Why grain exports from Russia threaten bankruptcy for American farmers

Vladimir Mishurov turned the remnants of the Leninsky Put collective farm in one of the Russian villages into a profitable business and helped make Russia the world's largest wheat exporter for the first time after the fall of the tsarist regime. Record exports of Russian grain has become a threat to the well-being of American farmers.

Фото: Depositphotos

He bought and rented hundreds of hectares of land, taking advantage of low land prices in Russia and eventually possessing more than 1500 hectares of fields. Like many American farmers, he often worked for several days in a row, without rest, interrupting only for a brief sleep, especially during harvest, tells Wall Street Journal.

The main difference between Mishurov and a farmer in America is that costs in Russia are lower and are carried out in rubles, which makes selling abroad in dollars much more profitable. In the context of a long-term, powerful decline in grain prices, Russian agriculture is thriving. The country exported more than 40 million tons of wheat in the year that ended in June, up about 50% from the previous year. And this is the highest level for any country over the past quarter century. Russia overtook the United States as the world's largest wheat exporter in 2016 and overtook America in 2018.

Russia's growing competitiveness is another pressure on American agriculture, which is now facing its biggest wave of farm closures since the 80s. A global grain supply glut pushed prices down to about half in 2012, when prices peaked, making it difficult to translate profits into dollars.

The US trade war with China and other countries could make Russian wheat even more attractive if large buyers impose US grain on their return duties. China introduced the US wheat 25 duty, but China’s restrictions on imports from Russia have not yet given Moscow the opportunity to take advantage of the situation, according to Svitan Steele, director of the Swiss company Solaris Commodities SA, which sells Russian grain.

For now, “it's not a trade war, it's economics” that is helping Russian wheat compete with American wheat even in places close to the U.S., such as Mexico, Still says. “The quality is better and their grain is cheaper.”

Russian farmers are moving ahead when export earnings are converted into rubles. As the Russian currency has depreciated, the dollar is now converted to twice the amount in rubles than in the 2014 year. Russia has a similar advantage over the euro and other currencies. Russian farmers can cover their expenses in order to continue sowing, as well as undermine Western competitors with lower prices.

Rising agricultural exports to Russia, including grain, fish and meat, are part of efforts to diversify the economy away from crude oil. Oil and natural gas once accounted for half of the federal government's revenue. With oil prices still 25% lower than in 2014 - having recovered from a 60% collapse - exports now account for about 40% of budget revenues.

“Given the fall in oil prices, grain has come to the fore. Grain is our oil,” said Minister of Agriculture Alexander Tkachev in 2016.

Less expensive Russian wheat is pushing US and European grain from import-dependent countries in the Middle East and North Africa, where the Kremlin has been developing military and diplomatic influence in recent years.

The export of agricultural products in 2017 in the amount of 20,7 billions of US dollars overtook the armed industry as the second source of profit in Russia. Wheat accounts for about a quarter of total exports.

According to the US Department of Agriculture, Russia gathered wheat from areas that are almost twice as large as in the United States. American farmers, seeing few opportunities for profit, sowed wheat with the smallest area recorded per century. US wheat production fell by 25% per year.

Mishurov's farm is located in the fertile steppe of southern Russia. The area is the country's largest grain producer, a breadbasket known for its mineral-rich black soil and mild climate. The 46-year-old spent his youth driving a tractor that required an engine rebuild every year, leaving the young man with calloused hands for life. A lack of cash meant workers were paid in sacks of flour, wheat or sugar, and drunkenness was widespread.

At the beginning of the 20th century, Russia was the world's largest exporter of wheat. The Soviets killed and imprisoned millions of people, including many of the most successful farmers, as part of an attempt to establish a collective farming system that proved ineffective. By the 1970 years, the Soviet Union had to import grain. The work of collective farms stalled after the Soviet Union collapsed in 1991 year, and often still managed by the same bosses, only without business smartphones or cash for investment.

“Nobody led them,” says Mishurov. “They could not adapt to the market economy because they were accustomed to mindlessly following instructions.”

Farmers worked “to hold out until the time of day when they could go home,” says Andrei Burdin, a farmer from a nearby village who works on land that formerly belonged to the Dawn of Communism collective farm. “Agriculture was at a standstill.”

Russia opened the land market at the end of the 1990s, but the new investors and their managers for the most part were far from the people and work on the land, and were not inclined to take risks, farmers said.

Mishurov, who worked as a chief agronomist at a large agricultural conglomerate, recalls how in the early 2000s he told the director that the use of pesticides could increase the barley yield by about a quarter.

“No, Vova, that’s enough,” answered the director. “Why should I convince someone to earn more money?” asks Mishurov.

He began his own activities in the middle of the 2000s. First, he united the land with his relatives and used all the equipment he could count on. Today he grows wheat, barley, beets, corn, sunflowers, peas and other crops.

43-year-old Burdin began farming on a 101 hectare of land in 2005, using a dilapidated tractor and seeder. He invested the first profit in more efficient vehicles and improved fertilizers, and also expanded the territory by renting land from neighbors.

“When we made our first money, I didn’t buy a Mercedes or an apartment,” he said. “I’m invested in next season.”

At first, he bought Russian equipment, but later switched to John Deere tractors and combines, which the Russians call “green equipment,” or “green cars.” Burdin said he tested the John Deere combine and compared it to a Russian, finding that the new one produces a third more grain in the same area.

He also bought a seeder from Sweden, Vaderstad AB, which shoots seeds into the ground at optimal depths and intervals, improving yields. Now the area of ​​his farm is about 1500 hectares. Burdine says he can only work for about four hours at a time now because he fears for his health. Its equipment can now measure how much pesticide to spray and where, cutting costs.

The price of land in the region where Mishurov and Burdin live is significantly lower than in other countries. On average, agricultural land in Romania is almost three times more expensive, and in Iowa and Kansas more than five times the price of Russian land.

Burdin says that Russian seeds and fertilizers are still cheaper than Western brands, although they have improved significantly in recent years. He buys wheat seeds at the State Agricultural Institute and can plant seeds obtained from this wheat in the next season. Many American farmers use expensive, high-yield, patented seeds from companies such as Bayer AG or DowDuPont Inc., which do not allow them to plant their seed in the following seasons, requiring annual purchases of fresh ones.

Transportation costs are also negligible for the region. It is close to the ports of the Black Sea, and the cost of gasoline is much lower than in Western Europe. Burdin and Mishurov manage their own truck fleets that transport grain to the port of Novorossiysk approximately 300 km from land.

Private and public companies in Russia have modernized grain terminals and increased their capacity. Farmers can use smartphone apps to book slots for their grain delivery trucks, instead of the old system of trucks waiting in days-long queues. Bumper wheat harvesting is infrastructure. Slots for unloading grain are quickly sold out. And exports could be even higher if we can find a way to ship more.

Russia made it a priority. President Vladimir Putin instructed officials to solve infrastructure problems that restrain exports. In inland areas, long distances, the lack of railcars for trains and storage facilities hinder the transfer of grain to foreign markets.

One of the largest Russian terminals in Novorossiysk is completing a three-year modernization this year, which will almost double its capacity. Other companies have announced plans to build or expand terminals on the Black Sea, the Baltic Sea in the north and the Far East. Officials said that port expansion could increase grain export capacity by 50% to 7,5 million tons per month by 2020.

Government officials have stressed the importance of government subsidies, including low-cost loans, to help farmers replace old equipment. Analysts and farmers say government efforts to support agriculture often fall short - subsidies end up in tightly knit companies, infrastructure investment is slow and bureaucrats and other officials often expect bribes.

“Farmers were given the freedom to conduct business in the way they considered most efficient,” says Andrey Sizov Jr., managing director of SovEcon. “Over the last 10 years, the role of the state has been completely eliminated, and this has been good for the industry.”

Giant agro-holdings, conglomerates, often created by wealthy magnates or people close to top federal and regional government officials, have created offshoots that hinder the development of western farms. According to Sizov, the share of farms with an area of ​​more than 100 thousand hectares accounts for about 13% of all the land cultivated in Russia.

Now Mishurov can afford to collect and repair half a dozen old Soviet cars and rest in the Maldives and Thailand, although he says he prefers to stay at home.

Poor villages here depend on the generosity of richer farmers. Mishurov financed the reconstruction of the statue of Lenin at his village and the monument to local residents who died during World War II, and Burdin paid for the repair of the kindergarten in his village.

Mishurov manages 10 farms, holds three guards and a cook who prepares food for the workers.

“This is a lot for our areas, but we are trying to preserve jobs in the village,” he says.

One morning, a man came out of Mishurov’s office. He was sent to collect corn for farm chickens. It was a former collective farm director.

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