Russian grain market suffers under grain tax

Russia will quickly become a “second-tier player” in the global wheat market if the government keeps its punitive export tax in place, says an analyst.

Andrey Sizov, managing director of SovEcon, said exports will contract substantially as the tax eats into farmer and exporter profits.

“This season we forecast (exports) at 34.3 million tonnes of wheat compared to 38 million tonnes in 2020-21,” he said in an email. “That trend is likely to continue.”

Canada will benefit from the anticipated contraction of Russia’s export program because it will drive up global wheat prices.

However, the European Union and Ukraine are likely to pick up most of the market share because they are direct competitors in traditional markets where Russia operates. Egypt is one example, he said.

Sizov recently wrote a column for the Financial Times outlining his concerns about how Russia’s interventionist actions are threatening the country’s position as a global wheat superpower.

Not long ago, the country was a large net importer of the commodity. During the Soviet Union era it imported 55 million tonnes of wheat in 1984-85, a record that still stands today.

Russia started shipping out wheat about 10 years after the 1991 collapse of the Soviet Union and gradually became the world’s largest exporter, selling as much as 41.4 million tonnes to customers around the world in 2017-18.

It is the top supplier to important markets like Egypt, Turkey and Azerbaijan.

That is due to what Sizov calls the “transformation” of Russia’s grain sector. When the Soviet Union fell, Russian farmers suddenly had the right to own land and enter into long-term rent contracts. That gave them the incentive to invest in machinery, storage and technology.

Moscow has largely refrained from interfering in the grain sector but that changed a few years ago when the government started experimenting with temporary export restrictions.

In June of this year it introduced a permanent export tariff on all key grains in an attempt to help keep domestic food price inflation in check.

“For wheat, the state claims an onerous 70 percent of anything exported above $200 per tonne, taking away the bulk of the upside of higher international grain prices for Russian growers,” Sizov said in his Financial Times column.

He noted that even Argentina, which has been taxing its farmers for decades, has substantially lower export taxes.

Russian farmers are going to lose 15 to 30 percent of their income due to the tax at a time when fertilizer and other input costs are rising.

He believes that will lead to a 1.7 to 2.5 million acre or five percent contraction in winter wheat crop area this year.

Perhaps more importantly, farmers will also cut back on fertilizer, chemicals and machinery upgrades.

“It could lead to a sudden, rapid drop in production in the case of adverse weather, despite not so big a decline in planted acres,” Sizov said in an email.

This year’s production is down 12 percent or 10 million tonnes despite record high plantings. That is primarily due to bad weather but cost-cutting also played a role, he said.

Sizov hopes the Russian government changes its mind on the tax as it sees farmers abandon wheat, corn and barley in favour of soybeans, rapeseed, flax, lentils, peas and summerfallow.

He also believes top Russian officials won’t be happy if they see the country lose its ranking as the world’s leading exporter of the crop because that is a source of pride for the government.

Sizov said Canadian farmers should value the “more or less” free economy in which they operate.

Source: producer.com

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