August 6, 2008


Boom in agriculture helps Russia hook investors

Global investors are looking at Russia to open up its long-neglected farm lands to supply a world increasingly in need of food.


Russian agribusiness firms have raised US$420 million since November last year. Analysts expect the figure to rise a further US$500 million to US$1.5 billion by the end of the year, either through initial public offerings or private placements.


Investors ranging from Western funds to English farmers want firstly to buy land in Russia.


Sid Bardwell, general manager in Russia for US agricultural equipment supplier Deere & Co told Reuters that there is remarkable opportunity in Russia, although the industry is still dominated by the Russian Agricultural Bank.


However, there is now much more participation in rural areas by other large Russian banks, he said.


Russian agriculture, previously severely disrupted by the farm collectivization scheme implemented by the communist regime, is now one of four sectors given priority status by the current government. 


Russia, the world's fifth-largest grain grower and exporter, expects a total grain crop of at least 85 million tonnes this year, up 4 percent on 2007. The wheat crop this year promises to be the best in 30 years.

Wheat accounted for 60 percent of Russia's total grain crop last year.


However, only 13 percent of Russian land is used for agriculture, compared with a world average of 38 percent.


Russian wheat yields, at 1.9 tonnes, is also less than half of wheat yields in the EU, which can reach 5.5 tonnes.


The 47.2 million hectares sown to grain in 2008 remain 25 percent below the area under cultivation in 1990.


Agriculture contributed 5 percent of Russia's GDP in 2007 and employs 10.5 percent of the country's work force.


Analysts say with government support even at such low production efficiencies, there remains vast potential for the industry to develop. Furthermore, what Russia lacks in efficiency, it can more than make up for in low production costs, analysts said.


However, fertilizer and fuel costs are rising worldwide, while investment is needed in equipment and seeds to increase yields. Also, planters would have to contend with Russia's famously bitter winters.


About US$3.3 billion from this year's federal budget was committed to the sector, with the same amount again supplied by regional governments, said Dmitry Rylko, general director of the Moscow-based Institute for Agricultural Market Studies.


This money, plus the rising private investment, is funding a move by large agribusiness firms to have a stronger presence in Russia.


Yuri Makarov, senior economist at the London-based International Grains Council,  forecasts  Russia could account for 11 percent of world wheat exports in the 2008/09 marketing season.


Unlike the optimism in grains, the government's efforts in livestock have been less successful however.


Despite having an exportable surplus of grains, Russia still imports over a third of its poultry and a quarter of its beef, spending US$4.5 billion on meat and poultry imports last year. Cattle numbers have stagnated, rather than increased as planned.


Sergei Mikhailov, chief executive of meat producer Cherkizovo Group, said Russian meat consumption had declined to 51 kg per capita per year from Soviet-era levels of 78 kg, although the decline would be reversed as incomes grow.


To cash in on that change, Cherkizovo, the first Russian meat producer to list on the London Stock Exchange, is investing US$350 million this year and last to develop its pork and poultry business.

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