Head of SovEcon: Russia adopts Argentine way, could put end to farmer success

From SovEcon                                                                             Bing Translated

(RBC is a leading Russian media company offering business news. Mr. Sizov, founder of SovEcon in 1991, has been an agricultural advisor to the Putin government, a director of Russian Railways, and advocate of Russian agriculture. This essay, written for RBC, expands on some remarks he made at a recent London International Grain Conference. I translated it from Russian using Bing Translator and edited it for English syntax. Wayne)
The Argentine way: as Russia puts an end to the successes of its farmers”, “RBC”
Andrey Sizov, Executive Director of the analytical center of rural Sciences “” for “RBC”

The Russian grain business successfully developed through exports. But the new fee, which begins 1 July, could halt investments in the industry and lead to its demise.

As the grain became a profitable business

President Vladimir Putin recently noted that the year 2014 Russia gathered close to the record harvest of grain, and also drew attention to the record export season 2014-2015. Earlier, Dmitry Medvedev spoke about the growth of exports of agricultural products at 40%, linking it with the growth of competitiveness of the Russian agrarian sector. Indeed, Russia’s crop production in the past dozen years has been quite competitive by world standards. This impressive success story: if 30 years ago, Soviet Russia was the largest importer of grain in the world at more than 30 million tonnes of grain per year, today we are one of the largest it exporter. Exports exceeded 30 million tons and already generate about $ 7 billion in revenues.

What happened? Firstly, radically reduced domestic consumption of grain, first due to the collapse of the fantastically inefficient Soviet farming. When 2000-ies livestock began again to grow, it was already much more efficient industry consuming less grain.  The production of meat and poultry Russia back to Soviet time values (percentage of birds is much higher), and coarse grain consumption has become so efficient that it has half of what it was in comparison with the end of the 1980 ‘s. Secondly, with 2000-ies export gave farmers the opportunity to make good money on virtually unlimited global market, I when prices rose dramatically. Thirdly, the State has pursued sound policies in general, without interfering with the market and its developing industry. Of course, the government could have encouraged the development of infrastructure and logistics, run a national exchange, avoided the introduction of short-term panic of export restrictions, limited excess phytosanitary control, addressed the development of the land market and other important and useful things that would have seriously accelerated the development of crop production. But this has not happened. On the other hand, we have several extremely dubious initiatives like a State monopoly on grain export or the idea to create a utopian “grain of OPEC.”  As a result, after failed harvests in the second half of the 1990 ‘s in recent years, we have reached the average production in the region of 90 million tonnes per year (in the second half of the 1980 ‘s was about 100 million tonnes). In 2014, harvest reached 105 million tonnes and in 2015 we expect it at 98 million tons. It seems that such a target dynamics 110-120 million tons are possible in a very near time.

Slipknot round neck of farmers

Growth in the coming years, however, threatens to turn the growth in domestic grain business into decline. The reason is in entering into force from 1 July: the permanent floating duty on wheat. The gist of it is this: the State has established a limit on the price of wheat (this is the main Russian grain culture) at 11,000 rubles per ton. Anything above that price when you export, will incur a 50% duty. While attitudes towards paying this fee at the farm level are rather calm, given the low level of current prices — in the region of 9,000 rubles/t in the domestic market and $ 195 (about 10,500 USD) per ton for export – that may not be the case with higher prices. In recent years, the Government has already several times without notice imposed temporary restrictions on exports, and there is a “clear and predictable mechanism”.  These views are totally incorrect. A permanent floating fee is a “slipknot around the neck of Russian agriculture.” Firstly, the modest amount of the fee is misleading. It is introduced in a period of a relatively strong ruble (in February, the dollar was worth almost 70 rub) and historically low world prices. If next year’s world price per ton of wheat is $ 300 (this was the case in 2014) and the dollar is worth 60 ruble, the amount of the fee will be already 19%. Even if the world price in the region of $ 200-250, direct losses of the Russian crop in the coming year will be more than 24 billion rubles, and this is significantly more than the amount of State subsidies for crop year 2015 lending.

Secondly, the imposition of duties would inevitably drive domestic farmers in a scissors between growing cost and artificially limited income. With an increase in grain prices, necessarily comes a rise in the world prices of most of the logistical resources — seeds, fertilizers, chemicals. To compensate for this increase during the term of the export tax, the farmer cannot get a higher price for his wheat.

Thirdly, the inability to make good money in a period of high prices will not allow our farmers to commit a new qualitative leap in production. What do farmers do? Buya property in France? No. They pay on loans embedded in storage capacities, new equipment, and look where to buy land. The result of the investment, leap, which showed a record harvest year 2008 happened just after record prices season 2007-2008. Since Soviet times of turnover eliminated 40 million hectares of agricultural land and crop yield at times inferior to the European. Fourthly, farmers in the South and Central Black Earth region, the regions most export-oriented, suffer the most from export duties. But only those regions showed strong growth in prices in the post-Soviet era. In other areas, crops either declined or were stable.

Strategic error

Officials argue that the fee would limit the rise in the prices of bread and fodder, and in General, that the regulation of exports is hardly the best world practice. But the price of bread is almost not related to grain prices. For example, prices for food wheat for 2014 increased by 40%, and the prices for bread by 7%, more than two times lower than the overall food inflation. And of course, we must help the poorest, but not through low prices on bread for all, through targeted financial assistance. The need for additional assistance through the regulation of prices for livestock feed also is questionable. Russian poultry and pigs without State regulation of grain prices have made repeated growth of output, and last year the public market participants reported profitability in 20-50% on EBITDA. Yes, many breeders are annoyed with high volatility in the prices of the grain market and dream about his predictability. But the mechanism for this is not State regulation of prices and a grain Exchange.
A common notion of world export control practice does not correspond to reality. In the vast majority of countries with advanced agriculture, export is not restricted. On the contrary In individual countries, even in 1990, ,exports were subsidized, not taxed. Indirect program support for exports remained and now, like the United States in the form of credit-related country-importer. Exception no. 1 out of the picture — Ukraine, where market participants meet to discuss and negotiate with core Office of Exports about corn and wheat exports, the result of which is voluntary-forced agreement. However, given the General course on deregulation of the agricultural market, I suppose, that in the near future the country will abandon this practice.

Exception no. 2-Argentina. Since the mid-2000’s South American country attempted to affect the food inflation through various restrictions on the export of wheat. Here were imposed temporary bans and quota restrictions – and floating taxes. The result is a drop in wheat exports at times and reducing production by tens of percent. And food inflation, like ten years ago, at the two-digit level is almost 20% in year 2014.

It’s a pity that having such a negative case before one’s eyes, our government wants to repeat the mistakes of Argentina a decade ago. The introduction of continuous duty is a strategic mistake, especially at a point in the success stories of the Russian crop, the future of which depends primarily on exports.