Russia scratches up grain

Due to abnormal heat, drought, the Russian Government has decided to impose a temporary ban on the exports of Russian grain. At the same time, experts fear the domestic producers of grain may incur losses and lose the position they had gained on the global market, which in turn may lead to the curtailment of expansion projects and construction of grain terminals in ports of the country.

The land of the baking sun

 

According to the pessimistic forecast of the Russian Ministry of Agriculture, voiced by the head of the Ministry Helena Skrynnik during a working meeting with Prime Minister Vladimir Putin, this year Russia might have about 60 million tons of grain yield. This is barely enough to meet the domestic demand. "All those measures that have been taken to date, let us hope that we will be able to satisfy our country’s need in grain," the minister added.
 
Earlier, the Ministry had forecasted 85 million tons of grain, which allowed the country to export at least 20 million tons. The reduction by 25 million tons shows that the export potential vanishes, making possible the grain deficit on the local market.

Such sentiments have made the government to announce such an extreme step, which may result in long-term negative aftereffects - a temporary ban on the grain exports until the end of this year.

 

At the same time, the Russian Grain Union is confident that given the last year's grain reserves should be sufficient not as well for the domestic market as for the world’s one, although in fewer than earlier volumes.

"If you remove the emotional component, we can confidently say: even under the most unfavorable outcome in gross grain yield in 2010, given the last year’s reserves, all domestic needs for food and fodder grain will be provided in full,” the Grain Union said. “Furthermore, our resources enable us to continue exports, perhaps in considerably less volume than in previous years but at a sufficient level to maintain the positions on the world agri-market that had been achieved over the past 10 years."

The Russian Grain Union is confident that the current situation poses a significant long-term risk for the development of the agriculture and the socio-economic situation in the country as a whole, including in connection with the speculative rise in grain prices, which does not have a fundamental long-term basis and therefore can result in a further sharp fall. According to Deputy Prime Minister Viktor Zubkov the authorities intend to handle this threat through grain intervention.

Commenting on the government’s decision to impose a temporary moratorium on grain exports, Russian President Dmitry Medvedev stressed the need for legal support of Russian exporters at the state level, so that the temporary exports ban would be considered by foreign importers as a force majeure and the inability to make deliveries.

Nevertheless, the withdrawal of Russian exporters even for a few months may lead to the loss of positions on the grain market and undermining of foreign consumers’ confidence in Russia as an exporter of grain.

Grain of truth

All this gives rise to the question of the fate of many port projects that were targeted at exports of grain.

Only the United Grain Company in June 2010 announced its plan to invest 22 billion rubles in the development of Russian sea grain terminals. According to the plans, UGC has projected the increase of the capacity of ports in the Black Sea region to 10-15 million tons a year, in the Far East to 4-5 million tons and in the Baltic Sea - up to 3 million tons of grain.

In particular, the planned modernization of the Novorossiysk grain terminal would boost annual grain volume up to 5 million tons there, the construction of a new deep water terminal at the port of Taman might increase grain exports up to 8-9 million tons a year, building a network of river grain terminals on the Volga and the Don rivers would add 3 million tons more annually.

In addition, for access to the world markets of Siberian grain it was planned to develop the terminals at the ports of the Far East. Basic Element, Saho, Itochu and Mitsui have been jointly preparing a project of construction of terminals at the ports of Vanino, Nakhodka and Vostochny. Also, a grain terminal with capacity of up to 3 million tons a year is projected at the port of Vladivostok.

In the North-West, UGC and Ust-Luga Company, are developing an Ust-Luga grain terminal project.

Implementation of these projects might boost exports volume and open new directions for the export of grain, new markets in the Asia-Pacific region and in South America.

So far, the investors have not announced any adjustment of these plans. In particular, the authorities of Commercial Port of Vladivostok (CPV) said in an interview with PortNews IAA that there were not any changes in the CPV’s terminal project relating to the exports ban and that its construction is included in the company’s development strategy for 2015.

According to Ust-Luga press service, the stevedoring company also had no changes in its plan for construction of a new grain terminal at the port, PortNews IAA reported.

Dmitry Teybash, a spokesman for UGC told PortNews IAA that "the temporary grain exports ban would not affect the company's own infrastructure projects, since they are still at the initial stage. Their implementation will proceed in accordance with the plans, Mr. Teybash said.

At the same time, the climate becomes more unpredictable and it seems doubtful that the Russian grain producers will be able to reach the last years’ grain yield and ensure previous export volumes. In particular, according to Russian president’s adviser on climate, President of the World Meteorological Organization Alexander Bedritsky, the abnormally hot weather in Russia is quite possible. Referring to the forecasts issued by the Intergovernmental Group of Experts with Rosgidromet and the Academy of Sciences of Russia, the scientist said that the heat waves in the territory of Russia will occur more frequently.

In any case, investments in grain projects intended to increase export volumes, are becoming increasingly risky.
As Alexander Ignatyuk, an analyst at Investment Group EnergoCapital commented on the issue in an interview with PortNews IAA, the ban on the export of grain might have a long-term negative impact on the efficiency of investments in grain terminals of Russian ports.
 
"The grain exporters will lose relations and contracts they had established with foreign customers. They will have to reestablish them again, and again proving the quality of Russian products. Therefore, return on investment in grain terminals will be extended in time and the management companies will have either to try to convert them or do away with this market," the analyst said.
 
According to Alexander Ignatyuk, the return to the same grain volumes at terminals will happen not earlier than 2-3 years. Especially, given the fact that the Russian exporters, in contrast, for example, from their U.S. colleagues, are working largely under direct contracts, rather than through auctions.
 
On the other hand, after the Russian exporters’ comeback on the world market, the new grain facilities at the ports may again be in demand, because the need in grain on the world market is still very high. So, everything will depend on the management of specific companies, because they will have to carry forward the current losses. According to the estimates of EnergoCapital’s analysts, the grain terminals may see a 10-15 percent cutback in total investments.
 
Vitaly Chernov.