Russian Economic Sanctions

Deere Executive: International Sanctions Forcing Russia to Modernize Agriculture

Chris Clayton
By  Chris Clayton , DTN Ag Policy Editor
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Derek Boudreau, managing director of operations for John Deere Co. in Russia, speaking at the 2014 DTN/The Progressive Farmer Ag Summit in Chicago. (DTN/The Progressive Farmer photo by Jim Patrico)

CHICAGO (DTN) -- Economic sanctions against Russia could translate into making the country more self-sufficient in food production and help Russian farmers become bigger competitors with the U.S. over the long-term.

That will depend on how well Russian officials stick to their strategy to increase the use of new farm machinery and open up more land to production in the country, said one expert at the DTN/The Progressive Farmer Ag Summit on Monday.

The opening afternoon of the summit was heavily oriented toward U.S. global competitors and the agricultural sectors in other countries. One key discussion included the impact of international sanctions on Russian agriculture.

The U.S., several European countries and Australia issued economic sanctions against Russia last spring after military forces entered parts of Ukraine. Derek Boudreau is managing director of operations for John Deere Co. in Russia. Despite the impact of sanctions on Russia's economy, Boudreau told the Ag Summit crowd of approximately 770 that he remains more optimistic about Russian agriculture than other parts of the country's economy.

"I'm probably much more optimistic than most people in the West," Boudreau said. He added, "From the agriculture side, they are planting, they are producing, and we don't see a decline right now."

Boudreau sees "vast potential" for Russia. The country has 9% of the world's arable land, but 2% of the population. That translates into a disproportionate amount of arable land per capita. Yet, as much as 30% of their land is fallow and has been so for more than two decades. Comparing soil and weather conditions to similar climate regions in the U.S., Russia has significant potential for yield expansion in crops such as wheat and corn.

Such factors have been around for quite some time, Boudreau noted, but Russia is starting to emerge as a grain exporter. The country's producers average about 4% of global grain exports and as much as 14% of the global wheat export market.

Reforms are needed to realize potential. Partially because of sanctions and counter-sanctions, Russian leaders are concentrating on mechanizing the agricultural sector to increase productivity. To make that work, Boudreau said Russia needs to upgrade logistical infrastructure such as rail and roads while also improving seed genetics and investing more heavily in regional agricultural research facilities.

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The Russian economy has been in decline after seeing strong growth in the early 2000s. Russia relies heavily on the oil and gas industries, so the recent price decline for oil worsens the outlook for the Russian economy. Moreover, the boom in Russia's consumer growth has stalled, partially because Russians have taken on more consumer debt, higher interest rates and lower disposable income. Sanctions would have to be removed to improve Russian's gross domestic product, Boudreau said.

The biggest sanction affecting agriculture has to do with European and U.S. banks prohibiting extension of debt or equity for Russian banks. That affects the ability of businesses in several Russian industries to get credit. Agriculture was somewhat hindered before the sanctions with machinery and operating-capital interest rates in the 12% range. Since the sanctions went into effect, those interest rates have spiked to 18% or higher.

Deere doesn't release volume totals for countries, but Boudreau said the farm-machinery sector has seen a 10% to 20% decline in sales due to declining economic conditions and sanctions. "The data is very spotty in the overall Russian market," he said.

However, the depreciation of the Russian ruble against the dollar has increased Russia's competitiveness for exports and reduced input costs. Commodity prices have increased as a result.

Russia's counter-sanctions banned beef, pork, poultry, fish, sausage, cheese, milk, fruit and vegetables from all countries that imposed sanctions on Russia. As a result, Russian leaders are emphasizing a need to become more self-sufficient in agriculture. Russian President Vladimir Putin said recently he expects the country to produce more affordable food in three to five years.

"The sanctions have clearly heightened the need for self-sufficiency, not just in agriculture, but in several sectors," Boudreau said. "In a three- to five-year term it will be interesting to see how self-sufficient agriculture is."

Some producers in the DTN audience were skeptical of Boudreau's positive outlook for Russian agriculture, noting they have heard all their lives about Russia looking to reform its farm industry to make it more productive and self-sufficient.

"Today, their primary choice is to put more land into use," Boudreau said. "Everywhere you go, Russian officials will talk about how many more mechanized acres are being put into use."

Somewhat supporting Boudreau's view on Russia's potential, another summit speaker said "very low land costs" in Russia and Ukraine are among the factors helping those countries become more competitive globally.

"In these countries, we don't have effective land markets," said Yelto Zimmer, director of the Thuenen Institute for Economics in Braunschweig, Germany.

Zimmer also noted Russia and Ukraine have cheaper plant protection products than the U.S. and Canada, but they have significantly higher costs of machinery, largely because of financing costs. Overall, in 2011 -- prior to any sanctions - Russian and Ukrainian producers incurred costs $50 cheaper to produce one metric ton (roughly 37 bushels). However, that also translated into those producers receiving comparably less for their crops.

Boudreau sees potential for Russia to increase production and potentially become a bigger competitor with the U.S. on the world market. Still, studies in Russia have determined extensive infrastructure investments are needed to boost production in areas such as dairy or livestock. Grain storage needs to be expanded and one of the country's glaring weaknesses is transportation capacity to get commodities to market.

"Those are some of the gaps they have recognized," Boudreau said. He added, "They are making great strides forward and one day could get there.

Chris Clayton can be reached at Chris.Clayton@dtn.com

Follow him on Twitter @ChrisClaytonDTN

(CZ/AG)

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Chris Clayton