From field to laptop

Agriculture
Global
Sector update
Equity Research
23 June 2011
From ﬁeld to laptop: The changing
face of soft commodities trading
Richard Ferguson
+44 (207) 367-7991 x8991
RFerguson@rencap.com
Deepak Krishna
+91 422 264 2883
DKrishna@rencap.com
Important disclosures are found at the Disclosures Appendix. This research material is released by Renaissance Securities
(Cyprus) Limited. Regulated by the Cyprus Securities & Exchange Commission (License No: KEPEY 053/04).

Sector update
Equity Research
23 June 2011
Agriculture
Global
Richard Ferguson
+44 (207) 367-7991 x8991
RFerguson@rencap.com
Deepak Krishna
+91 422 264 2883
DKrishna@rencap.com
From field to laptop: The changing face
of soft commodities trading
We have become used to the idea of structural change across the agriculture sector in recent
years. However, most analysis of these profound changes tends to focus on the emergence of
industrial farming groups across the corporate landscape. What is still missing is an analysis of
the equally profound impact that these aggregated enterprises will have on existing businesses.
The effect will be felt most keenly by the trading houses, which have dominated the agriculture
sector throughout the modern era.
As easy as ABCD. The dominance of the traditional trading houses is shifting, due to two
simple changes in the landscape: the emergence of larger farming groups; and, crucially, the
availability of cheap information, which is no longer under the control of the larger trading
groups. These drivers, in tandem with resource nationalism, food security and what we call
market dislocation, are having a profound impact on the structure of the industry. This loss of
oligopolistic power will force the traditional trading houses to enact fundamental and radical
changes to their existing businesses.
New market participants. Few will have heard of Gavilon, Libero Commodities and
Russia’s United Grain Company (UGC). Fewer still will be aware of the plans being put in
place by governments and ministries in countries as diverse as Abu Dhabi and South Korea to
establish alternative trading platforms. The ultimate paradox is that while these companies –
old and new - were all founded to reduce uncertainties, the outcomes are less certain than at
any other time in the modern era.
New orthodoxies. The companies best placed to survive these vast shifts in power will be
those willing to surrender complete control of their businesses and acknowledge new market
dynamics. Those attempting either to maintain or establish control of a rapidly changing
landscape will struggle to cope with the realignment of the sector.
New suppliers. The dominance of the United States, Canada and Australia as agriculture
suppliers is eroding in relative terms. Brazil and Russia – despite the setbacks experienced by
the latter through this year’s forest fires and droughts – will not only shape some of the
corporate entities that are emerging, their positions as soft commodities suppliers will also be
greatly enhanced.
The infrastructure challenge. However, making this transition will require massive
investment in infrastructure – from ports, railways and silos, to investment in farms themselves.
The ability to harness Brazil and Russia’s natural resources through a favourable investment
climate, underpinned by a strong rule of law, will amount to little if there is no corresponding
investment in both countries’ creaking infrastructure.
Important disclosures are found at the Disclosures Appendix. Communicated by Renaissance Securities (Cyprus) Limited, regulated by the Cyprus Securities & Exchange
Commission, which together with non-US affiliates operates outside of the USA under the brand name of Renaissance Capital.

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23 June 2011 From field to laptop: The changing face of soft commodities trading Renaissance Capital
Agents of change 3
Resource nationalism, dislocation and food security 4
The companies in the frame 5
The traders’ response 12
The infrastructure challenge 16
Russia and UGC 16
Brazil 21
Russia: Now for the hard bit 25
An overview of the Russian agriculture sector 26
The development of the Russian agricultural sector 28
Land use 32
Land ownership 36
Major agricultural products 40
Brazil: The past is another country 46
An overview of the Brazilian agriculture sector 47
The development of the Brazilian agriculture sector 49
The role of government 52
Land use 54
Farm structure 57
Agricultural output 60
Livestock 65
Sugar versus ethanol 66
Supply-side impediments 69
Important disclosures 71
Contents

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Renaissance Capital From field to laptop: The changing face of soft commodities trading 23 June 2011
Structural change can be so gradual that its effects can only be captured through
the lens of the historian. Therefore, seemingly complex events draw straightforward
explanations. Paradoxically, while we are prone to simple interpretations of a distant
past, somehow we cannot fathom the present in a similar manner.
This is true of the soft commodities sector. A fundamental realignment of the sector
is under way, and in a manner that years hence will likely be described as seismic.
The familiar arrangements and structures that have dominated the business since
the invention of the telegraph are now in the throes of change.
This lasting change is being driven by two interconnected shifts; and the
inescapable truth is that they are surprisingly simple adjustments: the first is
technological, the second structural. The technological shift is that the information
oligopoly that previously aggregated among the dominant industry quartet, Archer
Daniels Midland, Bunge, Cargill and Louis Dreyfus (ABCD), has now disseminated
among a considerably wider group of participants. Knowing it was not raining in the
state of Victoria in Australia, while simultaneously knowing it was raining too much in
parts of Iowa, was once expensive information to obtain and control, and only the
well capitalised – specifically the ABCD companies – could afford it.
Aggregating this sort of information and using it to one’s advantage was never going
to be an option for the type of traditional farming community symbolised in Grant
Wood’s iconic (and much parodied) painting, American Gothic, and underfunded
farmers have long been at the mercy of well-capitalised trading houses. However,
the fact that the cost of information has declined significantly in the past 10 years
means that one significant competitive advantage in the ABCD armoury is no longer
the weapon it was.
The second development is the emergence of industrial farming enterprises.
Doubtless, the farming industry remains highly fragmented, but increasingly we have
witnessed the emergence of industrial farming groups, which, while not in the same
league as the seed and fertiliser suppliers or trading houses, are becoming bigger.
In short, not only is their access to information greatly enhanced, but their own
technological know-how and access to capital is also increasing sharply. A decade
ago, a farm of 50,000 ha was a rarity; now the 12 biggest arable farms in Russia – if
combined – would be about the same size as Belgium.
In isolation, these two developments would hardly challenge the major trading
businesses’ operations. To illustrate the point, one might assume cheap information
was the norm, but the agriculture sector remained highly fragmented. In other
words, a farmer could look at soft commodities prices in a newspaper and wonder:
1) how (and why) he couldn’t achieve the prices quoted therein; and 2) how little he
could actually do about it. In this case, the only real change effected by cheaper
information would be that the farmer would understand the extent to which he was a
price taker.
As for the reverse, (i.e., the existence of well capitalised, large-scale farmers but
expensive information), one would probably find that the oligopolistic tendencies of
the ABCD quartet remained intact, or that the club simply included a few more
letters of the alphabet. Adam Smith’s view that (to paraphrase) business people
rarely meet to act in the public interest, but instead contrive to raise prices, would
have become axiomatic.
Agents of change

4
However, the two developments working in tandem will have a considerable impact.
A well-capitalised industrial farmer knows the end users for his products, and is not
a forced seller when harvest comes because he, too, has expensive silos. Ultimately
he is in a position not just to witness the arbitrage opportunity by cutting out the
middleman, but to act on it.
Of course, we shouldn’t ignore some brutal truths in this somewhat Panglossian
assessment. The fact is that some 85% of the world’s farmers produce from less
than 2 ha of land. In short, hundreds of millions of hopelessly impoverished farmers
is the norm, not the exception. Ignore the hobby farmers of Western Europe and the
subsidy junkies of the developed world; farmers, in the main, lack access to
information flows, possess little capital and even less cash; and when harvest
comes they are forced sellers because they can’t afford big, expensive storage
facilities. In short, the well-capitalised corporate farmer is becoming more common,
but is still rare in overall terms.
Equally, there is a multitude of asset-rich but cash flow-impoverished farmers on the
planet. The birth of the 100,000 ha-plus agricultural business has been paralleled by
the emergence of the cash-strapped and over-indebted 100,000 ha-plus agricultural
business. In short, size isn’t everything; and crucially, even among the well-
capitalised, aligning interests to challenge the existing market structures takes time.
Resource nationalism, dislocation and food security
We have noted how lower information costs, coupled with the industrialisation of
farmers, has been driving change throughout the soft commodities sector. However,
other supplementary themes should be considered alongside these pivotal shifts.
First, there is the issue of resource nationalism. The 19th century roots of the old
trading houses give an indication of the geostrategic influences that held sway at
that time. The current era, in which we are perhaps witnessing fundamental long-
term shifts towards a multi-polar world, is also forcing the traditional trading houses
to rethink their ways of working.
A second supplementary theme is what – for want of a better term – we might call
the dislocation theme: that is, the infrastructure and logistics facilities are in the
developed world, while the newly urbanised affluent are based in societies where
infrastructure and logistics remain poor. This is accentuated by the fact that the new
industrial farms are more likely to be based in emerging markets. Let us assume an
extreme example to illustrate the point: if Kazakhstan becomes a strategic supplier
of Chinese grain demand, there is an opportunity for someone to develop logistics
and infrastructure along the Silk Road – and it won’t necessarily be Cargill or ADM.
The third supporting theme is that of food security. In a previous professional
existence, we noted how you only had to type the words food security into Google
and 31mn references came up in one-fifth of a second. Two years later, that number
has leapt to 221mn references. We would certainly question some of the tenets of
food security, but it plays such a crucial part in the human psyche that it will always
be a motivating factor in the development of the sector. The leading grain trading
companies might have been around for more than a century, but the storage of food
for times of shortage dates back to antiquity. It is not a new theme.

5
Therefore, while our driving themes of lower information costs and the rise of
industrial farms are common to all new market participants, it is the three
supplementary themes of resource nationalism, dislocation and food security that
define the investment philosophies of individual companies. For example, food
security is probably an element in the South Korean and Abu Dhabi governments’
strategic thinking. Resource nationalism possibly plays a pivotal role in the
development of Russia’s UGC. Gavilon’s development is most likely prompted by
the notion of dislocation. Libero Commodities’ heritage is more focused on the rising
power of farmers and the dissemination of information – but resource nationalism
plays a small part in its strategic thinking as well.
So who are these challengers to conventional wisdom? Broadly speaking, we break
them down into three key groups: the state-sanctioned challengers, the private-
sector challengers and those that appear to operate between these two worlds.
The companies in the frame
Gavilon
The emergence of Gavilon demonstrates the extent to which the grain trading
market is changing. The notable difference between the other companies profiled in
this section and Gavilon is that the others are fundamentally emerging market
businesses. Gavilon is headquartered in Omaha, Nebraska, and is a direct
challenger to the predominance of the traditional grain traders.
Gavilon isn’t a new company – its roots date almost as far back into the 19th century
as those of Louis Dreyfus Commodities. However, when it was divested from
ConAgra in 2008, it became slightly less North American and somewhat more
international in outlook.
Before we look at Gavilon, we draw a comparison with one company we see as
broadly similar: Noble Group, a Hong Kong-based, Singapore-listed commodities
trading business. The author of this report witnessed at close quarters the original
listing of Noble Group in 1997. What was apparent – indeed, remarkable – at the
time was how few people understood the simple dynamics driving the business,
specifically Asian economic growth and escalating global trade patterns. It was that
simple. This lack of comprehension was reflected in the weakness of the research
coverage on the stock, and the fact that within months of listing, it was trading below
its issue price as it was engulfed along with every other corporate, in the Asian
financial crisis.
Anyone who believed in the long-term structural theme has been amply rewarded in
the past 10 years. Noble Group’s NAV rose from a range-bound $0.04-0.06/share in
its first five years as a listed company to $0.50 at end-2009. The company’s current
$10bn market capitalisation, $1.2bn end-2009 EBITDA, the 15% stake acquired by
China Investment Corporation in 2009 and its high ranking in the Fortune Global 500
say everything that needs to be said about the company’s first decade as a listed
company. For a company only founded in 1986, it is an impressive achievement.
Notably, however, Noble Group took advantage of these structural changes by
being off the radar screen of the existing major trading houses. It was a direct play

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on Chinese growth, and its expansion plans centred on places such as Latin
America, Asia and other emerging trade routes. In 1997, the investment banking
and analytical community was too wrapped up in financial crises to see what was
happening under its nose.
As noted, Gavilon might well follow a similar path. It has prominent shareholders in
the shape of Soros, Mitsubishi, Ospraie and General Atlantic, and its growth plans
are increasingly international. Its independence and lack of legacy structures mean
it is not held back by the conflicting plans and objectives of a parent company.
Gavilon’s international scope will likely become more evident in the years ahead.
Figure 1: Gavilon asset purchases
Asset Asset details Acquired in Location
Union Elevator’s eastern Washington assets
16 grain elevators, at 12 locations, with licensed storage capacity of 8.4
million bushels
2011 US
DeBruce companies
Grain handling, fertiliser distribution, feed milling and bean crushing -
combined licensed storage capacity in excess of 140mn bushels
2010 US
Minto Grain LLC Grain storage 2010 US
Pine Bluff Port Terminal, Inc.'s Arkansas River grain
operation
na 2010 US
Vasby Farms, Inc.'s grain elevator in Wisconsin Storage capacity of 5mn bushels 2010 US
Irv’s Feed and Supply Inc.'s grain elevator in WisconsinStorage capacity of 400,000 bushels 2010 US
Galesburg Order Buyers, Inc.'s west-central Illinois
assets
Eight grain elevators and one receiving station, with a combined storage
capacity of 14.6mn bushels
2010 US
Brisbane sugar terminal
Port facility with a private berth, 100,000 tonnes dry storage shed, covered
truck receiving station and ship loader
2009 Australia
Charlie Myers Grain Co.'s grain facilities in Texas Nine grain elevators 2009 US
Source: Company data
Both Gavilon and Noble Group faced early baptisms of fire, with Noble Group having
listed just prior to the Asian financial crisis; and Gavilon emerging as a buyout from
ConAgra in 2008, at the peak of the boom in soft commodities prices just prior to the
onset of the global financial crisis.
The crucial difference between Noble Group and Gavilon is the fact that the latter
has done this from a base in the US (i.e., in the domestic market of three of the four
trading houses that make up the ABCD quartet). Two decades back, would it have
been possible for a new, capital-hungry company to secure funding to compete with
the major trading groups in their domestic market? After all, Cargill’s profits are 12x
those of Gavilon, indicating the relative size of the latter. What it does demonstrate
is the extent to which the market is changing.
Figure 2: Gavilon operating segments
Segment Operations Key facts
Grain and ingredients
Grain and oilseeds origination, storage and distribution, as
well as feed and food ingredients.
Third largest grain merchandiser in the US.
Operates 125 grain facilities with more than 300mn bushels of storage capacity.
Fertiliser
Origination and distribution of nitrogen, phosphate and
potash fertiliser products.
Second largest fertiliser distribution network in the US.
Operates over 70 storage and handling facilities with about 1.5mnt storage capacity.
Energy
Storage and distribution of crude oil, natural gas, natural
gas liquids and renewable fuels.
Manages over 5mn bbls of crude oil storage, 14bcf of natural gas storage and 300,000
bbls of refined products storage capacity.

7
Figure 3: Gavilon segment EBITDA (two-year historic average)
Abu Dhabi Sources
When you only produce a tiny percentage of your domestic annual food and water
requirements, the notion of food security probably takes on a meaning that is as
much psychological as financial. There are two options for controlling physical
output: the acquisition of agricultural assets – a common enough theme among Gulf
enterprises in places such as Ethiopia and Sudan – or the establishment of a trading
house.
In Abu Dhabi Sources’ (ADS) case the approach appears to be to build a trading
platform for soft commodities (as well as other commodities). Clearly, funding for
this venture could be substantial given the Gulf state’s strategic reserves, which are
somewhere in the region of $1trn.
However, using food security as the prime objective ignores the fact that trading
physical on a commodities exchange or owning overseas agricultural farmland has
one major drawback: ownership may be vested with one person, company or
institution but it relies on overseas storage facilities which are based elsewhere. In a
country where an export ban is enacted, possession will mean a lot more than legal
title. Does BP provide energy security to the UK through the ownership of a 25%
stake in TNK-BP? Clearly not; and the same logic applies to overseas food assets
when looking at food security.
Therein lies a problem with some of the proposed solutions to food security.
Ownership could be meaningless in a crisis. It’s also worth highlighting the fact that
if food security was a genuine ambition, then Abu Dhabi should look more seriously
at building a complex of grain terminals in the desert. After all, a well-managed,
state-of-the-art grain facility can hold grain for several years and it would represent
real food security. One therefore has to ask what is the single motivation behind
ADS’ development of a commodities trading house if it doesn’t deliver genuine food
security? Obviously the significant financial resource available to the nascent
enterprise is one factor.
Grain and
ingredients, 62%
Energy, 20%
Fertiliser, 18%

8
Libero Commodities
Libero Commodities operates a unique model and demonstrates the increasing
power of industrial farmers. The company commenced operations in 2010 and has
been backed by one of the major trading houses. It may or may not seek private
investors at some point in the future
Libero is a Geneva-based trading house which is 50% owned by 30 Brazilian
farming groups, which manage some 5mn ha of land in the Mato Grosso region of
Brazil. In return for their 50% stake in the business, Libero’s shareholder farmers
allocate a proportion of their physical output to the parent company to trade. The
company has a dominant position in cotton, as well as smaller positions in soybeans
and corn.
Figure 4: Libero Commodities’ market position
Source: Libero Commodities
The obvious advantage for Libero Commodities is the fact that increasingly well-
capitalised farmers can hold the physical output on site, rather than transferring
ownership to the trading houses. Ultimately, the farmers receive higher margins
from trading activities.
Information asymmetries
Inferior marketing / risk mgmt. skillsLack of access to capital
Traders Input suppliers
Banks Commodity markets
Inefficiencies in logistics
Ports
Farmers

9
We have noted how the rise of the industrial farmer, coupled with the availability of
cheap information, has provided a platform for new market entrants to challenge
incumbents. Libero Commodities’ progress is obviously highly correlated to these
developments. However, there is more to it than this: Libero Commodities is a
Brazilian company and 50% of its equity will always be held by its shareholding
farmers. In other words, resource nationalism and dislocation are also two
underlying drivers of the company’s development.
The company expects to trade some 125,000 tonnes of cotton in 2010/2011, which
represents some 20% of total Brazilian cotton exports. Asian demand is already
becoming an increasingly important part of the company’s operations (China
accounts for some 30% of trade). Overall, these figures represent a considerable
uplift given that the company only traded 10,000 tonnes in 2009/2010.
In 2011, the company is looking at extending its operations into soybeans and corn
and trading some 300,000 tonnes of each commodity. The company believes it will
trade 200,000 tonnes of cotton and 2mnt of soybeans and corn.
The company also plans to add an intermediary service to guarantee delivery of
product exactly as specified by the contract. This requires investment in cotton
classification and logistics, which will allow cotton to be tracked straight to the port
without being unloaded or handled in warehouses. The aim is to achieve a similar
standard to Australian cotton, which is 100% irrigated and harvested in dry
weather. Libero Commodities believes this will be effective in the market for regular
delivery over 12 months, and will help build longstanding relationships with
international clients.
Libero’s challenge will be to take the early concept and widen it into more Brazilian
crops, explore different ways of employing this co-operative model into inputs as
well as outputs and taking the model into new markets. The success of the project to
date is demonstrated by the fact that it was backed by one of the major trading
houses and embraced by some 30 industrial farmers at the earliest stages of
development. Its unique position in the market should allow it to take the model and
employ it across other geographies in time, while it still holds a competitive
advantage.
Agrotrade
Founded in 1998, Agrotrade now owns 12 grain silos in Ukraine. The company’s
total storage capacity is approximately 530,000 tonnes making it the sixth-largest
private-sector grain trader in the country.
In 2006, there was a change in the company’s strategy. At this stage, Agrotrade
already had 12 silos and had begun to turn its attention to agriculture with the
acquisition of 3,000 ha of agricultural land. In 2007, the amount of land in the
company’s land bank accelerated to 25,000 ha. The company did not acquire any
additional farmland in 2008 but in each of the last two years another 5,000 ha of
land has been added to Agrotrade’s farming operations. Currently the company has
a 35,200 ha land bank.
Ultimately, the company’s strategic aim in agriculture is to control up to 200,000 ha
of land and become one of the leading agriculture holdings company in Ukraine. The
clusters are centred on the company’s existing storage facilities. The operations are

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already showing promise, having yielded above the Ukrainian average in
sunflowers, corn, wheat and barley in both 2008 and 2009. In 2009, the company
produced 80,000 tonnes of grains and oilseeds.
Figure 5: Agrotrade operating segments
Segment Operations Key facts
Trading Grain and oilseed trading
One of the top 10 grain exporters in Ukraine
548,000 tonnes of grains and oilseeds were traded in 2009
Agriservices
Grain storage services
Transportation services for agricultural producers
Agrotrade owns 12 grain silos with a total storage capacity of 530,000
tonnes - the sixth-largest in Ukraine
Farming and processing
Cultivation of sunflowers, corn, wheat and barley
Sunflower oil extraction
Buckwheat grits processing
Wheat flour milling
80.000 tonnes of grains and oilseeds produced in 2009
Crop yields were above Ukrainian averages in both 2008 and 2009
Crucially, Agrotrade has developed its storage and trading operations in five grain-
growing regions in the east of the country. These operations, in the Oblasts of
Poltava, Sumy and Chrnihiv, Kharkiv and Luhansk, are sufficiently divorced from the
ports through which most of Ukraine’s exports flow. In effect, this means Agrotrade
operates between the extremes of local markets and the international markets.
This niche is profitable. In 2007/2008, Agrotrade made some $9.5mn in profits. The
two subsequent years saw a decline in profitability primarily, due to lower soft
commodities prices and the effects of the global financial crisis as well as increased
costs associated with the establishment of farming operations. However, the
company still remained profitable: in 2008/2009, Agrotrade made $1.3mn in net
profits, and in 2009/2010, despite the depth of the global financial crisis, it managed
to make some $4.4mn. It is expected that in the current financial year, Agrotrade’s
profitability will return to pre-crisis levels with some 71% of revenues coming from
trading.
Figure 6: Agrotrade revenue split (2009/10) Figure 7: Agrotrade EBITDA split (2009/10)
Source: Company data Source: Company data
United Grain Company
The establishment of UGC is fundamentally linked to Russia’s overall infrastructure
plans, to the extent that we analyse the company and its plans in much greater
detail in a dedicated section of this article (see Infrastructure challenge: Russia and
UGC). At this stage, we highlight some of the key aspects of UGC’s development.
Trading
71%
Agriservices
17%
Farming
12%
Trading
52%
Agriservices
28%
Farming
20%

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In February 2010, the Russian government published its long-awaited and much-
conjectured plans to develop the country’s grain business. The plan, issued under
the broadly translated title of A plan for the development of grain market logistics
and infrastructure in the Russian Federation, could perhaps have discarded the
word “plan” and replaced it with the words “wish list”.
That is not to denigrate the plans or their observations; the issues raised in the
report are valid, and the identification of the problems faced is accurate. However, it
is unable to provide long-term resolutions to them.
What we can say with a greater degree of certainty is that the plans are not as
sinister as some commentators suggested last year. In other words, the
establishment of UGC does not confirm that the state is intent on re-creating a
Soviet-style monopoly.
Ultimately, the logic behind the development of the UGC concept appears to be
driven by some fairly pragmatic issues, specifically:
The poor state of the country’s grain market infrastructure generally. A lack
of modern elevators, a shortage of port facilities and an inadequate
transport infrastructure, all of which hinder export potential.
The private sector’s inability to provide the significant amounts of capital
required to develop the logistics and infrastructure in an integrated manner.
A view that, over time, the Russian market can satisfy its own needs, and
that surpluses can only be used in the export market.
The fact that food security is not the pressing issue that others see it as. In
other words, there is no economic or technical rationale in adding to the
country’s grain inventories even including the country’s intervention fund.
Sustained growth in world grain demand, which is likely to shape export
demand and domestic output.
The scale and complexity of the tasks involved in developing the Russian
grain market, indicating a need to attract investment at a rate that is
unlikely to be provided by the private sector alone.
The second point outlined above – the market’s inability to supply the funds required
for such an enormous undertaking – is debatable. An economic purist might argue
that provided there was a working rule of law and half-decent returns to be realised,
then, in all likelihood, the market would provide the necessary funds for investment.
Let’s face it; if a 100bn bbl oil reserve was discovered in Iowa, one might reasonably
assume private capital could get it to the surface and swiftly to the consumer.
On the other hand, there is a level of pragmatism mixed with the reality of current
operating conditions. The fact is that the rule of law in Russia is what might be
euphemistically termed a work in progress. The fact that dozens of small, illiquid and
capital-hungry participants constitute Russia’s agriculture sector suggests it will be
years before there will be a domestic market participant capable of achieving these
aims. Given the political uncertainty and investor wariness that exists with many
Russian investments, government must take a leading role.

12
To demonstrate this point, we consider the capital demands of farming even at its
most basic level, and leave aside for a moment the scale of spending required to
modernise Russia’s archaic infrastructure. In recent years, various Russian
commentators and academics have postulated a view that Russia needed to lift
grain output to 150mn tpa from the 100mn tpa currently produced.
Ignore the reasons why this was considered necessary. The omnipresent excuse of
food security was often employed. Equally, it could be said that it was, in part, a
hangover from the Soviet days and the nation’s need to distil and aggregate
everything into large single-number outputs.
However, where there is a clear parallel with the Soviet era is that this output figure
ignores the scale of the capital inputs required to deliver it. An annual increase in
50mnt of grain would require perhaps 15mn ha of land and approximately $15-20bn
of capital investment. And bear in mind, this omits wider infrastructure, logistics
capital expenditure and ongoing operating expenditure.
In conclusion, what this arithmetic suggests is that the vast capital sums required to
develop a modern, state-of-the-art infrastructure in the absence of an unbending
rule of law simply cannot be delivered by a few corporate farms with net asset
values or market capitalisations of $200mn.
The traders’ response
The previous models, ideas, companies and structures indicate the challenges
facing the traditional trading houses. But to suggest that somehow the traditional
trading houses are entering a period of long-term structural decline may also be
wrong. Few corporate entities have enjoyed the durability of these businesses. Of
the four that constitute the ABCD quartet only one (ADM) was founded in the 20th
century, and that was in 1902. These leviathans have not survived and prospered
without an evolutionary – and perhaps revolutionary – spirit. The fact that they have
done so for such a sustained period of time and, in some cases, as private
companies, says something about their corporate DNA. In short, they can’t be
written off, they will likely adapt and they are highly unlikely to end up as footnotes in
corporate history. The most imaginative and clear-headed may emerge as long-term
winners.
Business strategies
Cargill and Bunge, two of the largest grain traders, have reasonably vertically
integrated businesses and are active in grain origination, storage and handling and
the processing of grain into finished products. In contrast, some grain traders focus
on exports and imports and operate between the processors. Louis Dreyfus and
Glencore fall into this category. A brief description of the business models adopted
by some of the key companies in the industry is set out below.

13
Strategies of the major grain trading companies
Bunge
Bunge adopts an integrated, but decentralised, approach to its operations.
Decision making is delegated to local operations but, as part of a global
company with operations from farming to retail, these subsidiaries benefit
economically and operationally from one another.
The company purchases grains and oilseeds from farmers and
intermediaries. It stores, blends and supplies these commodities and
processed products to local and international customers. Its principal
customers for grains are feed manufacturers, wheat and corn millers and
oilseed processors, while the principal buyers of oilseed meal products are
animal feed manufacturers and livestock, poultry and aquaculture
producers who use these products as animal feedstock. Consequently,
Bunge’s agribusiness operations are dependent on global demand for meat
products, primarily poultry and pork.
The milling business of the company’s food products segment provides
processed wheat to food processors and bakeries. Sourcing oilseeds and
grains from its agribusiness unit, and leveraging them through a common
logistics system, Bunge improves operational efficiency.
Cargill
Cargill’s grain trading division is vertically integrated. The company
purchases grain directly from farmers or by bidding at various country
elevators. The grain is then transported to its elevators, where it is
sampled, graded and stored. From the elevators, the grains are shipped to
international destinations or sold to local customers.
Customers comprise feedlots, grain processing and milling companies. In
addition, the company also retains a part of the stock to serve its animal
feed and edible oil production facilities.
Glencore
The company owns a 34% stake in Xstrata, a prominent mining company
and in May 2011 it completed a $10bn IPO on the London Stock
Exchange. The IPO was, in our view, partially driven by the need to shift
Glencore's emphasis from commodities trading to outright ownership and
control of Xstrata. The fact that margins in the softs business are likely to
come under pressure from new market entrants and different models also
would have had a bearing on this strategic shift.
Louis Dreyfus
Louis Dreyfus transports grains between elevators. The company’s grain
trading activities include origination and aggregation for export to primary
agricultural production centres and shipment, import and domestic
distribution to local consumption markets throughout the world.

14
Fundamental strategic advantages
The emerging theme of scale in farming must surely be viewed as a threat to the
trading houses? Surely an opportunity exists for a farming operator in Russia or
Brazil to deal directly with customers and cut out the middleman? We know small
farmers are at a disadvantage when it comes to dealing with the asymmetric
information flows of the leading grain trading companies, so surely the reverse is
true when it comes to large-scale farming groups?
Interesting thoughts, no doubt, but consider the advantages that the grain traders
possess and how they might prove enduring:
Global footprint: The leading trading firms have a global network of
elevators and terminals in numerous strategic locations worldwide, which
gives them an advantage over farm collectives and regional traders. Their
global footprints enable them to exploit considerable arbitrage opportunities
arising from regional pricing differentials. In addition, they have the ability to
ensure consistency of supply throughout the year and to originate crops
across hemispheres and continents. In many cases, scale allows them to
provide variety and the flexibility to ship grains to their customers using in-
house networks, therefore avoiding delays commonly associated with
public ports and transport networks. Consequently, the grain traders can
reduce the natural volatility and cyclicality of the agricultural sector which
swings between strong and weak harvests and high and low inventories.
The major trading companies also have a strong network of marketing and
distribution offices in key markets.
Logistics: Logistics and the supply chain play a critical role in the grain
trading business. Decisions about when and where to buy, store, transport,
process and sell commodities, including changing locations or reducing
processing capacity, are vital for the success of any agribusiness firm. This
is another area in which the large grain traders beat regionally integrated
farms given the traders’ extensive infrastructure (ports, terminals, elevators
and so on) along with co-ordinated sales and logistics. A notable example
of this was when the Australian wheat crop failed in 2007. The grain traders
were able to identify the problem before it happened and redirect normal
trade flows. At the same time, some companies made significant gains
from the large uplift in prices. Global intelligence and logistics are
irreplaceable.
Operations in complementary business activities: In addition to
agricultural commodities, the major grain traders have operations in other
related businesses, such as shipping and logistics (Cargill, Louis Dreyfus,
Glencore); fertilisers (Bunge); processed food and food ingredients (Cargill,
Bunge); energy trading (Cargill, Glencore, Louis Dreyfus); and metals and
minerals production and distribution (Glencore, Louis Dreyfus). Grain
traders draw considerable synergies through the integration of these
activities with their grain trading businesses.
Association with suppliers and customers: The leading firms work in
close association with farmers and customers. All acknowledge that the
success of the farmers is crucial to their own success, and they offer
consultation services to improve farm productivity. On the supply side,

15
numerous grain traders create financial products – including structured
trade finance and risk management – to help their commodity customers
control expenses and manage risk. By staying close to suppliers as well as
customers, the trading firms are involved in the entire supply chain and
possess significant bargaining power.
While there is no doubt that the larger farm holding company will become more
prominent in the years ahead, smallholders will retain a prominent role in the supply
chain. The grain trading companies possess a range of advantages that would be
difficult to replicate. Clearly, competition is likely to increase, but we make a
fundamental strategic error if we think that the provision of a commodity product
means there is no association with added value.
The collective corporate memories of the grain trading houses stretch, in many
cases, back to the 19th
century and have survived wars, depressions and various
other calamities. One should expect them to remain dominant forces in the 21st
century.

16
Russia and UGC
Objectives
United Grain Company (UGC) is the Russian government’s chosen vehicle to
implement its strategy of enhancing grain exports. It would include assets
consolidated from various state-owned companies involved in different activities
including storage and port handling. The government’s objective is to increase
Russia’s grain exports from 23mnt in 2009 to 38mnt by 2015, with UGC’s share in
2015 being 16mnt.
UGC would primarily focus on infrastructure development relating to grain storage
and port handling, with the aim of enhancing grain storage capacity from 1.8mnt in
2009 to 8.4mnt by 2015, and increasing port handling capacity from 3.5mnt to 16mnt
of grain by 2015. The company also plans to optimise transport logistics including
the routing and despatch of grain. Together, these measures are expected to reduce
the infrastructure load on each tonne of grain exported by RUB488, by 2015.
Given that these activities would require an investment of close to RUB100bn over
2010-2015, the government intends UGC to exist as a public-private partnership,
with private investment augmenting state funds.
Export promotion
The government expects grain production to increase at a CAGR of 4.3% over
2009-2015. Over the same period, consumption is expected to increase at a CAGR
of 1.4%. Furthermore, since the government has also decided to fix the inventory
level at 15mnt, there would be a sizeable surplus. It is this surplus that the
government wants to export, hence the focus on building support infrastructure.
Apart from capacity building, UGC would also aim to become a major player in the
world export market. Towards this goal, the company would develop new markets
for Russian grain and strengthen existing ones. UGC plans to forge partnerships
with international unions, associations, producers and processors in importing
countries. The company would also establish a network of offices in major importing
countries to promote its exports.
Figure 8: Russia grain production, consumption, inventories and required exports
(mnt)
Figure 9: Russian grain exports (mnt) and global market share (%)
Source: Russian government strategy paper on UGC Source: Russian government strategy paper on UGC
0
20
40
60
80
100
120
2009 2010 E 2011 E 2012 E 2013 E 2014 E 2015 E
Production Consumption Inventories Required Exports
10%
12%
14%
16%
18%
20%
22%
24%
0
10
20
30
40
2008 2009 2010 E 2011 E 2012 E 2013 E 2014 E 2015 E
Russian grain exports Russian exports global share (RHS)
The infrastructure challenge

17
Another role that the company plans to play is to assist the government in regulating
the domestic market by upgrading technology for grain intervention, developing
regulatory tools such as pledging transactions, and creating a mechanism for
continuous monitoring of the grain market and proposing recommendations for
planning and control. Further, the company would also conduct operations on behalf
of the State Intervention Fund (SIF). UGC expects SIF closing stocks to be at a level
of 5mnt from 2010 onwards.
The current state of infrastructure
The major factor limiting the growth of exports is infrastructure, specifically, elevator
capacity, port facilities for transhipment and transport infrastructure.
Elevators: Total storage capacity in Russia is 118mnt, including storage
containers in agricultural enterprises and processing companies, linear
elevators and port elevators. Of this, linear and port elevators account for
32mnt of storage capacity.
Port handling capacity: The total capacity of ports for transhipment is
22mnt of grain per annum. Bulk handling takes place through ports on the
Azov-Black Sea basin, including 13mnt at the deep-water port on the Black
Sea and 6mnt at the shallow-water ports on the Azov Sea.
Transport infrastructure: According to the government, “Russia’s
transport system facilities are stretched to their technical limits”. From the
2001/2002 season to now, the volume of exports carried by rail has
increased from 3.5mnt to 9.7mnt, while domestic traffic has decreased from
13mnt to 11mnt.
Targets
UGC plans to increase elevator capacity through the acquisition and modernisation
of existing elevators, and the construction of new elevators. This build-up of capacity
requires an investment of about RUB82bn over 2010-2013, and the company
expects a reduction in storage costs of RUB174 per tonne of grain by 2015.
Figure 10: Additions to elevator capacity and total capacity (mnt) Figure 11: Investment in elevators (RUBbn) and addition to capacity (mnt)
The development of port handling capacity includes the modernisation of
Novorossiysk Commercial Sea Port and a shallow-water terminal on the Sea of
1.87
3.07
5.92
7.44
8.44 8.44 8.44
0
2
4
6
8
10
0.0
0.5
1.0
1.5
2.0
2.5
3.0
2009 2010 E 2011 E 2012 E 2013 E 2014 E 2015 E
Acquisition of elevators Modernization of elevators
Construction of elevators Total elevator capacity (RHS)
1.20
2.85
1.52
1.00
0.00 0.00
0.0
0.5
1.0
1.5
2.0
2.5
3.0
0
5
10
15
20
25
30
35
2010 E 2011 E 2012 E 2013 E 2014 E 2015 E
Investment Addition to capacity (RHS)

18
Azov; and the construction of new deep-water terminals on the Black Sea and in
Russia’s Far East. These activities entail an investment of RUB11bn over 2010-
2013, and are expected to reduce loading costs by RUB195 per tonne of grain by
2015.
Figure 12: Additions to port handling capacity and total capacity (mnt) Figure 13: Investment in port handling (RUBbn) and addition to capacity (mnt)
UGC would also establish a transport company, and work towards optimising the
routing and despatching of grain. The company plans to increase the proportion of
block shipments from 1mnt in 2010 to 6mnt in 2015. UGC also plans to purchase
3,000 wagons by 2015 at an investment of RUB5.7bn, which will be funded through
project financing and contribution from private investors. These measures are
expected to reduce transport costs by RUB119 per tonne of grain by 2015.
Figure 14: Investment in wagons (RUBbn) and addition to wagons (units)
Source: Russian government strategy paper on UGC
UGC also intends to develop processing facilities for flour and feed production. The
company currently has annual processing capacity of 635,000 tonnes of flour and
550,000 tonnes of feed. However, the utilisation rate is less than 50%. UGC’s
objective is to increase annual processing output to 950,000 tonnes of flour and
1,050,000 tonnes of feed by 2015, primarily by increasing the utilisation of existing
facilities.
3.5 4.0
8.5
12.0
13.0
16.0 16.0
0
3
6
9
12
15
18
0
1
2
3
4
5
2009 2010 E 2011 E 2012 E 2013 E 2014 E 2015 E
Additional capacity Total capacity (RHS)
0.5
4.5
3.5
1.0
3.0
0.0
0
1
2
3
4
5
0
1
2
3
4
2010 E 2011 E 2012 E 2013 E 2014 E 2015 E
Investment Addition to capacity (RHS)
0.5 1.0 1.0 1.5 1.0 0.7
300
570 560
800
500
270
0
100
200
300
400
500
600
700
800
900
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
1.6
2010 E 2011 E 2012 E 2013 E 2014 E 2015 E
Investment Number of wagons added (RHS)

19
Figure 15: Flour and feed production ('000 tonnes) and investment in processing facilities (RUBmn)
The total investment required for elevators, port handling, logistics and processing is
close to RUB100bn spread over 2010-2015, with elevators accounting for over 83%.
Figure 16: Total infrastructure investment required (RUBbn)
As a result of these infrastructure-building activities, UGC expects to see a reduction
in the infrastructure load per tonne of grain to reduce by RUB488, by 2015, with port
handling registering the largest decline.
395 545 700 825 900 950
290
440
595
730
850 1,050
20
30
75
80
60 60
0
10
20
30
40
50
60
70
80
90
0
500
1,000
1,500
2,000
2,500
2010 E 2011 E 2012 E 2013 E 2014 E 2015 E
Flour production Feed production Investment (RHS)
0.0
5.0
10.0
15.0
20.0
25.0
30.0
35.0
40.0
2010 E 2011 E 2012 E 2013 E 2014 E 2015 E
Elevators Port handling Logistics Processing

20
Figure 17: Reduction in infrastructure load per tonne of grain (RUB) Figure 18: Split of reduction in infrastructure load per tonne of grain by 2015E
(RUB)
UGC’s plans in context
When the Russian government decided to use UGC as its chosen vehicle to
implement its plans of promoting exports, commentators raised the possibility of the
Russian state trying to dominate the grain trade business. However, we feel such an
analysis is misguided. Although UGC would be a major grain trader, there is
sufficient scope for private players at every step of the value chain. As the chart
below demonstrates, UGC’s market share is large, but not dominant. In fact, to
achieve its targets, the Russian government requires the participation of private
investment.
Figure 19: UGC’s forecasted market share in Russia
Source: Russian government strategy paper on UGC, Russian government paper on grain market logistics and infrastructure
55
260
313
392
441
488
0
100
200
300
400
500
2010 E 2011 E 2012 E 2013 E 2014 E 2015 E
174
195
119
Storage Port handling Transport
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
2010 E 2011 E 2012 E 2013 E 2014 E 2015 E
Grain exports Linear elevator capacity Port handling capacity Grain carriers, wagons

21
Brazil
The most commonly cited obstacle to Brazil’s status as an agricultural superpower is the
poor state of its infrastructure - what is often referred to as the “Brazil cost”. Roads,
railways, storage and port facilities have not kept pace with the frantic growth of
agricultural production and exports. This is a particularly pertinent problem in the non-
traditional farming areas of the country’s northern and central regions. Some farm
commodities travel 1,000 miles or more over poor and congested roads to reach
seaports, where inadequate capacity often leads to long delays and additional costs. The
Brazilian government has taken steps to remedy this situation through its Growth
Acceleration Programmes (known by their Portuguese abbreviation, PAC). Now in its
second phase, PAC 2, involves investments of up to BRL1.6trn. However, PAC 1’s
implementation was so poor that PAC 2 should not be seen as some kind of a panacea.
A glance at the current state of Brazil’s infrastructure
The World Economic Forum's (WEF) Global Competitiveness Report 2010-2011 ranked
the quality of Brazilian infrastructure at 84 out of 139 the countries included. Brazil’s road
quality ranking was a fairly lamentable 105; while the quality of its rail infrastructure
achieved a marginally better ranking, at 87. However, more alarmingly, for a country
where agricultural exports are likely to play a major part in economic development, the
WEF labelled the quality of port infrastructure at a dismal 123.
Roads fulfil some 68% of Brazil’s transport needs. The country has about 1.6m km of
federal, state and local roads, of which only 12% are paved. By some reckonings,
unpaved roads add 35% to transport costs, through higher fuel consumption and
maintenance. This problem is especially acute in the central and northern regions, which
are now driving Brazil’s agricultural dominance. For instance, farmers in Central Brazil
have to send their produce to distant ports over pothole-ridden roads instead of by rail or
waterway. According to Agroconsult, it costs farmers in Mato Grosso, almost 5x what it
costs US farmers to get soya to port. Another (no less shocking) way of looking at this is
to consider that it costs more to transport a tonne of soya to the south-eastern ports of
Paranagua and Santos than to transport it onward to China. A corresponding problem in
the relatively well-developed Southern regions is not unpaved roads, but road
congestion.
Figure 20: Average cost to transport a tonne of soya from field to port ($)
Source: Agroconsult
17 22
44
103
0
20
40
60
80
100
120
Argentina US Parana, Brazil Matto Grosso, Brazil

22
Despite having one of the world’s largest river systems, waterways as a means of
transportation are poorly developed in Brazil. Similarly, railways – much cheaper
than road transport – are not an option for most farmers.
Another infrastructure bottleneck is storage capacity. When farmers lack sufficient
storage space, they become forced sellers at harvest time and lower margins result.
While estimates vary, total grain storage capacity in Brazil is likely to be somewhere
between 120-130mnt. This would imply a deficit of about 15-25mnt based on a 2010
grain harvest of around 146mnt. According to Brazil’s Agricultural Economics
Institute (IEA), grain production in Brazil has grown 77% since 2000, while storage
capacity has expanded only 52%. Again, paralleling the situation regarding transport
infrastructure, the lack of storage capacity is more critical in regions where recent
agricultural development has been rapid such as Mato Grosso.
The third component of infrastructure that is vital for exports is port infrastructure.
Around 95% of Brazil’s trade passes through its ports. There are 34 major ports and
around 128 privately operated terminals. However, absolute numbers conceal the
blunt fact that Brazil’s port infrastructure is woefully inadequate to service the
country’s growing needs and ambitions. During the peak of the 2009 harvest, many
ships faced delays of up to 30 days, due to congestion.
Growth Acceleration Programmes (PAC 1 and PAC 2)
Recognising the shortcomings in its infrastructure and its importance in delivering
future economic growth, the Brazilian government placed a greater policy emphasis
on infrastructure when it launched its four-year Growth Acceleration Programme
(PAC) in 2007, which had as its central objective 5% annual GDP growth. The
intention of PAC 1 was to spend almost BRL504bn by 2010, comprising a mix of
public and private funding and spread across several sub-sectors such as energy,
logistics, social and urban infrastructure. The total was revised upwards to
BRL638bn in 2009 and recently was raised still further to BRL657bn.
Figure 21: Source of funds for PAC 1 (2007-10) Figure 22: Allocation of funds for PAC 1 (2007-10)
Source: Brazilian federal government Source: Brazilian federal government
Note to Figures 21-22: Split available only for the initial PAC 1 amount
Energy was the key focus of PAC 1, cornering more than half the total initial
investment, of which oil and gas accounted for nearly two-thirds. Social and urban
infrastructure was the next major item, within which housing was the priority area.
Under logistics development, highways were the prime beneficiary. Of the
subsequent increase in outlay, most was directed towards housing.
Direct
government
investment
13%
Investment by
state
enterprises
44%
Private
investment
43%
Energy
54%
Social and
urban
infrastructure
34%
Logistics
12%

23
Figure 23: Split of PAC 1 - Energy Figure 24: Split of PAC 1 - Social and urban
infrastructure
Figure 25: Split of PAC 1 - Logistics
Source: Brazilian federal government Source: Brazilian federal government Source: Brazilian federal government
Note to Figures 23-25: Split available only for the initial PAC 1 amount
Set against PAC 1’s lofty aims, its implementation has been less impressive. As of
December 2010 – the scheduled end of the programme – completed projects
accounted for about one third of the total planned investment. Even including
projects in progress, the total investment up to December 2010 was only BRL619bn
or approximately 94% of the planned amount. Bureaucracy, corruption and delays in
environmental licensing have all played a part in PAC 1’s poor implementation
record.
Figure 26: PAC 1 - Investment allocated to completed projects (%)
Source: Brazilian federal government
Despite PAC 1’s failure to achieve most of its targets by 2010, the government
announced an even more ambitious follow-up plan – PAC 2, which envisaged
investment of BRL959bn over 2011-2014, and a further 632bn beyond 2014,
bringing a total investment of BRL1.59trn. In common with its predecessor, PAC 2’s
major priorities are energy and housing.
Oil and
natural gas
65%
Power
generation
24%
Renewable
fuels
6%
Electricity
transmissio
n
5%
Housing
62%
Basic
sanitation
23%
Water
resources
8%
Light for
all
5%
Subways
2%
Highways
57%
Merchant
marine
18%
Railways
14%
Airports
5%
Ports
5%
Waterways
1%
17.8% 21.7%
32.9%
40.3%
46.1%
67.5%
0%
10%
20%
30%
40%
50%
60%
70%
Dec-08 Apr-09 Aug-09 Dec-09 Apr-10 Dec-10

24
Figure 27: Allocation of funds for PAC 2 (2011-14)
Source: Brazilian federal government
While the numbers may seem large in absolute terms, they are brought into sharper
focus when considered in relation to GDP. If we take Brazil’s 2010 GDP of
BRL3.7trn, PAC 2’s total investment of BRL959bn over four years translates into
approximately 26% of GDP per year. However, given that GDP is also likely to grow
rapidly over the next four years, this percentage would be lower. If we take the IMF’s
forecast GDP over 2011-2014, PAC 2’s total investment over 2011-2014 would
represent an average of 21% of GDP. As the chart below shows, gross capital
formation as a proportion of GDP has been declining over the past three decades,
with the trend reversing only in the past few years. PAC 2 would accentuate that
trend.
Figure 28: Gross capital formation as a % of GDP
Source: World Bank, IBGE
Clearly, we could take a pessimistic view towards the implementation of PAC 2,
given the poor execution of PAC 1. The optimistic view would be that the lessons
learned during PAC 1 would help during PAC 2. The key fact remains that Brazil ‘s
already impressive agriculture industry is likely to force incremental infrastructure
improvements simply through the sheer scale of the opportunity in Brazil’s soil.
Whether that opportunity is maximised, however, remains to be seen.
Energy
49%
Housing
29%
Transportation
11%
Urban development
6%
Water and light for
all
3%
Bringing citizenship
to community
2%
20%
23%
21%
19%
17% 18%
21%
17%
19%
0%
5%
10%
15%
20%
25%
1960s 1970s 1980s 1990s 2000-06 2007 2008 2009 2010

25
Eight years ago, Russia’s land reform laws laid the foundation for a renaissance in
Russian agriculture. One only need look at the biggest farming groups in the country
to see how private sector participation has brought much-needed capital into the
industry. However, to make a successful transition from its current position will
require considerable investment in primary production, as well as an overhaul of the
country’s antiquated infrastructure.
A key aim for the country should be to avoid rebuilding an agricultural model built on
past collectivist failings. In part, that means placing greater trust in market
mechanisms and thinking less about overall outputs. A greater emphasis on market
mechanisms will promote competition, cut margins for traditional middlemen and
provide access to capital in an industry desperately short of it.
This will bring in more capital and investment and, over the longer term, provide
Russia with another vital source of export-generated earnings. At the corporate
level, the ability to raise yields, bring 40mn ha of land up to standard, and invest in
elevator capacity and associated infrastructure can be provided by the market.
However that will require a considerable improvement in perceptions of the rule of
law.
Consider the enforceability of property rights. The biggest contribution the Russian
government could make to the country’s agricultural sector is to speed up the land
registration process. The fact that, in some cases, it took two-to-three years to
register acquired blocks of land indicates the bottlenecks across the sector. An
emphasis on supporting market mechanisms and enforcing property rights could
have a major impact on investment.
If one views Russia’s agricultural inputs and outputs in isolation, the one word that
comes to mind is potential. The country’s soils are some of the best on the planet,
yet 40mn ha of land has remained untilled since 1992. Yields remain low by any
standards, but are getting better. Infrastructure is poor but being upgraded rapidly.
The labour force is poor but, again, is improving rapidly. Land is changing hands but
the registration process is more akin to the Soviet era.
Stand inside the control rooms of some of the bigger farming companies and you
are witness to a modern revolution. Heavy investment by a range of entrepreneurs
and companies has placed some of these farms at the cutting edge of the sector. If
the agricultural market is liberalising over the long term, as we believe it is, these
companies are not just going to make domestic headway but, in time, they could
provide a formidable challenge to some of the world’s biggest trading houses.
However, that was the easy bit. There might be a tendency to see this year’s
drought and forest fires as the hard bit. Instead, they should be seen as mere blips.
Rather, our concern is that Russia focuses too heavily on the output side of the
equation at the expense of inputs. To do so, in our view, may have long-term
detrimental effects on the development of the sector. Size and scale have a habit of
blinding the most sensible and practical of minds.
Governments consistently think they can manage processes and allocate resources
better than the private sector when much of the evidence suggests otherwise. Some
voices have raised concerns about the Russian government’s attempts to create a
state grain trading company. Our reservations are slightly different: will the
Russia: Now for the hard bit

26
government allocate resources efficiently, given the vast sums required to raise
output and modernise the country’s creaking infrastructure.
Political interference will always play a part in Russian agriculture. Output targets,
land as a strategic resource, food security, export bans – all have become
prominent themes across the sector in recent years. Three times in the 20th century
Russia implemented dramatic agricultural reform programmes. We are familiar with
the most recent which began in 1992 and is still ongoing i.e., the disestablishment of
the old collectives. The construction of the collectives, cobbled together in the 1920s
and framed against a flawed political and economic ideology, represented the
second great reform programme of the 20th century. To this day it holds a powerful
grip on the imagination.
However, the reforms of Peter Stolypin in the first decade of the 20th century are
just as pertinent. These reforms gave peasants the opportunity to acquire land and
led to the brief emergence of a rural middle class – the kulaks. Although these
reforms sparked off an agricultural transformation, they were killed off by the other
revolutions and wars that wracked the country in the two decades that followed their
implementation. In short, they, too, were killed off for political gain and did not
endure. Therein should lie a lesson for the sector today.
An overview of the Russian agriculture sector
When it comes to Russian agriculture, much has changed in the past 20 years.
Some vestiges of the sector from the Soviet era still remain in place – almost
quaintly so – and the old and the new rub alongside each other sometimes easily,
occasionally less so. Some positions have been reversed: from being a net importer
of grain, Russia has become a net exporter. Yet, where once it was self-sufficient in
meeting national meat demand, the country has now become a big importer of high-
value beef, pork and poultry.
The restructuring process can only be described as a work-in-progress. Like many
other current business issues in Russia, restructuring is a long-term theme.
Following a lengthy period of decline, the agriculture sector has grown strongly in
recent years.
However, despite that progress, the sector’s contribution to the overall economy fell,
an indication of the strength of non-agricultural sectors.
It does, however, remain a sensitive part of the country’s economy and its
importance far outweighs its contribution to GDP. While agriculture accounted for
only 4.7% of GDP in 2009, it absorbed approximately 11% of the country’s labour
force. There are also important welfare implications to be considered given that 18%
of the population lives below the poverty line and food accounts for 36% of
household expenditures.

27
Figure 29: GDP ($bn) and agriculture as a % of GDP
Source: IMF, World Bank
Given the geographical scale and topographical extremes of the country, Russian
farmers are hardly a homogeneous group. Harsh climates, winter temperatures, the
length of the growing season and the erratic nature of the weather all present some
formidable challenges. Combined, they limit agricultural activity to about 13% of the
total land area, of which only 56% is arable. The rest is devoted to pastures and
meadows. In 2006 and 2007, freezing temperatures and droughts in various parts of
the country had a major impact on the principal crops including wheat, potatoes,
barley and sunflower seeds, the outputs of all of which declined between 6% and
16% in 2007.
Grains are among the country’s most important crops and occupy more than 60% of
the crop land. Wheat is the most important and accounts for over half of the
country’s grain production with an average annual output of about 45mnt. Barley,
the second major grain, with an average annual production of approximately 16mnt,
is grown mainly for animal feed and beer production. Russia is also one of the
world's top producers of sunflower seeds (the country’s chief oilseed crop), which
has also become one of the most consistently profitable crops, due to demand.
Russia is also the world’s second-largest potato producer after China.
There are three types of farms that are traditionally responsible for production of
these agricultural products – agricultural organisations (enterprises), private farms
and household plots. While agricultural enterprises and private farms are primarily
involved with the production of commodities (grains, sunflower and sugar beet) for
commercial sale, household plots are concerned primarily with the production of
vegetables and milk for family consumption. These household plots account for
about 50% of Russia’s agricultural output, even though they control just 6% of the
agricultural land. Obviously a major structural development within the agricultural
enterprises segment in recent years has been the emergence of large-scale
corporate investments in agriculture.
In 2002 a number of prohibitions on buying and selling land were removed and, as a
result, the majority (58%) of agricultural land was privatised. Despite this, the pace
of reform has been slow. A major stumbling block is the land registration process,
which is both costly and time-consuming, and reduces the incentive to take land out
260 307 345 430 591 764 990 1,300 1,660 1,222
6.4% 6.6%
6.3% 6.3%
5.6%
5.0%
4.5% 4.4% 4.4%
4.7%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
GDP Agriculture as a % of GDP (RHS)

28
of the old collectives. As a result, the vast majority of former state and collective
farms remain in business as joint stock operations and operate with an unrivalled
degree of inefficiency.
Obviously this implies not just an inefficient structure but also a lack of access to
capital. A lack of access to capital hampers development given the shortage of
physical infrastructure available. In order to make optimal use of its production, the
country needs to increase its grain storage capacity and build more silos and
elevators, the cost of which is prohibitive. This goes some way to explain the
government’s plans to set up a grain trading agency, in which it will hold a 25%
stake. According to the USDA, the Ministry of Agriculture (MoA) intends that the
Agency for the Regulation of Food Markets (AFM), an open joint stock company, will
be turned into a major Russian grain trader and will likely take a controlling interest
in 28 of the country’s major grain elevators and terminals.
Another development that has longer term ramifications for the agriculture sector, as
well as for the country’s financial system, is the development of the futures market,
which got underway with the establishment of the grain trading exchange (NAMEX)
in April 2008.
The development of the Russian agricultural sector
Agricultural reform has proved a challenging task for Russia during its transition
from a command economy to a market economy. The forced collectivisation of
agriculture during the soviet regime left most farms badly managed, poorly
structured and dependent on state support for survival. Following the break-up of
the Soviet Union in 1991, large state farms had to contend with the sudden loss of
substantial government subsidies. As a result, livestock production, a priority sector
during the pre-reform period, declined significantly, pulling down demand for feed
grains with it. The use of mineral fertilisers and other expensive inputs plunged,
driving yields down. Most farms could no longer afford to purchase new machinery
and other capital investments. The dismantling of price and trade controls
substantially narrowed the gap between world and domestic input prices for
agricultural goods, increasing the plight of producers further.
After a desperate decade of decline, the sector stabilised and began to show signs
of improvement. The transition to a more market-oriented system introduced the
element of fiscal responsibility, which is gradually resulting in increased efficiency as
farmers try to maintain productivity while struggling with resource constraints.
Pre-1991: The Soviet Union
Agriculture in the Soviet Union was organised into a system of state farms
(sovkhozes) and collective farms (kolkhozes). The former USSR was one of the
world's leading producers of cereals with cotton, sugar beets and potatoes being the
other major crops.
Collectivisation of farm land was established by Joseph Stalin in 1928 by
confiscating land, machinery, livestock and grain stores from the peasantry. This
forced collectivisation was aimed at replacing the small-scale, non-mechanised and
inefficient farms prevalent at the time with large-scale mechanised and efficient

29
farms. However, despite immense land resources, extensive machinery and an
abundance of chemical inputs as well as a large rural workforce, the agriculture
sector was fantastically unproductive throughout the history of the Soviet Union.
And no wonder it was fantastically unproductive. Under extremely bureaucratic
policies, administrators who were unaware of the needs and capabilities of the
individual farms decided both input allocation and output levels. Meanwhile, farmers
were paid the same wages regardless of effort, application and productivity.
Subsidies ensured that any attempt to adopt more efficient production methods were
killed stone dead.
In 1986, the Soviet Union introduced an agricultural reform programme designed to
increase productivity by forming contract brigades consisting of 10-30 farm workers
who managed a piece of land leased from a state or collective farm. The brigades
were responsible for the yield of the land, which in turn determined their
remuneration. However, these reforms failed to have a material impact as too many
other distortions remained in place. Production suffered accordingly. In the 1980s,
the Soviet Union went from being self-sufficient in food production to being a net
food importer.
Private plots played a significant role in the Soviet agricultural system as the
government allotted small plots to individual farming households to produce food for
their own use and for sale as an income supplement. Throughout the Soviet period,
the productivity rates of private plots far exceeded their size. With only 3% of total
sown area in the 1980s, they produced over a quarter of agricultural output.
Another hallmark of this period was the emphasis placed on increasing livestock
output. Between 1970 and 1990 livestock herds and output in the USSR grew 63%.
The rise in feed requirements caused by the growing herds, in turn, stimulated the
crop sector. In the late 1980s the average annual output of feed grain in the former
USSR rose by approximately 50% compared with the late 1960s. The expansion of
the livestock sector also led to increasing agricultural subsidies. By 1989, subsidies
to agriculture accounted for 11% of GDP, with the bulk going to the livestock sector.
1991-1999: Transition phase
The Russian agricultural sector fared poorly during the transition period of the
1990s. At the beginning of the 1990s agriculture accounted for 16.4% of GDP. By
1998, the share of agriculture in GDP fell below 6%, recovering marginally to reach
6.8% in 1999 in the aftermath of the Russian financial crisis.
Agricultural production decreased not only relative to the national product, but also
in absolute terms. By 1999, agricultural production was only 58% of its average level
between 1989 and 1991. Crop production, the dominant sector in terms of its
contribution to gross agricultural output, declined less than the sector average but
fluctuated wildly due to changes in weather conditions. Livestock production,
however, declined more sharply over this period.
Some of the loss in output was a direct result of the implementation of price and
trade liberalisation and the corresponding reduction in producer and consumer
subsidies. In the pre-reform period, the agricultural sector was highly subsidised with
the majority of support delivered via cheap inputs, especially fertilisers and fuels. As
these subsidies declined after 1991, the use of these inputs plummeted. For

30
example, gasoline use in agriculture declined from 11.3mnt in 1990 to 2.4mnt in
1998, while diesel use fell from 20mnt to 5.9mnt and mineral fertiliser use decreased
from 11.1mnt to 1.6mnt over the same period.
Price liberalisation resulted in high inflation rates and substantially reduced
consumers’ real incomes and purchasing power. Declining real incomes hurt the
livestock sector particularly badly. And, of course, this hit demand for feedstock
grains. Trade liberalisation, too, had a big impact on the sector. Prior to the reform
period the government offered support to producers by setting domestic producer
prices above world prices. Once trade was liberalised, prices fell.
Although various types of subsidies steadily diminished during the 1990s, state
support was not wholly eliminated. Farms received indirect subsidies through the
recurring policy of writing off debts. Farms regularly received ‘soft loans’ from state
or quasi-state lenders, which were later written off.
Figure 30: Evolution of agriculture in Russia: crop and livestock production indices, 1992=100
Source: FAO
Some of the other reasons for the decline in the agriculture sector, apart from the
elimination of pricing support and subsidies, were the slow pace and inconsistency
of reforms across the sector – for example, the failure to restructure large farms
meaningfully; the continued stalemate over land ownership and use rights; the
failure to improve market infrastructure; and the re-imposition of trade barriers and
administrative price controls (the last of which was done at a regional level).
Despite these problems and setbacks, by the end of the 1990s, the country had
achieved the basic elements of a market-based agricultural sector. As the economy
developed – up until the financial crisis in 1998 – pricing policy in the sector became
steadily less dependent on the state compared to other sectors in the economy. The
role of the state as a basic buyer of farm products and as an agricultural input
supplier had diminished considerably. In 1993 the government bought 63% of all the
cereals sold by agricultural enterprises. By 1998 this had declined to 12%. State
procurement of vegetables declined from 71% of output in 1993 to 37% in 1998.
Even in the heavily protected livestock sector, the state’s share declined from 79%
to 41% during this period.
40
50
60
70
80
90
100
110
120
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
Crops production index Livestock production index

31
2000-present: Recovery phase
The sector has steadily recovered since the dark days of 1998, with agricultural
output growing at an average rate of 3.2% pa between 1999 and 2005. Growth in
agricultural output has primarily been driven by growing crop production, which
increased by 5.7% annually during this period.
The most significant development of the recent times has been the passing of ‘the
law on the turnover of agricultural land’, which legalised the purchase and sale of
agricultural land. This allows farmers to consolidate plots into more efficient units
and use them as collateral. This may sound unremarkable, but it is possibly one of
the most significant events in Russian farming since the Stolypin reforms of 100
years ago.
In 2004, the country initiated administrative reforms, which demarcated the roles of
the federal government and regional administrations in providing agricultural
support. The reforms provided regional authorities with considerable power and
discretion, which allows them to curtail monopolies and ensure that agricultural land
is used for farming. There is another side to this: regional administrations have in
some cases implemented their own trade policies with respect to other regions,
which has led to the introduction of inter-regional, as well as international, trade
barriers.
Administrations deploy various means to influence food markets in their regions.
The most common of these include controls over retail and wholesale prices (by
fixing price ceilings or trade margins), rationing, the creation of grain and other
product reserves, mandatory marketing of agricultural production to regional food
corporations, subsidies and compensation from regional budgets and financing of
agricultural programmes from regional budgets. In addition, a number of regions
have introduced their own testing laboratories and demand that foreign products
meet a local standard, which is often more rigorous than the national standard.
The federal government has also introduced various trade restrictions that have
implications on different sections of the sector. Since April 2003, poultry imports
from outside the CIS have been restricted by a physical quota while imports of red
meat have been under a tariff rate quota (TRQ), with all quotas allocated annually to
countries based on historical imports. In 2005, Russia extended the meat TRQ
regime to 2009, while agreeing to a gradual increase in the quota volumes and a
downscaling of over-quota tariff rates.
Sugar is another commodity that comes under a special import regime. White sugar
imports originating from areas outside CIS are levied at a specific duty of $340 per
tonne. CIS imports, accounting for the majority of Russia’s white sugar imports, are
free of duty if white sugar is processed from sugar beet; otherwise a $340 per tonne
duty is applied. Raw sugar imports are subject to a more complex regime. At the
end of 2003, a variable import levy was introduced to replace the earlier TRQ
system. Raw sugar imports are now subject to a specific tariff, whose rate varies
between $140-$270 per tonne depending on the level of average monthly price at
the New York Board of Trade (NYBOT). In 2004 and 2005, the applied variable tariff
(according to value) on raw sugar imports was approximately 98% and 61%,
respectively.

32
Government support to agriculture
The 1998 financial crisis led to a substantial reduction in budgetary support given to
the agricultural sector. While support to the sector has risen since 2002, it still lies
below the pre-crisis level. Total agricultural support relative to GDP was 1.4% during
2002-2006, down from an average of 2.8% during 1995-1997. While the overall
budgetary expenditure on agriculture, which includes disbursements from both
federal and regional budgets, rose in nominal terms between 2001 and 2006, its
share of the total state budget has fallen.
Interest rate concessions, input subsidies and output payments for livestock
products constitute the core of domestic support to the sector. Input subsidies on
working capital loans and payments for variable inputs, such as fertiliser, elite seeds
and insemination material, constitute the majority of budgetary support.
Additionally, farms enjoy access to budget-financed soft loans that are generally not
repaid. From the mid-1990s, a series of large-scale debt restructurings for
agricultural enterprises was implemented. By the end of 2006, the overall amount of
restructured debt was estimated at approximately RUB82bn ($3.2bn), of which
RUB72bn ($2.8bn) were fines and penalties.
Figure 31: Budgetary expenditure on agriculture ($bn) and agricultural
expenditure as a % of total
Figure 32: Break-up of budgetary spending on agriculture at federal and regional
levels
Source: OECD Source: OECD
In recent years, agricultural support has been decentralised, with regional
administrations assuming responsibility for the implementation of support measures
previously carried out by the federal government. Until 2004, some 50% of spending
was allocated at the federal level. However, the federal share has declined sharply
since 2004.
Land use
Russia is a federation, comprising 46 oblasts (provinces), 21 republics, 9 krais
(territories), one autonomous oblast, one autonomous okrug (district) and two
federal cities. It is spread across 12 zones, namely, the Far Eastern region, the East
Siberian region, the West Siberian region, the Urals region, the Northern region, the
North Western region, the Volga-Vyatka region, the Volga region, the North
2.4
2.0
2.2
2.7 2.8
3.2
0.0%
1.0%
2.0%
3.0%
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
2001 2002 2003 2004 2005 2006
Budgetary expenditure on agriculture
As a % of total budgetary expenditure (RHS)
0%
20%
40%
60%
80%
100%
2001 2002 2003 2004 2005 2006
Federal Regional

33
Caucasus region, the Central region, the Central Black Earth region and the
Kaliningrad region.
Figure 33: Russia by region
Source: Renaissance Capital
Russia is the world’s largest country, spread across 11 time zones, with a variety of
landscapes, climates, soils and wildlife. Harsh climatic conditions, unfavourable
topography and poor soil quality deters agricultural activity in most parts of the
country.
Figure 34: Total land split Figure 35: Agricultural land split
Source: FAO Source: FAO
Central Black Earth Region Far Eastern Region Northern Region Volga-Vyatka Region
Central Region Kaliningrad Region North Western Region Urals Region
East Siberian Region North CaucasusRegion Volga Region West Siberian Region
Agricultural
land area
13%
Non-
agricultural
land area
87%
Arable land
56%
Permanent
meadows and
pastures
44%

34
Approximately 75% of Russia is characterised by broad plains and low hills lying to
the west of the Urals to the taiga forests and tundra of Siberia. Uplands and
mountains cover most of the area along the federation’s southern border. More than
half the country is covered by forests, some 19% is more or less in the tundra belt
and about 4% is covered by water bodies, leaving only 13% for agriculture. Out of
this area, only 56% is used for cultivating crops, while the rest is devoted to pastures
and forage.
Russian soils are characterised by low levels of fertility and range from poor quality
acidic soils in the northern regions to highly fertile soils in the southern regions of
European Russia, the Urals and Siberia. The two main soil types are Podzols and
Gleysols, which occupy 22% and 16% of the total land area, respectively. However,
Chernozems, the most agriculturally productive soils, occupy less than 6% of the
land area.
The Russian landscape has been characterised by the typical grasslands of the
steppe. This region extends from Hungary to Ukraine, through southern Russia and
Kazakhstan, before ending in Manchuria, and comprises Russia’s Central Black
Earth and Volga regions. The region is characterised by a broad belt of grasslands,
devoid of trees and interspersed with mountain ranges. In a country exposed to the
most extreme climatic conditions, this transitional zone of moderate temperature and
adequate levels of precipitation offer an ideal setting for agriculture. In addition, the
region is endowed with the Chernozem, or black earth soil, which has a high humus
content and a low level of acidity, making it very fertile and turning the area into
Russia’s main source for grains. With about 65% of the land being dedicated to
agricultural activity, the region is considered to be the country’s most agriculturally
productive area. However, over the years, even in this fertile region, natural
calamities such as droughts and inadequate precipitation have adversely affected
agricultural yields.
Grains, including wheat, barley, rye and corn are among the most important crops
and cover about 60% of the entire crop land, with wheat being the dominant grain.
Winter wheat is cultivated primarily in the North Caucasus region while spring wheat
is cultivated in the middle Volga region, the Far East region and in South Western
Siberia. In terms of annual output, barley is the country’s second most important
grain and is primarily cultivated in the colder regions extending from the highlands of
southern Siberia to as far as 65° north latitude. Few grain fields in Russia are
irrigated, even in drought-prone areas.
In addition to grains, potatoes are grown in the colder regions ranging from 50°-60°
north latitude. Sugar beet is grown mainly in the central black earth region Russia.
Oilseeds such as flax, sunflowers and soybeans are grown primarily in the North
Western region’s Vologda oblast, the North Caucasus region and the Far East
region, respectively.
In the colder northern and north western regions of the forest zone, fodder crops
dominate produce and occupy 60-65% of the sown area. However, in the more
agro-productive central and eastern regions, forage crops occupy only 35-40% of
sown land.

35
Russian farmers employ several crop rotation schemes to maintain soil fertility. The
number of crops in rotation may vary from two to four or more. In the southern
forest-steppe and steppe regions, crop rotations are dominated by cereal/fallow and
cereal/sown crop/fallow cycles, in contrast to western Russia, where spring
crops/forage rotations dominate. In eastern Russia, grain/fallow/grass crop rotations
are the most feasible, with perennial pastures occupying 25-33% and soil protection
crop rotations occupying up to 70-80% of the arable land.
As corporate farms begin to make a significant impression on the landscape,
fertiliser use in Russia has also picked up in recent times. By mid-March 2008,
agricultural producers had applied about 1mnt of mineral fertiliser (including 0.6mnt
of nitrogen fertiliser), an increase of 14% over the same period last year. According
to the MoA, some 2mnt of mineral fertiliser on an active ingredient basis will be
applied this year, an 11% increase over 2007. Rapidly increasing fertiliser prices
may restrict consumption in the future.
Figure 36: Agricultural, arable and cultivated land (mn ha)
Source: Rosstat
Despite having the world’s largest land mass, Russia is still some way from
returning to the output levels it was able to sustain during the Soviet era. One of the
primary reasons for this has been the decline in cultivated area. The country’s
cultivated area decreased from 79.6mn ha in 2003 to 76.9mn ha in 2008. This
decline is attributable to several factors, including:
A decrease in the sown area of feed grains and other forage crops,
primarily due to dwindling livestock inventories.
The presence of vast tracts of fallow land, estimated at about 25mn ha in
2006 (38.6mn ha in 2005). Much of this fallow land remained abandoned
post the dissolution of the Soviet Union, primarily as a result of declining
farm subsidies and the inability of farmers to buy inputs such as pesticides
and fertilisers to protect crops and enhance yields.
Inadequate or incomplete certification of land distributed to state farm
workers in the form of land shares, following the break-up of the former
USSR. This led to inaccurate surveys and estimates of cultivable land.
194 193 192
168
118 117 116
102
80 77 76 75
0
20
40
60
80
100
120
140
160
180
200
2003 2004 2005 2006
Agricultural land Arable land Cultivated land

36
1. According to Aug 2008 estimates, out of the 12mn shareholders, who
hold a combined 110mn ha of agricultural land, only 3-4% have fully
completed the registration process, which includes determining precise
field coordinates and receiving a title.
2. In some cases, shareholders have completed the registration process
but have no interest in farming or leasing the land, thereby increasing
the area of idle land.
The MoA has been taking certain initiatives to combat problems associated with soil
fertility and reclamation of unused agricultural land:
In 2008, the MoA planned to reclaim 700,000 ha of unused agricultural
land. In addition, measures to impede water-driven soil erosion will be
implemented on 19,500 ha of land, while measures to combat wind-driven
soil erosion and desertification will be implemented on 45,000 ha of land.
To improve soil quality, encourage adoption of modern agricultural
technologies and solve issues related to land ownership, the MoA recently
established a Department of Land Policy and Property Relations.
In 2008, the government began to partially subsidise the purchase of
mineral fertiliser, as outlined in the Federal Program for the Development of
Agriculture and Regulation of Agricultural and Food Markets for 2008-2012.
1. In 2008, RUB2.3bn ($90m) was planned to be allocated for fertiliser
procurement support with an expected increase in mineral fertiliser
acquisitions from 1.8mnt in 2007 to 2.0mnt in 2008.
2. The government will impose export duties on mineral fertiliser in an
effort to curb exports and increase supply in the domestic market.
However, the success of this measure remains debatable as an
adequate supply of fertiliser for grain producers will depend on the
farmers’ ability to purchase the same rather than government
restrictions on fertiliser exports.
Land ownership
Land in Soviet times, with the exception of the small garden plots (which occupied
only 3% of the country’s agricultural land), was under the complete control of the
government bureaucracy. However, since the passing of the Land Reform Law in
1990, the country has made significant progress in the privatisation of land. This
piece of legislation recognised the right of private ownership in agricultural land by
dividing large tracts of state and collective land among rural people who lived in and
worked on these farms. The distribution was in the form of paper shares as per a
mechanism that became known as ‘joint shared ownership’. Subsequent reform
laws provided shareowners the option of withdrawing land plots from joint shared
ownership for the establishment of independent peasant farms. As a result of mass
re-organisation of the former state and collective farm land, the share of state-
owned agricultural land dropped from 97% in 1990 to around 42% in 2003.
However, this has not brought about a significant change in the manner in which
operations are run in the sector because even though almost 60% of agricultural

37
land is currently under private control, the majority of this land is still represented by
land shares. From our discussions with various parties, it would seem reasonable to
assume that as much as 70% of agricultural land in Russia is still owned by the state
or held in the form of private sector land shares.
At present, there are three modes of farming operations in Russia – agricultural
organisations, household farms and private family farms.
Figure 37: Split of agricultural land ownership
Source: Rosstat
Agricultural organisations (former state and collective farms) dominate production of
most agricultural commodities. For example, in 2009, nearly 78% of Russia’s grains
and 71% of the country’s sunflower seeds are produced by these enterprises. The
smaller private farms complement these enterprises in commodity production. In
2009, they accounted for 21% of the country’s grain production and nearly 29% of
its sunflower seed production.
Figure 38: Structure of agricultural farms in Russia (2006)
Farm type Ownership Description
Average farm
size (ha)
Agricultural land
holding (%)
Agricultural organisations (enterprises) Multiple shareholders
These are the successors of the former collective and state
farms, accounting for 43% of total agricultural output.
Virtually all individually owned land in corporate farms is in
the form of land shares owned by the local rural population.
The production is intended wholly for commercial use.
5,000 81
Private (peasant) farms Individual
Emerging after reforms in the early 1990s, these family
farms contribute 7% to the country’s total agricultural
output. Like agricultural organisations, the production is
primarily for commercial purposes.
81 13
Household plots Individual
These are physically demarcated land parcels owned by
individuals in rural areas and account for an astonishing
50% of the country’s agricultural output. The majority of the
households produce primarily for self-consumption and sell
the rest to consumers, usually directly at local farmers’
markets. Thus, the importance of this sector in marketed
output is much smaller than in the overall production.
0.5 6
Source: Rosstat, USDA
97%
44% 42%
3%
56% 58%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
1990 1995 2003
State Private

38
Household plots, on the other hand, produce mainly livestock products, potatoes,
vegetables and milk, and virtually no bulk crops such as grain, sugar beet and
oilseed. The fact that they still produce half the country’s total agricultural products
while operating on a mere 6% of its farm land indicates the high productivity of these
plots. It should be noted, however, that household plots, in addition to the land
formally given to them, also use some land belonging to agricultural organisations
for livestock activities.
Figure 39: Split of production of major agricultural products by farm type (2009)
Source: Rosstat
With the introduction of various laws and decrees defining the legal forms of land
ownership and the procedures for certifying and exercising ownership rights, it was
expected that private holdings would be created in rural areas and the large-scale
collective farms would be restructured. But, as it has turned out, few peasants
established individual farms and the management and operating practices of large
agricultural enterprises remained largely unchanged
Immediately after the demise of the Soviet Union, the number of individual private
farms increased sharply but their development has stalled since then. Currently,
these peasant farms face serious operational difficulties and are also handicapped
by a lack of competitive input and output markets. Consequently, the number of
private farms declined to 255,400 in 2007, after reaching a high of 280,100 in 1995.
Land transactions
Earlier legislation relating to land focused on providing use rights to the farmers.
However, buying and selling of land was restricted and ‘alienation’ of land was
allowed only to the state and not to individuals. While land shares held in the form of
paper certificates could be sold to other members of the collective, physical land
plots could be sold only under special circumstances (when the landowner retired,
when the plot was passed on in inheritance, when the peasant farmer relocated to
another region or when the seller undertook to use the proceeds from the sale for
the establishment of a non-farm business). It was not until the adoption of the law on
agricultural land transactions in Jan 2003 that ownership rights in agricultural land
(including buying and selling) were finally normalised.
78%
89%
71%
13%
18%
57%
44%
76%
1%
1%
0%
81%
71%
40%
51%
23%
21%
10%
29%
6%
10%
3%
4%
1%
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
Grains
Sugar beet
Sunflower seeds
Potatoes
Vegetables
Livestock
Milk
Eggs
Agricultural organisations Household plots Private farms

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