Russia tightens grip on grain industry

The Russian government has consolidated control over grain exports as a continuation of efforts to increase its influence on the global wheat market. In previous years, state policy proved somewhat detrimental to grain farmers, and the new steps taken in the background of the crumbling industry’s profitability are met with concerns.

Over the past two years, Russian grain exports have experienced a major consolidation as Western traders Cargill, Viterra and Louis Dreyfus Co. stopped sourcing grain in the country in July 2023. The four largest local companies — Rodnie Polya, Grain Gates, Aston, and MZK — have expanded their presence and now account for over 70% of the deliveries of Russian grain to foreign customers.

The process of leaving grain exports in the hands of only a few companies, which as observers pointed out is largely facilitated by the state, allows the Russian authorities to maintain tight controls over trade flows.

“Russia is striving to gain unconditional influence on the domestic grain market by working with a limited number of companies of Russian origin,” said Ekaterina Novikova, associate professor of the economic theory department at the Plekhanov Russian University of Economics.

Yaroslav Kabakov, strategy director at Finam, a Moscow-based think tank, noted: “The Russian government’s policy of consolidating the grain market in the hands of the local companies allows Russia to control a significant part of the industry.”

There are several reasons for Russia to seek more power over grain exports. In previous years, the Russian government tried to leverage the global market to its benefit. An example of this was setting an unofficial minimal price for its wheat during periods of tight supply. The policy occasionally harmed Russian grain exporters, who lost some big tenders in the Middle East in 2023, according to the Russian Grain Union.

The current level of consolidation gives Russian authorities an opportunity to adjust the wheat trade depending on political needs, said a Russian grain industry source who wished to remain anonymous. The available set of tools involves both carrots and sticks: discounts and favorable terms for those who earn it, and unofficial trade restrictions and minimal sale price for the countries deemed unfriendly.

The government’s increasing attention to the grain industry is no surprise since agricultural products, particularly wheat, are starting to play a more important role in Russian foreign trade. Petr Khodykin, head of Rodnie Polya, said the growth in grain exports could secure much-needed revenue diversification for the national economy.

Speaking with a Russian news outlet, Prime, Khodykin emphasized the need to open new logistics corridors to facilitate trade with China, Turkey, Iran, Indonesia, Vietnam, India, Bangladesh and Asian countries. He added that these efforts are required to better compete with grain from the United States, Canada and Ukraine in the global market, and with the European Union and Australia in the Middle East.

Khodykin stressed that under current conditions grain exports could become “a new oil,” compensating the Russian budget for the unstable revenue from hydrocarbon exports. Khodykin’s remarks refer to the warning signs that the Russian oil and gas sector, a traditional backbone of the national economy, may start crumbling under the weight of Western sanctions related to Russia’s invasion of Ukraine.

Russian state-owned gas giant Gazprom recently sustained a loss of 629 billion rubles ($6.9 billion) in 2023, its first annual loss in more than 20 years, amid dwindling gas trade with Europe, once its primary sales market.

Aside from the political rationale, Russian government officials and analysts explicitly state that they seek to end free pricing on the global wheat market. An inter-BRICS grain exchange, a draft project of which is due to be ready later this month, is one of the tools called to serve this purpose.

“The idea of such an exchange, to put it simply, is to create a cartel,” said Alexander Dynkin, president of the IMERO Institute under the Russian Academy of Science. “In general, it will resemble OPEC, thanks to which oil prices remain higher than they could be without coordination of the exporting countries' actions among themselves.”

Dwindling profits

Unless the global grain cartel regulating wheat prices becomes reality, the Russian grain industry’s potential to earn more money for the state treasury seems questionable, as the sector is far from its best financial shape. AKRA, a Russian rating agency, warned that Russian grain farmers are experiencing falling profitability despite the growth in exports.

In 2024, the Russian grain industry’s average marginal profit could plunge to 20% or 25%, the lowest level since 2019. For comparison, the analysts noted that the figure was 27.3% in 2022 and nearly 50% in 2021. The Russian Agricultural Ministry’s calculations paint an even gloomier picture. Elena Fastova, deputy minister, revealed that if the state subsidies are not factored in, the figure would be as low as 15.3%.

The trend should not be interpreted as Russian farms simply earning less money. As the Russian Central Bank jacked up the key interest rate to 16% in a bid to tame food inflation and keep the Russian ruble’s exchange rate at bay, bank loans have become more expensive. The investment inflow is believed to be in peril with profitability standing that low.

In general, 20% of average profitability in Russian agriculture is seen as a critical level, beyond which the investments no longer seem feasible, the agricultural ministry said.

There are no reasons to believe the profitability situation will improve in 2024, Fastova said.

This year, unexpected May frosts that killed harvests in the central European and southern parts of Russia, have made the profitability situation even worse, said Arkady Zlochevsky, president of the Russian Grain Union.

He described the situation in the grain industry as difficult.

“Either we will face the return of very difficult economic conditions for grain farmers or difficult conditions for financing from the state,” Zlochevsky said.

Moreover, in some sectors, there are even more reasons for concern. In the wheat segment, the average profitability fell from 33% in 2022 to -1%, the Russian state statistical service Rosstat reported.

Zlochevsky said the present investment level in the wheat segment is extremely low. Export duties are largely to blame, he believes, as this year the government seeks to collect 250 billion rubles ($2 billion) from grain farmers.

The share of unprofitable farms is on the rise, with every fifth farm estimated to have suffered a loss last year. The overall losses suffered by farms failing to generate profit are estimated at 100 billion rubles ($1.15 billion), up from 86 billion rubles ($1 billion) in 2022.

Farmers usually name the main reasons for their current predicament: soaring operational costs and excessive state regulation.

The Russian government plans to boost the agricultural industry’s output by 25% and exports of the key commodities by 50% through 2035. The reality, however, is that the Russian grain industry is exhausted and lacks resources to facilitate that growth.

Potential policy fallout

In a recent report, economists from the Institute of National Economic Forecasting of the Russian Academy of Sciences emphasized that two decades of intensive growth in Russian agricultural production have turned domestic agriculture into a source of instability, particularly warning about the fallout of the current government policy.

“The policy of containing domestic prices by limiting the export of agricultural products threatens to trigger a drop in output,” the analysts said, warning that it could lead to a wave of bankruptcies in the industry.

Another group of analysts from the Russian Academy of Science said the grain industry could benefit from consolidation like the ones that occurred in the poultry and pig industries during the last two decades. They explained that bigger companies usually boast better effectiveness and have a better chance of weathering turbulent times.

In the Russian meat and poultry industry, the share of industrial farms went up from only 20% in the early 2000s to nearly 80% in recent years. This happened primarily because the existing state regulations mostly benefited the big players, since they enjoyed better access to state subsidies and it was easier for them to get bank loans.