Vladimir Putin is determined to make sure that Russians don’t run out of affordable bread, even if it means a few bankrupt farmers and a disrupted grain market.
The country that last year was the fourth-largest wheat exporter is now taxing all overseas sales of the grain. Shipments dropped by more than half, and the loss of income is squeezing already thin profits for growers. While Putin’s move kept more wheat at home, farmers have cut back spending to stay solvent, including using less fertilizer and pesticide.
Russia’s energy-driven economy slipped into its first recession in six years after a slump in oil prices and the pinch of international sanctions sparked a plunge in the ruble. That made imports, including many food items, more costly. For now, reduced shipments of Russian grain haven’t affected global wheat prices much because of bumper harvests almost everywhere else, though that could change if exports keep falling.
“You have some farmers that are selling crops today below the cost of production, but they need cash to plant the next crop,” said Mike Lee, founder of Agronomy Ukraine, a farm adviser based in Kursk, Russia. “Everybody is cutting back to save cash,” he said by phone Monday, after completing a 12-day tour of fields around the Black Sea region, where winter-wheat harvesting starts in July.
Agrobiznes Group of Cos., which manages 14,000 hectares (34,600 acres) in western Russia, may dedicate about 20 percent less land to winter wheat if the tax isn’t lifted, according to Director General Alexander Chil-Akopov. Winter wheat, the variety that accounts for two-thirds of Russia’s output, is sown beginning in August and harvested the following year. Spring wheat is usually planted starting in March and collected in September.
Lower prices may drive farmers out of business and cause Russian grain production to decline, according to a March letter from the National Association of Exporters of Agricultural Products, a Moscow-based industry group that includes traders Cargill Inc. and Louis Dreyfus Commodities LLC.
“Farmers in the south have huge stockpiles that the market will not have demand for,” Alexander Korbut, vice president of the Russian Grain Union, said by telephone from Moscow. “This issue is a hard reality.”
Russia’s wheat exports since the tax began totaled 1.1 million metric tons as of April 8, down 59 percent from the same period in 2014, Agriculture Ministry data show. For the entire season that began in July, shipments still are up from a year earlier.
Inflation has accelerated in Russia after a global oil glut left prices at half what they were a year ago, the economy has slipped into recession and the ruble plummeted. Trade was disrupted by U.S. and European Union sanctions imposed following Russia’s incursions in Ukraine last year.
To slow the double-digit advance in consumer prices, the government sought to limit wheat sales overseas. As of Feb. 1, every shipment incurred a tax of 15 percent, plus 7.50 euros ($8.05) a ton. Even though the levy is set to expire in June, Deputy Prime Minister Arkady Dvorkovich said earlier this month that he favors extending it.
If the tax is lifted, world prices may fall as farmers dump crops on the market, Korbut of the Russian Grain Union said. Wheat on the Chicago Board of Trade, the global benchmark, has dropped 15 percent this year to $5.01 a bushel on Thursday.
With ample world stockpiles, any rally in wheat would be unsustainable, said Dan Basse, the president of market researcher AgResource Co. in Chicago. Government-subsidized loans will mitigate rising costs for Russian farmers and limit the drop in production, he said.
The tax will cost farmers 20 billion rubles ($373 million) this season and 50 billion rubles next year if it’s extended, data from Moscow-based research firm SovEcon show.
Costs are already rising, with farmers paying at least 14 percent more than last year because of more expensive fertilizer and seeds, a U.S. Department of Agriculture attache report showed last month. Domestic wheat prices in rubles have fallen about 13 percent since the tax was introduced, data from Macquarie Group Ltd. show.
It isn’t the first time the government has stepped in to limit wheat shipments that have doubled in the past decade. In 2010, Russia banned exports for 10 months after the worst drought in a half century, which led to a doubling of prices in Chicago.
“I don’t see a reason why farmers should be encouraged to plant more,” Daryna Kovalska, an analyst at Macquarie in London, said by telephone on April 17. “Prices are quite low, and on top of that, they just don’t have money to invest in this crop.”