By: Andras Marfi, Kleffmann Group
The global pesticide market saw serious decline after years of growth, in 2015, falling 10% in value. Russia, one of the world’s largest markets, is one of the few countries that managed to remain on a growth track, reaching approximately $1.2 billion.
Spurring that growth (and in some cases restricting it) are three major issues: the economical-political situation, the structural-industrial relationship, and the agricultural-technological connection.
In late 2014, the value of the Russian currency lost approximately half of its value against with leading global currencies in just a few weeks’ time. The key reason was the drop in the value of oil prices, but politics had its role in the devaluation with sanctions introduced by the U.S. and the EU against Russia — the latter countered by Russian government, which added import sanctions on a number of agricultural goods. Although the currency exchange rate stabilized by spring 2015, it has yet to return to previous levels.
With the ruble crisis striking just a few months before 2015’s main crop protection sales season, and with no reliable forecasts about where the exchange rate was headed, producer companies had a difficult time creating the pricing and sales strategy, especially since local farmers think in rubles. As a result, list prices in rubles went up significantly (on average 60%).
On the other hand, governmental goals to make Russia self-sufficient gave a huge support to local growers. Subsidies triggered market changes, and the appearance of a vacuum created by the sanctions gave Russian companies an opportunity to enter several markets related to food production. It also helped rekindle old friendships with China, Iran, North Africa, and Turkey. Both export and import businesses benefited.
Local generic companies saw growth in market share as well. While 55% of crop protection market turnover came from international producers in 2014, this share dropped to 51% last year. Not all major international producers suffered. Those whose portfolios were comparable with large local enterprises, such as Avgust or Shchelkovo, had a more difficult time selling.
Changing Structure, New Rules
All producers in Russia, locals and multinationals alike, are affected by the exchange rate. To put it simply: There is no pesticide active ingredient production in Russia. Most international companies import ready-to-use product. Some have production plants and are able to manufacture the AI from in country. Russian producers are strongly dependent on China where most materials originate. Thus the price increase of Russian producers was as significant, or in some cases, higher than that of international companies. There were several reasons:
- Russian companies lose on conversion as a significant share of their costs appear in foreign currency, mainly USD.
- Prices for Chinese AIs have been constantly growing over the past few years.
- The U.S. dollar grew stronger compared to the euro in the key sales period, giving an advantage to those who import material.
- Chinese AI imports to Russia are in USD.
There were also structural changes on the market. In the last decade, there was a clear separation in strategy between foreign and local companies. While international companies focused on sales through distributors, minimizing the share of direct sales (approximately 80% to 85% sales went through distributors), the biggest local companies predominantly sold directly to farmers (70% to 80% direct sales). This is changing with local companies increasing the share of sales they give to distributors.
In addition, there are big regional differences. Not all international companies can or are willing to invest in developing their markets in regions where the intensity of crop production is low. Approximately 80% of the crop protection turnover in Russia comes from the European part. More precisely, half comes from two main regions: South/North Caucasus and Central Black Soil. These regions are concentrated with a developed infrastructure and good growing conditions. In contrast, the vast areas of Siberia and other Asian parts mostly lack these features.
That said, the eastern part of the country is catching up. For instance, the Russian Far East is among the most rapidly developing agricultural areas in Russia, mostly because of soybean and its proximity to China.
The crop protection market in the East is dominated by a different set of companies: ones that either have a strong soybean portfolio, a solid country-wide network, or have geographical advantage (i.e. are Chinese). We are seeing the Russian Far East becoming a new growth market, and so far, local companies are taking advantage of the opportunity.
Technological Development — Visible Results
Despite the financial difficulties and big increase in product prices, crop protection technology used by Russian farmers is developing. This helped produce record-high yields and production volumes in 2015.
Growers are expected to set new records in 2016 when the total grain volume has the potential to reach 114 million tonnes.
Russia’s agricultural structure is unbalanced by regions and dependent on cereal crops. The total cultivated area is growing slowly, reaching 70 million ha in the 2015/16 sowing season for main field crops. More than 60% is still being cultivated by cereals (2/3 spring, 1/3 winter cereals).
The past few years showed a tendency toward diversification of the crop structure, primarily with the share of soybean increasing, but this tendency is still far from fulfilling the potential.
Average spending on crop protection products for one hectare of land cultivated with field crops is very low in Russia at $21/ha. There are vast differences in the costs of production by regions, which are only partly explained by the difference in crop structure. From the technological point of view, the most diverse and intensive technology is used in the European part along with the Far East (dominated by soybean). The average crop protection input costs are up to four times as high in the intensive regions as in the regions with lower intensity.
The difference in yield per hectare is almost as significant.
Herbicides still make up 60% of the total market value despite the low average product value. Glyphosate use is common, but when it comes to selective herbicides, cheap solutions still dominate. In fact, on some extensive areas in Siberia the average spending on selective herbicides for one hectare is only $2 to $3/ha (e.g. 2,4-D).
The penetration of fungicides in general is still quite low in key field crops. Nevertheless, fungicides are the main growth driver. Although azoles still dominate the market, there has been a visible switch in 2015, and it’s continuing in 2016: More farmers have started to use fungicides and/or have switched to more intensive technology with multi-AI products. The growth is mainly visible in cereals with 30% of the area being treated in 2015. While that figure is expected to grow in 2016, it leaves huge potential for development. Apart from cereals, there is obviously space for fungicide market development in sunflower (2% treated in 2015), sugar beet (area treated growing from 47% in 2014 to 64% by 2015) and soybean (growing from 7% to 15%).
Russia also differs from most of Europe in the practice of seed treatment. As the average size of a professional farm in Russia is much higher than that in the EU (about 1,000 ha), most farms require a more complex infrastructure for crop production. In terms of machinery there is still a big need for development, but seed treatment is primarily done on the farm. This is especially valid in cereals crops where 99% of the sowing material is of local production.
The seed-treatment market is growing as well as the competition on it. More farmers sow seeds treated with both fungicide and insecticide products, and trends show the share of complex fungo-insecticide products is growing. This market is still under development in cereals but is dominating in potatoes.
There appears to be a willingness to switch to innovative technology, but several obstacles limit investment. For instance, Russia’s grain storage capacities are limited, and this year, due to record volumes of production, some parts of the country are facing storage problems. This issue is complicated by the export challenges. Although this has little influence on the Southern regions with high yields and easy access to Black Sea ports, Siberia and Ural are limited by low storage capacities. On the other hand, the government’s aim to make Russia as self-sufficient as possible should be supported by the development of infrastructure in the coming years.
Huge Potential — Theoretically
Given the big areas available for cultivation, the opportunities for expanding and intensifying crop protection technology, and the willingness to develop, Russia should be one of the primary markets of interest of international producers. On the other hand, the shadow left by recent economic difficulties has not yet passed, and the political environment is still not clear for multinational companies. In fact, the atmosphere seems to be getting more hostile by the day. The pressure to have multinational companies localize production is in the air along with the import ban on crop protection products, but nothing is decided as of today. All things remaining constant, we can assume that companies that already are in the market will see further growth, but everything else depends on political decisions.