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Outlook on Russia agribusiness

Although the memory of the 2010 wildfires is starting to fade, the country is likely to face the after effects in the short term. Russian grain farmers are being hampered by soil conditions that remain poor in some areas and they have been unable to secure some of the financing needed to purchase fertilisers. Moreover, the relative scarcity of domestic grains (particularly feed grains) has begun filtering through to the livestock sector, as high feed prices are squeezing producer margins and limiting production growth. From this we expect consumption, particularly for livestock, to fall as well. Over the long term, we expect the situation to improve and for Russia to return to being a large wheat and livestock producer.

Key Trends

- Wheat production growth to 2014/15: 5% to 64.8mn tonnes. The weakness in this growth will be partly due to base effects. The key driver of wheat production over the long term will be export opportunities, particularly to growing emerging markets in the Middle East and North Africa.
- Milk production growth to 2014/15: 12% to 35.7mn tonnes. This will come from rising yields on the back of government investment in the sector.
- Corn consumption growth to 2015: 64% to 6.1mn tonnes. We expect corn consumption to experience dramatic growth as the long-term expansion of the livestock industry drives demand for feed.
- 2011 Real GDP Growth: 8.5% (up from 4%% in 2010; predicted to average 5.1% from 2010 until 2015).
- Food Price Inflation: 14.1% year-on-year in March 2011 (up from 4.8% y-o-y in March 2010).

Industry Developments

Domestic inflation has emerged as the key risk to Russian wheat exports at this stage. Year-on-year core inflation in Russia (which strips out food and energy) is running at approximately 10%, although this is partly due to base effects since the full effects of the wildfires were not seen until H210. This suggests that inflation in H211 should moderate somewhat due to the high inflation seen in 2010. If the 2011/12 crop comes in at, or above expectations, BMI expects the wheat export ban to be changed. We note, however, that it may change shape rather than be abolished completely. Specifically, the ban could be gradually lifted, or export quotas (currently used in Ukraine) could be put in place.

Coming off a strong fiscal year in 2010, BMI is optimistic regarding the long-term sales growth of large Russian poultry producers like Cherkizovo. The company saw increased sales and net earnings in 2010 and was a major force behind the sectors positive outturn in 2010. Over the short term, Cherkizovo, along with the rest of the Russian poultry sector, should struggle to maintain output in the wake of high feed prices which should squeeze farmer margins, thus increasing the costs of live poultry for producers. However, over the long term, we remain bullish regarding the poultry sector.

With the number of milk cows in Russia having fallen by more than 50% since 1990 and numbers continuing to fall, if at a slower rate, any immediate recovery in milk production will have to come from improved yields. Milk production per cow has indeed been rising since the mid-1990s, even as overall production levels continued to fall. This trend has been spurred by inefficient farmers being forced to slaughter their cattle stock, as without government assistance they were unable to make a profit. Despite having risen by around 40% over the last decade, at 3,229kg of milk per cow, average yields are still only around one-third of that seen in the US. This leaves plenty of room for growth and we expect yields to improve considerably over our forecast period.

by S. C.
05 june 2011, World News > Europe