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Oct 20, 2016 | 09:15 GMT

A Blight on the Future of Russian Agriculture?

(DANIL SEMYONOV/AFP/Getty Images)
Summary

Russia has had a tough couple of years. Low oil prices, continued economic sanctions and long-standing structural problems in the Russian economy — to say nothing of the country's involvement in Syria and Ukraine — have stretched Moscow's budget thin. Combined with demographic decline and brain drain, Russia's budgetary constraints have hampered development across a variety of economic sectors. Through it all, though, its agricultural sector has proved remarkably hardy, having recovered from a low point after the fall of the Soviet Union. Production levels of numerous crops have grown over the past decade, and the government declared the agricultural industry exempt from budget cuts this year. But this trend belies the formidable hurdles that Russian agriculture will have to overcome.

By all appearances, wheat — Russia's flagship crop — is thriving. For much of the past decade, Russian wheat production and exports have climbed. In fact, the U.S. Department of Agriculture's Foreign Agricultural Service projects that Russia's 2016-17 wheat harvest will be the largest in post-Soviet history at 72 million metric tons. At the same time, the country's wheat exports are projected to reach nearly 30 million metric tons, surpassing those from traditional wheat powerhouses in North America and Europe. Demand for Russian wheat is strong in Egypt, the world's largest importer, and it is increasing in other developing nations including Nigeria, Bangladesh and Indonesia. 

High Quantity, Low Quality

But the quality of the Russian wheat harvest this season is questionable. Numerous factors, including protein content, grain integrity and contaminant levels, determine a wheat's quality rating. Though aggregate information on the quality of the Russian harvest is not readily available, industry experts believe that feed grain — and not wheat for human consumption — accounts for the biggest part of the increase in this year's yield. In July, Russian wheat exports fell below the levels of recent years, leading experts to speculate that producers were struggling to compose shipments of sufficient quality. If reduced supply continues to elevate prices for higher-grade wheat suitable for milling, farmers may decide to hold on to those crops to get more money for them if the shortage gets worse. Russia is not alone in its plight, however; low quality is marking harvests in the United States, Canada and Europe as well.

Regardless, the decline is bad news for Russia. For one thing, feed wheat fetches roughly $30 less per metric ton than does the Class 3 wheat destined for milling. For another, feed wheat represents only about 20 percent of the global demand for wheat. Unusually large feed stocks and low prices could make wheat more competitive on the feed market, normally dominated by corn and soy. Nonetheless, the tightening supply of higher-grade wheat, and the amount that Russia reserves for export, will make it difficult for millers in Russia to obtain quality wheat over the next several months.

For Russian wheat growers, this could be the start of a trend. As wheat quality in Russia falls, input costs — for fertilizer, chemicals, seeds and machinery — are rising, in part because of inflation and a devalued ruble. The Kremlin, meanwhile, cannot afford to increase its support to the wheat sector, even though it brought in roughly $10 billion in export revenue in 2015 — more than twice the amount it was allotted in that year's budget. Without more governmental support, Russian wheat producers may not be able to purchase what they need to sustain yield and improve quality in subsequent harvests.

An Inaccessible Wealth

After a long history as Russia's premiere crop, wheat may have to share pride of place in the country's agricultural future. Higher-value products such as sugar, meat, tomatoes and apples are receiving much of the investment and modernization that seems to be lacking in many staple grain sectors. Russian billionaires, as well as the state, are investing rubles by the barrel to grow vegetables and fruit in high-tech operations such as the Yuzhny Agricultural Complex.

Even so, these efforts to expand Russian agriculture will likely fall short of realizing President Vladimir Putin's goal of a self-sufficient food supply by 2020. Without more agricultural modernization and automation, Russia's aging population will eventually become the greatest drag on the sector. Importing workers solves the problem to some extent, but social and political resistance may limit this solution. Furthermore, financial constraints likely will prompt the Kremlin to expand select areas of the agricultural sector based on potential for export profits and not on domestic demand. Even if Russia manages to increase its agricultural export revenue, the country's demographic and budgetary troubles will continue to impede its ability to exploit one of its most abundant resources: land.

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