Igor Babaev: Russia may benefit more from development of the “grain shelf” than from oil

April 15, 2015

Igor Babaev
Igor Babaev
© Dmitry Lomakin

Founder and Chairman of the Board of Directors of the agro-industrial Cherkizovo Group spoke to TASS about why the company intends to grow as an exporter of grain and not meat, and why Russia needs to double or triple the country’s grain harvest.

— Counter-sanctions showed that although Russia’s meat industry does not yet fully cover the country’s needs, it has evolved and become a growth area for the entire agricultural sector. What do you see as the next growth area for the country’s agriculture and for the company — fish, vegetables, processing, exports, or milk?

Today, a lot of people are saying we need to export meat. And in fact, because of what happened to the rouble, we have some of world’s cheapest poultry. But we must understand that our domestic needs are still not fully covered, and we aren’t welcome on foreign markets.

The question is: what can we do about exports? The answer is very simple: supply grain. This product is recognized worldwide. It will always be in demand, and Russia has been on foreign markets before. The government has done a lot to reach a high level of food security in Russia.

Whatever anyone says, today Russia covers domestic demand for main food products and feels much more confident than in the 1990s. Back then, the West could cut off meat supplies, and the country would go hungry. This is impossible today. Russia covers its needs for poultry and pork, dairy farming has begun to pick up, and mini dairy farms are being revived. But grain farming is still undervalued.

On the surface, everything is rosy. We produce all the grain the country needs and have a certain surplus that goes to export.

We’ve recovered from the slump in the 1990s and reached about the same harvest rates as in the Soviet era: 85–100 million tonnes of grain. However, in 1913, Russia was the world’s number one grain exporter with the volume of more than 10 million tonnes.

A hundred years later, we’re exporting sometimes 20, sometimes 25 million tonnes and consider it heroic. Today, the goal of the Agricultural Development Program for 2013?2020 is to reach 115 million tonnes of grain per year. This isn’t very ambitious, and doesn’t unlock the potential. It would be impossible to miss the opportunity to start production of high-quality grain. And get not 100, but 300 million tonnes from these lands.

Today, Russia has at least 120 million hectares of arable land, and 50 million hectares of fallow and pasture land. China has the same 120 million hectares and produces 350 million tonnes of grain from them. America has 170 million hectares and produces 500 million tonnes. This year’s crop forecast in Russia is around 100 million tonnes.

— How do you rate Russia’s “grain” policy, given that grain is an important export resource?

Russia has made a big leap in gas production and oil compared to the Soviet period. But what is the cost of increasing production capacity in the oil industry? Especially now, when the market is overheated and supply outstrips demand. The logical question is: maybe it makes sense to diversify the economy?

We have a huge “grain shelf” on the surface, waiting for development and we can get a lot of money from it. We’ve become used to a budget based on oil and gas. But we could have another component in the budget: grain exports.

We now export 20–25 million tonnes, which brings in revenues of 4–6 billion dollars. But what if this export component was 150–200 million tonnes today? This is a hefty figure! We worry about what will happen to the budget if global demand for oil and gas falls. But grain is always in demand!

I remember that when we came to Governor Oleg Korolev in Lipetsk Region, the regional budget was mainly formed by tax payments from NLMK (Novolipetsk Steel Company — ed. note).

Now a significant proportion of contributions come from agricultural enterprises, where Cherkizovo Group holds a major share. Or Belgorod Region, where the budget was largely formed by tax payments from the local mining and processing company. And now, thanks to Governor Evgeny Savchenko’s policy on the agribusiness sector, the region has become one of Russia’s leading agricultural producers. This is an example where a regional budget “kicks the resource habit” and develops the agricultural sector. If this has worked in a number of regions, it’s also going to work on a national scale.

Russia can boost grain cultivation, but first we need to identify priority areas. If we set a goal of implementing a national project for the development of export-oriented crops, I’m confident that Russia will “kick the oil habit” within 10 years.

— But Russia lacks the infrastructure to increase grain exports. Won’t this be a stumbling block to plans for developing the “grain shelf”?

If our aim is to have Russia supply 150–200 million tonnes to the world market and become a strong exporter, we have to create a grain storage group. There are already examples of modern and efficient grain storage facilities in the country, but they’re built with private money. I once asked for subsidies for construction of grain storage facilities and was turned down. Poultry farming is subsidized, pig framing is subsidized, but the grain storage group isn’t. We have all our own facilities for nearly one million tonnes of overall storage capacity built with our own money, or more precisely, with expensive market funds.

Most of the grain storage facilities in Russia are old reinforced concrete coffins. They’re worn out and obsolete, and have bad conditions for storing grain, which just may rot in them, but this capacity is not enough.

It would be correct today if the government built high-capacity grain storage facilities in partnership with the private sector, and also bought up grain for an intervention reserve depending on yield, and then released it for export by the state. Buy it from private owners, hold it, and then export it when needed!

Grain storage capacity is also the country’s food security today. If you increase export-oriented crops, you must provide the conditions for proper grain storage, so you have to build new storage facilities. And to completely cover the export chain, you need modern grain warehouses at marine terminals.

— Is lack of infrastructure the only problem for the grain industry?

Unfortunately not. The development of export-oriented grain farming is unthinkable without investments in genetics and high-quality seeds. We’re still completely dependent on imports here. They can cut off our access to genetics and breeding if they want to. Seeds have also become more expensive as a result of the devaluation of the rouble.

As far as I know, the Russian government has already decided to establish seed breeding centres, but so far only on paper, whereas it needs to be implemented on a large scale and quickly.

We often attribute a low yield to drought. If we plant seed stocks that are rotten, frankly speaking, and don’t apply the required amount of fertilizer, we call any vagaries of the weather a drought. And it can be attributed to losses and errors.

It’s worth mentioning that 90% of Russian-made fertilizers are exported because they’re too expensive in this country and are not in demand. As a result, fertilizer is applied to the land in amounts many times less than abroad, and this is one of the reasons for low yields. Russia loses a lot more money from low yields than revenues from fertilizer exports.

— How do you rate the prospects for Russian grain exports in the 2015/16 export year?

Farmers are simply going begging, and it’s quite likely that the 2015 grain harvest will be a disaster, because of the crisis in working capital. The country is facing a fierce challenge today — everyone’s sitting around without working capital. And planting is underway in the country. Farmers desperately need funds for fuel and fertilizer. And what’s incredible is that when we joined the WTO, we committed ourselves not to give subsidies for fuel and fertilizer. We decided that Russia would pay subsidies per hectare.

Here’s the actual figure. In a fairly prosperous region of Central Russia, Cherkizovo Group will get support of 75 roubles per hectare in 2015. China provides subsidies of more than $1,000 per hectare, Europe gives 500-800 Euros, and America gives $150. Compare this with our 75 roubles, which is a little more than a dollar! This is despite the fact that our costs per hectare were 12,000 roubles last year, and more than 18,000 roubles this year. When I see these 75 roubles, I want to send them back, saying “no thank you.”

— Have you changed your borrowing policy as a result of rising interest rates?

At present, Cherkizovo is included in the list of strategic enterprises in Russia, and we can use this status in case of a takeover of some other enterprise. In these circumstances, we may need both loans and government guarantees. But I would like to focus on the working capital needed by nearly every agricultural business today, because this is severely lacking. These loans are not available today.

In the US, farmers receive working capital for three years, not one year, like we do, and the cost of money is quite different. If there is suddenly a poor year, it’s possible to compensate for all of it in the next two years.

You can understand why the issue of subsidies is constantly being raised and there is some distrust of farmers. There was a transitional period, when no matter how much money they got, it all went down the drain. But farmers are different now, and there’s an understanding today that if the government wants to give us subsidized loans, why do we need a bank? The money should be given to farmers directly from the budget, bypassing banks. They should get a decent-sized special grant per ha of cultivated land. There’s not enough money for seeds, fuel, fertilizer and so on, while the price of diesel fuel has doubled since 2009; and last year alone, the cost of fertilizer increased by 50%.

— The institution of government support for agribusiness is often criticized for giving large agricultural holdings most of the budget funds for development and leaving nothing for small and medium-sized farms. Do you think this policy is justified?

Under the sanctions imposed on Russia, when it’s nearly impossible to raise money, the country is reliant on its own resources. In this situation, we need an absolutely clear program of targeted support for areas contributing to the development of the agricultural sector. For example, it was decided to allocate almost half a billion dollars of public money to develop the beef industry. Is this necessary? Yes, but not right now.

In a crisis, it would be much better to invest the money in dairy cattle, which simultaneously solves the problem of both milk and meat. And then, let’s think about the future. Will we be able to compete with Argentina or Brazil in beef cattle breeding? Not likely. But in grain farming we could be among the world’s leaders. There should be a clear priority — grain farming. So this is where you need to send the money. What is the breadbasket of Russia today, and where is the most fertile land located? It’s Central and Southern Russia, so we need to concentrate on them and provide tangible benefits.

Accession to the WTO has meant almost nothing but deterioration for the agricultural sector. Right now we’ve introduced retaliatory sanctions and stopped imports of products from the EU, but there is a silver lining. These actions show what has already been done in the Russian agricultural sector, and what remains to be done. We see all of Europe calculating the damage from loss of exports.

And where are our exports? We should be the number one agricultural power; but we do nothing. In the formation of any country, whether it’s Canada, Denmark, or the United States, everything starts with agriculture. The world’s largest government agricultural department is American, in Washington. They are now “number one” in grain and poultry; they feed 320 million people in their own country and export around the world. They gave rural residents gas, electricity, water, roads, everything — you can work now. We need to do the same and support the agricultural sector.

At one time, there was a national Agricultural Development program. This started the development of poultry and pig production and to some extent beef cattle. We can thank the government for doing this on time, so now we’re not dependent on imports and feel comfortable. Now we have to make a great and decisive step — announce a national grain cultivation project to double or triple the country’s grain harvest to 250?300 million tonnes by 2020–2025, and to realize the export potential of grain.

High-quality grain should be exported. There was a time in Russia when gross yield was rising, but it was a lot of low-quality grain. And this raised cries of “stop producing grain, it has nowhere to go. There are no cattle to feed it to, and we have to increase pig production.” But expanding pig production is a long-term program; it’s impossible to do it in a month or a year. It took 10 years for Russia just to approach the amounts necessary to cover domestic needs for pork. It will take 20-30 years to become poultry and pork exporters. But the harvest depends on many factors, including natural ones, so the forage option is unavoidable. This means that reproduction of meat must continue to grow.

There is growing demand for grain in the world. For example, China imports grain; and meat consumption is increasing in the country, which means they need more grain. The same is true for India and the rest of Asia. Demand for grain will be enormous in the next 100 years! We have 10% of the world’s arable land, and we must capture this market. Russia can do it, but we need a powerful national project at the highest level. Today we need a congress of agricultural producers representing actual rural workers, who can announce the current situation with grain growing.

— How much is the company investing in the grain project?

Since grain farming was not part of Cherkizovo Group at the initial stage, we set up a family-owned private company, NAPCO, and invested our money in it to privatize the land controlled by it and obtain loans for cultivation. We managed to gather about 400,000 ha; I invested about 50 million dollars in it. Through NAPCO, we received loans of more than 200 million dollars and bought equipment. It was a very powerful incentive to start cultivating the land. I can now say with certainty that grain farming is the most difficult process in the agricultural business.

As with poultry and pig production, my entry to grain farming was no accident. Feed is the basis of livestock breeding. And when I looked closely at agricultural practice, I was horrified, just as I had been with livestock breeding. Everything was destroyed, there was nothing. The only things that remained from Soviet times were fields clearly delimited by forest belts that protected them from wind and snow build-up. The land was not being cultivated, there was no machinery, no seeds, no storage facilities or human resources. There were only impoverished farmers with unregistered land shares.

I gathered a strong team of lawyers, and we went to the regions to negotiate for the purchase of land. I opened offices of our grain division in Voronezh, Lipetsk, Tambov, Penza, Ulyanovsk, Samara, and Orenburg Regions. In general, I think if my sons hadn’t stopped me, I probably would have reached Vladivostok. My goal was simple: to cover our long-term needs for grain. Today it makes up one million tonnes per year.

In the end, we did huge amount of work. We made a lot of mistakes at the beginning. We lost money, and we couldn’t find staff. But we learned a lot in 5–7 years. Today in Voronezh our yield is 7.0 tonnes per hectare. Obviously that won’t happen every year, but the amount of 4.0–5.0 t/ha is guaranteed if we do it right. This is a victory for us. If we transfer our performance to the whole country, we could get 200 million tonnes or more from 120 million hectares.

Igor Babaev
Igor Babaev
© Dmitry Lomakin

— What are plans of Cherkizovo as a grain producer and exporter?

We (Cherkizovo and the family-owned company NAPCO) have about 400,000 hectares of first-class arable land and hope that in future we can get 1–1.5 million tonnes of grain from it of a quality complying with international standards.

We previously raised the issue of taking over companies involved in poultry and pork production and meat processing. Once we reach maximum yield on our land, we may acquire other farmland, which is usually in a very difficult position.

It’s quite possible that we will sell high-quality commodity grain harvested by the group as a whole for export and buy the fodder we need for feed production from allied suppliers.

In May of this year, we will launch our first grain storage facility with capacity of 220,000 tonnes at the Elets complex. The second stage is planned in a year. The storage facility was built according to the best international standards. We have a small number of old storage facilities we acquired with other assets; and just for comparison, the old facility employs about 300 people, while 30 people will be enough at the new one with the same capacity.

Our most important victory with grain is that we had a taste of this business. It has a high margin, more than 30%, and this is despite expensive loans, fuel, and fertilizer.

— Will Cherkizovo survive as a Russian company in the midst of transnational acquisitions in the food industry? Or will the cooling of relations between Russia and the EU and the US protect you?

We operate the same way as Europeans or Americans. Cherkizovo is actually an international company. We’re not experiencing any geopolitical difficulties. I was recently in America, where I had a good reception and communicated normally. I also recognize that we have a lot to learn from them about agricultural production, and we need to do this.

We’ve brought the technology in poultry and pork production to international standards. Today, we’re the absolute leader in Russia in terms of meat production. There is a company that produces more pork, and a company that produces more poultry than us, but no one has all the meat business lines or comparable volumes.

In 2014 we produced 500,000 tonnes live weight of poultry, nearly 200,000 tonnes of pork, 140,000 tonnes of sausage products and ready-to-cook products. Total production was 800,000 tonnes of meat, and we’re not stopping there. We bought the Lisko Broiler poultry factory, and we’re building Tambov Turkey and new pork complexes. In the short term, our output will reach one million tonnes of meat per year.

With regard to acquisitions, land has been privatized in Russia, thank God. Bad or good, but to some extent it’s been completed. So there are no longer any risks of large-scale acquisitions in agriculture. Unlike Ukraine, for example. Land there was state-owned, and a moratorium was placed on privatization of land until 2016. The land was leased, and then the new government raised the rent. Ukrainian agricultural producers didn’t go for this and sublet it to foreigners.

Now Western entrepreneurs are coming and getting this land. After the moratorium is lifted, foreigners will have pre-emptive right to preferential privatization of the land. As we know, Ukraine’s land fund is the richest today — 3 major European countries put together don’t have as much. Germany, Italy, and England together have 27 million hectares, and Ukraine has 30 million hectares of arable land. And foreigners will buy it for a penny. That’s the whole philosophy.

— Are you ready to create agri-food projects in the Far East with a focus on developing the Asian part of Russia, as well as for export to Asian countries?

I went to the Far East and met with villagers and government officials. There are huge areas under soybeans. And being next to China, there is export potential. But here’s the paradox — the Chinese themselves say it’s cheaper for them to bring soybeans and corn across the ocean from Brazil than a couple hundred kilometres from Amur Region.

Why is this so? No roads, no infrastructure, no grain storage facilities. We can talk about the benefits of the Far East after we’ve built modern infrastructure. Investments by large agricultural holdings — and we have ten of these powerful operators — won’t happen until there is infrastructure and government participation. We need major government investments in infrastructure here, so we can enter the export market.

— What is your assessment of the complexity and scale of the ASF problem in Russia and in the world? Are there still risks of loss of the entire pork industry?

ASF is a huge problem that threatens the entire industry. It’s not that the government isn’t doing anything to combat ASF — it’s doing a lot. But unless rural residents have jobs, they will have to breed pigs on private farms, and with this kind of management there are risks of spreading the disease.

Governor Savchenko managed to end the practice of keeping pigs in backyards in Belgorod Region. It was decided to buy up pigs from the villagers. Other regions were afraid to do it, for fear of a riot. So we need to create jobs. There is a misconception that there are no skilled personnel in rural areas. But there are at Cherkizovo, and we obviously didn’t buy them at a store.

— What’s happening with projects involving international cooperation in view of the worsening political situation, in particular, the Tambov Turkey project with Grupo Fuertes and potential negotiations with the Spanish company Tarradellas?

I’ve known the Fuertes family, our partners in the project, for a long time. I proposed a joint venture to them ten years ago. They told me they’d come with their know-how. And I said no, guys, come with money. In the end, they believed me and came with money. This year, we are launching a turkey production and processing facility with the capacity of 40,000 tonnes. But I’m not talking about Fuertes to praise our project.

I want to draw attention to one detail: I flew with them by helicopter from Moscow to Tambov Region. They were so envious of the wealth of Russia’s land resources! I’m not exaggerating, they had tears in their eyes. They asked how can you live in poverty with this land?

— Does Cherkizovo have plans to attract Asian investors, especially the Chinese? What projects in Southeast Asia in general, and in China in particular, would you be interested in?

I visited China in 2007 at the invitation of one of the country’s leading pork producers. They received us in Shanghai and discussed the question of setting up a joint venture for pork production. The Chinese later visited Russia to see what we were doing, but unfortunately, they were still not willing to invest money; it was a “toe in the water”.

Now, with the warming of relations between our countries, I think we have to come back to this issue, and I’m not ruling out that the Chinese will get here and create a joint venture with us, like the Spaniards did.

— Could the move of Cherkizovo’s management into development be considered an effort to diversify the business? Is this step related to the difficulties and unpredictability of agribusiness?

Development is a business line that operates separately and independently outside of Cherkizovo. This year, construction of one of the best golf clubs in Russia with an area of 150 hectares will be completed near Rublevka.

In addition, we’re building a large shopping centre in the village of Perkhushkovo of Odintsovo District together with American and French investors. We’re also building housing in Dmitrov District.

There was also quite an anecdotic situation around our Kuznetsovsky Pork Complex. Due to the expansion of Moscow, all 60,000 piglets became “capital city residents”. We understand that for many reasons, including taxes and environmental regulations, the pork complex will sooner or later have to leave. It doesn’t belong in the capital, but there’s land, so we’re thinking about what to do with it. But, I repeat, development is not our core business.

In addition, our family is a co-owner of the Myasnov stores chain. We started doing it quite deliberately. We have about 150 stores in Moscow, and we recently started up a bakery plant.

We sell up to 20 tonnes of bread a day; it sells well in our stores, although it’s not cheap, because it is high-quality bread made from our own grain. We have our own mill in Penza. Our portfolio includes dairy plants that supply high-quality milk and dairy products from cows free of leucosis, and we process them in our own factory. The process is going extremely well, and I’m convinced that in a few years, we’ll “fly away” to 250–300 stores.