Interview with the founder and director of Agrospeaker Company, Vitaliy Shamajev
-What is the current situation on the Russian grain market?
Russia showed 127% food distribution in grains in the season of 2009/10 MY. It is calculated as the output to the domestic demand ratio. This index measures the availability of export potential. By the way, the food safety in the oilseeds is 80% because of the soybean imports. As for rapeseeds and sunflower, the internal needs were fully covered by the farmers.
The main problem of the Russian agro-industrial complex is that it has very low demand per hectare for grains and oilseeds from the sowing areas, which puts the barriers for implementation of the high crop technologies in all over the lands at the same time. In other words, the investor, opening the grain production should understand, that the market allows to sell just only 2 tonnes per hectare, meanwhile the technologies stipulate the yield at 4-5 tonnes. Russia agrarian production has bright shown grain orientation. The share of grains in the whole crop with oilseeds accounts for 92%. So as a result, the grain market is fulfilled. The consequences of such production to demand imbalance are the following: the price depression and necessity of fire-safety arrangements for market stabilization, for example, purchasing interventions, which do not cure the reason of the illness of the grain trade market, but just try to put the consequences away.
-As you have already said, nowadays, the Russian market is fulfilled with grain. The crop 2010 is also expected as very good. How should the market fight with the oversupply of grains?
With the growth of the ending stocks, the questions about the diversification of sowing areas and export policy had become the main thing in the program of market development. In order to make the effective arrangements of export support, it is necessary to understand very clear the borders of the export field, its condition, as well as the margin of safety in logistics.
-So, lots depend on the fact, if the market participants would have a chance to export grains?
Absolutely right. Lots depend on the fact, whether one has a chance to export grains or not. The analysis of railway transportation of grains for three previous seasons shows the rate of involvement of the Russian regions into the world market. The shares of the exports are dispersed among the Federal Districts (FD) in the following way: the Southern FD - 72.1 %, Central FD - 15%, Volga FD - 62.2%, Urals FD - 3,4%, Siberian FD - 3.1%.
The export field in the far regions is almost dried up. The cost of wheat delivery between the basis EXW elevator - CPT-Novorossiysk is about 60 USD/t all over the regions or 30% from the world level prices by the wheat index Agrospeaker - ASP_Wheat
For far regions, those are barrier tariffs, The internal market is also unable to proceed the demand. The verifier is high stocks of grains, which totaled 170-190% to the last year level in the second half of the season. The fast dynamics of growth of the grain transportation costs is able to shut the exports from far regions. The transport infrastructure increases the cost of their services much faster than the growth of grain prices. For 10 years, the export tariffs from the Orel and Stavropol to Novorossiysk have increased by 985% on an average, and internal ones to Rostov-on-Don by 737%. The summary index of the grain and oilseed global market was slowly consolidated just only at 215%. Outrun rates of growth of the tariffs for grain and oilseed transportation and transshipment are lowing the borders of the export field and create the threaten for the export powers loading.
-You were talking about the diversification of sown areas. What if we assume that the sown areas for grains will be reduced, would the market be able to work relatively stable?
Unfortunately, the farmers are not able to solve all the market problems just only by the diversification of areas. Though the reduction of the sown areas under grains, including wheat, is very important. It is also necessary to put the existing trade barriers away and create the new sales markets, which would double the demand per hectare, and would create the normal conditions for the agrarian sector development, not for certain farms, but at the regional level. When everybody is able to use the fetus of high-crop technologies, when the additional volumes of grains would bring the benefit, not the loss. But these questions are out of the production borders and are being solved in political sphere. That is why, the development of the Russian AIC is impossible without the political program, which will assist to reach the certain fundamental market parameters through the export developing, liquidate the customs barriers and create the new sales markets.
-Are there any adequate government programs today?
Until today, all the programs of agriculture development have not made possible to escape the depression on the market, not proceeded the financial stabilization for many years, so as they couldn't significantly change the fundamental market parameters till the necessary level. Though the certain steps are made by the government. For example, the creating of the United Grain Company (OZK), which is the governmental exporter of grains from Russia. There are certain data about the results of its activity. Thus, according to the last data, in May the company Glencore has shipped 30.000 tonnes of wheat to Egypt. This volume was purchased at the United Grain Company and sent from the port Novorossiysk. OZK has finished shipping to Cuba about 100.000 tonnes of milling wheat of the 4th grade from the state investment fund. Also, on May, 8, 2010, the company made its first grain delivery according to the commercial contract in the volume of 23,740 tonnes of milling wheat to one of the biggest traders-suppliers to Egypt. The good news is at least some steps are being made toward reducing the amount of grains available on the market. But unfortunately, considering the dynamics of shipping, it is just a little drop in the sea.
-How is the prime-cost calculation making today?
The high cost of the raw material picks up all over the time the loss-less level of yield, which had already been matched in many districts with the level of demand market per hectare. If to divide the average prime-cost per 1 hectare of wheat into today depression prices of grain sales in the industry, we would get the index about 2 tonnes/ha. This is the power of the Russian grain industry. Other words, in today prices the market allows the farmers to refund just only the expenses for production and not to sell the additional volumes of grains as for getting own profit.
Over the past decade, there have been too big changes in the economics, which dictate the farmers quite different borders for the prime-cost per hectare of sown areas and its loss-less yield. The Russian AIC cannot fit into these boundaries without creating an adequate market. When we say that the cost of grains in the good industries is 2000 rubles, you should understand that it was achieved with a yield at 3-4 tonnes/ha, and the market makes it possible to sell only two tonnes. That is why, such prime-cost is unattainable in the scales of the regions. Hence, the industry losses.
-What perspectives of grain crop do you see in the next season?
In my opinion, the next season will be quite difficult for the grain industry of Russia. I predict that we will see the diversification of the sown areas: the areas under grains will be reduced by 4.6 mln ha. The consumption of wheat and barley will reduce and compensated by the increased demand for maize from animal feed, alcohol, starch industries. However, the fundamental problem of the market - a surplus of grains are unlikely to be resolved, because in order to implement the carry-over stocks of wheat, which include intervention fund there should be done a big reduce of the area within -4.2 mln ha.
A good indicator of optimism in the Russian grain market is the spread appeared between the index of wheat prices of far regions and the world market. When the spread increases, the bearish moods intensify on the internal market, and, conversely, when it reduced, the market is out of depression. This indicator is very important because it influences the capacities of production. It is worth to note that since 2000 there have been three periods of depression of the market after the harvest 2002, 2005, 2009. The current market value for the spread is very similar to the season- 2002/03, after which wheat production declined by 30% on an average from the previous two years, and the sown areas reduced by -10%, meanwhile exports fell by -63%. I do not think that the necessary reduction in the sown area will occur immediately. However, my expectations for the year-2010 regarding wheat are the following: the sowing are may be reduced to 24 mln hectares, harvest to 47 mln tonnes, exports to 15 mln tonnes, taking into account the implementation of the intervention fund.
-Summarizing all above mentioned, what steps must first be taken to the normalization of the market in your opinion?
For development of the Russian agrarian sector one must undertake the following tasks:
1. To make the diversification of the areas in oilseed sector. To increase the proportion of oilseed sowing areas from 13% to 25%, and reduce grain acreage from 87% to 75%. To provide the governmental regulation of the market of oilseeds with the purpose of full loading of processing capacities and duty-free exports of oilseeds and by-products stocks to the global market.
2. To develop a program of export expanding, which provide subsidies for transport costs and infrastructure development.
3. To increase the capacity of the grain market up to 4 tonnes/ha; oilseeds up to 2 tonnes/ha through the creation of the biofuels market, so as the demand of the internal food market, and livestock and exports, taken together, are not able to provide achievement of these indicators all over the regions of Russia in the nearest future. This assertion is followed out of the population in Russia, and the light growth in the global market.
