Analysts warn of risk of storing record grain harvest

Against the backdrop of a record grain harvest and logistical difficulties associated with the sanctions, RUSSIA has accumulated grain stocks worth 260 billion rubles. Storing surplus can lead to a decrease in the margins of crop production,

Long-term storage of grain stocks, accumulated against the backdrop of a record harvest, Western sanctions and disruption of logistics, carries risks for Russian farmers. This conclusion was made by the experts of the consulting company Yakov and Partners (formerly McKinsey) based on the results of a survey of specialists and managers of the agro-industrial complex conducted in December 2022. The report is at the disposal of RBC.

What threaten large stocks of grain

In 2022, Russia harvested a record grain harvest - according to Rosstat, the gross harvest of grain and leguminous crops in net weight amounted to 153.8 million tons. Grain exports lagged behind the average annual values ​​for almost the entire 2022, the report says: only by November EXPORT volumes of grain equaled the values ​​of 2021.

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Traditionally, most of the products intended for export (up to 70%) are exported in the first half of the agricultural year (its scope does not coincide with the calendar year, it starts on June 30 and lasts until July 1 of the next year), analysts say. But in the first half of the current 2022/23 season, only 50-56% of the volumes were exported. Among the reasons for the lagging pace of exports are the difficulties with the charter of ships and the fears of partners about secondary sanctions, experts from Yakov and Partners point out.

“As a result of a record harvest and logistical problems, tens of millions of tons of grain are in storage and are likely to move into next season,” the report says. According to Rosstat, cited by analysts, as of January 1, 2023, Russian agricultural organizations had 35.4 million tons of grains and legumes in stocks, which is 43.6% more than on the same date last year. According to the results of the third quarter of 2022, almost 18 million tons of grain were in procurement and processing organizations.

According to analysts, the ending stocks of grain in the 2022/23 season (the agricultural year that began at the end of June 2022 and will last until July 2023) will amount to 26 million tons, of which about 17 million tons are wheat.

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“Thus, at current prices, the risk zone usually associated with long-term storage of grain includes reserves worth about 260 billion rubles. In order for this figure not to grow even more, Russia will need to export monthly grain volumes close to the record - more than 4 million tons,” said Alexey Poroshkin, an expert at Yakov & Partners and co-author of the report.

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An increased level of stocks is always a source of losses and risks in the production practice of all industries, adds Poroshkin. Due to large stocks, agricultural producers face commercial risks of storing grain, confirms Viktoria Mogilyuk, senior analyst at Yakov & Partners. The cost of storing grain “eats up” a significant share of the margin, it becomes unprofitable to store it, moreover, storage capacities are limited, the expert explains. Additional pressure on agricultural producers is exerted by high prices for consumables and low domestic prices for raw materials. “Therefore, we expect that the margin in the current season will decrease significantly compared to previous years,” the analyst concludes.

The fact that they have a surplus of grain was stated by 37 to 80% of respondents (the results depended on the district, most of the respondents declared surplus products in the Volga Federal District), wheat, sunflower, corn, barley, soybeans were most often in excess , SUGAR beets and peas. “Even more worrying is the fact that almost 46% of them do not know what to do with them,” the analysts add.

The situation is already negatively affecting the margins of wheat producers: according to analysts, it may decrease by 1.6 times compared to last year and three times compared to the 2020/21 season. The continuation of current trends may lead to a decrease in the production of grains, in particular wheat, by 13-19% already in the 2023/24 season, Yakov and Partners experts warn.

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Export flows and farm profits could reach higher volumes if export duties are reduced, but this may limit the regulator's ability to keep prices for food and animal feed on the domestic market, the authors of the report point out.

The press service of the Ministry of Agriculture confirmed the forecast, according to which grain exports in January-June 2023 will amount to 30 million tons, or about 5 million tons per month. The ministry emphasized that the projected export volumes will allow "effectively removing excess grain from the Russian market before the new crop arrives." As for the long-term storage of grain, the Ministry of Agriculture reminded that in recent years many projects have been implemented in Russia for the construction of modern elevator complexes, where grain is stored in an underworked form and practically does not lose quality. “Thus, the risks of a partial loss of the crop are insignificant - the entire volume of the harvested grain will be sent for processing, fodder purposes or export,” said a representative of the ministry.

Marginality in crop production has slightly decreased against the backdrop of lower selling prices for products, but the profitability in the sector, taking into account state support, remains at an acceptable level, and in 2023 the costs of farmers for the production and sale of grain will continue to be subsidized, says a representative of the Ministry of Agriculture. To ensure the balance of supply in the market and the maximum profitability of crop production, it is also planned to reduce the sown area under wheat this year - the target for this crop is 80-85 million tons. “This will help maintain the stability of the domestic market in the interests of all participants and realize last year's record harvest” , added the ministry.

What do market participants think?

Based on the current forecast of the Ministry of Agriculture, in the second half of the agricultural year, Russia will export more than 4 million tons of grain per month. Export is the main mechanism for removing excess grain from the market, Oksana Lut, First Deputy HEAD of the Ministry of Agriculture, said at a meeting with members of the People's Farmer Association in early February, Interfax reported. According to her, in the first half of the current agricultural year - from July to December 2022 - Russia exported almost a record 29 million tons of grain. According to the forecast of the ministry, in the second half of the agricultural year, exporters can take out another 30-35 million tons. With a record harvest, Russia could have taken out more grain if exports were not constrained by sanctions restrictions on the external market, Lut added. Speaking about export duties, the First Deputy Minister noted that "duties will not go away" because they are "a self-regulatory mechanism."

“Farming looks very easy when your plow is a pencil and you are a thousand miles from a cornfield,” commented Eduard Zernin, chairman of the Union of Grain Exporters, commenting on the report (the expert quoted former US President Dwight Eisenhower). According to him, record carry-over grain balances are expected this season in Russia, caused by a historically high harvest. “But what is the risk of long-term storage of grain in the context of carry-overs, when the shelf life of wheat is at least five years? We will use up the surplus in the next year or two,” Zernin assures. The surplus, in particular, will ensure “rhythmic exports at the turn of the seasons and offset the planned decline in yields in the next agricultural year.”

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Zernin considers the estimate of the Ministry of Agriculture for grain exports in the second half of the year at 30-35 million tons to be objective - according to him, the situation with export restrictions is still far from normal, but has changed for the better since the end of last season, and now companies are well aware " their export opportunities under the conditions of hidden sanctions and tacit restrictions, including against specific participants in the grain market.”

Zernin does not agree that the situation with a record harvest and the resulting fall in prices will reduce the investment attractiveness of crop production. “Of course, the marginality of agricultural producers has decreased, but not to critical levels. Sustained high prices for agricultural land speak of the fundamental attractiveness of the industry,” adds the expert.

What else bothered the farmers

At the end of 2022, most of the participants in the agro-industrial complex surveyed by Yakov & Partners - 32% - encountered difficulties due to weather conditions. 26% of the surveyed farmers had no problems in 2022. Another 19% reported a problem with a shortage of spare parts and a lack of harvesting equipment. The lack of serviceable machinery was noted by 70% of respondents as the main risk for the implementation of their plans for the current agricultural year. The situation with import substitution and localization is complicated by the serious dependence of Russian manufacturers on suppliers of some key imported components, the report says. “We harvested the harvest with combines that are decommissioned,” some survey participants noted. The Ministry of Industry and Trade told RBC that in recent years, the pace of renewal of the agricultural machinery fleet in Russia has shown "noticeable progress." According to the ministry, at the end of 2022, the share of domestic manufacturers in the Russian agricultural machinery market exceeded 60%. According to the results of last year, the production of Russian agricultural machinery increased by 15% compared to 2021 and amounted to 250.6 billion rubles, which was a record in the entire post-Soviet history.