Has Russia lost its position on the world grain market and how soon will it be before it resumes grain exports? RIA Novosti finds out in an interview with Agroinvestor’s editor-in-chief, Nikolai Lychev.

RIA Novosti: In recent years Russia has been a reliable grain supplier to countries in North Africa and the Middle East. The ban on grain exports came into effect on August 15. Is the export ban undermining Russia’s international image as a reliable grain supplier?

Nikolai Lychev: I would not say that Russia has built up a solid position on the world grain market. Rather, we have managed to become an interesting and promising partner for many grain importers. So we have not had the chance to consolidate this position yet. Russia has not yet become a traditional exporter, like the United States, the European Union, and some other countries and regions. In the past, Russia would import grain and only about five years ago became a grain exporter. Incidentally, we are returning to that status of being an importer, and will probably import over 5 million tons of different kinds of grain this year. Before this current period of poor harvests, we were simply one of the largest grain exporters, no more than that.

In short, I cannot say that Russia has managed to acquire a solid position [on the world grain market]. However, the ban on grain exports and especially the speed with which it was introduced – two weeks after the prime minister ordered an export embargo – was an unpleasant surprise not only for those selling grain, but for our international partners as well. Here I have in mind, first of all, such countries as Egypt and large companies based there that buy grain for private and state needs. Many market participants – domestic exporters, agricultural producers, as well as the buyers of Russian grain – were not prepared for this development.

As for the possible harm done to Russia’s image as a reliable grain supplier, there will be problems, of course. It should be up to the government, which after all initiated this measure, to resolve these problems, not the market participants. First, it should explain to international grain importers why this embargo was needed. Last week, Deputy Prime Minister Viktor Zubkov held a telephone conversation with [Russia’s] Egyptian partners. I think the Ministry of Agriculture, the Ministry of Foreign Affairs, and our trade representatives should all have this kind of regular contact with buyers. The way we explain the necessity of this measure backed up with convincing arguments will influence the way our partners respond to this sudden ban.

This measure was indispensible for the state. In July, it became clear that Russia is in for a large-scale drought and that the harvest would decrease by 20–25%, which in turn led to speculation on the domestic market. Grain prices started to rise: the price of flour grew by several dozen percentage points, bread became more expensive in some areas, not to mention grain. Speculative expectations were unreasonably strong. In particular, agricultural producers in Russia’s central regions told Agroinvestor off the record that wheat [for human consumption] cost up to 10,000 rubles ($324.7) per ton in 2008, and that they expected similar prices this year and refused to sell their grain at lower prices.

Flour producers, bakers, and retailers all had their own reasons to raise their prices. All this could trigger a rapid growth in inflation (in just one week from August 10 to 16, inflation rose to 0.2% from 0%, according to the Federal Service for State Statistics), and this is something the government could not allow. So in order to neutralize all this speculation on the agricultural market and prevent a rapid growth in inflation, the government acted quickly to introduce a ban on grain exports until the end of the year.

It would seem agricultural producers should actively sell their grain and earn money. But most are hoarding their grain, as they continue to expect to see consistent growth in grain price, if not throughout the whole season, then for some lengthy period. This unwise sales strategy has led to a stagnation on the market. Domestic sales are very low in volume, and grain is rarely sold at economically sound prices. It will take time for market participants to understand that the grain prices have stabilized and that unless they start selling grain again, they will lose more than they earn. I think the state will not be a passive onlooker here either: The government has already warned that it can, at any time, start selling grain from the intervention fund (that contains 9.6 million tons, according to official data). Selling grain from the intervention fund could weaken purchase prices for grain, and those who do not want to sell grain now will not earn anything, at least until the end of the year.

RIA Novosti: What can you say about our competitors, such as the United States and the European Union countries? Will they lure our grain customers away?

Nikolai Lychev:  I would not phrase the question like that. Right now our consumers have no choice. Grain is not gas. It is clear that those who buy Russian grain, primarily Egypt, will search for other options and will surely find them. Still, I am sure that many of our buyers will go back to trading with Russia once the ban is lifted, as Russian grain is the most competitive out there on the global market in terms of quality and price. We have been selling ordinary-quality cereal grains for five years, mainly wheat, purchased to form milling blends together with better-quality grains often purchased from other countries. We have been selling medium-quality grain abroad in recent years, and that became our niche. This year our traders won the most challenging and largest tenders in Egypt, offering a few dollars less for one ton of grain than our competitors. As soon as Russia lifts the ban, we will return to this market, with temporary image problems, of course. Our exporters have taken pains to establish contacts with some countries, which are very exacting clients, like Egypt, and it will certainly take time to restore these relations. The question is when we will be able to return to the world market. I would not rule out the option that the ban will last through to the end of the agricultural season (June 30, 2011).

RIA Novosti: How long will it take Russian companies to restore the contracts they had?

Nikolai Lychev: In order to answer that question, one needs to know how long the export ban will last. And, this is a question for market regulators rather than analysts. Assuming that the ban is lifted on January 1, 2011, Russian exporters will take one season, maybe more, to partly recover their former position. But this will also depend on the situation on the Russian market and grain prices, as the margin between the domestic and international price constitutes an exporter’s income, and it also depends on the 2011 harvest, that is, on how much grain Russia will be able to export next year, if any. In fact, it is already obvious that next year’s harvest is not going to be a large one.

RIA Novosti: But, as you say, Russian companies still have a chance of restoring their grain export level by next season, don’t they?

Nikolai Lychev: Theoretically, yes. We may see a partial recovery in exports over the next agricultural year starting from July 1, 2011. But this season will see a significant drop, according to various estimates down to between 2 and 8 million metric tons, from over 20 million tons the year before.

RIA Novosti: And the last question, when Russia finally regains its foothold on the international grain market, will it offer special, privileged, terms to its former largest grain importers such as Egypt and Turkey, or will it give preference to other customers?

Nikolai Lychev: There is no room here for favoritism, and even less so for privileges, as Russia is a commercial grain trader. There are around ten large grain traders in Russia, most of them units of major international trading companies such as Glencore, Louis Dreyfus and others. Commercial traders are guided by commercial interests.

A trader gives preference to the customer that gives the best offer in terms of price, amount, terms of delivery and other characteristics. If Egypt makes the best offer, the grain will be shipped to Egypt; if, say, Indonesia does, then Indonesia will have the grain. Let me repeat, it is in a commercial trader’s interest to profit from the price margin.

There is a state grain trader, the United Grain Company, which supplies grain to customers while also keeping in mind Russia’s national interests. It can also supply grain as part of relief aid and under inter-state contracts.

This company is not focused on commercial interests, and it does not make a profit in the above cases. Even when it operates as a commercial trader, it remains to a large extent a state development institution. From this perspective, the drought and crop failure will not overrule the president’s orders. He said last year that Russia should boost grain exports in the next five to seven years and become one of the world’s top grain exporters. The current export ban is a temporary measure and will be lifted; and so Russia will return to the global grain market sooner or later.