January 26 – Russia’s Wheat Game is Just Starting to Heat Up

Russian wheat exports have only just started to reach their potential. With a weak currency and possible investments from China, Russia has set themselves up for one successful year.

Russian wheat exports have only just started to reach their potential. With a weak currency and possible investments from China, Russia has set themselves up for one successful year.

By successful, I mean 35 million tonnes of wheat are expected to be exported. This makes them the top global wheat exporter for the year for the first time in decades.

Their success can be accredited to two main things: a weak currency and the short distance from major buyers in North Africa and the Middle East.

The weak currency make them a prime candidate for countries needing a price break.

The close location is something the U.S. and Canada are having a hard time competing against.

And although Russia is near their exporting capacity due to infrastructure limitations, there are plans in the near future to invest in some needed updates. These resources will likely be provided by domestic sources and China.

Once these updates are complete, Russia will be an even more serious competitor.

In order to continue their success, Russian grain farmers must find demand other than in the livestock and consumer markets.

Their livestock industry is relatively small – only about 50% more pork production than Canada. And due to low incomes, the Russians don’t usually find themselves enjoying a nice red meat meal.

So instead they turn to the Black Sea as a gateway to those who can take the grain, since the ports have close proximity to its major wheat-importing countries.

But it’s not stopping there.

China is looking into ways to optimize trade routes. They’re investing their infrastructure in better rail and ocean transportation to link them to areas out east– or otherwise, Russia.

With the possibility of Russia gaining better access to Asia’s wheat importers, countries like Canada and the U.S. could start to feel their export market shrinking.

And shrinking it is.

 

Russia’s wheat dominance set to get bigger in the future

For the first time since the days of the tsars, Russia this year will be the world’s largest wheat exporter at an expected 35 million tonnes. It will likely export a total of more than 45 million tonnes of grain once corn and barley are added in.

Infrastructure constraints pose a limit to its exports in the near term, but new infrastructure investment, from domestic sources and likely China, could make it an even more formidable competitor in the future.

Two bumper crops in a row have given Russia ample surpluses while a weak currency and close proximity to major buyers in North Africa and the Middle East make it hard to compete against.

It has the grain to export even more, but its rail and port systems are at maximum capacity.

Russia’s wheat exports are expected to top the second largest exporter, the European Union, by eight million tonnes, and the United States, the number three exporter, by about 8.5 million tonnes.

Canada is expected to export about 22 million tonnes.

After the collapse of the Soviet Union and Russia’s re-emergence as a grain exporter, its production and international sales were initially inconsistent.

But since about 2010 it has had mostly good luck with weather, and improved seed stock and production methods have greatly improved yields. Russian wheat quality has also improved, and millers around the world have improved technology to be able to use a wider range of wheat quality. As a result, the country’s grain production and exports have rapidly risen.

The export market is key for Russian grain farmers. Producing feedgrains for the domestic livestock industry is limited. Russia’s hog and cattle industries are relatively small, and consumer demand for red meat is limited because of relatively low incomes. For perspective, Russia’s population of 144 million is four times bigger than Canada’s, but its three million tonnes of pork production is only 50 percent more than Canada’s.

It produces only 1.3 million tonnes of beef.

While the weather will not always co-operate to produce bumper crops, Russia’s grain industry is gearing up to further expand its export capacity.

The Black Sea-Mediterranean system is by far its major outlet because of its proximity to its major wheat producing regions.

Only a small fraction of its wheat is grown in northern areas served by Baltic ports.

As well, Russia’s Pacific port is about 7,000 kilometres from the closest wheat producing area.

Russia in the past could use some of Ukraine’s port capacity, but the current tensions between the two countries rule that out.

The Black Sea ports, which are currently undergoing major expansions at grain terminals, are also useful because they are close to some of the world’s biggest wheat importers — Egypt, Turkey and Algeria.

However, major buyers in Asia, such as Japan, Indonesia and the Philippines, are much farther away, and until now that helped Australia, Canada and the United States maintain a market advantage in the fast growing region.

But China’s “one belt, one road” infrastructure plan will see huge Chinese investment in ocean and rail transportation links between China and areas to its east, including Russia, the former Soviet republics and Europe. These investments could make it easier for Russian grain to get to Asia.

The plan includes investment in transportation links to Kazakhstan, giving that grain exporter better rail access to western China.

I have found a few articles that talk vaguely about getting Russian grain to its Pacific coast, but as noted, the current most easterly wheat area in Russia, in Siberia north of Kazakhstan, is many thousands of kilometres from the Pacific coast.

However, agricultural investors from Heilongjiang, the northeastern province of China that grows much of the country’s corn and soybeans, are investing to produce crops in areas of Russia immediately north of the border that have similar climate and soil but few people.

If those ventures are successful, Russia’s influence on the grain trade could become even greater.

H/T: The Western Producer
About the Author
Megan Perrero

Megan Perrero is the financial editorial intern for FarmLead. She is currently a junior at Columbia College Chicago. She is working towards her BA in journalism with a concentration in magazine writing. She also has a minor in public relations. She grew up in central Illinois.