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Russia Could Return To The Wheat Market

Russia can regain its place among the world’s top-three wheat exporters in the coming years as long as it can avoid catastrophes such as last year’s massive drought, which resulted in it banning grain sales abroad.

Russia had plowed capital into its grains infrastructure as part of a longer-term strategy to push into international wheat markets, becoming the world’s No. 3 in 2008-09, before falling prey to its worst drought in over a century.

Aiming to diversify earnings streams from its huge energy and minerals resources Russia planned to increase grain output by some 25 per cent to 133 million to 136 million tonnes and to double exports to 40 million to 50 million tonnes in the next 10 to 15 years.

The export ban, to July 1, 2011, originally undermined confidence in Russia as a supplier, but traders still fulfilled existing contracts, buying supplies from other countries such as Kazakhstan at a loss if necessary.

Markets are likely to welcome Russian grain back with open arms as a series of weather disasters including rains in Australia, drought in Argentina and huge U.S. winter storms propel wheat prices up to 2-1/2-year highs.

“We have lost the momentum, but there wasn’t a reverse in our long-term export strategy… And there has been no cut in the sowings area,” Arkady Zlochevsky, president of the powerful lobby, the Russian Grain Union, said.

“Our clients in northern Africa and the Middle East are waiting for us eagerly as they are accustomed to buying our grain, the quality of which satisfies them.”

Countries in the region have stepped up grain purchases anxious to reassure populations eyeing the political turmoil in north Africa, partly prompted by food inflation, which has seen Tunisia’s president toppled and huge protests in Egypt.

HARVEST HOPES

Russia, which had a grain crop of 60.9 million tonnes last year after 97 million in 2009, hopes to harvest 85 million to 87 million tonnes this year, enabling it to resume exports on a small scale.

Zlochevsky reckons Russian farms can raise the sowings area by some 12 million hectares, as most of them keep free land, which they cultivate with an interval of two to three years.

“The key issue is investment in human capital,” Narek Arutyunyan, CEO and board member of Pentagro agricultural company told a recent agricultural conference.

“We do not have sufficient professionals in the agribusiness. We are now sowing grains on 40 million hectares, but could sow on 70. And we could raise yields from two tonnes per hectare to four or five or six with modern technologies.”

Zlochevsky forecasts Russia may have an exportable grain surplus of 15 million tonnes in 2011-12 crop year if the weather holds up, but will ship half that amount, as the government may want to keep stocks at home for safety.

“The expectations of an 85-million-tonne crop are quite feasible if the weather is favourable… But if there is a disaster, then the situation will be worse,” he said.

Higher prices abroad make exports more lucrative for producers than sales within Russia.

EXPORT BAN CONTINUED?

Voter concerns about inflation ahead of parliamentary polls in December and presidential elections next year mean the government is unlikely to allow exports unless they are sure Russia has enough grain to avoid a surge in domestic prices.

“There are great doubts that exports will be opened (after July 1),” said Ivan Tyryshkin, president of a major agricultural company Rusgrain.

“There are many reasons – political, social. We will soon have presidential elections. And stocks are low. We do not expect any changes until the end of August. Everything will depend on the summer.”

Dmitry Rylko, director of the Institute for Agricultural Market Studies (IKAR) think-tank said the government had four options after July 1 to prevent a domestic grain deficit.

One option is to let the ban expire, which is seen as unlikely unless the harvest exceeds 85 million tonnes.

Instead, the ban could be extended for another year and gradually lifted. The third option would be to extend the ban until the end of 2011, then lift it. The fourth – export quotas – would require a big administrative effort, Rylko said.

The quotas option, however, is favoured by the Russian Grain Union, although Zlochevsky said the plan had yet to be backed by the Agriculture Ministry. Russia is no stranger to quotas in the agricultural sector, using them to stimulate domestic meat production by pushing up the cost of imports.

An alternative could be discouraging exports by imposing restrictive tariffs after a certain amount of grain is exported, like in 2008, Zlochevsky said. But this could encourage traders to export grain at low prices, paying less to producers.

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“OurclientsinnorthernAfricaandtheMiddleEastarewaitingforuseagerlyastheyareaccustomedtobuyingourgrain,thequalityofwhichsatisfiesthem.”

– ARKADY ZLOCHEVSKY, RUSSIAN GRAIN UNION

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