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IKAR in Mass and Industry Media
Foreign investors plough cash into Black Earth farms
Business Report, 04.04.17
When Murat Shamshinurov toasted this year's harvest with a glass of vodka, he did so with confidence.
A fleet of new Dutch combine harvesters, better seeds and a mild winter promise a bumper crop at the farms he runs in Russia's fertile Black Earth region. This prosperity is the result of a $175 million (R1.3 billion) investment by Nastyusha, the grain trading firm that bought the land in 2006.
Shamshinurov's situation is not unique: investors are ploughing money into Russia's open lands to resuscitate the long neglected farm sector and supply a world in ever greater need of food. This year's Russian wheat crop promises to be the best in 30 years.
Sid Bardwell, a general manager in Russia for US agricultural equipment supplier Deere & Company, said: "The opportunity for agriculture in Russia is remarkable. It has the potential to be one of the truly key sectors of the economy."
Russian agriculture, crippled by the legacy of Soviet leader Josef Stalin's collectivisation, is one of four sectors afforded priority status by the Kremlin as it seeks to reverse more than a decade of decline that followed the Soviet Union's collapse.
Russia, the world's fifth-largest grain grower and exporter, expects a total grain crop of at least 85 million tons this year, up 4 percent on last year, but the country has yet to surpass Soviet-era production levels on a sustained basis.
Only 13 percent of Russian land is used for agriculture, compared with a world average of 38 percent, while a hectare of wheat yields an average 1.9 tons - much less than the US average of 2.8 tons and 5.5 tons in the EU. Therein lies the potential.
Natalya Zagvozdina, an analyst at Renaissance Capital, said: "Agriculture, even with the current low level of efficiency, is still a profitable business thanks to government support. Imagine what it would be like if efficiencies increase."
Prices for wheat, rice and maize hit records this year as droughts in grain-growing countries exacerbated a shortage at a time of high global demand. This makes Russian agriculture even more attractive as production costs are relatively low.
Wheat accounted for 60 percent of Russia's total grain crop last year, or 49.4 million tons. Moscow-based analyst group SovEcon says this year's wheat crop could rise to as much as 54.2 million tons, which would be the highest since 1978.
The country also grows large quantities of barley, as well as maize, rye and buckwheat.
Kingsmill Bond, of investment bank Troika Dialog, said: "The returns on investment are dramatically higher than they used to be. Increase yields to 5 tons a hectare, sell at $250 a ton, keep costs to $700 a hectare and you've got $550 of profit per hectare. But actually achieving that is very tough."
Fertiliser and fuel costs are rising worldwide, while investment is needed in equipment and seeds to increase yields and offer insurance against Russia's cold winters.
Still, investor appetite for the sector, coupled with the need for cash to develop land, will add to the $420 million in new capital raised by Russian agribusiness firms since November.
Zagvozdina said Russian farm firms were likely to raise a further $500 million to $1.5 billion by the end of the year through initial public offerings or private placements.
Investors ranging from Western funds to English farmers want firstly to buy land in Russia.
Sergei Glaser, of Vostok Nafta Investment, said: "Russia was the bread basket of Europe 100 years ago. The quality of land is exceptional, but the neglect of this land during Communist times was astounding."
Rural life got even harder after the break-up of the Soviet Union in 1991. Land lay fallow and machinery was left to rust.
Glaser's fund owns a quarter of Black Earth Farming, a Swedish-listed firm named after the fertile belt that stretches from eastern Europe to the banks of the Volga River.
Agriculture contributed 5 percent of Russia's gross domestic product of 32.5 trillion roubles (R10 trillion) last year. Farming employs about 10.5 percent of the country's work force, compared with 2.5 percent in the US.
Dmitry Rylko, of the Moscow-based Institute for Agricultural Market Studies, said about $3.3 billion from this year's federal budget was committed to the sector, with the same amount again supplied by regional governments.
This money, plus rising private investment, is funding a move by large agribusiness firms to establish themselves as reliable, long-term suppliers to global markets. Yuri Makarov, of the International Grains Council, said: "Russia has come to the front line of grain exporters."
There is also a second, less advanced thrust to investment in Russian farming: the development of a thriving livestock sector reared on home-grown fodder crops to cut the country's dependence on imported meat products. Despite an exportable surplus of grains, Russia imports more than one-third of its poultry and a quarter of its beef, spending $4.5 billion on these imports last year.
Nastyusha's strategy in the Lipetsk region of central Russia follows this model of using high-quality wheat to produce flour and bread, while also rearing cattle and producing its own milk. Originally a trading firm, it has united 29 former collective farms in Lipetsk over the past two years as the basis for a vertically integrated farming operation.
"It's essential for the development of the agricultural sector," said Shamshinurov, who runs Nastyusha's 130 000 ha in Lipetsk, where yields are set to almost double.
Richard Willows, a former grain trader, said: "Learning to apply Western technology in a Russian environment has led to better crops."
The government's push to make agriculture a priority project has not been an unqualified success. The 47.2 million hectares sown to grain this year remain 25 percent below the area under cultivation in 1990, while cattle numbers have stagnated.
Sergei Mikhailov, the chief executive of meat producer Cherkizovo Group, said annual Russian meat consumption had declined to 51kg per capita from Soviet-era levels of 78kg, although a declining trend was being reversed as incomes grew.
Private investment is again playing a large role. Cherkizovo is the first Russian meat producer to list on the London Stock Exchange and is investing $350 million to develop its pork and poultry business.
"The share of imported pork and poultry will go down in future, but the share of imported beef could even grow because of the lack of high-quality beef production facilities in Russia," said Mikhailov.
Despite the problems, access to capital is rising, with banks more willing to lend to farmers and private investors more confident of returns.
President Dmitry Medvedev underlined Russia's potential role in addressing the global food crisis at a Group of Eight summit last month.
"Our country's long-term input in solving this problem will mainly consist of significantly increasing our agricultural production and supplies," Medvedev said.
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