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A Sweet Assignment: Ag Challenges in Russia and Ukraine

Winter 2012

Context provides companies with the comprehensive research necessary to confidently advance efforts in situations that involve both new business endeavors and new geographies – wherever they are found in the world. As an example, Context recently was asked to explore and provide understanding of the sales potential and the best routes to market for a seed enhancement technology in Russia and Ukraine.

Our senior consultant travelled to the main production regions and discussed with input suppliers, growers, processors and commodity traders. The drivers and constraints became clear and we identified relevant opportunities and threats. Context will continue to support the client with appropriate and actionable market entry strategy, and in finding the right personnel to execute effectively.

There are four major beet-growing regions in the Former Soviet Union (FSU): Ukraine and the three Russian regions Central Russia, Volga/Siberia and South Russia (Figure 1).

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Most soils are of the high quality “black” earth: High organic matter and with good drainage. Climate is continental with cold winters and dry hot summers.

A main constraint is low precipitation in the Volga/Siberia and Central region. In the South region mainly high temperatures limit yield potential. In recent years, however, limited rainfall and high day and night temperatures have affected yields all over Russia and Ukraine. Especially in 2010 when yields were severely reduced due to heat stress in mid summer. Sharp season changes can cause drought in spring resulting in bad germination; early frost in autumn can result in harvest and storage losses of up to 25%, like in 2011.

For the purpose of this case study, we will consider Russian sugar beet production. With the collapse of the FSU, sugar beet production collapsed too. The Russian average area dropped from 1.5m ha in the period ’86-’90 to 0.8m in ’01-’05 (Diagram 1).

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However in recent years, total area rebounded to 1.3m ha in 2011. Supported by relatively high sugar prices, economic stability and government support, the private sector invested in agricultural inputs and machinery. Meanwhile, many factories were upgraded and consolidated into large holdings. These vertically integrated holdings consist of farms and factories and can produce and process their own beets. For example, “Prodimex”, a Russian holding, owns 15 factories and cultivates over 350k hectares.

Considering productivity, average yields fell sharply from 23 to 15 tonnes per ha during the period 1986 – 2000 (Diagram 2). Thanks to aforementioned factors such as government support and private sector investments, beet yields picked up during the period 2000 – 2010 and in 2011, were on average 39 tonnes per ha.

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As discussed, the collapse of the FSU resulted in a strong decrease of both beet acreage and yield but recovered during the last decade. Interestingly, the yield per hectare is now higher than during soviet times while acreage is still below historical peaks. Main reason for higher yields is the increased use of better inputs, technology and management. Western hybrids have replaced domestic varieties and growers are getting used to modern crop protection chemicals, fertilizer and machinery.

A major threat in Russia and Ukraine remains the political and legal systems. However, though corruption and bureaucracy are nuisances, they are not limiting the ability to do business. Bigger threats are the high cost of (working) capital, poor farm management, outdated accounting systems and poorly developed business plans. For the moment, both countries profit happily from relatively high agricultural commodity prices on the world market. But there is a risk that poor replenishment of nutrients will deplete the soil; that a lack of crop protection and narrow rotations will result in disease and pests; that poor crop management will result in harvest and storage losses; and that poor financial management will lead to corruption and wrong investments.

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Top photo: Insect damage during germination of sugar beet crop. Middle and bottom photos: Sugar beet harvest in Ukraine

Context understands the huge challenges of doing business in the FSU, but we also see the global opportunities for substantial and sustainable agribusiness. Farming systems are becoming more modern and intensive. Better inputs, technologies, and management are key success factors. For example, faster germination of sugar beet seeds, thanks to seed enhancing technology, establishes young plants before drought occurs and gives them an advantage in early life. Less seeds are needed per hectare, the soil is covered faster, more leaf canopy reduces evaporation, and with a longer growing period, yields are higher. Working smarter with less, while producing more…that’s our challenge.

To learn more, contact Context Senior Associate, Roelof Kramer at roelof.kramer@contextnet.com.