Russian farmers feeling the sting of massive harvest

While headlines about the size of Russia’s wheat harvest this year have captured headlines in the agriculture industry, it is not all good news for farmers as prices have taken a hit from the glut of supply and foreign exchange headaches.

The sheer size of the crop, as well as the logistical challenge of exporting in a country of Russia’s size, has left some farmers inland unable to export their crop, holding onto stocks and hoping for better prices, even as the market starts to fall.

Sliding prices

The laws of supply and demand have weighed on the market, with a particularly heavy price paid by farmers located inland, away from the major ports in the Black and Baltic Seas. While the export market has only seen limited downwards pressure, inland prices have taken a bigger hit.

The average prices for a third-class wheat – equivalent to a standard 12.5% protein grade – has fallen from 12.2% to RUB8,310/mt ($140.45/mt) in the south of Russia, close to the major Black Sea ports.

The price drop becomes even more pronounced when looking at western or central Russia, however, with lower quality grades taking the biggest hit. Headline prices of fifth class wheat east of the Urals have fallen 28% to RUB5,080/mt ($85.86/mt) since the start of the marketing year in July.

While it has shown some signs of recovery in recent days, the weakness of the rouble has compounded producers’ problems and eaten further into margins.

During the same period, the price of wheat for export has fallen from $194/mt to $192/mt, according to data from the Russian Ministry of Agriculture. At the time of writing, the Census 12.5% protein wheat FOB Novorossiysk stands at $190.25/mt for spot shipment.

Government intervention

The State Intervention Fund would have previously stepped in to fill the void in this situation, buying and storing grain produced by farmers unable to find a ready market for their crop.

The fund – which sets out to provide a minimum guaranteed price for farmers to encourage grain production and keep prices steady for consumers – has not been in the market since December 2016.

With its stores said to be full, the fund has not been able to complete new purchases, removing a market-of-last-resort which would typically would frequently buy up tens of thousands of tonnes of wheat from remote parts of the country over the past two marketing years.

Earlier this month, deputy minister of agriculture Dzhambulat Khatuov told an audience the ministry was considering reopening its intervention buying, earmarking the start of 2018 for the first purchases. Khatuov had previously signalled a December start in some regions. His boss, minister of agriculture Alexander Tkachev, said in August they would begin in September.

What next?

Farmers in Russia have previously shown a willingness to openly express their frustrations, protesting earlier this year at the actions of large agro-holding firms in the south of the country. It is probably too soon to say this is the next step. Anecdotal evidence simply shows an angry and upset group, unable to share in all the benefits of what should have been a boom year.

Should prices fall further, however, some questions may start to be raised about the long-term feasibility of Russia’s export-focussed grains policy.