Russia:  Grain Production Prospects and Siberia Trip Report

Analysts from the USDA Foreign Agricultural Service (FAS) in Washington, with the U.S. agricultural attaché in Moscow, conducted July crop-assessment travel in the Siberian District of Russia to assess 2008/09 wheat production prospects and other crop-production issues. The team traveled to key spring wheat regions and met with grain traders, grain producers, agricultural officials, and independent commodity analysts in Siberia and Moscow. Based on information gathered from interviews and field observations, the team drew the following conclusions:

• Wheat production in Siberia is likely to drop by about 2 million tons from last year due chiefly to persistent drought in southern Altai, but favorable harvest prospects in other production regions will compensate for the shortfall and total Russian wheat production will increase by an estimated 15 percent from last year.
• Although total sown area for all crops in Russia has declined by nearly 40 million hectares since 1991, only a portion of this land is likely to be returned to crop production due to high recovery costs and low profitability.
• Investors – including foreign investors – are actively acquiring agricultural land in Russia but are focusing chiefly on the purchase of leased land currently in production rather than the recovery of idle land.
• Future growth in Russia’s crop production potential will be achieved primarily through a technology-driven increase in yield, not by an expansion in area.

Current USDA Estimates and Analysis
With sown area up by 4 percent from last year and yields forecast to increase by at least 10 percent, Russian grain production for 2008/09 will likely reach at least 94 million tons, the largest harvest in 15 years. The USDA estimates Russia wheat production for 2008/09 at 57.0 million tons against49.4 million last year. Area is estimated at 26.1 million hectares, up 1.6 million from last year, and yield is estimated at 2.18 tons per hectare. (Winter wheat typically accounts for about 40 percent of total wheat area and about 60 percent of production.)  This is the highest Russian wheat yield on record, including the harvests of the Soviet era. Crop conditions have been outstanding throughout the growing season in most areas of European Russia, including the Southern, Central, and Volga Districts where virtually all of the country’s winter wheat is produced. Conditions have been generally favorable for spring wheat in the Volga, Ural, and Siberian Districts, although precipitation in southern Altai Krai (typically the largest spring-wheat producing territory in Russia) has been persistently below normal since early spring.

Based on the analysis of satellite-derived vegetative indices (NDVI), wheat production in the four major territories of the Southern District – Stavropol, Krasnodar, Rostov, and Volgograd, which together account for over 60 percent of Russia’s winter wheat output – is estimated to increase by 5 million tons over last year. (This analysis method is described in an earlier report: Ukraine: Estimated Wheat Yield Based on Satellite-Derived NDVI.) One of the main advantages of NDVI-based yield analysis is that the data provide a fairly reliable indicator of potential production five weeks before the launch of the harvest campaign. Harvest-progress reports indicate that 2008 output as of July 29, with harvest 80 percent complete, was up 5.3 million tons from last year.

Meanwhile, spring wheat in the Volga, Ural, and Siberian Districts has benefited from generally favorable weather and adequate rainfall, with a few exceptions: in western and southern Altai and southwestern Novosibirsk, and in western Orenburg and Bashkir territories in the Volga District. The persistent dryness in Altai could affect as much as 10 percent of Russia’s spring wheat area.

The FAS analysts observed very good conditions for spring wheat in the Ordinskiy raion of south-central Novosibirsk oblast in mid-July, and local producers said that yields will be higher than last year. (An oblast or krai is a first-order administrative unit in Russia, similar to a U.S. state. A raion is a second-order administrative unit, similar to a county. Unless otherwise indicated, Novosibirsk refers to the oblast, rather than the city of the same name, and Altai refers to Altai Krai.) According to a senior oblast official, conditions in Novosibirsk are generally better than last year (except in western Novosibirsk, where dryness hampered crop development), and officials estimate that total grain production will reach at least 3 million tons, 0.5 million above last year and the highest output since 2001. Spring wheat is the dominant crop in Novosibirsk, comprising about 75 percent of total grain area.

Spring-wheat conditions were considerably worse in north-central Altai, directly to the south of Ordinskiy raion. The poor crop conditions were attributed chiefly to excessive dryness, although local specialists said that later-planted fields were doing better than earlier-planted fields because the timing of the meager May rains was more beneficial for the development of the later-planted wheat.

Russian barley production for 2008/09 is estimated at 18.0 million tons, up 0.5 million from last month and up 2.4 million from last year. Yield is estimated at 1.88 tons per hectare, the third-highest yield in history. Barley is grown in all major agricultural regions and this year’s crop has benefited from the same weather that has boosted wheat yields. Harvest was roughly 15 percent complete by August 1 (spring barley accounts for nearly 95 percent of total barley area in Russia) and early yields are up 25 percent from last year.

Corn production is forecast at 5.8 million tons, up over 1.8 million from last year. Harvested area is estimated at 1.6 million hectares – up 23 percent from last year and the highest level since 1961. Although the crop got off to a promising start this year, with plentiful early-season moisture and moderate temperatures, yields could be negatively affected by several factors:

• A narrow band of localized dryness extending into Rostov oblast, one of the key production regions of the Southern District.
• Shortages of hybrid planting seed. The use of hybrid seed for both corn and sunflowers in Russia has increased steadily in recent years. Agricultural enterprises rely on imports of hybrid seed, and high demand for the 2008 planting season resulted in shortages.
• Increased area in regions outside of the traditional production zones. Some observers suggest that yields will likely be lower in these “non-traditional” regions due in part to the shorter growing season and potentially higher harvest losses.

These cautionary notes notwithstanding, corn yield for 2008/09 is forecast at an above-average 3.63 tons per hectares, substantially higher than last year when excessive summer heat sharply reduced output.

The Decline in Sown Area in Russia
According to data from the State Statistical Committee, total sown area in Russia slid from 117.7 million hectares in 1990 to 76.4 million in 2007. The decline is attributed in large part to a coincident drop in livestock inventories and a resultant decrease in the sown area of feed grains and other forage crops. Another contributing factor is inadequate or incomplete certification of land that was distributed to State farm workers in the form of land shares when these enterprises were liquidated following the breakup of the Soviet Union. Of the 12 million shareholders – who hold a combined 110 million hectares of agricultural land – only 3 to 4 percent have fully completed the registration process, which includes determining precise field coordinates and receiving a title. The lack of a title does not prevent the shareholder from farming the land or leasing it to an agricultural enterprise, but it prevents the sale of the land to another party. In some cases, shareholders have completed the registration process but have no interest in farming or leasing the land.

Although total sown area has been decreasing steadily, note that the combined area of grains and oilseeds has increased for five consecutive years. Grain area increased by 10 percent since 2003/04, including a 5-percent jump from last year, as producers responded to skyrocketing prices during the fall and spring sowing campaigns.  (Note that prices have since plummeted).  Official data cite total grain area for 2008/09 at 46.6 million hectares against 44.4 million last year, an increase of 5 percent.

“Idle” Land
The expanding global demand for grains and oilseeds has raised interest in Russia’s capacity to boost its agricultural production, either by increasing crop yields or through the reclamation of idle land (i.e., the nearly 40 million hectares of arable but unplanted land that was “abandoned” over the past 20 years). Specialists agree that a significant portion of this land is unsuitable for agriculture and never should have been cultivated to begin with. Informed observers have offered a wide range of estimates of the amount on idle land likely to be returned to production: from as high as 20 million hectares to as low as 5 million, not including the 2 to 4 million hectares that have already been returned to the rotation. Information collected by FAS analysts in interviews with grain producers, officials, and independent analysts indicates that less than half of the 40 million hectares of idle land – and probably considerably less than half – is likely to be returned to crop production (including grains, oilseeds, sugar beets, forage crops, and vegetables).

A variety of factors could hamper the reclamation of idle land:
• Reclamation costs are prohibitively high in some cases, especially in the Central District where a large share of the idle land is located.
• Much of the idle land is located outside of the fertile chernozem (‘black-soil”) zone or in zones of risky agriculture, and is of marginal productivity.
• The purchase and titling of land is a cumbersome and time-consuming process, and many investors prefer to lease land that is currently in production rather than purchase and renovate idle land.
• A relatively small amount of agricultural land has been lost to urbanization.

Considering the amount and location of the idle land, and the view (repeatedly expressed by investors officials, and analysts) that higher yield – not higher area – will be the key to boosting grain and oilseed production, the evidence would suggest that total idle-land recovery is unlikely to exceed 10 million hectares.

Location and Estimated Recovery Costs of Idle Land
Between 1990 and 2007, Russian grain area dropped by nearly 19 million hectares, from 63.1 to 44.4 million hectares. The Volga District accounted for over 40 percent of this decrease, the Central District for 25 percent, and Siberia for 17 percent. In the Southern District, which produces 30 percent of the country’s grain and more than half of the sunflowerseed, grain area decreased by only 4 percent over the same time period, and virtually all of the decrease occurred in Volgograd oblast, which is the lowest-yielding of the four major territories of the Southern District. Most specialists in Russia agree that only a small portion of Russia’s idle land is located in the Southern District, and that efforts to recover idle land will focus chiefly on the Central and Volga Districts.

The cost of reclaiming idle land depends on two factors: location and the amount of time that the land has been left unplanted. In the Southern District, the central Volga Valley, and western Siberian, where unplanted fields are less likely to become overgrown with large woody plants, recovery costs can be as low as $40 per hectare ($20 for herbicides and $20 for cultivation) even for a field that has been idle for ten years. (Insert idle-field slide.) In the more humid Central District, reclamation costs typically run $300 per hectare or more, according to analyst estimates. Weed growth is much more prolific and trees can become established in only three to five years, making recovery labor-intensive and expensive.

Current land-recovery activity is occurring chiefly in the Volga District, where reclamation costs tend to be relatively low, and in the southern Central District. Despite the low recovery costs in western Siberia, experts indicate that infrastructure constraints and transportation costs could discourage recovery efforts. According to officials in Novosibirsk, about 0.25 million hectares of idle land will be returned to production, which represents less than one-third of the idle land in the oblast. In Altai, only 0.14 million hectares of idle land, or 2 percent of the total arable land, has been recovered to date. Thirty years ago, grain area in Altai was about 5 million hectares; local specialists maintain that sown area will never return to that level and stressed that future growth in grain output will hinge on higher yield rather than expanded area.

Land Ownership Issues
Progress in the recovery of idle land is tied partly to land-ownership issues, particularly in areas where recovery costs are high. As in Ukraine, potential investors are unlikely to sink large amounts of money into the recovery of land that they do not own. The land-acquisition process is cumbersome and time-consuming, typically taking at least a year. According to local observers, purchasers can accelerate the process through the payment of bribes, but even in these situations it will still take months to obtain the title. Furthermore, an investor that wants to purchase land within the territory of a previously-dismantled former State farm faces additional hurdles. A separate contract must be negotiated with each individual shareholder, typically for a 10- to 15-hectare land parcel. This share-by-share approach both increases the cost of land acquisition and complicates the efforts of investors to acquire large, consolidated tracts of land.

Although the government relinquished ownership of most of the former State and collective farms following the breakup of the Soviet Union, a significant amount of land remained in the hands of local administrations, and some of this land is being leased or sold to private investors. This includes land that was either confiscated by the government from private shareholders because it was not being used for agriculture, or land on State farms for which the land was never distributed to shareholders. Purchasing land from a local administration offers two huge advantages: the convenience of dealing with only the regional administration (rather than dozens of individual shareholders), and field consolidation (in the case of former State farms).

Foreign Ownership of Agricultural Land in Russia
Foreign investors are technically prohibited from purchasing agricultural land in Russia, but this restriction can be skirted fairly easily. A foreign company can own agricultural land as long as it is classified as a subsidiary of a Russian company; this connection can be established through participation in a project using joint capital. Although foreign farmers have established successful, long-term agricultural enterprises in Russia, some observers remain wary of land purchases by foreign investors. According to a leading agricultural official, the primary driving force behind this “land grab” is speculation, not crop production. The prospect of the eventual conversion of agricultural land to non-agricultural use causes mixed reactions among Russian agricultural specialists. Some see it as a genuine threat to the country’s crop-production potential. Others maintain that the land being purchased is good agricultural land that lacks only investment capital in order to return it to productivity, and further suggest that sufficient regulations are in place to prevent the significant loss of agricultural land.

Boosting Production through Technology-Based Yield Improvement
The potential productivity of reclaimed land under intensive technology is high. According to grain-production specialists from one of Russia’s major agriholding companies, yields on Novosibirsk wheat fields during the first season following recovery (with favorable weather) are approximately 2.0 tons per hectare, and typically reach 3.0 to 3.5 tons per hectare by the third season. Analysts suggest that even in regions where recovery is more difficult, farmers are capable of achieving maximum grain yields within five years.

Nevertheless, given the potentially high recovery costs and administrative obstacles to the purchase of land, many investors prefer to lease land from shareholders (or assist the shareholder in the titling process in preparation for eventual purchase by the investor) rather than invest in the recovery of idle land. Most analysts agree that it is more economically sound to invest in technology to increase yields on currently cultivated land. Russian agricultural enterprises that practice intensive technology can reportedly achieve yields of 7.0 tons per hectare for winter wheat, 3.5 tons for sunflowerseed, and 5.0 tons for corn, compared to maximum official national-average yields of 3.4 tons, 1.5 tons, and 3.9 tons per hectare respectively.

Agriholding Companies and State Subsidies
Although weather remains the chief determinant for crop yields, a sustained increase in yield and production potential will be driven by continued improvement in agricultural technology, which will in turn depend on the level of financial support for agriculture. This support can be in the form of State subsidies or as investment capital from so-called agriholding companies, which typically invest in the production of grains and oilseeds in order to secure commodities for sale or to provide raw materials for milling or processing. In Altai, for example, milling companies have historically been the number-one source of investment capital for grain producers. Data about the level and sources of investment capital are sketchy (one of Russia’s leading independent commodity analysts estimates that agriholding companies manage over 10 percent of the country’s arable land), but most observers suggest that the majority of agricultural enterprises in Russia have ready access to either investment capital or affordable credit. Producers and other specialists in Novosibirsk and Altai indicated to FAS personnel that grain yields are typically 50 to 100 percent higher on enterprises associated with agriholding companies due to the higher level of technology. It should be noted, however, that intensive technology is not limited to enterprises associated with agriholding companies; there are many progressive and successful independent farms.

This access to operating capital, both investment capital and credit, has fueled a steady improvement in technology on many enterprises, ranging from the use of certified planting seed to the purchase of efficient (i.e., western) machinery. The acquisition of new machinery is accelerating. According to officials in Novosibirsk, for example, agricultural enterprises bought $120 million worth of new equipment during 2007. Purchases reached the same level during the first half of 2008, and officials forecast that an additional $120 million will be spent before the end of the year.

Official statistics citing 50-percent reductions in machinery inventories over the past 10 years are misleading because the data fail to reflect the improved efficiency resulting from the replacement of outdated, Soviet-era machinery with newer and more efficient equipment, both western and domestic. Furthermore, official inventory numbers do not include leased equipment, nor do they reflect the growing role played by custom-combining enterprises, which account for an estimated 5 to 10 percent of the grain harvest in Russia.

Disparities in Applied Technology
Improved efficiency notwithstanding, enormous disparities in the quality of agricultural machinery continue to exist between prosperous and financially struggling enterprises, and between regions as well. In Altai, the fleet of grain-harvesting combines is sorely inadequate according to local experts, who maintain that 80 percent of the region’s harvesting machinery is outdated and should be scrapped, and that Altai has not witnessed the improved harvest efficiency seen in other regions. In Soviet times (prior to 1992), the ratio of grain area to harvesters in Altai was about 125 hectares per combine and the Altai harvest campaign could be completed in about two weeks. Currently, each aging combine must harvest from 300 to 700 hectares and observers indicate – perhaps with slight exaggeration – that the duration of the harvest campaign is now measured not in weeks but in months. Agricultural specialists in Altai also pointed to the use of outdated cultivation and sowing machinery as an example of the technology shortfall. Uneven leveling of soil in preparation for planting, resulting in uneven planting depth, can contribute to highly variable conditions within an individual field (insert planting-depth slide).

Regional differences in the level of agricultural technology are not limited to machinery. In Ordinskiy raion in Novosibirsk, 11 of the raion’s 14 agricultural enterprises are associated with agriholding companies. The FAS team observed generally good crop conditions with a low level of weed infestation and a fairly high level of uniformity among the fields. Fields became noticeably weedier and less uniform only 50 miles to the south, in north-central Altai. Although crop conditions in Novosibirsk certainly benefited from more abundant rainfall, specialists in Altai pointed to the sharp contrasts in neighboring fields within Altai as an indication of the highly variable level of technology between farms (insert slide of adjacent fields).

Support from Local Administrations
Specialists in Altai repeatedly cited the need for increased subsidies from the regional administration, such as an interest subsidy to supplement the subsidy provided by the federal government. According to grain producers in western Siberia, the prevailing interest rate for commercial loans in early July was about 14 percent. In Novosibirsk oblast, the agriculture enterprise pays about 2 percent of the interest, 8 percent is fully subsidized by the federal government, and the remaining 4 percent is paid by the oblast administration. In Altai, borrowers receive the same federal interest subsidy but nothing from the regional administration. Enterprises in both Novosibirsk and Altai receive relatively small direct subsidies for agricultural inputs such as seed, fertilizer, and fuel, but the amounts of direct subsidies vary between administrative districts. Agricultural enterprises in Ordinskiy raion, for example, receive no direct subsidies for machinery purchases, while the enterprises in a neighboring raion do. The most effective support that the federal government could provide, according to a veteran Moscow-based analyst with one of the major grain-trading firms, would be to more fully subsidize fuel costs.

The regional differences in the level of applied agricultural technology extend beyond Siberia. In the highly productive Southern District of European Russia, about 80 percent of the cropland is under some form of intensive technology compared to only about 40 percent in neighboring Voronezh oblast in the southern Central District.

The examination of grain yields in the various territories of Russia supports analysts’ contentions that support from the regional authorities and increased private investment is the key to boosting agricultural productivity. In the Central District, grain yields have been increasing in Belgorod oblast (where an estimated 80 percent of the arable land is under intensive technology) and in Lipetsk oblast (60 percent and rapidly improving). Both regions have been relatively progressive in terms of private investment activity and technological advancement. Progress has been slower in Voronezh oblast, which one observer light-heartedly described as part of the “Red Belt,” a region that remains under strong Communist influence. An estimated 40 percent of the arable land in Voronezh is under intensive technology. (See yield graph.)

Nizhny Novgorod oblast, in the Volga District, was one of the first regions in Russia to undertake market reforms despite an initial lack of support from the federal government. The local administration focused on improving the quality of agricultural equipment by increasing access to credit and subsidizing interest on commercial loans. Grain yields in Nizhny Novgorod have essentially doubled over the past ten years. Official data indicate an even sharper yield increase in Tatarstan, which has long been considered one of the most economically progressive territories in Russia. Large agriholding companies have invested in agricultural development and the regional administration has established close contacts with foreign suppliers of agricultural machinery and other technology. (See yield graph.)

Fertilizer Application Rates
According to an official from the Russian Grain Union, wheat yield could increase by 20 percent within 3 to 4 years if fertilizer application rates could be increased to recommended levels. Rates have doubled over the past ten years but currently stand at about half the level of Soviet times. An estimated 80 to 90 percent of the fertilizer produced in Russia is exported, in part because producers receive tariff and VAT benefits if they export material, and also because Russian farmers are unable or unwilling to pay the high prices that producers can receive from importers in China, South America, and other countries throughout the world.

Current USDA area and production estimates for grains and other agricultural commodities are available on IPAD’s Agricultural Production page, or at PSD Online.