Grain of rationality

By Mikhail Tuzhikov, Тransport Rossii

Natural disasters have yet again shuffled players of the world grain market, turning recognized leaders – Canada, Argentina and Australia – into outsiders and making long-time wheat importers – the CIS countries – into exporters. The reversal of the West-East direction, while not robbing the Baltic states of their profits from grain transit, will, however, create certain troubles for them

Photo: A.F.I.

According to figures of the U.S. Department of Agriculture, the world’s total grain output amounts to 1.514 billion tons and global trade in wheat during the farming year of 2002-2003, closing this June 30, will reach 104.8 million tons. In opinion of the U.S. experts, major wheat importers will be Brazil (6.7 mln tons), Egypt (6.2 mln tons), Japan (5.8 mln tons), Algeria (4.8 mln tons) and the European Union (10 mln tons). Likely wheat exporters will be the U.S. (25 mln tons), the EU (15 mln tons), Russia (10 mln tons), Ukraine and Kazakhstan (5-7 mln tons each).

The International Grain Council (IGC) lists some 30 countries as its members, including nine major exporters: the U.S., Canada, Australia, Argentina, the EU, Ukraine, Kazakhstan, Hungary and Turkey. Russia is still listed by the IGC as an importing country alongside Ecuador, the Vatican and Tunisia.

By the way, Russian grain exports previously reached their peak in 1913 when the country produced 80 million tons of grain and exported 10.5 mln tons of grain.

Fighting record crops

Last year’s crop failure in Australia, Canada and Argentine, all ranking among the world’s ten leading grain exporters, propelled Russia into the position of a major grain supplier for the EU. In 2002 Russia produced 86.5 million tons of grain, including 48.5 million tons of wheat.

Along with Russia, Ukraine and Kazakhstan are also turning into grain exporting nations thanks to record high crops. But Ukraine, having the largest of all grain terminals in the former Soviet Union at its port of Odessa, is a competitor to the Baltic states while Russia and Kazakhstan are suppliers of bulk transit cargo.

Grain and cereals – wheat, rice, rye, oats, barley, maize – all belong to the category of bulk cargo not broken down by species in statistics. Therefore wheat, all 20 or so sorts of it, is used as a yardstick on the grain market.

The IGC expects Russia to supply the world market with 10.5-11 million tons of wheat in 2002-2003, worth over one billion US dollars. According to the Russian Agriculture Ministry’s forecasts,  wheat supplies to foreign countries and the CIS states will be growing steadily, rising to 14-16 million tons a year by 2010. In addition, Russian grain will remain among the cheapest on the world market at USD 80.6 per ton which is 25 percent lower than the price for North American and West European grain and also down by nearly one-third from the price of Australian and Argentinean grain. Considering that the Food and Agriculture Organization (FAO) of the United Nations and the World Wheat Council estimate a global deficit of this cereal at 72-84 million tons, there will always be a demand for Russian grain.

More over, Russia has even started exporting rye, a product that was hardly ever exported before. Another important development in Russian grain exports took place in October 2002, with the first delivery of 9.6 million tons of fodder wheat was sent to France, one of Russia’s main rivals on the European grain producing market. Iraq, Romania and Sweden have also become new buyers of Russian grain in addition to Italy, Egypt, Saudi Arabia, Algeria and Morocco.

The Russian government in attempt to ensure maximum loading of its ports with export-import cargo introduced discount reduced rates as of July 1, 2001, which earlier applied only to domestic shipments. This exemption, creating an advantage over competitors, resulted in a steep rise of handling at Russian ports that consequently became clogged with cargo as their processing capacity was insufficient to deal with the unplanned growth of shipments. It should be enough to mention as an example that at the Novorossiisk terminal, up to 2,000 rail cars laden with grain were waiting in queue to be reloaded daily. Indeed, as an old saying goes, he who wants to have more than he can will have less than he could.

On the other hand, Russian grain exported through Ukrainian, Latvian and Estonian ports, where applicable rates are 2.5 times higher than on the world market, adds considerably to its price and loses its competitive ability. Therefore Russian experts believe that, firstly, rates need to be lowered by 30 percent and, secondly, Russia must use foreign ports since its own ports can handle 1.5 million tons of grain but Russian grain exports in 2001 rose to 5 million tons and doubled in 2002.

At the same time, a 50 percent discount on railway rates for long-distance transportation of grain to Russia’s Far East ports took effect on October 19, 2002. The largest ports of the region  -- Vostochniy and Vladivostok – said they were fully prepared to reload export wheat. In the meantime the Baltic states with their high interest remained left out.

It should be said that problems related to growing grain shipments from the East were felt also in Latvia. After all, grain shipments are coming in not only from Russia, but also from Kazakhstan but there’s only one grain terminal in Latvia – in port Riga. The state-owned Latvijas Dzelzcels (Latvian Railway) company first deputy director general Stanislavs Baiko said: “the Riga grain terminal  can process 40 rail cars daily at best. Speaking figuratively, our businessmen reload 10 cars a day using shovels, while assuring clients that they can handle 50 cars. That’s why last December 300 rail cars were waiting in line to be reloaded. It’s the same in other ports as well.” The situation is further aggravated by a deficit of rail cars for transportation of grain both in Russia and Kazakhstan.

Local red tape also contributed to problems for grain transit through Latvian ports by demanding from cargo forwarders two certificates – one from the Food and Veterinary Service and another from the National Plant Protection Service. By the way, in neighboring Lithuania and Estonia certificates required for transit shipments are granted automatically on the basis of just a single cargo certificate issued in Russia.

Fighting for grain transit

Russian and Kazakh grain transit through Estonia increased by a factor of 40 last year. One of the largest grain terminals in Europe, Muuga, reloaded 1.5 million tons on grain traveling from Estonian business news to West in 2002. Of this amount, 70 percent came from Kazakhstan and 30 percent from Russia. In 2001 grain handling stood at just 35,000 tons. Muuga Grain Terminal manager Sergei Shcheblanov expects grain transit to keep growing till this August. But cargo turnover at Muuga terminal may suffer if the EU comes through with its plan to restrict grain imports from Russia. “There are many ways, though, to circumvent these restrictions,” said the manager. “For example, to re-sell grain in the open sea.”

In addition, Muuga Grain Terminal intends to boost its capacity, increasing grain reloading to 3 million tons a year. The company intends to spend some 1.5 million US dollars on this program in the nearest future.

Muuga Terminal Photo: E.Prozes, Aripaev

The grain terminal at Muuga was built in the late 1980s for grain imports from the West but now has switched to handling exports from the East. New equipment allows to load ships with 1,200 tons an hour. The elevator or grain terminal can hold 300,000 tons at a time.

The number of stevedore companies wishing to handle Russian grain exports keeps growing. At present wheat is being reloaded in all largest Latvian ports. Last November Ventspils tirdzniecibas osta (Ventspils Trade Port) company arranged for an experimental batch of 4,000 tons of wheat for smoothing out technical matters in processing the cargo new to them. Results were positive and in future Ventspils tirdzniecibas osta plans to be handling  50-60 thousand tons of grain a month.

Valery Pashuta Photo: Ventspils Tirdzniecibas Osta

Venspils tirdzniecibas osta CEO Valery Pashuta told the BC about steps the company is taking to increase grain handling: “In view of the rapidly rising demand for Russian and Kazakhstan grain, Venspils tirdzniecibas osta is seeking to attract this kind of cargo, in a very short time by adjusting existing warehousing facilities for storing grain and also investing  money in technological equipment. To date the company can handle grain shipments of up to 25,000 tons while keeping in storage another 35,000 tons. In addition, extremely cold weather this winter clearly demonstrated the advantages of ice-free Ventspils port over its competitors when it comes to uninterrupted grain exports by vessels of non-ice class, at the time all competing ports in the Baltics are frozen over. During the current season (from November to February) we reloaded about 30,000 tons of grain.”

Another Ventspils company, the Kalija parks terminal, until recently specializing  only in processing mineral fertilizers, has also started adjusting its facilities in order to be able to accept a new type of cargo for the terminal – yes, grain, intended to be stored in two warehouses with holding capacity of 10,000 tons each. Wheat will be unloaded from railway cars and put either in the warehouse and from there on to pier No. 4 and the ship hold, or in the receiving bunker at pier No. 3.

Riga grain terminal Kompass tranzits hasn’t been standing idle either, reloading 70,000 tons every month. Due to growing Russian grain exports to Europe, grain and grain product handling via Riga free port in 2002 rose a huge 333 percent from 2001.

In the south-western Latvian port of Liepaja, TransWide Service, with an elevator  grain terminal with capacity of up to 100,000 tons of grain, has started building a new terminal that will be able to accept up to 120,000 tons of grain. The construction that will cost the company USD 5 million is to be completed this summer. 

By the way, Latvia is a grain exporter itself. In 2001 grain exports were 3.5 times higher than imports. Total grain exports stood at 100,300 tons, up 28 times from 2000. As for consumption of cereals, this rose 8.7%. Grain yield in 2001 was 928,000 tons.

Lithuania has become an outsider in terms of Russian grain handling but not of its own will. The thing is that this January Russia raised railway tariffs by 12% and, as a result, transportation of Russian grain via Klaipeda port grew too expensive.

The largest Lithuanian stevedore, KLASCO, having built an 8.69 million euros worth terminal with annual capacity of 1.5 million tons specifically for dry cargo handling, has signed a long-term agreement with Russian partners for five years. This year, however, the agreement was terminated, and now the Lithuanians have to be content with reloading only Kazakh grain in much lesser amounts.

Traders don’t care

No year is ever like any other, and a record high yield is, as a rule, replaced by a bad or poor harvest. Even upon two successive years of poor years, carriers should not worry. Ilya Kovtun, the information department head at Vitalmar Argo, the Russian branch of a transnational company told the BC his opinion on the subject: “By tradition, for every five years there are two bad years, two years with high yield and one average year. We already had two bad years and two good years. Consequently, it is possible that in future Russia may again change from a leading exporter into a grain importer. But the direction of trade doesn’t matter for traders in principle.”