MOSCOW Russia's decision not to ban grain exports after another poor harvest shows its leaders recognize that the embargo imposed after the failed 2010 crop was a mistake.
Farmers are making money as domestic wheat prices have closed in on international levels, and inflation also has been contained as exports from Russia's Black Sea ports have helped balance a tight global market.
By keeping the trade channel open, Russia recognizes that, while it is a leading grains exporter, it is also a big buyer of meat and other processed produce. To boost food security, the government now wants to let the market work.
"Our domestic goal is to provide people with good food at reasonable prices - to do this we need to increase production," says Arkady Dvorkovich, the deputy prime minister responsible for farm policy in the government appointed last May.
"Exports and free prices are good economic incentives for producers," Dvorkovich, a liberal economist, told Reuters in an interview toward the end of the year.
By contrast, the one-year export blockade Russian leader Vladimir Putin ordered in August 2010 had a series of unintended consequences:
Prices for imported Brazilian beef and U.S. pork followed wheat higher, and Russian food inflation more than doubled to 14 percent by early 2011. Farmers could not cash in on diminished crops, as the export ban suppressed domestic grain prices.
Despite speculation that another ban would be imposed as it became clear the latest crop would again fall short, the government held firm in ruling out any export limits before 2012 was out.
As the graphics show, Russian wheat prices have closed the gap on Paris wheat futures, helping farming enterprises like Stockholm-listed Black Earth Farming (BEF) (BEFsdb.ST) turn a decent profit after years of pain.
"A business like ours, producing grains and oilseeds, can make some money," BEF's chief executive, Briton Richard Warburton, told Reuters. "So we are in a position to invest."
GENTLY DOES IT
Russia's overall grain harvest last season, at 70 million tonnes, was down on the 2011 outturn of 94 million tonnes, due to a dry spring in its "bread basket" farm regions.
The 2010 harvest was still lower, at 61 million tonnes, but taking into account higher carryover stocks that year, the overall supply situation is, if anything, tighter this season, especially after a dreadful wheat harvest.
Credibly ruling out a ban has curbed a speculative rush to ship grain out of the country and let domestic prices adjust gradually to the point where it is no longer economic to export.
"Thanks to the fact that the government decided not to restrict exports, we have seen a gradual increase in prices for the 2012 harvest," said Yevgeny Izyumski, commercial director of Kuban, billionaire Oleg Deripaska's agri-business group.
Even though exports this season have reached 12.8 million tonnes, the government has had time to launch sales from its intervention stocks to balance supply and demand. Grain exports last year totaled 28 million tonnes.
Inflation is behaving, more or less, with the headline rate nosing slightly above the central bank's target of 5-6 percent. Bank of Russia Chairman Sergei Ignatyev expects price growth to revert to the range by mid-2013.
Despite a relatively slow winter sowing campaign, held back by continuing dry weather in the Russian south, where Black Earth Farming cultivates 260,000 hectares, Warburton expects a "production response" to higher prices in this crop year.
But the 2010 ban boosted transportation and port loading costs, and they stayed painfully high. "If you put a ban in place and you effectively shut down those facilities for months, with some justification these businesses can become even more expensive," he said.
Many grain producers remain burdened with heavy debts that constrain their ability to invest in new crops, adds Pavel Skurikhin, the head of Russia's Grain Producers' Union and a founder of Siberia-based producer SAHO.
"Price increases have compensated for production costs, but you need to sell a lot of grain to make a profit," Skurikhin said. "And if farmers don't, they can hardly make ends meet."
Russia's extreme continental climate causes the grain harvest to vary by up to 30 percent around the long-term average - twice as much as in Europe or North America - making it harder to plan ahead.
The inability to sell physical product forward, locking in prices ahead of delivery, is another risk that cannot be banished until the prospect of another export ban is eliminated, making hedging on international markets a safe exercise.
Nonetheless, investors are starting to look again at farming in Russia, attracted above all by vast tracts of arable land available at rock-bottom prices from struggling sellers.
According to agriculture analysts SovEcon, a hectare of land in Russia's prime southern region of Krasnodar costs around $1,700, compared to over $11,000 in Germany or France.
A1, the venture capital arm of oil-to-banking tycoon Mikhail Fridman's Alfa Group, wants to create an agricultural firm in Russia or neighboring Ukraine.
"Before 2008, a lot of farmland was bought, but there were few success stories," Mikhail Khabarov, president of A1, told Reuters. "There have been many defaults, and special situations, that we can make use of."
An investor from Saudi Arabia, a big grain importer, has set up a joint venture with SAHO to ship Russian wheat and barley to the Middle East and North Africa. The venture, with Najd Trading and General Contracting, is intended to help SAHO restructure its debts to Russian banks.
Putin wants to boost annual grain output to 120-125 million tonnes by 2020, freeing up 35-40 million tonnes for export, and has put global food security high on his agenda for Russia's annual presidency of the Group of 20 nations.
That's achievable, as long as Russia does not commit farm policy blunders. These, unfortunately are not out of the question to those who remember the disastrous results of the forced collectivization of Soviet farming between the world wars.
"Russia has to be a major grain producer, otherwise there simply isn't going to be enough food in the world," said Warburton. "It's a micro issue for me, but it's important to humanity: This sector has to get off its backside."
(Additional reporting by Polina Devitt and Olga Sichkar; Editing by David Gregorio)