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MORE IMPORT SUBSTITUTION TIPS IN WARTIME — WHICH SIDE OF THE RUSSIAN MUSHROOM WILL MAKE A FORTUNE

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By John Helmer, Moscow

A lucky man can stumble upon a treasure, runs an old Russian proverb; an unlucky one can’t even find a mushroom. If he does find a mushroom, Lewis Carroll’s account of Alice in Wonderland added a problematic choice: eating one side of the mushroom may dwarf you; eating the other may turn you into a giant. The blue caterpillar didn’t make clear to Alice which side was which.

Investing in Russian mushroom farming to replace imports is the same – your money could go either way. Especially if, as the new mushroom farmers of Moscow and St. Petersburg are finding out, they grow low-cost, high-margin oyster mushrooms, which Russians haven’t thought of collecting from the forest, or considered paying money to eat before.

For the moment, the case of the oyster mushroom is being called patriotic import substitution. But if the mushroom entrepreneurs are calculating that war conditions in Russia will be extended for years, continuing to diminish most Russians’ buying power and their ability to eat meat for protein, then mushroom protein for sale may be a new form of war profiteering, financed out of the state budget.

Before the war commenced in 2014, changing everything for mushrooms, the Russian demand to eat the fungi was growing, and the volume of sales was growing in parallel, though slowly. Published figures for Russian mushroom consumption vary wildly from one source to another, and noone is sure what volume of mushrooms is gathered and eaten from the wild.

VOLUME OF RUSSIAN DEMAND, AND SALES OF CULTIVATED MUSHROOMS, 2009-2014
in thousands of tonnes

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Even the publisher of this chart isn’t sure how the numbers were calculated. The red column appears to represent annual consumption of mushrooms; the grey column, sales of fresh, farmed mushrooms, both domestically grown and imported. The gap – roughly double the farmed production – is accounted for by mushrooms eaten in processed form, either dried, canned, frozen, or pickled.

1813_2In Soviet times, the experts believe Russia may have been consuming a far larger volume – up to a million tonnes annually, says Alexander Khrenov (right), publisher of Mushrooms and Mushroom Business, an industry website [1], and general director of Mushroom Production School, an analytical consultancy in Moscow for growers and investors.

Today, according to Khrenov, “we produce fourteen thousand tonnes in Russia – 10,000 tonnes of champignons and 4,000 tonnes of oyster mushrooms. We import about 50,000 tonnes of fresh mushrooms and about 50,000 tonnes of canned. Previously, it was more, but less now. Devaluation and sanctions have reduced imports. For exactly how much mushrooms are consumed after the collapse of the Soviet Union the statistics are not kept. It used to be about a million tonnes. It can be a little less, or a little more now. For ourselves we say [consumption volume] was about 1 million tonnes.”

Before 2014, sales of the domestically farmed mushrooms were dropping because imports were replacing them, and driving Russian mushroom farmers out of business. Compared to 2012 the volume of farmed mushrooms in Russia dropped almost 3% to just under 8,000 tonnes. This low level had not been seen since 2005.

RUSSIAN IMPORTS OF FRESH MUSHROOMS – genus agaricus (champignons)
In millions of US dollars

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In the wild the Russian favorites are Белые (white, porcini), подберезовики (birch bolete), подосиновики (red-capped bolete), маслята (slippery jack), лисички (chanterelle, pictured below, centre), рыжики (saffron milk cap), опята (honey mushroom), грузди (milk mushrooms), and cыроежки (russule). The common white or button mushroom is known in Russian by the generic French name, champignon.

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Pleurotus ostreatus – the oyster mushroom (above, left) – is a common native in the forests of Europe and Asia, where it can often be seen growing on fallen tree trunks. It was first farmed in Germany during World War I as a cheap form of protein when the Allied blockade and wartime conditions threatened malnutrition. In Chinese, Japanese and Korean cuisine, the oyster mushroom is a delicacy added to soups and highly sauced. Truffles (above, right) can be grown in Russia, but are as rare in the ground as on restaurant plates.

“Yes, you can grow truffles,” says Khrenov, “if you plant the seedlings of oaks and introduce the truffle mycelium. Then it will take five years to grow truffles. But this requires a special soil. In Russia, this can only be in the Krasnodar region. They say that they have tried planting there. But whether the truffle will grow or not, I do not know.”

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Khrenov confirms other industry reports that almost half the volume of Russia’s farmed mushrooms come from the Moscow region. Samara produces a quarter, followed by Leningrad, Penza, and Rostov.

The value of mushroom farming can be calculated from the traditional appetite for mushrooms in Russian cuisine; the popularity of wild mushroom hunting; and the relatively low level of current consumption and poor yields. “Our forests are rich in mushrooms,” reported Andrei Evplanov in an industry assessment [2] in 2012. “But there are countries in Europe where there are much more mushrooms. From every thousand hectares of forest land in Romania, for example, they collect an average of 1.03 tonnes of mushrooms, Hungary, 0.2 tonnes; in Czechoslovakia, 0.16; in Poland; 0.09; whereas we have only 0.02.”

Counting consumption of mushrooms from all sources, it is estimated that on average at present, Russians are eating less than 1 kilogram per person per year. That compares to almost 4 kg in Korea; 2.9 kg in the UK; 2.5 kg in the US; and 1.9 kg in Poland. In Soviet days, the experts estimate the Russian consumption level may have been three times today’s level. Figuring this to be the natural target towards which Russian consumers will head if supply and price are right, then domestic demand can be calculated to be at least as high as the European average, perhaps as high the Soviet one, so the gap between demand and supply ought to be profitable for growers to fill.

According to Khrenov, in 2015 the price of fresh mushrooms on Moscow grocery shelves ranged from a seasonal low in summer of 180 rubles per kg to a winter high of Rb253/kg. In outlying regions and cities like Vladivostok, the price can reach a high of Rb400.

So long as the Russian economy was expected to grow at 2012-2013 rates, with sustainable real income to support consumer demand, the investment calculation for mushroom farming was that it promised easy, quick money. In 2013 countrywide sales of fresh farmed mushrooms are reported to have totalled Rb6.8 billion (($213 million); in 2014, the total was double at Rb13.6 billion ($353 million).

That was a mushrooming boom, but so long as Polish growers were able to sell to the growing Russian appetite, they, not Russian farmers, gained most. The start of the war in Ukraine in February of 2014; the first European Union (EU) sanctions in March; and the retaliatory sanctions imposed on EU imports in August [3], threatened to stop the Polish mushrooms. But not quite — as some of the Polish cargoes were diverted through Belarus, where they were repacked in Belarus cartons and relabelled for crossing the border into Russia.

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August 27, 2014: Putin and Belarus President Alexander Lukashenko

President Vladimir Putin announced [4] the sticker fraud within weeks. “That is signed,” Putin said, pointing at a photograph of a carton of imported mushrooms. “Belarus as the country of origin. But the real sticker is Poland,” he added underneath the Belarus label there was an original one from Poland. That was at the end of August 2014.Then the rouble crashed in November, and the price of imports grew out of reach. As the import table for champignons shows, imports from Poland fell in value from $32.5 million in 2014 – five times the year before – to zero in 2015. Over the same time period the value of imports from Belarus jumped from $12.4 million to $19.6 million.

Into the gap moved Russian investors. For them, the mushroom counted for little; the price of entry, the speed and rate of return were everything. “There are dozens of entrepreneurs,” Khrenov says, “who are planning to invest, but which of those will ultimately invest is a big question.”

Pavel Afonin, general director of Mozhaisk Champignon, was enthusiastic. “Now”, he said [4] in September 2014, “is a very good moment for the development of the domestic mushroom business. Our cost of production today is about 65 to 80 rubles per kilogram, while the Polish mushrooms cost [to produce] 45 to 60 rubles. Before sanctions, the wholesale price of our mushrooms remained between 85 and 100 rubles per kilogram. After sanctions the price increased to between 130 and 150 rubles.”

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Cultivation at Mozhaisk Champignon, Moscow region

Eighteen months ago, as the flow of Polish mushrooms was squeezed off, Afonin said he had been counting on an annual rate of return of 40% to 45%, with an expected payback of the initial investment outlay within 5 to 6 years. “Now we hope to recoup the investment in three and a half to four years. Profitability is more than 60%. Even if after a year, Polish mushrooms return to Russian market, we still have time to develop new sales channels, strengthen [our position in] the market.”

Globally, the two options for mushroom investors are the Chinese and the Dutch models. The Chinese use large amounts of outdoor land and low-paid labour; the yield per hectare is also low. The Dutch model requires high-technology investments, indoor water and energy, and computer controls instead of manual ones; harvest yields are much higher. The rush of Russian investors to mushrooms has been towards the Dutch model. The minimum entry investment required has been estimated at the equivalent of $2 million to $3 million for a growing and processing complex with a capacity of up to a thousand tonnes per annum.

Sourcing the right planting material or compost isn’t straightforward, however. According to industry reports, as well as government plans, the biggest limit now on growth of mushroom production in Russia is the availability of compost. Domestic compost production has been dwindling in recent years, and just as the counter-sanctions cut off the importation of mushrooms, so too they barred imported compost; the main pre-war sources had been Poland, Lithuania, and Ukraine.

Finding alternative imports of compost at a cost-effective price hasn’t been easy. Investing in a domestic compost plant is proving to be double or triple the cost of a mushroom farm.

Compost for mushrooms combines crop straw, seed husks, chalk, fertilizer, chicken manure, and water, maintained at the right, stable temperature. Champignons require more manure and sanitary control than oyster mushrooms, for which straw suffices. Russia’s mushrooming businessmen calculated they could better hold their costs down, and expand their profits, if they opted for the oyster mushroom, not the champignon.

Between the two there is roughly the same protein content – 3.3 grams per 100 grams weight. But Russian consumers have not acquired the same taste for oyster as for white.

Last week Khrenov warned that delivered and forecast supply may swamp market demand. “In the planned volumes that have been reported, the oyster mushroom is now impossible to sell. Our population knows the oyster less well than the champignon. The difference in consumption is around 1 to 10. For what reason will this ratio of consumption grow? To increase the consumption of oyster mushrooms it is necessary to spend quite serious money on the market – in education, advertising, etc. So, essentially, to increase oyster mushroom output by the four to five thousand tonnes that are spoken of is not very realistic.”

At present, according to an industry report published [5] last week, there are only 22 mushroom farming companies with production of more than 50 tonnes of mushrooms a year. With a capacity of over 1,000 tonnes, there are just three companies – Kashira in the Moscow region, Prinevskoe in Leningrad region, and Oryx in in Samara. A fourth, Shchipanov in Volgograd, comes close, according to the federal Agriculture Ministry.

The most ambitious of the new wave mushroom growers is Igor Chaika (below, left). He is the younger and less controversial [6] of two sons of Yury Chaika, the Prosecutor-General (right).

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A Moscow press report [5] early this month indicates that a newly registered investment company called Eco-Region plans to grow mushrooms on a 50-hectare site in the Moscow region, supported by the regional administration. The plan calls for a combination of compost plant, with a capacity of 37,000 tonnes per annum, a mushroom plantation to deliver 12,000 tonnes. The sales target is a 20% share of the Moscow mushroom market. The investment is reported to be Rb2.5 billion ($39.5 million) over two years.

Eco-Region is reportedly owned by Igor Chaika. He is also registered as owning control stakes in several other agro-industry companies – Aqua Solid (pesticides); Innovation of the World (non-food trade); Russian Exports (food trade with China); Innovations of Light (Innovatsii Sveta); and BetElTrans.

1813_10This month too, a more modest new investment in Leningrad region was announced [7] by Alexander Zhuk (right), owner of the Agromir company. In press interviews last week he said he is switching from a meat import line of business to farming oyster mushrooms. His plan is for a site of 4.5 hectares to grow 750 tonnes per year to start in 2017, and to expand to 1,500 tonnes a year or two later. The investment cost is projected at Rb200 million ($3.1 million), according to Zhuk. He says he will stump up 25% of the money, and borrow the rest.

There is to be a substantial sum of federal budget money for the mushroomers. A five-year plan for the industry, 41 pages in length and entitled “The concept of development of the Russian mushroom for the period 2015 – 2020”, has been approved by the federal ministries of Agriculture and Economic Development, and was released after the counter-sanctions were introduced in 2014. Click [8] to read it in full.

The government’s mushroom strategy calls for “import substitution for fresh mushrooms by 90%; for canned mushrooms by 60%; … and for compost for growing mushrooms by 100%. Provision to Russian producers of mushrooms of domestic raw materials, and to consumers, clean and fresh domestic production of mushroom.” The plan estimates that import costs to be saved by domestic supplies will be more than $400 million per year.

The plan also calls for state funding to assist “construction and modernization of compost and mushroom complexes in Russia, equipping them with modern innovative technological equipment, increasing mushroom production, as well as providing employment and improved living standards for the rural population. The total amount of funding provided for this concept, is 24, 800 million rubles, of which: from federal budget funds – 6,200 million rubles.”

That’s a total investment target equivalent to $382 million, including a direct federal budget outlay of $95 million. Where the rest of money, $287 million, will come from, the document doesn’t say. Nor is it clear how much will be budgeted for spending by regional administrations and by the state banks; and how much of the budget expenditure will be in the form of cash grants, input subsidies, or reduced interest-rate financing.

One point is clear – the Kremlin has agreed that Russian mushrooms won’t be left in the dark now that the wartime lights are going out. Another clear point is that the lion’s share of the state budget money is likely to go the biggest mushroom farmers or the most influential of them. If Chaika’s investment plan calls for state funding of his $39.5 million target, and if he is successful, then he is in the running for 42% of the budget allocation.

And this is the point at which the blackout has already started. The largest of the national producers – Kashira, Prinevskoe, and Oryx – refuse to answer questions about which mushroom varieties they are already growing; what their recent financial results have been; the expansion of production they are planning, and the amount of money they expect to spend on new investment. Noone wants to respond to Khrenov’s prediction that the market may be quickly swamped with oyster mushrooms, forcing the price below targeted profitability, or even the cost of production.

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Individual mushroom entrepreneurs, Afonin of Mozhaisk Champignon and Zhuk of Agromir, answer their telephones, but won’t answer the questions.

Igor Chaika’s companies lack websites; several lack public record of their contact telephone numbers. Not all of Chaika’s listed telephones ring; of those which ring, few are answered. At one of Chaika’s telephone numbers, the telephonist answered that the manager in charge wasn’t available, and she didn’t know how to connect with Chaika. At another of his companies, the telephonist said it was impossible to put through the call or arrange for Chaika to answer questions. She cut the line before the mushroom questions could be relayed.