Russians starved through the 90s, but the big money was busy gobbling up the old state assets. Now the food shortage and the good prices are attracting altruists from hedge funds and Moscow’s idealistic Ministry of Agriculture.
Russia has a very large amount of land that can be turned into cash crops. Russia has nearly six times as much land as Britain lying fallow growing weeds, abandoned. That's 35
million hectares.
Another part of this revival of interest in food is that it could well be a major next step in the return of Russia as a global power, this time an agricultural superpower.
The New York Times:
Earlier reformers envisioned the collective farms eventually breaking up into family farms. But the new business model rests on a belief that Russia’s long, painful history of collectivization is destined to end in large corporate factory farms.
These investments are also a gamble in a country accustomed to government control of business. Some officials have hinted at the prospect of a government takeover of the farming industry reminiscent of the Soviet era.
And Russia’s minister of agriculture, Aleksey Gordeyev, speaks often of food in terms of national security. “Russia is very often perceived throughout the world as a major military power,” he told a food summit in Rome early in his tenure. “At the same time, and perhaps above and beyond anything else, Russia is a major agrarian power.”
Maybe this is naïve, but a multi billion dollar industry in a sellers’ market might just have some appeal. A government takeover is about as likely as Stalin returning from the grave. Big capital in Russia is neither stupid nor badly connected, and a government takeover would be quite superfluous.
The problem is that Russian agriculture is still back in the Stalin era. It’s not particularly productive, but with modern methods it could be. That would require getting rid of the antiques, which needs doing anyway, and getting some real machinery.
Real cost, relative to the kind of capital available in Russia? Peanuts. One of the trademarks of Russian capitalism in the 90s was buying up old state assets like oil and gas at rock bottom prices. The world was for some reason amazed at subsequent rise of a very profitable energy industry.
There’s no reason agriculture couldn’t operate the same way.
Look at the costs:
1. Land is going for $1000 per hectare.
2. According to NYT, the average yield from the collectives is 1.85 tons of grain per hectare. At least one private capital venture, however, has managed 3.3, and is expecting to achieve 4.4.
3. Wheat futures for December 2008 are up around $8.99 per bushel, which is $298 per ton. That’s $1311.20 per hectare, at 4.4.
Meaning even the land would more than pay for itself in one year.
That’s still not a great performance by the standards of Western countries, some of which get 6+ tons per hectare, but if you add the sheer potential size of a Russian crop using the abandoned land, it could be a giant piece of the global grain market.
That market is currently vulnerable. Although things are now better than they were at the height of the grain shortage, the major grain producers haven’t been producing at capacity for a variety of reasons. Russia could easily take up the slack, and also acquire a real ability to affect grain prices.
Russia also isn’t known to be suffering from the water crises and droughts affecting other big grain producers. They can start with brand new industries, too, and compete effectively. Should drive the EU up the wall.
Politically, this could be another Russian move with major global ramifications. This century may well be the beginning of food as an economic weapon. The ever increasing number of mouths to feed around the world adds another incentive.
There’s expected to be 12 billion people on Earth by the end of the century at the latest. Food is going to be a huge issue.
Russia is perfectly placed to take advantage of that situation.
