Huge Grain Harvest No Boon for Farmers

This year Russia is enjoying the biggest grain harvest it has ever seen -- and farmers couldn't be more worried.

By November 2008, the country's harvest stood at 112.5 million tons, a 31 percent increase over last year's 81.8 million tons.

But grain prices have plummeted since mid-March, devastating farmers' earlier prospects for profit and leaving many to hope for solvency.

In an effort to stabilize abysmally low domestic grain prices and keep farmers in business, the government has been buying up and storing millions of tons of surplus grain.

"Government subsidies on the large volume of grain surplus have enabled prices to attain more stable levels," said Alexander Korbut, vice president of the Russian Grain Union, in an e-mail on Saturday.

"It is not necessarily the case that these reserves will come onto the domestic market in 2009. The grain might be exported, or it could be stored for a few years and put on the market again if prices for grain and flour get too high," Korbut said.

Over 12 billion rubles have already been spent this season on 2.6 million tons of grain, according to the Agriculture Ministry. The government has already pledged a total of 30 billion rubles ($1.1 billion) in subsidies and is considering lowering railway transport fees and providing export and transport subsidies for producers.

Last week, Russian class-3 wheat, one of the three wheat grades grown in the country, was trading at 4,344 rubles ($155) per ton, down 50 percent from its mid-May price of 9,128 rubles per ton.

Wheat futures for December 2008 and December 2009 delivery have fallen 60 percent and 50 percent respectively since their March 12 high.

"Prices were pushed to 2003 levels because everybody in the world had a surplus. This is the problem -- everyone had high crop yields this year, " said Ivan Nikolayev, an agriculture analyst at Renaissance Capital.

The 2008 global grain yield is edging close to 700 million tons, 70 million more than the 2006-2007 crop year.

"Before the first harvest data were released from Australia in August, nobody had any indication that the world harvest would be so high," Nikolayev said.

But in September, after the Australian and later the U.S. data came in, prices plummeted, and stiff competition among surplus-heavy exporters ensued.

Commodities analysts say the competition for Russia is especially tough now that Ukraine and the European Union are more aggressively exporting to Russia's top buyers in the Middle East and Africa.

"Last year Ukraine exported very little wheat, about 1.2 million tons, compared with Russia's 12 million. But this year Ukraine canceled their export quotas and their wheat exports shot up to between 7 million and 8 million tons," said Alexander Kovalyov, an analyst at KIT-Finance.

Russia is also facing stiffer competition from the EU, which in previous years consumed most of what it produced internally, Kovalyov said.

The EU will export 19 million tons of wheat in the 2008-2009 crop year, up from 12 million in 2007-2008, according to U.S. Department of Agriculture statistics.

Low grain prices and export woes, now compounded by the global financial crisis, are making it very difficult for many Russian farmers to pay off last season's loans and take out new loans to finance the upcoming season, Nikolayev said.

"With the financial crisis, nobody is giving loans to farmers anymore," Nikolayev said.

"Climbing grain prices in 2006 and 2007 pushed producers to expand acreage and take out loans to buy new equipment. But now some farmers have to reduce cropland. They need to buy fertilizer but they don't have money, the prices are too low to sell and they can't get financing," he said.

In a meeting last week with President Dmitry Medvedev, First Deputy Prime Minister Viktor Zubkov said that, in an effort to mitigate the consequences of the financial crisis on the country's agricultural industry, the government has "worked with leading banks and decided that in 2009 the total loans to the agricultural sector will come to 886 billion rubles."

State-owned Rosselkhozbank, the government's chosen instrument for providing credit to the agriculture sector in a time of crisis, has already been capitalized by the state to the tune of 30 billion rubles over the last several months.

Nevertheless, some are forecasting that a sizable majority of mid-sized Russian farmers will go bankrupt in 2009.

"I expect there to be lots of new mergers and acquisitions in the farming industry. Small farms will be selling land to larger farms just to cover their debt," Nikolayev said.

"They were spending lots of money on agricultural equipment in 2007 and they have no choice. They need to repay their loans."