Column: State intervention threatens Russia’s position as a wheat superpower

Andrey Sizov 27.09.2021

Andrey wrote a column for Financial Times on Russia’s wheat exports success story and state intervention risks. See it below; the original piece is here.

For those who remember the days of the USSR, the country was the world’s biggest grain importer, buying tens of millions tonnes from the west.

Struggling to grow enough crops to feed the population, Soviet president Leonid Brezhnev in 1981 described food as “the central problem” in economic planning. In the 1984-85 crop year, Moscow imported 55m tonnes, a world record that still stands.

Thirty years after the collapse of the Soviet Union, Russia has transformed itself into a global wheat powerhouse, accounting for almost a quarter of the world’s exports. It is the top supplier of wheat to Egypt, as well as Turkey and Azerbaijan.

But the government’s move to tax grain exports could erode its leading position in this market.

The Russian grain industry’s transformation over the past several decades has been driven by several factors. After the collapse of the USSR, farmers became entrepreneurs and received the freedom to conduct business as they wanted.

The right to own land and to have long-term rent agreements provided incentives to invest in machinery, storage and better technology. No longer restricted by the government, farmers gained access to the world market, while global warming also helped more winter wheat production, which typically has higher yields than spring varieties.

Increased efficiency in the livestock sector meant meat and dairy farmers needed substantially less animal feed compared to Soviet times, boosting the amount of grains available for export.

Unlike the livestock, fruits and vegetable sectors, which have enjoyed state aid, grain has been a very different story. The state set loose rules in the early 2000s but has largely been absent. The sector prospered, with Russia soon turning into a net exporter.

But over the past few years there has been a change. The government started to pay more attention to the grains industry, and while it has trumpeted the country’s position as the top wheat exporter, at the same time, it started to intervene in exports.

After several years of temporary export restrictions, from June this year, Moscow implemented permanent export tariffs on all key grains in response to increasing domestic grain prices and to protect domestic consumers from rising food inflation.

In reality, the cost of grains has a limited effect on retail prices and the impact of tariffs on food inflation is negligible. The less well-off consumer will benefit from a more targeted approach. For example, direct payments to the poorest, similar to that in the US, would be a substantially more efficient measure.

For wheat, the state claims an onerous 70 per cent of anything exported above $200 per tonne, taking away the bulk of the upside of higher international grain prices for Russian growers.

Farmers could lose 15-30 per cent of their income due to the tax, which could total more than $4bn in the 2021-22 crop season. Even Argentina, which has been taxing its farmers heavily for decades, has substantially lower export taxes.

The export tariff comes at a time when farmers’ costs are rising sharply due to price increases in inputs such as fertilisers. The impact of the margin declines is already being felt. We expect the country’s wheat harvest to fall 12 per cent, or 10m tonnes, from a year before despite record-high plantings.

Unfavourable weather has undoubtedly affected output, but cost cutting by some farmers has also contributed to lower crop yields. We could see a decline in wheat acreage, and the input reductions suggest smaller yields and bigger risks of crop failures in adverse weather.

It’s a grave situation for Russian farmers and some of their traditional buyers such as Egypt. It will also mean more profits for Russian competitors, with EU producers and neighbouring Ukraine probably being the biggest beneficiaries.

It took decades for Russia to become a wheat superpower; becoming a second-tier player will require way less time.

Andrey Sizov is managing director of SovEcon, an agricultural research firm focused in the Black Sea region