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Russian farming: from basket case to breadbasket

by at 19/09/2008 00:12

LIPETSK, Russia - An American-made combine harvests barley doing the job of five Soviet tractors on this patch of the "Black Earth" region - a glimpse into changes sweeping Russian agriculture that have raised hopes of transforming a once backward industry into a breadbasket.

Lured by soaring food prices, corporations - both domestic and foreign - have been snapping up land in this fertile region the size of France, replacing inefficient Soviet-style collective farming with modern farming techniques and economies of scale.

"Foreigners who come here get astonished at the gleaming black earth," said Viktor Karnushin, head of a local subsidiary of Sweden's Black Earth Farming corporation - one of the biggest foreign players in Russian farming.

Russian government officials recently announced plans to transform the country into the world's leading grain exporter within five years. While there are skeptics, Natasha Zavozdina at investment bank Renaissance Capital said the target is realistic.

"With $70 billion (1.8 trillion RUB) investment within 5 or 7 years... the goal will be achieved," she said. "As long as production is profitable, public and private investment will be flowing in."

Meanwhile, the Kremlin plans to form a state trading company to broker about half of the country's millions of tons of grain exports, expanding its control of who buys Russia's cereals and how much they pay for them. That has led to concern abroad that Russia may use its grain as it uses its control of the nation's enormous oil and natural gas wealth - as leverage for diplomatic and political goals.

There's lots of room for Russia to ramp up its farm production.

Russia is the globe's largest country geographically, and has almost one hectare out of every ten of the world's arable land. According to analyst estimates, the Soviets farmed 314 million acres of Russian land in 1985. But in 2007, Russian farmers cultivated only 190 million acres - a 40 percent drop.

Much of Russia's land is marginal and millions of acres of farmland are located far north in areas with short growing seasons. But the Black Earth region stretching across Southern Russia and neighboring Ukraine is some of the most fertile land in Europe.

Much of Russia's fertile land was abandoned after the Soviet collapse, as thousands flooded into urban areas, and investors see an opportunity.

The government launched an agricultural renovation program in 2001 that restricted farm imports, reduced taxes, subsidized loans and provided farmers with cheap equipment leasing. Rising food prices have done the rest. Production and investment have been on a steady rise in the past five years although many farms are far from Western standards of efficiency. This year's wheat crop is widely forecast to be the highest since 1978.

Ivan Nikolaev of Renaissance Capital sees Russia as the world's biggest grain exporter, second only to the United States, in five years. "The government has created a very favorable investment climate," Nikolaev said.

Viktor Gulov, director general of Agrolipetsk, one of Black Earth Farming's subsidiaries, said Russian farming has great growth potential, while "the West has already hit the ceiling in terms of harvest volume and arable land areas."

Investors paid relatively little attention to Russian agriculture in the 1990s because of low food prices and the lure of quicker profits in other areas, including energy and metals.

But that has changed.

Foreign investment in Russian agriculture and forestry nearly tripled between 2005 and 2007, from $158 million (4 billion RUB) to $468 million (12 billion RUB), according to the national statistics agency.

Russian farming seems poised to boom even without bringing many more fields into production. In Soviet times, Karnushin said, farmers were lucky to get 2.5 tons of wheat out of a hectare (about 2.5 acres) of land. Using modern technology and farming methods, his company today expects to harvest at least five tons of wheat out of the same plot, he said.

There are obstacles to agricultural development here. One is a lack of roads and infrastructure to transport goods to market, which may soon become a major drag on the sector's development.

A recent slip in commodities prices can also leave some of the investors disappointed. Declining prices will show the real commitment of the investors who were hoping to reap sizable profits every year, said Andrei Sizov from the Moscow-based SovEcon consultancy.

Grain production will generate no more than 40 percent profits this year against 100 percent last year, he said. High energy prices, meanwhile, have driven up the cost of fertilizer as well as fuel for farm vehicles.

Political risks are also high on foreign investors' concern list.

Many Western energy companies that poured billions into Russian oil- and gas-fields were elbowed out of the industry as prices soared and the Kremlin asserted control over key assets. Some fear the same could happen to farming - with foreigners invited to modernize the industry then shunted aside once profits start to roll in.

The sector's potential is also held back by a labor shortage - a legacy of the exodus to cities in the 1990s. Those who stayed are either too old or too young to work.

Agrolipetsk, the Black Earth Farming subsidiary, has merged 20 former collective farms in the Usman District into a mammoth operation, cultivating about 100,000 acres with wheat, corn, barley, sunflower and rapeseed.

In Renaissance Capital's estimate, 78 percent of the total arable agricultural land in Russia is already owned by agricultural companies. The company says farmland ownership will be increasingly dominated by corporations worth more than half a billion dollars (around 13 billion RUB).

Some analysts have concerns about the corporatization of Russian farming - saying it will hinder democracy by discouraging the emergence of individual property owners who can challenge traditional power structures.

If a new class of small entrepreneurs emerges in Russia, though, it seems unlikely to include many small farmers. Several Agrilipetsk workers said they had no interest in the risks associated with running a farm of their own.

"I know the situation with fuel prices too well," said Alexander Buravlev, who works for Agrilipetsk. "You can run up debts and leave them to your grandchildren."

ROUND TABLE 1.1

Russian Agriculture - Leadership Potential

Friday, 19 September

Venue: Hotel Zhemchuzhina, Cinema-Concert Hall

By Nataliya Vasilyeva

Associated Press

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