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Russia Reaps What Privatization Sows in Great Grain Revolution

Wheat harvesting in the Omsk Region on Sept. 4, 2016. (Alexey Malgavko/Sputnik via AP)

While few have noticed, Russia has quietly grown into a new role: Top dog in the global wheat trade.

An astonishing rise in productivity, which has seen the country’s wheat output more than double in size since the late 1980s, comes primarily as a result of privatization of the agricultural sector. A potential bonus for the former Soviet economy is that if, as some analysts expect, prices for the grain jump the country could see a bump in export earnings.

From small beginnings just before the fall of the Soviet Union, Russia has now become the world’s leading exporter of wheat, surpassing both the U.S. and the European Union. In the 2017-18 growing season the country is expected to sell 33.5 million metric tons of the grain in the global market — up from less than 1 million tons for the year 1987-88, according to data from the U.S. Department of Agriculture.

Part of the reason for the increase in exports is that the growth in Russia’s total wheat production (which includes grain that isn’t exported) has far surpassed the increasing size of the global wheat market. For the growing season 1987-88, Russia produced 7 percent of the world’s wheat, but in the most recent growing season that share had jumped to 12 percent of world production. Meanwhile, aggregate world supply ballooned by 51 percent over the same period. In other words, Russia’s output grew much faster than world supply did.

“This is a big turnaround from the days in the 1970s when the Soviet Union was in a big grain deficit and the U.S. signed a deal to send them surplus U.S. grain,” says Steve Hanke, professor of applied economics at The Johns Hopkins University and a special counselor to Venezuela-headquartered grain trading company Merino. “This has been going on since the privatization of the agricultural sector and is the equivalent to the revolution in the shale sector.”

Less State Ownership, More Output

The privatization, which started in the 1990s, got implemented in various ways, some more fully than others. Such techniques include the simple sale of agricultural land, but also involve the partial sale of previously state-owned companies, he explains. “Generally, the pattern is more privatization than before,” he says.

The result in Russia is precisely as privatization proponents would expect: More output and lower costs across the industry.

“This is the greatest privatization story in the former Soviet Union,” Hanke says. “It is mind-boggling.”

Certainly, the USDA figures back that up with total output up more than twofold to a projected 83 million tons this growing season versus less than 37 million in 1987-88. Output in the U.S. fell over the same period.

This economic news could get even better for Russia over the coming years if prices for wheat skyrocket as some analysts expect. Recent wheat prices of $4.33 a bushel are down considerably from almost $8 as recently as early 2013, according to data from Bloomberg. Shawn Hackett, who writes the Hackett Money Flow Agricultural Report newsletter, states that the relative cost of wheat versus other commodity prices is currently at a 45-year low. In other words, it is undervalued.

One thing that might rectify the low prices problem for wheat farmers globally is the possible poor harvest or worse in the U.S. This year, there is the potential for the harvest to “not be just a poor crop but a crop failure.”

Such a crop failure would cause world prices for wheat to jump. Grain prices are determined on the global market. Of course, as Russia is the largest exporter in the world, increased prices would benefit Russia more than other countries.

Grain on the world market typically gets sold for U.S. dollars, so higher wheat prices will help replenish Russia’s somewhat depleted foreign exchange reserves, which should help bolster the ruble from any future economic or geopolitical shocks. As recently as 2013 Russia had reserves of more than half a trillion dollars, but the rout in the energy markets, which started in 2014, has subsequently resulted in a fall to less than $400 billion before recovering somewhat to $432 billion recently, according to data from TradingEconomics.com. More than a third of the Russian government budget is financed through money from energy exports. The extra income from grain exports will help diversify the income source.

Overall, the former communist country is seeing the economic benefits from embracing free markets. “It’s certainly a good news story for Putin,” says Hanke.