program was not designed to meet all the machinery needs of Russia’s agricultural sector. The leasing fund can compensate in part for the machinery shortage, but resources must come also from other sources.

Some farms rely on custom combining. Custom combiners, who typically retain one-fourth to one-third of the crop in payment for their services, operate chiefly in the south where yields are higher and custom combining is profitable. Only five to ten percent of Russia’s total grain output is gathered by custom combiners.