By Will Horner, Dow Jones Newswires
Q&A with Andrey Sizov, head of SovEcon / sizov.report, and Will Horner, Dow Jones Newswires, about Russia’s grain export taxes and their implications for Russia and the global grain market.
Taxes on Russian wheat exports are due to come into force next week, followed by taxes on corn and barley exports in March. The fixed taxes are set to be replaced by a floating levy in early June that is expected to remain in place indefinitely. With Russia the world’s largest wheat exporter, the taxes have already had an impact by helping to boost already high global prices and disrupting international tenders.
Andrey Sizov, managing director of SovEcon, a Russian research rm focussed on Black Sea grains markets, spoke with the Wall Street Journal about what the potentially permanent taxes could mean for Russian farmers and global grain markets. Here are edited excerpts:
Q: The Russian government’s stated goal in introducing these taxes is to bring down domestic food inflation. To what extent are the taxes likely to succeed in doing that?
A: In the past, the correlation between grain prices and food inflation has been very, very weak, I would say negligible. The biggest factor for food inflation is the ruble exchange rate, which has fallen substantially and that has sped up inflation. What they can achieve with these taxes is hard to quantify, but maybe they can reduce inflation by 1 or 2 tenths of percentage points, that is it. So it will have a negligible effect, if any, I would say.
Q: What will the consequences be for Russian farmers and how are they responding to the taxes?
A: It is a disaster for the Russian farmer. Those crops–wheat, corn and barley–account for around 90% of Russia’s total grain production and the tax will account for around 20% to 30% of the nal price farmers receive. Many farms will lose between 10% to 20% of their income.
The taxes will still have a relatively small effect on the 2021 corp. Because Russia mainly produces winter wheat and that wheat had already been planted before these decisions. There is a question market about spring wheat, however, as farms could choose to plant something else. We are likely to see bigger problems with the next crop in 2022, because we will see the full consequences of those taxes by that time. Farmers will have to make a very tough choice about what to plant or whether to plant anything next fall. I think they will cut the area for winter wheat quite substantially and we could see a very poor crop in 2022.
It’s great news for farmers all over the world because the Russian government did a lot to drive grains prices higher but the biggest beneficiary won’t be the Russian farmer, he will suffer. The biggest beneficiaries will be the Russian farmers’ direct competitors, rst of all in the EU, particularly France, then Ukraine, and then farmers all over the world, most of all in the U.S.
Q: For years Russia has been the world’s largest wheat exporter. It has been the dominant supplier to Egypt, the world’s largest wheat importer. Do these taxes threaten Russian’s dominant position?
A: If the tax remains I think it is very possible that Russian will lose its position as largest wheat exporter. Russian has large carryover stocks, so it could potentially remain the number one next season. But it could lose it if the EU has a good wheat crop and there is a good chance of that happening. If it does not happen this season it is almost an inevitability that it will happen in the 2021-22 season or in 2022-23 when farmers will cut their areas substantially as we feel the full consequences of those taxes.
With it now officially announced that taxes will remain in place, Russian farmers lost their incentive to store grain until the new season to sell it free of taxes. It was an initial idea for many farmers that if that tax was temporary they would just store their grain till the new season to sell it without the tax. But now we see domestic wheat prices going down as farmers are starting to sell more aggressively. That implies Russia will continue to export quite extensively despite the tax because stocks are still there and they have to be exported.
In the next season and after, Russian wheat will obviously lose its competitiveness in distant regions. Russia’s typical buyers are North Africa and the Middle East and after that Southeast Asia. Russia will lose its presence in Southeast Asian markets but will likely remain a key supplier for Northern Africa and the Middle East because of the huge freight cost advantage it has.
Q: The taxes have already been attributed as one of the drivers of recent wheat price strength in wheat. What will the future implications of Russia’s wheat taxes be on global wheat prices?
A: Global grain supply and demand are tightening almost every week, not because of Russia, but mainly because of huge Chinese demand and smaller-than-expected production in the U.S. Yes, the Russian story adds tightness to that but this season it is not a game-changer. It helped the bulls a little bit but Russia will still remain a big exporter this season. But as for next season, the Russian tax story will be the biggest bullish story for the global wheat market, especially if our assumption that Russian farms could cut their planting area substantially in the autumn of 2021 is true.