DOBRINKA, Russia (Reuters) - When Murat Shamshinurov toasted this year’s harvest with a glass of vodka, he did so with confidence.
A fleet of new Dutch combine harvesters, better seeds and a mild winter promise a bumper crop at the farms he runs in Russia’s fertile Black Earth region. This prosperity is the result of a $175 million investment by Nastyusha, the grain-trading firm that bought the land in 2006.
Shamshinurov’s situation is not unique: investors are plowing money into Russia’s open lands to resuscitate the long-neglected farm sector and supply a world in ever greater need of food. This year’s Russian wheat crop promises to be the best in 30 years.
“The opportunity for agriculture in Russia is remarkable. It has the potential to be one of the truly key sectors of the economy,” said Sid Bardwell, general manager in Russia for U.S. agricultural equipment supplier Deere & Co.
Russian agriculture, crippled by the legacy of Soviet leader Josef Stalin’s collectivization, is one of four sectors afforded priority status by the Kremlin as it seeks to reverse more than a decade of decline that followed the Soviet Union’s collapse.
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, but the country has yet to surpass Soviet-era production levels on a sustained basis.
Only 13 percent of Russian land is used for agriculture, compared with a world average of 38 percent, while a hectare of wheat yields an average 1.9 tonnes -- much less than the U.S. average of 2.8 tonnes and 5.5 tonnes in the European Union.
Therein lies the potential.
“Agriculture, even with the current low level of efficiency, is still a profitable business thanks to government support,” Renaissance Capital analyst Natalya Zagvozdina said.
“Imagine what it would be like if efficiencies increase.”
Prices for wheat, rice and maize hit records this year as droughts in grain-growing countries exacerbated a shortage at a time of high global demand. This makes Russian agriculture even more attractive as production costs are relatively low.
Wheat accounted for 60 percent of Russia’s total grain crop last year, or 49.4 million tonnes. Moscow-based analyst group SovEcon says the 2008 wheat crop could rise to as much as 54.2 million tonnes, which would be the highest since 1978.
The country also grows large quantities of barley, as well as maize, rye and buckwheat.
“The returns on investment are dramatically higher than they used to be,” said Kingsmill Bond, chief strategist at investment bank Troika Dialog.
“Increase yields to 5 tonnes per hectare, sell at $250 per tonne, keep costs to $700 per hectare and you’ve got $550 of profit per hectare. But actually achieving that is very tough.”
Fertilizer and fuel costs are rising worldwide, while investment is needed in equipment and seeds to increase yields and offer insurance against Russia’s typically cold winters.
Investor appetite for the sector, coupled with the need for cash to develop land, will add to the $420 million in new capital raised by Russian agribusiness firms since November.
Zagvozdina said Russian farm companies were likely to raise a further $500 million to $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.
“Russia was the bread basket of Europe 100 years ago. The quality of land is exceptional, but the neglect of this land during Communist times was astounding,” said Sergei Glaser, a manager at Vostok Nafta Investment Ltd.
Rural life got even harder after the break-up of the Soviet Union in 1991. Land lay fallow and machinery was left to rust.
Glaser’s fund, with $1 billion in assets under management in the former Soviet Union, owns a quarter of Black Earth Farming, a Swedish-listed firm named after the fertile belt of soil that stretches from eastern Europe to the banks of the Volga River.
Agriculture contributed 5 percent of Russia’s gross domestic product of 32.5 trillion roubles ($1.4 trillion) in 2007. Farming accounts for about 10.5 percent of the country’s work force, compared with 2.5 percent in the United States.
About $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 -- whose assets include land, grain elevators, flour mills and port terminals -- to establish themselves as reliable, long-term suppliers to global markets.
“Russia has come to the front line of grain exporters,” said Yuri Makarov, senior economist at the London-based International Grains Council, which forecasts Russia could account for 11 percent of world wheat exports in the 2008/09 marketing season.
There is also a second, less advanced thrust to investment in Russian farming: the development of a thriving livestock sector reared on home-grown fodder crops to cut the country’s dependence on imported food products.
Despite having an exportable surplus of grains, Russia still imports over a third of its poultry and a quarter of its beef, spending $4.5 billion on meat and poultry imports last year.
Nastyusha’s strategy in the Lipetsk region of central Russia follows this model of using high-quality wheat to produce flour and bread, while also rearing cattle and producing its own milk.
Originally a trading firm, it has united 29 former collective farms in Lipetsk over the last two years as the basis for a vertically integrated farming operation.
“It’s essential for the development of the agricultural sector,” Shamshinurov, who runs Nastyusha’s 130,000 hectares in Lipetsk, said as he stood in fields of golden wheat that will be processed at the company’s flour mills in Moscow.
Authorities in Lipetsk, 450 km (280 miles) southeast of Moscow, describe their region as the ‘Pearl of the Black Earth’. Yields at Nastyusha’s farms are set almost to double to 6 tonnes per hectare this year. Similar results can be seen elsewhere.
“Learning to apply Western technology in a Russian environment has led to better crops,” said Richard Willows, an ex-grain trader who left England six years ago to run Heartland Farms in the Penza region at the invitation of the local governor.
The government’s push to make agriculture a priority project has not been an unqualified success however. The 47.2 million hectares sown to grain in 2008 remain 25 percent below the area under cultivation in 1990, while 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 a declining trend is being reversed as incomes grow.
Private investment is again playing a large role. Cherkizovo is the first Russian meat producer to list on the London Stock Exchange and is investing $350 million this year and last to develop its pork and poultry business.
“The share of imported pork and poultry will go down in future thanks to growing domestic production,” Mikhailov said, “but the share of imported beef could even grow because of the lack of high-quality beef production facilities in Russia.”
Despite the problems, access to capital is rising, with banks more willing to lend to farmers and private investors more confident of returns.
“It’s still dominated by the Russian Agricultural Bank, but you’re seeing much more participation in rural areas by other large Russian banks,” said Deere & Co country manager Bardwell.
Russian President Dmitry Medvedev also underlined the country’s potential role in addressing the global food crisis when meeting fellow Group of Eight leaders in Japan last month.
“Our country’s long-term input in solving this problem will mainly consist of significantly increasing our agricultural production and supplies, not only to the local market but also to world markets,” Medvedev said at the summit.
Farmers across Russia will drink to that.