By John Helmer, Moscow
On Wednesday, the Russian Grain Union, representing most of the country’s grain traders and exporters, said that if the export embargo on grain is extended from July 1 to the year’s end, the expanding surpluses of grain in the southwestern growing regions will force domestic prices down to the Rb3,000 ($107) per tonne level, too low to be profitable for growers and traders, and risking a $3.3 billion loss of trade earnings in the coming season.
The next day, on Thursday, following the weekly Russian government ministers’ meeting in Moscow, Agriculture Minister Yelena Skrynnik (left image) announced that “the government is not currently discussing whether and when the grain export ban will be lifted.” She added that her forecast for this year’s harvest is 85 million tonnes – that compares with 64 million tonnes in last year’s drought-hit harvest; 97 million tonnes in the 2009-2010 season; and 108 million tonnes in the record season of 2008-2009.
Russian grain trade experts claim this season’s harvest must come in at a minimum of 85 million tonnes to assure the domestic consumption level of 75 million tonnes, and either add 10 million tonnes to price-control reserves, or allow resumption of export trade at the 10-million tonne level.
The countrywide grain price average is currently between Rb5,000 and Rb6,600 ($179-$236), depending on location. The grain-growing regions of the southwest are currently piling up low-priced surpluses, while some grain-consuming regions complain of supply shortages and localized price spikes. Grain Union sources told Fairplay it is understandable that the Kremlin fears that if the embargo is lifted, the countrywide price will rise threefold towards the current global price of around $320 per tonne.
As the parliamentary election deadline in December approaches, followed by the presidential election due next March, the political priority of restraining consumer price inflation – bread, meat, gasoline – is intensifying. Prime Minister Vladimir Putin’s parliamentary address on April 20 made that clear. “Inflation has begun to decrease in March and April of this year,” Putin said. “We do not expect it to rise beyond 6.5-7.5 percent.” What the prime minister did not mention is that individual disposable income has been falling at the same time as prices have been rising, magnifying the squeeze on the Russian standard of living.
The latest Russian Statistics Agency (Rosstat) data show that despite the healthy looking macro-economic growth measurements, real disposable income fell 3.4% in March, compared to March of 2010; while for the first quarter of this year, the decline in this measure of consumer spending power dropped 2.9%. For nervous politicians, reading this tabulation is far from reassuring:
On the industrial front, falling steel production figures have been reported by all major producers in the first quarter. Making matters worse, there is now the prospect – acknowledged last week by Magnitogorsk Metallurgical Combine (MMK) – that across-the-board production cutbacks at the steelmills have been ordered for the second quarter, and may be extended into the third quarter. As the prospect of an economic slowdown grows, the political consequences are obvious.
The Grain Union has been actively lobbying for early termination of the embargo, which was introduced initially from August 15, 2010, and then extended from December 31 to July 1. If it is lifted then, the union calculates that Russia could export between 12 million tonnes and 15 million tonnes of grain for the season. That number appears to be tied to a forecast harvest of 87 to 90 million tonnes, however. The union adds that the government could simultaneously contain domestic price speculation by fixing an upper limit for domestic price growth.
Union head Arkady Zlochevsky (right image) predicted this week that if exports are not resumed in July, between then and December, domestic grain will fall in price by Rb200 to Rb300 ($7-$11) per tonne per week. In March the deputy prime minister in charge of the farm sector, Victor Zubkov, warned that a further extension of the embargo might be necessary to conserve domestic grain stocks and prevent a rising grain price passing through livestock feed into meat prices, and the food index in general. Zlochevsky’s reply this week is that the cost of such a measure in restraint of trade would be $3.3 billion in foregone export trade profits – or more than half the state budget outlays on farm costs and grain price support.
Grain Union spokesman Alexander Korbut says Skrynnik’s estimate for this year’s harvest is shared by the union. “Counting on the [harvest] resources, market conditions and weather, the figure of 85 million tonnes for the 2011 agricultural year is quite realistic.” Before exports can be resumed, Skrynnik’s Ministry of Agriculture will have to assure Putin and Zubkov that it is confident (certain) that the domestic comsumption requirement of up to 75 million tonnes will be met, plus at least 10 million tonnes for either domestic standby stocking or foreign trade. For Korbut of the Grain Union, that is sufficient leeway for the export ban to be lifted, allowing shipments abroad of up to 15 million tonnes.
“The grain ban causes the prices to drop, so the only beneficiaries are the livestock businesses and theoretically grain consumers within the country.” However, “the wholesale and retail trade companies add much value to the grain and products therefrom, so [if the embargo is extended] the end-users are unlikely to gain any profit.”
In this context, Skrynnik’s announcement is interpreted in the trade as foreclosing the possibility of early termination of the export embargo before July 1, while leaving the government’s options open for what to do after July 1 – until the harvest results are more certain. By fixing the government’s forecast at 85 million tonnes, the agriculture minister has in effect confirmed the possibility of a resumption of trade – if not the certainty at this stage.
Skrynnik has not ended the union campaign, according to Korbut. “The Grain Union’s negotiations [with the government] haven’t failed. Our position is clear — exports are absolutely necessary. They will help the grain companies solve problems with grain storage, win back the export markets, and raise profitability.”
Andrei Sizov, an analyst at the Moscow-based agro-industry think-tank Sovecon, points out that there is also a pay-off for the big Russian meat producers if the policy on trade restraint isn’t changed. “The grain ban is profitable for livestock businesses. It’s not clear yet if the ban will remain after July 1, but the why-question here goes to the government.”
Grain Union members also say that reports this week in the London press, fostered by grain trader Glencore, that it had successfully lobbied in favour of the embargo last August are false. A high-ranking Russian trader in Moscow said Glencore had lost heavily from the embargo . “They failed to complete their contracts; they failed to get new ones; they missed the opportunities there were. They never wanted the embargo. Glencore is getting ready for the IPO, so they have to deal with powerful competitors and make their way on the market, so they might have said they lobbied the embargo to make a favourable impression.”