Thomas White Global Investing
Russia
Russia Stamp
June 10, 2011
A Postcard from Europe
Russia: Stepping in to ensure global food security

A wheat and barley field in Russia

It is widely believed that the seeds of the popular uprising that rocked Egypt were actually sown in the wilted wheat and barley fields of Russia and Ukraine last year.

Perhaps the humble prayer for daily bread has rarely found more resonance with millions across the world than in the recent months. The concern seems clearly warranted as global food prices have already exceeded the levels last seen in the early part of 2008. It may not be a mere coincidence that both the periods were marked by events that are strikingly similar: export bans, panic buying by food importing nations, and an attempt to impose price controls. The rising food prices also partly triggered some of the popular uprisings which ravaged countries in the Middle East such as Egypt, where the word for bread “aish” also means life. In that sense, Russia is the true life-giver to citizens of Egypt, which imports about 60% of its wheat from the BRIC constituent. The snowballing food crisis has evoked a sharp reaction from the G-20 countries, which have adopted food security as their top priority this year. Taking stock of the situation, the spotlight inevitably turns to big exporters of low-cost grain such as Russia and other Central Asian republics like the Ukraine, collectively referred to as Europe’s breadbasket.

Even as a severe drought in the Black Sea region destroyed about 40% of its wheat production last year, it was Russia’s reaction to the nearly unprecedented natural calamity that grabbed the headlines. A blanket ban on wheat exports was issued from the country, which was the third biggest exporter of the grain in 2010. Neighbor Ukraine too followed suit though it stopped short of a total export ban. Ignoring fervent pleas from the United Nations Food and Agriculture Organization to lift curbs on exports, both the nations initially looked set to extend the ban until next year.

It is no surprise that Russia is in the global food security spotlight these days. As the planet runs short of cultivable land to grow grains, the largest country in the world has plenty of arable land and an adequate supply of fresh water to boost farm production and ensure a steady supply of grains to the world food market. Moreover, Russia’s vast reserves of natural gas help the country produce low-cost nitrogen fertilizers. Small wonder these natural advantages have emboldened Russia recently to draw up an ambitious plan to meet most of its food requirements internally by 2020. Needless to say, protectionist tactics from such a country, like the ban on grain exports, have set off panic reactions across the world.

When you talk about a global food crisis, this mind-blowing projection is sure to strike you in the face: The world, which is not even able to feed its current population of 7 billion, will have to feed 9 billion mouths by 2050. Besides the scorching growth of the population, other factors such as the growing demand for food in fast-developing economies such as India and China and changing preferences of people for more nourishing food have also contributed to the dilemma. And in a globalized world, even consumers in the developed world feel the heat from rising food prices, as firms such as Kraft and McDonald’s have already announced price hikes for 2011.

Natural calamities can’t be helped. It can strike any country, any time, especially as climate changes have become sporadic and unpredictable. Not to mention the recent FT report that mentioned the threat from weeds, which have struck agricultural crops in many Central Asian republics. However, Russia has put last year’s severe crop damage behind it and is forecasted to increase its wheat production this year to 85-90 million tons, compared to 61 million tons produced in 2010. What is more, the benign weather in the country’s rich Black Earth farming region is seen as the harbinger of a good harvest this year.

Still, even as the world yearns for more food, Russia, which has some of the world’s most fertile soil, is hampered by the lack of efficient machinery that could help boost farm produce. Sensing a good business opportunity, farm equipment makers such as John Deere and Agco Corp. have started supplying machinery to Russian farmers. Shortages of storage facilities and transport bottlenecks also have affected delivery of food grains to shops and ports.

However, the latest news emanating from Russia and Ukraine is heartening. While Russia has announced its decision to lift a ban on grain exports from July 1, citing expectations of a good crop this year, Ukraine has decided to scrap the quota on grain exports imposed last year. With two of the world’s biggest grain producers resuming their supplies to the global markets, food prices are expected to come down. Though the lifting of the ban did not come as a surprise to many in Russia, the gesture may eventually help answer the prayers of a starving family in some remote corner of the world.

 

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