Investors plow money into Russian farming, but problems remain

Reuters | Wednesday, August 6, 2008

By Robin Paxton

DOBRINKA, Russia: 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 investment by Nastyusha, the grain-trading company that bought the land in 2006.

Shamshinurov's situation is not unique. Investors are plowing money into Russia's open lands to resuscitate the long-neglected farm sector and supply a world in ever greater need of food. The Russian wheat crop this year promises to be the best in 30 years.

"The opportunity for agriculture in Russia is remarkable," said Sid Bardwell, general manager in Russia for Deere, the U.S. agricultural equipment supplier. "It has the potential to be one of the truly key sectors of the economy."

Russian agriculture, crippled by the legacy of Josef Stalin's collectivization, is one of four sectors given priority status by the Kremlin as it seeks to reverse more than a decade of decline after the Soviet Union's collapse.

Russia, the world's fifth-largest grain grower and exporter, expects a grain crop of at least 85 million tons this year, up 4 percent from 2007. Agriculture contributed 5 percent of Russia's gross domestic product in 2007. But Russia 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. A hectare of wheat, or about 2.5 acres, yields an average of 1.9 tons - much less than the U.S. average of 2.8 tons and 5.5 tons in the European Union.

"Agriculture, even with the current low level of efficiency, is still a profitable business thanks to government support," Natalya Zagvozdina, an analyst at Renaissance Capital, said. "Imagine what it would be like if efficiencies increase."

Prices for wheat, rice and corn 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.

Still, farming accounts for about 10.5 percent of the country's work force, compared with 2.5 percent in the United States.

Fertilizer and fuel costs are rising worldwide, and investment is needed in equipment and better seeds to increase yields and offer insurance against Russia's cold winters.

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 companies since November.

Zagvozdina said Russian farm companies were likely to raise a further $500 million to $1.5 billion by the end of the year, either through initial public offerings or private placements.

Foreign investors want first to buy land in Russia.

"Russia was the bread basket of Europe 100 years ago," said Sergei Glaser, a manager at Vostok Nafta Investment. "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, with $1 billion in assets under management in the former Soviet Union, owns a quarter of Black Earth Farming, a company listed in Sweden that is named after the fertile belt of soil.

About $3.3 billion from this year's federal budget was committed to the sector, and the same amount was supplied by regional governments, said Dmitry Rylko, general director of the Institute for Agricultural Market Studies in Moscow.

That money, plus the rising private investment, is financing a move by large agribusiness companies - whose assets include land, grain elevators, flour mills and port terminals - to establish themselves as reliable, long-term suppliers to global markets.

"Russia has come to the front line of grain exporters," said Yuri Makarov, senior economist at the International Grains Council, based in London, which forecasts that Russia could account for 11 percent of world wheat exports in the 2008-09 season.

There is also a second thrust to investment in Russian farming: the development of a livestock sector reared on homegrown crops to cut dependence on imported food products.

Despite having an exportable surplus of grains, Russia still imports more than a third of its poultry and a quarter of its beef. It spent $4.5 billion on meat and poultry 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 company, it has united 29 former collective farms in Lipetsk over the past two years as the basis for an integrated farming operation.

"It's essential for the development of the agricultural sector," Shamshinurov, who runs Nastyusha's 130,000 hectares in Lipetsk, said as he stood in fields of golden wheat that will be processed at the company's flour mills in Moscow.

The authorities in Lipetsk, 450 kilometers, or 280 miles, southeast of Moscow, describe their region as the "Pearl of the Black Earth." Yields at Nastyusha's farms are expected almost to double to 6 tons per hectare this year. Similar results can be seen elsewhere.

"Learning to apply Western technology in a Russian environment has led to better crops," said Richard Willows, a former grain trader who left England six years ago to run Heartland Farms in the Penza region at the invitation of the governor.

The government's push to make agriculture a priority has not been an unqualified success, however. The area of 47.2 million hectares planted with grain in 2008 is 25 percent below the area of 1990, and the number of cattle has stagnated, rather than increased.

Sergei Mikhailov, chief executive of a meat producer, the Cherkizovo Group, said Russian meat consumption had declined to 51 kilograms, or about 112 pounds, a person a year from the Soviet-era level of 78 kilograms.

Private investment is again playing a large role. Cherkizovo is the first Russian meat producer to be listed on the London Stock Exchange and is investing $350 million this year, after the same amount last year, to develop its pork and poultry business.

"The share of imported pork and poultry will go down in future thanks to growing domestic production," Mikhailov said, "but the share of imported beef could even grow because of the lack of high-quality beef production facilities in Russia."

President Dmitri Medvedev stressed Russia's potential in addressing the global food crisis when he met fellow Group of 8 leaders in Japan last month.

"Our country's long-term input in solving this problem will mainly consist of significantly increasing our agricultural production and supplies, not only to the local market but also to world markets," he said.

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