Russia Goes for World Dominance - in Wheat!
Jun 07, 2010
I had a post from about two weeks ago about the USDA predicting that Russia would become a larger exporter of wheat than the US by about 2019.
Bloomberg Businessweek just wrote an article on how Russia is fighting for World Dominance - in Wheat!. The article recaps that Russia is able to sell their wheat to Egypt for about 7% cheaper than what the US can sell it for. During the last 11 months, they have garnered about 58% of the Egypt market versus about 40% for the year before. Our share fell from 13% to 8%.
During the 1990's, Russia was actually a net importer of wheat due to their farms being so inefficient from decades of ruinous Soviet practices. However, starting in 2002, the region emerged as major exporter by selling about 600 million bushels of wheat.
During the 2008 global grain rally, Swedish, British, Chinese and Korean investors have piled into Russian farmland. Today, Russia exports about 14% of the world's wheat, up from 0.5% in 2000. The US share has slipped from 26% to 19%.
Russia created a new state company, United Grain in 2009 to modernize the storage and shipment of wheat in a $3.3 billion overhaul. United Grain is also pursuing more deals in Southeast Asia and Latin America which have long been strongholds for US and Australia growers.
Valars Group which is the third largest wheat exporter in Russia has spent $250 million on farmland and $108 million on equipment since 2006, the year it was founded. One of their farms is about 100,000 acres and last year it yielded on average about 65 bushels per acre which is on par with our yields here in the US. They are using New Holland tractors and combines instead of the old Russian machinery which now sits in storage all rusted out.
However, the Russians did buy their land and equipment at the peak of the market and they indicate that they are struggling to pay off their debts and may have to sell shares in the market to pay down the debt. During the last year, wheat growing brought "zero" profit after the plunge in prices. The Grain Union is asking for $320 million in subsidies to improve the profitability of exports. Such state aid could help Russia's growers compete even more ferociously with the US on price.