28 June 2002

Rights to top Russian land

BRITISH farmers who sub-let land from Heartland farms will do so for $35/ha a year.

In return they will get production rights to some of the best land in Russia for an initial five years, backed up with a full service contract.

"So far it is mostly consortiums of three or four people who have shown interest," says Richard Willows of Heartland Farms. "In the past year we have brought about 25 farmers over here to have a look."

As part of the deal Heartland Farms will establish a Russian company for the investors, though it is the investors responsibility to set up a UK-based holding company.

Heartland Farms will also provide a full-time translator and assistant for the first two years, arrange suitable accommodation, supply machinery storage and workshop facilities, and offer initial cropping and input advice.

This service contract is obligatory for an initial five years, after which it may be renewed in whole, in part or not at all. It includes a compulsory whole-crop insurance policy to protect both parties.

In return, the incoming farmers are obliged to purchase or lease their inputs and machinery from manufacturers participating in the project.

The farmers also have to commit all their output, less any farm-saved seed, to a pool marketing scheme, which will match sales to cash flow. (The provision of machinery and input credits are secured by commodities committed to the pool.)

Mr Willows, who as former managing director of UK-based co-op Lingrain has a long experience in the grain trade, believes the Russian market is as secure and potentially lucrative as any.

"Prices are broadly similar to or better than western values," he says. "Wheat is currently valued at $80/t (£54/t), though it did reach $110/t (£76/t) for Class 2 earlier in the season. Sunflowers are making $220/t (£148/t) and barley $85/t (£57/t).

"These figures are better than those used in our business plan, which are based on very conservative estimates."

Mr Willows says that, contrary to some opinions, the future demand for arable commodities will come from the home market rather than exports.

"We already sell wheat direct to millers in local towns and in Moscow," he says. "There are also brokers and multinationals, which give us different marketing options. And, once the livestock industry starts to recover, there will be strong demand for feed grains, proteins and by-products."

Most trade is done on a spot basis for next month delivery, with payment triggered by presentation of a document called a Form 13 which accompanies each consignment. There is no credit in the system and payment is in roubles, which are fully convertible to US$.

"We are also forging links with local vodka factories, which will take rye in the early part of the season, and wheat thereafter. One of the countrys largest brewers, Ochakovo, is also building a new $100m (£68m) plant in Penza, and a large maltings."

With harvest getting under way, Russia is expected to produce about 65mt of grains this season, of which 42mt will be wheat. This is way down on last years total of 75mt, due partly to the late end to last years harvest followed by a hard winter and a spring drought in the south of the country.

This bodes well for new season prices.

On the input side, fertiliser, seed and agro-chemical costs are all cheaper than in western Europe, at about $70/t (£47/t) for 22.11.11 and $175/t (£118/t) for elite seed. But the biggest savings are in land and labour, which is available at a local rate of $75/month (£50/month).

Mr Willows estimates that, from an initial investment of $500,000 (£337,800), including the first years rent and down payments on machinery and other inputs, farmers should see a positive return on investment by the third year.

Repatriation of profit is not a problem, he says, so long as all local taxes are paid. "Once that is done, its just a matter of paying a dividend to the parent company shareholders," says Mr Willows. &#42

So what are the risks? According to agriculture director, Colin Hinchley, it is incoming farmers own attitude. "Yes, there is a psychological barrier to overcome," he says. "A lot of people have a very negative opinion of Russia, but most of that is media exaggeration.

"The real problem is if people come in thinking they can walk all over the local people. The key is to get stuck in, to respect all people at all levels and show you want to work with them."

Net margin comparison

for wheat

$/ha UK Russia

Income

Yield* 8 4

Price** 100 100

Output 800 400

Input cost

Seed 61 30

Fertilisers 130 38

Sprays 162 38

Gross margin 447 294

Operating cost

Labour 109 7

Fuel 28 12

Other 33 14

Total 170 33

Machinery cost 79 69

Land cost 375 35

Total 624 137

Margin before aid -177 157

Area aid 277 0

Net margin 100 157

* t/ha; ** $/t